Osian's Auction Catalogue India The Passionate Detachment | February 2001

20 TAXATION One of the areas which will require greater thought, transparency and public awareness before art can be accepted as a credible financial asset, is the issue of taxation, especially regarding the sale of art by individuals. The ambiguity which exists in the case of considering art as a capital asset rather than a ’personal effect’ needs to be clearly addressed. Also issues related to import duties pertaining to bringing back Indian art into India needs to be addressed systematically, along with various inter-state Sales Tax inconsistencies. Educating the public on these issues and achieving a sense of justice from the laws - many requiring studied re-examination in today’s new context, where a significant financial value can be attached to seemingly insignificant pieces of wood & canvas - is another area of work. Regarding the issue of taxability of Art, especially the capital asset or ’personal effect’ argument, Osian’s presents the opinion of our Tax Counsel Mr. Porus F.Kaka , on the matter. Hopefully this opinion will help enlighten all concerned and encourage debate and greater compliance with the law. “ The issue of taxability of Art (being paintings held not on trading account) has not received serious examination in India under the Income-tax Act, 1961 (hereinafter referred to as “the Act”). Any Art being moveable property would fall within the definition of “capital asset” held by an assessee in India. If there is a transfer of moveable property within the territory of India, capital gains on the same will be chargeable under the provisions of section 45 of the Act. Capital assets under section 2(14) of the Act, excludes “personal effects” defined as “moveable 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” (section 2(14)(ii) of the Act). The Supreme Court of India in the decision of H.H.Maharaja Rana Hemant Singhji vs CIT-Rajasthan (1976) 103 ITR 61 (SC) has held, that to render something a personal effect an intimate connection between the person of the assessee and the effect must be shown. In the said case, sovereigns and silver coins used on ceremonial occasions of worship were held not to fall within the meaning of “personal effect”. Similarly, the same was also held to be true of silver bars and bullion held by the assessee. The Court laid emphasis on the expression “personal use” occurring in clause (ii) of the above sion. Items used for pooja or as a matter of pride or ornamentation were held by the Court not to amount to use which can be characterised as personal use. The Court approved the decision of the High Court at Bombay in G S Poddar vs Commissioner of Wealth Tax (1965) 57 ITR 207 (Bom) whereunder the Court considering the provisions of the Wealth Tax Act, 1957 held that gold caskets, gold tray, two gold glasses, a gold cup, saucer and spoons and photo frames kept in a glass show case for display in the drawing room of the assessee do not fall within the explanation under section 5(1)(viii) of the Wealth tax Act, 1957 which covered items “intended for personal or household use”. Thus, it would be difficult in the opinion of Counsel to bring Art as defined hereinabove within the meaning of “personal effect” so as to exclude its chargeability to tax under the head Capital Gains of the Act. Subsequently, however, the Supreme Court in CIT vs H H Maharani Usha Devi (1998) 213 ITR 793, the Supreme Court has held that personal effects need not be confined only to those articles which were worn on the person of the assessee but still they must be for the personal use of the assessee. The Court also referred to the decision of the Bombay High Court mentioned above. The Court was considering the case of jewellery worn on the person of the assessee only on ceremonial occasions (being heirloom jewellery) and whether the same would fall within the definition of personal effect. The Court held in favour of the assessee. In view of the above decisions it is the opinion of Counsel that Art is not a personal effect as defined under section 2(14) (ii) of the Act and thus is a capital asset liable to tax upon transfer. In this view of the matter, any sale of Art would be liable to tax under the head Capital Gains. The tax chargeable would be on the difference between the full value of the sale consideration and the cost of acquisition plus cost of improvement plus any cost of transfer incurred. If the Art has been held prior to 1st April 1981 by the assessee who sells it, or an assessee who has inherited it or acquired it by gift, will, etc., from a person who held it prior to 1st April 1981, in accordance with provisions of section 55, the cost of acquisition in the hands of the assessee who sells it, would at his option be either the cost of acquisition of his predecessor in title or the fair market value of the Art as on 1st April 1981. Further, the said cost of acquisition could be indexed in the hands of an assessee in accordance with the cost inflation index notified under the second proviso to section 48 of the Act read with explanation thereto. NOTE: This summary is the opinion of the Tax Counsel for Osian’s - Connoisseurs of Art Pvt. Ltd. It is not intended to constitute a complete analysis of the tax consequences for potential sellers & purchasers of Art. Potential clients should consult their own tax advisors on the consequences of acquisition, ownership and sale of Art and the application of the Provisions of the Act thereto.” One further issue which needs clarity in understanding the above opinion is the question of determining the fair and acceptable valuation for an art work, as of 01.04.81, when an art work has been held in the family for many years. Without having clear documentation, evidence and expertise, it will become difficult for agreement to be reached between the tax payer and the tax authorities. Also pre-1981 it is very rare for such documentation to exist, given commercial practices and habits were very different, and cash would have been the dominant means of payment. It would be unjust to impose financial standards of today, back-dated. Thus any such dispute on valuation can lead to litigation even when the potential assessee has genuine intentions of paying their tax dues. This situation needs serious and systematic attention and the co-operation of various governmental bodies. It is here that Osian’s will also try to lend its knowledge and expertise. There are many other legal issues pertaining to the treatment of ’art as an asset’ which require greater clarity and study. A national lobby group for the arts needs to take up such issues in the public realm.