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TMI Blog2015 (12) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee that the on the basis of professional advice, receipts from sale of paintings was treated as capital receipt not chargeable to tax, is found to be acceptable. Therefore the plea of the assessee that receipts from sale of paintings were not offered to tax on a bona fide belief is acceptable. Consequential imposition of penalty in so far as, it relates to the addition of ₹ 60,99,454/-, in our view is unsustainable, as there was neither concealment of particulars of income or furnishing of inaccurate particulars of income. The show cause notice u/s. 274 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed. Following the decision of the Hon’ble Karnataka High Court in the case of CIT & Anr. v. Manjunatha Cotton and Ginning Factory [2013 (7) TMI 620 - KARNATAKA HIGH COURT ], we hold that the orders imposing penalty in all the assessment years have to be held as invalid and consequently penalty imposed is cancelled. - Decided in favour of assessee. - ITA No.1303/Kol /2010 - - - Dated:- 6-11-2015 - Shri N.V. Vasudevan, Judicial Member and Shri Waseem Ahmed, Accountant Member For The Appellant Shri A.K. Tibrew ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60,99,454/- in the units of different mutual funds during the previous year, which was not disclosed in his return of income. Source of such deposits have been stated to be receipt from sale of paintings. This is added to his income. B. Bank interest amounting to ₹ 1,09,473/- credited in such accounts was not disclosed and it is being added to the income of the Assessee. C. Honorarium of ₹ 5,500/- received during the previous year, not reported in his return of income is also being added to his income. D. Foreign travel. The assessee is a celebrated painter enjoying a very good reputation in the field of art across the globe. During the previous year 2005-06, he visited the following countries. Sl Period Country Trip financed by Reasons of visit 1 27/4/05 to 3/5/05 Pakistan Self Goodwill mission 2 29/6/05 to July 05 USA North American Bengali Conference Bangal Smmelan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come. The balance of ₹ 9,79,410/- is being added to his income. I. Long term capital gains the assessee purchased units of ICICI Prudential on 30/7/04 for ₹ 5,000,000/- and sold it for ₹ 9,81,159/- on 7/12/05, generating long term capital gains of ₹ 4,71,159/- only. As this income is exempt, it is not being added to his income. J. Dividend -The assessee has not reported any dividend from such investments as most of the units are under growth option. K. Closing stock / work in progress of art The assessee in his sworn statement has stated that at any given point of time, about 10-15 works of art are usually lying with different galleries. However, as he follows cash system or accounting, it is accounted in income only at the point of sale. Unsold paintings are retuned back, which are again displayed in other galleries. As such no value of closing stock WIP can be assigned. The plea of assessee is accepted and no addition is made on this account. L. Expense Apart from expenses mentioned in the return of income, the assessee has further claimed expenses of ₹ 37,060/- which relate to bank and other charges. It is being accepted and allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nent artist and not aware of the intricacies of tax laws. He was advised by his tax consultant that income from sale of art is not taxable as it was in the nature of person effects and hence not a capital asset within the meaning of the definition of the said term u/s.2(14)(ii) of the Act. The assessee also pointed out that the sale of paintings was not done by him as an adventure in the nature of trade. The paintings were kept for years over because of his aesthetic sense. It gave him tremendous pleasure and pride of profession. The paintings were therefore his personal effects . The sale was effeted for the very purpose of making investments in the units of mutual funds and to earn income from such investments for his livelihood. Therefore, the incidence of sale cannot be construed to be adventure in the nature of trade. Since the source of investments in units of mutual funds is explained as from and out of sale proceeds of paintings which are personal effects and hence not taxable, the very basis of addition by the AO is not correct. In the course of assessment proceedings, facts were placed before the AO but the Assessee did not want to fight on the issue of taxability of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther concealment of dividend interest etc. 3.4 On appeal by the Assessee, the CIT(A) confirmed the order of the AO. The CIT(A) was of the view that the two bank accounts with Standard Chartered Bank and Kotak Mahindra Bank Ltd., were not disclosed by the assessee and it was only when the AO made verification with mutual funds/banks and thereafter the Assessee admitted undisclosed investments in mutual funds. 