1982 (5) TMI 96 - AT - Income Tax

Summary

Issues Involved:
1. Nature of assets disclosed under the Voluntary Disclosure Scheme: capital assets or stock-in-trade.
2. Taxability of revaluation of assets.
3. Conversion of capital assets into stock-in-trade.
4. Calculation and assessment of capital gains.
5. Validity of ITO's inquiry into the nature of the assets.
6. Appropriate assessment year for capital gains.

Issue-wise Detailed Analysis:

1. Nature of Assets Disclosed:
Finding: The jewelry and precious stones declared by the Hindu Undivided Family (HUF) were acquired and held as capital assets and not as stock-in-trade.
Reasoning: The assets were held for over nine years, which is inconsistent with the behavior of stock-in-trade. The Department is precluded from questioning the dates of acquisition as declared in the voluntary disclosure.

2. Taxability of Revaluation of Assets:
Finding: No income liable to tax accrued or arose to the HUF as a result of the revaluation of the assets.
Reasoning: Income-tax is a levy on real income, not hypothetical income. The mere revaluation of assets and entry into books of account does not result in taxable income.

3. Conversion of Capital Assets into Stock-in-Trade:
Finding: The alleged conversion of a part of the jewelry into stock-in-trade was a mere device adopted by the HUF to reduce tax liability.
Reasoning: The sale of the three items of jewelry was an isolated transaction and did not represent a continuous trading activity. The revaluation and transfer to a trading account were devices to bring the case within the ratio of the Supreme Court's decision in Shirinbai K. Kooka's case.

4. Calculation and Assessment of Capital Gains:
Finding: The income resulting from the sale of dismantled jewelry was of the nature of long-term capital gains, liable to tax.
Reasoning: The original cost of acquisition was used to calculate the capital gains, and the assets were held for more than sixty months, qualifying them as long-term capital assets.

5. Validity of ITO's Inquiry into the Nature of the Assets:
Finding: The ITO is not barred from examining the claim of the assessee that the assets were acquired and held as capital assets.
Reasoning: The Voluntary Disclosure Act and the assurances given by the Government do not protect the assessee from such an inquiry. The ITO can question the nature of the assets in later assessment proceedings.

6. Appropriate Assessment Year for Capital Gains:
Finding: The previous year for assessing the capital gains is the financial year, not the Diwali year.
Reasoning: The assessees did not maintain accounts for the capital gains and did not opt for a previous year other than the financial year. Thus, the capital gains should be assessed for the financial year ending 31st March, 1976, relevant to the assessment year 1976-77, not 1977-78.

Summary of Findings:
1. Nature of Assets: Jewelry and precious stones are capital assets.
2. Taxability of Revaluation: No taxable income from revaluation.
3. Conversion of Assets: Alleged conversion to stock-in-trade is a mere device.
4. Capital Gains: Long-term capital gains arise from the sale of dismantled jewelry.
5. ITO's Inquiry: Valid to inquire into the nature of assets.
6. Assessment Year: Capital gains should be assessed for the financial year ending 31st March, 1976.

Conclusion:
The appeals filed by the assessees are partly allowed, and the departmental appeals are dismissed. The capital gains arising from the contribution of assets to the partnership should be assessed for the assessment year 1976-77, not 1977-78.