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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: Shri Owais M. Husain
This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-33, Mumbai [in short CIT(A)], in appeal No. CIT(A)-33-Rg.21/105/2014-15 dated 30.03.2016. The Assessment was framed by the Income Tax Officer, Ward 18(2)(3), Mumbai (in short ‘ITO) for the A.Y. 2006-07 vide order dated 24.03.2014 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The first issue in this appeal of assessee is against the order of CIT(A) confirming the addition made by AO on account of sale of paintings which were claimed to be gifted by his father Late Shri MF Husain, as business income instead of treating the same as capital receipt, non taxable, amounting to ₹ 50 lacs. For this assessee has raised the following ground No. 1: - “Ground No. 1: 'Business income' or Capital receipt not subject to tax' (i) The learned ClT(A) erred in confirming the addition of Rs. 50,00000/- arising from the sale of painting (which were gifted from his father M. F. Husain), as Business income' instead of treating the same as Capital Receipt not subject to tax (ii) The learned CIT(A) erred in confirming the addition by considering the source, use and nature of the holding of the paintings sold in the hands of MF HUSAIN (presuming that it formed a part of the father's unsold stock) instead of considering the nature of holding in the hands of the Appellant (i.e. as personal effect, which is outside the scope of the definition of 'capital asset) and not as stock-in-trade and therefore fell outside the purview of Business income.
(iii) The learned CIT(A) erred in making the addition on the ground that no documentary evidence was provided for determining that the painting were gifted to the Appellant, although the manner in which the Appellant received it is not relevant so much as the manner and the intention of the Appellant to determine the nature of the holding is relevant.
(iv) Without prejudice the learned CIT(A) erred in not giving directions to the AO, to allow a deduction u/s. 37 in respect to all those expenses that were incurred by the Appellant in relation thereto.”
The assessment in this case of the assessee was reopened on the basis of AIR information relating to financial transactions. The AO during the course of assessment proceedings on perusal of bank statement and computation of total income noticed that the assessee has credit entries of ₹ 1,09,16,442/- in the bank account maintained with City Bank. The assessee explained that out of the above credit entries a sum of ₹ 8,56,977/- pertains to interest on deposits and balance of ₹ 1,00,59,465/- is receipts on account of sale proceeds of paintings received by assessee as gift from his father Late Shri MF Husain, a world renowned painter. The AO require the assessee to explain as to how the sale receipts of paintings are capital receipts and not business receipts. The assessee explained that the entire sale proceeds of paintings, which was gifted by the late father Shri MF Husain and assessee is not in any business of sale of paintings. The assessee also produced sale receipts from the respective buyers to the extent of ₹ 50 lacs only. But the assessee could not produce evidence which shows that the paintings share sold by the assessee was received as gift from his late father Shri MF Husain other than a letter by assessee’s sister Miss Raisa Husain. For the rest of the receipt of ₹ 50,59,465/-, the assessee claimed that the same is part of sale of paintings only but could not submit any details of confirmation of sale of paintings of the respective buyers. The assessee claimed that the paintings received from his late father as gift is a personal effect not exigible to income tax. As the assessee could not produce any document to prove that he has received the paintings as gift from his late father, the receipts out of paintings sold are treated as income from business or profession amounting to ₹ 50 lacs. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) confirmed the action of the AO in assessing the receipts of sale of paintings amounting to ₹ 50 lacs as business income by observing in Para 14 to 18 as under: - “14 I have carefully considered the above submissions of the appellant in the light of the findings made in the assessment order and facts on record. My observations are as under:
The AO has made the first addition of ₹ 50,00,000/- treating it as sale proceeds of paintaings of late M.F. Hussain on the basis of confirmation of receipts of four paintings from two buyers. The confirmation of Art Musings, Mumbai and Manoj N. Israni, as submitted by the appellant, clearly state that the paintings of M.F. Husain were purchased from Mr. Owasis Husain in the months of April and June, 2005. According to the AR of the appellant, these paintings are gifted by Late M.F. Husain during his lifetime to his son, Mr. Owais M. Husain and should be considered as personal effect.
