9911796707
TMI Blog1982 (5) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... the Voluntary Disclosure of Income and Wealth Act, 1976 (hereinafter referred to as the 'Voluntary Disclosure Act') on 31st Dec., 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 30th Dec., 1975 which was filed before the CIT on 31st Dec., 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 ₹ 38,75,179 on which the income-tax payable was ₹ 23,11,357. The details of the assets disclosed, along with other details, as set out against item No. 5 of the particulars required to be given in Form A (the statement of Voluntary disclosure u/r 3 of the Voluntary Disclosure of Income and Wealth Rules, 1975 as filed before the CIT) are as follows : 5. Statement of Voluntarily disclosed incomes : SI. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets, as shown in the declaration, were the cost of acquisition of the assets, at the time they were acquired. 5. On the date that the assessee prepared the statement of voluntary disclosure, namely 30th Dec., 1975, the assessee opened books of account for bringing on record the assets disclosed. In these books, all the assets, other than cash, were revalued by the assessee, according to the prevailing market rates, as on the date of disclosure. Such values, as entered in the books are as follows : Ornaments 41,51,343 Cut processed stones 46,00,000 Silver utensils 1,14,305 Household goods 5,200 Total ₹ 88,70,848 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 ₹ 88,90,848 which includes cash of ₹ 20,000. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituted. The deed, evidencing this partnership, was written on 23rd June, 1976 and showed the following persons as partners : Name of partner Share Mannalal Soorana 10 per cent Nirmal Kumar S/o M.L. Soorana 30 per cent Vimal Kumar S/o M.L. Soorana 30 per cent Narandra Kumar S/o M.L. Soorana 30 per cent 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, ₹ 15.31 lakhs, ₹ 15.32 lakhs and ₹ 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 ₹ 34,60,000. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) The above items were revalued and entered in the books of account, opened by the assessee, on 31st Dec., 1975 as follows : Jewellery and ornaments ₹ 41,15,343 Cut processed stones ₹ 46,00,000 (iii) The cut and processed stones were partitioned on 4th January 1976 among three months of the HUF as follows : 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 M/s. Mannalal Nirmal Kumar Soorana Co. (iv) Out of the 121 items of jewellery and ornaments, valued at ₹ 41,51,343, 104 items valued at ₹ 8,93,313 were partitioned on 4th Jan, 1976 among the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annalal Nirmal Kumar Soorana Co. His capital account was credited with the amount of ₹ 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 (hereinafter referred to as 'IAC')in accordance with the provisions of s. 144 B of the IT Act. The ITO was of the view that, when the assessee revalued the jewellery and ornaments and the cut and processed stones at ₹ 87,51,343 as against the declared value of ₹ 37,89,679 resulting in an appreciation in value of ₹ 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 processed stones were acquired during the accounting years relevant for the asst. yrs. 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 31st Dec., 1975 when the disclosure petition was filed. The assessee pointed out that a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on business in his individual capacity in the name of Hazarimal Milapchand. After the Samvat year 2013(1958-59) only one business, in the name of Hazarimal Milapchand 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 asst. yr. 1971-72. In the assessments completed on the HUF for the asst. yrs. 1964-65 to 1967-68, pursuant to a settlement arrived at by the assessee with the CIT, 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 ₹ 10,000 from the sale of one item of jewellery which was purchased by the assessee from his wife of the Karta, was shown by the assessee as income from business and assesses as such. The assessee HUF was trading in precious rough stones and rough diamonds in the asst. yrs. 1965-66 and 1966-67. It was also significant that the 2,800 carats of cut and processed stones, disclosed by the assessee in the voluntary disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 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 ₹ 37,89,679 were revalued at ₹ 87,51,343 and brought into the books of account, the difference of ₹ 49,61,664 represented the income of the assessee, which was labile 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 in CIT vs. Bai ShrirnibaI K.Kooka (1962)46 ITR 86 (SC) the cost of the jewellery ornaments, to the business, would be ₹ 32,58,030. However, he worked out the proportionate cost of the jewellery transferred to the trading account at ₹ 11,68,970. According to him, the difference of ₹ 20,89,060 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled the addition of an amount ₹ 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 ₹ 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 ₹ 23,23,366 was liable to be assessed as capital gains and ground number 10 assailed the disallowance of ₹ 2,063 out of an amount of ₹ 2,063 out of telephone expenses. 23. In the ground raised against the addition of ₹ 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 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 a dealer in preci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Disclosure Act did not prevent the ITO from enquiring into the nature of the asserts, 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 ofd 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 Commr. that the assets disclosed were held as capital assets. Thus, this is not a matter which is concluded against the Department by the Commr.'s acceptance of the disclosure. 