Income Tax Appellate Tribunal - Jaipur
Mannalal Nirmal Kumar Soorana vs Income-Tax Officer on 13 May, 1996
Equivalent citations: [1982]1ITD412(JP)
ORDER
Shri E. M. Narayanan Unni, Vice President (NZ)
1. The above appeals have been assigned by the President of the Income-tax Appellate Tribunal, to this Special Bench, for hearing and disposal. The assessees involved are Mannalal Nirmal Kumar Soorana, a HUF, Shri Mannalal Soorana, karta of the said HUF (in respect of his individual assessments), Shri Nirmal Kumar Soorana and Shri Narendra Kumar Soorana, members of the above HUF, also in respect of individual assessments. We shall, first take up the appeals relating to the HUF.
2. The assessment order passed by the ITO in this case was for the assessment year 1977-78, had its genesis in a disclosure filed by the assessee under the Voluntary Disclosure of Income and Wealth Act, 1976 (hereinafter referred to as "the Voluntary Disclosure Act") on 31-12-1975. 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 30-12-1975, which was filed before the Commissioner on 31-12-1975. 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 number 5 of the particulars required to be given in Form 'A' (the statement of voluntary disclosure, under rule 3 of the Voluntary Disclosure of Income and Wealth Rules, 1975 as filed before the Commissioner) are as follows :
"5. Statement of voluntarily disclosed income :
Sl. Amount of Assessment If the income is represented Remarks
No. income year(s) to by cash (including bank
declared which the deposits) bullion, investment
income in shares, debts due from
relates other persons commodities
or any other assets
-----------------------------
Description Name Amount
of assets in
which
held
1. 14,89,679.00 1964-65 to Ornaments as per list
1967-68 enclosed.
2. 23,00,000.00 1964-65 to Cut & processed stones
1967-68 (2,800 Cts.) at Bombay
acquired in 1964 to 1967-68.
3. 45,000.00 1975-76 Household goods as per
list attached.
4. 20,000.00 1958-59 to Silver utensils.
1969-70
5. 20,000.00 Cash upto 1975-76."
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38,75,179.00
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4. The list of ornaments, filed along with the voluntary disclosure, showed that there were 121 items, acquired on different dates between the years 1964 and 1968. As far as the cut and processed stones, weighing 2,800 carats, are concerned, the details of the dates of acquisition were not shown but it is mentioned in column 2 that the acquisition thereof related to the assessment years 1964-65 to 1967-68. The other items, included in the voluntary disclosure, namely, household goods, silver utensils and cash, are not of any significance for the purposes of the present appeal and, therefore, it is not necessary to discuss these in any detail. It may be mentioned that the values of the assets, as shown in the declaration, were the cost of acquisition of the assets, at the time they were acquired.
5. On the day that the assessee prepared the statement of voluntary disclosure, namely, 30-12-1975, the assessee opened books of account for bringing on record the assets disclosed. In these accounts, all the assets, other than cash, were revalued by the assessee, according to the prevailing market rates, as on the date of the disclosure. Such values, as entered in the books are as follows :
Rs.
Ornaments 41,51,343
Cut and processed stones 46,00,000
Silver utensils 1,14,305
Household goods 5,200
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Total 88,70,848
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Necessary entries, showing such values, were passed in the Nakal Bahi. The capital account of the assessee was also credited with the revised value of Rs. 88,70,848, which includes cash of Rs. 20,000.
6. The precious stones valued at Rs. 46 lakhs were entered by the assessee in an account styled as "Precious Cut Stones Investment Account". Expenses totalling Rs. 7,604 were debited to this account on account of cost of transport, insurance, packing and forwarding, 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 account styled as "Jewellery ornaments investment 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. Nirmala Soorana, by way of partition, Vimal Kumar Soorana, getting items valued at 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 77 items valued at Rs. 32,58,030, were shown as having been transferred to an account styled as "Jewellery ornaments stock-in-trade account". From the account, 3 items being items at serial numbers 46, 53 and 57 of the list of ornaments, whose cost, as shown by the assessee is Rs. 9,70,950 and which were valued at Rs. 31,43,400, were shown to have been transferred to the "Jewellery ornaments manufacturing account". That account is also debited with wages amounting to Rs. 8,934. It is the contention of the assessee that those three items, being Necklaces, were dismantled and the precious stones embedded in them were removed and cut and polished and were sold to a sister concern, namely, Mannalal Nirmal Kumar Soorana & Co. for Rs. 34,60,000, in one single lot. The gross profit in this account was shown at Rs. 3,07,665.
8. On 4-1-1976, when the alleged partial partition of jewellery and precious stones took place, a partnership by name Mannalal Nirmal Kumar Soorana & Co. was also said to have been constituted. The deed, evidencing this partnership, was written on 23-6-1976 and showed the following persons as partners :
Name of partner Share Mannalal Soorana 10% Nirmal Kumar, s/o M. L. Soorana 30% Vimal Kumar, s/o M. L. Soorana 30% Narendra Kumar, s/o M. L. Soorana 30%
The precious cut stones, allotted to Nirmal Kumar, Vimal Kumar and Narendra Kumar, in the partial partition, were transferred by them to the above firm and their capital accounts were credited with the value of such stones, as stated earlier, namely, Rs. 15.31 lakhs, Rs. 15.32 lakhs and Rs. 15.37 lakhs, respectively. It will be noticed that the precious stones, taken out of the three items of jewellery, which were dismantled, were also transferred by the assessee-HUF to the same firm, for export, allegedly by way of a sale of Rs. 34,60,000.
9. From the above narration of facts, it will be seen that the ornaments and cut and processed stones, whose cost was declared by the assessee at Rs. 37,89,679 in the voluntary disclosure, were valued by the assessee at Rs. 87,51,343 as on 30-12-1975, for purposes of entering the same, in its books of account. The difference between these figures amounted to Rs. 49,61,664.
10. Before proceeding to discuss the controversy, in respect of the assessment of the HUF, we shall set out the relevant facts in respect of the individuals, Mannalal Soorana, Nirmal Kumar Soorana and Narendra Kumar Soorana as the entire conspectus of 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 Commissioner on 31-12-1975, declaring the following assets :
Cash Rs. 2,90,000 Processed precious stones (1670 carats) Rs. 10,20,000
On 8-12-1976, he gave the above 1670 carats of precious stones to the newly formed family firm of the name of 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 of Mannalal Nirmal Kumar Soorana & Co., contributing 930 carats and 939 carats, respectively, of the precious stones received by them on the partial partition of the HUF, on 4-1-1976, 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 :
Summary of facts
1. The HUF filed a voluntary disclosure dated 30-12-1975 before the Commissioner showing, among others :
Rs.
- Jewellery and ornaments 14,89,679
- Cut and processed stones (2,800 carats) 23,00,000
2. The above items were revalued and entered in the books of account,
opened by the assessee, on 30-12-1975 as follows :
Rs.
- Jewellery and ornaments 41,51,343
- Cut and processed stones 46,00,000
3. The cut and processed stones were partitioned on 4-1-1976, among three
members of the HUF, as follows :
Rs.
- Nirmal Kumar Soorana (930 carats) 15,31,000
- Vimal Kumar Soorana (931 carats) 15,32,000
- Narendra Kumar Soorana (939 carats) 15,39,000
Contributing the stones so received, as capital, they became partners in a newly constituted family firm of the name of Mannalal Nirmal Kumar Soorana & Co.
4. Out of the 121 items of jewellery and ornaments, valued at Rs. 41,51,343, 104 items valued at Rs. 8,93,313 were partitioned on 4-1-1976 among the following members :
Rs.
- Vimal Kumar Soorana 3,05,740 - Narendra Kumar Soorana 2,99,323 - Km. Nirmala Soorana 2,88,250
5. The balance of 17 items of jewellery and ornaments valued at Rs. 32,58,030, were claimed to have been converted into stock-in-trade and transferred to an account styled as "Jewellery ornaments stock-in-trade account".
6. Out of the 17 items transferred to the above stock-in-trade account, 3 items, being necklaces, were broken up and the precious stones embedded in them, valued at Rs. 31,43,400, were taken out and transferred to an account, styled as "Jewellery ornaments manufacturing account". The remaining 14 items and the precious stones obtained after breaking up the 3 items were valued at Rs. 1,14,630 and shown as closing stock in the jewellery ornaments stock-in-trade account. This figure of Rs. 1,14,630, included Rs. 98,630, being the value of the 14 items of jewellery and Rs. 16,000, being the value of the precious metals obtained after breaking up the 3 necklaces. It is pertinent to observe here that the 14 items were subsequently taken out of the stock-in-trade account and distributed to Vimal Kumar, Narendra Kumar, Nirmal Kumar and Km. Nirmala, by way of partial partition on 16-8-1978. The precious metal left over from the 3 items was sold on 28-10-1978.
7. 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 Mannalal Nirmal Kumar Soorana & Co. for Rs. 34,60,000 on 21-11-1976. This account showed a gross profit of Rs. 3,07,665.
8. Shri Mannalal Soorana, in his individual capacity, had filed a disclosure before the Commissioner on 31-12-1975 disclosing cash of Rs. 2,90,000 and processed precious stones (1670 carats) valued at Rs. 10,20,000. On 8-12-1976, he valued these precious stones at Rs. 20,40,000 and contributed it as his capital in the firm of 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 in accordance with the provisions of section 144B of the Income-tax Act, 1961 ("the Act"). The ITO was of the view that, when the assessee revalued the jewellery and ornaments and the cut and processed stones at Rs. 87,51,343, as against the declared value of Rs. 37,89,679, resulting in an appreciation in value of Rs. 49,61,664, this appreciation represented the income of the assessee, which was liable to tax. The assessee had stated, in his disclosure petition, that the jewellery and ornaments as well as the cut and processed stones were acquired during the accounting years relevant for the assessment years 1964-65 to 1967-68. It was the claim of the assessee that these assets were acquired as capital assets and were held, as such, till 31-12-1975, when the disclosure petition was filed. The assessee pointed out that a mere revaluation of the assets, for purposes of an entry in its books of account, could not give rise to any taxable income as tax can be levied only on real income, which accrues or arises or is received by the assessee. The assessee's case was sought to be built upon the decision of the Supreme Court in the case of CIT v. Bai Shirinbai K. Kooka [1962] 46 ITR 86, wherein their Lordships of the Supreme Court have held that when a capital asset, belonging to an assessee, is revalued by him at the market price and brought into his books as stock-in-trade of his business, the difference between the cost of the asset and such market price did not give rise to any taxable income in his hands. Relying on this principle, the assessee claimed that :
a. the revaluation of the assets, resulting in a difference of Rs. 49,61,664, did not give rise to any taxable income;
b. the transfer of 17 items of jewellery and ornaments, whose cost was Rs. 10,27,970 to the "jewellery ornaments stock-in-trade" account at a value of Rs. 31,43,400, also did not give rise to any income liable to tax; and c. as far as the assessee is concerned, the only income, which is liable for tax is the income arising from the sale of goods on 21-10-1976 for Rs. 34,60,000 giving rise to a gross profit of Rs. 3,07,665.
15. The ITO did not accept the assessee's contention that the ornaments and cut and processed stones, declared in the voluntary disclosure, were acquired by the assessee as capital assets. He was of the view that, having regard to the family history of the assessee, these could have 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 cut stones and rough stones. He had two sons, namely, Milap Chand (father of the present karta Mannalal Soorana) and Lal Chand. After the death of Hazarimal, the business was being carried on by the HUF consisting of Milap Chand and Lal Chand. After the death of Milap Chand in 1936, Lal Chand became the Karta of the HUF, the other coparcener being the present karta Mannalal Soorana. The business of the HUF continued up to 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 Hazari Mal Milap Chand. After the Samvat Year 2013 (1958-59), only one business, in the name of Hazari Mal Milap Chand 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 assessment year 1971-72. In the assessments completed on the HUF for the assessment years 1964-65 to 1967-68, pursuant to a settlement arrived at by the assessee with the Commissioner, the income from the sale of certain items of jewellery was included in its total income as income from business, even though it was the claim of the assessee that the items of jewellery sold represented ancestral jewellery obtained by Mannalal Soorana from his father. Further, income of Rs. 10,000, from the sale of one item of jewellery, which was purchased by the assessee from the wife of the karta, was shown by the assessee as income from business and assessed as such. The assessee-HUF was trading in precious rough stones and rough diamonds in the assessment years 1965-66 and 1966-67. It was also significant that the 2800 carats of cut and processed stones, disclosed by the assessee in the voluntary disclosure, were held at Bombay and not at Jaipur where the members of the family permanently resided. This would go to show that these stones were held as stock-in-trade and not as capital assets.
16. In the light of these facts, the ITO put it to the assessee that its contention that the assets which were declared in the voluntary disclosure were capital assets, could not be accepted.
