An analysis of judgment of ITAT in case of Emami Chisel Art - a case of high pitched assessment (and harassment) – part I.

[CA DEV KUMAR KOTHARI]

I.T.O. Ward 9(2), Kolkata Vs. Emami Chisel Art Pvt. Ltd. - 2014 (2) TMI 859 - ITAT KOLKATA

The case of Emami Chisel Art Pvt. Ltd (ECA):

As discussed in this article with help of related judgment of the Tribunal it appears that learned AO made additions and disallowances ignoring various business aspects, facts and circumstances. In fact it can be said that learned AO did not consider ground realities, facts and circumstances simply to make a high pitched assessment order. Such orders are causing un-necessary litigation and brain drain in proceedings. Let us hope that the judgment of the Tribunal will not be challenged in the High Court as the judgment is based on concurrent findings of facts by CIT(A) and Tribunal and any question of law is not involved. However, as per general practice, just on consideration of amount involved, appeals are filed before High Court, before revenue, even in cases where an addition or disallowance should not be made even at assessment stage.

One of issues in disputes:

Learned AO disallowed loss on certain paintings value of which had fallen and in the public auction bids received from other bidders were lower than reserved price hence not valid. Only valid bid equal to reserved advertised price was received from one party to whom learned AO alleged as close associate of assessee, just to disallow the loss suffered. Learned AO also ignored that from sale of paintings to the same party, assessee had earned profit which was offered in income and assessed by the AO. Learned AO also ignored fact that for booking of loss it was not necessary to sell those paintings and assessee could have valued stock-in-trade of such paintings at market value which was lower than cost. Thus AO disallowed loss by ignoring various facts and circumstances and legal provisions, rather we can say by deliberately ignored them, just to disallow an actual loss suffered by branding it as an attempt to evade tax. In fact even in grounds of appeal raised before the Tribunal, learned AO has made allegations of fabricated loss, attempt to evade tax etc. This is not at all proper, when CIT(A) has allowed loss after a detailed and reasoned order. However, unfortunately, our tax authorities take it very lightly to call tax payer a CHOR. Time has come when tax payers must demand damages against such allegations made by tax authorities particularly when the allegations are patently wrong.  

Grounds of the revenue before Tribunal on this issue were as follows:

1. That the Ld.CIT(A) erred in law and in fact in deleting the addition of Rs.1,78,00,000/-made on account of disallowance of loss of the same amount on sale of paintings to M/s Emami Frank Ross Ltd.
2. That the Ld.CIT(A) was not justified in law and in fact in deleting the addition of Rs. l8,93,568/-made on account of excess interest paid on unsecured loan by invoking the provisions of section 40A(2)(b) of the Act.
3. That the Ld.CIT(A) was not justified in failing to appreciate the facts and evidences brought on record by the AO that loss of Rs.1.78 crore was a make-believe and stage-managed arrangement through a colourable device, premeditatedly designed by the assessee with a dubious motive of arranging a fake or unreal loss so that the assessee gets away with non-payment of taxes which are legally due on its profit earned.

Facts as assumed by the AO as analyzed by Tribunal:

Facts (as per AO added by author) in brief are that the assessee is engaged in the business of trading in art works like paintings, archives, sculptors etc. During the year under consideration the assessee had claimed loss of Rs.1,78,00,000/-on account of art works sold through auction to M/s. Emami Frank Ross Ltd. [M/s. FRL] In the course of scrutiny assessment, the AO observed that M/s. Emami Frank Ross Ltd. is closely a holding company (sic.a closely held company – added by author) of the assessee under the same management. The assessee was able to fabricate a device to create the loss of Rs.1,78,00,000/-with M/s. Emami Frank Ross Ltd with an intention to evade the tax liability, which are legally due on its profit earned from sale of art works.

Finding and order of CIT(A) as analysed by Tribunal

Vide the impugned order the ld.CIT(A) has deleted the disallowance of Rs.1,78,00,000/-.

