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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI G. MANJUNATHA
PER SAKTIJIT DEY, J.M.
Captioned appeals by the assessee are against two separate orders, both dated 31st October 2016, passed by the learned Commissioner of Income Tax (Appeals)–47, Mumbai, pertaining to the assessment years 2007–08 and 2008–09.
The only issue arising in the appeal for the assessment year 2007–08 and the issue raised in ground no.2 of appeal relating to the 2 Atul Arun Kesabekar assessment year 2008–09 are on the common point, whether the receipt from the sale of paintings is to be assessed as income from business and profession or capital gain.
Brief facts are, the assessee, an individual, is engaged in profession of a professional photographer. For the assessment year 2007–08, the assessee filed his return of income on 29th October 2007, declaring total income of ` 97,56,138. Similarly, for the assessment year 2008–09, the assessee had filed his return of income on 26th September 2008, declaring total income of ` 3,02,06,403. It is relevant to observe, assessment in both these assessment years were originally completed under section 143(3) of the Income-tax Act, 1961 (for short "the Act"). Subsequently, in pursuance to a search and seizure operation conducted under section 132 of the Act in case of the assessee on 24th January 2011, proceedings under section 153A of the Act was initiated for both the assessment years. In response to the notice issued under section 153A of the Act, the assessee filed a revised return of income for the assessment year 2007–08, declaring total income of ` 1,66,00,130. Whereas, in respect of assessment year 2008–09, the assessee again declared the same income as was declared in the original return of income. During the assessment proceedings, the Assessing Officer noticed that in the year under consideration, the assessee purchased and sold many paintings and 3 Atul Arun Kesabekar derived profit of ` 20,14,335. However, the assessee had not offered it as income. Similarly, in the assessment year 2008–09 also, the assessee had not offered receipts from sale of paintings as income by treating the same as capital receipt from sale of personal effect. Similarly, in the assessment year 2008–09 the assessee has offered the income from sale of painting under the head capital gain. Being of the view that the profit derived from sale of painting is in the nature of business income, the Assessing Officer called for an explanation from the assessee and after rejecting the explanation furnished by the assessee, he proceeded to treat the profit derived from the sale of painting as income from business and profession. While deciding assessee’s appeal on the issue, learned Commissioner (Appeals) also rejected assessee’s claim of capital receipt and held that the profit from sale of painting has to be treated as business income. However, he granted partial relief to the assessee in the assessment year 2008– 09 by reducing the total addition made by the Assessing Officer in this regard.
Reiterating the stand taken before the Departmental Authorities, the learned Authorised Representative submitted, the assessee is a professional photographer and is not in the business of trading in painting. He submitted, the assessee is an art lover and collector, hence, he regularly purchases paintings of reputed artists. He
4 Atul Arun Kesabekar submitted, knowing assessee’s love towards paintings, even his friends also on some occasions gift him paintings. He submitted, due to constraint of space in his residential house, he was forced to sell some of the paintings in these assessment years which also included paintings received as gift. The learned Authorised Representative submitted, till assessment year 2007–08, the paintings were in the nature of personal effect which is evident from the fact that by virtue of an amendment to section 2(14) of the Act by Finance Act, 2007, w.e.f. 1st April 2008, the definition of personal effect was amended by excluding painting and art work from the definition of personal effect. Thus, he submitted, till the assessment year 2007–08, paintings are to be treated as personal effect, hence, not taxable even as capital gain. He submitted, the income derived from sale of painting cannot be treated as business income also as the assessee is not carrying on any business in sale and purchase of painting. He submitted, merely because the assessee had purchased and sold some paintings in these two assessment years, it cannot be treated as business income. In support of such contention, the learned Authorised Representative relied upon a decision of the Tribunal, Kolkata Bench, in ACIT v/s Suresh Sethi, ITA no.763/Kol./2012, dated 15th March 2013.
The learned Departmental Representative strongly relying upon the observations of the Assessing Officer and learned Commissioner
5 Atul Arun Kesabekar (Appeals) submitted, the assessee’s claim cannot be accepted due to contradictory statements made by him before the Departmental Authorities. He submitted, to justify sale of paintings though the assessee had stated that due to constraint of space in house he has sold paintings, however, it has been found by the Departmental Authorities and the assessee has also purchased new paintings during the year. Therefore, had it been a case of constraint of space, the assessee would not have purchased the paintings. He submitted, factual analysis made by the Assessing Officer and learned Commissioner (Appeals) also reveal that the assessee has undertaken frequent purchase and sale of paintings. Therefore, activity of the assessee is akin to adventure in the nature of trade. The learned Departmental Representative submitted, for these reasons also, the assessee has himself shown part of profit derived from sale of painting as business income in the assessment year 2008–09. Thus, he submitted, there is no reason to interfere with the decision of learned Commissioner (Appeals). In support of his contention, the learned Departmental Representative relied upon the following decisions:– i) Sumati Dayal v/s CIT, [1995] 214 ITR 801 (SC); ii) ACIT v/s Faiz Murtaza Ali, [2012] 52 SOT 358 (Del.); iii) P.M. Mohammad Meerakhan v/s CIT, [1969] 73 ITR 735 (SC); iv) Mazagaon dock Ltd. v/s CIT, [1958] 34 ITR 368 (SC); & v) H.H. Maharaja Rana Hemant Singhji v/s CIT, [1976] 103 ITR 61 (SC).
