COMMISSIONER OF INCOME TAX AHMEDABAD III V. ANIL AMRUTLAL RELIA

TAXAP/656/2013

AI Insights

The case involves the Commissioner of Income Tax Ahmedabad III as the appellant and Anil Amrutlal Relia as the respondent. The primary legal issue was whether the income from the sale of paintings by the respondent should be classified as business income or long-term capital gains. The respondent, engaged in trading of promotional materials and owner of an art gallery, sold several paintings, some of which were gifted by renowned artists. The Assessing Officer initially treated the income as business income, but this was overturned by the CIT (Appeals) and the Tribunal, which classified the income as long-term capital gains. The Revenue appealed against this decision, leading to the present judgment.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 703366 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 23-07-2013
• Assessment Year: misc
• Other Referred Cases: H.H. Maharaja Rana Hemant Singhji vs. Commissioner of Income-tax, In re COLLINS' WILL TRUSTS DONNE and another vs. Hewetson and others
• Laws Referred To: Income-Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S N DIVATIA
• Assessee Lawyers: PAURAMI SHETH
• Keywords: Art gallery; Business income; Investment; Long Term Capital Gain; Paintings; Promotional Materials; Stock-in-Trade
• Section: 142(1); 143(2); 143(1); 2(14); 260A

Judgement Text

"O/TAXAP/656/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 656 of 2013 With TAX APPEAL NO. 478 of 2013 With TAX APPEAL NO. 479 of 2013 With TAX APPEAL NO. 608 of 2013 With TAX APPEAL NO. 609 of 2013 With TAX APPEAL NO. 322 of 2013 With TAX APPEAL NO. 323 of 2013 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MS JUSTICE SONIA GOKANI ================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================= COMMISSIONER OF INCOME TAX AHMEDABAD III....Appellant(s) Versus ANIL AMRUTLAL RELIA....Opponent(s) Appearance: [ Tax Appeal Nos. 656/2013;478/2013; 479/2013; 608/2013 and 609/2013] MS PAURAMI B SHETH, ADVOCATE for the Appellant MR SN DIVATIA, ADVOCATE for the Respondents Appearance: [ Tax Appeal Nos. 322/2013 and 323/2013] MR SN DIVATIA, ADVOCATE for the Appellant MS PAURAMI B SHETH, ADVOCATE for the Respondents ================================================= CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MS JUSTICE SONIA GOKANI Date : 23/07/2013 ORAL JUDGMENT Page 1 of 18 O/TAXAP/656/2013 JUDGMENT (PER : HONOURABLE MS JUSTICE SONIA GOKANI) 1. As common questions of law emerge in all these appeals, for the sake of convenience, they are being decided by this common order and judgment where facts necessary for the purpose of adjudication of these appeals are to be noted from Tax Appeal No.656 of 2013. Tax Appeal No.565 of 2013, Tax Appeal No.478 of 2013, Tax Appeal No.479 of 2013, Tax Appeal No.608 of 2013 and Tax Appeal No.609 of 2013 are preferred by the Revenue. Whereas, Tax Appeal Nos. 322 of 2013 and Tax Appeal No.323 of 2013 are preferred by the assessee-respondent and for the sake of convenience, Revenue shall be addressed as the appellant and assessee as the respondent in this judgment. 2. Respondent assessee is an individual and is engaged in the business of trading of promotional materials, posters, paintings and publications. For the Assessment Year 2008-09, the assessee filed his return of income on 30.9.2008 declaring the total income of Rs.1,27,53,580/-. His return was processed under section 143(1) of the Income-Tax Act,1961 (hereinafter referred to as “the Act”) and he also filed a revised return on 20.11.2009 declaring his total income at Rs.1,27,77,080/-. 3. As his case was selected for scrutiny, notice of hearing Page 2 of 18 O/TAXAP/656/2013 JUDGMENT was given under section 143(2) of the Act on 17.8.2009. On 14.10.2009 notice under section 142(1) was issued on the respondent assessee calling for certain compliance. A questionnaire was sent on 27.4.2010 and with the change in the incumbent, fresh opportunity was availed on 10.6.2010. The assessee had shown a total receipt of Rs.2,08,19,019/- out of which, he declared a sum of Rs.1,08,29,315/-. 4. On carefully examining everything, the request of the assessee to consider the nature of his income as long term capital gain and not business income was turned down by the Assessing Officer who framed the assessment calculating the total income of the assessee at Rs.1,28,07,015/-. 