CIT (A) deleted the disallowance after having the following observations :

1. These grounds of appeal are directed against the action of the AO in disallowing the loss of Rs.1,78,00,000/-on account of sale of some of paintings to FRL.
2. In relation to these grounds of appeal, the appellant has filed a detailed written submission as above.
3. Appellant has also filed copy of Show Cause Notice (SCN) issued by the AO and reply thereto filed by the appellant and other documents and evidences all of which have also been filed before the AO.
4. During the course of hearing to make further enquiries appellant was asked to furnish some more documents and information, which have been filed and as advised, the appellant has also forwarded a copy of the same to the AO.
5. AO was given opportunity of hearing by issue of notice and also by specific letter to offer his comments on further documents filed by the appellant and to make his representations by 12.10.11 and the case was fixed on 14.10.11.
6. Neither any written submission has been sent nor the learned AO has made appearance till the next and final hearing on 18.10.11
7. I have carefully perused the Show Cause Notice issued by the AO to appellant, the reply filed by appellant before the AO and other explanations, evidences filed before the AO, the assessment order, and explanations and evidences filed before me.
8. On perusal of the same, I notice that the AO has ignored various vital aspects of business of appellant. As rightly pointed out in grounds of appeal. AO has not at all addressed to various vital facts and contentions made by appellant before him.
9. I also find that the AO has acted upon some apprehensions and not on facts. From various statements made in the assessment order it is seen that it is not based on actual facts of the case but is based on several inferences which can possibly be drawn.
10.  It is noticed that the AO has ignored various business aspects of appellant that:

(i)   this was first year of business, the business was new for appellant,

(ii)  the business of paintings and other art fact etc. is a high risk business,

(iii)  this is reason that banks and NBFC are not allowed to finance against stock of paintings etc.,

(iv) the appellant has accumulated large stock-in-trade and in view of high borrowings, appreciation in some of stocks and also falling value of some other stocks it decided to sell some of stock-in-trade to realize profit and to cut further losses in case of paintings which were falling in demand and value etc.

(v)  All sales were through public auction which was well advertised and well attended and the auction was open to world at large as it was open for online bidding through phones and website. Furthermore, in the same auction conducted by appellant not only its own stock but also paintings of other parties received on consignment basis were auctioned.

(vi) Details as taken from website about reserved price and highest price at which paintings were sold were also furnished.

(vii) Regarding relaxation allowed in the matter of payment by many purchasers of paintings, it is brought to the notice that the auction conducted was the first and only auction in the previous year and that in case of high value sale some relaxation is necessary to be allowed and it was allowed to various parties including M/s. Emami Frank Ross P. Ltd. (FRL).

(viii) Furthermore, apparently time allowed to appellant company for explaining the matters covered in SCN was very short.

(ix)   It is apparently observed that the AO has disallowed the loss without proper understanding of business aspects and with a biased mind by sheer surmise and conjecture as rightly pointed out by the appellant in grounds of appeal and written submission.

(x)   The AO has not brought any evidence that the market price of those paintings was higher than the price at which those paintings were sold to the highest bidder (FRL) or that the appellant earned any consideration over and above disclosed in its accounts.

 (xi)   the reserved price of all items on block for sale including own stock and paintings of other parties (consignment sale) many items in which case reserve price was lower than cost, was displayed in physical and electronic catalogues which were well circulated well in advance from the date of auction.

(xii)   The auction was well advertised and also attended by interested parties.

(xiii)  Since there were no other bidders even at such low price, is clear enough to show that the price of those paintings was indeed lower due to falling popularity or other reasons.

(xiv)  Therefore, to book a loss it was not at all necessary to sell them at loss and appellant could have booked even higher loss simply by valuing stock-in-trade of such items at market value which was lower than cost.

(xv)   In view of these facts, in my opinion any doubt cannot be raised that appellant kept the reserved price intentionally low to book loss as alleged by the AO.

(xvi)  The inference drawn by the AO is contrary to facts and circumstances of the case.

