TaxTMI 
TaxTMI 
1982 (5) TMI 96
X X X X Extracts X X X X
X X X X Extracts X X X X
....ereinafter referred to as the 'Voluntary Disclosure Act') on 31st Dec., 1975. The facts giving rise to these appeals may be, briefly summarised, as follows. 3. The assessee is a HUF of which Shri Mannalal Soorana is the Karta. Pursuant to the Voluntary Disclosure Act, the assessee prepared a declaration on 30th Dec., 1975 which was filed before the CIT on 31st Dec., 1975. By this declaration, the assessee disclosed the following assets, purportedly acquired by it over a period of years, but the source of which was not disclosed to the Department earlier for purposes of taxation. The total value of such assets, as disclosed by the assessee, was Rs. 38,75,179 on which the income-tax payable was Rs. 23,11,357. The details of the assets disclosed, along with other details, as set out against item No. 5 of the particulars required to be given in Form A (the statement of Voluntary disclosure u/r 3 of the Voluntary Disclosure of Income and Wealth Rules, 1975 as filed before the CIT) are as follows : 5. Statement of Voluntarily disclosed incomes : SI. No Amount of income declared Assessment year(s) to which the income relates If the income is represented by cash (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, insurance, packing and forwarding expenses, etc., involved in transferring the goods from Bombay, where they were allegedly kept, to Jaipur. Thereafter, the precious stones were said to have been distributed to three of the members of the HUF by way of partial partition. In the process, it is claimed that 930 carats, valued at Rs. 15,31,000 were given to Shri Nirmal Kumar Soorana, 931 carats valued at Rs. 15,32,000 were given to Vimal Kumar Soorana and 939 carats, valued at Rs. 15,37,000 were given to Narendra Kumar Soorana. 7. The ornaments and jewellery valued at Rs. 41,51,343 were entered in an accounts styled as "Jewellery Ornaments Investments Account". Out of the total of 121 items, 104 items were valued at Rs. 8,93,313. These were shown as distributed to three members, namely, Vimal Kumar Soorana, Narendra Kumar Soorana and Km. Nirmal Soorana, by way of partition, Vimal Kumar Soorana getting items valued Rs. 3,05,740. Narendra Kumar Soorana getting items valued at Rs. 2,99,323 and Km. Nirmala Soorana getting items valued at Rs. 2,88,250. The remaining 14 items valued at Rs. 32,58,030 were shown as having been transferred to an account styled as "Jewellery Ornaments Sto....
X X X X Extracts X X X X
X X X X Extracts X X X X
....facts, relating to all these cases, have to be considered together in deciding the various appeals. 11. The facts relating to Mannalal Soorana are as follows. In his individual capacity, he filed a disclosure petition before the CIT on 31st Dec., 1975, declaring the following assets : Cash Rs. 2,90,000 Processed precious stones (1670 carats) Rs. 10,20,000 On 8th Dec., 1976 he gave the above 1670 carats of precious stones to the newly formed family firm of the name of M/s. Mannalal Nirmal Kumar Soorana & Co. towards his capital, at a value of Rs. 20,40,000 which was credited to his capital account. 12. The facts relating to Shri Nirmal Kumar Soorana and Narendra Kumar Soorana are that they, too, became partners in the newly formed family firm M/s. Mannalal Nirmal Kumar Soorana & Co. contributing the 930 carats and the 939 carats respectively, of the precious stones received by them on the partial partition of the HUF on 4th Jan.,1976, towards their capital. Their capital accounts were credited with the value of such stones, namely, Rs. 15,31,000 and Rs. 15,37,000. 13. Before proceeding further, it will be useful to summarise the facts stated above: S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 28th Oct., 1978. (vii) The Jewellery Ornaments Manufacturing Account was debited with the value of the stones namely, Rs. 31,43,400 and manufacturing wages of Rs. 8,934 being expenditure incurred in cutting and polishing the stones. All the stones were sold to the sister concern, namely, the newly constituted firm of M/s. Mannalal Nirmal Kumar Soorana & Co. for Rs. 34,60,000 on 21st Jan., 1976. This account showed a gross profit of Rs. 3,07,665. (viii) Shri Mannalal Soorana, in his individual capacity, had filed a disclosure before the CIT on 31st Dec., 1975 disclosing cash Rs. 2,90,000 and processed precious stones (1670 carets) valued at Rs. 10,20,000. On 8th December, 1976 he valued these precious stones at Rs. 20,40,000 and contributed it as his capital in the firm of M/s. Mannalal Nirmal Kumar Soorana & Co. His capital account was credited with the amount of Rs. 20,40,000. 14. Having stated the facts relating to all the cases, we would now proceed to consider the assessment made in the case of the HUF. This assessment has been completed by the ITO after submitting a draft assessment order to the IAC (hereinafter referred to as 'IAC')in accordance....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e been acquired only by way of stock-in-trade. In this connection, he referred to the following facts : The assessee's grand father, Hazarimal Soorana, had been carrying on business in ornaments and precious stones and rough stones. He had two sons, namely, Milapchand (Father of the present Karta Mannalal Soorana) and Lalchand. After the death of Hazarimal the business was being carried on by the HUF consisting of Milapchand and Lalchand. After the death of Milapchand in 1936, Lalchand became the Karta of the HUF, the other coparcener being the present Karta, Mannalal Soorana. The business of the HUF continued upto 1955 after which Mannalal Soorana took over the business of the HUF. He was also carrying on business in his individual capacity in the name of Hazarimal Milapchand. After the Samvat year 2013(1958-59) only one business, in the name of Hazarimal Milapchand Soorana was continued by Mannalal Soorana in his individual capacity. This was ultimately converted into a partnership of the same name with effect from the asst. yr. 1971-72. In the assessments completed on the HUF for the asst. yrs. 1964-65 to 1967-68, pursuant to a settlement arrived at by the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arimal Soorana was dealing only in imitation stones and not in precious stones. Secondly, it was the assessee's contention that when a part of such assets was revalued at market rate and brought in as stock-in-trade, the difference between the cost and the market value, as on the date of conversion, also could not be subjected to tax in the light of the decision of the Supreme Court in CIT vs. Bai Shirinbai K.Kooka (1962)46 ITR 86(SC). 18. The ITO did not accept these contentions put forward on behalf of the assessee. He pointed out that the disclosure petition filed by the assessee did not contain any information on the question whether the assets disclosed were capital assets or trading assets. Thus, according to the ITO, this was not a matter which was covered by the acceptance of the disclosure, and consequently, he was not precluded from enquiring into the nature of the assets. Referring to his appreciation of the previous trading history of the family, he came to the conclusion that the assets were trading assets, acquired by the assessee, in the course of its business which were kept outside its books of account. In this view of the matter, he held that when the ornam....