17. The assessee contended before the ITO that he was not entitled to question the assessee with regard to the dates of acquisition of these assets, their value as shown in the disclosure petition and also the nature of the assets, after the disclosure has been accepted by the Commissioner. In this connection, the assessee referred to various pressnotes issued by the Government and also the clarifications given by the Chairman of the CBDT with regard to the scope of immunity that will be conferred on assessees, coming forward with voluntary disclosures under the Voluntary Disclosure Scheme. It was submitted that, once the disclosure is accepted by the Commissioner, no income-tax authority was entitled to question the dates of acquisition of the assets, as declared in the disclosure petition, or the cost of acquisition, as declared therein, or the nature of the assets, namely, whether they are capit al assets or trading assets. Thus, it was the claim of the assessee that its contention that the assets were capital assets could not be assailed or probed into by the ITO. Even on merits, the assessee contended that the ITO's statement regarding the trading history of the HUF was incorrect. It was pointed out that Hazarimal 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 v. Bai Shirinabai K. Kooka (supra).
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 but which were kept outside its books of account. In this view of the matter, he held that when the ornaments and the precious stones costing Rs. 37,89,679 were revalued at Rs. 87,51,343 and brought into the books of account, the difference of Rs. 49,61,664 represented the income of the assessee, which was liable to tax. He has not mentioned the head of income under which it is taxable. The ITO went on to observe that in view of the decision of the Supreme Court CIT v. Bai Shirinbai K. Kooka (supra), the cost of the jewellery and ornaments, to the business, would be Rs. 32,58,030. However, he worked out the proportionate cost of the jewellery transferred to the trading account at Rs. 11,68,970. According to him, the difference of Rs. 20,89,060, though not chargeable as income from business, would be chargeable as income under the head "Income from other sources".
19. The ITO further observed that there was another aspect of the matter which required consideration. The jewellery, which were transferred to the trading account, were sold for Rs. 34,60,000. The proportionate cost of the items sold was worked out by him at Rs. 11,27,700. Adding the manufacturing wages of Rs. 8,934, the total cost worked out to Rs. 11,36,634. The difference between this and the sale price of Rs. 34,60,000, namely, Rs. 23,23,366, represented, according to the ITO, capital gains chargeable to income-tax. In coming to this conclusion, he rejected the contention of the assessee that the capital assets were first converted into trading assets before sale.
20. Thus, in the draft assessment order submitted by him to the IAC, he had come to the following conclusions :
a. that the amount of Rs. 49,61,664 being the difference between the cost of acquisition of the declared assets and their market value, as entered in the books of account by revaluation, was liable to tax;
b. that, in any case, an amount of Rs. 20,89,060 was chargeable under the head "Income from other sources"; and c. that an amount of Rs. 23,23,366 was liable to tax as capital gains.
However, he proposed to add only the amount of Rs. 49,61,664 to the total income of the assessee, without specifying the head of income.
21. A copy of the draft assessment order was served on the assessee, who submitted its objections thereto. The objections were on the lines already dealt with above. After considering the objections, the IAC agreed with the proposal of the ITO to tax the amount of Rs. 49,61,664. Thus, 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 "Income from other sources".
22. Aggrieved by the above assessment, the assessee filed an appeal before the Commissioner (Appeals). As many as 11 grounds were raised in this appeal. The first seven grounds assailed the addition of an amount of 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 of Rs. 23,23,366 was liable to be assessed as capital gains and ground number 10 assailed the disallowance of an amount of Rs. 2,063 out of telephone expenses.
23. In the grounds 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 disclosed under the voluntary disclosure as stock-in-trade as against the assessee's claim that they were capital assets. According to the assessee, the ITO was bound to accept the assessee's contention that these were capital assets and that, in the light of the assurances and clarifications given by the Government and by the CBDT, he was not entitled to question any of the matters covered by the disclosure. The appeal also assailed the finding of the ITO that the assessee was dealer in precious cut stones and ornaments. According to the assessee, the ITO had not given a correct account of the assessee's family history. In this connection, the karta of the HUF, Mannalal Soorana, filed an affidavit dated 28-8-1980 before the Commissioner (Appeals), in which it was asserted that the declared assets were acquired and held by the assessee as capital assets. It was also stated therein that Hazarimal Soorana, grand-father of Mannalal Soorana, was dealing only in imitation and synthetic stones and that he was not dealing in ornaments, precious cut stones and rough stones as stated by the ITO. Even after the death of Hazarimal Soorana, no business in ornaments, precious cut stones and rough stones was carried on by the succeeding kartas of the HUF. The assessee also argued before the Commissioner (Appeals) that the ITO was wrong in holding that the assessments made on the HUF for the assessment years 1964-65, 1966-67 and 1967-68, pursuant to a settlement, in which certain amounts were added to the total income of the assessee as income from business of jewellery and ornaments, established that the assessee was carrying on such business in the earlier years. According to the assessee, there were sales of 5 items of ornaments received by the karta, Mannalal Soorana, from his late father Milap Chand and represented sale of capital assets. However, the department did not accept this explanation and taxed the profits arising from such sale. Though the assessee's appeals against such assessments were allowed by the AAC, the department had filed appeals before the Tribunal and had also initiated penalty proceedings for concealment of income. Faced with such litigation and threat of penalty, the assessee considered it expedient to buy peace through a settlement before the Commissioner, in which it was agreed that the profits arising from the sale of such jewellery may be treated as business income, without subjecting the assessee to pay any penalty. The assessee 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 Commissioner (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 Commissioner (Appeals) that the provisions of the Voluntary Disclosure Act did not prevent the ITO from enquiring into the nature of the assets, 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 of 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 Commissioner, that the assets disclosed were held as capital assets. Thus, this is not a matter which is concluded against the department by the Commissioner's acceptance of the disclosure.
25. After considering the provisions of the Voluntary Disclosure Act and the arguments advanced from both sides, the Commissioner (Appeals) came to the conclusion that the department was not precluded from enquiring into the nature of the assets disclosed by the assessee. He observed that the assurances given on behalf of the Government, in connection with the Voluntary Disclosure Scheme, were directed towards the objective of bringing out concealed income. The assurance, in effect, was that the nature and source of the income declared will not be enquired into and the actual cost of acquisition of the assets, as disclosed in the declaration, as also the dates of their acquired as capital assets or as trading assets is not a material aspect of the Voluntary Disclosure Scheme and, in any case, the assessee had not made any statement regarding the nature of these assets in the declaration filed before the Commissioner.
26. The Commissioner (Appeals) then addressed himself to the question whether in fact, the declared assets represented capital assets or stock-in-trade of the assessee. Relying, substantially, on the discussion contained in the assessment order, he came to the conclusion that the assessee-HUF had a history of dealing in jewellery, atleast for the past two or three decades. He referred to the fact that in the assessee's own case, the past assessments showed that there were trading accounts described as "Rough diamond account, precious rough stones account", etc., (1965-66 and 1966-67 assessments). In the assessment year 1975-76, there was a trading account styled as "Jawahar Ki Dagina". He also referred to the assessments for the assessment years 1964-65, 1966-67 and 1967-68 when certain amounts were taxed as income from jewellery business, as a result of the settlement before the Commissioner. He also took note of the fact that the precious stones (2800 carats) declared by the assessee in the voluntary disclosure, were not kept at the seat of the HUF, in Jaipur, as would have been the case if they were held as capital assets, but were held in Bombay, which is a trading centre and where no member of the HUF resides permanently. For these reasons, he came to the conclusion that the assets, declared by the assessee in the voluntary disclosure, represented the stock-in-trade of the family business and were not capital assets as claimed by the assessee.
27. The Commissioner (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 assessment year 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, at his option either at cost or at market rate, whichever is lower, 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 Commissioner (Appeals), 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 Commissioner (Appeals) has also agreed with this finding of the ITO, he held that the so-called conversion of capital assets into a trading asset, whereby certain items of jewellery were transferred to the trading account, was also of no consequence. He observed that profits arose to the assessee only at the point of sale of these assets and the profit liable to tax will be the difference between the sale price and the actual cost of the assets, to the assessee, and not the so-called revaluation cost. In this view of the matter, he held that the profit arising to the assessee was Rs. 20,89,060, being the difference between Rs. 32,58,030 (the value at which jewellery was transferred to the stock-in-trade account) and the proportionate cost of the acquisition of the items so transferred, namely, Rs. 11,68,970 (the figure mentioned in paragraph 27 of the assessment order). As the assessee had already shown a gross profit of Rs. 3,07,665 in its trading account, the Commissioner (Appeals) held that the amount to be added to the total income was only Rs. 17,81,395 (being the difference between Rs. 20,89,060 and Rs. 3,07,665.
29. With regard to the partition of some of the declared assets, namely, the precious stones and some of the items of jewellery, among the members of the family, the Commissioner (Appeals) observed relying on the observations of the Madras High Court in KM. PR. KM. Firm v. CIT [1966] 62 ITR 159, that when a member of a HUF is allotted a share out of the joint family property at a partition, he gets it as capital. Accordingly, he held that, in the hands of the divided members, the assets which they received on partition constituted capital assets and when they contributed such assets to the partnership of Mannalal Nirmal Kumar Soorana & Co., at a higher value, it would give rise to capital gains as on the date of transfer as discussed by him in the relevant appellate orders.
30. With regard to the claim that telephone expenses of Rs. 2,063 were wrongly disallowed, he found that the telephone was installed at a farm house, belonging to the assessee; that the assessee did not have any continuous business activity during the year which necessitated the use of the telephone installed at the farm house, for business purposes and, consequently, he held that the claim was rightly disallowed in computing the income from business.
31. Both the assessee, as well as the revenue, are aggrieved by the appellate order passed by the Commissioner (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 Commissioner (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 the appeal, permission was sought, on behalf of the department, to raise certain additional grounds, which will be dealt with, later.
32. Taking the assessee's appeal, first, the grounds can be, broadly summarised as follows :
1. That the Commissioner (Appeals) was wrong in coming 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.
2. That his 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.
3. The Commissioner (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 4-1-1976 at a value of Rs. 32,58,030 and substituting in its place an amount of Rs. 11,68,970 as the average cost of acquisition of those assets. He was, thereby, wrong in taking the business profit at Rs. 20,89,060 instead of Rs. 3,07,665, as shown by the books of account.
4. The finding given by the Commissioner (Appeals) in paragraph 51 of his order, regarding the capital gains arising to the members of the HUF on contributing the assets derived by them, on partial partition, to the firm of Mannalal Nirmal Kumar Soorana & Co. is irrelevant for the present appeal. He also erred in holding the character of the partitioned assets as business assets in the hands of the assessee-HUF and as capital assets in the hands of the recipient members.
5. The Commissioner (Appeals) was wrong in sustaining the disallowance of Rs. 2,000 out of telephone expenses.
33. Shri G. C. Sharma, the learned counsel for the assessee, took us through the facts relating to the voluntary disclosure made by the assessee before the Commissioner, already referred to in paragraphs 2 to 13, (supra). His main contention before us has been that when the assessee had taken the stand, that the assets declared by it in the voluntary disclosure were its capital assets, the ITO was precluded from doubting the correctness of the assessee's claim and in launching into an enquiry to find out whether the assets were capital assets or stock-in-trade of the assessee. In putting forward this contention, Shri Sharma relied on the various newspaper reports, regarding assurances given by the Chairman of the CBDT and also on the correspondence between the Jewellers' Association of Jaipur and the Commissioner, Rajasthan. The gist of these assurances was that those taking advantage of the Voluntary Disclosure Scheme and filing declarations thereunder, would not be asked about the source of the income or wealth declared, nor would any penal action be taken against them. It was further clarified that only the cost of acquisition of the assets disclosed, has to be declared for purposes of payment of tax, and not their market value as on the date of declaration. However, the declarants had to show the market value of the assets in their wealth-tax returns for the relevant years. It was also clarified that if the declarant claimed that any asset was acquired in a particular year, he would not be asked to adduce any evidence in support thereof. Referring to these assurances, the learned 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. v. State of UP [1979] 118 ITR 326, 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, he was precluded from making any such enquiry. In support of this contention, he relied on the decisions of the Supreme Court in Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 and K. P. Varghese v. ITO [1981] 131 ITR 597 and of the Gujarat High Court in Rajan Ramkrishna v. CWT [1981] 127 ITR 1. He also relied on the decision of the Punjab and Haryana High Court in Smt. Sudesh Khanna v. IAC [1978] 114 ITR 261 in support of his contention that the press-notes issued by the Government, under the Voluntary Disclosure Scheme, were binding on the income-tax authorities.
34. Relying on the above authorities, he submitted that the assessee could not be called upon, in the course of assessment proceedings, to adduce evidence to show that the assets were acquired as capital assets. He contended that even if there was any onus on the assessee to prove that the assets were capital assets, it should be taken that the onus has been discharged by the various statements given by the assessee as also by its conduct. He pointed out that the department based its conclusion, that the assets were trading assets, on two premises, namely, the so-called family history of the assessee and, secondly, acquiscence of the assessee, before the Commissioner, in the course of a settlement in respect of the assessment years 1964-65,1966-67 and 1967-68.
