2007 (9) TMI 433 - AT - Income Tax

Summary

Issues Involved:
1. Taxation of the sale proceeds from the collection of rare postal stamps as long-term capital gains.
2. Determination of cost of acquisition for the computation of capital gains.
3. Withdrawal of credit for TDS certificates.

Issue-wise Detailed Analysis:

1. Taxation of the Sale Proceeds from the Collection of Rare Postal Stamps as Long-term Capital Gains:
The primary issue revolves around whether the sale proceeds from the collection of rare postal stamps should be considered as long-term capital gains and thus be taxable. The assessee, a senior advocate, sold his collection of rare stamps for Rs. 7,66,848 and claimed it as a capital receipt from the sale of 'Personal Effects,' which are excluded from the definition of capital assets under section 2(14)(ii) of the Income-tax Act. The Assessing Officer (AO) treated the collection as a capital asset and added Rs. 6,40,892 as long-term capital gain under section 45, arguing that the collection of stamps cannot be considered as movable property held for personal use. The AO allowed certain travel expenses related to the sale but determined the indexed cost of acquisition as Nil.

On appeal, the CIT(A) upheld the AO's decision, referencing various case laws that emphasized the need for an intimate connection between the personal effects and the person of the assessee. The CIT(A) concluded that the rare stamps did not qualify as personal effects, citing cases like CIT v. H.H. Maharni Usha Devi and others, which defined personal effects as items intimately and commonly used by the assessee.

However, the Tribunal found that the collection of rare postal stamps and covers had the characteristics of 'personal effects' due to the intimate connection and personal use by the assessee, who was a prominent philatelist. The Tribunal referenced cases like Re Collins' Will Trusts v. Hewetson, where valuable stamp collections were considered personal effects. Consequently, the Tribunal held that the sale proceeds of Rs. 7,66,848 were not taxable under section 2(14)(ii) of the Act and directed the deletion of the impugned addition.

2. Determination of Cost of Acquisition for the Computation of Capital Gains:
The second issue pertains to the computation of capital gains, specifically the determination of the cost of acquisition. The assessee argued that the cost of acquisition should be considered, and if it is taken as Nil, the computation under section 48 is not possible, referencing CIT v. B.C. Srinivasa Setty. The CIT(A) noted that the assessee did not claim any cost of acquisition for the stamps, and expenses claimed were mainly for foreign travel, not for maintaining the stamps. The Tribunal upheld the AO's method of computing capital gains, stating that the value of stamps cannot be equated with the cost of acquisition, and the assessee failed to produce evidence of any cost of acquisition.

3. Withdrawal of Credit for TDS Certificates:
The third issue involves the withdrawal of credit for TDS certificates amounting to Rs. 9,725. The assessee claimed that the amount of TDS had been included in the professional receipts for the assessment year 1998-99, as required under section 198, and offered as income in the assessment year 1999-2000 under section 199. The AO withdrew the credit for TDS certificates, stating that the income had not been offered for taxation in the relevant assessment year. The Tribunal set aside this issue to the AO for fresh examination, directing that the matter be verified after affording a reasonable opportunity of being heard to the assessee.

Conclusion:
The appeal of the assessee is partly allowed. The Tribunal held that the sale proceeds from the collection of rare postal stamps are not taxable as long-term capital gains, directed the deletion of the impugned addition, and set aside the issue of TDS credit withdrawal for fresh examination by the AO.