Looking to the overall facts brought on record, I do not find any merit in the argument of the AR of the appellant. Inspite of repeated opportunity given by the AO as well as by the undersigned, no documentary evidence is submitted by the appellant that establishes his claim that these paintings are given as gift by Late M.F. Husain during his lifetime. Even in the copy of the will of Mr. M.F. Husain dated 09.04.2009, which was produced during the appellate proceedings, there is not a whisper of gifting of any paintings to his sons or daughters either during his lifetime or after his death. Therefore, the sale of paintings cannot be considered as sale of gifted paintings. In this regard, I agree with the AO that these paintings are out of the inventory of paintings of M.F. Husain, which were sold by the appellant instead of by Late M.F. Husain during his lifetime. The AO has brought on record that late MF Husain has shown gross professional receipt of ₹ 22.30 crore for the AY 2006-07. When sale of his own paintings are not treated as personal effect by Late M.F. Husain, there is no reason for treating the same as personal effect by the appellant, when source and use of the paintings remain the same.
17. At the same time, I do not agree with the claim made by the AR of the appellant that a no. of expenses have been incurred in dealing with the paintings. Hence, deduction should be granted. It is also admitted by the AR that no details of such expenses are kept by the appellant treating the paintings as personal effects. Looking to the fact that neither the appellant has furnished details of any such expenses nor established incurring of any expenses during the course of sale of the paintings, no expenses is admissible under the Income Tax Act. Hence, the claim made by the AR of the appellant is rejected.
18. Therefore, the stand taken by the AO in taxing the proceeds from sale of paintings of ₹ 50,00,000/- under the head “income from business or profession” is justified and hence confirmed. Thus ground of appeal no. 1 is dismissed.”
Aggrieved, now assessee is in second appeal before Tribunal.
Before us, the learned Counsel for the assessee Shri Prakash Jotwani argued that the assessee is a son of world renowned painter late Shri MF Husain and is currently residing abroad. It was claimed that during the relevant assessment year the assessee had sold the paintings received from his father as gifts. He also earned interest on bonds and savings bank account. Further, the assessee also offered notional income from house property as deemed let out. The assessee claimed that the receipts from sale of paintings were not included in the return of income as their sale proceeds of painting gifted by his father which was treated as personal effect. As such the income from sale of personal effect was not liable to be assessed either as income from business or capital gains. The same was treated as non taxable capital receipts. The learned Counsel for the assessee stated that the assessee is not a dealer in paintings, therefore, there is no question for sale proceeds to be assessed as income from business or profession. The learned Counsel for the assessee took us through the assessee’s paper book page 1 to 2 i.e. computation of income and sated that the only source of income is bank interest and interest from bonds and also deemed rent as notional income from house property. The learned Counsel for the assessee also took us through the page 3 of assessee’s paper book, wherein complete detail of sale of paintings and details of payments is enclosed which reads as under: -
Bank Summary – Citi Bank A/c-5-573051-019 for FY 2005-06 Opening balance as on 2,494,589 01/04/2005 Add deposits Sale of paintings 10,059,465 Interest of bonds 8,000,000 Dividends of MFs 476 Interest on savings A/c 56,301 Other receipts 200 10,916,442 Less Payments Personal expenses 7,351,432 Credit cards 3,077,871 Property purchased 2,500,000 Income tax paid 300,000 13,229,303 Closing Balance as on 181,727 31/03/2006 5. The learned Counsel for the assessee also drew our attention to page 7 of the assessee’s paper book wherein letter of assessee’s sister Raisa Husain confirming the paintings gifted by assessee’s father and the relevant text of the letter reads as under: - “Dear Owais,
I refer to your letter dated 17th December, 2003.
I confirm that our father, Mr. M.F. Husain, did indeed gift to you some of his paintings from time to time.