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessment was completed by adding the said amount to the total income of the assessee. In the assessment order, the ITO did not mention the head of income under which the amount was added. However, in the printed assessment form, the ITO has shown the amount under the head other sources'. 22. Aggrieved by the above assessment, the assessee filed an appeal before the Commissioner of Income-Tax (Appeals), (hereinafter referred to as CIT (Appeals). As many as 11 grounds were raised in this appeal. The first seven ground assailed the addition of an amount Rs. 49,61,664 as the income of the assessee. Ground No. 8 assailed the finding given in paragraph 27 of the assessment order that an amount of Rs. 20,89,060 was liable to be taxed as income from other sources. Ground No. 9 assailed the finding given in paragraph 29 of the assessment order that an amount Rs. 23,23,366 was liable to be assessed as capital gains and ground number 10 assailed the disallowance of Rs. 2,063 out of an amount of Rs. 2,063 out of telephone expenses. 23. In the ground raised against the addition of Rs. 49,61,664 it was the contention of the assessee that the ITO was wrong in treating the assets d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee contended that this settlement should not be held against the assessee, as evidence of having carried on a business in jewellery, in the past. It was also vehemently argued before the CIT (Appeals) that, by questioning the nature of the assets declared by the assessee under the Voluntary Disclosure Scheme, the ITO was going against all the assurances given by the Government. 24. On behalf of the Department, it was argued before the CIT (Appeals) that the provisions of the Voluntary Disclosure Act did not prevent the ITO from enquiring into the nature of the asserts, in connection with the assessments to be made for any assessment year. The scheme only provided that the amount of voluntarily disclosed income shall not be included in the total income of the assessee and the value ofd the assets disclosed should also not be included in the assessee's total wealth. The assessee has not stated, in the disclosure petition filed by him before the Commr. that the assets disclosed were held as capital assets. Thus, this is not a matter which is concluded against the Department by the Commr.'s acceptance of the disclosure. 25. After considering the provisions of the Voluntar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee. 27. The CIT (Appeals) then considered whether the revaluation of the assets, resulting in an appreciation of Rs. 49,61,664 gave rise to any income liable to tax. The accounting year of the assessee, for the asst. yr. 1977-78, is the Diwali year 1976 which ended in October, 1976. He observed that it was open to an assessee to value the closing stock either at cost or at market rate, whichever is lower at his point, at the end of the accounting year. In the present case the revaluation was made on an intermediate date between the beginning and the close of the accounting year. Such a revaluation, in the opinion of the CIT (Appeal), did not give rise to any income to the assessee, and such a revaluation was immaterial as no potential profit was embedded in such revaluation. In this view of the matter, he held that the ITO was wrong in treating the difference of Rs. 49,61,664 arising on such revaluation as the income of the assessee. 28. He further went on to consider what was the actual profit, if any, arising to the assessee. As the ITO has treated the assets as trading assets of the assessee and as the CIT (Appeals) has, also, agreed with the finding of the ITO, he h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d by the CIT (Appeals). The assessee has raised as many as 18 grounds in the appeal filed by it before the Tribunal. The Department, in its appeal, has contested the finding of the CIT (Appeals) that the amount of Rs. 49,61,664 arising from the revaluation of the assets was not income liable to tax. At the time of hearing of appeal, permission was sought, on behalf of Department, to raise certain additional ground which will be dealt with later. 32. Taking the assessee's appeal first, the grounds can be broadly, summarised as follows : (i) That the CIT(Appeals) was wrong in computing to the conclusion that the assets declared by the assessee in the voluntary disclosure, namely, the precious stones and the jewellery and ornaments were stock-in-trade of the assessee and not capital assets. (ii) That this appreciation of the trading history of the HUF was incorrect and his conclusion based on such trading history, regarding the nature of the assets, was also wrong. (iii) The CIT(Appeals) was wrong in not accepting the claim of the assessee that it had converted a part of the jewellery and ornaments from capital assets to stock-in-trade on 4th Jan, 197....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce in support thereof. Referring to these assurances, the ld. counsel submitted that where the assessee declared the assets to be capital investments, it was not open to the Income-tax authorities to doubt the assessee's claim as it will be a breach of the assurances given by the Government. Relying on the decision of the Supreme Court in Motilal Padampat Sugar Mills Co. Ltd. vs. State of U.P. and Ors. (1979)118 ITR 326 (SC) he submitted that the ITO was precluded from making any enquiry regarding the nature of the assets, on account of the principle of Promissory Estoppel. Besides, he also argued that the circulars and instructions issued by the CBDT in this connection were binding on the ITO, and for this reason also be was precluded from making any such enquiry. In support of this contention he relied on the decision of Supreme Court in Ellerman Lines vs. CIT 1972 CTR (SC) 71 : (1971) 82 ITR 913(SC); K.P. Verghese vs. ITO (1981)24 CTR (SC) 351: (1981)131 ITR 597 (SC) and of the Gujarat High Court in Rajan Ramamkrishna vs. CWT (1980) 17 CTR 293 (Guj) : (1981) 127 ITR 1(Guj). He also relied on the decision of the Punjab and Haryana High Court in Smt. Sudesh Khanana vs. IAC (19....