35. He went on to argue that the assets being capital assets, the assessee was entitled to convert them into trading assets, at any time. In so doing, he was also entitled to value them at the market price as on the date of conversion. Applying the ratio of the decision of the Supreme Court in CIT v. Bai Shirinbai K. Kooka (supra), the cost of the goods to the business has to be taken at the market value on the date of such conversion and the profit arising on the sale of such assets will be the difference between the sale value of such assets and the value at which the capital assets were converted into trading assets. In this connection, he also relied on the decision of the Supreme Court in CIT v. Groz-Beckert Saboo Ltd. [1979] 116 ITR 125. The gross profit of Rs. 3,07,665, disclosed by the assessee in its trading account, was arrived at on an application of the above principles stated by the Supreme Court and there was no justification for interfering with the same.
36. Referring to paragraph 51 of the order of the Commissioner (Appeals), he submitted that the finding recorded by him, with regard to the assessability of capital gains in the hands of the divided members, was not material or relevant for the disposal of the appeal filed by the HUF.
37. No arguments were advanced in respect of the ground relating to the disallowance of a part of the telephone expenses.
38. Replying to the arguments advanced by Shri Sharma, the learned departmental representative, 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 assessees, 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 Commissioner, he pointed out that the assessee had not mentioned in that petition that these assets were acquired as capital assets. In fact, there was nothing either in the petition itself or in the annexures filed along with the petition to indicate that they were capital assets. In these circumstances, he submitted that the press-notes and circulars referred to by the learned counsel did not confer on him any immunity from enquiry by the ITO, regarding the nature of the assets. Besides, it was pointed out that it was the assessee who was claiming that certain capital assets were converted into stock-in-trade, thereby, he was claiming certain tax benefits, based on the decision of the Supreme Court in CIT v. Bai Shirinbai K. Kooka (supra). The facts, relating to the contention that these assets were acquired as capital assets, were within the peculiar knowledge of the assessee and, in the circumstances, the burden of proving them was squarely on the assessee, in view of the provisions of section 101 of the Evidence Act. He also referred to the provisions of sections 102, 103 and 106 of the Evidence Act, in this connection and submitted that the ITO was right in calling upon the assessee to prove his contention regarding the nature of these assets. Shri Gupte pointed out that, beyond asserting repeatedly that the assets were acquired as capital assets, the assessee had not placed any evidence in support of such assertion.
39. He referred to the list of jewellery annexed to the voluntary disclosure and pointed out that there were 121 items, which were acquired by the assessee between 1964 and 1968. Of these, 22 items were acquired in 1964; 16 in 1965; 20 in 1966; 18 in 1967 and 45 in 1968. According to Shri Gupte, this indicated a continuous activity of acquisition of these assets over a period of 5 years. He then referred to the trading history of the HUF as set out in paragraph 18 of the assessment order and submitted that the HUF has been continuously dealing in jewellery and precious stones over a period of nearly 2 to 3 decades. He also referred to paragraphs 19 and 20 of the assessment order to show that between 1964-65 and 1967-68, the assessee had submitted itself, before the Commissioner, to assessments on profits arising from the sale of jewellery albeit on the basis of a settlement. Not even a single item of purchase and sale of jewellery was shown by the assessee as a business transaction in the assessment year 1975-76. Reference was also made to a letter-head used by the assessee, some time in 1970, wherein it had described itself as, "Jewellers, manufacturers, 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 it 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 v. CIT [1972] 77 ITR 253, 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 this connection. He referred to the arguments of Shri Sharma that the transactions in jewellery, in the earlier years, were really realisations of capital assets and were only isolated transactions but were agreed to be treated as business transactions, 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 three necklaces. According to the assessee, these were broken up and the stones embedded in them were removed and sold in one lot to a family concern, namely, Mannalal Nirmal Kumar Soorana & Co. According to Shri Sharma, there were no business transactions in jewellery in any of the earlier years. Admittedly, according to the assessee, there were no transactions in jewellery after this sale to the firm of Mannalal Nirmal Kumar Soorana & Co. Thus, Shri Gupte pointed out that, if the argument of the learned counsel is accepted, this transaction also will stand in isolation and no justification has been provided for the alleged conversion of these three items into stock-in-trade.
40. Shri B. Swarup, the learned senior departmental representative from Jaipur, sought to augment the submissions made by Shri C. V. Gupte. He pointed out that the total value of jewellery declared in the voluntary disclosure was Rs. 14,89,679 representing the value of 121 items. Out of these, three necklaces appearing at serial numbers 46, 53 and 57 of the list accounted for a value of Rs. 9,70,950. The entire jewellery was revalued by the assessee at Rs. 41,51,343 and entered in its books of account. From these items, 104 items, revalued at Rs. 8,93,313 were given to members of the family, on partial partition and 17 items, revalued at Rs. 32,58,030, were allegedly transferred to the stock-in-trade account. Out of these 14 items, as mentioned above, were transferred to the jewellery ornaments manufacturing account". Manufacturing wages of Rs. 8,934 were incurred in braking up these necklaces, for taking out the precious stones, and further cutting and polishing them. Such cut and polished stones were sold, in one lot, on 21-10-1976 to the sister concern. Shri Swarup pointed out that, even though the assessee has claimed that the necklaces were broken up and the stones were taken out and sold, the precious metal which remained after such dismantling of the jewellery did not appeal as closing stock in the jewellery ornaments manufacturing account. According to him, this could mean that the assessee's claim of having taken out the precious stones and sold only the stones to the sister concern may not be correct, and the necklaces as such may have been transferred to the sister concern. He also submitted that the claim of conversion of the capital asset into trading asset would, in the event, be only a device adopted by the assessee in order to bring itself within the ratio of the Supreme Court decision in CIT v. Bai Shirinbai K. Kooka (supra) in order to derive the tax benefit that will accrue as a result.
41. Replying to the arguments advanced on behalf of the revenue, the learned 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 Commissioner, 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 thereinto. According to him, it was implicit in the declaration form and in the entries made in the books of account that the assets were capital assets. The fact that, in the books of account, the assessee had shown some of the assets as having been converted into stock-in-trade, would go to show that all the items were capital assets and only some of them, by an act of conversion on the part of the assessee, acquired the character of trading assets. The nature of onus, in income-tax proceedings, it was submitted, was ambulatory. Since the assessee asserted its claim that the assets were capital assets and adduced evidence in support thereof in the form of entries in the books of account, affidavit filed before the Commissioner (Appeals), the deed of partial partition in respect of some of the assets, which was also recognised by the ITO under section 171, and the fact that the assessee took out registration under the Sales Tax Act as a dealer only in March 1976, would all go to show that during the years prior to the date of conversion of the assets into trading assets, the assessee was not trading in ornaments, jewellery or precious stones but was holding them only a capital assets. When the ITO wants to disbelieve this claim of the assessee, it is for him to substantiate his stand, with the necessary evidence. Shri Sharma assailed the narration of the trading history of the family, as set out in paragraph 18 of the assessment order, which has also been relied upon by the Commissioner (Appeals) in coming to the conclusion that the assessee was carrying on business in jewellery and precious stores for the last 2 or 3 decades. He pointed out that the assessee's grandfather and father were not dealing in jewellery or ornaments or precious stones. They were only dealing in imitation stones, up to 1955-56. He pointed out that from 1955-56 to 1963-64, there was no business at all carried on by the HUF and, in fact, the department also has no evidence to show that any business was carried on during this period. From the assessment year 1964-65 onwards, the assessee was deriving income only from money-lending. For the assessment years 1965-66 and 1966-67, there was some trading in precious rough stones and rough diamonds. Thereafter that business was not carried on. Mannalal, the present karta, had inherited 5 items of jewellery from his father, who had handed them over to Lal Chand (Mannalal's uncle), at the time of his death, to be handed over to Mannalal. Mannalal was a small boy at the time of his father's death. These were the jewellery, which were sold by Mannalal, during the assessment years 1964-65, 1966-67 and 1967-68. These were realisation of capital. But, as the ITO did not accept this claim of the assessee 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 Commissioner that the profits on the sales may be taxed as business income, subject to the penalty proceedings being dropped. According to Shri Sharma, this was not an evidence to show that the assessee was carrying on a 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 lead of the assessee, wherein it was shown as a trader and importer and exporter of precious and synthetic stones and as jewellers and manufacturers, 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 of jewellery 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 the form of three propositions, which are as given below :
"1. There is no material before the income-tax authorities to come to the conclusion that the jewellery ornaments worth Rs. 41,51,343 on 30-12-1975, whose corresponding worth on Diwali, 1966 was disclosed to be at Rs. 14,89,679, in the declaration filed on that date was not the personal property of the assessee but was the stock-in-trade of the assessee.
2. There is adequate material to support the finding that the assessee converted what was his erstwhile personal property into his stock-in-trade on 4-1-1976.
3. The income-tax authorities were not competent in any respect to go behind the terms of the 'Declaration' and disregard them in the assessment proceedings."
43. Before we give our findings on the issues raised in the assessee's appeal, we would also consider the grounds raised in the appeal filed by the revenue. The grounds, as raised in the appeal, are to the effect that the Commissioner (Appeals) was wrong in holding that the difference of Rs. 49,61,664, arising on the revaluation of the assets on 30-12-1975, did not give rise to any profit which is liable to tax. As stated earlier, the revenue sought permission to raise the following additional grounds at the time of the hearing of the appeal :
"1. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in not holding that a sum of Rs. 20,89,060 was income of the assessee assessable under the head 'other sources';
2. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in not holding that a sum of Rs. 23,23,366 was income of the assessee under the head 'Capital gains'; and
3. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in deducting a sum of Rs. 3,07,665 from the amount of Rs. 20,89,060 while computing the business profits in para 50 of his order."
44. The learned counsel for the assessee strongly opposed the admission of the additional grounds. According to him, though the ITO has made certain observations in paragraphs 28 and 29 of the assessment order, to the effect that an amount of Rs. 20,89,060 would be assessable as income from other sources and Rs. 23,23,366 would be assessable as capital gains, he has finally chosen to assess only an amount of Rs. 49,61,664 as income from other sources. It was this addition, which was challenged by the assessee, in appeal before the Commissioner (Appeals) and it was with reference to that appeal, that the Commissioner (Appeals) had held that the said amount was not liable to tax, as it did not represent any income of the assessee. In fact, the Commissioner (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 Commissioner (Appeals) has, itself, been challenged by the assessee in ground No. 15 of its grounds of appeal. Shri Sharma 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 three or four 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. Referring to the third ground, in the additional grounds of appeal, Shri Sharma pointed out that the Commissioner (Appeals) has not committed any mistake in deducting the sum of Rs. 3,07,665 from the amount of Rs. 20,89,060 and, even if he has committed any such error, the remedy for the department would be to move an application before him under section 154.
45. Replying to the objections raised by the learned counsel for the assessee, Shri C. V. Gupte, the learned departmental representative, pointed out that it will be permissible for an appellant to take up additional grounds as long as these related to the subject-matter of the appeal. In the present case, he submitted, the subject-matter of the appeal was the income arising to the assessee as a result of the sale of certain assets, which were disclosed by the HUF under the Voluntary Disclosure Scheme. The ITO in the order of assessment, had considered various aspects of the taxability of the income. According to him, the entire increase in value, consequent on revaluation, was liable to tax. However, he has also considered the other aspects of taxability based on the contentions of the assessee. He referred to the decision of the Delhi High Court in CIT v. Edward Keventer (Successors) P. Ltd. [1980] 123 ITR 200 and, in particular, cited the following passage appearing in the head-notes (at page 201) :
"In a case where there are interconnected grounds of appeal and they have impact on the same subject-matter, the scope of the appeal should be broadly considered in the correct perspective. While the appellant should not be made to suffer and be deprived of the benefit given to him by the lower authority where the other side has not appealed, equally the procedural rules should not be interpreted or applied so as to confer on an appellant a relief to which he cannot be entitled if the points decided in his favour on the same matter by the lower court are also considered as requested by the respondent."
