TMI Blog2006 (11) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... t value of assets as on 1-4-1981." 3. Vide subsequent order dated 18-7-2006, the Hon'ble President, I.T.A.T. has further directed the whole appeal to be disposed of by this Special Bench. Accordingly, as per direction of the Hon'ble President, I.T.A.T., all the grounds taken by the assessee are disposed of by this Special Bench. 4. Ground No. 1 of the assessee's appeal reads as under:- "For that in the facts and circumstances of the case, the learned CIT (Appeals) has erred in not giving proper opportunity of hearing of the appellant and consequently failed to appreciate certain specific contentions taken by the appellant and come to a finding which is submitted to be perverse and wrong." 5. At the time of hearing before us ld. counsel for the assessee did not press the above ground. Accordingly the same is rejected. 6. Ground Nos. 2 to 4 of the assessee's appeal reads as under:- "2. For that in the facts and circumstances of the case, the learned CIT (Appeals) as well as the first assessing authority have erred in computing the profit under the head 'capital gains'. 3. For that the computation of capital gain as made by the learned authorities below are wrong. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee apparently inflated the cost of diamond as on 1-4-1981 which was disclosed to have been acquired in the assessment year 1975-76 under VDIS. According to the Assessing Officer the valuation shown under VDIS was Rs. 1,39,020 as on 1-4-1987 for the assessment year 1975-76, the valuation as on 1-4-1981 is unlikely to be Rs. 6,37,990. The Assessing Officer after considering the assessee's submission and direction of the ld. Addl. CIT under section 144A dated 5-2-2001 computed the capital gain at Rs. 16,86,204 as under:- Sale proceeds of 87.27 ct. of polished diamond Rs. 20,77,670 Less: Processing Service Charges Rs. 62,782 Less: Fair market value as on 1-4-1981 calculated by resorting to declared value of defective diamonds under VDIS as on 1-4-1987 i.e. Rs. 1,25,850 divided by 140 multiplied by 100 = 99,300. Then the value as on 1-4-1981 i.e. 99,300 has been indexed 99,300 divided by 100 multiplied by 331 = Rs. 3,28,684 = (-)Rs. 3,91,465 Long Term Capital gain arrived at by the Assessing Officer Rs. 16,86,204 Accordingly, the assessment was completed vide order dated 6-2-2001 passed under section 143(3)/14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it is undisputed fact that the rough unfinished diamonds were the capital asset which became the property prior to 1-4-1981 and in view of the clear provision of section 55(2)(b)(i) of the Act, the option is available to either adopt the cost of the acquisition of the asset which was existing or acquired prior to 1-4-1981 or the FMV of the said asset i.e. rough, uncut, unfinished diamond with cracks, impurities etc. The law is very clear in this regard. The market value of the unfinished diamond/precious stone with spots and cracks has been determined by approved valuer as on 1-4-1987 and the same has also been brought to the notice of the Assessing Officer in course of assessment proceedings. The specified date i.e. 1-4-1981 comes prior to 1-4-1987. The value therefore as on 1-4-1981 will definitely be lower than as on 1-4-1987. There is no such circumstances for which the market value of the same asset as on 1-4-1981 will be higher than that of 1-4-1987. 6.2 The logic that unfinished diamonds and finished diamonds are precious stones which come under the definition of jewellery for which the appellant has the freedom to adopt FMV of non-existent finished diamond as on 1-4-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isition of finished diamonds is to be considered while computing capital gain. That admittedly the capital assets were acquired before 1-4-1981, therefore, the fair market value of the assets as on 1-4-1981 is to be considered at the option of the assessee. It is further contended by the ld. counsel that by the process of cutting and polishing, no new assets come into existence. In support of this contention he relied upon the decision of Hon'ble Apex Court in the case of CIT v. Gem India Mfg. Co. [2001] 249 ITR 307. The assets acquired by the assessee during the financial year 1974-75 (i.e. assessment year 1975-76) was the raw diamond which after the process of improvement has resulted into finished diamonds which was sold by the assessee. Therefore, fair market value of finished diamond as on 1-4-1981 should be taken. In support of this contention ld. counsel for the assessee has relied upon the following decisions:-Barish Mahindra v. CIT [1982] 135 ITR 191 (Bom.) CIT v. Shakuntala Kantilal [1991] 190 ITR 56 (Bom.) 10.1 It is further contended by the ld. Counsel that by the process of improvement the old diamond i.e. raw diamond did not remain in existence and replaced by the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to opt for fair market value of the asset as on 1-4-1981 as per provision of section 55(2)(b)(i) of the Income-tax Act. However, the question is fair market value of which asset is to be taken? He contended that the fair market value of the raw diamond with spots and cracks which was acquired by the assessee in 1975-76 can only be taken and not of the polished diamond. Section 48 provides for deduction of cost of acquisition as well as cost of improvement. That under section 55(2)(b)(i) the assessee has an option for the substitution of cost of acquisition with fair market value of the asset as on 1-4-1981 if it was acquired prior to 1-4-1981. Therefore, the fair market value of the asset acquired by the assessee prior to 1-4-1981 is to be taken. The asset acquired prior to 1-4-1981 was raw and uncut diamond, which was got cut/polished in the accounting year relevant to assessment year 1998-99. Therefore, finished diamond was not in existence as on 1-4-1981. In support of this contention ld. D.R. has relied upon the following decisions:- 1. Meccane Industries Ltd. v. CIT [2002] 254 ITR 175 (Mad.) 2. M. Nachiappan v. CIT [1998] 230 ITR 737 (Mad.) 3. Keshavji Karsondas v. CIT [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isclosed (by the assessee) at the market value as on 1-4-1987." And the assessee has consciously declared the fair market value of the rough diamonds at Rs. 1,39,020 as on 1-4-1987. (e) It is impossible that the fair market value of the rough diamonds declared as on 1-4-1987 at Rs. 1,39,020 and the FMV of the same diamonds would be Rs. 6,37,990 as on 1-4-1981. (f) In the answer to question 16 of the CBDT Circular/Clarification No. 754, dated 10-6-1997, that is, will the value of assets declared be accepted by the department as it is or will it be necessary to file a valuer's certificate along with the declaration? Can the matter be referred by the Department to Valuation Cell? Is any evidence required to be filed regarding the year or purchase of the jewellery or other assets? Whether the value of jewellery as on 1-4-1987 will be adopted only for purposes of VDIS or will it also be adopted for wealth-tax in subsequent years, the Board replied that "In respect of immovable property, the Department will not insist upon any valuation certificate along with the declaration. It is the responsibility of the declarant to declare the correct value. In respect of the jewellery if it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. He, therefore, stated that the use of the inflation index by the Assessing Officer in the reverse direction was a practical necessity to arrive at the just value of the capital asset as on 1-4-1981. He, therefore, stated that the order of the Assessing Officer is quite fair and reasonable. The same should be upheld. 12. We have carefully considered the argument of both the sides and perused the material placed before us. Section 48 provides the mode of computation of capital gain. The same is re-produced below:- "The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:- (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto: Provided that in the case of the assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption of the assessee." 12.2 Thus where a capital asset was acquired by the assessee before 1-4-1981 the assessee has an option to take either (i) actual cost of acquisition of the asset or (ii) the fair market value of the asset on 1-4-1981. In the case under consideration before us admittedly the asset in the form of raw and uncut diamond was acquired during the financial year relating to assessment year 1975-76. Such raw and uncut diamond was got processed during the accounting year relevant to assessment year 1998-99. By such processing the polished and cut diamond was received by the assessee which was sold. Thus as on 1-4-1981 the raw and uncut diamond was in the possession of the assessee. Section 55(2)(b)(i) gives an option to the assessee to adopt fair market value of the asset as on 1-4-1981 as against the cost of acquisition. Thus the fair market value of the asset acquired by the assessee is to be taken and not the fair market value of the asset which is sold by the assessee after improvement. "Fair market value" of the capital asset as on 1-4-1981 is to be substituted for cost of acquisition at the option of the assessee. Therefore, it has to be linked to the asset