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2025 (1) TMI 1288 - AT - Income TaxUnexplained credits u/s 68 - treatment of sale consideration received on sale of diamonds as unexplained/Bogus LTCG -HELD THAT - The existence of rough diamonds with the assessee together with the activity of processing of rough diamonds into cut and polished diamonds and sale of those cut and polished diamonds to third party customers is proved beyond reasonable doubt by the assessee herein. In the present case the diamonds were gifted to the assessee by his grandfather in the previous year relevant to assessment year 1994-95 while computing capital gains the period of holding should be construed accordingly. Thus such diamonds shall fall within the definition of long term capital assets and consequently long term capital gains shall arise on their transfer. CIT-A had relied on CBDT Circulars referred supra to treat the gains arising on sale of diamonds as short term capital gains. In this regard we find that the Circulars had taken oscillating positions with regard to the period of holding of assets which works contradictory to the existing provisions of the Act itself. Hence the provisions of the Act would prevail. Explanation 1(i)(b) of Section 2(42A) of the Act clearly lays down the law regarding the period of holding of assets. Hence there is no need to place reliance on Circulars for this purpose. Either way the Circulars are binding only on the revenue authorities and the same is not binding on the Tribunal. Period of holding of diamonds need to be reckoned from Assessment Year 1994-95 in terms of provisions of the Act and accordingly the resultant gain on sale of diamonds would have to construed only as Long Term Capital Gains in the facts and circumstances of the instant case. Gains on sale of cut and polished diamonds is to be construed as LTCG which had already been offered to tax by the assessee in the return of income and the same cannot be treated as unexplained cash credit u/s 68 of the Act in the facts and circumstances of the instant case.Ground Raised by the assessee are allowed.
ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment include:
ISSUE-WISE DETAILED ANALYSIS 1. Treatment of Sale Consideration as Unexplained Cash Credits The relevant legal framework involves Section 68 of the Income Tax Act, which deals with unexplained cash credits. The Court examined whether the sale of diamonds, declared under the Income Declaration Scheme (IDS) 2016, could be questioned by the revenue authorities. The Court noted that the IDS declaration is binding and conclusive, providing immunity from further questioning. The assessee had declared rough diamonds under IDS 2016, paid the requisite tax, and received a certificate from the Principal Commissioner of Income Tax (PCIT), which should have settled the matter. The Court found that the revenue's challenge to the existence of diamonds contradicted the IDS's purpose and the statutory immunity it conferred. The Court also considered the evidence provided by the assessee, including job work invoices, bank statements, and confirmations from buyers, which substantiated the genuineness of the transactions. The Court concluded that the sale consideration could not be treated as unexplained cash credits. 2. Classification of Capital Gains The Court analyzed whether the gains from the sale of diamonds should be classified as long-term or short-term capital gains. The legal framework involves the definition of long-term capital assets under Section 2(42A) of the Act, which includes the period for which the asset was held by the previous owner in the case of gifts. The Court found that the diamonds were gifted to the assessee by his grandfather in 1994, and thus, the period of holding should include the time held by the grandfather. The Court dismissed the revenue's reliance on CBDT Circulars that suggested a different holding period, emphasizing that statutory provisions prevail over circulars. Consequently, the Court held that the gains should be classified as long-term capital gains. 3. Addition of Commission Expenditure The Court addressed the addition of commission expenditure under Section 69C, which was based on the assumption that the sale proceeds were accommodation entries. Given the Court's decision that the sale proceeds were genuine, the addition of commission expenditure was unwarranted and thus dismissed. 4. Validity of Assessment The Court did not delve into the legal ground regarding the validity of the assessment without incriminating material, as no arguments were advanced by the assessee on this point. Therefore, this ground was dismissed as not pressed. 5. Principles of Natural Justice The Court noted the assessee's claim of being denied a fair hearing. However, since the core issues were addressed in the substantive grounds, this ground was considered general and subsumed within the adjudication of the main issues. 6. Levy of Interest under Section 234B The issue of interest levy was deemed consequential, dependent on the final tax liability determined by the Court's rulings on the substantive issues. SIGNIFICANT HOLDINGS
In conclusion, the appeals were partly allowed, with the Court ruling in favor of the assessee on the primary issues of unexplained cash credits and capital gains classification. The decision for the assessment year 2018-19 was applied mutatis mutandis to the subsequent year, with variations only in figures.
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