25. After considering the provisions of the Voluntary Disclosure Act and the arguments advanced from both sides, the CIT (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 assurances, in effect, was that the nature and source of the income declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting 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 CIT (Appeal), 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 ₹ 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 CIT (Appeals) has, also, agreed with the 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... half of Department, to raise certain additional ground which will be dealt with later. 32. Taking the assessee's appeal first, the grounds can be broadly, summarised as follows : (i) That the CIT(Appeals) was wrong in computing 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. (ii) That this 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. (iii) The CIT(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 4th Jan, 1976 at a value of ₹ 32,58,030 and substituting in its place an amount of ₹ 11,68,970 as the average cost of acquisition of those assets. He was, thereby, wrong in taking the business profit at ₹ 20,89,060 instead of ₹ 3,07,665 as shown by the books of account. (iv) The finding given by the CIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment. Relying on the decision of the Supreme Court in Motilal Padampat Sugar Mills Co. Ltd. vs. State of U.P. and Ors. (1979)118 ITR 326 (SC) 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 be was precluded from making any such enquiry. In support of this contention he relied on the decision of Supreme Court in Ellerman Lines vs. CIT 1972 CTR (SC) 71 : (1971) 82 ITR 913(SC); K.P. Verghese vs. ITO (1981)24 CTR (SC) 351: (1981)131 ITR 597 (SC) and of the Gujarat High Court in Rajan Ramamkrishna vs. CWT (1980) 17 CTR 293 (Guj) : (1981) 127 ITR 1(Guj). He also relied on the decision of the Punjab and Haryana High Court in Smt. Sudesh Khanana vs. IAC (1978) 114 ITR 261 (P H) 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 assessee., 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 Commr., 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, of these assets were in its 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 vs. CIT (1970) 77 ITR 253 (SC) 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 his connection. He referred to the argument of Shri Sharma that the transactions in jewellery, in the earlier years, were really realisation of capital assets and were only isolated transactions but were agreed to be treated as business transaction, 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, M/s. Mannalal Nirmal Kumar Soorana Co. According to Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to derive the tax benefit that will accrue as result. 41. Replying to the arguments advanced on behalf of the ld. 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 Commr., 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 there into. According to him, it was implicit in the declaration form and in the entries made in 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 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 incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the Commr. that the profits on the sale may be taxed as business income, subject to the penalty proceedings being dropped. According to Shri Sharma, this was not evidence to show that the assessee was carrying on 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 head of the assessee, wherein it was shown as a trader and importer and exporter of precious and synthetic stones and as jewellers and manufactures, 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 or jeweller 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 conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, in appeal before the CIT(Appeals) and it was with reference to that appeal, that the CIT (Appeals) had held that the said amount would not be liable to tax, as it did not represent any income of the assessee. In fact the CIT(Appeals) had held that the amount of ₹ 20,89,060 is liable to be taxed as business profit, as against ₹ 3,07,665 shown by the assessee. This finding of the CIT (Appeals) has, itself, challenged by the assessee in ground No. 15 of its appeal. Shri Shama 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 3 or 4 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 additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT(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 ld. Deptl. Rep. Shri C.V. Gupte, advanced his a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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 vs. CIT (1981) 24 CTR (SC) 345 : (1981) 131 ITR 451 (SC) and submitted that the mistake should be corrected. 48. Replying to the submission 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 consideration. With regard to the first ground in the additional grounds, it was again submitted that the amount of ₹ 20,89,060 was arrived at by the ITO by deducting from the value of jewellery transferred to the stock-in-trade account, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or 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 CIT, Jaipur, would protect the assessee from any such enquiry. The extent of the immunity conferred on a declaration, under the above disclosure scheme, is contained in ss. 8,11,12 and 16 of the Voluntary Disclosure Act. Sec. 8 provides that the amount of the voluntarily 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (iv) The nature and source of the income declared under s. 3(1) will not be questioned by the Departmental authorities. 