Commissioner of Income Tax vs Faiz Murtaza Ali

In this appeal preferred by the Revenue, the following substantial questions of law are proposed on which we have heard the arguments at length at the stage of admission itself: (1) Whether the income tax Appellate Tribunal was correct in law in deleting the addition of Rs. 39,47,136 made by the Assessing Officer treating the sale of alleged personal effects as ''Income from undisclosed sources''?

(2) Whether the income tax Appellate Tribunal was correct in law in holding that the evidence filed by the assessee was believable and, therefore, the onus was shifted to the Revenue to prove that the items sold were not personal effects of the assessee?

(3) Whether the items sold by the assessee were ''personal effects'' so as to fall within the ambit of the exclusionary clause of section 2(14) of the Act, which defines ''capital asset''?

The aforesaid questions have arisen for consideration on the following set of facts.

In the return filed by the assessee for the assessment year 2002-03 he declared income of Rs. 31,71,656. The Assessing Officer noticed that in the bank account of the assessee there is a deposit aggregating to Rs. 39.47 lakhs, which, according to the assessee, was the amount realised by him from the sale of certain "personal effects". According to him, the sums realised from the aforesaid sales were exempt u/s 2(14) of the income tax Act. The assessee had explained that he had received various household items, paintings, carpets, collector items, furniture items, etc., owned by his grandfather, father, uncle and aunt. These movable properties were held for personal use by the assessee. The details as given by the assessee are as under:

A.

Carpets (silk on silk carpets)

35 items

B.

Paintings

20 Pcs

C.

Collector items which included antique watches, rings and decorative items

14 Pcs

D.

Household items which included crystal items

12 Pcs

E.

Antique furniture which includes table, chairs, centre table, chest, etc.

34 Pcs

The Assessing Officer was of the view that the aforesaid items could not be treated as personal effects and were in fact capital assets within the meaning of section 2(14) of the income tax Act and, therefore, refused to grant any exemption on the sale proceeds thereof from tax and included this amount for the purpose of tax. Another reason given by the Assessing Officer was that the assessee had failed to establish the identity of the items sold individually to each buyer or that these items have market value of Rs. 39.47 lakhs. According to him, since the assessee had not produced any documentary evidence in support of his claim, he was not able to establish the genuineness of his claim for exemption u/s 2(14) of the Act. This was the additional ground on which he rejected the plea of exemption u/s 2(14) of the Act.

The assessee preferred an appeal thereagainst before the Commissioner of income tax (Appeals). The Commissioner of income tax (Appeals) held that the items sold were articles meant for personal use and were, therefore, personal effects. The entire discussion of the Commissioner of income tax (Appeals) on this aspect is in the following terms:

Before deciding the appeal, I would like to clarify that the assessee has sold certain furniture items including fixtures, household items, silk carpets, paintings, etc., which were assets of personal use of the assessee''s father and parcel of the immovable properties the assessee has inherited. The assessee was using these assets along with the immovable properties where these assets were located. Hence, sale of these assets, in my opinion, is sale of articles meant for personal use.

Thereafter, the Commissioner of income tax (Appeals) took up the issue as to whether the assessee had been able to prove the genuineness of the sale as claimed by him and recorded the finding of fact that the assessee had in fact been able to discharge the onus from sufficient material produced by him on record that he had in fact sold the aforesaid items and realised the amount of Rs. 39.47 lakhs on sale thereof. In this manner he arrived at a finding that the sale proceeds were exempted u/s 2(14) of the Act and not exigible to tax. The income tax Appellate Tribunal has affirmed the order of the Commissioner of income tax (Appeals), vide the impugned judgment dated October 17, 2008, thereby dismissing the appeal of the Revenue. However, the order of the income tax Appellate Tribunal is only on the second aspect, namely, the genuineness of the items sold and the money realised. Since the order of the income tax Appellate Tribunal was silent on the first issue, namely, whether the items sold were personal effects entitled to exemption u/s 2(14) of the Act or not, the Revenue moved an application u/s 254(2) of the Act alleging that this aspect was not decided though it was raised. The Tribunal has dismissed this application, vide order dated July 17, 2009, stating that no ground was raised that some articles were personal effects or capital assets.

The present appeal was filed even when the aforesaid application u/s 254(2) was pending before the Tribunal. In this appeal, it is clear from the proposed questions of law that both the aspects of the issue are questioned by the Revenue.

Insofar as the question of the genuineness of the sale by the assessee to various buyers at a sum of Rs. 39.47 lakhs is concerned, after going through the orders of the Commissioner of income tax (Appeals) as well as of the income tax Appellate Tribunal we are of the opinion that the finding of fact is arrived at in this behalf in favour of the assessee on the basis of evidence produced by the assessee. This is a pure finding of fact.

The only question that needs to be considered is as to whether the aforesaid articles sold by the assessee to different buyers would be treated as personal effects and, therefore, eligible for exemption u/s 2(14) of the Act. According to the assessee, to claim exemption from tax under the head "capital asset", Dr. Gupta, learned counsel for the assessee, argued that this question was only raised by the Revenue before the Tribunal.

The ground which was taken by the Revenue in the appeal before the Tribunal reads as "on the facts and circumstances of the case and in law", the Commissioner of income tax (Appeals) erred in holding the additions of Rs. 1,09,40,000 allegedly made by the Assessing Officer. The aforesaid amount of Rs. 1,09,40,000 includes the amount of Rs. 39.47 lakhs as well. No doubt no separate ground was raised by the Revenue dealing with the nature of articles sold by the assessee against which he had realized a sum of Rs. 39.47 lakhs. However, the ground relating to addition of Rs. 1,09,40,000 was raised. In the ground it was specifically stated that whether the addition made by the Assessing Officer was correct "in law". The aspect as to whether the articles sold were to be treated as personal effects or capital assets was specifically considered by the Assessing Officer.

The Commissioner of income tax (Appeals) also discussed this issue though he treated the same as personal effects. Under these circumstances, one of the issues was whether the articles claimed to be sold by the assessee are capital assets or not as per section 2(14) of the Act. Even otherwise, the nature of the articles which were sold as extracted above was taken on record by the Tribunal.

The question was only of the applicability of section 2(14) in respect of these articles. No factual aspects were involved and it was a question to be decided on the basis of facts.

Under these circumstances, we are of the opinion that the Tribunal should have gone into this issue and decided the same. For this reason alone we remit the case back to the income tax Appellate Tribunal for deciding this aspect of the matter. For this reason we are not deciding the proposed questions of law. The parties to appear before the Tribunal on July 18, 2011.