SATISH GUJRAL vs. ADDL CIT RANGE -32,

PER CHANDRA MOHAN GARG, J.M.

The above captioned cross appeals by the assessee as well as the Revenue have been directed against the order of CIT(A)-XXVI, New Delhi dated 30.03.2007 in Appeal No. 129/06-07 for assessment year

2003-04.

2 ITA Nos. 2932 & 3397/Del/2007 REVENUE’S APPEAL IN ITA NO. 2932/DEL/2007

I.T.A. No. 2932/Del/2007 read as under:-

“1. The Ld. CIT(A) has erred in deleting the addition of Rs. 20,70,000/- being work in progress as during assessment proceeding, the assessee furnished photo f the semi finished sculpture which was finished in the next year and installed at the site of power Grid Corpn.

3 ITA Nos. 2932 & 3397/Del/2007 6. The Ld. CIT(A) has erred in allowing full claim of assessee amounting to Rs. 1,09,92,953/- u/s 80RR ignoring the fact that the assessee had filed necessary certificates in form 10 H only in respect of Rs. 19,98,700/-.

assessee is an artist who derives income from making and selling

paintings and sculpture etc. The assessee filed his return of income

declaring an income of Rs. 1,06,18,392/- which was processed u/s

143(1) of the Income tax Act, 1961 [for short, 'the Act']. According to

the audit report filed with the return of income, the assessee

followed the method of accounting in the previous year relevant to

the A.Y under consideration which was professional/artistic income

on receipt. The assessee accounts for his professional receipts as an

4 ITA Nos. 2932 & 3397/Del/2007 artist on receipt basis. No value was being assigned for their stocks

as on the date of the balance sheet for the drawing and studio

materials and the paintings etc under preparation or completed but

held by him. This method of accounting followed by the assessee, has

been accepted by the department for the past many decades. The

learned AO has in this year equated the professional with a normal

business man and added to income for raw materials, work in

progress and unsold paintings on presumptions and surmises. The

assessee who has permanent physical disability of hearing and speech

and was being allowed deduction u/s 80U for many decades. The

learned AO has allowed this deduction also. The assessee who has

participated in an exhibition cum sale organized in USA by Living

Media Ltd. The receipts /proceeds from the exhibition were brought

into India, in convertible foreign exchange on behalf of the assessee

by Living Media Ltd., on behalf of the assessee and were duly

supported by FIRCS. The AO has denied the deduction u/s 80RR on

such receipts brought in India and has also disallowed payments to

one Mr. Ramesh Jena by producing a statement recorded by the

Department wherein he denied even knowing the assessee. The

assessee produced photographs of that person working along with the

assessee, bank statement of the assessee showing payments to him

5 ITA Nos. 2932 & 3397/Del/2007 by cheques as well as his bank account number. Further the AO was

requested to produce him for cross examination for answering as to

how his signatures and bills bearing his signatures were with the

assessee as well as his having collected cheques from him. The

department has not produced him for cross-examination, but

disallowed payments to him on the basis of his statement.

Aggrieved, the assessee went in appeal before the ld. CIT(A) who

granted part relief to the assessee. Now the assessee is in appeal

agitating the part relief granted by the ld. CIT(A) whereas the

revenue is in appeal against the deletion of additions.

relevant material on record.

20,70,000/- being work in progress. The AO observed that the assessee

had sold a 15 feet sculpture to Power Grid Corporation at Rs.

46,00,000/-. The assessee had stated that the payments were received

on dates which fell under the A.Y 2004-05 and not in A.Y 2003-04

which is the year under consideration. Bill of Shri Ramesh Jena was

dated 30.3.2004. The assessee’s assertion was that the payments of

Rs. 7,16,720/- to Shri Ramesh Jena were relevant to A.Y 2004-05 and

6 ITA Nos. 2932 & 3397/Del/2007 not 2003-04. Not satisfied with the explanation tendered by the

assessee, the AO made addition of Rs. 20,70,000/-. Aggrieved, the

assessee went in appeal before the ld. CIT(A) who granted relief to the

assessee. Now the Revenue is in further appeal before the Tribunal

against the relief granted to the assessee.

relief to the assessee without any reasonable and justified reasoning.