(xvii)    the AO himself has noted at page 2 of assessment order that there is substantial profit earned in other paintings sold to the same purchase party FRL and the AO has assessed the profit of Rs.2.21 Cr earned in sale to the very same party.

(xviii)  The A/R has rightly pointed out that had there been intention not to pay tax, appellant could have deferred the sale on paintings in which profit of Rs.2 .21 crore was earned by selling to same party (FRL). The appellant could have cancelled those sales also if it was possible, as apprehended by the AO.

(xix)  The main ground and reason of learned AO in action of disallowing loss of Rs. 1.78 crore is that in his view the appellant adopted a device to avoid tax and therefore he applied Mcdowells case reported at 1985 (4) TMI 64 - SUPREME Court and disallowed the loss of Rs.1.78 crore.

(xx)    It is also seen that the sale of paintings have actually taken place, property in paintings sold at profit or at loss has been transferred in favour of buyers, payments have also been realized by A/c payee cheques.

(xxi)   Though some payments were with some delay but all payments have been realized.

(xxii)    The sale was to highest bidder, the reserved prices (less or more than cost as the case may be) were well advertised and circulated, and auction was open to public at large through attendance and also through website.

(xxiii)  It is clear that the purpose of selling some of own stock was to reduce huge inventory, reduce interest burden, book profit in case of appreciated items and to cut loss in case of items falling in valuation because price may fall further in such items.

(xxiv)  It is also clear that for booking a loss it was not necessary for appellant to sell the paintings at loss.

(xxv)   Once it is found that reserved price was less than cost, and at that low price also there were not many interested parties, clearly shows that the price of those paintings was lower, therefore, appellant could have booked loss by valuing stock at market value whichever was lower than cost.

(xxvi)  appellant could have deferred sale of paintings to highest bidder ( FRL) in which it earned profit of Rs.2.21 crore in some cases price realized was much more than reserved price because of interest of buyers in those paintings.

(xxvii) Therefore, apparently it is not a case of tax planning or tax avoidance by selling some paintings at loss as alleged by the AO.

(xxviii)  It has also been brought on record that the purchaser FRL is not a person covered by section 40A (2) (b).

(xxix)  Even if it is an associate concern — having some common shareholders or directors or by having a common part of its name EMAMI, genuine transactions between associates or related parties at market price determined in open auction, cannot be disregarded merely because in some transactions there is loss.

(xxx)  Piecemeal approach adopted by the AO in accepting and assessing profit transactions and disregarding loss transactions cannot be adopted to assess total income.

 (xxxi)  As noticed earlier and as argued by the appellant, there is no case of tax planning as alleged by the AO, however, even if there be some element of tax planning it is acceptable as the transactions are genuine.

 (xxxii)  The A/R has filed copy of judgments in cases (a) Eveready Industries India Ltd. Versus CIT 2011 (3) TMI 21 - CALCUTTA HIGH COURT and (b) CIT V. M/s Pivet Finance Ltd. 2010 (4) TMI 293 - PUNJAB & HARYANA HIGH COURT in which it has been held that loss suffered in genuine transactions cannot be disallowed even if it results in reduction of tax liability.

 (xxxiii)  In view of the above and keeping in view the totality of facts and circumstances the loss of Rs.1,78,00,000/-is held to be allowable and the addition made by the AO is deleted.

 Observations, finding and order of Tribunal are analyzed below:

                        We have considered the rival contentions, gone through the orders of the authorities below and found from the record that :

a. assessee was engaged in the business of sale of art works/paintings.

b. During the course of scrutiny assessment, the AO found that in respect of some transactions the assessee has booked a loss of Rs.1,78,00,000/on account of art works sold to M/s. Emami Frant Ross P. Ltd through auction sale on 23-02-2010.

c. The AO further observed that the assessee has filed details of transaction with M/s. Emami Frank Ross Ltd. By observing that some of the shareholders of M/s. Emami Frant Ross Ltd are common to the shareholders of the assessee company.

