Madras H.C : the Appellate Tribunal was right in law in holding that the paintings would be personal effects and sale of the same would not attract the capital gains

High Court Of Madras

CIT, Chennai vs. Kuruvilla Abraham

Assessment Year : 2005-06

Section : 2(14), 45

Mrs. R. Banumathi And K. Ravichandrabaabu, JJ.

Tax Case (Appeal) No. 24 Of 2010

April  16, 2013

JUDGMENT

K. Ravichandrabaabu, J. – The Revenue is on appeal as against the order of the Income Tax Appellate Tribunal in respect of the assessment year 2005-2006.

2. The respondent assessee filed the return of income for the relevant assessment year admitting a total income of Rs. 2,40,150/-. When the assessment was taken up for scrutiny, the Assessing Officer treated the paintings sold by the assessee as capital asset and computed the capital gains arising from sale of such paintings. The Assessing Officer rejected the contention of the assessee that the paintings sold were personal effects and not capital assets. Accordingly, he brought an amount of Rs. 39,14,800/- to tax towards capital gains on sale of paintings and added the same to the returned income of Rs. 2,40,150/-.

3. Aggrieved against the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The first appellate authority found that the paintings are personal effects of the assessee and the sale of those personal effects would not attract the capital gains. He also found that under Section 2(14) of the Income Tax Act the paintings were included in the definition of capital asset only with effect from the assessment year 2008-2009. Therefore, the Commissioner of Income Tax (Appeals) deleted the addition made by the Assessing Officer.a

4. The Revenue took it on appeal before the Tribunal. Accepting the contention of the assessee as well as the finding rendered by the first appellate authority, the Tribunal dismissed the appeal filed by the Revenue. Aggrieved against the said order of the Tribunal, the Revenue has filed the present appeal before this court by raising the following substantial question of law:-

“Whether on the facts and circumstances of the case, the Appellate Tribunal was right in law in holding that the paintings would be personal effects and sale of the same would not attract the capital gains ?”

5. Learned counsel appearing for the Revenue submitted that the Assessing Officer was right in making the addition by treating the paintings as capital asset. He also submitted that even though the amendment was brought in by the Finance Act 2007 to include the paintings also within the definition of capital asset, still it does not imply that the paintings were expressively included under the definition of “personal effects” for the earlier periods. The learned counsel for the Revenue further contended that the finding of the Tribunal that the assessee was holding the paintings for two decades is perverse in view of the fact that the assessee was holding the paintings only for seven months after getting the same from his mother and therefore it can not be treated as personal effects of the assessee. Thus, he supported the order of the Assessing Officer.

6. Per contra, the learned counsel appearing for the assessee submitted that the paintings are only the personal effects and when the relevant assessment year is 2005-2006, the amendment brought in by the Finance Act 2007 with effect from 1.4.2008 excluding the paintings from the personal effects cannot be applied retrospectively. Even the objects and reasons to bring the amendment would also show that it was intended to apply from the assessment year 2008-2009 onwards. The learned counsel for the assessee further submitted that there was no finding by the Assessing Officer with regard to the period of holding by the assessee and the Revenue has also not raised any ground to that effect while filing the appeal before the Tribunal. The learned counsel relied on the decision in Guffic Chem (P.) Ltd.v. CIT [2011] 332 ITR 602/198 Taxman 78/10 taxmann.com 105 (SC) to contend that the tax liability cannot be applied retrospectively.

7. Heard the learned counsel appearing for either side.

8. In this tax case appeal, the only issue that arises for consideration is as to whether the paintings are to be treated as personal effects and the sale of the same would attract the capital gains or not ?

9. In order to consider the said issue, it is relevant to quote Section 2(14) of the Income Tax Act as it existed during the relevant assessment year as hereunder:-

“2(14) “capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include—

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ;

[(ii) personal effects, that is to say, movable property (including wearing apparel and furniture, but excluding jewellery) held for personal use by the assessee or any member of his family dependent on him.”

10. An amendment was brought in to the above Section 2(14) under the Finance Act 2007 with effect from 1.4.2008. Consequently, it reads as follows:

(14) “capital asset” means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include—

(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ;

[(ii) personal effects that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes—

(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art.

11. As per the amended provision, the paintings were excluded from the purview of personal effects as contemplated under Section 2(14)(ii). Thus, in effect the paintings are brought under the definition of capital asset by virtue of the amended Act 2007 with effect from 1.4.2008. The first appellate authority elaborately considered this aspect by discussing the objects and reasons of the Finance Act 2007 in bringing the paintings within the purview of definition of capital asset. Thus, he observed that the jewellery was the only asset which is not in the nature of personal effects liable to be treated as capital asset upto the assessment year 2007-2008 and the paintings etc., would fall within the meaning of capital assets to attract capital gains tax, only from the assessment year 2008-2009. Consequently, the first appellate authority held that the paintings of the appellant sold during the assessment year 2005-2006 cannot be brought under the definition of capital asset and accordingly, he allowed the appeal filed by the assessee.