Therefore, the impugned order may be set aside by restoring that of

the AO on this issue.

before the authorities below and submitted that payments received

were relating to A.Y 2004-05 and not 2003-04 which is the A.Y under

consideration. The ld. AR submitted that the AO was not right in

coming to the conclusion that since the sculpture was installed in May

2003, the work in progress related to March 2003.

that the ld. CIT(A) has granted relief to the assessee with the

following conclusion and findings:

“From the facts of the case, it is seen that the work was discussed in May 2003 and subsequently commissioned vide

7 ITA Nos. 2932 & 3397/Del/2007 letter of July 2003. Therefore, to value the incomplete sculpture on the basis of the estimated market value is not correct. On the one hand, the AO has estimated the cost at 10% of the market value which comes to Rs. 2,30,000/- even if the market rate is applied. Therefore, the work in progress could at the most be estimated, if at all, at Rs. 2,30,000/- and not Rs. 20,70,000/- representing the profit/income which was yet to be earned by the assessee as on that date.”

relevant material on record. We are in agreement with the findings of

the ld. CIT(A) that the A.O was not correct in holding that the 50% of

the estimated value of Rs. 23 lakhs is taken as work in progress not

shown by the assessee. We may point out that during the earlier A.Y,

the department accepted a factual position that the assessee did not

show any work in progress on the date of the balance sheet for the

drawing and studio material and the painting etc under preparation or

completed. Hence the issue of work in progress cannot be raised

without any sustainable basis. The ld. CIT(A), after properly analyzing

the facts of the case, rightly held that even if market rate is applied,

then also as per basis of estimated cost @ 10% of the market value of

the work in progress, at the best, can be estimated to Rs. 2,30,000/-

and not Rs. 20,70,000/-. In view of the above factual position and

stand of the A.O in previous A.Ys the conclusion of the ld. CIT(A)

8 ITA Nos. 2932 & 3397/Del/2007 correct and we have no reason to interfere with the same.

Accordingly, Ground No. 1 of the Revenue is dismissed.

be sold at New York exhibition and the assessee did not reflect them

either in the sales or in the closing stock.

consideration, Art Today - a division of Living Media India Pvt. Ltd.,

arranged an exhibition at New York of the paintings etc of the assessee. As per the contract dated 14th June the total number of

paintings which were handed over to Art Today was 26.

As per the contract, the Art Today was to arrange: Place of display of the paintings. (a) Publicity and advertisement at his own cost. (b) Meet the cost of air-conditioning, electricity, lighting, display, (c) security and literature etc.

Art Today had to arrange transportation of paintings to New (d) York after completing the formalities on behalf of the assessee:

NOC from Archeological Survey of India to ensure that they (i) are not antique;

FERA/FEMA regulations and furnishing of undertaking to (ii) bring the foreign exchange on behalf of the assessee to India for the paintings sold.

9 ITA Nos. 2932 & 3397/Del/2007 Arrange custom clearance in India as well as USA in respect (iii) of the paintings.

Arrange packing, forwarding and insurance of the (iv) paintings.

The sharing of sale proceeds of paintings had to be made in the

manner mentioned in schedule attached to the agreement. As per

schedule, the assessee was entitled for the Artist Price mentioned in

front of each painting, whereas the difference between the Artist’s

Price and suggested sale price was to be retained by Art Today as its

share. Out of 26 paintings sent to New York, only 19 paintings could

be sold and the assessee had received Rs.44,80,000/- as his share and

had claimed the deduction u/s 80RR of the Act thereon. The

remaining unsold seven paintings were brought back to India. The AO

from same website obtained information of the paintings displayed.

On the basis of such information, the AO alleged that the assessee had

displayed 24 paintings and out of them 11 paintings were sold and 13

paintings remained unsold. The AO further alleged that such 11

paintings were sold for $92,500 and by applying the conversion rate of

Rs.48, the proceeds work out to Rs.44,40,000 approximately which

almost tallied with the receipts shown by the assessee at Rs.44,80,000

received by Art Today Living Media. In the earlier part of the order,

the AO alleged that the assessee is a commercial artist and he reached

10 ITA Nos. 2932 & 3397/Del/2007 the pinnacle of his career and already developed a style and his

paintings are assembly type production. Hence whatever the paintings

remained there, the same should be shown as closing stock of the year

and then observed that the cost of paper, color and ink would be

about 10% of the price of paintings. On the basis of such inference,

the AO alleged that because unsold 13 paintings have not been

brought back to India and not showing part of closing stock, hence he

presumed that the assessee has sold the paintings outside the books of

account. He valued the paintings at gross price at $1,13,500 and by

multiplying the conversion rate of Rs.48.67, the gross price was

worked out at Rs.54,48,000/- and out of that after allowing the

expenditure of 10% for this stock, the AO worked out the balance

figure at Rs.49,03,200/- and treated the same as sale outside the

books of account.

contended that he was an artist by profession and had been a regular

income-tax assessee for more than 40 years. The assessee accounts his

professional receipt as an artist on receipt basis. In other words, as

and when any painting is sold, the whole proceed is accounted as

professional receipt and this method of accounting has always been

accepted by the department in the past as well as in subsequent

11 ITA Nos. 2932 & 3397/Del/2007 years. In this isolated year, the AO has stated that the professional

accounting should also be on same lines as that of normal businessman

and accordingly the unsold stock of paintings and work in progress of

incomplete paintings and sculptures be also shown as closing stock.