With regard to ground No. 3 wherein it was submitted that the mistake made by the Commissioner (Appeals) should be corrected, he referred to the decision of the Supreme Court in Kapurchand Shrimal v. CIT [1981] 131 ITR 451. The following passage, appearing at page 460, was referred to in support of his contention that the Tribunal could rectify this mistake committed by the Commissioner (Appeals) :
"It is well 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 Commissioner (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 learned departmental representative, Shri C. V. Gupte, advanced his arguments, first, in support of the grounds as originally raised, namely, that the Commissioner (Appeals) was wrong in deleting the addition of Rs. 49,61,664. It will be remembered that the Commissioner (Appeals) deleted the addition on the ground that a profit liable to tax will not arise by a mere revaluation of the asset, even if it is a trading asset, in the middle of an accounting year. Shri Gupte sought to derive support from the decision of the Supreme Court in Tata Iron & Steel Co. Ltd. v. State of Bihar [1963] 48 ITR 123 and of the Madras High Court in ALA Firm v. CIT [1976] 102 ITR 622, for his submission that the Commissioner (Appeals) was wrong in holding that no profit could arise from mere book entries relating to revaluation. With regard to the additional grounds, he submitted that the case of CIT v. Bai Shirinbai K. Kooka (supra) only dealt with the computation of business income, after a capital asset has been converted into a business asset, by revaluing the asset at the market rate. According to him, that decision did not consider the nature of the income arising to the assessee as a result of the revaluation of the assets, for purpose of bringing them in as stock-in-trade. Thus, it was argued that the decision of the Supreme Court, in that case, did not stand in the way of the ITO considering the taxability of the income accruing or arising to the assessee as a result of such revaluation. It is the grievance of the department that the Commissioner (Appeals) has not dealt with this aspect of the matter in his appellate order. Referring to the second ground in the additional grounds, it was submitted that the alleged conversion of the so-called capital assets into a trading asset could also be regarded as a mere device if, in fact, the assets were capital assets. In this connection, he reiterated the argument advance by his colleague Shri B. Swarup that if the earlier transactions in jewellery were isolated transactions of the nature of realisation of capital, as was contended by Shri Sharma, the sale of these three items, which were ostensibly converted into stock-in-trade, would also be only capital realisation as there was no continuity of business operations in respect of jewellery, subsequent to this sale. In that event, it was contended, the profit arising on the sale would give rise to capital gains, for the ascertainment of which it is the actual cost of acquisition of these 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 v. CIT (supra) and submitted that the mistake should be corrected.
48. Replying to the submissions 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 a 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 that 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, also, has no substance.
49. With regard to the second ground in the additional grounds, Shri N. M. Ranka, learned counsel for the assessee, submitted that there can be no question of capital gains arising at the point of sale of these assets, which were transferred to the "jewellery ornaments manufacturing account". The amount of Rs. 23,23,366 has been arrived at by deducting from the sale price of Rs. 34,60,000, the proportionate cost of the transferred assets, namely, Rs. 11,36,634. He submitted that immediately after these assets were transferred to the stock-in-trade account, they ceased to be capital assets. Thus, when they were sold, they were sold as stock-in-trade of the business and not as capital assets. According to him, the question of capital gains could arise only if, at the time of sale, the asset sold is a capital asset. Thus, it was contended that the second ground in the additional grounds also was without any merit.
50. As far as the third ground in the additional grounds was concerned, it was contended that this is a matter which should be taken up by the department with the Commissioner (Appeals), for such rectification as may be necessary.
51. We have considered the facts of the case and the arguments advanced from both sides, on the various issues arising in this appeal. The issues requiring consideration are, briefly, as follows :
1. Whether the ITO is debarred from enquiring into the nature of the assets disclosed by the assessee, that is, whether they are capital assets or stock-in-trade ?
2. If not, what is the real nature of the assets ? Are they capital assets or stock-in-trade ? If capital assets, are they short-term capital assets or long-term capital assets ?
3. Did any income arise to the assessee by the revaluation of the assets on 30-12-1975, which was liable to be taxed ?
4. If not, at what point of time any income arise to the assessee in respect of such assets ?
5. Was there a real conversion of some of the capital assets into trading assets as claimed by the assessee ?
6. Did any income from business accrue to the assessee on the sale of the assets in question ?
7. If not, what was the nature and extent of such income ?
We shall now, proceed to consider each of these issues.
52. Whether the ITO is debarred from enquiring into the nature of the assets disclosed by the assessee, that is, whether they are capital assets of 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 Commissioner, Jaipur, would protect the assessee from any such enquiry. The extent of the immunity conferred on a declarant, under the above disclosure scheme, is contained in sections 8, 11, 12, and 16 of the Voluntary Disclosure Act. Section 8 provides that the amount of the voluntary 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 under any of the direct tax laws. Section 12 ensures that all particulars contained in a declaration made under this Act shall be treated as confidential and no court or any other authority shall be entitled to require any public servant or the declarant to produce before it any such declaration or part thereof or to give any evidence before it in respect thereof. It also lays down that no public servant shall disclose any particulars contained in sub-section (2) thereof. Section 13 provides certain exemptions from wealth-tax in respect of assets specified in the declaration. Section 16 provides immunity to a declarant from penalty, prosecution, etc., under certain Acts. Beyond these provisions, there is no further immunity provided to a declarant under the provisions of the Voluntary Disclosure Act, from any enquiry by an ITO in the course of the assessment proceedings.
53. However, to encourage persons with unaccounted income or wealth, to come forward and file declarations under the Act, the Government as well as the Chairman, CBDT, issued certain press-notes and circulars for the information and guidance of prospective declarants. Besides, the Jewellers' Association of Jaipur had also addressed the Commissioners, Jaipur, for certain clarifications with regard to the scheme. The assessee has field extracts of the press-notes, circulars and the correspondence between the Jewellers' Association and the Commissioner, Jaipur at pages 103 to 123 of its paper book. A perusal of these papers shows that the assurances given to prospective declarants are as follows :
1. There will be no harassment of those, who disclose black money. No questions will be asked about the source of such money and no stigma will attach to those who take advantage of the scheme.
2. It is only the cost of acquisition of the undisclosed assets, which has to be declared under the scheme and tax has to be paid only on that amount. The market value of the assets, as on the date of declaration has to be shown only in the relevant wealth-tax returns.
3. The declarant should declare the dates of acquisition of the various assets. However, where a declarant gives certain dates as the dates of acquisition of the disclosed assets, the department will not call upon the declarant to prove that those were the actual dates of acquisition of the assets.
4. The nature and source of the income declared under section 3(1) will not be questioned by the departmental authorities.
54. Declarations under section 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 choose to do so, he may give an indication in that column about the nature of the asset. However, under the provisions of the Act, or 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 Commissioner 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 questions will also be asked be asked about the truth of the assessee's declaration regarding the year or year in which such income was earned or such assets were acquired or the value at which the assets were acquired.
56. In the present case, the assessee had not indicated, anywhere in the declaration filed by it, or in the annexures filed along with the declaration, that the ornaments as per list enclosed therewith, or the 2800 carats of processed stones, were acquired and held by it as capital assets. Thus, when the Commissioner accepted the disclosure filed by the assessee, it could not be said that such acceptance also included acceptance of the assessee's claim that these assets were acquired and held as capital assets. In the absence of any provisions in the Voluntary Disclosure Act or of any assurance or commitment held out by the Government, not to enquire into the nature of the assets at any later stage, the principle of promissory estoppel, sought to be pressed into service by the learned counsel for the assessee, has no application to the facts of the present case. Thus, the ITO is not barred from examining the claim of the assessee that these assets were acquired and held by it as capital assets.
57. What is the real nature of the assets ? We shall now consider, in the light of the materials and arguments placed before us, the real nature of the assets in question, namely, the ornaments and the cut and processed stones. As stated earlier, it is the contention of the assessee that these are capital assets whereas according to the ITO, these are the assessee's stock-in-trade. In coming to the conclusion that these are the stock-in-trade of the assessee, the ITO as well as the Commissioner (Appeals), have relied heavily on the past history of the case, as stated by the ITO in paragraph 18 of his order. The learned counsel for the assessee has pointed out one serious flaw in the narration of that history, namely, that the assessee's grand-father and father had never dealt in jewellery or precious stones but had dealt only in imitation stones. As far as the assessee is concerned, the ITO has proceeded to hold that it has been carrying on business in jewellery, on the basis of the settlement before the Commissioner, for the assessment years 1964-65, 1966-67 and 1967-68 and also on the acquisition and sale of one item of jewellery recorded in a trading account in 1975-76. 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 assessment years 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 stones between 1967-68 and 1976-77. Similarly, as far jewellery is concerned, apart from the assessment made consequent on a settlement before the Commissioner, there was no 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 assessment years 1965-66 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 assessment years 1964-65 and 1967-68. Here again, neither the value, nor the years of acquisition, could be questioned by the ITO.
59. Thus, proceeding on the basis-which basis cannot be challenged-that the impugned assets were acquired between 1964 and 1966 (corresponding to the assessment years 1964-65 and 1967-68) and that they have been held by the assessee for a period of at least 9 years, before they were disclosed under the Voluntary Disclosure Scheme. It does not stand to reason that, if these assets were acquired as stock-in-trade they would have been held by the assessee, without effecting any sales, for a period of 9 years, blocking valuable capital. The department has assiduously tried to argue that no credence can be given to the assessee's statement that these were acquired between 1964 and 1966. As stated earlier, the de partment is precluded from setting up an argument of this type in view of the categorical assurances given by the Government and the Chairman, CBDT, to the public that, where a declarant declares that the assets disclosed by him are acquired in a particular year for a particular value, he will not be called upon to prove the date of acquisition or the real value of the asset and that no question will be asked about these matters. As held by the Punjab and Haryana High Court in Smt. Sudesh Khanna v. IAC (supra), the departmental authorities are clearly bound by those assurances.
60. Thus, proceedings on the above facts, relating to the dates of acquisition of the ornaments and the precious stones, and taking into account the fact that they were held by the assessee for more than 9 years, as at the time of the declaration of these assets under the Voluntary Disclosure Scheme, we have to hold that these were held by the assessee as investments of the nature of capital assets and not as stock-in-trade. No doubt, it would appear a little strange that the precious stones were kept at Bombay and not at Jaipur, which is the seat of the HUF. But this circumstance, by itself, does not detract from the unassailable fact that the assets were held, in fact, for more than 9 years after acquisition. Thus, our finding regarding the nature of the assets is that they are capital assets.
61. The further question is, whether they are short-term capital assets or long-term capital assets. Considering that the ITO is precluded from questioning the dates of acquisition of these assets, by virtue of the assurances 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 30-12-1975 ? 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. 87,51,343 and entered the same in its books of account on 30-12-1975, the difference of Rs. 49,61,664 represented the income of the assessee. On 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 resulted in an income of that magnitude, which was liable to income-tax. The answer to this question will be found in the observations of the Supreme Court in CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144. The relevant observations of the Court are as follows (at page 148) :
".... Income-tax is a levy on income. No doubt, the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account ..."
It is, obvious that by merely revaluing its assets and making entries, to that effect, in its books of account, the assessee has not earned any income.
63. According to the scheme of the Income-tax Act, the income which could be subjected to tax is the income which accrues or arises or is received by an assessee. Such income is the real income and not notional income-Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC). The real test of accrual of income will be, whether the assessee has a legally enforceable right to receive such income. In a case where a person merely revalues in his books of account, it is obvious that no income accrues to him. This is because there is no question of his enforcing any right against himself, of receiving the difference in valuation as income. Till such time as he transfers the assets to a third party for consideration, there will be no question of any legal right, inherent in him, to receive any income in respect of those assets. No doubt, there are instances where the Income-tax Act brings to charge notional income also. However, that is by enacting specific provisions in the Act, such as, section 23 of the Act, which enables the taxing of a notional income from self-occupied property, section 41(2) of the 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 notional incomes. The simple questions is, whether by revaluing his assets on 30-12-1975 and making entires 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 three 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 that it is necessary to cite any authorities for this proposition, which is self-evident. Some of the jewellery, which was revalued, was also distributed by way of partial partition to three member of the family. The total value of the jewellery, so distributed, was Rs. 8,93,313. This distribution, also, did not result in any income to the assessee. 17 items of jewellery, valued at Rs. 32,58,030 were transferred from the investment account to stock-in-trade account, by book entries. Here again, by merely making book entries of transfer, no income had accrued to the assessee. From the "jewellery and ornaments stock-in-trade account", the assessee took out three items, namely, three necklaces, extracted the precious stones embedded therein, and transferred them to the "jewellery ornaments manufacturing account", at a value of Rs. 31,43,400. The remaining 14 items of jewellery and there precious metal, obtained from breaking up the three necklaces appeared as closing stock in the "jewellery ornaments stock-in-trade account", at a value of Rs. 1,14,630. Incidentally, this answers the doubt raised by Shri B. Swarup, the learned departmental representative, whether the three items of jewellery were, at all, dismantled before sale as, according to him, the precious metal obtained from such breaking up did not appear as closing stock. In fact, it was not the three items of jewellery, which were transferred to the manufacturing account but only the stones poised out of those necklaces. The precious metal valued at Rs. 16,000 has been included in the closing stock of Rs. 1,14,630 in the "jewellery ornaments stock-in-trade account". Here again, by transferring these precious stones from the stock-in-trade account to the manufacturing account, no income accrued or arose to the assessee as these, also, are mere book entries as far as the assessee is concerned. After such transfer, the stones were further cut and polished, for which the assessee incurred manufacturing wages of Rs. 8,934. Thereafter, the entire quantity of stones was sold by the assessee, in one lot, to a family firm, namely, Mannalal Nirmal Kumar Soorana & Co. on 21-10-1976 for Rs. 34,60,000. This firm is a separate entity from the assessee-HUF. Accordingly, when the assessee sold the stones for Rs. 34,60,000 to that firm, there was a transfer of the assets, for consideration and it is at the point of this sale, that income arose to the assessee, which could be considered for the purpose of taxtation. Thus, prior to the sale on 21-10-1976, none 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 Shirinabai K. Kooka's case (supra), 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 ornaments 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 three necklaces, whose value, as declared in the disclosure was Rs. 9,70,950 and their value according to the revaluation was Rs. 31,59,400. 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 the contention of the assessee that the cost of these three items, for purposes of its trading account, will be Rs. 32,58,030 and the cost of the stones, for purposes of trading account, will be Rs. 31,43,400, by applying the ratio of the Supreme Court in Shirinabai K. Kooka's case (supra). It is on this basis that the assessee has declared the gross profit of Rs. 3,07,665 in respect of the sale of the stones.
