2018 (3) TMI 2054 - AT - Income Tax

Undisclosed investment in paintings - HELD THAT - The assessee claimed to have received aforesaid paintings as gift. During the appellate proceedings ld. CIT (A) while concurring with AO has not accepted the theory of gifting to the assessee in question put forth by the assessee. During the arguments before the Bench the assessee has failed to bring on record plausible and sustainable reasons as to why such costly paintings in question have been gifted by the celebrated artists. Assessee has also not brought on record the fact that if he was related to aforesaid six artists or was having close family relations. Moreover form the facts on record it is proved that the assessee being partner of M/s. R R Arts and Director of M/s. Cue Apparel Pvt. Ltd. had been transacting with aforesaid artists for sale and purchase of paintings. When a celebrated artist was having business interest with the assessee the question of gifting paintings all of sudden by all of them is not acceptable. So we concur with the findings of AO as well as CIT (A) to the extent that though the creditworthiness of the donors has been proved but occasion and relationship of the donor with the donee has not been proved beyond doubt. Undisclosed investment in such paintings found at the residence cum business premises of the appellant - HELD THAT - The value of the paintings of Shibu Natesan Bhupen Kakkar F.N. Souza Manjit Bawa Jogen Choudhary and Arpana Caur is to be assessed at Rs. 4, 01, 200/- Rs. 10, 00, 000/- Rs. 10, 00, 000/- Rs. 2, 00, 000/- Rs. 6, 00, 000/- and Rs. 2, 66, 700/- respectively. So far as value of the paintings of F.N. Souza and Bhupen Kakkar are concerned no such bills for comparison have been brought on record by the assessee so its value be determined at Rs. 10, 00, 000/- each. In these circumstances addition of Rs. 58, 00, 100/- is ordered to be restricted to Rs. 34, 67, 900/-. Consequently ground no. 2 of the appeal filed by the Revenue is decided against the Revenue and grounds no. 1 2 of the appeal filed by the assessee is partly determined in favour of the assessee. Addition on account of household expenses incurred from undisclosed sources - CIT (A) while deleting the addition also taken into account the deletion made by ld. CIT (A) on account of household expenses in case of Shashi Gandhi mother of the assessee for AY 2002-03 2006-07 and 2007-08. So in these circumstances we find no scope to interfere into the findings returned by the ld. CIT (A) hence ground no. 1 of the Revenue s appeal is also determined against the Revenue. Unexplained investment in painting made by Anjolie Ela Menon on the ground that assessee has failed to explain the acquisition of this painting - When we examine receipt undisputedly it is issued by Anjolie Ela Menon in the name of M/s. R R Arts owned by the assessee bearing cheque no. 880110. However after rectification of mistake another receipt dated 04.03.2007 has been brought on record which is issued in the name of M/s. Vibhuti Investment Company Ltd. bearing same cheque number drawn on Bank of India Prabha Devi Mumbai. When the payment is proved to have been made by way of cheque in the name of M/s. Vibhuti Investment Company Ltd. and this fact has been verified by the AO during assessment proceedings as well as during the remand proceedings and rectified receipt has been brought on record by the assessee and the assessee is not having got issued any cheque book bearing series of cheque no. 880110 we are of the considered view that the ld. CIT (A) has rightly deleted the addition.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment are:

(a) Whether the addition of Rs. 1,00,00,000/- on account of undisclosed investment in paintings made by the Assessing Officer (AO) is justified, given the assessee's claim that the paintings were received as gifts from the artists;

(b) Whether the source of the alleged undisclosed investment in paintings can be attributed to undisclosed income already declared by a firm associated with the assessee;

(c) Whether the estimation of the value of paintings for addition purposes by the AO and the Commissioner of Income Tax (Appeals) (CIT(A)) is reasonable and sustainable;

(d) Whether the deletion of an addition of Rs. 6,00,000/- on account of household expenses incurred from undisclosed sources is justified;