5. Aggrieved by such decision of Assessing Officer, the assessee approached CIT (Appeals). Assessee’s main thrust of arguments was that he had sold 5 paintings for a sale consideration of Rs.4,29,000/-. The cost of acquisition of such paintings was minimal. After indexation, he declared long terms capital gain on sale of these paintings at Rs.4,15,292/-. CIT (Appeals) considered at length all pros and cons and also took into account entire gamut of facts and circumstances and held that the paintings sold were not stock-in-trade and the sale of original paintings of renowned artists was not part of his business. Accordingly, CIT (Appeals) directed the Page 3 of 18 O/TAXAP/656/2013 JUDGMENT Assessing Officer to tax sale proceedings of the paintings as capital gains. 6. This was challenged before the Income Tax Appellate Tribunal (hereinafter referred to as “the Tribunal”). The Tribunal, after a detailed discussion on the issue, concurred with the findings of CIT (Appeals), which has given rise to these litigations. 6.1 The questions of law raised by the Revenue in the Tax Appeal Nos.656 of 2013; 478 of 2013; 479 of 2013; 608 of 2013 and 609 of 2013, preferred under section 260A of the Act, are as follows:- “A. Whether the Appellate Tribunal is right in law and on facts in confirming the order of CIT(A) holding that the paintings held by the Assessee were not held in the nature of stock in trade but investment despite the fact that the Assessee was running an art gallery and was engaged in sale of paintings? B. Whether the Appellate Tribunal is right in law and on facts in confirming the order of CIT(A) treating the Sale Proceeds of paintings by the Assessee as Long Term Capital Gain and not as Business income while reversing the order of the AO to assess the same as Business income?” 6.2 Whereas the questions of law preferred by the appellant in Tax Appeal No.322 of 2013 and Tax Appeal No.323 of 2013 are as under:- “A. Whether on the facts and in the circumstances of the case, Income-tax Appellate Tribunal, was right in law in confirming that the original painting sold were not “personal effect” u/s. 2(14) of the Income Tax Act, 1961 so that the profit on sale thereof was chargeable to tax as Page 4 of 18 O/TAXAP/656/2013 JUDGMENT capital gains? B. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal could have reached to the conclusion of the painting sold were not “personal effect” under section 2(14) of the Income Tax Act, 1961?” 7. We have heard learned counsel Ms. Paurami Sheth for the Revenue, who has forcefully urged the Court that the paintings of M.F. Hussain, renowned artist are sold by the assessee, they need to be held as stock-in-trade. She further argued that sale of original paintings was part of the business of the assessee, and therefore, the Assessing Officer was justified in treating the sale consideration as business income. She urged that it is impossible for person to possess as many as 500 paintings unless he is running a business of this kind. 8. Learned advocate Mr. Divatia appearing for the assessee respondent has fervently urged that the assessee is in fact trading in promotional materials, posters, paintings and publications. He is into Serigraphy. The assessee had possessed some of the paintings, which were gifted to him by renowned artists and he retained these paintings for 13 to 18 years before selling and this long period is clearly indicative of his intention to make investment and the sale proceeds, therefore, need to be treated as capital gains. According to him, the paintings were either gifted or were purchased for a Page 5 of 18 O/TAXAP/656/2013 JUDGMENT very small amount and they were certainly not purchased for business purpose. He in fact is in the business of trading and printing. Along with the printing of Diwali and marriage cards and posters of advertisements, he is also in selling of reprographs and serigraphs of paintings. He further urged that when he was gifted such paintings by renowned artists, he cannot ask for the declaration in his favour by those artists that they were given free of costs. For showing his proximity with some of the painters, he also produced sufficient material on record before all the authorities and therefore both CIT (Appeals) and the Tribunal have concurrently and rightly held in favour of the assessee respondent. 9. Upon thus hearing both the sides, firstly we would like to advert to the facts which, though lie in a narrow compass, are posing interesting questions. 