I am aware also of the paintings he had gifted to you and that you had sold to Mr. Manoj Israni and of the paintings which he had gifted to you and which you had also sold through Art Musings. I was in Mumbai at the time when he had gifted the same to you.
I accordingly, confirm that he did indeed gift these paintings to you in or over the years in the past and that I am aware that you sold them subsequently.”
In view of the above, the learned Counsel for the assessee stated that once this gifted paintings were sold to various customers who have also confirmed (confirmation filed are enclosed in assessee’s paper book pages 9 to 17), these paintings being personal effects are capital in nature. The learned Counsel for the assessee argued that the AO has not applied his mind in this regard and has not specifically disregarded the definition of ‘capital asset’ under section 2(14) of the Act which does not specifically exclude paintings from the purview of ‘personal effects’ and as such not liable to tax. The paintings were excluded from the purview of personal effects and consequently included as a ‘capital asset’ under section 2(14) only in pursuant to the amendment made by the Finance Act, 2007 and that too with effect from 01-04-2008. The above amendment was not made with any retrospective effect. On the other hand, the amendment was intended to take effect from 01.04.2008 and would accordingly apply in relation to the assessment year 2008-09 and for subsequent years. When the amendment itself was brought in with prospective effect, the same cannot be applied retrospectively. In order to attract the tax liability under the head ‘capital gains’, it should first fall within the definition of ‘capital asset’ as contemplated under section 2(14) of the Act. The paintings are excluded from the purview of personal effects and included within the scope of capital asset only with effect from 01.04.2008. Therefore, the capital gains tax on the paintings are liable only with effect from 01.04.2008 in respect for the assessment year 2008- 09 & onwards and not in respect of earlier assessment years. Therefore, the paintings were the personal effect of the assessee and the sale of same would not attract tax liability under the head capital gains. He explained that in subsequent years when the law was amended, the assessee himself has offered sale proceeds from paintings gifted to him by his father as taxable capital gain and paid the taxes accordingly.
On the other hand, the learned Sr. Departmental Representative heavily relied on the assessment order and the findings of CIT(A) that the assessee could not produce evidences to the effect that these paintings were gifted by his father and hence, this has rightly been treated as business income being adventure in the nature trade.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the receipts from sale of paintings were not included in the return of income as their sale proceeds of painting gifted by his father which was treated as personal effect. As such the income from sale of personal effect was not liable to be assessed either as income from business or capital gains. The same was treated as non taxable capital receipts. It also a fact that the assessee is not a dealer in paintings, therefore, there is no question for sale proceeds to be assessed as income from business or profession. Once this gifted paintings were sold to various customers who have also confirmed that these paintings being personal effects are capital in nature. We have gone through the definition of ‘capital asset’ under section 2(14) of the Act which does not specifically exclude paintings from the purview of ‘personal effects’ and as such not liable to tax. The paintings were excluded from the purview of personal effects and consequently included as a ‘capital asset’ under section 2(14) only in pursuant to the amendment made by the Finance Act, 2007 and that too with effect from 01-04-2008. The above amendment was not made with any retrospective effect. On the other hand, the amendment was intended to take effect from 01.04.2008 and would accordingly apply in relation to the assessment year 2008-09 and for subsequent years. When the amendment itself was brought in with prospective effect, the same cannot be applied retrospectively. In order to attract the tax liability under the head ‘capital gains’, it should first fall within the definition of ‘capital asset’ as contemplated under section 2(14) of the Act. The paintings are excluded from the purview of personal effects and included within the scope of capital asset only with effect from 01.04.2008. Therefore, the capital gains tax on the paintings are liable only with effect from 01.04.2008 in respect for the assessment year 2008-09 & onwards and not in respect of earlier assessment years. Therefore, the paintings were the personal effect of the assessee and the sale of same would not attract tax liability under the head capital gains. As explained by assessee that in subsequent years when the law was amended, the assessee himself has offered sale proceeds from paintings gifted to him by his father as taxable capital gain and paid the taxes accordingly. Accordingly, we are of the view that addition on account of sale of paintings received by assessee from his late father as gift is not taxable being personal effect. Accordingly, we delete the addition of ₹ 50 lacs made by the AO and allow this issue of assessee’s appeal.
