Facts of the Case

The assessee, Rohit Gandhi, an individual and Director of M/s Cue Apparel Private Limited, was subjected to a search under Section 132 of the Income-tax Act, 1961 at his residential premises. During the search, several works of art were found, which the assessee claimed were personal collections gifted to him by renowned artists.

The Assessing Officer completed assessment under Section 143(3) for Assessment Year 2008–09, assessing income at ₹1,44,62,994 as against returned income of ₹18,40,524. An addition of ₹1,00,00,000 was made on account of alleged undisclosed investment in works of art based on estimated values attributed to six artworks found during the search.

The assessee produced confirmations from the respective artists stating that the artworks were gifted to him; in the case of one deceased artist, confirmation was provided by his daughter. The Assessing Officer accepted the identity of the donors but rejected the genuineness and creditworthiness and made the addition without obtaining any valuation report.

Issues Involved

Whether the assessee had discharged the onus of proving identity of donors, creditworthiness and genuineness of gifts of artworks, and whether additions could be sustained in absence of valuation or cogent material, based merely on surmises and conjectures.

Petitioner’s Arguments

The assessee contended that all three ingredients required to establish a genuine gift were satisfied. The identity of donors was undisputed; the donors were artists gifting their own works; and genuineness was evidenced by confirmations, inscriptions on the artworks, and long-standing personal relationships.

It was argued that neither the Assessing Officer nor appellate authorities obtained any valuation from a Valuation Officer or independent expert, and the estimates adopted were arbitrary and unsupported by evidence. Reliance was placed on settled law that additions cannot be made on pure guesswork.

Respondent’s Arguments

The Revenue supported the findings of the Assessing Officer, Commissioner (Appeals) and the ITAT to the extent the addition was sustained, contending that the assessee failed to establish genuineness beyond doubt and that the relationship between donors and donee was not proved satisfactorily.

Court Order / Findings

The Delhi High Court held that the additions were unsustainable. The Court noted that the assessment order did not disclose any basis for estimating the value of artworks and that no reference was made to a Valuation Officer or independent valuer. On this ground alone, the additions could not be sustained.

The Court further held that the authorities below erred in rejecting the genuineness of gifts despite confirmations from artists, inscriptions on artworks indicating gifting, and undisputed personal relationships. The Court observed that the donors had confirmed the gifts and there was no material to doubt their statements.

Relying on authoritative precedents including Dhakeswari Cotton Mills Ltd., Esthuri Aswathiah and Omar Salay Mohd. Sait, the Court reiterated that tax authorities cannot base additions on conjectures, surmises or suspicion, and must act on cogent material.

Important Clarification

The Court clarified that while tax authorities may act on probabilities, they cannot make arbitrary estimates without evidence or valuation. Additions relating to alleged undisclosed investments must be supported by reliable material and cannot rest on unfounded assumptions.

Final Outcome

The appeal was allowed. The Delhi High Court set aside the findings of the Assessing Officer, Commissioner (Appeals) and the Income Tax Appellate Tribunal insofar as they sustained the addition on account of alleged gifts of artworks, answered the substantial question of law in favour of the assessee and against the Revenue, and deleted the addition in its entirety.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769686876_ROHITGANDHIVsINCOMETAXOFFICER.pdf

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