10. The factum is not in dispute that the assessee ordinarily deals in the business of drafting and printing, particularly, the printing of Diwali and marriage cards etc. His business activities commenced in the year 1979. The assessee is a Fine Arts graduate from M.S. University. In his business premises, he displays “reprographs” and “serigraphic” paintings. His website dated 1.7.2012 is indicative that he is the founder Chairman of Archer Group, which is a Fine Art major in Page 6 of 18 O/TAXAP/656/2013 JUDGMENT applied arts, photography, serigraphy, etc. He started a designing studio in a small room and has a archer house which also has manufacturing facilities. His Art Gallery has received various National Awards and achievements for over a period of 20 years. Various books related to field of Arts have also been published. His design studio also makes calenders, brochures, wedding cards, greeting cards, handmade paper- bags etc. His gallery is also actively involved in promoting upcoming artists and also organizes the Exhibitions of various artists. The assessee came in contact with various artists like Shri M.F. Hussain, Shri Bhupen Khakhar, Shri Amit Ambalal, Shri Gulam Mohammed Sheikh, Shri Jatin Das and Shri Vasudev Smart. It was at the behest of Shri M.F. Hussain that the Art Gallery was started by the assess in the year 1996. His Gallery has one of the largest collections of Contemporary paintings, Sculptures and Graphics as per the claim made by his website. 11. At the business premises of the assessee on 23.12.2005 under section 133A of the Act, a survey was carried out and more than 550 paintings including sizable number of original and costly paintings of renowned artists named hereinabove were found. 12. When the reply of the assessee was sought by the Page 7 of 18 O/TAXAP/656/2013 JUDGMENT Investigating Officer on 3.1.2006, he stated that, dealing in original paintings cannot be said to be an inbuilt business activity of his business. 13. It was claimed by the assessee that on sale of 70 paintings in the Assessment Year 2006-07 under the long term capital gains, Rs.1.75 crores [rounded off] was disclosed. The cost of acquisition of such paintings was claimed to be nil. During the course of assessment proceedings, the assessee also raised a claim that the paintings must be deemed to be “personal effects” within the meaning of section 2(14) and, therefore, cannot be held to be assets and cannot, therefore, be held to be liable for capital gains. 14. In such circumstances, the assessee was asked to discharge the burden of establishing the source of investment in purchase of such paintings. 15. The Tribunal extensively considered all the facts and circumstances of the case and concluded after an elaborate discussion that the amount received on sale of paintings shall have to be treated as long term capital gain and not the income from the business. 15.1 It would be profitable to reproduce the relevant discussion on the issue made by the Tribunal:- “2.10 From the above para of the order of Ld. CIT(A), we find that a clear finding is given by Ld.CIT(A) Page 8 of 18 O/TAXAP/656/2013 JUDGMENT that 5 out of 12 paintings were sold before the survey on 23.12.2005 and the balance 7 of the impugned paintings were not found during the survey. It was submitted by the assessee before Ld. CIT(A) that the paintings were at Mumbai office. Regarding 500 paintings found in the course of survey, it is noted by Ld. CIT(A) that in the statement recorded during the survey, the assessee has given the explanation that the acquisition of the paintings as per which 47 of the paintings were stated to have been purchased at long intervals. It has also given finding that no evidence was found to indicate frequent purchase and sale of paintings. He also noted that as per the report, it was for the first time he sold original painting. He also noted that as per the report, it was for the first time he sold original painting. Regarding the normal paintings sold we find that as per the details available on page 5 of the paper book, the sale price of Rs.1,75,54,800/- received during this year is on account of 14 paintings and the entire sale proceeds of these paintings were offered by the assessee as long term capital gain without claiming any deduction. In respect of costs of acquisition and regarding the source of acquisition of these paintings, it was stated that these were received by way of gift and the assessee has also given the dates of acquisition of these paintings. The A.O has not brought out on record any evidence of any other sale of paintings by the assessee in the present year or in any earlier year. The finding of the A.O is on this basis that so called gifts of paintings shown by the