66. It has been the vehement contention on behalf of the assessee, that it never had any trading in jewellery or precious stones in the past. We have accepted that contention of the assessee. It is also admitted by the assessee that, after the sale of stones to the extent of Rs. 34,60,000 on 21-10-1976, and the sale of the precious metal obtained from these three items on 28-10-1978 to one Mali Ram Puran Mal, the assessee did not have any trading in jewellery or precious stones in any of the succeeding assessment years also. In other words, the sale of these three items of jewellery stands in isolation and does not represent a continuous trading activity on the part of the assessee in jewellery or precious stones. Thus, even according to the contentions put forward on behalf of the assessees, this is an isolated transaction. It has been the contention ofthe assessee that the sales of jewellery during the accounting years relevant for the assessment years 1964-65, 1966-67 and 1967-68 were sales of capital assets, but the income from which was surrendered for taxation as a matter of expediency for the purposes of a settlement with the income-tax department. Shri Sharma had vehemently contended, on behalf of the assessee, that from this circumstance alone, a history of trading in jewellery, on the part of the assessee, should not be inferred. We have accepted that plea put forward on behalf of the assessee, also. In the circumstances, the net result would be that the assessee did not have any trading activity in jewellery or precious stones prior to 21-10-1976. Even subsequent to that date, the sale was only of; the precious stones is based solely and exclusively on the sale of the three items of jewellery, appearing at serial Nos. 46, 53 and 57 of the list of jewellery, enclosed with the voluntary disclosure. 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 partial partition on 16-8-1978.
67. The question, thus, boils down to this, namely, whether the sale of these three 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 behalf 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 years were by way of capital realisation, we do not see how the sale of the three items, now under consideration, is of any different character. We have accepted the assessee's plea that these items were acquired and held by it as capital assets till the date of the disclosure petition filed by it. One could understand the conversion of such capital assets into trading assets, as in the case of Shirinabai K. Kooka (supra), if the assessee is carrying on a business in jewellery and precious stones. As pointed out earlier, the assessee was not carrying on any such business in the past, nor did it carry on any such business after the sale of these three items. Neither the acquisition of these three assets nor the sale of these three assets to a family concern, namely, a firm consisting of the members of the assessee-HUF, has, any of the incidents of a trading activity. The revaluation of these items and their ostensible transfer to trading activity. The revaluation of these items and their ostensible transfer to a trading account are merely devices employed by the assessee to bring itself within the ratio of the Supreme Court's decision in Shirinabai K. Kooka's case (supra). The facts of that decision are clearly distinguishable from the facts in the assessee's case. That was a case, in which the assessee, who held a large number of shares of different companies, by way of investment, converted those shares into stock-in-trade and thereafter carried on a business in shares. It was common ground, in that case, that after the conversion of the shares, there was a continuous business activity of trading in shares, carried on by that assessee. In the case before us, the claim of trading is confined to only three items of jewellery out of 121 items held by the assessee. Neither before, nor after these sales, had the assessee carried on any trading activity. We are not overlooking in the fact that, for the assessment year 1975-76 the assessee did trade in one item of jewellery. However, that was a case where the assessee sold one item of jewellery, belonging to the wife of the karta. It was shown as a purchase of jewellery for the lady and its sale by the HUF. In the circumstances, we are unable to held that the assessee had really converted a capital asset into stock-in-trade, for the purposes of carrying on a business in jewellery or precious stones. The breaking up of the three pieces of jewellery into precious stones and the metal and the sale of the stones separately, is only one of the methods employed by the assessee for getting the maximum value for the assets held by it. Such a sale, as pointed out by the Madras High Court in CIT v. Kasturi Estates (P.) Ltd. [1966] 62 ITR 578 is one, which any prudent owner of an 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 the 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 or 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 assets and, they were held over a period of more than 9 years. The assessee's conduct in respect of these pieces 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 all these circumstances into account, the sale of these items was only of the nature of realisation sale of capital assets, even though the assessee has chosen to describe it as a trading activity, by conversion of capital assets into stock-in-trade.
68. Did any income from business accrued to the assessee on the sale of the assets ? In the light of the detailed discussion above, no income from business accrued or arose to the assessee from the sale of the precious stones to the family of Mannalal Nirmal Kumar Soorana & Co. at there was no trading activity in respect of those sales.
69. If not, what was the nature and extent of such income ? From the discussion above, it will be clear that on the sale of the capital assets, the income which accrued to the assessee was of the nature of capital gains. As the assets were held by the assessee over a period of more that 9 years, such gains will be long-term capital gains. For the purposes of working out the capital assets into stock-in-trade has to be ignored. Only the original cost of acquisition of these items has to be taken into account. In the present case, such cost of acquisition of the three items was Rs. 9,70,950. The precious metal which remained after the sale of the stones was valued by the assessee at Rs. 16,000. The exact cost of acquisition of such precious metal is not capable of being ascertained. For the purpose of this calculation, we would estimate the cost of the metal at Rs. 4,000, keeping in view the increase in prices of precious metal over the period of 9 years. Thus, this amount of Rs. 4,000 will be deducted from the cost of Rs. 9,70,950. Further, an amount of Rs. 8,934 spent by the assessee in breaking up the jewellery and cutting and polishing the stones has to be added to the cost of the stones. Thus, the total cost of the stones, sold by the assessee, would work out to Rs. 9,75,884. As against this, the assessee has realised Rs. 34,60,000 by selling the stones to the family firm. This results in long-term capital gains of Rs. 34,84,116 which will be liable to tax in the hands of the assessee-HUF.
70. In the result, both the appeals, namely, IT Appeal No. 1527 (Jp.) of 1980 as well as IT Appeal No. 62 (Jp.) of 1981 are treated as partly allowed, in the manner stated above.
71. IT Appeal No. 58 (Jp.) of 1981 CO No. 46 (Jp.) of 1981-Shri Mannalal Soorana - Individual - Assessment year 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 that Voluntary Disclosure Scheme, before the Commissioner, on 31-12-1975, declaring the following assets :
Rs.
Cash 2,90,000
Processed precious stones (Emeralds 1070 carats) 10,20,000
---------
Total 13,10,000
---------
The disclosure petition was dated 30-12-1975. 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 :
Rs.
Cash declared in the voluntary disclosure 2,90,000
Revised value of the Emeralds declared in the voluntary
disclosure 20,40,000
---------
Total 23,30,000
Less : Tax paid under the Voluntary Disclosure Scheme 7,72,250
---------
Balance credited to the capital account 15,57,750
---------
It was the assessee's claim, before the ITO that the emeralds were acquired and held by him as capital assets and that they were revalued after the disclosure and brought into his books of account as stock-in-trade. Accordingly, it was claimed that there was no income arising to him on such revaluation, basing his claim on the decision of the Supreme Court in Shirinabai K. Kooka's case (supra). The ITO, on the other hand, referred to the fact that the assessee has been carrying on a regular business in precious stones in the past and that the emeralds, whose value was declared in the voluntary disclosure, were acquired by him in the course of such business, but kept out of the books of account. Thus, according to the ITO, these were not capital assets acquired by the assessee but represented stock-in-trade kept out of the accounts. He further held that when such stock-in-trade was revalued, at Rs. 20,40,000, the difference between the value declared in the voluntary disclosure and the value at which it was entered in the books of account, namely, Rs. 10,20,000, represented the income of the assessee, which was liable to tax as a trading profit. The ITO assessed the said amount by including it in the total income of the assessee.
72. On appeal by the assessee, the Commissioner (Appeals) agreed with the finding of the ITO that the emeralds represented the stock-in-trade of the assessee. However, he pointed out that the accounting year of the assessee, relevant for the assessment year 1977-78, was the year ending in October 1976. Any valuation of closing stock could be made by an assessee only on the last day of the accounting year and not on any intermediate date between the beginning and the close of the accounting year. In the present case, he pointed out, the revaluation was done on 30-12-1975, which was an intermediate date. According to him such a revaluation on an intermediate date could not give rise to any income in the hands of the assessee, which is chargeable to tax. On this line of reasoning, he deleted the addition of Rs. 10,20,000. Aggrieved by the said order of the Commissioner (Appeals), the revenue has filed an appeal, in which the following grounds have been raised :
"In the facts and circumstances of the case, learned Commissioner (Appeals) has erred in :
(i) holding that there can be no revaluation of stock-in-trade in the case of any business 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 in account of revaluation of the assets declared under Voluntary Disclosure Scheme on 30-12-1975 gave rise to any income liable to tax, and
(iii) deleting the addition Rs. 10,20,000 made by the ITO on account of difference in the value of stock declared under Voluntary Disclosure Scheme 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 learned Commissioner (Appeals) erred in holding that the nature of processed precious stones (emeralds 1070 carats) representing voluntarily disclosed income declared by declaration dated 30-12-1975 was stock-in-trade and not capital asset.
2. That the learned Commissioner (Appeals) erred in not allowing benefit of section 23(3) (sic) of the Act.
74. However, at the time of hearing of the appeal, the learned counsel for the assessee submitted that the assessee wished to withdraw the cross objection, as the assessee accepted the finding of the Commissioner (Appeals) to the effect that the emeralds whose value was disclosed under the Voluntary Disclosure Scheme, represented his stock-in-trade.
75. Arguing on the grounds raised in the departmental appeal, the learned departmental representative, pointed out that the Commissioner (Appeals) was wrong in holding that there could not be a valid revaluation of stock-in-trade in the middle of the accounting year. In this connection, he referred to the commentary appearing at page 96 of Kanga and Palkhivala's 'The Law and Practice of Income-tax', 7th edition, volume I, and, in particular to the following note therein :
"When a moneylender takes lands in satisfaction of his debt, the market value of the land would have to be ascertained and brought into account, and to the extent to which the market value exceeds the principal sum advanced there would be realisation of interest."
He also referred to the decision of the Supreme Court in Raja Mohan Raja Bahadur v. CIT [1967] 66 ITR 378 and submitted that when the emeralds were revalued and brought into the books of account, the difference in valuation accrued to the assessee as income. By this line of reasoning, he submitted that the Commissioner (Appeals) was wrong in deleting the addition of Rs. 10,20,000 made by the ITO to the total income of the assessee.
