DRP’s power to ‘enhance’ confined to issues raised in draft assessment order. ‘Future losses’ allowable as deduction

Dredging International NV vs. ADIT (ITAT Mumbai) - 

 The arguments are that the assessee has already shown the revenue receipt, i.e. work-in-progress at Rs. 19,83,63,908/- which was more than the contract receipts determined by the DRP at Rs.13,12,94,847/- and so the question of estimating revenue on the amount as directed by the DRP does not arise as contested in ground No. 3. Further, since assessee claimed the future loss of Rs.32,86,17,293/- and this future loss was proposed to be disallowed by the A.O. in the draft assessment order, the DRP cannot direct the A.O. to estimate the profit on 20% of the contract at 8%, which is at variance with the proposed draft order. It was also the contention that the DRP does not have any powers to give such directions, which are at variance with the proposed draft order and various arguments have been raised in this regard.  The learned counsel referred to the provisions of the I.T. Act with reference to the powers of the DRP, then compared them with reference to the earlier positions of section 144B to submit that the directions of the DRP are at variance with the original proposed draft order and, therefore, the direction is invalid. The learned counsel further relied on the recent decision of the Hon’ble Karnataka High Court in the case of GE India Technology Centre Pvt. Ltd. in Writ Appeal No. 1010 of 2011 dated 5th July 2011.

Assessee’s claim for provision for loss, which was made in accordance with the guidelines of AS-7 and duly debited in the audited accounts of the company is an allowable expenditure. Therefore, DRP was not correct in rejecting the same without assigning any reason. The AO is directed to allow the claim of future loss in this year. Since assessee’s claim was rejected by the AO in the order and adjusted in the next assessment year, A.O. is free to pass necessary modification order, if necessary in A.Y. 2007-08 withdrawing the claim to that extent being allowed in this year.

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