IN THE INCOME TAX APPELLATE TRIBUNAL : SPECIAL BENCH

CUTTACK 

(Before Shri G.D. Agrawal, V.P., Shri Dinesh K. Agarwal, J.M.

And Shri Jugal Kishore, A.M.)

I. T. A. No. 555/CTK/2002

Assessment Year 1998-99

Appellant by : Shri S. K. Tulsiyan

                        Respondent by : Shri Vinay Kumar, Shri Alok Nath

                            And Shri B.D. Kaler

O  R  D  E  R

The cost of the original asset viz. the raw and uncut diamond is to be substituted by the fair market value of the same as on 1-4-1981 and, therefore, for determining the capital gain in the case of the assessee, the fair market value of the raw and uncut diamond as on 1-4-1987 is to be taken and not the fair market value of the polished and finished diamond. (Para 17)

2.The Division Bench hearing this case had made a reference to the Honble President I.T.A.T. u/s. 255(3) of the Income Tax Act, 1961 for consideration of Special Bench.  Accordingly, the Honble President, I.T.A.T. was pleased to constitute Special Bench of three members to consider the following question :-

Whether on the facts and circumstances of the case and as per provisions of sec. 55(2)(b)(i) the assessee is entitled to opt for the fair market value of an asset as on 01.04.1981 OR the valuation arrived at by the department by applying the cost inflation index method in the reverse direction on the valuation of assets as on 1.4.1987, was the correct method for arriving at fair market value of assets as on 1.4.1981.

3.Vide subsequent order dated 18.07.2006, the Honble President, I.T.A.T. has further directed whole appeal to be disposed of by this Special Bench.  Accordingly, as per direction of the Honble President, I.T.A.T., all the grounds taken by the assessee are disposed of by this Special Bench.  Accordingly, as per direction of the Honble 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 assessees 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.Grounds No.2 to 4 of the assessees 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 learned authorities below should have accepted the capital loss or gain as returned by the appellant.

4.For that in the facts and circumstances of the case, the assessment as made by the assessing officer as well as the appellate order passed by the learned CIT(Appeals) are submitted to be quite contrary to the law as prescribed.

7.The facts, relating to these grounds are that the assessee is an individual who derives income from salary and interest.  The return was filed showing a net income from salary Rs.28,002/- and interest Rs.27,479/- aggregating to Rs.55,480/-.  During the course of assessment proceedings, it was found by the Assessing Officer that the assessee has shown Long Term Capital Gain on sale proceeds of diamond as under :-

7.1From the details filed by the assessee along with return, it was observed by the Assessing Officer that the assessee under VDIS, 1997 disclosed investment in acquisition of diamonds valued at Rs. 1,39,020/- giving description as Tejabi Gold and 16 Pcs. Of diamonds with spot and cracks for the assessment year 1975-76 which was accepted by the Ld. CIT, Cuttack vide certificate dated 22.12.1997 issued u/s. 68(2) of VDIS, 1997.  It was further observed that the assets disclosed under VDIS was processed through M/s. Santosh Gem & Jewellers and thereafter the same has been sold for a sum of Rs.20,77,670/-.  In the statement of computation of capital gain, the assessee has taken the valuation of diamond as on 01.04.1981 on the basis of valuation report of Valuer dated 26.2.1998 at Rs.6,37,990/- and for this purpose, the assessee has given a note in the computation sheet which reads as under :-

Valuation of diamonds as on 01.04.1981 is taken for capital gain purpose as because the said diamonds was acquired by the assessee in the assessment year 1975-76.

From the above material the Assessing Officer was of the view that the assessee 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 01.04.1987 for the assessment year 1975-76, the valuation as on 01.04.1981 is unlikely to be Rs.6,37,990/-.  The Assessing Officer after considering the assessees submission and direction of the ld. Addl. CIT u/s 144A dated 5-2-2001 computed the capital gain at Rs. 16,86,204/- as under :-

Accordingly, the assessment was completed vide order dated 06.02.2001 passed u/s. 143(3)/144A as under :-

8.The assessee preferred first appeal before the Ld. CIT(A).  Before the CIT(A) assessee filed a valuation report of raw and uncut diamond as on 1-4-1981 valued by Shri Mansukhlal Lotia, Raipur.  However, the CIT(A) was of the opinion that the valuation report amounts to additional evidence as the same was never furnished before the A.O. at the time of assessment.  Since the conditions specified under Rule 46A are not satisfied the additional evidence in the form of valuation report furnished by the assessee was not accepted.  Accordingly CIT(A) upheld the order passed by the Assessing Officer vide finding recorded in paras 6 & 7 appearing at pages 16 to 18 of his order which are reproduced as under :-