The second issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in treating the balance receipts from sale of paintings amounting to ₹ 50,59,465/- as unexplained income. For this assessee has raised the following ground No. 2: - “Ground No. 2: Unexplained income' or Capital receipt not subject to tax' (I) The learned CIT(A) erred in confirming the addition of Rs. 5059465/- arising from the sale of painting (which were gifted from his father M. F. Husain), as Unexplained income' instead of treating the same as 'Capital Receipt not subject to tax'.
(ii) The learned CIT(A) erred in confirming the addition by considering the source, use and nature of the holding of the paintings sold in the hands of M. F. Husain (presuming that it formed a part of the father's unsold stock), instead of considering the nature of holding in the hands of the Appellant (i.e. as personal effect, which is outside the scope of the definition of capital asset')”
The facts and circumstances are exactly identical as in the above ground we have already dealt with, but only difference is that as regards to these receipts of ₹ 50,49,465/- the assessee could not produce confirmations from the buyers of the paintings and the details of receipts from bank account. The CIT(A) also confirmed this by observing in Para 19 as under: - “19. The AO has made another addition of Rs. 50,59465/- to the total income on account to of unexplained credit entries in the Citi Bank account of the appellant, as discussed in the preceding paragraphs Before the AO no proof or evidence was submitted to explain the nature and source of these entries. Even during the appellate proceedings the AR of the appellant was specifically requested to submit some documentary evidence to establish that these entries in the bank account represent sale proceeds of paintings of Late M. F. Husain, However, the AR explained his inability to submit any such details Under these circumstances it is concluded that the appellant has failed to establish the source and nature of the credit entries in his CITI Bank to extent of Rs. 5059465/- and hence the addition made by the AO treating it from unexplained source is confirmed. Hence, the ground of appeal No. 2 is dismissed.”
11. Before us, the learned Counsel for the assessee only requested for setting aside the issue to the file of the AO for the reason that only because of the passage of time and because the assessee has to live abroad to be with his father that the assessee is not able to recall or get details of the purchasers. The assessee has even earlier stated that all such amounts were from the sale of paintings. The assessee has fortunately been able to recall some information and to get confirmation from some of the purchasers i.e. Mr. Manoj lsrani and Art Musings. All this corroborates his statements. Unfortunately, the assessee at present does not have details of the remaining amount but reiterates the statement that it is from the sale of paintings, gifted by his father to him is correct, no addition is required to be made on this account. The assessee confirms that he has made umpteen attempts to obtain details from the bank to know the source of the credit entries which would held him re- collect the source and the nature of the receipts. Accordingly he requested for one more chance to explain his case.
On the other hand, the learned Senior Departmental Representative objected to setting aside the order of the lower authorities to the file of the AO for the reason that the assessee was given sufficient opportunities to produce the details.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that now assessee’s Counsel before us has clearly undertook to file the necessary details to prove that receipts from sale of paintings are on account of sale to the respective buyers. He undertook to file the confirmation from these buyers and the relevant evidences to prove that the sale proceeds are deposited in the bank account will be produced before the Assessing Officer. In such undertaking, we are of the view that the primary responsibility/onus is on assessee to file these details and in term of this undertaking we set aside this issue to the file of the Assessing Officer.
The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in adopting Annual Let able value at ₹ 9,000 PM in respect of each of the flat i.e. in respect of two worli flats, being deemed let out premises under section 23(1)(a) of the Act. For this assessee has raised the following ground No. 3:-
Ground No. 3: 'Annual Let Out Value' (i) The learned AO erred in computing the Annual Let Value u/s. 23(1)(a)/(b) of the 2 Worli properties (being deemed let-out premises) at Rs. 900000/- each, based on unauthentic information based on some 'local enquiry', instead of adopting the Municipal Ratable value as (ii) The learned AO failed to take into consideration the various case laws. which have explained the words used in section 23(1)(a), i.e. 'what might be reasonably expected from year to year", which mean the Actual rent or Municipal ratable vale, whichever is higher.”
