2011 (7) TMI 512 - AT - Income Tax

Sale of paintings - Capital asset chargeable to capital gain - Revenue applied a restrictive test Held that - There appears to be an incorrect test applied by revenue because all personal effects need not be used daily - So long as they are meant for personal use they will have to be considered as personal effects - Thus the sale of old paintings inherited by assessee does not fall in the mischief of section 2(14)(ii) of the Act i.e. in the definition of capital asset and does not attract capital gains tax prior to amendment brought by Finance Act 2007 with effect from 1-4-2008 - Decided in favour of assessee. Deemed income from house property - AO deputed his Inspector to ascertain annual value of the house property who reported after verification in the locality that this property may fetch a rent of Rs. 15, 000 to Rs. 20, 000 per month & AO accordingly estimated the annual value of the property at Rs. 1.80 lakhs and assessed income from house property at Rs. 1.26 lakhs - Held that - The assessee fairly agreed that the estimation made is higher and he has not contested that the deemed annual value is not to be adopted for rental purposes - Decided against the assessee.

Summary

Issues Involved:
1. Treatment of sale of paintings as capital asset chargeable to capital gains.
2. Addition of deemed rent from house property not in self-occupation.

Detailed Analysis:

1. Treatment of Sale of Paintings as Capital Asset Chargeable to Capital Gains:
Facts and Arguments:
- The assessee sold old paintings inherited by him and received Rs. 62,52,500 as sale proceeds.
- The Assessing Officer (AO) treated the sale proceeds as a transfer of capital asset chargeable to long-term capital gains.
- The CIT(A) confirmed the AO's decision, stating that paintings are not personal effects and are chargeable to capital gains as per section 45 of the Income-tax Act, 1961.

Legal Provisions and Judgments:
- The definition of "capital asset" under section 2(14) was amended by the Finance Act, 2007, effective from 1-4-2008, to include paintings.
- The assessee argued that the amendment applies from the assessment year 2008-09, not 2007-08.
- The CIT(A) relied on section 47(ix), which excludes transfers of paintings to specified institutions from being treated as capital assets, implying other transfers are capital assets.
- The CIT(A) also referenced the Supreme Court case H.H. Maharaja Rana Hemant Singhji v. CIT [1976] 103 ITR 61 and Calcutta High Court case Smt. Shree Kumari Mudra v. CIT [1997] 228 ITR 548, which held that expensive decorative items like paintings are not personal effects.

Tribunal's Analysis and Conclusion:
- The Tribunal noted that the amendment to section 2(14) applies from the assessment year 2008-09, not 2007-08.
- The Tribunal referenced various definitions and judicial interpretations of "personal effects," noting that personal effects include items used for personal or household purposes.
- The Tribunal concluded that the paintings sold by the assessee were personal effects and not capital assets under the definition applicable for the assessment year 2007-08.
- The sale of paintings did not attract capital gains tax for the relevant assessment year.
- The appeal on this issue was allowed in favor of the assessee.

2. Addition of Deemed Rent from House Property Not in Self-Occupation:
Facts and Arguments:
- The assessee had two residential properties: one at 7, Harington Road, Kolkata (self-occupied) and another at 10, Gurusaday Road, Kolkata (vacant).
- The AO, based on an Inspector's report, estimated the annual rental value of the vacant property at Rs. 1.80 lakhs and assessed income from house property at Rs. 1.26 lakhs under section 23(4).

Legal Provisions and Judgments:
- The AO's estimation was based on the Inspector's report, which suggested a rental value of Rs. 15,000 to Rs. 20,000 per month for the vacant property.
- The CIT(A) upheld the AO's estimation and addition.

Tribunal's Analysis and Conclusion:
- The Tribunal noted that the assessee did not contest the deemed annual value for rental purposes.
- The Tribunal found no infirmity in the lower authorities' orders and confirmed the addition.
- The appeal on this issue was dismissed.

Result:
The appeal of the assessee was partly allowed, with the issue regarding the sale of paintings decided in favor of the assessee and the issue of deemed rent from house property confirmed against the assessee.