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rguments advanced by Shri Shanma, the ld. Deptl. Rep. Shri C.V. Gupte submitted that the burden of proving that the assets were acquired as capital assets was entirely on the assessee. He took us through the various press-notes and circulars relied upon by Shri Sharma and pointed out that no assurance had been given either by the Government or by the Chairman of the CBDT to the effect that no question will be raised by the departmental authorities about the nature of the assets disclosed by the declarants under the Voluntary Disclosure Scheme. All that was conveyed by these press-notes and circulars was that the dates of acquisition of the assets and the values at which they were acquired, as declared by the assessee., will not be questioned by the departmental authorities. The disclosure scheme also conferred immunity on the declarants from assessment of the income disclosed, in subsequent assessment proceedings and from penalty proceedings in respect of such disclosed income. Referring to the disclosure petition filed by the assessee, before the Commr., he pointed out that the assessee had not mentioned in that petition that these assets were acquired as capital assets. In fact, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erein it had described itself as "jewellers, manufactures, importers and exporters of precious and synthetic stones". On the basis of these facts, he submitted that the acquisition and subsequent sale, by the assessee, of these assets were in its ordinary line of business and these would constitute business transactions of the assessee. Reliance was placed on the decision of the Supreme Court in Raja Bahadur Kamakhya Narain Singh vs. CIT (1970) 77 ITR 253 (SC) in support of the above proposition. Certain views expressed in a book " Revenue Law" by Barry Pinson, at page 24 were also referred to in his connection. He referred to the argument of Shri Sharma that the transactions in jewellery, in the earlier years, were really realisation of capital assets and were only isolated transactions but were agreed to be treated as business transaction, only to buy peace. If that were so, argued Shri Gupte, the present sale of 3 items of jewellery could also be treated only as an isolated transaction and not as a business transaction. In other words, it will be only a method of realisation of the capital asset. He pointed out that the items allegedly converted into stock-in-trade were only thr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be only a device adopted by the assessee in order to bring itself within the ratio of the Supreme Court decision in CIT vs. Bai Shirinbai K.Kooka (1962) 46 ITR 86 (SC) in order to derive the tax benefit that will accrue as result. 41. Replying to the arguments advanced on behalf of the ld. counsel for the assessee submitted that the mere fact that the assessee had not mentioned in the voluntary disclosure statement, that the jewellery and precious stones represented capital assets, would not detract from the position that the ITO was precluded from enquiring into their nature. He pointed out that, if the assessee had declared them to be capital assets, and the voluntary disclosure had been accepted by the Commr., it would have formed part of the disclosure itself and the ITO could not have questioned that statement. He submitted that even if the declaration does not mention the nature of the assets, it will be equally impermissible for the Department to make any enquiry there into. According to him, it was implicit in the declaration form and in the entries made in books of account that the assets were capital assets. The fact that in the books of account, the assessee had shown....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and appeal proceedings as well as penalty proceedings were going on in respect of these, the assessee considered it expedient to settle the matter by submitting before the Commr. that the profits on the sale may be taxed as business income, subject to the penalty proceedings being dropped. According to Shri Sharma, this was not evidence to show that the assessee was carrying on business in jewellery. The assessment history also shows that there were no sales of precious cut stones during any of the earlier years or subsequent years. Referring to the letter head of the assessee, wherein it was shown as a trader and importer and exporter of precious and synthetic stones and as jewellers and manufactures, Shri Sharma pointed out that this was only in the nature of a piece of puffery and this, by, itself would not make the assessee a manufacturer or jeweller or importer or exporter of precious stones, unless in fact, the assessee had carried on any such business. According to him, the findings recorded by the ITO in paragraph 18 of the assessment order, as to the nature of the business carried on by the assessee, are without any evidence. 42. Shri Sharma summed up his arguments, in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. It was this addition which was challenged by the assessee, in appeal before the CIT(Appeals) and it was with reference to that appeal, that the CIT (Appeals) had held that the said amount would not be liable to tax, as it did not represent any income of the assessee. In fact the CIT(Appeals) had held that the amount of Rs. 20,89,060 is liable to be taxed as business profit, as against Rs. 3,07,665 shown by the assessee. This finding of the CIT (Appeals) has, itself, challenged by the assessee in ground No. 15 of its appeal. Shri Shama pointed out that the Department has to take a definite stand about what is the income liable to be assessed and under what head it is to be assessed. He submitted that the Department could not claim that the same income is assessable under 3 or 4 different heads and go on shifting its stand as and when the appellate authority held that the income is taxable under a particular head. The additional grounds, he submitted were in the nature of anticipatory grounds, in the sense that the Department wanted these grounds to be kept in view if the Tribunal accepted the assessee's contention that the income was not liable to be taxed as business income.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh unless forbidden from doing so by the statute. The statute does not say that such a direction cannot be issued by the appellate authority in a case of this nature." 46. We have considered the rival submissions in respect of the additional grounds sought to be moved by the revenue. In our view these additional grounds have to be admitted as it is necessary to consider the aspects of the case covered by the additional grounds for a proper disposal of the appeals filed before us by the assessee as well as by the Revenue. The matters covered by the additional grounds are discussed fully in the assessment order and they were also in issue before the CIT(Appeals). Accordingly we have admitted these additional grounds and heard the arguments of the parties on all the grounds including the additional grounds. 47. The ld. Deptl. Rep. Shri C.V. Gupte, advanced his arguments,first, in supp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....items, which should be taken into account and not the alleged converted cost. With regard to ground No.3, as stated earlier, Shri Gupte referred to the decision of the Supreme Court in Kapurchand Shrimal vs. CIT (1981) 24 CTR (SC) 345 : (1981) 131 ITR 451 (SC) and submitted that the mistake should be corrected. 