76. Replying to the arguments put forward by the learned departmental representative, Shri G. C. Sharma, learned counsel for the assessee, pointed out that the question for consideration is whether any assessable income accrued or arose on the revaluation of the asset, whatever may be its character. If nothing comes in, by way of income, no taxable income would result. According to him, income has either to be received. or it has to accrue before there could be any question of taxability. In the present case, it was pointed out, no income was admittedly received. All that has been done was to introduce the asset in the books of account at the market value. This did not give arise to any right to receive income as any such right will accrue or arise only at the point at which such assets are sold. Admittedly, it was pointed out, no transaction had taken place during the year of account in those assets. He referred to the decision of the Supreme Court in Chainrup Sampatram v. CIT [1953] 24 ITR 481 and, in particular, to the observations at pages 485/486 relating to the valuation of closing stock, wherein the Supreme 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, 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 a 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 of arising to an assessee is that there should inherent 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 received, whereas if the cash system of accounting is followed, the income is liable to be taxed on the basis of accrual, even though not actually received, whereas if the cash system of accounting is followed, the income is liable to be taxed only when actually received. In either case, there should exist a legal right with the assessee to receive such income. When stock-in-trade, belonging to an assessee, has not been sold, but is held in stock, it is obvious that he does not acquire a legally enforceable right against anybody to receive any income in respect of such stocks, until such time as they are sold to a third person. The Commentary from Kanga and Palkhivala's book, referred to by the learned departmental representative is in respect of lands taken by a money-lender in satisfaction of debts due to him. In such a case, there is already a concluded transaction of money-lending. When land is taken in satisfaction of the principal and interest due, the market value of the lands has to be ascertained and brought into account in order to settle the accounts as between realisation of capital and interest. This example has no relevance for the point at issue before us. The reference to the decision of the Supreme Court in Raja Mohan Raja Bahadur v. CIT (supra). is clearly against the case put forward by the department. The following passage from the head-note would clarify this position :
"If accounts are maintained according to the mercantile system, whenever the right to receive money in the course of a trading transaction accrues or arises, even though income is not realised, income embedded in the receipt is deemed to accrue or arise. Where the accounts are maintained on cash basis, receipt of money or money's worth and not the accrual of the right to receive is the determining factor. Therefore, if commercial assets are received by a trader maintaining, accounts on cash basis in satisfaction of an obligation, income which is embedded in the value of the assets is deemed to be received; the receipt of income is not deferred till the asset is realised in terms of cash or money. It makes no difference whether the receipt of assets is in pursuance of an agreement or that the trader is compelled by law to accept the assets from the debtor. Once title of the trader to an asset received is complete whether by a consensual arrangement or by operation of law, he receives the income embedded in the value of the asset." (p. 378)
78. On the other hand, the Supreme Court's observations in Chainrup Sampatram v. CIT (supra), 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 Commissioner (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. IT Appeal Nos. 1526 (Jp.) of 1980 and 61 (Jp.) of 1981-Shri Mannalal Soorana (Individual) -Assessment year 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 assessment year 1977-78. After the emeralds were revalued at Rs. 20,40,000, the assessee handed over these stones to the firm of Hazarimal Milap Chand Soorana, in which he is a partner. This was by way of capital contribution and the firm credited his capital account with the sum of Rs. 20,40,000. The ITO held that, as the original cost of these stones, as declared by the assessee in the voluntary disclosure was only Rs. 10,20,000, capital gains to the extent of Rs. 10,20,000 arose to the assessee when he contributed the stones to the firm, by way of capital contribution and got a credit of Rs. 20,40,000 in his capital account. It was argued on behalf of the assessee, before the ITO, that contribution of capital, in the form of precious stones did not amount to a "transfer" within the meaning of section 2(47) of the Act and there could be no question of capital gains arising on the basis of such capital contribution. In this connection, the assessee referred to the decision of the Supreme Court in CIT v. Hind Construction Ltd. [1972] 83 ITR 211. The ITO did not accept the plea put forward on behalf of the assessee but proceeded to treat the amount of Rs. 10,20,000 as capital gains arising to the assessee. Besides, the ITO held that it represented short-term capital gains on the ground thar the assessee had not proved the actual date of acquisition of the emeralds and, consequently, it has to be taken that these were acquired at or near-about the time of the voluntary disclosure.
82. Against the said assessment, the assessee filed an appeal before the Commissioner (Appeals) and contended that, there was no question of a transfer of capital asset, when the assessee contributed capital to a firm. It was submitted that the firm is not a juristic person distinct from the partners and there was not transfer of ownership from one person to another when a partner contributes capital to the firm. Reference was also made to decisions of various High Courts, in this connection. A reference was also made to the decision of the Supreme Court in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 wherein the Court held that there was no extinguishment of rights in the partnership assets, amounting to a transfer of assets of the partnership takes place on dissolution. It was also argued that unless all the rights of the partners in the property contributed to the firm, are extinguished, there could not be said to be any transfer within the meaning of section 2(47), when distribution of assets of the partnership takes place on dissolution. It was also argued that unless all the rights of the partners in the property contributed to the firm, are extinguished, there could not be said to be any transfer within the meaning of section 2(47). In the case of contribution of capital, it was submitted, 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 dates of acquisition declared by the assessee, in the voluntary disclosure.
83. After considering the submission put forward on behalf of the assessee, as also the reasons given by the ITO in the assessment order, the Commissioner (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 capital gains.
84. The Commissioner (Appeals) then took up the question, whether these were long-term capital gains or short-term capital gains. He observed that as far as the date of acquisition of these emeralds is concerned, the ITO could not go behind the date of acquisition declared by the assessee, in the voluntary disclosure. Proceeding on the basis of the year of acquisition, as declared by the assessee, he held that the capital gains have to be treated as long-term capital gains.
85. Aggrieved by the order of the Commissioner (Appeals), both the assessee as well as the revenue have filed appeals before the Tribunal.
86. Taking up the revenue's appeal, first, the ground raised therein is as follows :
"In the facts and circumstances of the case, learned Commissioner (Appeals) has erred in holding that the assets declared under the Voluntary Disclosure Scheme have to be treated only as long-term capital asset because period of their retention exceeded the statutory period of 36 months and capital gains would have to be treated only as long-term capital gains and not short-term capital gains and thereby directing the ITO to recompute the tax on this basis."
87. In the appeal, filed by the assessee, it is contended that the Commissioner (Appeals) was wrong in holding that the expression "extinguishment of any right" would cover contribution of an asset, by way of capital, to a partnership.
88. Before proceeding with these two appeals, it will be useful to recapitulate that, for the assessment year 1977-78, the ITO as well as the Commissioners (Appeals) held that the emeralds declared by the assessee under the Voluntary Disclosure Scheme represent his stock-in-trade and not a capital asset, as was contended by the assessee, originally. A cross-objection, which was filed by the assessee against such a finding, was withdrawn by the assessee so that the finding of the Commissioner (Appeals) that these stones represented the stock-in-trade of the assessee, holds the field. In these circumstances, it is clear that the emeralds are no longer to be considered as a capital asset of the assessee. The question of capital gains would arise only on the transfer of a capital asset. Section 2(14) defines "capital asset" as follows :
"2(14) 'capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include -
(i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession;"
Thus, stock-in-trade of a business is clearly excluded from the definition of capital asset. Capital gains, according to section 45 of the Act, arises 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, section 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 section 2(47), which includes "the extinguishment of any rights". However, section 2(47) concerns itself only with capital assets as will be seen from the definition reproduced below :
"2(47) 'transfer', in relation to a 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,"
Again, as pointed out above, as the emeralds have been held to be the stock-in-trade of the assessee and not capital assets, the question of extinguishment of rights therein, so as to give rise to a transfer of a capital asset, resulting in capital gains, also, does not arise.
89. The learned departmental representative sought to argue that an asset is capable of changing its character from stock-in-trade to a capital asset and that, even if the emeralds were earlier held by the assessee as stock-in-trade, they got converted to capital assets before they were contributed by way of capital. In this connection, he sought to rely on the decision of the Madras High Court in O. M. S. PL. A. Alagappa Chettiar v. CIT [1966] 59 ITR 440. He also referred to the decisions of the same High Court in S. T. S. Swaminathan Chettiar v. CIT [1966] 62 ITR 125 and KM. PR. KM. Firm v. CIT (supra) and of the Allahabad High Court in Gangadhar Babu Lal v. CIT [1966] 62 ITR 719 as also to another decision of the Madras High Court in M. S. M. M. Firm v. CIT [1969] 72 ITR 14. In our view, none of these decisions has any relevance to the point at issue, before us. The case of OM. S. PL. A. Alagappa Chettiar v. CIT (supra) deals with property received by a partner on dissolution of a money-lending firm, which was claimed by him as stock-in-trade. It was held by the Court that there was no evidence to show that the assessee treated such property as stock-in-trade of the money-lending business. All the other decisions cited by the learned departmental representative provide authority for the proposition that when a member of a HUF gets his share in the joint family properties, such properties represent capital in his hands, notwithstanding its erstwhile character in the hands of the family. These decisions also have no relevance as far as the facts of the present case are concerned. The learned departmental representative also referred to the decision of the Gujarat High Court in the case of CIT v. Kartikey V. Sarabhai [1981] 131 ITR 42. That case deals with a contribution by a partner of certain capital assets, at their market price, towards his capital, in a partnership. The question was, whether there was an extinguishment of rights of the partner, in those assets, in favour of the firm and whether the difference between the original cost of such assets and the market value at which they were contributed, represented capital gains in his hands, liable 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 section 2(47) 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 v. Hind Construction Ltd. (supra). 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 remind 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, represented its income. The Supreme Court held that neither when the assessee wrote up the value of the partnership, was there a sale and the assessee did not derive any income by handing over the machinery to the partnership at a higher value. In this context, the Supreme Court observed, thus :
"If a person revalues his goods and shows a higher value for them in his books, he cannot be considered as having sold those goods and made profit therefrom. Nor can a person by handing over his goods to a partnership of which he is a partner as his share of the capital be considered as having sold the goods to the partnership."
91. In the light of the above discussion, we have to hold that the amount of Rs. 10,20,000 was not assessable as income of the assessee or as capital gains.
92. Another contention which has been raised in the appeal filed by the assessee is that the Commissioner (Appeals) was wrong in sustaining the disallowance of Rs. 4,950 out of legal fee of Rs. 9,950 paid to N. S. Rathore & Co., in connection with income-tax and wealth-tax assessments, settlement proceedings and other allied services. The ITO applying the provisions of section 80VV of the Act allowed an amount of Rs. 5,000 and disallowed the balance of Rs. 4,950. It is the contention of the assessee that even the balance of Rs. 4,950 should have been allowed under section 37 of the Act. Section 80VV is a special provision relating to the deduction of expenditure incurred by the assessee in respect of proceedings before any income-tax authority or the Appellate Tribunal or any court, relating to the determination of any liability under the Act. That being the case, the deduction of any amount, claimed by the assessee as expenditure by way of legal expenses in connection with the income-tax proceedings, has to be governed by these special provisions and any amount that is not covered by those provisions has to be disallowed. Section 37 could not be be called to aid in allowing the amount which becomes ineligible for deduction under section 80VV.
93. In the result, the assessee's appeal, namely, IT Appeal No. 1526 (Jp.) of 1980 is partly allowed, to the extent indicated above and department's appeal, namely, IT Appeal No. 61 (Jp.) of 1981 is dismissed.
94. IT Appeal nos. 1581 (jp.) of 1980, 59 of 1981, 1580 (jp.) of 1980 and 60 (jp.) of 1981 - shri Narendra Kumar Soorana, Jaipur : assessment year 1977-78-shri Nirmal Kumar Soorana, Jaipur : assessment year 1977-78. The contentions raised in it Appeal Nos. 1580 (Jp.) of 1980 and 1581 (Jp.) of 1980 by Narendra Kumar Soorana and Nirmal Kumar Soorana are identical and are, therefore, dealt with together. In the narration of fact, in the appeal relating to the HUF of manual 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 precious stones failing 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 failing to the share of Vimal Kumar Soorana was Rs. 15,32,000. This division was effected on 4-1-1976. 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 Kumar Soorana. These three persons have contributed the stones, so received by them, to the above partnership, by way of capital contribution and their capital accounts have been credited with the valued of the stones, as mentioned above. These facts have already been stated in paragraph 13 of this order, (supra).
95. The ITO was of the view that when they contributed the stones to the partnership by way of capital and got the corresponding credit entries in their capital accounts, income by way of capital gains accrued or arose to them with reference to the original cost of the stones received by them. The appeal of Vimal Kumar Soorana is to before us. Accordingly, the discussion that follows is confined mainly, to the facts of the case of Nirmal Kumar Soorana and Narendra Kumar Soorana.
96. It was contended, on behalf of the assessee, that when they contributed the stones by way of capital to the partnership, there was no transfer of any capital asset by them to the partnership and, consequently, the question of any capital gains resulting from such contribution did not arise. In advancing this argument, they relied on the judgment of the Supreme Court in CIT v. Hind Construction Ltd. (supra). It was also submitted that the judgment of the Kerala High Court in the case of A. Abdul Rahim v. CIT [1977] 110 ITR 595 (FB) did not lay down the correct law.
97. In the case of Nirmal Kumar Soorana, the ITO had further proposed to treat the capital gains as short-term capital gains, with reference to the date on which he came into possession of the asset, as a result of the partial partition. The assessee objected to this, on the ground that in respect of assets received on partition from the HUF, the question whether the asset is a short-term capital asset or a long-term capital asset has to be determined with reference to the date of acquisition of the asset by the HUF. In the present case, as these assets were shown to have been acquired by the HUF between 1964-65 and 1967-68 as per the voluntary disclosure, the ITO was not entitled to go behind the correctness of those dates and to hold that the assessee became the owner of the assets only on 4-1-1976.
98. The ITO prepared a draft assessment order under section 144B, in which he rejected the contention of the assessee, and submitted the same to the ITO along with the assessee's objections. The IAC agreed with the ITO's view that short-term capital gains to the extent of Rs. 7,65,000 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 the 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 order under section 144B of the act and submitted it to the IAC 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 assessments, Nirmal Kumar Soorana as well as Narendra Kumar Soorana filed appeal before the commissioner (Appeals). It was contended before the Commissioner (Appeals), by both the assessee that the authorities below were wrong in holding that when they contributed the precious stones, received by them on partition, to the partnership, by way of capital, there was "extinguishment of rights", which would bring the transaction within the meaning of a "transfer" as contemplated in section 2(47). It was also submitted that the ITO was wrong in relying on the decision of the Kerala High Court in A Abdul Rahim v. CIT (supra) in coming to the conclusion that such a transaction involved the extinguishment of the rights of the partner, in the contributed property, in favour of the partnership. It was pleaded that as there was no transfer of a capital assets within the meaning of section 2(47), there was no question of any capital gains arising to them as a result of such capital contribution. It was pleaded that as there was no transfer of a capital asset within the meaning of section 2(47), there was no question of any capital gains arising to them as a result of such capital contribution. It was further contended, as an alternative ground, that the ITO and the IAC were wrong in treating the precious stones received by which they came into possession of those assets, by partition. It was pointed out by the assessee that the question should have been decided with reference to the dates on which the HUF itself acquired these assets and, for its purpose, the dates declared in the voluntary disclosure should have been accepted and acted upon by the ITO.