6.It is worthwhile to mention that similar issue of possession of raw, uncut, polished diamond/precious stone with spots, cracks etc. as on 1.4.81, its processing and improvement sometime in 1998 and sales during the same year have been noticed, in many cases where appeals are filed.  In all these cases the appellants have shown to have possessed rough, uncut, unfinished diamond pieces with spots and cracks before 1.4.98.  After a long lapse of period i.e. during the year 1998 these unfinished diamonds/precious stones have been given to one concern i.e. M/s. Santosh Gem & Jewellers for processing after which polished diamonds have surfaced.  These polished diamonds have also been purchased by the said concern i.e. M/s. Santosh Gems & jewelers.

6.1In the case of the appellant, the rough unfinished diamond pieces are capital assets which became the property before the first day of April, 1981.  The finished diamonds which surfaced in the year 1998 were not having any existence as on 1.4.81.  In view of this, the question of adopting or opting for the value of finished diamond as on 1.4.81 does not arise at all.  Since the capital assets in the form of finished diamond was not existing on 1.4.81 the appellants option of adopting its FMV is out of question.  On the other hand, it is undisputed fact that the rough unfinished diamonds were the capital asset which became the property prior to 1.4.81 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 1.4.81 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 1.4.87 and the same has also been brought to the notice of the A.O. in course of assessment proceedings.  The specified date i.e. 1.4.81 comes prior to 1.4.87.  The value therefore as on 1.4.81 will definitely be lower than as on 1.4.87.  There is no such circumstances for which the market value of the same asset as on 1.4.81 will be higher than that of 1.4.87.

6.2The 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 1.4.81

6.3The condition that both the assets are same is not violated by taking the FMV of the asset acquired.

6.4Taking into account the order at Para 4 to 6.3, it is concluded as under :

i)The A.O. has only followed the legal provision relating to the computation of capital gain and he has not confused the entire issue as contended by the appellant in his grounds of appeal.

ii)The A.O. has correctly applied the provision of section 45 to 55 of the Act and has not erred in computing the capital gains as has been alleged in the grounds of appeal.

iii)There is no scope for misinterpretation of meaning of asset because of the clear provision of the Act.  The A.O., therefore, has come to the correct conclusion.

iv)In the entire issue the A.O. has not questioned the disclosure made by the appellant.  The points that have been considered relate to aftermath of disclosure.  In any case provisions of sections 64, 71 & 72 of the VDIS, 1997 are very clear and the A.O. has not gone beyond his statutory function while finishing the assessment.

7.In the result, order of the Assessing Officer is confirmed.

9.Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.

10.At the time of hearing before us ld. counsel for the assessee argued at length.  He stated that the assessee had acquired 16 pieces of diamond with cracks and spots during the accounting year relating to assessment year 1975-76.  Such diamonds were not declared before the department at that time.  Therefore, the same were declared by the assessee under VDIS 1997.  During the accounting year relevant to assessment year under consideration part of such diamonds were got processed and after processing the finished diamonds were sold for a sum of Rs.20,77,607/-.  The assessee incurred an expenditure of Rs.62,783/- on the processing of such diamonds.  That since the cut and polished diamonds (i.e. finished diamonds) were sold by the assessee, the capital gain is to be worked out on the sale of finished diamonds.  The capital assets which is sold by the assessee is finished diamonds.  That as per Sec.48 as well as Sec.55(2) the cost of acquisition of the asset transferred by the assessee is to be considered.  The asset transferred by the assessee is finished diamond and, therefore, cost of acquisition 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  Honble Apex Court

in the case of CIT vs Gem India Manufacturing Co. 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 :-

Harish Mahindra and another vs. CIT 135 ITR 191 (Bom)

CIT vs. Shakuntala Kantilal 190 ITR 56 (Bom)

10.1It 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 finished diamond.  Therefore, the fair market value of the raw diamond cannot be taken.  It is held by the Honble Apex Court in the case of CIT vs. B.C. Srinivasa Setty 128 ITR 294 that if the computation provision fails, the capital gain cannot be levied.  That if the stand of the revenue is accepted that the fair market value of raw diamond is to be taken then computation provision will fail and the capital gain cannot be levied upon the assessee.  The computation provision would be workable only when the cost of acquisition or fair market value of the assets transferred i.e. finished diamond is taken into account while computing the capital gain.