12. The Tribunal also found that the paintings can be considered as capital asset only with effect from 1.4.2008 by virtue of the Finance Act 2007 and the relevant assessment year being 2005-2006, the paintings were not excluded under the definition of Section 2(14) as the personal effects. Therefore, the Tribunal rejected the appeal filed by the Revenue.

13. We find that the order of the Tribunal confirming the order of the first appellate authority does not warrant any interference in view of the following reasons:-

(i) The relevant assessment year is 2005-2006 and during such assessment year, the definition of capital asset found under Section 2(14) does not specifically exclude paintings from the purview of personal effects.

(ii) the paintings were excluded from the purview of personal effects and consequently included as one of the capital asset under Section 2(14) only in pursuant to the amendment made under the Finance Act 2007 that too with effect from 1.4.2008.

(iii) The above said amendment was not made with any retrospective effect. On the other hand, as could be seen from the memorandum explaining the provisions of the Finance Bill 2007 as also the notes and clauses of the Finance Bill 2007, as extracted by the Commissioner of Income Tax (Appeals) in his order, it is very clear that the amendment was intended to take effect from 1st April 2008 and will accordingly apply in relation to the assessment year 2008-09 and for subsequent years.

(iv) When the amendment itself was brought in with prospective effect, the same cannot be applied retrospectively. Moreover, it being a taxing liability, the same cannot be applied retrospectively as held by the Apex Court in the decision in Guffic Chem (P.) Ltd.’s case (supra). Therefore, the first appellate authority as well as the Tribunal have rightly deleted the addition made by the Assessing Officer.

(v) In order to attract the capital gains, it should first fall within the definition of capital asset as contemplated under Section 2(14). However, the capital asset, as defined, does not include the personal effects which in turn excluded the paintings etc., after the amendment was brought in. To put it simply, the paintings are excluded from the purview of personal effects and included within the scope of capital asset only with effect from 1.4.2008. Therefore, the capital gains tax on the paintings are liable only with effect from 1.4.2008 in respect of the assessment year 2008-2009 onwards and not in respect of earlier assessment years. The relevant assessment year in this case being 2005-2006, both the authorities below viz., the Commissioner of Income Tax (Appeals) as well as the Tribunal have rightly found in favour of the assessee in this regard.

(vi) In so far as the contention of the Revenue with regard to the period of holding of such personal effects is concerned, we have perused the order of the Assessing Officer and there is absolutely no finding to that effect as contended by the learned counsel for the Revenue. Therefore, a contention which was not raised and considered before the lower authorities, cannot be permitted to be raised first time before this court.

(vii) No doubt, the Assessing Officer relied on the decision of the Apex Court in H.H. Maharaja Rana Hemant Singhji v. CIT [1976] 103 ITR 61 (SC) in support of his conclusion to hold that the paintings are not personal effects of the assessee. The facts of the said case show that the assessee therein was held liable to tax on the capital gains derived by the sale of sovereigns, silver bars and rupee coins, under Section 12B of the Indian Income Tax Act 1922, read with Section 2(4A). Considering those facts and circumstances, the Apex Court held that the silver bars or bullion could by no stretch of imagination be deemed to be “effects” meant for personal use. The said decision of the Apex Court was rendered by taking into consideration of the relevant provisions under the Income Tax Act 1922, read with Section 2(4A). On the other hand, the present case involving the assessment year 2005-2006 deals with Section 2(14) of the Income Tax Act, 1961, which was amended under the Finance Act 2007, as discussed supra. Therefore, when Section 2(14) of the 1961 Act had only excluded jewellery from the purview of personal effects before amendment and further excluded the paintings and others after the amendment, it would only show that the facts and circumstances of that case before the Apex Court are totally different and distinguishable, apart from the fact that the same was rendered prior to the 1961 Act. Therefore, the Assessing Officer was not right in relying on the said decision of the Apex Court.

14. Hence, we find no merits in the appeal as we are in full agreement with the finding rendered by both the appellate authorities. Consequently, the tax case appeal is dismissed and the question of law is answered that the paintings are excluded within the meaning of personal effects and included within the scope of capital asset only with effect from the assessment year 2008-2009 onwards and not in respect of the earlier periods. No costs.

[Citation : 356 ITR 519]