Case Law Details
KVR Infra Vs ACIT (ITAT Mumbai)
Introduction: The case of KVR Infra vs. ACIT (ITAT Mumbai) revolves around the deletion of an addition made under Section 69B of the Income Tax Act concerning the inflated cost of a crane in an agreement. The agreement’s exaggeration was primarily aimed at securing a higher banking loan facility for financing the crane. In this article, we provide a detailed analysis of the case’s background, arguments, and the ITAT’s decision.
Detailed Analysis
1. Background of the Case KVR Infra, a partnership firm engaged in crane hiring, purchased a crane (Manitowoc 3900) during the relevant assessment year (2011-12). The agreement for the crane’s purchase, dated 31.03.2011, mentioned a cost of Rs. 1,40,62,500/-, while the firm’s books of accounts reflected a cost of Rs. 90,37,625/-. The Assessing Officer (AO) questioned the difference of Rs. 50,24,875/-, leading to an addition under Section 69B of the Income Tax Act.
2. Explanation by the Assessee The assessee explained that the actual cost of the crane, as per its books, was Rs. 90,37,625/-. However, the inflated cost in the agreement was a deliberate act to secure additional banking loan facilities. The AO rejected this explanation, resulting in the addition.
3. ITAT’s Decision KVR Infra, in its appeal, cited cases like CIT Vs. Nangalia Impex and CIT Vs. Patel Proteins (P.) Ltd., among others, to support the argument that the addition under Section 69B was unjustified, as it could not be proven that purchases were made from undisclosed income. The ITAT considered these arguments.
4. Key Observations – It is an undisputed fact that the crane’s cost in the agreement was Rs. 1,40,62,500/-, while in the books, it was Rs. 90,37,625/-. – The AO made the addition under Section 69B due to the unexplained difference between the agreement price and the book value. – The assessee claimed that the exaggerated cost in the agreement aimed to secure a higher banking loan facility. – The ITAT referred to cases like CIT Vs. Vrundvan Roller Flourmills and CIT Vs. Patel Proteins (P.) Ltd., where similar situations were dealt with. – In both cases, the courts held that differences in stock statements made to banks for higher credit facilities, compared to the book values, couldn’t be treated as undisclosed income.
5. Ruling The ITAT ruled in favor of KVR Infra, stating that no addition under Section 69B could be made. The exaggeration of the crane’s cost in the agreement was solely for the purpose of securing a higher banking loan facility for financing the crane. The ITAT emphasized that the real cost of the crane, as per the books of accounts, was Rs. 90,37,625/-, which was duly audited under Section 44AB of the Act.
6. Depreciation Consideration The ITAT also noted that if the crane’s cost in the books was undervalued, the assessee would lose the benefit of depreciation on the higher cost stated in the agreement. However, there was no evidence that the assessee had claimed depreciation on the higher agreement value. Therefore, the addition under Section 69B had no merit.
7. Ethical Consideration While the addition was deleted, the ITAT expressed disapproval of the unscrupulous practice of inflating asset values to secure higher credit facilities.
Conclusion: In conclusion, the ITAT Mumbai ruled in favor of KVR Infra, deleting the addition made under Section 69B. The exaggeration of the crane’s cost in the agreement was solely for the purpose of securing higher banking loan facilities, and the real cost, as per the books of accounts, was considered valid. The decision underscores the importance of ethical practices in financial dealings.
This detailed analysis of the KVR Infra vs. ACIT (ITAT Mumbai) case highlights the key arguments, ethical considerations, and the ITAT’s decision to delete the addition made under Section 69B. It emphasizes the need for transparency and honesty in financial transactions.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi (hereinafter referred to as ‘the CIT(A)’) dated 27.12.2022, for the Assessment Year 2011-12.
2. The solitary issue raised in appeal is against addition of Rs. 50,24,875/- made under section 69B of the Income Tax Act, 1963 (hereinafter referred to as ‘the Act’)
3. The facts of the case as emanating from records are: The assessee is a partnership firm engaged in the business of hiring Cranes. During the period relevant to the AY under appeal, the assessee had purchased a Crane i.e. Manitowoc 3900, the said Crane was purchased by the assessee from KGN Earthmovers vide agreement dated 31.03.2011. The cost of Crane as per agreement dated 31.03.2011 is Rs. 1,40,62,500/-. Whereas, in books of the assessee, cost of Crane is shown as Rs. 90,37,625/-. In assessment proceedings, the Assessing Officer (AO) asked the assessee to explain the difference of Rs. 50,24,875/-. The assessee explained that the actual cost of Crane is Rs. 90,37,625/- as reflected in the books of account, the assessee had exaggerated the cost of Crane in the agreement to avail extra banking loan facility. The AO rejected explanation furnished by the assessee and made addition of the difference between the agreement price and the amount shown in the books of assessee. Aggrieved by the assessment order dated 06.12.2016 passed under section 143(3) r.w.s. 147 of the Act, the assessee filed appeal before the CIT(A). The CIT(A) vide impugned order dismissed the appeal of assessee, hence, the present appeal.