54. Declarations under s. 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 chooses to do so, he may give an indication in that column about the nature of the asset. However, under the provisions of the Act on 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 CIT, Jaipur, it will be seen that they have not given any assurance to the declarants tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to hold that it has been carrying on business in jewellery, on the basis of the settlement before the Commr. for the asst yrs. 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 asst. yrs. 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 between 1967-68 and 1976-77. Similarly, as far as jewellery is concerned, apart from the assessments made consequently on a settlement before the Commr. there was not 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 ₹ 14,89,679 were acquired between the asst. yrs. 1964-65 and 1967-68. Neither the above dates of acquisition, nor the valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 30th Dec., 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 ₹ 37,89,679 at ₹ 87,41,343 and entered the same in its books of account on 30th Dec., 1975 the difference of ₹ 49,61,664 represented the income of the assessee. In 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such time as he transfers the assets to a third party for consideration, there will be no question of any legal right, inhering in him, to receive any income in respect of those assets. No doubt, there are instances where the Income-tax Act brings to charge national income also. However, that is by enacting specific provisions of the Act, such as s.23 which enables the taxing of a national income from self-occupied property, s.41(2) of the IT 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 national incomes. The simple question is, whether by revaluing his assets on 30th Dec., 1975 and making entries in respect of such revaluation in its books of account, an income of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely, M/s. Mannalal Nirmal Kumar Soorana Co. on 21st Oct., 1976 for ₹ 34,60,000. This firm is a separate entity from the assessee HUF. Accordingly when the assessee sold the stones for ₹ 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 purposes of taxation. Thus, prior to the sale on 21st Oct., 1976, non 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 Shirinbai K. Kooka's case (1962) 46 ITR 86 (SC) in respect of such conversion. The total value of these 17 items, as declared by the assessee, in the voluntary disclosure, was ₹ 10,27,970. These have been revalued at ₹ 32,58,030 for the purpose of transfer to the Jeweller ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the circumstances the net result would be that the assessee did not have any trading activity in jewellery or precious stones prior to 21st Oct., 1976. Even subsequent to that date, the sale was only of the precious metal obtained from the breaking up of the same three items. Thus the assessee's claim of having traded in jewellery and 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 partition on 16th Aug., 1978. 67. The question, thus, boils down to this, namely, whether the sale of these items of jewellery could constitute a trading activity. On the basis of the assessee's own contention, all the earlier transactions in jewel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he asst. yr. 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 hold 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 be it. Such a sale, as pointed out by the Madras High Court in CIT vs. Kasturi Estates Lts. (1966) 62 ITR 578 (Mad) is one, which any prudent owner of the 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 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, inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking 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 assessee, would work out to ₹ 9,75,884. As against this, the assessee has realised ₹ 34,60,000 by selling the stones to the family firm. This results in long-term capital gains of ₹ 24,84,116 which will be liable to tax in the hands of the assessee HUF. 70. In the result, both the appeals, namely ITA No. 1527(JAI) of 1980 as well as ITA No.62(JAI) of 1981, are treated as partly allowed, in the manner stated above. 71. ITA No. 58(JAI) 1981 and C.O. No. 46(JAI)of 1981'Shri Mannalal Soorana, Individual' Asst.yr. 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 the Voluntary Disclosure Scheme, before the Commr. On 31st Dec., 1975 declaring the following assets: Cash ₹ 2,90,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including it in the total income of the assessee. 72. On appeal by the assessee, the CIT (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 asst. yr. 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 30th Dec., 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 ₹ 10,20,000. Aggrieved by the said order of the CIT (Appeals), the revenue has filed an appeal, in which the following grounds have been raised: In the facts and circumstances of the case, ld. CIT (Appeals) has erred in : (i) holding that there can be no revaluation of stock-in-trade in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee as income. By this line of reasoning, he submitted that the CIT (Appeals) was wrong in deleting the addition of ₹ 10,20,000 made by the ITO to the total income of the assessee. 