assessee are now established as genuine and therefore acquisition of paintings is treated as unaccounted having been acquired from undisclosed source of income. By this finding of the A.O, we are of the considered opinion that admittedly, the assessee could not produce any proper evidence regarding gifts of paintings from Shri MF Hussain but various photographs placed in the paper book show the assessee with Shri MF Hussain sitting before him when he is making the paintings. It has to be accepted that the assessee was having very close relations with Shri MF Hussain and if a person is having such a close relation with such a great painter, it cannot be out rightly rejected that he might have given some paintings to the assessee as gifts even in the absence of any confirmation because if a person received gift in kind from such a great person, he cannot ask him to give a gift declaration or confirmation also. In the light of the evidences available in the paper book in the form of various photographs of the assessee with Shri MF Hussein indicating very close relationship with the assessee with Page 9 of 18 O/TAXAP/656/2013 JUDGMENT such a great painter, we have no hesitation in holding that the claim of the assessee regarding gift received from Shri MF Hussein cannot be rejected on this basis alone that the assessee could not produce gift confirmation/declaration. Regarding the gift from other painters, we find that in the remand report available on pages 85-86 of the paper book, it is reported by the A.O. in the remand report that the he examined Shri Amit Ambalal in the course of remand proceedings and he also confirmed his confirmation dated 12.07.2010 that 22 paintings were sold by him to the assessee in 1980. It is also certified by him that a painting was sold by him to the assessee in 1980 and the same paintings won an award from Ahmedabad Municipal Corporation in 1974 and on his request, the assessee returned it back to him and in place of this, he has given 22 paintings to the assessee from time to time as per the list enclosed with this certificate. When the A.O. examined Shri Amit Ambala, he confirmed this certificate and he also confirmed that these paintings were given by him to the assessee out of love and affection and artistic relationship and some times he has taken small amounts of consideration also. The A.O has also reported in the remand report that he could not examine Shri MF Hussain because he stays at Doha and he also could not examine Shri B Khakhar because he expired 4 years back. He also reported that they are also well known and reputed painters. He further reported that in the light of the confirmation from Shri Amit Ambalal and considering the line of activities profession and business carried out by the assessee, the additional evidence submitted by the assessee can be considered. Considering all these facts, we are of the considered opinion that regarding the claim of the assessee of receiving gifts from other painters also, it cannot be rejected on this basis alone that the assessee could not furnish gift declaration/confirmation because asking such a great painter to give confirmation/ declaration for gift is not realistic.” 16. During the course of hearing, the paper book had been produced and various photographs of the assessee respondent and his family with Shri M.F. Hussain were shown to us, which had clearly reflected proximity of the assessee and his family with the renowned artists. It has been rightly held by Page 10 of 18 O/TAXAP/656/2013 JUDGMENT the Tribunal that it is very unlikely that the artists of such repute would also, while gifting the paintings, provide the declaration of gift to the assessee respondent. Moreover, in case of other artists, such confirmation had been received by the Revenue authorities. It is to be noted that the sale price fetched on account of sale of 14 paintings in the year 2008-09 were offered by the assessee as the long term capital gain without claiming any deduction. He had provided the date of acquisition and the cost of the acquisition was nil since all these paintings were gifted to him. 17. Revenue’s insistence of non-disclosure of evidence on the part of the assessee for having received the gifts of painting from the renowned artists, particularly, of Shri M.F. Hussain is not finding favour with this Court. There is overwhelming material on record to indicate their proximity and the possibility of such proximity resulting into the gifts of paintings being given to the assessee could not be ruled out. It was also pointed