TaxTMI 
TaxTMI 
2006 (11) TMI 241
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.... on 1-4-1987, was the correct method for arriving at fair market value of assets as on 1-4-1981." 3. Vide subsequent order dated 18-7-2006, the Hon'ble President, I.T.A.T. has further directed the whole appeal to be disposed of by this Special Bench. Accordingly, as per direction of the Hon'ble President, I.T.A.T., all the grounds taken by the assessee are disposed of by this Special Bench. 4. Ground No. 1 of the assessee's appeal reads as under:- "For that in the facts and circumstances of the case, the learned CIT (Appeals) has erred in not giving proper opportunity of hearing of the appellant and consequently failed to appreciate certain specific contentions taken by the appellant and come to a finding which is submitted to be perverse and wrong." 5. At the time of hearing before us ld. counsel for the assessee did not press the above ground. Accordingly the same is rejected. 6. Ground Nos. 2 to 4 of the assessee's appeal reads as under:- "2. For that in the facts and circumstances of the case, the learned CIT (Appeals) as well as the first assessing authority have erred in computing the profit under the head 'capital gains'. 3. For that the computation of c....
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....sessment year 1975-76 which was accepted by the Ld. CIT, Cuttack vide certificate dated 22-12-1997 issued under section 68(2) of VDIS, 1997. It was further observed that the assets disclosed under VDIS was processed through M/s. Santosh Gem & Jewellers and thereafter the same has been sold for a sum of Rs. 20,77,670. In the statement of computation of capital gain, the assessee has taken the valuation of diamond as on 1-4-1981 on the basis of valuation report of Valuer dated 26-2-1998 at Rs. 6,37,990 and for this purpose, the assessee has given a note in the computation sheet which reads as under:- "Valuation of diamonds as on 1-4-1981 is taken for capital gain purpose as because the said diamonds was acquired by the assessee in the assessment year 1975-76." From the above material the Assessing Officer was of the view that the assessee apparently inflated the cost of diamond as on 1-4-1981 which was disclosed to have been acquired in the assessment year 1975-76 under VDIS. According to the Assessing Officer the valuation shown under VDIS was Rs. 1,39,020 as on 1-4-1987 for the assessment year 1975-76, the valuation as on 1-4-1981 is unlikely to be Rs. 6,37,990. The Assessing....
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....ed a valuation report of raw and uncut diamond as on 1-4-1981 valued by Shri Mansukhlal Lotia, Raipur. However, the CIT(A) was of the opinion that the valuation report amounts to additional evidence as the same was never furnished before the Assessing Officer at the time of assessment. Since the conditions specified under Rule 46A are not satisfied the additional evidence in the form of valuation report furnished by the assessee was not accepted. Accordingly CIT(A) upheld the order passed by the Assessing Officer vide finding recorded in paras 6 & 7 appearing at pages 16 to 18 of his order which are reproduced as under:- "6. It is worthwhile to mention that similar issue of possession of raw, uncut, polished diamond/precious stone with spots, cracks etc. as on 1-4-1981, its processing and improvement sometime in 1998 and sales during the same year have been noticed, in many cases where appeals are filed. In all these cases the appellants have shown to have possessed rough, uncut, unfinished diamond pieces with spots and cracks before 1-4-1981. After a long lapse of period i.e. during the year 1998 these unfinished diamonds/precious stones have been given to one concern i.e. M/s.....
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....on of sections 45 to 55 of the Act and has not erred in computing the capital gains as has been alleged in the grounds of appeal. (iii) There is no scope for misinterpretation of meaning of asset because of the clear provision of the Act. The Assessing Officer, therefore, has come to the correct conclusion. (iv) In the entire issue the Assessing Officer has not questioned the disclosure made by the appellant. The points that have been considered relate to aftermath of disclosure. In any case provisions of sections 64, 71 and 72 of the VDIS, 1997 are very clear and the Assessing Officer has not gone beyond his statutory function while finishing the assessment. 7. In the result, order of the Assessing Officer is confirmed." 9. Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. 10. At the time of hearing before us ld. counsel for the assessee argued at length. He stated that the assessee had acquired 16 pieces of diamond with cracks and spots during the accounting year relating to assessment year 1975-76. Such diamonds were not declared before the department at that time. Therefore, the same were declared by the assessee under VDIS, 199....