The assessee objected to such observation of AO and stated that:

Artist, playwright, author, poet, musician and similar (i)

professionals are creative and intellectual persons when they do

their work, it is done out of inspiration and creative urge.

A work created by artist may be well appreciated by the public or (ii)

may receive a lukewarm response on painting of some size on the

same medium can fetch him boutiques or brickbats. Sometimes

the work of an artist is not appreciated in his lifetime but

appreciated posthumously (Monalisa painting of Leonardo Devinci

is the example thereof).

Creative work of an artist, author, playwright or poet cannot be (iii)

equated and compared with the goods produced by a

manufacturer or businessman.

(iv) For artist, the papers, canvas, ink, cloth, stone etc. are only the

medium of creation and expression of his urge.

12 ITA Nos. 2932 & 3397/Del/2007 The volume of papers, ink, canvas etc. consumed by the artist (v)

cannot determine the cost of any painting because an artist can

start painting on a canvas for days together and can destroy it or

scrap it altogether if it does not come out as per his creative

concept. An artist can mix number of colors and can wash them

of in drain if they do not match with shade as per his creative

concept.

(vi) Neither in past nor in subsequent years, the assessee has ever

shown the closing stock of paintings and on the contrary as and

when any painting is sold, the same was treated as professional

receipt.

From the relevant operative part of the order of the ld. CIT(A), we

observe that he granted relief to the assessee by observing as follows:

“Therefore, after considering the submissions of the appellant and the circumstances of the case, it is held that the AO’s action in holding that the closing stock is not properly valued and the appellant had sold some paintings outside the books adopted by of account is not correct and cannot be upheld. The very method the AO to arrive at the value of closing stock and the value of sales made outside the books of account by applying a uniform rate which has been culled by the AO from a Website and Internet and deducting an estimated expenditure of 10% from the above figure to

13 ITA Nos. 2932 & 3397/Del/2007 arrive at the net undisclosed income of the appellant is held to be faulty and is held to be arrived at on the basis of incorrect appreciation of the facts and circumstances. It is further observed that the method of accounting followed by the appellant wherein sale proceeds are recorded as and when the sale materialized is upheld to be correct. The AO did not have sufficient reasons to hold that the appellant’s method of accounting was incorrect. The application of the case of British Paints Ltd to the case of the appellant is held to be inadequate and erroneous on the ground that one can only likes can be compared with the likes. Since the respective facts of the two cases [British Paints Ltd and that of the appellant] are different and are in fact, miles apart, the same cannot be equated. The two could not have been possibly compared. Therefore, the imaginary thesis constructed by the AO on the basis of certain information on the Internet is not found to be sufficient grounds for arriving at the conclusion that the appellant was engaged in sales outside the books of accounts and a wrong method of accounting was followed. . The very foundation upon which the AO has built the shaky edifice of undisclosed income is found to be weak. Hence it is held that the same deserves to be demolished. The addition made on this account is directed to be deleted.”

to painting displayed in New York, the assessee stated that such

information is not correct and cannot be relied upon when sufficient

14 ITA Nos. 2932 & 3397/Del/2007 contrary material is available on record. As per records 26 paintings

were dispatched after obtaining NOC from Archeological Survey of

India. As per records 19 paintings were sold and the sale proceeds of

such paintings were brought to India by Living Media on behalf of the

assessee as per FIRC. The remaining seven unsold paintings were

brought back by Living Media and handed over to the assessee.

Rs.44,80,000 [as his agreed share] as admitted by the AO, as his share

and had claimed the deduction u/s 80RR of the Act. The assessee,

therefore, concluded that the assumption of the AO that the figure of

unsold paintings at 13 [it is actually seven] is wrong. In the absence of

any evidence, that such paintings have been sold out of the books of

account is wrong. The ld. AR pointed out that actually the assessee

sent 26 paintings and not 24 as wrongly noted by the A.O and after

sale of 19 paintings, 7 paintings were brought back to India and

handed over to the assessee by Living Media. The ld. AR pointed out

that when the assessee is entitled for deduction u/s 80RR of the Act in

respect of professional income earned as an artist then he is not

required to hide sale of painting. When we logically analyze the facts

of the case on the touchstone of the provisions of the Act, at the very

15 ITA Nos. 2932 & 3397/Del/2007 outset, we note that the A.O proceeded to make addition by alleging

sale of paintings sent abroad and sold outside the books of accounts

but he ignored the very fact that when the income of the assessee

from abroad is entitled for deduction u/s 80RR of the Act, then why

the assessee would hide its income from abroad on sale of paintings.

