The Hindu Business Line : The fine art of taxing

The scope of `capital asset' is proposed to be expanded to exclude from the meaning of personal effects archaeological collections, drawings, paintings, sculptures, or any work of art. Transfer of these assets will attract capital gains tax.

VALUING ART

India is home to spectacular art creations. Architectural marvels, paintings, sculptures are all considered pride of possessions and often displayed as representing the high point of culture. But we are now in philistine times. The Finance Bill, 2007 attempts to bring to tax gains arising from transfer of archaeological collections, drawings, paintings, sculptures or any work of art. These were considered personal effects till now. Transfer of such personal effects will hereafter attract capital gains tax.

Clause 3 of the Finance Bill, 2007 amends Section 2(14) of the Income-Tax Act, 1961. This contains a definition of the term "capital asset" for purposes of levying capital gains tax. As it existed, under Section 2(14), a capital asset meant property of any kind held by an assessee, whether or not connected with his business or profession. Personal effects held for personal use by the assessee or any member of his family dependent on him were excluded from the ambit of definition of `capital asset'. The only asset in the nature of a personal effect but is included in the definition of capital asset is jewellery.

To to widen the scope of `capital asset', it is proposed to amend the said clause so as to also exclude from the meaning of personal effects archaeological collections, drawings, paintings, sculptures, or any work of art. Transfer of such personal effects will attract capital gains tax.

Implications of the amendment

The current definition of capital assets is fairly exhaustive. It excludes from the concept of capital assets any stock-in-trade or raw material held for the purposes of business or profession. It also excludes personal effects. At the same time, jewellery has been brought within the ambit of capital asset. There is also an Explanation to indicate which items of jewellery would be brought within the ambit of capital assets. The Finance Bill, 2007 proposes to include the following items as liable for tax on transfer:

Archaeological collections,

Drawings,

Paintings,

Sculptures,

Any work of art

It is well-known that assets for which there is no cost of acquisition will not be liable for capital gains tax on transfer. This was laid down by the Supreme Court in the Srinivasa Setty (128 ITR 294) case. This ruling was sought to be overcome by special provisions defining cost of acquisitions in respect of goodwill, trademark, brand name, right to manufacture, tenancy rights stage carriage permits or loom hours by the periodical amendments to Section 55 of the Act.

The question that arises with reference to art objects concerns the determination of the cost of acquisition. Generally, objects of art are inherited. In CIT vs Pushpraj Singh (232 ITR 754), shares and bonds transferred by the Government of India as a matter of moral gesture were considered as gifts and no capital gains tax was held exigible on transfer of such shares and bonds. The Madras High Court recently ruled that the sale of a palace by a former ruler of Pudukkottai will not give rise to capital gains tax as there was no cost of acquisition (282 ITR 126 Madras).

How will revenue deal with such situations with reference to objects of arts? A second related issue concerns sale by leading artists. Painters and sculptors often bold exhibitions to display their works of art. Paintings are sold for huge amounts; the very idea of creating such art objects is to sell them for substantial profits. How will such profits be taxed? Obviously, no capital gains tax can be levied. Probably such artists can be considered as engaged in the business or profession of selling art pieces. Will such sale constitute an adventure in the nature of trade inviting the provisions of Section 28(i) of the Act? Sculptures are often taken out from their original abode, some times stealthily and some times openly, and sold abroad for huge amounts. How will the Government deal with such situations?

Valuation Problem

The foremost problem will of course be that of valuation. Recent raids on art galleries in Mumbai and Delhi brought out the fact that huge unaccounted money is invested in paintings and sculptures. Hereafter, the real value of the art piece will never be declared openly. The amendment will only encourage clandestine dealings in works of art. Is the Departmental Valuation Cell competent to value such works of art for determining the correctness of the sale value declared for purposes of capital gains tax? There is no Stamp Valuation Authority for art objects as there is for immovable property. Probably some more amendments may be needed to the law to get over these problems if works of art are to be brought under the concept of capital assets for levying capital gains tax.

(The author is a former Chief Commissioner of Income-Tax.)

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