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..... The computation provision would be workable only when the cost of acquisition or fair market value of the assets transferred i.e. finished diamond is taken into account while computing the capital gain. 10.2 Ld. Counsel further contended that the Assessing Officer has worked out fair market value of the diamond as on 1-4-1981 by applying the cost inflation index in a reverse direction. He stated that the Hon'ble Jurisdictional High Court has held in the case of Jogat Mohan Kapur v. WTO [1995] 211 ITR 721 (Cal.) that the cost inflation index cannot be applied in the reverse direction. Therefore, the action of the Assessing Officer is contrary to the decision of Jurisdictional High Court and deserves to be quashed. 10.3 It is stated by the ld. counsel that the Assessing Officer has adopted the value disclosed by the assessee for determining the fair market value of the asset as on 1-4-1981 by applying the inflation index in reverse direction. He stated that the CBDT had issued the Circular No. 754, dated 10-6-1997 clarifying the voluntary disclosure of scheme in 1977. In reply to question No. 16 it is stated that the value adopted as on 1-4-1987 is for the limited purpose of ....
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....written submission furnished by the ld. D.R. in this regard reads as under:- "(a) The FMV of the raw diamonds would no doubt be the price that a willing purchase would pay to a willing seller of the raw diamonds in question, having due regard to its existing conditions with all its advantages, potentialities etc. The FMV of the rough diamonds is now to be determined as on 1-4-1981. (b) There are only two actual values in our hands - the value disclosed by the assessee of the rough diamonds as on the date of purchase (i.e. financial year 1975-76) and the value which was all the Fair Market Value of the same rough diamonds as consciously disclosed by the assessee in VDIS, 1997, that is the FMV as on 1-4-1987. It is another matter that both these values are the same i.e. Rs. 1,39,020. All the other values are just deemed/calculated and hypothetical values. The cost of acquisition as in financial year 1975-76 or the FMV as on 1-4-1987 have to be the basis for arriving at the FMV as on 1-4-1981 for the purpose of calculation of Capital Gains/loss in this particular case. As it happens both these final values are one and the same i.e. Rs. 1,39,020. (c) A possibly acceptable valu....
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....see had to be the "correct value", as duly certified by a valuer. So far as the "limited purpose" is concerned, it clearly implies that the limited purpose was the purpose of VDIS only and for that particular year only. It only meant that this disclosure of value would not have any implication for income tax and wealth tax purposes of earlier years. The "limited purpose" in no way implies that the value so disclosed will not be of any consequence in income tax or wealth tax proceedings in the future years. And the "limited purpose" phrase used in the Circular No. 754 of the Board, in no way precludes the use of the disclosed value for being used for any logically correct purpose like determining the FMV of the asset in question as on a particular date, if the need arose, as it has done in this instant case. More so because there is no other way available. Moreover, only the fact is being utilized for the purpose of quantifying the fair market value of the rough diamonds as on 1-4-1981. And fact cannot change. (g) There cannot be two cost of acquisition. Cost of acquisition of an asset is always one. It cannot be more than one. Only the Fair Market Value can be different for diff....
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....e applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company: Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted: Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government: Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result....
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....nt. If the contention of the ld. counsel is accepted that as against fair market value of the original asset the fair market value of the improved asset is to be considered then allowing further deduction for cost of improvement would amount to allowing double deduction for the same. By providing separate deduction for cost of acquisition as well as cost of improvement, intention of the Legislature is clear that the cost of acquisition of original asset is to be allowed and thereafter further deduction for improvement in the original asset is to be allowed. 13. Ld. Counsel for the assessee in support of his contention has relied upon the decision of Hon'ble Bombay High Court in the case of Harish Mahindra. The facts in that case was the assessee had acquired 500 shares before 1-1-1954. The shares were sub-divided after that date. The Bonus share also issued subsequent to 1-4-1954. On the above facts the dispute was about the determination of the fair market value of the shares as on 1-4-1954. On the above facts their Lordships held as under:- "For purposes of ascertainment of the fair market value of the shares on 1-1-1954, any issue of bonus shares subsequent to that date is....