out from the paper book that Shri Hussain was in a habit of painting even while attending to daily chores on a menu card of a hotel or even while sitting anywhere in a casual gathering. He had an inimitable way of painting and gifting the paintings to people which speak eloquently about the artist. The Tribunal has provided satisfactorily sufficient Page 11 of 18 O/TAXAP/656/2013 JUDGMENT reasonings for having accepted the theory of gifts of the painting to the assessee respondent. These paintings of various artists when had been retained by the respondent for a long time and when he offered the amount received by way of a sale price as a long term capital gain, in the opinion of this Court, the Tribunal committed no error in treating the said amount as the long term capital gain. Both CIT(Appeals) and the Tribunal have rightly quashed and set aside Assessing Officer’s findings of treating the entire sum as business income. These paintings certainly cannot be held to be stock- in-trade and original paintings, in such facts and circumstances, cannot be said to be the part of his business. 18. In view of the above discussion held hereinabove, we are of the firm opinion that the paintings held by the assessee was rightly not held to be stock-in-trade but were in the nature of investment and the sale proceedings sale proceeds of the original paintings of renowned artists received by the assessee cannot be held to be the business income of the assessee but is required to be treated as the long term capital gain and held to be treated accordingly. Accordingly, both the questions raised by the Revenue are answered in favour of the Assessee and against the Revenue. Page 12 of 18 O/TAXAP/656/2013 JUDGMENT 19. So far as the questions proposed by the assessee in Tax Appeal No.308 of 2013 and Tax Appeal No. 309 of 2013 are concerned, it would be also relevant to discuss at a little length the claim of the assessee respondent of contending that the paintings were personal effects of the assessee as per the provisions of section 2(14) of the Act, and therefore, sale proceeds of such personal effects is not chargeable to tax. 20. The Tribunal has rightly found no merit in such contentions raised by the assessee. The Tribunal held that there was nothing to establish the claim of the assessee that the paintings were held by him as personal effect. Section 2(14) of the Act defines Personal Effect as follows:- “2 (14) “capital assets” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include- (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; (ii) personal effect, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes- (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art.” 21. Learned advocate Mr. Divatia relied upon the following two authorities for the said purpose:- Page 13 of 18 O/TAXAP/656/2013 JUDGMENT 1. H.H.Maharaja Rana Hemant Singhji vs. Commissioner of Income-tax reported in [1976] 103 ITR 61(SC). 2. In re COLLINS’ WILL TRUSTS DONNE and another vs. Hewetson and others reported in 1 W.L.R 37. 3. The Supreme Court in the case of H.H.Maharaja Rana Hemant Singhji vs. Commissioner of Income-tax (supra) held that the expression ‘personal use’ occurring in section 2(4A)(ii) of the 1922 Act is very significant. A close scrutiny of the context in which the expression occurs showed that only those effects can legitimately be said to be personal which pertain to the assessee’s person. In other words, an intimate connection between the effects and the person of the assessee must be shown to exist to render them “personal effects”. The enumeration of articles like wearing apparel, jewellery, and furniture mentioned by way of illustrations in the above quoted definition of “personal effects” also showed that the legislature intended only those articles to be included in the definition which were intimately and commonly used by the assessee. The Court was considering the question of personal effects in connection with the demise of Maharaja Shri Udebhan Singhji of Dholpur, who died issueless in the year 1954. Following his demise, all his moveable valuables were Page 14 of 18 O/TAXAP/656/2013 JUDGMENT taken over and sold by the Government of Rajasthan. The appellant, Shri Hemant Singhji was recognized by the Government of India as successor of the former Maharaja and the said assets of late Maharaja were released by the Rajasthan Government and handed over to the Rajmata in her capacity of adoptive mother and guardian of the appellant. These valuables were sold at the suggestion of the Government of India. 