6 Atul Arun Kesabekar 6. We have considered rival submissions and perused material on record. The dispute lies within a narrow compass as to whether the income derived from sale of paintings is to be treated as capital receipt as claimed by the assessee or it is to be treated as income from business and profession. As revealed from the facts on record, the assessee basically derives income as a professional photographer. There is no material on record to suggest that the assessee either is a art dealer or engaged in the business of purchase and sale of paintings. On the contrary, it appears from record that the assessee is an art lover and is in the habit of collecting paintings of reputed artists. This is evident from the fact that several paintings of reputed artists adorn his residential premises. No doubt, in the assessment years under consideration, the assessee had sold some paintings either purchased by him or gifted to him by some of his friends. From the sale of such paintings, the assessee had derived some profit. Analysis of facts emerging from record does not suggest that the assessee has indulged in any organized or regular activity of purchase and sale of paintings. There is nothing on record to suggest that except the aforesaid assessment years, the assessee had engaged himself in the activity of purchase and sale of paintings in any other past or subsequent years. At least, no such fact has either been brought on record by the Departmental Authorities or brought to our
7 Atul Arun Kesabekar notice by the Departmental Authorities. Therefore, in the absence of any material brought on record to demonstrate that the assessee is carrying on the business of purchase and sale of painting in an organized manner, it cannot be said that the sale of painting is a business activity or is an adventure in the nature of trade. That being the case, the conclusion drawn by the Departmental Authorities holding that the income from sale of painting is to be treated as business income, in our view, is unsustainable. As a natural corollary such income has to be treated as capital receipt.
Having held so, now it is necessary to deal with assessee’s contention that in assessment year 2007–08, such income is not taxable as it will come within the purview of ‘personal effect’ as defined under section 2(14) of the Act. Notably, while dealing with an identical issue in case of Suresh Seth (supra), the Co–ordinate Bench has held that painting is to be treated as personal effect as per section 2(14) of the Act. No contrary decision in this regard has been brought to our notice by the learned Departmental Representative. In view of the aforesaid, we hold that the gain derived from sale of painting in the assessment year 2007–08 is not taxable as it is personal effect as defined under section 2(14) of the Act. However, insofar as assessment year 2008–09 is concerned, paintings have been specifically excluded from being treated as personal effect, therefore,
8 Atul Arun Kesabekar the gain derived from sale of painting amounting to ` 3.50 lakh has to be assessed as long term capital gain. Accordingly, grounds no.1 and 2 of ITA no.784/Mum./2017 and ground no.2 of ITA no.785/Mum./2017, is allowed.
The only other surviving issue for our adjudication is ground no.1 and 1.1 of ITA no.785/Mum./2017.
These grounds relate to the addition of an amount of ` 51,20,600, as undisclosed income on account of sale of shares of Matrix India Entertainment Consultant Pvt. Ltd. (MIECPL).
Brief facts are, during the search and seizure operation conducted in case of the assessee, certain incriminating material relating to purchase and sale of shares of MIECPL were found. As per the seized documents, it was noticed that the assessee was offered an amount of ` 3.1 crore towards transfer of shares in MIECPL. On the basis of the aforesaid information, the Assessing Officer called upon the assessee to explain why the amount of ` 3.1 crore should not be treated as undisclosed income of the assessee as against the income disclosed of ` 1.46 crore in the return of income. Though, the assessee objected to the proposed addition, however, the Assessing Officer rejecting the explanation of the assessee proceeded to add an amount of ` 1.64 crore as undisclosed income from sale of shares. The 9 Atul Arun Kesabekar assessee challenged the aforesaid addition before the first appellate authority.
After considering the submissions of the assessee, learned Commissioner (Appeals) called for a remand report from the Assessing Officer. After perusing the remand report, learned Commissioner (Appeals) found that there is nothing on record to show that the assessee had received anything over and above the amount of ` 1.46 crore from the sale of shares in the year under dispute. Therefore, he deleted the addition of ` 1.64 crore made by the Assessing Officer. However, learned Commissioner (Appeals) observed, the assessee had sold 2,400 shares of MIECPL to Shri Vivek Kamat, in the assessment year 2007–08. Further, he observed, the assessee had shown sale of the aforesaid shares at ` 24.97 lakh in the assessment year 2007–08. The learned Commissioner (Appeals) observed, when the assessee had received sale consideration of ` 1.46 crore from sale of similar shares of MIECPL @ ` 3,174 per share on 20th April 2007, there is no reason for him to sale the shares at the price of ` 1,040 per share on 27th November 2006. Thus, he held that the sale consideration of shares of MIECPL for the assessment year 2007–08 should be computed at ` 3,174 per share resulting in total sale consideration at ` 76,17,600. Since, the assessee had disclosed sale consideration of ` 24,97,000 in the return of income filed for the assessment year 2007–08, he
10 Atul Arun Kesabekar directed that the balance amount of ` 51,20,600, should be added to the income of the assessee in the assessment year 2007–08. Learned Authorised Representative submitted, while enhancing the income of the assessee for the assessment year 2007–08, that too, in the appeal proceeding for the assessment year 2008–09, learned Commissioner (Appeals) had not given any opportunity of being heard to the assessee in complete violation of section 251(2) of the Act. Thus, he submitted, enhancement of income by learned Commissioner (Appeals) cannot be sustained.
The learned Departmental Representative submitted, the issue may be restored back to learned Commissioner (Appeals) for deciding afresh after due opportunity of being heard to the assessee.
Having considered rival submissions and perused material on record, we are of the view that learned Commissioner (Appeals) while enhancing the income of the assessee for the assessment year 2007– 08 has not complied with the mandatory provision of section 251(2) of the Act. The aforesaid factual position has not been disputed by the learned Departmental Representative. In view of the aforesaid, we restore the issue to learned Commissioner (Appeals) for fresh adjudication after providing reasonable opportunity of being heard the to assessee. These grounds are allowed for statistical purposes.
Atul Arun Kesabekar
In the result, appeal in ITA no.784/Mum./2017, is allowed and appeal in ITA no.785/Mum./2017, is partly allowed. Order pronounced in the open Court on 07.09.2018