3.5 Before the Tribunal the learned counsel for the Assessee reiterated the stand taken before the AO and CIT(A). He further submitted that the AO has not recorded satisfaction in the order of assessment that the Assessee is liable to be proceeded against u/s.271(1) of the Act except recording as follows in the order of assessment viz., Penalty proceeding u/s.271(1) initiated. According to him, the above manner of initiation of penalty proceedings in the order of assessment is not in accordance with law. In this regard he made reference to the decision of the Hon ble Karnataka High Court in the case of CIT Vs. MWP Ltd. (2014) 41 taxmann.com 496 (Karn.). In the aforesaid decision it was held that mere mention of Penalty Proceedings under section 271(1) initiated sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds, interest income in SB Account with bank and Short Term Capital Gain on sale of units of mutual funds. 4. The learned counsel for the Assessee also drew our attention to the show cause notice issued u/s.274 of the Act before imposing penalty and submitted that the said notice does not specify as to whether the Assessee is guilty of having furnished inaccurate particulars of income or of having concealed particulars of such income . He pointed out that the printed show cause notice does not strike out the irrelevant portion viz., furnished inaccurate particulars of income or concealed particulars of such income . He drew our attention to a decision of the Hon ble Karnataka High Court in the case of CIT Vs. Manjunatha Cotton Ginning Factory (2013) 218 Taxman 423 (Kar.) wherein it was held that if the show cause notice u/s.274 of the Act does not specify as to the exact charge viz., whether the charge is that the Assessee has furnished inaccurate particulars of income or concealed particulars of income by striking out the irrelevant portion of printed show cause notice, than the imposition of penalty on the basis of such invalid show cause notice cannot be sustaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession; (ii) personal effects, this is to say, movable property (including wearing apparel, jewellery and furniture) held for personal use by the assessee or any member of his family dependent on him; (iii) agricultural land in India. Sub-Clause (ii) was substituted w.e.f. 1st April, 1973 by the Finance Act, 1972 for the original sub-cl. (ii) to exclude jewellery from personal effects . Under s. 45 of the IT Act, any profits or gains arising from the transfer of a capital asset are chargeable to tax. The term capital asset as defined in cl. (14) of s. 2 of the IT Act does not include, inter alia, personal effects, i.e. movable property including wearing apparel, jewellery and furniture held for personal use by the assessee or any member of his family dependent on him. In view of the specific exclusion of jewellery from the definition of capital asset profits and gains arising from the transfer of jewellery held for personal use are not chargeable to income tax. The exemption of capital gains arising from transfer of jewellery facilitates tax evasion through bogus or infl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The expression would normally include privately owned articles for intimate use by the assessee. The essential feature, thus appears to be that article in question should have intimate relation with the person of the assessee and should be of personal use, that is to say, should be normally, ordinarily and commonly in such use. Even though prior to 01.04.2008, a painting could be regarded as a personal effect , but, before a painting can be regarded as a personal effect there must be evidence on record to show that it was intimately and commonly used by the assessee, for the purpose of exclusion from the definition of capital asset. 5.3 In the penalty proceedings, the Assessee pointed out that the sale of paintings was not done by him as an adventure in the nature of trade. The paintings were kept for years over because of his aesthetic sense. It gave him tremendous pleasure and pride of profession. The paintings were therefore his personal effects . This aspect has not been disputed by the AO. In the statement recorded u/s.131 of the Act by the AO in the course of assessment proceedings, in answer to Question No.11 the assessee has stated that the paintings are made as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be discernible from the order passed during the course of the proceedings. At the stage of initiation of penalty proceeding, the order passed by the AO need not reflect satisfaction vis-a-vis each and every item of addition or disallowance, if overall sense gathered from the order is that a further prognosis is called for. The decision of the Hon ble Supreme Court in the case of MAK Data (P) Ltd. (supra) has to be understood in the context of the facts of the said case. The relevant portion of the judgment in the aforesaid case, reads thus: 9. We are of the view that the surrender of income in this case is not voluntary in the sense that the offer of surrender was made in view of detection made by the AO in the search conducted in the sister concern of