After evaluation of the allegations of the A.O and explanation of the

assessee, the ld. CIT(A) rightly held that the impugned figure to arrive

at the undisclosed income of the assessee is faulty and the same was

arrived at on the basis of correct appreciation of facts and

circumstances. As we have already observed that the method of

accounting followed by the assessee, wherein sale proceeds is

recorded as and when sale is materialized has been accepted by the

Revenue in the earlier A.Ys and the present case of the A.O did not

have sufficient reasons to hold that the assessee’s method of

accounting is incorrect or different from the earlier A.Ys. Therefore,

we also observe that the addition made by the A.O on the basis of

incorrect facts cannot be held a sustainable. The imaginary facts

leading to the impugned addition are not based on correct facts but

the same are based on the information on the internet which cannot

be relied for establishing allegation of sale outside books of account.

16 ITA Nos. 2932 & 3397/Del/2007 15. On the contrary there was sufficient evidence to establish that

Living Media had brought back to India the unsold seven paintings and

returned them to the assessee. As per the method of accounting

followed consistently in the past as well as in the subsequent years, as

well as accepted by the Department, no closing stock had ever been

taken into account and the professional receipts had been shown as

and when any paintings were sold. This method of accounting has

been consistently followed.

assessee, the CIT (A) was satisfied with the contentions of the assessee

and held as under:

The normal process of manufacture cannot be applied to the (i) creative process of an artist. The method of accounting adopted by the appellant is a reasonable (ii) and correct method and need not be disturbed. (iii) As far as paintings sent for display at New York, the information obtained from website was not authentic. (iv) The assessee provided convincing evidence about the total number of paintings dispatched. Out of 26 paintings, only 19 paintings were sold and the Art Today (v) of Living Media has duly certified the payment of assessee’s share therein about which necessary evidence available on record. (vi) The assessee provided convincing evidence relating to the Art Today and also relating to the unsold paintings which have been sent back to India.

17 ITA Nos. 2932 & 3397/Del/2007 (vii) Once having held that the method of accounting of the appellant is that professional fee was recorded only as and when sale prices of paintings is received, the AO’s action of estimating the value of paintings alleged to have been sold outside the books of account without corroborating evidence cannot be upheld. This method of accounting has been consistently followed by the assessee. The valuation of paintings on a fixed price is also not correct and it is not correct to adopt the suggested price of the paintings because there can be many different situations with regard to valuation of paintings. (viii) The AO has not made out a case that the assessee has not recorded the sale proceeds in the books of account even after the sale has been made.

relevant material on record. Before us also the rival representative

have reiterated their contentions as made before the authorities

below. We find force in the contention of the ld. AR that the assessee

is an artist by profession and the professional receipts are declared

and offered as and when any painting is sold. This method of

accounting has consistently been followed by the assessee in earlier

year and also in subsequent years. Assessment Year 2006-07 has also

been completed u/s 143(3) of the Act and no addition has been made

on account of closing stock. The ld. AR has relied on the various

decisions in support of his contention including the decision in 193 ITR

321 (SC), Radha Soami Satsang vs. CIT 220 CTR 105 (SC), CIT vs. J.K.

Charitable Trust 264 ITR 276 (Del), CIT vs. ARJ Security Printers 113

ITD 624 (Del - T.M.), DCIT vs. Jindal Photo Films 304 ITR (AT) 76

18 ITA Nos. 2932 & 3397/Del/2007 (Mum), IRB Infrastructure Ltd. vs. ITO. We also find that the ld. CIT(A)

has held that once having held that the method of accounting of the

appellant is that professional fee was recorded only as and when sale

prices of paintings is received, the AO’s action of estimating the value

of paintings alleged to have been sold outside the books of account

without corroborating evidence cannot be upheld, which is correct

and justified. The ld. CIT(A) has categorically held that the assessee

provided convincing evidence relating to the Art Today and also

relating to the unsold paintings which have been sent back to India.

In view of the above submissions and finding of the ld. CIT(A), we

decline to interfere with the just and proper conclusion arrived at by

the ld. CIT(A) which we uphold and dismiss ground No. 2 raised by the

revenue.

evidence from the assessee in violation of Rule 46A of the income tax

rules. The ld. DR strongly agitated the ld. CIT(A)’s action in accepting

fresh evidence.