(e) Whether the deletion of an addition of Rs. 20,00,000/- made by the AO on account of unexplained investment in a painting by Anjolie Ela Menon is justified, considering the assessee's failure to explain the source of acquisition;

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Addition on account of undisclosed investment in paintings and source of investment

Relevant legal framework and precedents: The Income-tax Act, 1961, empowers the AO to make additions on account of undisclosed income or investments where the assessee fails to satisfactorily explain the source or nature of such investments. The presumption under section 132(4A) regarding ownership of seized assets is also relevant. The burden lies on the assessee to prove the genuineness of the claimed gifts and the source of acquisition.

Court's interpretation and reasoning: The AO made an addition of Rs. 1,00,00,000/- estimating the value of six paintings seized during a search and seizure operation. The assessee claimed these paintings were gifts from the respective artists. The CIT(A) partly confirmed the addition but restricted it to Rs. 58,00,100/-, rejecting the gift claim due to lack of credible evidence establishing the occasion or relationship between the donor artists and the assessee.

The Tribunal noted that the assessee furnished confirmations of gifts from some artists during assessment and appellate proceedings, including documentary evidence seized from the premises. However, the Tribunal observed that the assessee failed to produce plausible reasons or evidence of close family or social relationships with the artists, which would justify such costly gifts. The fact that the assessee was engaged in business transactions with these artists further weakened the gift claim, as sudden gifting by business associates was deemed improbable.

Key evidence and findings: Confirmations of gifts from certain artists, seized documents, bills for sale of paintings by some artists (not exactly matching seized paintings), and the assessee's business relationship with the artists.

Application of law to facts: The Tribunal concurred with the AO and CIT(A) that while the creditworthiness of the donors was established, the occasion and relationship necessary to substantiate the gift claim were not proven beyond doubt. Consequently, the Tribunal upheld the addition but revised the valuation of paintings based on comparable bills submitted by the assessee for paintings sold by the same artists during the relevant period.

Treatment of competing arguments: The assessee argued that the paintings were gifts and that the source of investment could be undisclosed income declared by the associated firm M/s R & R Arts. The Revenue contended that the additions were justified due to lack of credible gift evidence and unexplained sources. The Tribunal balanced these by accepting the creditworthiness but rejecting the gift occasion and relationship, leading to a restricted addition.

Conclusions: The addition on account of undisclosed investment in paintings is sustained but restricted from Rs. 1,00,00,000/- to Rs. 34,67,900/- based on reasonable valuation derived from comparable bills. The ground challenging the addition is partly allowed in favor of the assessee and partly upheld against it.

Issue (c): Reasonableness and sustainability of estimation of paintings' value

Relevant legal framework and precedents: Valuation of intangible assets like paintings requires a holistic approach, considering market value, comparable transactions, and expert opinions. Arbitrary or exorbitant estimations by the AO or appellate authorities are subject to scrutiny.

Court's interpretation and reasoning: The Tribunal examined the bills submitted by the assessee for paintings sold by the same artists during the relevant period. It noted that while the bills were not for the exact paintings seized, they provided a reasonable benchmark for valuation. The AO and CIT(A) had estimated values significantly higher than these bills. The Tribunal held that intangible assets like paintings cannot be precisely valued but must be assessed holistically.

Key evidence and findings: Bills for sale of paintings by Shibu Natesan, Manjit Bawa, Jogen Chowdhary, and Arpana Caur; absence of bills for Bhupen Kakkar and F.N. Souza paintings.

Application of law to facts: The Tribunal adjusted the value of paintings based on the bills, assigning Rs. 4,01,200/- for Shibu Natesan, Rs. 10,00,000/- each for Bhupen Kakkar and F.N. Souza (in absence of bills), Rs. 2,00,000/- for Manjit Bawa, Rs. 6,00,000/- for Jogen Chowdhary, and Rs. 2,66,700/- for Arpana Caur, totaling Rs. 34,67,900/-.