76. Replying to the arguments put forward by the ld. Deptl. Rep. Shri G.C. Sharma, ld. 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 rise 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 vs. CIT (1953) 24 ITR 481 (SC) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in Raja Mohan Raja Bahadur vs. CIT (1967) 66 ITR 378 (SC) 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the assessee but proceeded to treat the amount of ₹ 10,20,000 as capital gains arising to the assessee. Besides, the ITO held that it represented short-term capital gains on the ground that the assessee has 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 CIT (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 no transfer of ownership from one person to another when a partner contributes capital to the firm. Reference was also made to the decision of the Supreme Court in Malabar Fisheries Co. vs. CIT (1979) 12 CTR (SC) 415: (1979) 120 ITR 49 (SC) wherein the Court held that there was no extinguishment of rights in partnership assets, amounting to a transfer of assets within the meaning of s.2 (47), when distribution of assets of the partnership takes place on dissolution. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset 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 CIT (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 asst. yr. 1977-78 the ITO as well as the CIT (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 CIT (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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). He also referred to the decisions of the same High Court in ST.S. Swaminathan Chettiar vs. CIT (1966) 62 ITR 125 (Mad) and KM. PR. KM. Firm vs. CIT (1966) 62 ITR 159 (Mad) and of the Allahabad High Court in Gangadhar Babulal vs. CIT (1966) 62 ITR 719 (All) as also to another decision of the Madras High Court in M.S.M.M. Firm, Ipoh vs. CIT (1969) 72 ITR 14 (Mad). In our view none of these decisions has any relevance to the point at issue, before us O.M.S. PL.A. Alagappa Chettiar and Anr. vs. CIT (1966) 659 ITR 440 (Mad) 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 decision cited by the ld. Dept. Rep. provide authority for the proposition that when a member of an 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 ld. Deptl. Rep. als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 CIT (Appeals) was wrong in sustaining the disallowance of ₹ 4,950 out of legal fee of ₹ 9,950 paid to M/s. 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 s. 80-VV allowed an amount of ₹ 5,000 and disallowed the balance of ₹ 4,950. It is the contention of the assessee that even the balance of ₹ 4,950 should have been allowed under s. 37 of the IT Act. Sec. 80-VV 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 Tribunal or any Court, relating to the determination of any liability under this Act. That being of the case, the deduction of any amount, claimed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts, 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 not before us. Accordingly, the discussion that follows is confined, mainly, to the facts of the cases of Nirmal Kumar Soorana and Narendra Kumar Soorana. 96. It was contended, on behalf of the assessees, 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 vs. Hind Construction Ltd. (1972) 83 ITR 211 (SC). It was also submitted that the judgment of the Kerala High Court in the case of A. Abdul Rahim vs. CIT (1977) 110 ITR 595 (Ker) 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, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 asset within the meaning of s. 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 the assessees as short-term capital assets, with reference to the date on which they came into possession of these assets, by partition. It was pointed out by the assessees that the question should have been decided with reference to the dates on which the HUF itself acquired these assets and, for this purpose, the dates declared in the voluntary disclosure have been accepted and acted upon by the ITO. 101. The CIT (Appeals) agreed with the submission made on behalf of the assessees 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 s. 144B. 103. The CIT (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 s. 144B, along with the objections of the assessee, the IAC was not competent to issue instructions under s. 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 CIT (Appeals), holding that long-term capital gains arose for assessment, both the assessees have filed appeals before the Tribunal. The Revenue has also filed appeals contending that the CIT (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 declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olved was whether this resulted in a transfer of the assets by those individuals to the partnership so as to warrant the withdrawal of development rebate under s. 155(5) of the IT Act. Both the Kerala High Court as well as the Karnataka High Court held that there was a transfer, as defined in s. 2(47) of the IT 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 vs. Kartikey V. Sarabhai and CIT vs. Sunil Sidharthbhai (1981) 24 CTR (Guj) 184 : (1981) 131 ITR 42 (Guj). 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 these cases, the two individuals, who owned certain shares held by them as capital assets contributed those shares to a partnership by way 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supplement to that Edition, wherein the learned authors have also expressed similar views. 