4. The Counsel for the assessee on 03.08.2023 has filed written submissions dated 19.07.2023 along with case laws.
5. Per contra, Sh. Prakash Kishinchandani representing the Department vehemently defended the impugned order and prayed for dismissing appeal of the assessee. The ld. DR submits that the explanation furnished by the assessee for difference in rate of the Crane is unsubstantiated.
6. We have heard the submissions made by ld. DR and have perused the submissions filed on behalf of the assessee. We have also considered the case laws on which reliance has been placed by the Counsel for the assessee.
7. It is an undisputed fact that as against the cost of Crane Rs. 1,40,62,500/- mentioned in the agreement with vendor, the assessee in its books has shown cost of Crane at Rs. 90,37,625/-. Since, the assessee was unable to reconcile the difference between the cost of Crane mentioned in the agreement and the books of assessee, the AO made addition of the difference i.e. Rs. 50,24,875/- under section 69B of the Act. The sole contention of the assessee for the difference in cost is, that the cost of the Crane was exaggerated by the assessee to secure higher banking loan facility. The assessee inter-alia placed reliance on the decision to contend in the case of CIT Vs. Nangalia Impex [54 taxmann.com 225 (Guj.)] to contend that the AO could not show that assessee had made purchases out of undisclosed income, hence, addition under section 69B of the Act is unjustified. The assessee further placed reliance on the following decisions:
(i) CIT Vs. Patel Proteins (P.) Ltd. [393 ITR 274 (Guj.)]
(ii) CIT Vs. Vrundvan Roller Flourmills [72 taxmann.com 250 (Guj.)]
(iii) Sri Chitta Ranjan Bara Vs. ITO [150 taxmann.com 277 (Calcutta)]
To support his arguments that addition cannot be made under section 69B where inflated statement was furnished to the Bank for availing higher credit facility.
8. The assessee has inflated the cost of Crane in the agreement purportedly to secure higher banking loan facility. According to the assessee the true value of Crane is Rs.90,37,625/- as reflected in the books duly audited under section 44AB of the Act. We find that the Hon’ble High Court in the case of CIT Vs. Vrundvan Roller Flourmills (supra) in somewhat similar set of facts, where addition under section 69B of the Act was made on the basis of inflated statement furnished to the Bank for availing of higher credit facility by overvaluation of the stock shown in books of account, the Hon’ble Court held, that the statement furnished to banking authorities could not be treated as undisclosed income.
9. We find that similar view has been taken by the Hon’ble Gujarat High Court in the case of CIT Vs. Patel Proteins (P.) Ltd. (supra). The Hon’ble High Court held that the difference in stock statement as furnished before Bank as compared to stock shown in the books of account for availing of higher credit facility could not be added under section 69B of the Act as undisclosed investments. Thus, in the light of aforesaid decisions, we hold that no addition under section 69B of the Act can be made in the instant case as the assessee had inflated the cost of Crane in the agreement merely to avail higher banking loan facility for financing of the Crane.
10. We find that in the instant case no effort was made by the AO to cross verify submissions of the assessee. No summons or notice were ever issued by the AO to the vendor of the Crane to know real cost of the Crane. Now, let us see effect of valuation of Crane from different perspective. The assessee would be eligible for the benefit of depreciation on book value of Crane and not on the value stated in agreement. If the assessee has undervalued the cost of Crane in books, then, the assessee would lose benefit of depreciation on higher cost as stated in agreement. There is no finding by the AO that the assessee has claimed depreciation on Crane at higher value as per agreement. Therefore, we see no merit in the addition made under section 69B of the Act.
11. Before parting, we would hasten to add that though the addition made under section 69B of the Act has been deleted as there was no impact in the books of assessee of higher price of Crane as stated in the agreement, nevertheless, we do not subscribe to this unscrupulous manner of availing higher credit facility from the bank by over valuation of the asset.
12. In the result, impugned order is set-aside and appeal of the assessee is allowed.
Order pronounced in the open court on Friday, the 18th day of August, 2023.