10.2Ld. Counsel further contended that the A.O. has worked out fair market value of the diamond as on 1-4-1981 by applying the cost inflation index in a reverse direction.  He stated that the Honble Jurisdictional High Court has held in the case of Jogat Mohan Kapur vs. Wealth Tax Officer (211 ITR 721) that the cost inflation index cannot be applied in the reverse direction.  Therefore, the action of the A.O. is contrary to the decision of Jurisdiction High Court and deserves to be quashed.

10.3It is stated by the ld. counsel that the A.O. has adopted the value disclosed by the assessee for determining the fair market value of the asset as on 1-4-1981 by applying the inflation index in reverse direction.  He stated that the CBDT had issued the Circular No.754 dated 10-6-1997 clarifying the voluntary disclosure of scheme in 1977.  In reply to question No. 16 it is stated that the value adopted as on 1-4-1987 is for the limited purpose of the scheme.  Thus as per the circular of the CBDT the value disclosed by the assessee for the purpose of VDIS cannot be utilized for any other purpose.  Therefore, the action of the A.O. in reverse working of the fair market value of the capital asset on the basis of value disclosed in the VDIS is contrary to the Board Circular and deserves to be cancelled.

10.4In view of above it is contended by the ld. counsel that the computation of capital gain made by the assessee is correct and the same should be upheld.

11.Ld. D.R. on the other hand also argued at length.  His argument can summarized as follows.  At the outset he fairly admitted that the asset was acquired in the year 1975-76.  Therefore, the assessee is entitled to opt for fair market value of the asset as on 1-4-1981 as per provision of Sec.55(2)(b)(i) of the I.T.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.  Sec.48 provides for deduction of cost of acquisition as well as cost of improvement.  That under Sec.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. vs. CIT (2002) 254 ITR 175

2.M.Nachiappan vs. CIT (1998) 230 ITR 737

3.Keshavji Karsondas vs. CIT (1994) 207 ITR 737

4.B.N. Vyas vs. CIT 159 ITR 141

5.ITO vs. Deepak Raj Narang 27 ITD 139

6.CIT vs. M.Subaida Beevi 160 ITR 557

7.Ranchhodbhai Baijibhai Patel vs. CIT 81 ITR 446

8.CIT vs. Steel Group Ltd. 131 ITR 234

11.1Ld. D.R. further stated that the second question is how to determine the fair market value of the raw and uncut diamond.  The written submission furnished by the ld. D.R. in this regard reads as under :-

a)The FMV of the raw diamonds would no doubt be the price that a willing purchase would pay to a willing seller of the raw diamonds in question, having due regard to its existing conditions with all its advantages, potentialities etc.  The FMV of the rough diamonds is now to be determined as on 1-4-1981.

b)There are only two actual values in our hands the value disclosed by the assessee of the rough diamonds as on the date of purchase (i.e. F.Y. 1975-76) and the value which was all the Fair Market Value of the same rough diamonds as consciously disclosed by the assessee in VDIS 1997, that is the FMV as on 1-4-1987.  It is another matter that both these values are the same i.e. Rs.1,39,020/-.  All the other values are just deemed/calculated and hypothetical values.  The cost of acquisition as in F.Y. 1975-76 or the FMV as on 1-4-1987 have to be the basis for arriving at the FMV as on 1-4-1981 for the purpose of calculation of Capital Gains/loss in this particular case.  As it happens both these final values are one and the same i.e. Rs.1,39,020/-.

c)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 assessees own valuer (Govt. approved valuer) the declaration to be given by the valuer requires persona 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 (vide Page 39 of the paper book provided by the assessee).

