2025 (4) TMI 941 - HC - Income Tax

Undisclosed investments - addition was premised on the estimated value of certain works of arts which were found at the Assessee s residential premises during the search proceedings and which the Assessee claimed were gifted to him - HELD THAT - Quantum of addition made by the AO and as upheld by the learned CIT(A) in respect of works of art found during the search proceedings is not based on any valuation or cogent evidence as to their market value. Neither the AO nor any other authority had made any reference to the Valuation Officer or obtained the value of the said artworks from any independent valuer. On this ground alone the additions made by the AO and as upheld by other authorities is unsustainable. It is well settled that additions cannot be made on unfounded surmises. Whether the Assessee had established the genuineness of the transaction? - Assessee had stated that he knew the artists in question for several years and some of them are also his friends/ acquaintances of his mother. There is no material to controvert this assertion as well. In the given circumstances where the donors have confirmed that they have gifted the works of art to the Assessee and that they are the friends and acquaintances of the Assessee; there is also no reason to doubt the genuineness of the transactions. Any addition to the income of the Assessee is required to be based on cogent material and not on mere surmises and conjectures. It is also material to record that Assessee is a constituent partner of a firm that is engaged in running an art gallery. This also clearly establishes that the Assessee would be acquainted with the artists in question. There is no reason to suspect that they have not given their personal works of art as gifts to the Assessee. We find that the finding of the AO learned CIT(A) and ITAT are based on surmises and completely unjustified and thus are liable to be set aside - Decided in favour of assessee.

The core legal question considered by the Court was whether the Income Tax Appellate Tribunal (ITAT) was justified in sustaining the addition of INR 34,67,900/- to the assessee's income despite the assessee discharging the onus to prove that certain works of art found during a search were received as gifts.

At the heart of the dispute was the treatment of artworks found at the assessee's residence during a search under Section 132 of the Income Tax Act, 1961. The Assessing Officer (AO) had made additions to the assessee's income on the basis that these artworks represented undisclosed investments, valuing them at Rs. 1 crore. The assessee claimed these works were personal gifts from the respective artists, supported by letters from the artists or their representatives. The AO accepted the identity of the donors but rejected their creditworthiness and the genuineness of the gifts, making the addition without any independent valuation or cogent evidence. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the addition but reduced its quantum, while the ITAT sustained the addition on the basis that the relationship of donor and donee was not proved beyond doubt.

The Court examined several interrelated issues:

1. Validity and quantum of addition made by the AO and upheld by lower authorities:

The Court noted that the addition of Rs. 1 crore was made without any basis in valuation or independent evidence. Neither the AO nor any appellate authority referred to a valuation officer or obtained an independent valuation of the artworks. The Court emphasized the settled legal principle that additions cannot be made on mere surmises or conjectures. It relied on authoritative precedents, including Esthuri Aswathiah v. Commissioner of Income Tax and Dhakeswari Cotton Mills Ltd. v. Commissioner of Income Tax, which establish that tax authorities cannot make arbitrary assessments without evidence or material. The Court held that the quantum of addition was unsustainable due to lack of cogent evidence or valuation.

2. Whether the assessee discharged the onus to prove the gifts:

The Court analyzed the three conditions to establish gifts under income tax law: (i) identity of the donor, (ii) creditworthiness of the donor, and (iii) genuineness of the transaction. It was common ground that the identity and creditworthiness of the donors were established, as the artists were known to the assessee and had no business interest with him. The main contention was on genuineness.

The assessee produced letters from the artists confirming the gifts, including one from the daughter of a deceased artist. The Court found these letters credible and noted that some artworks bore inscriptions indicating they were gifts (e.g., a sketch inscribed "To Rohit/Rahul" and a Diwali card from an artist to the assessee). The Court observed that the AO and lower authorities had disregarded these confirmations without any cogent reasons.

The Court also noted that the assessee was a partner in a firm dealing with works of art, which strengthened the credibility of the relationship with the artists and the genuineness of the gifts. There was no material to doubt the genuineness of the transactions or the credibility of the artists as donors.

3. Treatment of competing arguments:

The AO and appellate authorities relied on the absence of independent valuation and doubts about the genuineness of the gifts to justify additions. However, the Court found these grounds insufficient and based on conjecture. The Court emphasized that the burden on the assessee to prove gifts was satisfied through documentary evidence and credible confirmations. The Court rejected the approach of the ITAT and others to disbelieve the gifts without substantive evidence.

4. Application of law to facts:

The Court applied the principles from precedents that additions must be based on evidence and not guesswork. It held that the assessee had discharged the onus by proving identity, creditworthiness, and genuineness of the gifts. The Court found the additions to be arbitrary and unsupported by evidence, thus violating fundamental principles of natural justice and statutory requirements.

The Court concluded that the additions made by the AO, upheld by CIT(A) and ITAT, were unsustainable and liable to be set aside. It answered the question of law in favor of the assessee and against the Revenue.

Significant holdings include the following verbatim legal reasoning:

"It is well settled that additions cannot be made on unfounded surmises."

"The Tribunal cannot make arbitrary decisions: it cannot found its judgment on conjectures, surmises or speculation."

"The Income Tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all."

"On no account whatever should the Tribunal base its findings on suspicions, conjectures or surmises nor should it act on no evidence at all or on improper rejection of material and relevant evidence or partly on evidence and partly on suspicions, conjectures or surmises."

Core principles established or reaffirmed include the necessity for tax authorities to base additions on cogent evidence rather than conjecture; the burden on the assessee to prove gifts requires establishing identity, creditworthiness, and genuineness; and that credible documentary evidence and confirmations from donors suffice to discharge this burden.

Final determinations were that the addition of INR 34,67,900/- sustained by the ITAT was unjustified, the assessee had discharged the onus of proving gifts, and the impugned order was set aside in favor of the assessee.

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