Osian's Auction Catalogue Masterpieces and Museum-Quality III | March 2004

21 Taxability of sale of art is now becoming an issue which is coming to the forefront of tax issues for those engaged in this field especially due to the efforts of entities such as Osian’s and others who have tried to institutionalize the process of buying and selling art. In my earlier article written several years ago which had been commissioned by Osian’s, I had commented upon the cumulative effect of various decisions on the taxability of sale of art under the head ‘Capital gains’. I have now been asked to once again consider the issue and also consider any recent decisions which throw further light on this vexed issue. Taxability of art is determined by its status in the hands of the individual or company which transfers the same and which status is determined by the provisions of section 2(14) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) which defines a ‘Capital asset’. For corporate and other non-individual assessee’s art can fall into two categories of assets. Firstly, stock-in-trade for those who regularly deal in the same as a business and secondly as a capital asset for those assessees who do not deal in art on a regular basis but treat art like an investment and hold the art on capital account and not as stock- in-trade. For the former namely those who hold the art as stock- in-trade, profits, gains or losses would be assessable under the head ‘Profits and gains from business or profession’ and losses and gains intra the same head would be available for set off against each other before determination of the net gain or loss under the head for tax purposes. For those corporate and other non-individual assessees who hold the asset as an investment on capital account, taxability from the profit, gain or loss from the sale of art would fall under the head ‘Capital gains’. If the art is held by the assessee for more than three years (including in certain cases the holding period of his predecessor in title as set out in section 47 of the Act) as profits, gains or losses from the transfer of a long term capital asset as per section 2(29A) of the Act and the gain therefrom representing long term capital gain (see section 2(29B)). Long term capital assets would also be entitled to have their cost of acquisition indexed from the year of purchase. Conversely, profit, gain or loss from assets held for a period less than three years would represent short term capital gains or losses. Under the current rules as they exist for Assessment Year 2004-2005 long term losses cannot be set off against short term capital gains but only against long term capital gains. For individual assessee’s the taxability of art depends on the status of the art which can fall under an additional third category of asset namely “a personal effect”. The Hon’ble Income-tax Appellate Tribunal at Mumbai recently in the case of Asstt. CIT vs Mrs. Dilnavaz S. Variava (2003) 87 ITD 113 (Mum.) had to consider the situation and the facts under which art can constitute a personal effect. The department also further contended that the sale of art constituted an adventure in the nature of trade whose effect from a taxation point of view would be similar to art being treated as stock-in-trade. In the said case, the assessee had sold four paintings in the Assessment Year 1992-93 for Rs.1 lakh to Mr. N. D. Sidhwa. The paintings were purchased in the following manner. The first painting was procured in 1980 for Rs.3,000/-. The 2nd was inherited by the assessee from her father and the third and fourth paintings were purchased at a price of Rs.2,000/- and Rs.1,550/- during financial years 1974 and 1978 respectively. The assessee claimed before the Hon’ble Tribunal that the assets were not liable to tax as they were “personal effects”. In the said case, the assessee’s profession was not a dealer in art but a Management Consultant. The Tribunal found on facts that : “In the present case, we find that the assessee is a Management Consultant. She was stated to be a connoisseur of art. She purchased the paintings because of her aesthetic tastes. It gave her tremendous pleasure and pride of profession. She is owning other paintings also. Neither in the preceding years nor in the subsequent years assessee did ever make any sale of her paintings collection. It is abundantly clear from the details that selling of paintings was not the business of the assessee. The paintings were acquired by the assessee for her own collection. She kept those paintings for more than 25 years. Therefore, the incidence of sale cannot be construed to be adventure in the nature of trade. We have perused the reasoning adduced in the impugned order. We are inclined to agree with the same in this count.” Thereafter, after considering the decision of the Bombay High Court in G S Poddar vs CWT (1965) 57 ITR 207 (Bom.) and the decision of the Supreme Court in the case of H H Maharaja Rana Hemant Singhji vs CIT (1976) 103 ITR 61 (SC) and the definitions relating to ‘personal effects’ and in the context of art and in relation to the assessee concerned, the Tribunal held as follows : “The Paintings were used to decor the house. Assessee loved paintings. A good painting transmits good vibe across. The element of personal attachment with the object did exist in the facts of the case. Therefore, in our opinion, paintings could be construed to be the personal effects, as such not eligible to tax. Accordingly we uphold the impugned order.” At this stage, reference can also be made to the decision of the Calcutta Tribunal in the case of Princess Shri Kumari of Kishangarh vs ITO (1982) 1 ITD 85 (Cal.) wherein the Hon’ble Tribunal at Calcutta similarly held that where an intimate connection between art and the person is shown art can be treated as a ‘personal effect’. In this case also the elder brother of Late Majaraja deposed before the Revenue Authorities by way of an affidavit that the painting in question was regularly used for decorating the room of the assessee as was the usual custom of the family. From the above decisions succour can be drawn that art can constitute a ‘personal effect’, if it is shown that there is an “intimate connection” between the effect and the person of the assessee. Each individual assessee should therefore lead before the Revenue Authorities necessary evidence to show this connection in order to satisfy the asset being categorized as ‘personal effect’. If the tests are satisfied then there would be no taxation on the sale of art, as personal effects are not liable to taxation under the current tax laws. The factual matrix on this issue would have to be examined, however, individually, by each assessee and more importantly also qua each painting sold, and no general rule can be laid down as a blanket criteria. If, however, the painting does not satisfy the test of ‘personal effect’ in the hands of an individual assessees in such a case, thereafter, the question would remain similar to what I have dealt with in the paragraph dealing with corporate assessees, namely whether the art has been held by the individual on capital account or as a stock-in-trade and the consequences would be as has been dealt out with supra. It would be arguable that there would be a presumption (unless proven otherwise) that if a person is not a regular dealer in art that the same ought to be on capital account. SALE OF ART WHETHER TAXABLE OR NOT : REVISITED Porus F Kaka [Advocate] ART AS INVESTMENT