d)A twist to the whole question is the provision of section 73 of the VDIS 1997 read with the Circulars 753, 754 and 755 of the CDBT, which provide that undisclosed income represented by Jewellery acquired prior to 1-4-1981 is required to be disclosed (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 it, Will the value of assets declared be accepted by the Department as it is or will it be necessary to file a valuers 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 been acquired prior to 1-4-1987, the value will be taken as on 1-4-1987 as certified by valuer.  Further, the value adopted as on 1-4-1987 is for the limited purpose of the scheme.  This matter is to be understood in depth, particularly the phrase limited purpose of the scheme.  A closer look at the whole answer of the Board, reveals that this declaration of the Fair Market Value of the asset in question as on 1-4-1987 by the assessee had to be the correct value, as duly certified by a valuer.  So far as the limited purpose is concerned, it clearly implies that the limited purpose was the purpose of VDIS only and for that particular year only.  It only meant that this disclosure of value would not have any implication for income tax and wealth tax purposes of earlier years.  The limited purpose in no way implies that the value so disclosed will not be of any consequence in income tax or wealth tax proceedings in the future years.  And the limited purpose phrase used in the Circular No.754 of the Board, in no way precludes the use of the disclosed value for being used for any logically correct purpose like determining the FMV of the asset in question as on a particular date, if the need arose, as it has done in this instant case.  More so because there is no other way available.  Moreover, only the fact is being utilized for the purpose of quantifying the fair market value of the rough diamonds as on 1-4-1981.  And fact cannot change.

g)There cannot be two cost of acquisition.  Cost of acquisition of an asset is always one.  It cannot be more than one.  Only the Fair Market Value can be different for different years.

11.2It is further contended by the ld. D.R. that the assessee himself has shown the fair market value of the asset in question at Rs.1,39,020/- as on 1-4-1987 while filing the declaration under VDIS.  Therefore, now the fair market value as on 1-4-1981 claimed by the assessee at Rs.6,37,990/- is a very unlikely proposition.  He stated that when the assessee himself has declared the fair market value of the assets as on 1-4-1987 for the purpose of VDIS, the A.O. was fully justified in determining the fair market value as on 1-4-1987 by making pro rata calculation on the basis of available inflation index.  He also explained the rational behind indexation is to set off against the inflation and the fall in the purchasing power of money.  He, therefore, stated that the use of the inflation index by the A.O. 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 A.O. 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.  Sec. 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 exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilized in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company:

Provided further that where long term capital gain arises from the transfer of a long term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words cost of acquisition and cost of any improvement, the words indexed cost of acquisition and indexed cost of any improvement had respectively been substituted :

Provided also that nothing contained in the second proviso shall apply to the long term capital gain arising from the transfer of a long term capital asset being bond or debenture other than capital indexed bonds issued by the Government:

Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section.

12.1From the above it is evident that for computing the capital gain from the full value of the consideration received or receivable by the assessee following amount is to be reduced:

i)expenditure incurred in connection with such transfer;

ii)cost of acquisition of asset;

iii)cost of any improvement thereto

Sec.55 provides the meaning of the words cost of acquisition and cost of improvement etc. Clause (b)(i) of sub-section 2 of Sec.55 reads as under :-

in relation to any other capital asset asset

i)where the capital asset became the property of the assessee before the 1^st day of April, 1981 means the cost of acquisition or the asset to the assessee or the fair market value of the asset on the 1^st day of April, 1981, at the option of the assessee.

12.2Thus 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.  Sec. 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 originally acquired by the assessee.  The asset sold by the assessee after improvement cannot be said to be the asset acquired by the assessee is to be taken into account and not the fair market value of the finished diamond sold by the assessee.  Sec. 48 provides deduction not only for the cost of acquisition but also for cost of improvement.  If the contention of the ld. counsel is accepted that as against fair market value of the original asset the fair market value of the improved asset is to be considered then allowing further deduction for cost of improvement would amount to allowing double deduction for the same.  By providing separate deduction for cost of acquisition as well as cost of improvement, intention of the legislature is clear that the cost of acquisition of original asset is to be allowed and thereafter further deduction for improvement in the original asset is to be allowed.

13.Ld. Counsel for the assessee in support of his contention has relied upon the decision of Honble Bombay High Court in the case of Harish Mahindra and another (supra).  The facts in that case was the assessee had acquired 500 shares before 1-1-1954.  The shares were sub-divided after that date.  The Bonus share also issued subsequent to 1-4-1954.  On the above facts the dispute was about the determination of the fair market value of the shares as on 1-4-1954.  On the above facts their Lordships held as under :-

For purposes of ascertainment of the fair market value of the shares on January 1, 1954, any issue of bonus shares subsequent to that date is wholly extraneous and irrelevant and cannot be taken into consideration.