Treatment of competing arguments: The Revenue argued for sustaining higher estimations, while the assessee contended for valuation based on actual bills. The Tribunal favored a balanced approach, relying on documentary evidence rather than arbitrary estimation.

Conclusions: The Tribunal restricted the addition to Rs. 34,67,900/-, thereby partially allowing the assessee's appeal and rejecting the Revenue's contention for higher valuation.

Issue (d): Deletion of addition of Rs. 6,00,000/- on account of household expenses from undisclosed sources

Relevant legal framework and precedents: Additions on account of household expenses from undisclosed sources require proof that such expenses were not met from disclosed income or legitimate sources.

Court's interpretation and reasoning: The assessee demonstrated that household expenses were met from disclosed salary income, rental income, and income of his mother from her proprietorship concern. The CIT(A) also considered prior deletions of similar additions for the mother in earlier years.

Key evidence and findings: Salary income statements, rental income records, mother's proprietorship account schedules, and prior appellate orders.

Application of law to facts: The Tribunal found no reason to interfere with the CIT(A)'s deletion since the assessee satisfactorily accounted for household expenses from disclosed sources.

Treatment of competing arguments: The Revenue challenged the deletion, but the Tribunal upheld the CIT(A)'s findings.

Conclusions: The deletion of Rs. 6,00,000/- addition on account of household expenses is upheld, and the Revenue's appeal on this ground is dismissed.

Issue (e): Deletion of addition of Rs. 20,00,000/- on account of unexplained investment in painting by Anjolie Ela Menon

Relevant legal framework and precedents: Under section 132(4A), presumption of ownership arises for seized assets. The assessee must explain the source and ownership to avoid addition.

Court's interpretation and reasoning: The AO made an addition of Rs. 20,00,000/- based on unexplained investment in a painting. The payment was made by cheque no. 880110. The assessee contended that the receipt initially issued in the name of his firm M/s R & R Arts was a clerical mistake, and the correct recipient was M/s Vibhuti Investment Company Ltd., supported by a rectified receipt.

The Tribunal noted that the payment was indeed made by cheque bearing the same number to M/s Vibhuti Investment Company Ltd., and the AO verified this during assessment and remand proceedings. The assessee did not possess a cheque book series covering cheque no. 880110, reinforcing the contention that the payment was not from the assessee's firm.

Key evidence and findings: Original and rectified receipts, cheque details, AO's verification during assessment and remand.

Application of law to facts: The Tribunal accepted the rectification and the explanation that the painting was not owned by the assessee but by M/s Vibhuti Investment Company Ltd., thereby negating the addition.

Treatment of competing arguments: The Revenue relied on the presumption of ownership and unexplained source, while the assessee provided documentary evidence to rebut the presumption.

Conclusions: The deletion of Rs. 20,00,000/- addition is justified and upheld; the Revenue's appeal on this ground is dismissed.

3. SIGNIFICANT HOLDINGS

"Though the creditworthiness of the donors has been proved but occasion and relationship of the donor with the donee has not been proved beyond doubt."

"Value of the paintings being an intangible cannot be exactly estimated except by taking a holistic view in the light of the bills brought on record having been issued by same Artists during the period in question."

"The addition on account of undisclosed investment in paintings is ordered to be restricted to Rs. 34,67,900/-."

"The deletion of addition of Rs. 6,00,000/- on account of household expenses is justified as the assessee has proved that household expenses are met from disclosed income sources and prior appellate orders in favor of the assessee's mother have been considered."

"The deletion of addition of Rs. 20,00,000/- on account of unexplained investment in painting by Anjolie Ela Menon is upheld as the payment was made by cheque to M/s Vibhuti Investment Company Ltd., and the presumption of ownership against the assessee is rebutted."

The Tribunal partly allowed the assessee's appeal by reducing the addition on paintings, and dismissed the Revenue's appeals on household expenses and unexplained investment in painting by Anjolie Ela Menon, thereby affirming the deletions made by the CIT(A).