101. The Commissioner (Appeals) agreed with the submission made on behalf of the assessee that the question, whether the asset is a long-term capital asset or a short-term capital asset, should be decided with reference to the date or dates on which the asset was acquired by the HUF. In this context, he observed that section 2(42A) of the Act was only an extension of section 49(1) of the act. The Commissioner (Appeals), however, did not accept the contention of the assessees that there was no extinguishment of their rights when they contributed the assets, received on part ITO in, to the partnership, as capital. He referred to the decision of the Kerala High Court in A. Abdul Rahim v. CIT (supra) and of the Karnataka High Court in Addl. CIT v. M. A. J. Vasanaik [1979] 116 ITR 110, in which, both the high courts have taken the view that there was extinguishment of rights of a partner when he contributed a capital asset belonging to him, to a partnership, by way of capital contribution, so as to bring such a transaction within the meaning of "transfer" as defined in section 2(47). Referring to certain observations of the Karnataka High Court, the Commissioner (Appeals) held that even without reference to section 2(47), such a transaction would amount to a transfer, as understood in the ordinary sense. Accordingly, he came to the conclusion that the capital gains arose to both the assessee, when they contributed the assets received by them as 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 Commissioner (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 section 144B. It was the IAC who, suo motu, gave direction to the ITO, purportedly, acting under the provisions of section 144A of the Act, to treat the capital gains as short-term capital gains. It was the contention of the assessee, before the Commissioner (Appeals) that, in proceedings under section 144B, the IAC is not competent to give directions under section 144A. Any directions, which he has to give to the ITO under section 144A should be at a stage prior to the framing of the draft assessment order. Once the draft assessment order was framed by the ITO and sent to the assessee, calling for his objections, the IAC is entitled to consider only the objections raised by the assessee, against the proposed assessment and to give his directions with reference to those objections. It is not for the IAC to raise objections against the proposed assessment and to give directions to the ITO pursuant to his own objections. That is not within the scheme of section 144B.
103. The Commissioner (Appeals) agreed with the above contention put forward on behalf of the assessee and held that, after a draft assessment order has been prepared and submitted by the ITO under section 144B, along with the objection of the assessee, the IAC was not competent to issue instructions under section 144A, on matters which are not covered by the draft assessment order. Consequently, he held that the instructions issued by the IAC, to treat the capital gains as short-term capital gains, have to be ignored.
104. Aggrieved by the orders of the Commissioner (Appeals), holding that long-term capital gains arose for assessment, both the assesses have filed appeals before the Tribunal. The revenue has also filed appeals contending that the Commissioner (Appeals) was wrong in holding that the ITO cannot question the nature and source of the income disclosed under the voluntary disclosure scheme as well as the year of acquisition of the declared assets. The revenue also contends that the Commissioner (Appeals) was wrong in holding that section 2(42A) is only an extension of the provisions of section 49(1), with reference to the period of acquisition and retention of the capital assets. In other words, it is the contention of the revenue that the Commissioner (Appeals) was wrong in treating the assets in question as long-term capital assets. In the department's appeal filed in the case of Narendra Kumar Soorana, the revenue also contests the finding of the Commissioner (Appeals) that the IAC was not competent to issue instructions under section 144A, after a draft order has been submitted under section 144B, and, consequently, his instructions in that regard, are to be ignored.
105. Taking the appeals filed by the assessee, first, their contentions are three-fold. Firstly, it is their contention that the Commissioner (Appeals) was wrong in holding that the words "extinguishment of any rights" in the definition of "transfer" in section 2(47) would cover contributions 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 framed the stock-in-trade of the HUF, the Commissioner (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 4-1-1976. They could have been brought to charge only for the financial year ending 31-3-1976, i.e., for the assessment year 1976-77, and not for the assessment 1977-78, as has been done by the ITO.
106. As stated earlier, the Commissioner (Appeals) has relied on the decisions of the Kerala High Court in A. Abdul Rahim v. CIT (supra) and of the Karnataka High Court in Addl. CIT v. M. A. J. Vasanaik (supra) in coming to the finding that there was an extinguishment of the rights of the partners, giving rise to a transfer of the assets to the firm, which resulted in capital gains. Those two decision were given in the context of assets, which were used by individual sand on which they had obtained the benefit of development rebate, but which were subsequently handed over by them by way of capital contribution to firms in which they became partners. The question involved was whether this resulted in a transfer of the assets by those individual to the partnership so as to warrant the withdrawal of development rebate under section 155(5) of the Act. Both the Kerala High Court as well as the Karnataka High Court held that there was a transfer, as defined section 2(47) of the Act, inasmuch as, there was an extinguishment of the rights of the individuals in those assets with a corresponding creation of rights in the partnership.
107. By the time these appeals came to be heard by us, the Gujarat High Court has given its decision in CIT v. Kartikey v. Sarabhai and CIT v. Sunil Sidharthbhai (supra). In those decisions also, the Gujarat High Court has dealt with a situation which is similar to that obtaining in the two cases before us. In those cases, the two individuals, who owned certain shares, held by them as capital assets contributed those shares to a partnership by ways of capital contribution, at the prevailing market price. Their capital accounts in the firm were credited with the market value of the shares, so contributed by them. The question before the Gujarat High Court was whether involved any transfer of assets by them to the firm, within the meaning of section 2(47) and whether it gave rise to any capital gains, chargeable to tax. After referring to the decisions of the Kerala High Court and of the Karnataka High Court cited (supra), as also section 5 of the transfer of Property Act, the Gujarat High Court held that there was an extinguishment of the rights of the individuals in those shares, in favour of the firm, which would bring the transaction within the definition of transfer in section 2(47). In doing so, the Gujarat High Court distinguished the decision of the supreme court in CIT v. Hind Construction Ltd. (supra) on the ground that the question considered by the Supreme Court, in that case, was only whether there was a sale of the goods by the partner to the firm. The question, 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 learned 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 at a result of such transfer. According to him, no real profit or gin could be said to arise from the transfer as a result of such a mere credit entry in the capital account of the partner. In this connection he referred to the observations of the learned authors of Kanga and Palkhivala's law and practice of income-tax, 7th edition, volume I, page 549, along with the further observations contained at page 109 of the supplement to the edition, wherein the learned authors have also expressed similar view. He argued that the firm is not a legal entity and has no existence apart from its partners. There could be a transfer only from one person to another or one legal entity to another. He referred to the decision of the Madras High Court in D. Kannaih Pillai v. CIT [1976] 104 ITR 520 and CIT v. Abdul Khader Motor & Lorry service [1978] 112 ITR 360 in support of the above contention. He also argued that the High Court was not correct in relying on section 5 of the transfer or property act while distinguishing the decision of the supreme court in Malbar fisheries Co. v. CIT (supra) is the income-tax act is self-contained code, in itself.
109. He then argued that at the Commissioner (Appeals) had come to a finding that the precious stones were the stock-in-trade of the HUF, he was wrong in holding the same stones, in the hands of the members of the family as capital assets. According to him, the nature of the asset or its character did not change with partition.
110. With regard to the third contention, namely, the previous year relevant for the assessment of capital gains, if any, arising from the alleged transfer of the assets to the firm, he referred to the provisions of section 3(1) of the Act. It was his case that unless an assessee has maintained books of account in respect of any source of income and has made up those accounts to any particular date, and has opted to have the twelve months ending on such date as his previous year, in respect of that source of income, the normal previous year for that source of income will be the financial year immediately preceding the assessment year. In this connection, he referred to the decision of the Supreme Court in CIT v. Binodiram Balchand [1970] 77 ITR 128 and of the Delhi High Court in K. S. Malik v. CIT [1980] 124 ITR 522. He also pointed out that wherever there was a contrary intention, it was specifically provided in the Act itself, that for a particular source of income a particular previous year will be adopted. As an example, he referred to section 68, which provides that for cash credits appearing in the books of accounts of the assessee, which are treated as the income of the assessee or 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 form 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 their financial year immediately preceding the assessment year. Shri Sharma pointed out that, according to the revenue, the capital gains arose on 4-1-1976, when these two persons contributed the assets to the partnership. If that is so, he pointed out, the previous year relevant for the assessment of such capital gains would be the financial year ended 31-3-1976 and the appropriate assessment year will be 1976-77 and not 1977-78, as has been taken by the ITO.
111. Replying to the arguments advanced by the learned counsel for the assessees, Shri C. V. Gupte, the learned departmental representative relied on the decisions of the Kerala and the Karnataka High Courts in A. Abdul Rahim v. CIT (supra) and Addl. CIT v. M. A. J. Vasanaik (supra) and also on the decision of the Gujarat High Court in CIT v. Kartikey V. Sarabhai (supra). He took us extensively through these judgments and argued that, for the purpose of the income-tax Act, the partnership has a separate personality from the partners constituting it and that it is possible for a partner to transfer property belonging to him to the partnership, by way of capital contribution. He also relied on the line of reasoning fallowed by their Lordships of the Gujarat High Court in VIT v. Kartikey v. Sarabhai (supra) in supporting the department's case that capital gains arose to these persons, when they contributed their assets to the partnership by way of capital.
112. With regard to the contention put forward on behalf of the assessee, that the Commissioner (Appeals) was inconsistent in treating the assets received by these two persons, on partition, as capital assets, whereas he had treated the same assets in the hands of the HUF as stock-in-trade, Shri Gupte pointed out that there was no inconsistency in the stand taken by him. In this connection, he relied on the decisions of the Madras High Court in O. M. S. PL. A. Alagappa Chettiar v. CIT (supra), S. T. S. Swamina than Chettiae v. CIT (supra), KM. PR KM. Firm v. CIT (supra) and M. S. M. M. firm v. CIT (supra), KM. PR KM. Firm v. CIT (supra), and also on the decision of the Allahabad High Court in Gangadhar Babulal v. CIT (supra). In all these decisions, the High Courts have held that when a member of a joint hindu family is allotted a share out of a joint property at a partition, he gets it as a capital. it is, of course, open to him to bring it into his stock-in-trade. Whether he does it or not will depend 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 Commissioner (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 entires relating to the contribution of capital appeared in the books of account of the assessee. Those 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 assessee should be presumed to have opted for the Diwali year as their previous year of capital gains also. Referring to the case of Shri Narendra Kumar Soorana, he pointed out that, apart form the capital gains arising on the contribution of capital to the firm, he had also earned capital gains by sale of ornaments, which are entered in his books of accounts maintained for the Diwali year ending in October 1976. From this circumstances also, he contended that his previous year for capital gains was correctly taken as the Diwali year instead of the financial year.
114. We have given careful consideration to the arguments advanced from both sides, on the various points at issue. The first question to which we will address ourselves is with regard to the nature of the assets, which have been contributed by these persons to the partnership, namely, whether those precious stones constituted capital asset or stock-in-trade in their hands. In this connection, we would refer to paragraphs 57 to 60 (supra), wherein we have held, that the precious stones constituted capital assets in the hands of HUF. That being the case, the stones coming to the share of the members, i.e., NRK and NMK, on partial partition, also part of the nature of capital assets. It is now well settled that when a member of HUF receives any asset from the HUF, in the course of a partition, whether total or partial, such assets, coming to his share, will represent capital asset in his hands. A multitude of authorities for this preposition has been cited by the learned departmental representative and has been referred to above. In the case of O. M. S. PL. A. Alagappa Chettiar v. CIT (supra), there was a firm carrying on money-lending business and also in the purchase and sale of real properties in malaya. At the time of the dissolution of the firm, one-sixth share, both in money-lending as well as in the real property, was allotted to each of the partners. The erstwhile partner sold certain items of real properties. The department sought to tax the surplus arising from such sales as revenue receipts assessable under the income-tax Act. The High Court held that when the real properties were allotted to the assessees at the time of dissolution of the firm, they held the properties as ordinary private owners and there was nothing to show that the by treated the real properties allotted to them as stock-in-trade. In this connection, their lordships referred to an earlier decision in S. V. R. Y. K. N. Kannappa Chettiar v. CIT [1962] 46 ITR 576 (Mad.), in which the High Court had held that the properties obtained at the partition. by an assessen was a capital asset. It was also observed that the stock-in-trad of a business carried on by the HUF dud bit aytinatucakkt vecane tge sticj-in-trade of the coparcener, if he recived 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-on-trade. To the same effect are the other decisions of the Madras High Court in S. T. S. Swaminathan Chettiar v. CIT (supra), K. M. PR. K. M. Firm v. CIT (supra) and M. S. M. M. Firm v. CIT (supra) and of the Allahabad High Court in Gangadhar Babulal v. CIT (supra). In the two cases before us, there is absolutely no material to hold that the assessee treated the precious stones received by them on partition as their stock-in-trade. On the other hand, they contributed the stones toward their capital in the partnership. On these facts, it is clear that the stones constituted a capital asset in their hands. Thus the Commissioner (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 asset or short-term capital assets. The expression "short-term capital asset" is defined in section 2(42A), in the following terms :-
"2(42A) 'short-term capital asset' means a capital asset held by an assessee for not more that sixty months immediately preceding the date of its transfer.