48. Replying to the submission made by Shri Gupte, Shri Anoop Sharma, counsel for the assessee, submitted that there can be no income arising by mere book entries or by mere revaluation. This is clear from the fact that a person cannot make a profit out of himself by revaluing his assets. Any income would arise to the assessee only by any of the known processes of transfer, for consideration. With regard to the first ground in the additional grounds, it was again submitted that the amount of Rs. 20,89,060 was arrived at by the ITO by deducting from the value of jewellery transferred to the stock-in-trade account, its proportionate cost. Here again, it was submitted, there was no sale by the assessee but only a transfer from one head of account to another head of account in its own books of account. Thus it was submitted that the first ground in the additional grounds, als....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sets disclosed by the assessee, that is, whether they are capital assets or stock-in-trade? The first issue to be considered is whether the Departmental authorities have no power, as contended by the assessee, to question its claim that the assets were acquired and held by it as capital assets. This claim of the assessee proceeds on the assumption that the provisions of the Voluntary Disclosure Act and the assurances given by the Government and by the Chairman, CBDT and by the CIT, Jaipur, would protect the assessee from any such enquiry. The extent of the immunity conferred on a declaration, under the above disclosure scheme, is contained in ss. 8,11,12 and 16 of the Voluntary Disclosure Act. Sec. 8 provides that the amount of the voluntarily disclosed income shall not be included in the total income of the declarant for any assessment year, if the conditions stated under that section are fulfilled by him. Section 11 provides that nothing contained in any declaration made under the scheme of the Voluntary Disclosure Act shall be admissible in evidence against the declarant for the purpose of any proceedings relating to imposition of penalty or for the purpose of prosecution und....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me declared under s. 3(1) will not be questioned by the Departmental authorities. 54. Declarations under s. 3(1) of the Voluntary Disclosure Act are to be filed in Form A appearing in the appendix to that Act (See Rule 3 of the Voluntary Disclosure Rules, 1975). The tabular proforma for declaring the assets has already been reproduced at the end of paragraph 3 of this order. It will be seen that the proforma does not provide any column for showing whether the disclosed asset is a capital asset or an item of stock-in-trade. There is a remarks column, numbered as 7. If a declarant chooses to do so, he may give an indication in that column about the nature of the asset. However, under the provisions of the Act on the Scheme, he is not required to do so. 55. From the summary of the press-notes and clarifications issued by the Government and by the Chairman, CBDT and by the CIT, Jaipur, it will be seen that they have not given any assurance to the declarants that no questions will be asked about the nature of the assets, namely, whether they are capital assets or stock-in-trade. The scheme only assures that no question will be asked about the nature and source of the income and no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....6. As far as precious stones are concerned, the ITO held that the assessee was carrying on this business in the past, on the basis of the trading accounts for the asst. yrs. 1965-66 and 1966-67, recording certain small transactions in uncut rough stones and rough diamonds. According to the assessment history of the HUF, there has been no trading in precious stones either rough or cut and polished between 1967-68 and 1976-77. Similarly, as far as jewellery is concerned, apart from the assessments made consequently on a settlement before the Commr. there was not trading between 1967-68 and 1975-76. Thus, it could not be said that the assessee had a continuous history of trading in precious stones and jewellery. 58. According to the disclosure filed by the assessee, the ornaments valued at Rs. 14,89,679 were acquired between the asst. yrs. 1964-65 and 1967-68. Neither the above dates of acquisition, nor the value, could be questioned by the ITO, by virtue of the assurances given by the Government. Similarly, according to the disclosure statement, the cut and processed stones were also acquired for Rs. 23 lakhs between the asst. yrs. 1964-65 and 1967-68. Here again, neither the valu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rances given by the Government under the Voluntary Disclosure Scheme, the answer to this question presents no difficulty. They have to be held to be long-term capital assets as they have been held by the assessee for more than 60 months, immediately preceding the date of the declaration. 62. Did any income arise to the assessee by the revaluation of the assets on 30th Dec., 1975? The assessment made by the ITO has proceeded on the assumption that when the assessee revalued the ornaments and precious stones, whose declared value was Rs. 37,89,679 at Rs. 87,41,343 and entered the same in its books of account on 30th Dec., 1975 the difference of Rs. 49,61,664 represented the income of the assessee. In coming to this conclusion, he proceeded on the basis that these assets were held by the assessee as stock-in-trade of a business which was being carried on by the assessee. We have already recorded our finding that these assets were held by the assessee, not as stock-in-trade, but as capital assets. Thus the question for our consideration is, whether the revaluation of these capital assets. In the assessee's books, resulting in an enhancement of their value by Rs. 49,61,664 res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l income from self-occupied property, s.41(2) of the IT Act which enables the taxation of the balancing charge, in respect of assets, as income etc. In the instant case, before us, we are not concerned with such national incomes. The simple question is, whether by revaluing his assets on 30th Dec., 1975 and making entries in respect of such revaluation in its books of account, an income of Rs. 49,61,664 had accrued in favour of the assessee. Our clear and unequivocal answer to this question is in the negative, as the assessee could not have made such an income out of itself. 64. If the revaluation of the assets did not give rise to any income, at what point of time did any income arise to the assessee in respect of such assets? In the earlier part of this order we have set out the facts of the case, according to which a part of the revalued assets, being cut and processed stones, was partitioned among 3 members of the HUF. It is obvious, that the distribution of the assets, by way of partition, did not bring any income to the assessee. We do not consider it is necessary to cite any authorities for this proposition which is self-evident. Some of the jewellery, which was revalu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the book entries made by the assessee produced any income, which was liable to tax in its hands. 