Unexplained cash credits and holding period rules fail where diamond sales are supported by documentary evidence and gifted asset ownership is traced.

Sale proceeds of cut and polished diamonds could not be assessed as unexplained cash credits where the rough diamonds were evidenced through an IDS declaration and Form 4 certificate, and the processing and sales were supported by invoices, confirmations, bank trail, stock records and section 133(6) responses; the addition under section 68 was deleted. The gain on sale of gifted diamonds was held to be long-term capital gain because the holding period had to include the previous owner's holding period under section 2(42A), and the IDS valuation date could not displace that rule. The consequential commission addition under section 69C also failed because it rested entirely on the rejected premise of bogus accommodation entries.

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Issues: (i) whether the sale proceeds of cut and polished diamonds could be assessed as unexplained cash credits under section 68; (ii) whether the gain on sale of the diamonds was long-term capital gain or short-term capital gain; and (iii) whether the consequential commission addition under section 69C could survive.

Issue (i): whether the sale proceeds of cut and polished diamonds could be assessed as unexplained cash credits under section 68.

Analysis: The declaration under the Income Declaration Scheme, 2016 and the certificate in Form 4 established the existence of the rough diamonds. The processing of the diamonds through job workers was supported by invoices, confirmations, bank payments and responses to notices under section 133(6) of the Income-tax Act, 1961. The sales to independent purchasers were also supported by sale invoices, confirmations, stock records, bank trail and replies to notices under section 133(6). The adverse statements of third parties were retracted and were not supported by any incriminating material. On these facts, the transaction of sale could not be treated as bogus or the sale consideration as unexplained credit.

Conclusion: The addition under section 68 was unsustainable and was deleted.

Issue (ii): whether the gain on sale of the diamonds was long-term capital gain or short-term capital gain.

Analysis: The diamonds were received as a gift from the grandfather, so the period of holding had to include the period for which the previous owner held the asset under Explanation 1(i)(b) to section 2(42A) of the Income-tax Act, 1961. The date relevant for valuation under the Income Declaration Scheme, 2016 could not replace the statutory rule for computing holding period. Since the asset was held for the requisite period through the previous owner, the resulting gain on transfer retained the character of long-term capital gain.

Conclusion: The gain was held to be long-term capital gain and not short-term capital gain.

Issue (iii): whether the consequential commission addition under section 69C could survive.

Analysis: The commission addition was entirely consequential to the assumption that the diamond transactions were accommodation entries. Once the sale proceeds were held to be genuine and the addition under section 68 failed, there remained no basis to infer commission expenditure for the alleged bogus transaction.

Conclusion: The addition under section 69C was deleted.

Final Conclusion: The appeal succeeded on the substantive tax additions concerning the diamond transactions, while only the non-adjudicated or consequential grounds did not alter the overall partial relief.

Ratio Decidendi: Where the source asset is accepted through an IDS declaration and the chain of processing and sale is supported by contemporaneous evidence, sale proceeds cannot be treated as unexplained cash credits, and the period of holding of a gifted asset must be computed by including the previous owner's holding period under section 2(42A).

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