Explanation : (i) In determining the period for which any capital asset is held by the assessee -
(a) in the case of a share held in a company in liquidation, there shall be excluded the period subsequent to the date on which the company goes into liquidation;
(b) in the case of capital asset which becomes the property of the assessee in the circumstances mentioned in sub-section (1) of section 49, there shall be included the period for which the asset was held by the previous owner referred to the said section;
(c) ** ** **
116. Sub-clause (b) of Explanation (i) specifically provides that in the case of a capital asset, which becomes the property of the assessee in the circumstances mention in sub-section (1) of section 49, the period during which the asset was held by the previous owner should also be taken into account in determining the period for which the capital asset is held by the assessee. The provisions of section 49(1), in so far as they are relevant for the present discussion, are reproduced belows :
"49(1) Where the capital asset become the property of the assessee -
(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;
(ii) to (iv) ** ** ** the cost of acquisition of the assets shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be."
It will be seen that the total or partial partition of a Hindu undivided family is one of the modes mentioned in section 49(1), whereby an assessee becomes the owner of a capital assets. In such case, sub-clause (b) of explanation (i), to section 2(42A) clearly postulates that the period of which the partitioned asset was held by the HUF should also be taken into account in calculation the period for which the divided coparcener is deemed to have held the capital asset. In the case before us, the HUF had acquired the precious stones during the period 1964-65 to 1967-68, as per the voluntary disclosure filed by it, before the Commissioner. 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 the other word, 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 valued 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 of the assessee has vehemently argued that the decision of the Gujarat High Court is not correct and he has also taken support for this submission from the commentary on this subject by the learned authors of Kanga and Palkhivala's law and practice of income-tax, referred to supra. However, we cannot overlook the fact that there high courts have taken the view that when a partner contributes a capital asset belonging to him, to the partnership, by way of capital contribution, there is an extinguishment of his rights involved in such transaction, which brings it within the definition of term "transfer" contained in section 2(47). In fact, the only decision of a High Court in which the question whether capital gains would arise from such a transaction and whether such capital gains would be liable to tax, is that of the Gujarat High Court in CIT v. Kartikey v. Sarabhai (supra). The decision in that case is clearly against the plea put forward on behalf of the assessees. There is no contrary decision of any other High Court, on this point. In such circumstances, the Bombay High Court (Nagpur Bench) has ruled in CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589 that such a decision is binding on the It Appellate Tribunal, wherever the bench deciding the issue may be situated. We would, respectfully, follow the above ruling of the Bombay High Court and, in the light of its judgment, hold ourselves bound by the decision of the Gujarat high court in CIT v.
Kartikeya V. Sarabhai (supra). Doing so, we hold the when these two assesses before us, namely, Narendra Kumar Soorana and Nirmal Kumar Soorana, contributed the precious stones to the partnership by way of capital contribution, and got the market value of the stones credited to their capital contribution, and got the market value of the stones c redit to their capital account, capital gains, as computed by the ITO accrued by the ITO accrued or arose to them by way of long term capital gains and they are liable to be taxed on such capital gains.
118. The further question to be considered is whether such capital gains are assessable of the assessment year 1977-78, treating the previous year of the assessee in respect of such income, as the Diwali year 1976 or whether they should be assessed for the assessment year 1976-77 treating the previous year, in respect of such capital gains, as the financial year ended 31-3-1976. The provisions of section 3(1) of the income-tax Act, relating to the definition of "previous year ", in so far as they are relevant for our consideration, are reproduced below :
"3 (1) For the purposes of this act, 'previous year' means -
(a) the financial year immediately preceding the assessment year; or
(b) 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."
119. Section 2(11) of the Indian Income-tax Act, 1922 had defined total "previous year" in similar terms. Interpreting the definition contained in the 1922 Act, the Delhi High Court has observed, thus, in K. S. Malik v. CIT (supra) at page 531 :
"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 income. Section 2(11) of the 1922 Act makes it clear that an assessee is entitled to have different previous years in respect of separate sources of his income. This would be so even where the sources of income fall under the same head. He is even permitted to treat each branch of a business as a separate source. It has also been held in this context that the expression 'source' means not a legal concept but something which a practical man would regard as a real source of income. Section 2(11) also provides that where in respect of a particular source of income an assessee has once exercised an option in respect of the previous year, he will not be entitled to vary the meaning of the expression in respect of the said source except with the permission of the ITO and subject to such conditions as he might impose. Similarly, once such a previous year has been adopted in respect of an particular sources of income it will not be open to the department to vary the pervious year for any subsequent assessment. To start with 'previous year' means, in so far as we are concerned ' (a) the financial year immediately preceding the assessment year; or (b) if the accounts of the assessee have been made up to a date within the said financial year than at the option of the assessee the twelve months ending on such date.' Once such an option has been exercised or assessment made on the above footing it will not ordinarily be open either to the ITO or to the assessee to change the previous year in respect of such source."
The expression "previous year" also came to be considered by the supreme court in CIT v. K. Srinivasan and K Gopala [1953] 23 ITR 87. Their lordships have observed, thus, at page 99. :
"The expression 'previous year ' substantially means an accounting year comprised of a full period of twelve months and usually corresponding to a financial year preceding the financial year of assessment. It also means an accounting year comprised of a full period of twelve months adopted by the assessee for maintaining his accounts but different from the financial year and preceding a financial year."
120. The position which emerges from the consideration of the definition of the term "previous year" as well as from the exposition of the law, as referred to above, is that the previous year for any source of income would be the financial year unless 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 to empowered to impose a previous year, other that the financial year, on any assessee, if the assessee does not wish to adopt that year. In the present case, the assessee 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 section 2(47), that it has been held that capital gains liable to tax have accrued or arisen to the assessees. Whether, in fact, and in reality, and 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 the assessee. For, it has now become almost axiomatic in the interpretation of fiscal statutes, that where a provision in such a statute is capable of more than one interpretation, the one in favour of the taxpayer should be preferred-CIT v. Naga Hills Tea Co. Ltd. [1973] 89 ITR 236 (SC) and CIT v. Kulu Valley Transport Co. (P.) Ltd. [1970] 77 ITR 518 (SC). In the circumstances, it is obvious that the assessees have not maintained any accounts in respect of such capital gains allegedly arising to them and they have also not opted for the Diwali year as the previous year, in respect of this source of income. Because the contribution of capital has been entered in the books of account for the Diwali year 1976, the ITO has presumed that the previous year for the capital gains is also the Diwali year. Capital gains which are deemed to arise from the contribution of assets by way of capital is a distinct and separate source of income and as the assessees have not opted for a previous year, other than the financial year, in respect of this source, we have to hold that the previous year in respect of this source of income, could only be the financial year. As the income is held to have accrued or arisen on 4-1-1976, when the capital was so contributed, the income pertains to the financial year which ended on 31-3-1976. This will be the previous year fr the assessment year 1976-77 and not for 1977-78. Accordingly, we are of the view that these capital gains could not be included in their total income for the assessment year 1977-78.
121. In the case of Narendra Kumar Soorana, it was contended by the revenue that he had also derived income by way of capital gains, by the sale of ornaments during the year, which are recorded in the books of account maintained for the Diwali year. From this, it was sought to be argued that he had opted for the Diwali year as his previous year for capital gains also. We do not find much substance in this argument put forward on behalf of the assessee. As pointed out by the Delhi High Court in the passage quoted above from the case of K. S. Malik v. CIT [1980] 124 ITR 522 (vide paragraph 119 supra), the assessee could have separate previous years for different sources of income, even where the sources of income fall under the same head. In other words, an assessee can derive income under the head "capital gains" from different sources. 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 a 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 that 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 assessment year 1976-77 and not for the assessment year 1977-78.
122. In this view of the matter, we direct the exclusion of such capital gains from the total income of the two assessees for the assessment year 1977-78.
123. A further question, which remains for consideration is whether the IAC is entitled to issue directions under section 144A while considering a draft assessment order submitted to him by the ITO under section 144B. In the present case, the directions of the IAC were to treat the capital gains as short-term capital gains instead of as long-term capital gains. On a consideration of the facts of the case, we have already held that these capital gains are to be treated as long-term capital gains and not as short-term capital gains. To this extent, we have accepted the plea put forward on behalf of the assessees. In the circumstances, we do not consider it necessary to give a decision, for the present, on the larger question, whether the IAC could issue directions under section 144A in the course of considering the objections filed by the assessee against a draft order submitted by the ITO under section 144B.
124. Ground No. 7 in the appeals filed by both the assessees is in respect of determination of the A. LV. of their property. This ground was not pressed or argued at the time of hearing of the appeals.
125. In the result, the appeals filed by the assessees, namely, IT Appeal Nos. 1580 (Jp.) of 1980 and 1581 (Jp.) of 1980 are partly allowed.
126. The departmental appeals are to the effect that Commissioner (Appeals) was wrong in holding the assets to be long-term capital gains, and the capital gains arising as long-term capital gains. It is the contention of the revenue that the Commissioner (Appeals) was wrong in holding that the ITO was precluded from questioning the nature and source of the income disclosed under the Voluntary Disclosure Scheme as well as the year or acquisition of the declared assets. We have already held, that the ITO is precluded from questioning the dates of acquisition of the assets, as declared in the voluntary disclosure (vide paragraphs 53, 55 and 59, supra). We have also held that the assets, in question, are long-term capital assets and capital gains arising for consideration are long-germ capital gains (vide paragraphs 116 and 117, supra).
127. A further contention raised, in the case of Narendra Kumar Soorana, is that Commissioner (Appeals) was wrong in holding that the IAC cannot issue directions under section 144A after the submission of the draft assessment order under section 144B. As we have pointed out above, it is not necessary for us to consider this larger question for the present, as were 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, IT Appeal Nos. 59 and 60 (Jp.) 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 HUF 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. When entries were made in the books of account of the HUF revaluing the assets, no income liable to tax accrued or arose to the HUF, as a result of the revaluation (paragraphs 62 and 63).
5. The alleged conversion of a part of the jewellery into stock-in-trade was a mere device or pretence adopted by the HUF to reduce liability to tax (paragraph 65 to 68).
6. When such jewellery was dismantled and sold by the HUF, the income resulting therefrom was of the nature of long-term capital gains, liable to tax as such (paragraph 69).
IN THE CASE OF MANNALAL SOORANA (INDIVIDUAL)
1. The precious stones declared by him in the voluntary disclosure constituted his stock-in-trade and not capital assets (paragraphs 74 and 88).
2. No income accrued or arose to the assessee by the mere revaluation of the precious stones, in his books of account (paragraphs 77 to 79).
3. When he handed over the precious stones to the firm of Hazarimal Milapchand Soorana, by way of capital contribution and got credit for Rs. 20.40 lakhs in his capital account, no income or capital gains liable to tax accrued or arose to him.
The decision of the Gujarat High Court in Kartikey V. Sarabhai's case (supra) does not apply to the contribution of stock-in-trade towards capital. The decision of the Supreme Court in CIT v. Hind Construction Ltd. (supra) applies to such a case (paragraphs 88 to 91).
IN THE CASE OF NARENDRA KUMAR SOORANA AND NIRMAL KUMAR SOORANA
1. The jewellery got by them on partial partition in the HUF of Mannalal Nirmal Kumar Soorana represented capital assets in their hands (paragraphs 112 and 114).
2. Such assets were long-term capital assets (paragraphs 115 and 116).
3. By contributing such capital assets to the partnership of Mannalal Nirmal Kumar Soorana & Co. at a value higher than their cost of acquisition to the HUF, they brought themselves within the ratio of the Gujarat High Court's decision in Kartikey V. Sarabhai's case (supra) (paragraph 117).
4. That being the only decision of a High Court directly on this point, the Tribunal has to hold itself bound by that decision (paragraph 117).
5. That being so, the difference between the cost of acquisition of the assets to the HUF and the value at which they were contributed as capital represented capital, gains liable to tax in their hands (paragraph 117).
6. The previous year in which such capital gains could be brought to tax is the financial year as the assessee has not opted for any other previous year in respect of this source of income (paragraphs 118 to 121).
7. Hence, such capital gains are not liable to tax for the assessment year 1977-78 (paragraph 122).