15. The assessee owns three flats i.e. one at Chennai which is treated as self occupied property by the AO, for which there is no dispute. The other two properties being flat at Queens court Worli and Dhun Apartment Worli Mumbai. The AO estimated the reasonable let out value of the house property after taking inspectors report. The report is on the basis of local enquiry conducted in the surroundings areas of the building situated and the going rent per square feet is ₹ 50.70 per square ft. per month. Based on inspectors report, the AO estimated the rent per month for each of flat at ₹ 75,000/- per month. Therefore, the AO worked out the ALV of the flat at Dhun cooperative society Worli Mumbai at ₹ 9 lacs and for other flat at queens court Worli Mumbai at ₹ 9 lacs. Aggrieved assessee preferred the appeal before CIT(A).
16. The CIT(A) confirmed the action of the AO by observing in Para 31 as under:-
31. In the instant case, the AO, by deputing inspector of Income-tax in that locality, has reached to the conclusion that the fair rent @ ₹ 9,00,000/- per annum for FY 2006-07 is justified. In the judgments cited above. Hon'ble courts have considered ALV of 7-8.5% of fair market value of the property as reasonable. I find that as per the estimate of the AO, the Annual let out value (ALV) of ₹ 9,00,000/- comes to 6% of the fair market value of the flat at Queens Court as on 31.03.2007, if the same value is adopted as on 31.03.2006. Even if inflation in the value of the property between the period 31.03.2006 and 31.03.2007 is accounted for, still ALV will be below 7%. Since both the flats are situated in the same locality, same ALV for the flat at Queens Court can be adopted as that of the flat situated in Dhun Apartment. Hence, the estimation of ALVs of ₹ 9,00,000/- for the two flats are found to be just and fair and hence confirmed. However, I agree with the appellant that since the possession of the flat in Queens Court was taken on 18 August, 2005, the ALV needs to be estimated for only seven months and 12 months instead of for the entire year. Therefore, the AO is directed to compute the deemed rent under section 23(1)(a) from the two flats at Worli, Mumbai by adopting ALV of ₹ 9,00,000/- for Dhun Apartment for the entire year and the ALV of ₹ 9,00,000/- for the Apartment at Queen’s Court for seven months and 12 days only. Thus ground of appeal No.3 is partly allowed.
Aggrieved assessee came in second appeal before Tribunal.
We have heard rival contentions and gone through the facts and circumstances of the case. As cited by the assessee, the decision of Hon’ble Bombay High Court in the case of CIT vs. Tip Top Typography [2014] 368 ITR 330 (Bom.), wherein it is held that for computing letable value, Municipal rateable value can be adopted by the AO. For this Hon’ble Bombay High court observed as under:-
“48. We are not in agreement with Shri Chhotaray that the municipal rateable value cannot be accepted as a bona fide rental value of the property and it must be discarded straightway in all cases. There cannot be a blanket rejection of the same. If that is taken to be a safe guide, then, to discard it there must be cogent and reliable material.
We are of the opinion that market rate in the locality is an approved method for determining the fair rental value but it is only when the Assessing Officer is convinced that the case before him is suspicious, determination by the parties is doubtful that he can resort to enquire about the prevailing rate in the locality. We are of the view that municipal rateable value may not be binding on the Assessing Officer but that is only in cases of afore-referred nature. It is definitely a safe guide.
In view of the above, we direct the AO to compute the deemed rent as per Municipal rateable value and assess the income accordingly. This issue of assessee’s appeal is set aside to the file of the AO.
In the result, the appeal assessee is partly allowed.
Order pronounced in the open court on 11.05.2018.