2014 (9) TMI 728 - HC - Income Tax

Valuation of jewellery Charging of capital gains - Held that - CIT has valued the jewellery as per cost index, but the fact remains that jewellery always contains some impurity - no jewellery can be made from pure gold - This aspect was not examined by the CIT before enhancing the addition - Had he given the benefit of impurity, perhaps there was no occasion to enhance the addition - the jewellery was converted into stock in trade by the assessee - It was not an actual sale - when there are two interpretation pertaining to the charging of the capital gains, then the order passed by AO is not erroneous - It is case of change of opinion which is not permissible as decided in C.I.T. Vs. Kelvinator of India 2002 (4) TMI 37 - DELHI High Court - the order passed by the AO is neither erroneous nor prejudicial to the interest of the revenue thus, the order of the Tribunal is set aside Decided in favour of assessee. Penalty u/s 271(1)(c) Held that - The Tribunal has cancelled the levy of the penalty as the addition in quantum appeal is being deleted, then there is no justification to levy any penalty u/s 271(1)(c) the order of the Tribunal is upheld Decided against revenue.

Issues involved:
Cross appeals against orders passed by the Income Tax Appellate Tribunal for the assessment year 1998-99, substantial questions of law regarding jurisdiction under Section-263 of the Income Tax Act, applicability of CBDT Circular No. 560 dated 18.05.1990, valuation of jewellery items, treatment of conversion into "stock in trade" vs. sale, erroneous order by Assessing Officer, cancellation of penalty under Section-271(1)(c).

Jurisdiction under Section-263 of the Income Tax Act:
The case involved a dispute over the jurisdiction of the Commissioner of Income Tax (C.I.T.) to invoke Section-263 of the Income Tax Act, particularly in the context of an order passed by the Income Tax Officer (I.T.O.). The central issue was whether the order by the I.T.O. was erroneous or prejudicial to the interest of revenue, justifying the intervention of the C.I.T. The Tribunal had to determine if the C.I.T. rightly acted under Section-263 and brought to tax a sum claimed as a loss by the assessee. The Tribunal also considered the applicability of CBDT Circular No. 560 dated 18.05.1990, clarifying the treatment of the date of transfer for capital assets converted into stock in trade. The debate centered on whether the circular's interpretation was limited in scope and if it could be extended to provisions of Section-45(2) concerning capital gains.

Valuation of Jewellery Items and Conversion into "Stock in Trade" vs. Sale:
During the assessment year in question, the assessee, engaged in the business of manufacturing and selling jewellery items, faced a discrepancy in the valuation of jewellery. The dispute arose when the C.I.T. enhanced the income of the assessee by adding a certain amount, contending that the value of jewellery sold was understated. The assessee argued that no jewellery was sold but was converted into "stock in trade" based on prevailing market rates. The core contention was whether the capital gain was chargeable on the transfer of capital goods or their conversion into stock in trade. The Tribunal had to assess whether the order by the C.I.T. was justified in valuing the jewellery as per cost index and whether the conversion into stock in trade constituted a sale for tax purposes.

Erroneous Order by Assessing Officer and "Change of Opinion" Doctrine:
The Tribunal scrutinized the actions of the Assessing Officer (A.O.) in determining the tax liability concerning the conversion of jewellery into stock in trade. The A.O.'s decision was challenged on grounds of being erroneous or prejudicial to revenue. The Tribunal analyzed whether the A.O.'s order constituted a mere change of opinion, which is impermissible under established legal precedents. Citing relevant cases, the Tribunal concluded that the A.O.'s order was not erroneous and reinstated the original assessment, emphasizing that the A.O.'s decision was not detrimental to the revenue's interest.

Cancellation of Penalty under Section-271(1)(c) of the Act:
The Tribunal addressed the issue of penalty levied under Section-271(1)(c) of the Income Tax Act in a separate appeal. Given the deletion of the addition in the quantum appeal, the Tribunal found no justification for imposing the penalty. Consequently, the Tribunal upheld the cancellation of the penalty, aligning with its previous decision. The Tribunal dismissed the department's appeal regarding the penalty, affirming that the penalty was not warranted after the adjustment made in the quantum appeal.

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