Rajasthan High Court - Jaipur
Vimal Chand Hirawat vs Commissioner Of Income-Tax on 28 October, 1993
JUDGMENT V.K. Singhal, J.
1. The Income-tax Appellate Tribunal has referred the following two questions of law arising out of its order dated May 5, 1982, in respect of the assessment year 1977-78 under Section 256(1) of the Income-tax Act, 1961 :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that precious stones disclosed 'under the Voluntary Disclosure Scheme, 1975, were not 'stock-in-trade' but 'capital assets' within the meaning of Section 2(14) of the Income-tax Act ?
(2) Whether the Tribunal was justified in holding that the contribution of precious stones towards the capital in the partnership firm amounted to transfer of a capital asset within the meaning of Section 2(47) of the Income-tax Act and gain arising out of that is liable to be taxed under Section 45 of the Income-tax Act 7"
2. The brief facts of the case are that the assessee made a declaration under Section 3(1) of the Voluntary Disclosure Scheme, 1975, of income of Rs. 24,720 on December 30, 1975. The said income represented the stock of cut emeralds. The assessee transferred the entire stock worth Rs. 24,720 after revaluing the same at a figure of Rs. 32,980 to the firm, Messrs. Prakashchand Vimalchand, in which the assessee was a partner. The capital account of the assessee was credited by Rs. 32,980 in the books of the firm. The Income-tax Officer took the view that there was a transfer of a capital asset by the assessee under Section 2(47) and, therefore, the gain of Rs. 8,260 (32,980-24,720) was liable to tax as a short-term capital gain. A plea was raised by the assessee that the stock of cut emeralds represented the assessee's stock-in-trade and the case was covered by the exception as laid down in Clause (i) of Section 2(14) of the Income-tax Act. The dispute was as to whether the cut emeralds constituted the assessee's stock-in-trade or were "capital assets". The Income-tax Officer found that the assessee had never dealt on his own in precious stones and, therefore, the cut emeralds Could not be considered as stock-in-trade.
3. On the second question, it was found that in view of the decision of the Karnataka High Court in the case of Addl. CIT v. M.A.J. Vasanaik [1979] 116 ITR 110 and the Kerala High Court in the case of A. Abdul Rahim, Travancore Confectionery Works v. CIT[1977] 110 ITR 595 [FB], there was a transfer within the meaning of Section 2(47) and, therefore, the gain arising to the partner is liable to capital gains tax.
4. In appeal before the Appellate Assistant Commissioner of Income-tax, it was held that simply because the assessee had not declared the business dealing in cut emeralds in the earlier years, it cannot be considered that the cut emeralds are not capital assets. On an interpretation of the provisions of the Voluntary Disclosure Scheme, the appellate authority came to the conclusion that the said cut emeralds represented the assessee's capital assets. On the second question also he came to the conclusion that in view of the decisions of the apex court in CIT v. Hind Construction Ltd. [1972] 83 ITR 211 and CIT v. Dewas Cine Corporation [1968] 68 ITR 240, there was no transfer and, therefore, the addition is liable to be deleted.
5. In the second appeal before the Income-tax Appellate Tribunal, it was found that since the firm is carrying on the business of cut emeralds the said business should be deemed to be the business of the assessee. The Tribunal came to the conclusion that under the Voluntary Disclosure Scheme, 1975, the assessee must be deemed to have some concealed business income which is required to be declared. No presumption can be raised that he carries on a business in cut emeralds and, therefore, he was not in possession of the stock of that trade. The income could be concealed from any type of business and the cut emerald may be purchased before the disclosure. It was found that there is nothing on record to show that he ever carried on the business and that he was in possession of stock of that business. During the continuance of a firm, a partner can only claim the profits of his share and after its dissolution the share in the assets could be claimed after satisfying the liabilities but a partner is not supposed to deal with any portion of the property as his own and the firm's business could not be said to be the business of the assessee for the purpose of the Voluntary Disclosure Scheme, 1975. In respect of the second point the Tribunal came to the conclusion that the cut emeralds transferred by the assessee to the firm represented his capital asset and, therefore, Section 2(14) was clearly attracted to the case of the assessee in view of the decision of the Gujarat High Court in the case of CIT v. Kartihey V. Sarabhai [1981] 131 ITR 42, wherein it was held that where a property or asset belonging to an assessee is brought in or introduced by him into a firm in which he is a partner, the property in question would belong to the firm and that there would be transfer within the meaning of Section 2(47) when the individual assets are transferred to the firm.
6. We have considered the matter and are of the opinion that the reasoning which has been given and the finding of fact which has been arrived at by the Income-tax Appellate Tribunal in this regard that the cut emeralds were stock-in-trade, is not substantiated by any evidence on record and, therefore, the same cannot be considered as stock-in-trade and is a finding of fact and is based on cogent reasons. A person may carry on the business in any line which may be different from the business of a firm in which the firm is carrying on the business. The business of the firm for the purpose of the Voluntary Disclosure Scheme, 1975, cannot be considered in respect of concealed income by a partner that the said concealed income is from the same line of business. A partner could carry on business in a different line and simply because the firm was carrying on the business in cut emeralds, it cannot be considered that the declaration of the assessee was also in respect of the concealed income of business from cut emeralds. Moreover, it is a finding of fact and the assessee has not been able to prove by any evidence before the authorities below and, therefore, we are of the view that the Income-tax Appellate Tribunal was justified in holding that the precious stones disclosed under the Voluntary Disclosure Scheme, 1975, were not "stock-in-trade" but "capital assets" within the meaning of Section 2(14) of the Income-tax Act.
7. The matter was considered in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509 by the apex court in appeal. It was held by the apex court that where a partner makes a capital contribution of his assets to the firm there is transfer of the concerned asset by the partner of the firm because the exclusive interest of the partner in the said asset is reduced to a share interest by making entries in the books of the firm. But as the partner does not receive any property or gain accrues to him for the purpose of capital gains tax levied under Section 45 and the transaction was a device or ruse for converting the assets into money, the Income-tax Officer is entitled to penetrate the veil covering it and ascertain the truth. Following the view of the apex court, there was a transfer of a capital asset within the meaning of Section 2(47) and the Income-tax Appellate Tribunal was justified in holding that the contribution of the precious stones towards the capital asset in the partnership firm amounted to a transfer of capital asset within the meaning of Section 2(47) of the Income-tax Act. But, so far as the liability of capital gains tax under Section 45 is concerned, this court has already followed the decision of the apex court in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, wherein it was held that the assessee is not liable to tax.
8. Accordingly, on the basis of the decision of the apex court and the view taken by this court, we are of the view that the assessee is not liable to capital gains tax under Section 45 of the Income-tax Act.
9. Accordingly, question No. 1 is answered in favour of the Revenue and against the assessee and question No. 2 is answered in favour of the assessee and against the Revenue. No order as to costs.