46A of the I.T. Rules, 1962 by the ld. CIT(A) as the additional evidence

has not been considered and the same is not a basis for granting relief

to the assessee on any grounds.

19 ITA Nos. 2932 & 3397/Del/2007 20. We have heard the rival submissions and have perused the

relevant material on record. From the relevant operative part of the

impugned first appellate order as reproduced above, we observe that

the ld. CIT(A) has not granted relief on the basis of so called

additional evidence. The assessee submitted additional evidence

alongiwth letter dated 19.1.2007 but information regarding sales and

remittances which form basis of relief by the ld. CIT(A) was already on

the record of the A.O. The ld. counsel of the Revenue could not

controvert this fact that for granting relief the papers submitted as

additional evidence have not been considered hence there was no

violation of Rule 46A of the Act. Thus we are inclined to hold that

Ground No. 3 of the Revenue is not sustainable in the light of the facts

and circumstances of the case as merely because some additional

evidence were submitted by the assessee during the first appellate

proceedings, which was not considered for granting relief to the

assessee violation of Rule 46A cannot be alleged against the impugned

order. Thus Ground No. 3 being devoid of merits stands dismissed.

With regard to the 4th ground, the ld. DR contended that Ld. 21.

CIT(A) was not justified in deleting bogus payment of Rs. 1,56,010/-

without appreciating the fact that the said Shri Ramesh Jena has

clearly denied, in his recorded statement that he had never rendered

20 ITA Nos. 2932 & 3397/Del/2007 any service to the assessee to receive the payment.

made to Ramesh Jena on the ground that the assessee failed to file

details of bank account in which the payment was credited. The CIT

(A) accepted the claim of the assessee and deleted the disallowance

made by the AO. Aggrieved, the Revenue is in Appeal before the

Tribunal.

relevant material on record. The ld. AR reiterated his submissions

made before the authorities below and submitted that and AO has

abdicated his power to ITO Balasore and has not made any enquiry on

his own which is not permissible under law. In this connection, the ld.

AR relied on the decisions in the case of 144 ITR 225-237 (SC), CIT vs.

Mahindra & Mahindra Pvt. Ltd., 74 ITR 115 (Patna), Elphinstone Picture

Palace vs. UOI. The ld. AR vehemently submitted that enquiry by ITO

Balasore was made behind the assessee which cannot be used against

the assessee in the absence of cross- examination. The ld. AR relied on

the judgments of the Hon'ble Supreme Court reported in 125 ITR 713

(SC), and the Hon'ble High Court of Delhi in the case of Kishan Chand

21 ITA Nos. 2932 & 3397/Del/2007 Chela Ram 306 ITR 27 (Del). We find force in the submission of Shri

Ramesh Jena has not assisted the assessee, how he got passes from the

office of Power Grid Corporation. From the perusal of the relevant

operative part, we find that the ld. CIT(A) has observed that the AO

obtained statement from Shri Ramesh Jena stating that he never did

any work for the assessee, then how come Shri Ramesh Jena obtained

payments through cheques from the bank account of the assessee to

his own account if he did not do any work for the assessee? This

remained unanswered by the AO. The AO had also not produced his

own witness, when the assessee demanded that he may be produced

before him for cross examination. Lastly, we find force in the

contention of the ld. AR that if Shri Ramesh Jena did not work for the

assessee, then how he could get temporary passes to work in the

office of Power Grid Corpn Ltd to work on the sculpture. Accordingly,

we find no infirmity in the order of the ld. CIT(A) holding the payment

made has been genuinely made to Shri Ramesh Jena. Therefore,

finding no merit in the ground raised by the Revenue, we hold that the

ld. CIT(A) has rightly deleted the addition made by the AO amounting

to Rs. 1,56,010/-. Ground No. 4 stands dismissed.

22 ITA Nos. 2932 & 3397/Del/2007 24. In Ground No. 5, the ld. DR has argued that the ld. CIT(A) was

not correct in deleting the addition of Rs. 1,50,000/- made by the AO

shown as paid by the assessee to his wife. The ld. DR submitted that

the assessee has not shown any proof of his wife Smt. Kiran Gujral as

having rendering any services for which payment was made to her.

the assessee was an artist and having diploma in Fire Arts from College

of Arts, Delhi. Assessee has an impaired hearing and speech problem.

Mrs. Gujral spends considerable time in assisting the assessee to

communicate with his clients and explain the expression of painting.

Her professional qualification has helped a lot in the process of

dialogue and communication. In recognition of her contribution to the

profession of the assessee, he has paid her Rs 1,50,000/- as

remuneration. The ld. AR further submitted that Mrs. Kiran Gujral is

liable to tax at highest slab rate as her income from other activities

and sources itself and thus there is no question of any loss to the

Revenue on the remuneration paid to her. However, the AO disallowed

the same u/s 64(1 )(ii) of the Act which is not sustainable.