65. Was there a real conversion of some of the assets into trading assets as claimed by the assessee ? The next question, which arises for consideration, is with regard to the alleged conversion of 17 items of jewellery into stock-in-trade. The assessee claims the benefit of the ratio of the decision of the Supreme Court in Shirinbai K. Kooka's case (1962) 46 ITR 86 (SC) in respect of such conversion. The total value of these 17 items, as declared by the assessee, in the voluntary disclosure, was Rs. 10,27,970. These have been revalued at Rs. 32,58,030 for the purpose of transfer to the "Jewellery Ornamants Stock-in-trade Account". Out of that stock-in-trade account, the assessee has taken out three items for the purpose of its trading. These are 3 necklaces, whose value, as declared in the disclosure, was Rs. 9,70,950 and their value according to the revaluation was Rs. 32,59,400. The precious metal obtained by breaking up the 3 necklaces has been valued at Rs. 16,000 and the value of the stones transferred to the manufacturing account has been put at Rs. 31,43,400. It is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sclosure. It is interesting to note that out of the 17 items of jewellery, allegedly transferred to the "Jewellery Ornaments Stock-in-trade Account ", the 14 items remaining, after the three items were taken out for sale, were again distributed to 5 members of the family, namely, Vimal Kumar Soorana, Narendra Kumar Soorana, Nirmal Kumar Soorana, Km. Nirmala Soorana and Smt. B. D. Soorana, by way of partition on 16th Aug., 1978. 67. The question, thus, boils down to this, namely, whether the sale of these items of jewellery could constitute a trading activity. On the basis of the assessee's own contention, all the earlier transactions in jewellery were realisation sale of capital assets and not trading transactions. The three items, under consideration, have no doubt been broken up and the stones, embedded therein, and the precious metal, have been sold separately. It was sought to be argued on beheld of the assessee that this was a manufacturing process, which was undertaken by the assessee in the course of a business in jewellery and precious stones. We are unable to accept these contentions put forward on behalf of the assessee. If the sales of jewellery in the earlier yea....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... sale of the stones separately, is only one of the methods employed by the assessee for getting the maximum value for the assets held be it. Such a sale, as pointed out by the Madras High Court in CIT vs. Kasturi Estates Lts. (1966) 62 ITR 578 (Mad) is one, which any prudent owner of the asset would engage in, for the realisation of a capital investment, and is not a venture in the nature of trade. As pointed out by Madras High Court, in considering the nature of the transaction, regard must be had to the nature of the property, length of its ownership and holding, actual conduct of the assessee in respect of it all along, and all other facts, including the absence of evidence of any trading activity or speculative venture. In the present case, it is common ground that the nature of the three pieces of jewellery, at the point of acquisition, was that of capital asset, and they were held over a period of more than 9 years. The assessee 's conduct in respect of these pieces of all along has been to treat them as capital assets, and even according to the assessee there has been no trading activity in jewellery or precious stones either in the past or in the future years. Taking al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....6(JAI)of 1981'Shri Mannalal Soorana, Individual' Asst.yr. 1977-78. We shall now take up the appeal filed by the Revenue in the case of Mannalal Soorana (Individual) and the cross objection filed by the assessee in respect of that appeal. Mannalal Soorana, in his individual capacity, filed a Voluntary Disclosure under the Voluntary Disclosure Scheme, before the Commr. On 31st Dec., 1975 declaring the following assets: Cash Rs. 2,90,000 Processed precious stones (Emeralds 1070 carats) Rs. 10,20,000 Total Rs. 13,10,000 The disclosure petition was dt. 30th Dec., 1975. On the very same day, he revalued the Emeralds at Rs. 20,40,000 and made entries in his books of account to that effect. His capital account was also credited with a sum of Rs. 15,57,750 which was arrived at in the following manner : Cash declared in the voluntary disclosure Rs. 2,90,000 Revised value of the Emeralds declared in the voluntary disclosure Rs. 20,40,000 Total Rs. 23,30,000 Less: Tax paid under the voluntary disclosure scheme Rs. 7,72,250 Balance credited to the capital account Rs. 15,57,750 It was the assessee's claim before the ITO that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ess in the middle of the accounting year and such a revaluation, if made, has to be ignored and cannot give rise to any income, (ii) holding that there is no justification for the ITO in coming to a conclusion that the difference on account of revaluation of the assets declared under VDS on 30th Dec., 1975 gave raise to any income liable to tax, (iii) deleting the addition of Rs. 10,20,000 made by the ITO on account of difference in the value of stock declared under the VDS and as shown in the books of accounts." 73. The assessee filed a cross objection, in which the following grounds were raised: 1. That the ld. CIT (Appeals) erred in holding that the nature of processed precious stones (Emeralds 1070 carats) representing voluntary disclosed income declared by declaration dt. 30th Dec., 1975 was stock-in-trade and not capital asset. 2. That the ld. CIT (Appeals) erred in not allowing benefit of s. 23(3) of the Act. 74. However, at the time of hearing of the appeal, the ld. counsel for the assessee submitted that the assessee wished to withdraw the cross objection, as the assessee accepted the finding of the CIT (Appeals) to the effect that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me Court has observed that the true purpose of valuing and crediting the closing stock is to balance the cost of the goods, entered on the other side of the accounts at the time of the purchases, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales, in the course of the year, showing the profit or loss actually realised on the year's trading. Relying on these observations, Shri Sharma argued that neither in law nor in commercial practice, could any profit be said to accrue or arise by a mere revaluation of stocks in the books of account. 