2013 (9) TMI 562 - AT - Income Tax

Unexplained investment u/s 69 - Sale and purchase of paintings - Personal effect - Purchases shown as stock in trade - Held that - assessee is a connoisseur of art. The object of art is not only the pride possession but it also satiates the aesthetic quench for the art of the connoisseur. It gives joy to the possessor which is different from the pride of possession. The expression personal effect as per the Black s Law Dictionary means articles associated with person, as property having more or less intimate relation to person of possessor - The apex court in the case of H. H. Maharaja Rana Hemant Singhji v. CIT 1976 (2) TMI 1 - SUPREME Court has said that an intimate connection between the effects and the person of the assessee must be shown to exist to render them personal effects within the meaning of that expression used in clause (ii) of the exceptions in section 2(4A) of the Indian Income-tax Act, 1922. We make it clear that these holdings of paintings cannot be considered as personal effects. It is also on record that the assessee was holding these paintings in a packed condition and is preserving them according to the norms required and is not displaying them at his house. These aspects were admitted in the course of arguments. Therefore, these paintings cannot be held as personal effects. To that extent the assessee s contentions are rejected. - Decided against the assessee. Whether the transaction is in the nature of adventure in the nature of trade so as to consider it as business or as an investment by the assessee. - For deciding whether trade or investment, it is to be examined afresh in the light of past conduct of the assessee and necessary details/evidences, including the running account in Synergy Art Foundation. Additions u/s 69 - While accepting that the amount of Rs. 5 lakhs was made subsequent to the search and seizure proceedings, the Commissioner of Income-tax (Appeals) surprisingly confirmed the same as an afterthought to explain the discrepancies detected. - Held that - There is no dispute with reference to the cost of the painting and also no dispute with reference to the payment over 2 years. The Assessing Officer has already accepted the payment of Rs. 15 lakhs which was stated to have been paid by way of cheques and subsequently Rs. 9 lakhs was paid in three instalments of Rs. 4 lakhs and Rs. 2.5 lakhs each and were evidenced by the statements of ICICI Bank. In the light of the facts above, no amount can be considered as unexplained investment, unless there is confirmation from the other party that the amounts were paid in cash other than what was stated by the assessee. - Decided in favour of assessee.

Issues Involved:
1. Classification of profits from the sale of paintings as business profits or capital gains.
2. Determination of whether paintings can be considered personal effects.
3. Examination of the nature of transactions (trading vs. investment).
4. Verification of unexplained investment under section 69.

Detailed Analysis:

1. Classification of Profits from Sale of Paintings:
The primary issue was whether the profits from the sale of paintings should be treated as business profits or capital gains. The Assessing Officer (AO) observed that the assessee conducted the buying and selling of paintings as a business activity, using purchases as stock-in-trade through his company Synergy Art Foundation Ltd. (SAFL) or directly through online auction houses and art galleries. Consequently, the AO assessed the profits from the sale of paintings as business profits. The Commissioner of Income-tax (Appeals) confirmed this classification, leading to the assessee's appeal to the Tribunal.

2. Determination of Whether Paintings Can Be Considered Personal Effects:
The assessee contended that the paintings should be considered personal effects and thus not attract capital gains tax under section 2(14) of the Income-tax Act. The Tribunal referred to the case of Asst. CIT v. Mrs. Dilnavaz S. Variava [2003] 87 ITD 113 (Mumbai), where it was held that paintings used to decorate the house could be considered personal effects. However, the Tribunal noted significant differences in the present case, such as the number of paintings and the nature of transactions, and concluded that the paintings could not be considered personal effects.

3. Examination of the Nature of Transactions (Trading vs. Investment):
The Tribunal examined whether the assessee's activities constituted trading or investment. The assessee provided details of his purchases and sales, arguing that the transactions were investments driven by passion for art. However, the Tribunal found discrepancies and incomplete details in the submissions. For instance, the assessee admitted to purchasing 61 paintings from SAFL but failed to provide complete details of all purchases and sales. The Tribunal restored the matter to the AO to examine the entire gamut of purchases and sales, year-wise, and analyze whether the assessee was an investor or a trader.

4. Verification of Unexplained Investment Under Section 69:
For the assessment year 2007-08, the AO treated Rs. 9,00,000 as unexplained investment under section 69. The Commissioner of Income-tax (Appeals) reduced this amount to Rs. 5,00,000. The assessee argued that the amount of Rs. 5,00,000 was paid by cheque after the search and seizure proceedings, which the Tribunal accepted. The Tribunal directed the AO to delete the amount of Rs. 5,00,000, as the payments were made through cheques and could not be doubted or treated as unexplained.

Conclusion:
The Tribunal concluded that the issue of whether the assessee was a trader or an investor needed further examination by the AO, who should analyze the complete details of purchases and sales. The Tribunal also held that the paintings could not be considered personal effects and directed the AO to delete the unexplained investment of Rs. 5,00,000 for the assessment year 2007-08. The appeals for both years were allowed for statistical purposes.

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