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Income Tax Appellate Tribunal (ITAT) Kolkata in a recent judgment has held that treating the receipts from sale of paintings as capital receipt not chargeable to tax being personal effects on the basis of professional advice is acceptable ground and deleted the penalty proceedings u/s 271(1)(c) for concealment of income/furnishing inaccurate particulars of income.

Case Details:
ITA No.1303/Kol /2010 AY : 2006-07
Suvaprasanna Bhatacharya (Appellant) vs ACIT (Respondent)
Date of Order: 06-11-2015

Brief Facts of the Case:
The Assessee was an eminent professional artist (painter). In the course of assessment proceedings for AY 2006-07 the Assessing Officer (AO) issued notice u/s142(1) calling upon the Assessee to explain, among other things, as to whether the Assessee had deposited cash exceeding Rs.10 lacs in any savings Bank Account. From replies submitted by the assessee, it came to light that for AY 06-07 the assessee had not disclosed income from sale of work of art i.e., paintings. The assessment was completed among other, with additions of Rs. 60,99,454/- for investment made in mutual funds out of undisclosed sales of paintings and the assessee paid the taxes on the income so assessed. Later, penalty proceedings u/s 271(1)(c) for concealment of income were initiated by issue of notice u/s 274.

The Assessee submitted he was an eminent 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 effected 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 income from sale of paintings and was content paying taxes to avoid litigation. Assessment and penalty proceedings are two different proceedings and the Assessee is not precluded from urging the correct position in law and on that ground avoid imposition of penalty though the Assessee has accepted an assessment.

The AO referring to the decision of the Hon’ble Supreme Court in the case of Dharmendra Textile Processors and others 306 ITR 277 (SC) and held that mens rea is not essential for attracting civil liabilities. As such, there was no onus on the department to prove mens rea beyond doubt. The AO further observed that the assessee being a responsible professional was aware of volume of his receipts. He did not disclose it truly and fully. Investment in mutual fund was made from concealed income. It led to further concealment of dividend interest etc.

On appeal, the CIT(A) upheld the penalty proceedings.

Important Excerpts from ITAT Judgment

It is not in dispute that the source of funds for making such investments was the sale of assessee’s own paintings. If the painting are considered as “personal effects” than they cannot be regarded as “capital assets” within the meaning of Sec.2(14)(ii) of the Act. Consequently the receipts on sale of paintings had to be treated as capital receipts not chargeable to tax. This was the reason, according to the assessee that receipts on sale of paintings was not disclosed as “income” in the return of income filed. The Assessee pleaded that the professional advice he received in this regard was that it was not income and hence need not be disclosed.

The expression "personal effects" has not been defined in the Act. It would ordinarily mean physical chattels having some personal connection with the assessee such as articles of personal or domestic use, clothing, furniture etc. "personal effects" would not include money or securities for money or chosesin-action represented by promissory notes. 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.

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 per creation desire of the assessee. Therefore, it would be proper to accept the contention of the assessee that the paints were his “personal effects”.

The AO has not disputed the position that the source of funds for investment in units of mutual funds was the sale of paintings which were personal effects and therefore income from sale of paintings were capital receipts not chargeable to tax. Therefore, the plea of the 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 Rs.60,99,454/-, in our view is unsustainable, as there was neither concealment of particulars of income or furnishing of inaccurate particulars of income.

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ITAT-Non Disclosure of Paintings sold being tax exempt personal effects on professional advice is acceptable ground, penalty u/s 271(1)(c) can not be imposed | 11-11-2015 |