77. It is common ground that, during the year of account, apart from introducing the disclosed Emeralds as stock-in-trade of his business, at the value of Rs. 20,40,000, the assessee had not sold any part of those Emeralds. The ordinary concept of an income accruing or arising to an assessee is that there should inhere in the assessee a legal right to receive such income. If the accounts are maintained under the mercantile system of accounting, such income will be taxable on the basis of accrual, even though not actually rec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ram vs. CIT (1953) 24 ITR 481 (SC), would make it amply clear that no income accrues or arises to an assessee by a mere revaluation of his closing stock or any other stock held by him. Income would accrue or arise only as a result of the transfer of such stocks for consideration. In the present case, as no such sale has taken place during the year of account, we have to hold that no income accrued or arose to the assessee, which was liable to tax. 79. In the result, we confirm the order of the CIT (Appeals), though for reasons which are different from those stated by him, and dismiss this appeal, filed by the Revenue. 80. As the assessee has withdrawn the cross objection, it is also treated as dismissed. 81. ITA Nos. 1526 (JAI) of 1980 and 61 (JAI) of 1981. Shri Mannalal Soorana (Individual) Asst. yr. 1978-79 The subject matter of these appeals is the same Emeralds which were declared by the assessee under the Voluntary Disclosure Scheme, which also came up for consideration in the appeal for the asst. yr. 1977-78. After the Emerald's were revalued at Rs. 20,40,000 the assessee handed over those stones to the firm of M/s. Hazarimal Milapchand Soorana, in which....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mitted, there was no total extinguishment of the rights of the partner, in the property contributed, as he continues to have an interest in such property, along with the other partners. The credit given to the capital account, it was argued, was not a consideration for the transfer of the assets but was only a consequence of the contribution of assets towards capital. The action of the ITO, in treating the Emeralds as short-term capital gains, was also assailed as he could not go behind the date of acquisition declared by the assessee, in the voluntary disclosure. 83. After considering the submissions put forward on behalf of the assessee, as also the reasons given by the ITO in the assessment order, the CIT (Appeals) confirmed the view taken by the ITO, He held that there was an extinguishment of rights in the Emeralds as far as the assessee was concerned, when he contributed them as capital to the partnership and, consequently, the difference between the value at which they were contributed to the firm and the original cost will represent capital gains arising to the assessee. Accordingly, he came to the conclusion that the amount of Rs. 10,20,000 was rightly assessed as capit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ores or raw materials held for the purposes of his business or profession: ' ' ' ' ' ' (Emphasis supplied) Thus, stock-in-trade of a business is clearly excluded from the definition of capital asset. Capital gains, according to s. 45 of the IT Act arise only on the transfer of a capital asset. Since the Emeralds in question have been held to be the stock-in-trade of the assessee, s.45 has no application to them, when they were contributed as capital in a partnership. Much discussion has been entered into between the assessee and the Department on the effect of the definition of "transfer" contained in s. 2(47) of the IT Act, which includes "the extinguishment of any right". However, s. 2(47) concerns itself only with capital assets as will be seen from the definition reproduced below : 2(47). "transfer", in relation to capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law." (Emphasis supplied) Again, as pointed out above, as the Emeralds have been held to be the stock-in-trade of the assessee a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....able to assessment. In the present case, as already stated, the assets which are contributed are not capital assets but are stock-in-trade and, consequently, the question of extinguishment of rights, within the meaning of s. 2(47) of the IT Act, and the accrual of any capital gains in respect of such contribution does not arise. 90. On the other hand, the facts of the assessee's case are directly covered by the decision of the Supreme Court in CIT vs. Hind Construction Ltd. 1974 CTR (SC) 157: (1972) 83 ITR 211 (SC). That was a case in which the assessee acquired a half interest in a joint venture for the purchase and sale of machinery. Some machinery remained unsold, after the venture was dissolved. This was divided among the partners of the joint venture and the assessee received machinery valued at Rs. 2,06,372 as its shares. The assessee revalued such machinery at Rs. 6,06,372 in its books of account, and thereafter, it contributed that machinery by way of capital to a partnership, in which it had a half share. The question was whether the amount of Rs. 4 lakhs, by which the assessee had increased the value of the machinery, prior to contributing it to the partnership, re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Narendra Kumar Soorana, Jaipur, Asst. yr. 1977-78 and Shri Nirmal Kumar Soorana, Jaipur, Asst.yr. 1977-78. The contentions raised in ITA Nos. 1580(JAI) of 1980 and 1581 (JAI) of 1980 by Narendra Kumar Soorana and Nirmal Kumar Soorana are identical and are, therefore, dealt with together. In the narration of facts, in the appeal relating to the HUF of Mannalal Nirmal Kumar Soorana, it was mentioned that cut and processed stones declared by the HUF under the Voluntary Disclosure Scheme, at a value of Rs. 23 lakhs, were revalued at Rs. 46 lakhs and these were divided by way of partial partition, among three members of the HUF, namely, Nirmal Kumar Soorana, Vimal Kumar Soorana and Narendra Kumar Soorana. The value of the precious stones falling to the share of Nirmal Kumar Soorana was Rs. 15,31,000 and to the share of Narendra Kumar Soorana Rs. 15,37,000. The value of the stones falling to the share of Vimal Kumar Soorana was Rs. 15,32,000. This division was effected on 4th Jan, 1976. On the same day, a partnership by name Mannalal Nirmal Kumar Soorana & Co. was constituted, consisting of four partners, namely, Mannalal Soorana, Nirmal Kumar Soorana, Narendra Kumar Soorana and Vimal....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... agreed with the ITO's view that short-term capital gains to the extent of Rs. 7,65,500 accrued or arose to Nirmal Kumar Soorana, when he contributed the precious stones received by him on partition, to the partnership, by way of capital. 