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 decisions of the Madras High Court in D. Kanniah Pillai vs. CIT (1976) 104 ITR 52 (Mad) and CIT vs. Abdul Khader Motor and Lorry Service (1978) 112 ITR 360 (Mad) in support of the above contention. He also argued that the High Court was not correct in relying on s. 5 of the Transfer of Property Act while distinguishing the decision of the Supreme Court in Malabar Fisheries Co. vs. CIT (1979) 12 CTR (SC) 415 : (1979) 120 ITR 49 (SC) as the IT Act is a self-contained code, in itself. 109. He then argued that as the CIT (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 assets or its character did not change with the partition. 110. With regard to the third contention, namely, the previous yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s advanced by the learned counsel for the assessee, Shri C.V. Gupte, the learned Departmental Representative, relied on the decisions of the Kerala and Karnataka High Courts in A. Abdul Rahim vs. CIT (1977) 110 ITR 595 (Ker) and Addl. CIT vs. M.A.J. Vasanaik (1979) 116 ITR 110 (Kar) and also the decision of the Gujarat High Court in CIT vs. Kartikey V. Sarabhai (1981) 24 CTR (Guj) 184 : (1981) 131 ITR 42 (Guj). He took us extensively through these judgments and argued that, for the purposes of the IT 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 followed by their Lordships of the Gujarat High Court in CIT vs. Kartikey V. Sarabhai (1981) 24 CTR (Guj) 184 : (1981) 131 ITR 42 (Guj) 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 CIT (Appeals) was inconsistent in treating the assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have give 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 these precious stones constituted capital assets 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 the HUF. That being the case, the stones, coming to the share of the members, on partial partition, also partook of the nature of capital assets. It is now well-settled that when a member of a 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 assets in his hands. A multitude of authorities for this preposition has been cited by the ld. Deptl. Rep. and has been referred to above. In the case of OM.S.PL.A. Alagappa Chettiar Anr. vs. CIT (1966) 59 ITR 440 (Mad) there was a firm carrying on money-lending business and also in the purchase and sale of real properties in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee- (a) In the case of a share held in 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-s. (1) of section 49, there shall be included the period for which the asset was held by the previous owner referred to in the said section; (c) '.. '.. '.. . '.. '.. '.. 116. Sub-cl. (b) of Expln. (i) specifically provides that in the case of a capital asset, which becomes the property of the assessee in the circumstances mentioned in sub.s (1) of section 49, the period during which the asset was held by 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 s. 49(1), in so far as they are relevant for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contribution of those capital assets, by way of contribution of capital to the partnership, at a value 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 for the assessee has vehemently argued that the decision of the Gujarat High Court is not correct, and he has also taken support for the submission from the commentary on this subject by the learned authors of Kanga and Palkhivala's Law and Practices of Income-tax referred to supra. However, we cannot overlook the fact that three 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 s. 2(47) of the IT Act. 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 vs. Kartikey V. Sarabhai (1981 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t previous years in respect of separate sources of his income. (Emphasis supplied) 119. Sec. 2(11) of the Indian IT Act, 1922 had defined previous year in similar terms. Interpreting the definition contained in the 1922 Act, the Delhi High Court has observed, thus, in K.S. Malik vs. CIT (1980) 124 ITR 522 at p. 531 (Del): 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. Sec. 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 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. Sec 2(11) also provides that where in respect of a particular source of income an assessee has once exercised an option in respect of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s. 2(47), that it has been held that capital gains liable to tax have accrued or arisen to the assessee. Whether, in fact, and in reality, any 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 tax-payer should be preferred (Vide CIT vs. Naga Hills Tea Co. Ltd. 1973 CTR (SC) 329 : (1973) 89 ITR 236 (SC) and CIT vs. 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 Di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 the 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 asst. yr. 1976-77 and not for the asst. yr. 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 asst.yr. 1977-78. 123. A further question which remains for consideration is whether the IAC is entitled to issue direction under s. 144A while considering a draft assessment order submitted to him by the ITO under s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Hindu Undivided Family 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 Hindu Undivided Family, revaluing the assets, no income liable to tax accrued or arose to the Hindu Undivided Family 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 Hindu Undivided Family to reduce liability t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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