ITO 5(1)(3), MUMBAI vs. C.DIGITAL ARTS & CRAFTS P. LTD, MUMBAI

In ground no.1, the Revenue has challenged deletion of addition of ` 1,80,000, made on account of professional charges.

Brief facts are, the assessee company is engaged in the business of dealing in arts. For the assessment year under dispute, the 2 M/s. C. Digital Arts & Crafts Pvt. Ltd. assessee filed its return of income on 29th September 2011, declaring total income of ` 3,06,117. During the assessment proceeding, the Assessing Officer noticing that the assessee has claimed deduction on account of payment of legal and professional charges called upon the assessee to furnish the details with supporting evidence to justify the claim. From the details furnished, he found that the assessee has debited the amount of ` 1,80,000, towards professional fees paid / payable to Shri Porus Kaka. However, on verifying the bills submitted, he found that the bill raised, though, was dated 28th February 2011, however, it related to work done for the period from 9th May 2008 to 19th September 2009. The Assessing Officer being of the view that the expenditure claimed as deduction did not relate to impugned assessment year but related to prior period disallowed it. Being aggrieved of such disallowance, the assessee preferred appeal before the first appellate authority.

After considering the submissions of the assessee and documentary evidences produced, the learned Commissioner (Appeals) being satisfied with the fact that the expenditure crystallised in the impugned assessment year allowed assessee’s claim by relying upon the decision of the Hon'ble Delhi High Court in SMCC Construction India Ltd., 38 taxmann.com 146 (Del.).

Learned Authorised Representative strongly supporting the decision of the learned Commissioner (Appeals) submitted that when the Assessing Officer himself has admitted that the bill for the expenditure incurred was raised in February 2011, it cannot be said that the expenditure crystallized in the earlier year. He submitted, as the liability was determined and crystallised during the year it has to be allowed in the impugned assessment year.

We have heard rival submissions and perused material on record. Undisputedly, the Assessing Officer has accepted the fact that the bill for the legal and professional service rendered was raised on 29th February 2011 i.e., within the financial year relevant to assessment year under dispute. However, simply relying upon the fact that such bill relates to service rendered during the period May 2008 to September 2009, the Assessing Officer has disallowed assessee’s claim of deduction by holding that the expenditure related to prior period. In our view, the expenditure claimed has to be allowed in the previous year wherein the liability is determined and crystallised. On a perusal

In ground no.2, the Revenue has challenged the decision of the first appellate authority in allowing assessee’s claim of loss amounting to ` 64,68,016 on sale of paintings.

Brief facts are, during the assessment proceeding, the Assessing Officer on verification of details of sale and purchase of painting found that the assessee has shown loss in respect of many sale transactions. He further alleged that the sale transactions where los was shown were mostly made with group concerns. He further noted that all paintings on sale of which loss was shown were purchased either during the year or earlier year from its group concern, Osain C.A. Pvt. Ltd. and Osian Art Fund. Since, the loss making transactions were with 5 M/s. C. Digital Arts & Crafts Pvt. Ltd. the group concerns, the Assessing Officer entertained a suspicion that for reducing the profit derived from other transactions, the assessee has deliberately entered into such loss making transactions. Accordingly, he issued a show cause notice dated 5th Marcy 2014, requiring the assessee to prove the genuineness of the loss making transactions with supporting evidence. In reply to the show cause notice, it was submitted by the assessee that due to melt down in the art market during the relevant period and continuous decrease in the cost of the painting, the management decided to sell maximum paintings in that year to recover whatever price available. Hence, some of the paintings were sold at loss. He submitted, only paintings of well known artists could fetch higher price. It was submitted, the paintings were sold at arm's length price.

The learned Commissioner (Appeals) after considering the submissions of the assessee in the context of facts and material on record observed that neither there can be any restriction in buying or selling paintings to the sister concerns as they are in the same line of business nor on the basis of such transaction it can be presumed that to generate loss the assessee has entered into such purchase and sale transactions with sister concern. On verifying the factual details submitted before him, the learned Commissioner (Appeals) found that it is not a fact that the assessee has only incurred loss from sale of 6 M/s. C. Digital Arts & Crafts Pvt. Ltd. paintings to sister concern but the assessee has also earned profit from sale of painting made to sister concerns. He also found that many of the paintings sold where loss occurred were out of opening stock and many paintings bought during the year remained unsold as closing stock. He also noted that the assessee has sold paintings to outsiders by incurring loss. Further, he observed, the Assessing Officer has not failed to establish that purchases were inflated and sales were suppressed by bringing on record comparable cases. On the aforesaid basis the learned Commissioner (Appeals) deleted the addition made by the Assessing Officer.