the assessee. In that situation, it cannot be said that the surrender of income was voluntary. AO during the course of assessment proceedings has noticed that certain documents comprising of share application forms, bank statements, memorandum of association of companies, affidavits, copies of Income Tax Returns and assessment orders and blank share transfer 8 deeds duly signed, have been impounded in the course of survey proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, we have read the order of assessment as a whole and are satisfied that satisfaction for initiation of penalty proceedings is not discernible from the order of assessment. We therefore concur with the argument of the learned counsel for the assessee that initiation of penalty proceedings was not proper in the present case and on that ground the imposition of penalty u/s.271(1)( c) of the Act is unsustainable. 8. The next argument that the show cause notice u/s.274 of the Act which is in a printed form does not strike out as to whether the penalty is sought to be levied on the for furnishing inaccurate particulars of income or concealing particulars of such income . On this aspect we find that in the show cause notice u/s.274 of the Act the AO has not struck out the irrelevant part. It is therefore not spelt out as to whether the penalty proceedings are sought to be levied for furnishing inaccurate particulars of income or concealing particulars of such income . 8.1 The Hon ble Karnataka High Court in the case of CIT Anr. v. Manjunatha Cotton and Ginning Factory, 359 ITR 565 (Karn), has held that notice u/s. 274 of the Act should specifically state as to whether pen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be strictly construed, notice issued under Section 274 should satisfy the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended if the show cause notice is vague. On the basis of such proceedings, no penalty could be imposed on the assessee. 60. Clause deals with two specific offences, that is to say, concealing particulars of income or furnishing inaccurate particulars of income. No doubt, the facts of some cases may attract both the offences and in some cases there may be overlapping of the two offences but in such cases the initiation of the penalty proceedings also must be for both the offences. But drawing up penalty proceedings for one offence and finding the assessee guilty of another offence or finding him guilty for either the one or the other cannot be sustained in law. It is needless to point out satisfaction of the existence of the grounds mentioned in Section 271(1) when it is a sine qua non for initiation or proceedings, the penalty proceedings should be confined only to those grounds and the said grounds have to be specifically stated so that the assessee would have the opportunity to meet those grounds. Afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses will lead to an inference as to non-application of mind. The final conclusion of the Hon ble Court was as follows:- 63. In the light of what is stated above, what emerges is as under: a) Penalty under Section 271(1) is a civil liability. b) Mens rea is not an essential element for imposing penalty for breach of civil obligations or liabilities. c) Willful concealment is not an essential ingredient for attracting civil liability. d) Existence of conditions stipulated in Section 271(1) is a sine qua non for initiation of penalty proceedings under Section 271. e) The existence of such conditions should be discernible from the Assessment Order or order of the Appellate Authority or Revisional Authority. f) Even if there is no specific finding regarding the existence of the conditions mentioned in Section 271(1) , at least the facts set out in Explanation 1(A) (B) it should be discernible from the said order which would by a legal fiction constitute concealment because of deeming provision. g) Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under Section 271(l) is a sine qua non fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty proceedings on one limb and finding the assessee guilty of another limb is bad in law. t) The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from proceedings of assessment, it is independent and separate aspect of the proceedings. u) The findings recorded in the assessment proceedings in so far as concealment of income and furnishing of incorrect particulars would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits. However, the validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter of penalty proceedings. The assessment or reassessment cannot be declared as invalid in the penalty proceedings. (emphasis supplied) It is clear from the aforesaid decision that on the facts of the present case that the show cause notice u/s. 274 of the Act is defective as it does not spell out the grounds on which the penalty is sought to be imposed. Following the decision of the Hon ble Karnataka High Court, we hold that the orders imposing penalty in all the assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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