Voluntary disclosure and revaluation do not bar asset classification review or create income without real accrual.

The note explains that disclosure under a voluntary scheme does not prevent the tax authority from examining whether disclosed assets are capital assets or stock-in-trade, and the assessee retains the burden of proving their character. It further states that mere revaluation of self-held assets in the books does not create taxable income because income must accrue, be received, or be realised. It also distinguishes between genuine business stock and capital assets: a real sale of capital assets can produce long-term capital gains, while contribution of stock-in-trade to a firm does not attract capital gains provisions. Contribution of capital assets to a partnership may constitute a transfer, but taxability depends on the asset's true character and the correct previous year.

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Issues: (i) Whether the Income-tax Officer was barred from enquiring into whether the assets disclosed under the voluntary disclosure scheme were capital assets or stock-in-trade; (ii) whether the jewellery and precious stones disclosed by the Hindu undivided family were capital assets or stock-in-trade and whether their revaluation on 30 December 1975 created taxable income; (iii) whether the alleged conversion of part of the jewellery into stock-in-trade and its later sale resulted in business income or long-term capital gains in the hands of the Hindu undivided family; (iv) whether the emeralds disclosed by the individual assessee and revalued in his books gave rise to taxable income or capital gains on contribution to a firm; and (v) whether the precious stones received on partition by the other two assessees were long-term capital assets and whether their contribution to the firm gave rise to capital gains taxable in assessment year 1977-78.

Issue (i): Whether the Income-tax Officer was barred from enquiring into whether the assets disclosed under the voluntary disclosure scheme were capital assets or stock-in-trade.

Analysis: The disclosure provisions protected the amount disclosed, the date and value of acquisition, and confidentiality of the declaration, but they did not confer immunity against enquiry into the legal character of the assets where that character had not been declared. The assurances relied upon did not extend to an implied acceptance that the assets were capital assets. The burden of establishing that character remained on the assessee.

Conclusion: The Income-tax Officer was not barred from enquiring into the nature of the disclosed assets.

Issue (ii): Whether the jewellery and precious stones disclosed by the Hindu undivided family were capital assets or stock-in-trade and whether their revaluation on 30 December 1975 created taxable income.

Analysis: On the accepted dates of acquisition and the long period for which the assets were held, the assets were treated as investments and not trading stock. Revaluation in the books by itself did not bring any real income into existence, because income under the Act arises only when it accrues, is received, or is otherwise realised. Mere book entries or enhancement of value of self-held assets do not generate taxable income.

Conclusion: The assets were capital assets, they were long-term capital assets, and the revaluation on 30 December 1975 did not create taxable income.

Issue (iii): Whether the alleged conversion of part of the jewellery into stock-in-trade and its later sale resulted in business income or long-term capital gains in the hands of the Hindu undivided family.

Analysis: The claimed conversion of a few items into stock-in-trade was treated as a device and not as a real change in the character of the holding. The family had no real continuous jewellery business to support the claimed trading character. The sale of the stones after dismantling the necklaces was a real transfer for consideration of capital assets, not a trading sale, and the cost for computation had to be taken on the original acquisition basis.

Conclusion: No business income arose on the sale, but long-term capital gains arose and were chargeable to tax in the hands of the Hindu undivided family.

Issue (iv): Whether the emeralds disclosed by the individual assessee and revalued in his books gave rise to taxable income or capital gains on contribution to a firm.

Analysis: The emeralds were found to be stock-in-trade. Their mere revaluation in the books did not generate income because no sale or other realisation took place during the year. Likewise, contribution of stock-in-trade to a partnership capital account did not give rise to capital gains, as capital gains provisions apply only to transfer of a capital asset and the assets in question were not capital assets.

Conclusion: No taxable income or capital gains arose on revaluation or on contribution of the emeralds to the firm.

Issue (v): Whether the precious stones received on partition by the other two assessees were long-term capital assets and whether their contribution to the firm gave rise to capital gains taxable in assessment year 1977-78.

Analysis: The assets received on partition retained the character of capital assets in the hands of the coparceners and, by reason of the period for which the HUF had held them, they were long-term capital assets. Their contribution to the partnership capital attracted the principle that such contribution results in extinguishment of rights and hence a transfer for capital gains purposes. However, the relevant source of income arose in the financial year ending 31 March 1976, and not in the previous year relevant to assessment year 1977-78.

Conclusion: Long-term capital gains arose, but they were not assessable in assessment year 1977-78.

Final Conclusion: The appeals were disposed of by sustaining tax on long-term capital gains in the hands of the Hindu undivided family, deleting the revaluation-based additions and the proposed business-income treatment, and excluding the coparceners' capital-gains additions from assessment year 1977-78 while leaving the individual assessee without any taxable accretion on revaluation or contribution of stock-in-trade.

Ratio Decidendi: A mere revaluation of assets in the assessee's own books does not create taxable income; disclosed assets may be examined as to their true character where the disclosure scheme grants no immunity on that point; and contribution of a capital asset to a partnership may attract capital gains, but only if the asset is truly capital in nature and the income falls in the correct previous year.

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