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.... its conversion into non-agricultural land is to be taken as notional cost of acquisition of the capital asset. Hon'ble High Court rejected the assessee's contention and held as under:- "That the assessee had acquired the lands at a certain value and when the assessee sold those lands, they were sold at a much higher value. The cost of acquisition did not change. It remained constant. The fact that by the time the assessee sold them, they were to be put to use for non-agricultural purposes did not involve any additional cost being incurred by the assessee. The object of applying commercial principles of accounting is to ascertain the real profit which can appropriately be regarded as a capital gain and brought to tax. Here, in this case, the real extent of the gain was obviously the difference between the price at which the assessee sold the property and the price which the assessee bad paid for acquiring the property. The cost of acquisition was the cost of acquisition of the agricultural land and not the notional cost as on the date the lands were put to non-agricultural use." 16.1 Similar view was taken by the Hon'ble Madras High Court in the case of M. Nachiappan and by t....
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....ds, subsequent events affecting its value need not be taken into consideration." 17. The ratio of the above decisions relied upon by the ld. D.R. fully supports the case of the revenue that the cost of the original asset viz. the raw and uncut diamond is to be substituted by the fair market value of the same as on 1-4-1981 and, therefore, for determining the capital gain in the case of the assessee, the fair market value of the raw and uncut diamond as on 1-4-1987 is to be taken and not the fair market value of the polished and finished diamond. 18. Now the second question arises, how to determine the fair market value of the raw and uncut diamond as on 1-4-1981. The Assessing Officer has taken the value of the diamond as declared for the purpose of VDIS as on 1-4-1987 and has applied cost inflation index in a reverse direction. We find that the Hon'ble Jurisdictional High Court has considered the similar issue in the case of Jogat Mohan Kapur wherein their Lordships has held as under:- "The Cost Inflation Index is to be applied only to forward figures in time, that is, the inflation is to be calculated by appropriately inflating the cost of acquisition of the capital in a....
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....stage. It is not understood how the report was not submitted before the Assessing Officer when the valuation was made as early as 2-1-1998. The submission of the valuation report amounts to additional evidence and is subject to the conditions under Rule 46A of Income-tax Rule, 1962. Since conditions specified under clauses (a), (b), (c) and (d) of Rule 46A(1) are not satisfied, the additional evidence produced is not accepted." 20.2 Thus the assessee has submitted the valuation report of raw and uncut diamond before the CIT(A) which probably escaped the notice of the ld. DR while furnishing the above written submission before us. The ld. CIT(A) has refused to admit the same as an additional evidence on the ground that the condition specified under Rule 46A(1) are not satisfied. Rule 46A of the Income-tax Rules reads as under:- "(1) The appellant shall not be entitled to produce before the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals), any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the Assessing Officer, except in the following circumstances, namely:- (a) where the....
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....as no occasion for the assessee to produce the valuation report for raw and uncut diamond before the Assessing Officer. Neither the Assessing Officer asked the assessee to furnish such valuation report before him. When the Assessing Officer did not accept the assessee's contention that the fair market value of finished diamond is to be considered, the assessee furnished the valuation report of raw and uncut diamond before the CIT(A). CIT(A) did riot accept the same being additional evidence in violation of Rule 46A. Considering the facts of the case, in our opinion, there was a reasonable cause for assessee's failure to furnish the valuation report of raw and uncut diamond before the Assessing Officer. We also find that under Rule 46A(4) the CIT(A) has the power to admit any evidence which will enable him to dispose of the appeal. In our opinion, the valuation report of raw and uncut diamond is an important document which would be very relevant for the disposal of the appeal. Therefore, in our opinion, CIT(A) ought to have admitted the additional evidence, which was in the form of valuation report of raw and uncut diamond. However, as per sub-rule (3) of rule 46A whenever any addit....