Learned Departmental Representative relying upon the observations of the Assessing Officer submitted, the assessee has not established the genuineness of the transactions by bringing on record supporting evidence. She submitted, neither movement of paintings nor money was demonstrated by the assessee, except accounting entries. She submitted, when the assessee has entered into transactions with related parties, the burden is entirely on the assessee to establish that the price paid for such transaction is at arm’s length. The learned Departmental Representative submitted, without properly appreciating the fact the learned Commissioner (Appeals) was not justified in deleting the addition.

Learned Authorised Representative submitted, the observations of the Assessing Officer that the paintings were sold to sister concern, is baseless as none of the parties to whom paintings were sold during the year were sister concerns of the assessee. He submitted, the assessee has entered into genuine purchase / sale transactions and considering the prevailing market condition and also the fact that paintings of not so reputed artists available in the stock of the assessee could not be sold, the assessee took a business decision to sell the paintings to Neville Tuli who offered to buy the paintings either himself or through Osian C.A. Pvt. Ltd., wherein he was a director. Learned Authorised Representative submitted, even Osian C.A. Pvt. Ltd. also suffered loss on sale of paintings purchased from the assessee. The learned Authorised Representative submitted, it is not a fact that assessee has only shown loss from sale of paintings but in many instances, the assessee has sold paintings at a profit. He, therefore, submitted, the addition made by the Assessing Officer on mere presumption and surmises was rightly deleted. He submitted, ultimately when it is found that godown rent paid by the assessee is genuine the loss incurred on sale of painting cannot be held to be bogus. He further submitted, the Assessing Officer having not rejected the books of account the loss claimed by the assessee cannot be disallowed.

We have heard rival submissions and perused material on record. A reading of the impugned assessment order would reveal that the primary reason for disallowance of assessee’s claim of loss by the Assessing Officer is the loss making sale transactions were with group concerns. Of–course, he has also observed that there is no evidence of delivery of the paintings on receipt of payment by the assessee. However, after examining the details of persons with whom the so called loss making transactions were made during the year it is to be noted that Neville Tuli is no way related to the assessee. Further, from the share holding pattern of KKT Art Advisory Services Pvt. Ltd. It appears that it is not a related party. However, it needs to be observed, one of the directors of the assessee company Smt. Sangeeta Kathiwada, was a share holder of Osian C.A. Pvt. Ltd., during the relevant period. Therefore, the observations of the Assessing Officer that loss making sale transactions were with related parties / group concerns, is not fully correct as KKT Art Advisory Services Pvt. Ltd. And Neivelle Tuli are not related parties or group concerns. Therefore, the loss arising from transactions with these parties cannot be said to be non–genuine. As far as loss claimed of ` 33.50 lakh on sale of paintings to Osian C.A. Pvt. Ltd. is concerned, though it may be a fact that one of the directors of the assessee company is also a shareholder in Osian C.A. Pvt. Ltd. during the relevant previous year, however, for that reason alone it cannot be 9 M/s. C. Digital Arts & Crafts Pvt. Ltd. said that the assessee has generated loss to suppress profit. As could be seen, in case of two paintings sold by the assessee to Osian C.A. Pvt. Ltd., viz. Jayshree Chakravarty and Atul Dodiya, Osian C.A. Pvt. Ltd. has suffered further loss on sale of those paintings. Therefore, the claim of the assessee that sale of those paintings at a good price was difficult, hence, the assessee took a business decision to sale them at a loss to remove from the stock appears to be reasonable. Further, the learned Commissioner (Appeals) has also recorded a finding of fact that in the relevant previous year, the assessee has sold paintings to outsiders for loss. Therefore, the aforesaid fact also indicates that the prevailing market condition was not conducive for fetching good price for the paintings. Since the paintings sold by the assessee at loss were part of the old stock available with the assessee, the sale of such paintings at a lesser price is understandable. In view of the above, we do not find any infirmity in the order of the learned Commissioner (Appeals), hence, uphold the same.

In the result, Revenue’s appeal is dismissed. Order pronounced in the open Court on 21.02.2018