d. the AO disbelieved the loss incurred in respect of sale of some of the paintings to M/s. Emami Frant Ross Ltd.

e. The ld. CIT(A) has deleted the same after observing that the assessee has earned profit in respect of paintings sold to very same purchasers amounting to Rs.2.21 crores. Thus, there was no justification for disregarding the loss incurred in respect of paintings sold to the very same party, wherein assessee has suffered a loss of Rs. 1.78 crore.

f. The ld. CIT(A) after recording the detailed finding at para 5.2 as reproduced above, observed that assessee has entered into genuine transaction for which there was open auction, in respect of some of the transactions the assessee has suffered a loss, whereas in some other transactions with the very same party the assessee has earned higher profit than what was suffered.

g. From the record,we find that painting so sold was constituting assessee’s stock-in-trade.

h. had the assessee any intention to evade any tax, the assessee could have valued stock at cost price or market price, whichever is lower.

i. Thus, the allegation of the AO that assessee artificially booked the loss has no basis.

j. At the very same time, we find that the assessee has sold some of the paintings to the very same party at profit of Rs. 2.21 crores, which was more than the loss suffered by the assessee in respect of sale of other paintings to the very same party, which was disbelieved by the AO.

k. Had the assessee any intention to reduce its profit or to evade any tax, he could have easily managed to show marginal profit in respect of transaction with the very same party and could have easily come out from the doubts raised by the AO by showing net profit of Rs. 43.19 lakh (Rs..2.21 crores profit – Rs.1.78 crore loss), which it actually earned from sale of paintings to the very same party i.e. M/s. Emami Frant Ross Ltd.

l. The detailed findings recorded by the ld.CIT(A) as reproduced above have not been controverted by the ld.DR by bringing any positive material on record,

m. accordingly, we do not find any reason to interfere with the order of the ld.CIT(A) in deleting the loss.

Accordingly, we uphold the loss.

Observations of author:

As noted in the order of the CIT(A), learned AO made disallowance ignoring facts, circumstances, lack of any reason to sell stock at loss just to book loss as alleged by AO legal provisions, and he disallowed loss on mere bald allegations based on his prejudiced mind and apprehensions that the assessee has avoided tax. The AO deliberately ignored various aspects, and alternatives available to assessee if he wanted to defer tax. AO deliberately ignored that assessee could have valued stock of such items at much lesser than the price at which assessee could sell those stocks. AO also ignored that assessee could have deferred sale of items sold at huge profit, by about 45 days so as to take profit in next year. AO ignored that there was public auction open to public at large and catalogues including lower price of many items as reserved price were well advertised in advance and were available on website on which bidding could be made even prior to the days fixed for floor auction.

Therefore, AO was not at all justified in expressing his unfounded doubts and in making allegations of attempt to evade tax. Such actions of the AO are very unfortunate and deserves to be highly criticized if not condemned.

The assessee had also suffered losses due to demands raised by the AO which remained due and a significant part of the same was forcibly collected also by the AO. This also badly affected the business carrying capacity of assessee.

In such cases Tribunal can allow cost of appeal in favor of assessee. Allowing such costs, may reduced tendency of tax authorities for making such bald allegations which causes severe impairment to the reputation of assessee.

Let us hope that revenue will not dispute order of CIT(A) confirmed by Tribunal by filing an appeal. Let us hope that the senior counsels of revenue will not recommend filing of appeal against the order of Tribunal. However, it is unfortunate that even very senior counsels also think about their pecuniary gains and recommend indulging into un-necessary litigation.

As a tax professional author convey thanks to tax authorities for initiating and carrying litigation. However, author would be very happy, if such un-necessary litigation comes to an end, even though, in such situation author may have to go without work for some time and then try to find work in other areas of his specialization to earn his livelihood.

We must think for society at large and personal goals must not go against interest of society. Un-necessary litigation is result of greed of many persons including professionals who help even dishonest persons.