21.1 The question arose whether the assets sold were capital assets within the meaning of section 2(4A) chargeable to capital gain tax, where the Apex Court discussed the dictionary meaning of personal effects. After an extensive discussion, it held that a close scrutiny of the context in which the expression “occurs” shows that only those effects can legitimately be said to be personal, which pertain to the assessee’s person. In other words, an intimate connection between the effects and the person of assessee must be shown to exist to render them “personal effects”. The Court held that:- “Bearing in mind the aforesaid meaning assigned to the expression in various dictionaries and cases, the silver bars or bullion can by no stretch of imagination be deemed to be “effects” meant for personal use. Even the sovereigns and the silver coins which are alleged to have been customarily brought out of the iron safes and boxes on two special occasions, namely, the Ashiami Day of “Sharadh Paksh” for Maha Page 15 of 18 O/TAXAP/656/2013 JUDGMENT Lakshmi Puja and for worship on the occasion of Diwali festival cannot also be designated as effects meant for personal use. They may have been used for puja of the deities as a matter or pride or ornamentation but it is difficult to understand how such user can be characterised as personal use. As rightly observed by the income-tax authorities if sanctity of puja were considered so essential by the assessee, the aforesaid articles would not have been delivered by his guardian to the banks for sale. 22. Chancery Division, in the case of In re COLLINS’ WILL TRUSTS DONNE and another vs. Hewetson and others (supra), had considered the question of right to select article of furniture and personal effects. 23. It is emphatically argued by learned advocate Mr.Divatia that the paintings sold were received by the assessee respondent on account of close relationship as well as out of love and affection and the same would be intimately and proximately connected with the respondent, and therefore, they would satisfy the test that the asset was personal effect under the law and he also further urged that now the amendment has come in section 2(14) of the Act where the paintings have been specifically included in the definition clause itself, and therefore, also it has to be construed that the legislature always considered the paintings to be included under the personal effect, if duly proved. 24. Admittedly, at the time when the assessment was made Page 16 of 18 O/TAXAP/656/2013 JUDGMENT the definition of section 2(14) did not include the paintings in the definition of personal effects. Be that as it may, we find no flaw in the approach of the Tribunal in not holding the paintings as a personal effect under section 2(14) of the Act. The sale proceeds of such personal effect is not chargeable to tax under section 45 and, therefore, after having offered the sale price of the original paintings as the long term capital gain, the assessee also claimed personal effect under section 2(14) of the Act. 25. Even going by the Apex Court’s decision rendered in the case of H.H. Maharaja Rana Hemant Singhji vs. Commissioner of Income-tax (supra), it is necessary that the article must be associated with the person of the possessor. The use as a decoration in the drawing room which is only included to give a pride of possessions is not contemplated by the exemption and the personal use. What is contemplated by the exemption is the use of like nature as the use of other items, namely, furniture, household utensils, wear apparel and provisions. It was further held in that case that the expression “intended for personal or household use” did not mean capable or intended for personal or household use. It meant normally, commonly or ordinarily intended for Page 17 of 18 O/TAXAP/656/2013 JUDGMENT personal or household use. This, in our opinion, is a true concept of expression “personal use”. Going by the aforementioned discussion, the paintings in question rightly cannot held to be personal effects as contended by the assessee and cannot be held not chargeable to tax under section 45 of the Act and sale proceeds were rightly offered as the long term capital gains. 26. Resultantly, Tax Appeal Nos. 656/2013; 478/2013, 479/2013; 608/2013 and 609/2013 preferred by the Revenue in light of the above discussion held hereinabove are dismissed and Tax Appeal Nos.322/2013 and 323/2013 preferred by the assessee are disposed of as well with no order as to cost. (M.R.SHAH, J.) (MS SONIA GOKANI, J.) Sudhir/pt* Page 18 of 18 "