CIT(A) deleted the addition of Rs. 1.50,000/- against which the

Revenue is in appeal before the Tribunal.

23 ITA Nos. 2932 & 3397/Del/2007 27. We have heard the rival submissions and have perused the

relevant material on record. We find that Mrs. Kiran Gujral possesses

professional qualification in the field of Art and paintings and has

experience of more than 40 years. She had passed the diploma in Fine

Arts in the year 1957. We further find that for technical/professional

qualification as contemplated u/s 64(1)(ii) of the Act, there is no need

to have any degree from any university and if a person has sufficient

experience, then it amounts to professional qualification and no

disallowance can be made. The ld. AR has relied on the decision of the

Hon'ble High Court of Andhra Pradesh in the case of Bata Kalyani vs.

CIT reported at 154 ITR 59 (AP) and ITA No. 1342/Del/95 dated

12.2.01-DCIT Vs. Smt. Neelam. In that view of the matter, we find no

infirmity in the finding of the ld. CIT(A) and decline to interfere with

the same. Ground No. 5 of the Revenue stands dismissed.

CIT(A)’s action in allowing full claim of assessee amounting to Rs.

1,09,92,953/- u/s 80RR of the Act ignoring the fact that the assessee

had filed necessary certificates in form 10H only in respect of Rs.

19,98,700/-.

24 ITA Nos. 2932 & 3397/Del/2007 29. Briefly stated the facts of the case are that the assessee claimed

deduction u/s 80RR of the Act on the following remittances:

(i) Amount received through Art Today of Living Media India Pvt.Ltd. in respect of sale proceeds of paintings exhibited at New York Rs.44,80,000 (ii) Receipts of $93,381 from Govt, of Mauritius Rs.45,44,853

claim on the ground that in FIRC, the name of beneficiary is Living

Media and not Satish Gujral. As far as item No. (ii), is concerned, the

AO disallowed the claim that no bank certificate has been filed.

Admission letter from the High Commission / Govt, of Mauritius of is

not sufficient. CIT (Appeals) allowed the deduction and held that the AO disallowed the deduction on technical grounds.

relevant material on record. We find that the assessee has contended

that as regards amount received in respect of paintings sold at New

York, the paintings were sold through Living Media who also undertook

to bring the sale proceeds on behalf of assessee. The further

contention of the assessee that to claim deduction u/s 80RR, of the

Act it is not necessary that such receipt should be brought into India

by the assessee himself but as per section it will be sufficient that

25 ITA Nos. 2932 & 3397/Del/2007 receipts may be brought into India by other agency on behalf of the

assessee, as laid down by section 80RR of the Act, has not been

rebutted by the revenue. The department has not brought any

evidence to disregard the contention of the ld. AR. Accordingly,

finding no infirmity in the finding of the ld. CIT(A), we dismiss Ground

No. 6 raised by the department.

allowing deduction u/s 80U of the Act.

order of the AO is that the assessee has claimed deduction u/s 80U

of the Act on account of permanent physical disability. As per the

provisions of the Act, for claiming such deduction the assessee has

to file a certificate in the prescribed format along with the return.

Assessee has not filed the same. To uphold the principles of natural

justice several opportunities were accorded to the assessee vide

letter dated 30-01-2006 and note sheet entries on various dates to

file certificate u/s 80U(2) of the Act. The same was not done. Even

under this section the mandatory requirement is that the assessee

has to file the certificate along with the return. In response, the

assessee stated vide his letter dated 24.2.06 that since 1971-72 he is

being granted the deduction, however, the relevant papers may

26 ITA Nos. 2932 & 3397/Del/2007 have got destroyed while weeding out the time barred records. The

assessee has finally mentioned that he should be granted the

deduction permanently, it need not be reviewed each year. This

submission/argument of the assessee was not accepted by the AO

since it is the requirement under the law of the land that the

specified disability should exist in the year in which it has been

claimed, the same should be certified by a qualified doctor to be so,

and the said certificate should be filed along with the return of

income. The AO declined to give deduction against the provisions of

the Act. Aggrieved, the assessee went in appeal before the ld.