o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Shakuntala Kantilal. The facts of the case are that the assessee owned a piece of land. In 1963, she entered into an agreement of sale of the said property with R. Disputes subsequently arose. R filed a suit for specific performance and eventually, here was a settlement whereby the assessee agreed to pay Rs. 35,504 to R. In the meantime, the assessee entered into another agreement of sale in 1967 in respect of the same property with C. C had to give an assurance to R that, on the completion of the sale, they would deduct Rs. 35,504 from the total consideration and pay it to R. The assessee claimed that this amount of Rs. 35,504 should be allowed as deduction for the purpose of computing her income under the head "Capital gains" and this claim was accepted by the Tribunal. On a reference held: "that, unless the assessee had settled the dispute with R, the sale transaction with C could not have materialized. The sale consideration had to be reduced by the amount of compensation paid to R." 15. From the above it is evident that the facts of the assessee's case are altogether different and, therefore, the above decision would not support the contention of the assessee tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'cost of acquisition' and not the date on which asset became a capital asset for the purpose of levy of capital gains tax. The cost of acquisition did not change. It was the cost on the date when the asset was actually acquired by the assessee or by his grandfather. The property which was transferred could become the property of the assessee only at one point of time. It would not become the property of the assessee as a non-capital asset at one point of time and as a capital asset at another point of time. The date of acquisition of the land for the purposes of section 48 read with section 49(2) of the Act was the date when the land in question was acquired by the grandfather of the assessee prior to 1941. The assessee, therefore, had the option, either to take the original cost of acquisition or its fair market value as on 1-1-1954. Therefore, for the purpose of determining the capital gains, the cost of acquisition of the agricultural land belonging to the assessee had to be taken as on 1-1-1954, and not as on 1-4-1970." 16.3 Similar view is also taken by the Hon'ble Kerala High Court in the case of Smt. M. Subaida Beevi. 16.4 The Hon'ble Jurisdictional High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Hon'ble Jurisdictional High Court cannot be sustained. 20. Now the question still remains how to determine the fair market value of the raw and uncut diamond as on 1-4-1981. We find that the revenue in its written reply at page 6 has given a suggestion in this regard which reads as under:- "A possibly acceptable valuation of the asset under question would have been the actual valuation of the rough diamonds through personal evaluation of an approved valuer. This unfortunately did not take place, in this particular case. As per assessee's own valuer (Govt. approved valuer) the declaration to be given by the valuer requires personal inspection of the property, which is mandatory as per Form 1, Rule 8D of the Wealth-tax Rules, 1957 and thus without physical verification valuation of any capital asset is an impossibility". 20.1 We entirely agree that the above suggestion of the revenue that the proper method would be to obtain valuer's report in respect of raw and uncut diamond determining the fair market value of such diamond as on 1-4-1981. We find that in the case under consideration before us the assessee has submitted such valuation report before the CIT(A) which would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Appeals) or, as the case may be, the Commissioner (Appeals) shall not take into account any evidence produced under sub-rule (1) unless the Assessing Officer has been allowed a reasonable opportunity- (a) to examine the evidence or document or to cross-examine the witness produced by the appellant, or (b) to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant. (4) Nothing contained in this rule shall affect the power of the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the Assessing Officer) under clause (a) of sub-section (1) of section 251 or the imposition of penalty under section 271." Clause (c) of Rule 46A(1) provides where the appellant was prevented by sufficient cause from producing any evidence before the Assessing Officer which is relevant to any ground of appeal then the CIT(A) can admit such additional evidence. Admi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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