99. In the case of Narendra Kumar Soorana, the ITO proposed to assess him on a sum of Rs. 7,68,500 as long-term capital gains, treating the precious stones as having been acquired by the HUF between 1964-65 and 1967-68. This was so, in spite of fact, that on the same set of facts, he had treated the capital gains as short-term capital gains in the case of Nirmal Kumar Soorana. On this basis, he prepared a draft assessment under s. 144B and submitted it to the IAC of IT, who gave a direction to the ITO to treat the capital gains as short-term capital gains, as in the case of Nirmal Kumar Soorana. On that basis, the ITO completed the assessment in the case of Narendra Kumar Soorana also. 100. Against those assessment, Nirmal Kumar Soorana as well as Narendra Kumar Soorana filed appeals before the CIT (Appeals). It was contended before the CIT (Appeals) by both the assessees, that the authorities below were wrong in holding that when they c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....servations of the Karnataka High Court, the CIT (Appeals) held that even without reference to s. 2(47), such a transaction would amount to a transfer, understood in the ordinary sense. Accordingly, he came to the conclusion that capital gains arose to both the assessees, when they contributed the assets received by them on partition, to the partnership. While confirming the computation of capital gains, as made by the ITO, he held that such capital gains should be treated as long-term capital gains with reference to the dates of acquisition of the assets by the HUF. 102. In the case of Narendra Kumar Soorana, a further contention was raised before the CIT (Appeals) against treating the capital gains as short-term capital gains. The assessee pointed out that the ITO, himself, had treated the capital gains as long-term capital gains, in the draft assessment order submitted by him to the IAC under s. 144B. It was the IAC who, suo motu gave directions to the ITO, purportedly, acting under the provisions of s. 144A, to treat the capital gains as short-term capital gains. It was the contention of the assessee, before the CIT (Appeals) that, in proceedings under s. 144B, the IAC is not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he CIT (Appeals) was wrong in holding that the words "extinguishment of any rights" in the definition of "transfer" in s. 2(47) would cover contribution of an asset by a partner to the firm, as capital. Secondly, it is their contention that having found, in the case of the appeal of the HUF, that the precious stones formed the stock-in-trade of the HUF, the CIT (Appeals) was wrong in holding that these were capital assets in the hands of the two coparceners. Thirdly, it is contended that even if any capital gains arose as a result of the contribution of these assets to the partnership, such capital gains would have arisen only on 4th Jan., 1976. They could have been brought to charge only for the financial year ending 31s March, 1976, i.e. for the asst. yr. 1976-77 and not for the asst. yr. 1977-78, as has been done by the ITO. 106. As stated earlier, the CIT (Appeals) has relied on the decisions of the Kerala High Court in A. Abdul Rahim vs. CIT (1977) 110 ITR 595 (Ker) and of the Karnataka High Court in Addl. CIT vs. M.A. J. Vasanaik (1979) 116 ITR 110 (Kar) in coming to the finding that there was an extinguishment of the rights of the partners, giving rise to a transfer of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion, whether there was an extinguishment of the rights of the partner, has not been considered by the Supreme Court in the above case. 108. The ld. counsel for the assessee, Shri G.C. Sharma, vehemently argued that the decision of the Gujarat High Court does not lay down the correct law on the subject. He submitted that the Gujarat High Court is not correct in holding that the credit given to the partner, in his capital account is the consideration for the transfer of the asset to the firm. It was his case that the credit entry, by itself, did not create a right in the partner to receive the money-equivalent of the credit, as and when he desired, once it has been treated as the capital of the partner. His right is only to receive such amount as may be found due to him on a settlement of his accounts at the time of the dissolution of the firm. Even if, technically, there would be said to be an extinguishment of any of the rights of the partner, in the asset contributed by him to the firm, the real question for consideration would be whether any income arose to him as a result of such transfer. According to him, no real profit or gain could be said to arise from the transfer as a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ular previous year will be adopted. As an example, he referred to s. 68 which provides that for cash credits appearing in the books of account of the assessee, which are treated as the income of the assessee for want of satisfactory explanation, the previous year will be the same as the previous year of the source of income, for which the books are maintained. In the present case, neither Nirmal Kumar Soorana nor Narendra Kumar Soorana had maintained any accounts wherein any capital gains arising from the contribution of capital was recorded. On the contrary, it is their contention that no capital gains, at all, accrued or arose to them. In the circumstances, there was no question of their opting for any previous year in respect of such non-existent income. If, however, on technical grounds, it is held that such income by way of capital gains did accrue or arise to them, in the eyes of the law, the only previous year for the purpose of their assessment would be the financial year immediately preceding the assessment year. Shri Sharma pointed out that, according to the Revenue, the capital gains arose on 4th Jan., 1976, when these two persons contributed the assets to the partnershi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d upon facts and circumstances of each case. This will be so even if the property of the HUF which is partitioned, represents its stock-in-trade. In the light of these decisions, Shri Gupte contended that the CIT (Appeals) was fully justified in treating the precious stones obtained by these persons, as a result of partial partition of the HUF as capital assets in their hands. 113. With regard to the assessee's contention regarding the previous year in which the capital gains, even assuming that such capital gains, arose, could be assessed, Shri Gupte submitted that the entries relating to the contribution of capital appeared in the books of account of the assessees. These books, he submitted, were maintained for the Diwali year. That being the case, he argued, the previous year in respect of the capital gains would also be the Diwali year as the assessees should be presumed to have opted for the Diwali year as their previous year for capital gains also. Referring to the case of Shri Narendra Kumar Soorana, he pointed out that, apart from the capital gains arising on the contribution of capital to the firm, he had also earned capital gains by sale of ornaments, which are ent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lly become the stock-in-trade of the coparcener, if he received it on partition. It will be for the Department to show, from the conduct of the divided members, that he had treated such property as his stock-in-trade. To the same effect