1993 (10) TMI 55 - HC - Income Tax

Summary

Issues:
1. Classification of precious stones under Voluntary Disclosure Scheme as 'stock-in-trade' or 'capital assets'.
2. Tax liability on the transfer of precious stones to a partnership firm under section 45 of the Income-tax Act.

Analysis:

Issue 1:
The case involved determining whether the precious stones disclosed under the Voluntary Disclosure Scheme, 1975, were to be classified as 'stock-in-trade' or 'capital assets' under section 2(14) of the Income-tax Act. The assessee declared income from cut emeralds under the scheme and transferred the stock to a partnership firm. The Income-tax Officer treated it as a transfer of a capital asset, leading to a short-term capital gain tax liability. The Appellate Assistant Commissioner held that the cut emeralds represented the assessee's capital assets. However, the Income-tax Appellate Tribunal found that the stones were not stock-in-trade but capital assets, as the assessee had no prior dealing in precious stones individually. The Tribunal's decision was based on the lack of evidence supporting the stones as stock-in-trade, leading to the conclusion that they were capital assets.

Issue 2:
Regarding the tax liability on the transfer of precious stones to the partnership firm, the Tribunal applied the decision of the Karnataka High Court and the Kerala High Court, determining that the transfer constituted a capital asset under section 2(47) and was subject to capital gains tax under section 45. However, referencing the apex court's decision in Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, the court found that while the transfer qualified as a capital asset transfer, the assessee was not liable for capital gains tax under section 45. The court upheld the Tribunal's decision that the contribution of precious stones to the partnership firm amounted to a transfer of a capital asset but ruled in favor of the assessee regarding the liability for capital gains tax.

In conclusion, the court ruled in favor of the Revenue on Issue 1, confirming that the precious stones were capital assets. However, on Issue 2, the court sided with the assessee, holding that the assessee was not liable for capital gains tax under section 45.