CAPT S.K.KHURANA,MUMBAI vs. ITO 12(3)(2), MUMBAI

1. The learned Assessing Officer 12(3)(2), Mumbai erred in law and on facts in treating profits on sale of PAINTING as normal income to be taxed at normal rate.

For the Assessment Year 2007-2008 as per Sec.2(14) of Income Tax Act, 1961 Painting is not a capital assets and hence profit on sale not liable to tax at all.

It was submitted by the ld. AR of the assessee that the issue regarding chargeability of tax on short term capital gain arising on sale of painting is covered in favour of assessee by the judgment of Hon’ble Madras High Court rendered in the case of CIT Vs. Kuruvilla Abraham as reported in 88 DTR 291 (Madras). He also placed reliance on following judgments of Hon’ble Bombay High Court:-

I have considered the rival submissions. I find that in the present case, the assessee offered Short Term Capital Gain to tax totaling of Rs.5,59,611/- including an amount of Rs.2.75 lakhs being short term capital gain on account of sale of painting at tax rate of 10%. Admittedly, the short term capital gain being profit on sale of shares amounting to Rs.1,90,167/- and profit on sale of Mutual Fund Rs.94,444/- are liable to tax at the rate of 10% only. But in respect of gain on sale of painting of Rs. 2.75 lakhs, the AO initiated the present proceedings u/s 154 and in the same, it was held by the AO as per his order dated 03.01.2012 that the gain of Rs.2.75 lakhs on sale of painting is chargeable to tax at normal rate and not at 10%. During these proceedings, it was submitted by the assessee before the AO also that as per section 2 (14), personal effects is not a capital asset and this section was amended by Finance Act 2007 w.e.f. 1.04.2008 as per which, Paintings were specifically excluded from the definition of Personal Effects which is not a capital asset as per section 2(14) but in the present case, the assessment year involved is AY 2007-08 i.e. before this amendment and therefore, gain arising to the assessee on sale of painting is not liable to tax at all. But the AO rejected this contention of the assessee by stating in his order passed by him u/s 154 that the assessee has brought the mistake to notice only when the notice to rectify to tax short term capital gain tax on sale of painting was sought. Hence, it is seen that this is not the case of AO that as per the provisions of section 2 (14) as were on the statute book during the relevant period i.e. before the amendment by the Finance Act 2007 with effect from A. Y. 2008 – 09, painting is a capital asset and it is not personal effects. The order of learned CIT(A) is this that the assessee did not raise any claim in the course of assessment proceeding that the painting in question is representing his personal effects held by him for personal use and it is not capital asset. Therefore, it is seen that as per impugned order of CIT(A) also, it is not a case made out that painting in question is not personal effect and therefore, it had to be accepted that painting in present case is personal effect. In that situation, the order of the AO u/s 154 to increase the rate of tax chargeable on such gain arising on sale of painting cannot be approved at normal rate. Since the assessee has himself offered the profit on sale of painting as liable to tax at the rate of 10% and no appeal was filed in original assessment proceedings and this claim is made in section 154 proceedings initiated by the A.O. to charge tax at normal rate as against 10% rate offered by the assessee, it cannot be held in the present proceedings that no tax is chargeable on this profit on sale of painting but action of AO of increasing the tax rate from 10% to normal rate also cannot be approved. In the facts of the present case when it is seen that the profit on sale of painting is actually not liable to capital gain tax because this is not a capital of asset, it cannot be subjected to tax at normal rate of tax only because the assessee has wrongfully offered the same to tax at the rate of 10%. Hence, on this aspect, we hold that the rectification made by the AO u/s 154 to the effect that normal rate of tax should be applied in respect of short term capital gain on sale of painting is unjustified and therefore, I reverse the order of ld. CIT(A) on this issue and it is held that whatever tax is paid by the assessee on the profit on sale of painting be accepted without making any further addition in the tax liablility of the assessee on this account. I want to make in clear that the returned income cannot be reduced in 154 proceedings initiated by the A.O. In the result, the assessee’s appeal is allowed in the terms indicated above. Order pronounced in the open court on 4th December, 2015