CIT(A) who held as under:

“The submissions of the appellant have been considered. It is seen that the deduction has been statedly granted since 1971- 1972 by the Department. It is not in doubt that the appellant suffers from the impairment of hearing. Therefore, since such benefit has been allowed to the appellant in earlier decades and the impairment is reportedly irreversible, the disallowance should not have been made on a mere ground of technicality. Hence the AO is directed to allow the deduction claimed u/s 80U of the Act.”

relevant material on record. We find that the assessee has claimed

deduction u/s 80U of the Act on account of permanent physical

disability. But as per the provisions of the Act, for claiming such

deduction the assessee has to file a certificate in the prescribed

27 ITA Nos. 2932 & 3397/Del/2007 format along with the return, which the assessee has not filed.

Several opportunities were accorded to the assessee vide letter

dated 30-01-2006 and note sheet entries on various dates to file

certificate u/s 80U(2) of the Act. The assessee, vide his letter

dated 24.2.06 stated that since 1971-72 he is being granted the

deduction, however, the relevant papers may have got destroyed

while weeding out the time barred records. The assessee

mentioned that he should be granted the deduction permanently, it

need not be reviewed each year. We find that the ld. CIT(A) has

directed the AO to allow deduction in view of the fact that there is

no doubt that the assessee is suffering from permanent impairment

of hearing, which is irreversible and disallowance cannot be made

on the ground of mere technicality. Accordingly, we find substance

in the finding of the ld. CIT(A) and direct the AO to allow deduction

u/s 80U of the Act as claimed by the assessee. Ground No. 7 stands

dismissed.

Ground No. 8 of the Revenue and Ground Nos. 1 and 2 of the assessee.

value of stocks of drawing and studio material from Rs. 10,53,450/-

to Rs. 5 lakhs. In the ground Nos. 1 and 2, the assessee has

28 ITA Nos. 2932 & 3397/Del/2007 challenged the upholding addition to the extent of Rs. 5 lakhs.

during the course of assessment proceedings, observed that the

assessee had neither shown any closing stock or work in progress in

his books nor has he any record of the painting made by him during

the year. He further observed that a painter of the caliber and

standing of Shri Satish Gujral, each painting is identified by a

name, particular size, canvas on which painted, the type of paint

used, the series of which it is part and the year in which it is made.

Therefore, the AO came to the conclusion that the auditor’s

certificate that the assessee is an artist hence no stock record is

maintained is not acceptable since the cash basis of accounting

does not give the right to maintain a stock record. Accordingly,

the AO rejected the method of accounting of the assessee by

following the decision in the case of British Paints of the Hon'ble

Supreme Court and made the addition of Rs. 10,53,450/-.

Aggrieved, the department went in appeal before the ld. CIT(A)

who reduced the addition to Rs. 5 lakhs. Further aggrieved, the

revenue is now in appeal before the Tribunal.

29 ITA Nos. 2932 & 3397/Del/2007 37. We have heard the rival submissions and have perused the

relevant material on record. We find that the AO observed that the

assessee incurred a total sum of Rs. 38.72 lakhs on drawing and

studio materials during the year under consideration against which

professional receipts of Rs. 171.09 lakhs have been shown. It is

noticed that the raw material of the assessee comprises of blank

canvasses, oils, and acrylic colors, brushes, pellets etc. The AO

made an addition of Rs. 10,63,485/- as estimated value of stock of

raw material. The ld. CIT(A) however, agreed that the assessee

has not shown any value of the closing stock of raw material and

hence the AO was correct in holding that at the end of the year the

assessee must have some left over closing stock of studio material

and other related materials. The ld. CIT(A) further held that the

addition made by the AO would amount to evaluating the stock of

paper and pens in the case of a poet is a misplaced comparison

because the nature of the creative work of an author/writer/poet

using only a pen and pencil is different from that of a painting

artist. In the absence of amyl material information on record

except the amount spent of purchase of raw material inputs, the

AO has applied her mind on the right tract and estimated the value

of stock of drawing and studio material at the end of the year to

30 ITA Nos. 2932 & 3397/Del/2007 the best of her judgment. Accordingly, the ld. CIT(A) keeping in

mind the addition made by the AO to be excessive, felt that an

addition of Rs. 5 lakhs would be sufficient to cover the estimated

cost of such input material.

relevant material on record, we find that the action of both the

authorities below are not correct and justified. Addition made on

the basis of conjectures and surmises cannot survive. We do not

agree with the AO’s action in making the addition and the ld.