are the other decisions of the Madras High Court in S.T.S. Swaminathan Chettiar vs. CIT (1966) 62 ITR 125 (Mad), KM.PR.KM. Firm vs. CIT (1966) 62 ITR 159 (Mad) and M.S.M.M. Firm, Ipoh vs. CIT (1969) 72 ITR 14 (Mad) and of the Allahabad High Court in Gangadhar Babulal vs. CIT (1966) 62 ITR 718 (All). In the two cases before us, there is absolutely no material to hold that the assessees treated the precious stones received by them on partition as their stock-in-trade. On the other hand, they contributed the stones towards their capital in the partnership. On these facts, it is clear that the stones constituted a capital asset in their hands. Thus the CIT (Appeals) did not commit any error when he treated them, as such. 115. The further question is, whether such capital assets were long-term capital assets or short-term capital assets. The expression "short-term capital asset" is defined in s. 2(42A), in the following terms: 2(42A) "short-t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....luntary disclosure filed by it, before the Commr. We have already held, in disposing of the appeal filed by the HUF, that the Department is not entitled to question or go behind the correctness or truth of the assessee's statement in the voluntary disclosure that these assets were acquired between 1964-65 and 1967-68 (vide paragraphs 53,55 and 59 supra). That being the case, when the two coparceners received a part of those precious stones, on the partial partition of the HUF, it is clear that they should be deemed to have held these assets for more than sixty months, before they contributed the stones to the partnership. In other words, they are long-term capital assets, in their hands and not short-term capital assets as contended by the Revenue. 117. The next question to which we would address ourselves is, whether, on the contribution of those capital assets, by way of contribution of capital to the partnership, at a value higher than the cost of acquisition to the previous owner, namely, the HUF, any capital gains accrued or arose to these two persons, which would be liable to tax. No doubt the learned counsel for the assessee has vehemently argued that the decision of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on of previous year, in so far as they are relevant for our consideration, are reproduced below : "Previous year" defined. 3(1). For the purposes of this Act, "Previous year" means- (a) the financial year immediately preceding the assessment year ; or If the accounts of the assessee have been made up to a date, within the said financial year, then, at the option of the assessee, the twelve months ending on such date ; or '' '' '' '' '' '' (3) Subject to the other provisions of this section an assessee may have different previous years in respect of separate sources of his income. (Emphasis supplied) 119. Sec. 2(11) of the Indian IT Act, 1922 had defined "previous year" in similar terms. Interpreting the definition contained in the 1922 Act, the Delhi High Court has observed, thus, in K.S. Malik vs. CIT (1980) 124 ITR 522 at p. 531 (Del): "Under the IT Act, an assessee is taxed in every assessment year on the total income of the previous year. The previous year varies, even in respect of the same assessment year, in respect of different sources of incom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nless the assessee chooses to maintain his books of account, in respect of such source, for a different period of 12 months from the financial year and adopts that period as his previous year. In other words, the choice of the previous year other than the financial year is available only to the assessee, at his volition. The ITO is not empowered to impose a previous year, other than the financial year, on any assessee, if the assessee does not wish to adopt that year. In the present case, assessees have not maintained any accounts in respect of the capital gains, which are sought to be taxed, for the simple reason that the assessee denies the existence of any such capital gains. It is only by an interpretation of the definition of "transfer" contained in s. 2(47), that it has been held that capital gains liable to tax have accrued or arisen to the assessee. Whether, in fact, and in reality, any real income by way of capital gains has accrued or arisen, is a matter for considerable doubt and debate. But for the direct decision of the Gujarat High Court, which is the only decision of a High Court on this point, the benefit of such doubt would have normally worked to the advantage of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urces. That is, by the sale or transfer of different capital assets at different times, the assessee could derive capital gains liable to tax. In respect of each such source, the assessee is entitled to choose previous year, according to his volition. In respect of any such source, if he does not make a choice of previous year, the financial year would be the previous year for that source. In the case of Narendra Kumar Soorana, he had chosen the Diwali year as the previous year for capital gains arising from the sale of jewellery, inasmuch as, the transaction of sale was recorded by him in the books maintained for the Diwali year. However, as there has been no entry with regard to the capital gains deemed to accrue or arise on account of the contribution of capital to the firm, in the books maintained for the Diwali year, it cannot be said that the assessee has exercised the option to have the Diwali year as the previous year for this source of income also. Accordingly, in his case also, the capital gains arising from the contribution of precious stones by way of capital to the partnership, could be assessable only for the asst. yr. 1976-77 and not for the asst. yr. 1977-78. 122....
X X X X Extracts X X X X
X X X X Extracts X X X X
....after the submission of the draft assessment order under s. 144B. As we have pointed out, above, it is not necessary for us to consider this larger question for the present, as we have already come to a finding, on facts, that the direction issued by the IAC, to treat the capital gains as short-term capital gains, is wrong. 128. In the result, the departmental appeals, namely, ITA Nos. 59 and 60 (JAI) of 1981 are dismissed. 129. To sum up, our findings in the various cases are as follows : In the case of the Hindu Undivided Family of Mannalal Nirmal Kumar Soorana (1) In a case of voluntary disclosure, under the Voluntary Disclosure of Income and Wealth Act, 1976, if the assessee has not specifically declared any asset as a capital asset or stock-in-trade, it will be permissible for the ITO to enquire into the nature of the asset in later assessment proceedings (paragraphs 52 to 56). (2) The jewellery and precious stones declared by the Hindu Undivided Family of Mannalal Nirmal Kumar Soorana, in the voluntary disclosure, were acquired and held by it as capital assets (paragraphs 57 to 60). (3) Such capital assets were long-term capital assets (paragraph 61). (4)....