CIT(A)’s action in reducing the same to Rs. 5 lakhs without any

concrete material on record to do so. It is not clear as to how and

why such addition was made and part relief given to the assessee

on such estimated basis. It is relevant to note that the ld. counsel

of the Revenue has not disputed this fact that no addition on this

count has been made in the earlier and subsequent assessments on

this issue. We may also point out that if addition is being made

towards estimated value of closing stock then the same should be

reduced by estimating opening stock which certainly was brought

forward from earlier A.Y and when a method of accounting is being

followed by the assessee and accepted by the Revenue during the

earlier and subsequent A.Y without alleging the same as incorrect

31 ITA Nos. 2932 & 3397/Del/2007 then no addition can be made on the estimation of value of raw

material. The basis accounting principle cannot be flouted by

making addition on the basis of estimation of closing stock of raw

material, which are brushes, paints, canvass etc in the case of

present artist assessee, without giving any attention to the fact

that there was no opening stock brought forward shown by the

assessee in the balance sheet and without giving credit of the same

estimated the value of closing stock cannot be added to the income

of the assessee on the basis of surmises and conjectures.

Consequently, conclusion of the authorities below viz. the action of

the A.O making the addition on estimation of value of closing stock

and conclusion of the ld. CIT(A) restricting the same to Rs. 5 lakhs

being without any basis cannot be held as sustainable. Accordingly,

finding no merits in the ground raised by the Revenue, we dismiss

this ground of appeal raised by the Revenue and Ground Nos. 1 and

2 of the assessee are allowed and the A.O is directed to delete the

entire addition.

ASSESSEE’S APPEAL IN ITA NO. 3397/DEL/2007

32 ITA Nos. 2932 & 3397/Del/2007 “1. The ld. CIT(A) should have deleted the whole of the addition on account of stock [in case of an artist] once it has been held that the regularly followed and accepted method of accounting cannot be disturbed.

The above grounds are independent and without prejudice to each other.”

this issue and dismissed the ground raised by the Revenue and Ground

Nos 1 and 2 f the assessee have been allowed in the final conclusion as

recorded in the earlier part of this order.

sustenance of the amount of salaries payable out of sundry liabilities.

the method of accounting according to the audit report was cash basis.

However, the balance sheet indicates that sundry liabilities to the tune

of Rs. 1,00,159.88 was appearing with reference to various expenses.

33 ITA Nos. 2932 & 3397/Del/2007 The AO held that under the method of accounting, such expenses could

not be allowed. When the assessee did not respond to the AO’s query

in this regard, he made an addition of Rs. 1,00,159.88 and added the

same to the income of the assessee and also initiated penalty

proceedings u/s 271(1)(c) of the Act. When the aggrieved assessee

went in appeal, the ld. CIT(A) held that the professional income of the

appellant is being accounted for on receipt basis and the assessee has

provided for regular expenses like salaries, telephone and electricity on

mercantile basis. After considering the nature of expenses, the ld.

CIT(A) held that the expenses were periodic bills and allowed the bills

relating to telephone and electricity but upheld the action of the AO on

account of salaries paid. The aggrieved assessee has challenged the

action of the A.O and the ld. CIT(A) in Ground No. 3.

relevant material on record. The A.O made addition by observing in

para III at page 4 of the assessment order as follows:

“Method of accounting according to the audit report is cash basis. However, balance sheet indicates that sundry liabilities to the tune of Rs. 1,00,159.88 (Rs. 1,05,559/- -TDS payable 5400/-) is appearing with reference to various expenses. Under the cash method of accounting such expenses cannot be allowed. Assessee when asked about this and was given an opportunity

34 ITA Nos. 2932 & 3397/Del/2007 chose to remain silent on this issue. Hence addition on account of this point to the tune of Rs. 1,00,159.88 is being made to the income of the assessee.”

note that the first appellate authority granted part relief to the

assessee and upheld the action of the A.O to the extent of liability

shown on account of salaries by observing as follows:

“ The above submissions of the appellant have been considered. It has been seen that although the professional income of the appellant is being accounted for on receipt basis, the appellant has provided for regular expenses like salaries, telephone and electricity on mercantile basis. After considering the nature of the expenses, which are periodic bills and other relevant facts and circumstances of the case, it is held that the liabilities relating to telephone and electricity bills are to be allowed. The liability shown on account of salaries is not allowed and the action of the A.O is upheld to that extent.”

facts of the issue, the ld. CIT(A) was correct in holding that the nature

of expenses which are periodic bills the liabilities relating to

telephone and electricity bills are allowable. The ld. Counsel could

not controvert the contention of the ld. CIT(A) that the liability shown

on account of salaries is not allowable as it was not crystallised and

35 ITA Nos. 2932 & 3397/Del/2007 paid during the year i.e. financial period 2002-03. Thus we are unable

to see any valid reason to interfere with the impugned order on this issue and hence we uphold the same. Consequently, Ground No. 3 of

the assessee is dismissed.

allowed and that of the Revenue is dismissed.

The decision is pronounced in the open court on 22.07.2015.

Sd/- Sd/- (O.P. KANT) (C.M. GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 22nd July, 2016

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