14.In our opinion the ratio of the above decision does not help the contention of the assessee that the fair market value of the finished diamond as on 1-4-1981 is to be considered and not the fair market value of raw and uncut diamond.  On the other hand this decision would support the case of the revenue because it is the contention of the revenue that the subsequent processing of diamond is irrelevant for determining the fair market value of the raw diamond as on 1-4-1981.  Honble Bombay High Court has also held that subsequent event after 1-1-1954 is irrelevant and cannot be taken into consideration.

14.1Ld. Counsel has also relied upon another decision of the Honble Bombay High Court in the case of CIT vs. Shakuntala Kantilal 190 ITR 56.  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 assessees case are altogether different and, therefore, the above decision would not support the contention of the assessee that fair market value of the finished diamond as on 1-4-1981 is to be considered.

16.On the other hand ld. D.R. has relied upon the decision of Meccane Industries Ltd. (supra) where in the assessee had purchased the agricultural land but subsequently it was sold for non-agricultural purpose.  It was the claim of the assessee that for determining the capital gain the fair market value of the land on the date of its conversion into non-agricultural land is to be taken as notional cost of acquisition of the capital asset.  Honble High Court rejected the assessees contention and held as under :-

That the assessee had acquired the lands at a certain value and when the assessee sold those lands, they were sold at a much higher value.  The cost of acquisition did not change.  It remained constant.  The fact that by the time the assessee sold them, they were to be put to use for non-agricultural purposes did not involve any additional cost being incurred by the assessee.  The object of applying commercial principles of accounting is to ascertain the real profit which can appropriately be regarded as a capital gain and brought to tax.  Here, in this case, the real extent of the gain was obviously the difference between the price at which the assessee sold the property and the price which the assessee had paid for acquiring the property.  The cost of acquisition was the cost of acquisition of the agricultural land and not the notional cost as on the date the lands were put to non-agricultural use.

16.1Similer view was taken by the Honble Madras High Court in the case of M. Nachiappan (supra) and by the Honble Gujrat High Court in the case of B.N. Vays (supra).

16.2In the case of Keshavji Karsondas (supra) the agricultural land was acquired by the grand father of the assessee prior to 1941 and the assessee became the owner of the land by devolution.  The agricultural land was not included within the definition of capital asset till 1-4-1970 and it was only by Finance Act 1970 certain agricultural land in India were included in the definition of capital asset.  The assessee transferred the agricultural land during the previous year relevant to assessment year 1972-73.  He claimed that the fair market value of the land on the date on which it became capital asset should be considered.  Honble Bombay High Court rejected the assessees claim and held as under :-

that what was relevant was the 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 acquisition or its fair market value as on January 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 January 1, 1954, and not as on April, 1, 1970.

16.3Similar view is also taken by the Honble Kerala High Court in the case of Smt. M. Subaida Beevi (supra).

16.4The Honble Jurisdictional High Court in the case of Steel Group Ltd. (supra) held as under :-

While computing capital gains the assessee is concerned with the cost of acquisition, that is, the price which was paid by the assessee for acquiring the capital asset on the date it was acquired subject to the adjustment laid down under s.55.  The assessee has no concern with what would be the value of that asset on some subsequent occasion, in other words, subsequent events affecting its value need not be taken into consideration.

17.The ratio of the above decisions relied upon by the ld. D.R. fully supports the case of the revenue that the cost of the original asset viz. the raw and uncut diamond is to be substituted by the fair market value of the same as on 1-4-1981 and, therefore, for determining the capital gain in the case of the assessee, the fair market value of the raw and uncut diamond as on 1-4-1987 is to be taken and not the fair market value of the polished and finished diamond.

18.Now the second question arises, how to determine the fair market value of the raw and uncut diamond as on 1-4-1987.  The A.O. has taken the value of the diamond as declared for the purpose of VDIS as on 1-4-1987 and has applied cost inflation index in a reverse direction.  We find that the Honble Jurisdiction High Court has considered the similar issue in the case of Jagat Mohan Kapur (supra) wherein their Lordships has held as under :-

The cost Inflation Index is to be applied only to forward figures in time, that is, the inflation is to be calculated by appropriately inflating the cost of acquisition of the capital in accordance with the declared index.  There is no warrant for reversing the operation of the Cost Inflation Index, and treating it in a reversed manner as a shrinkage index for the purpose of computing past land value.  This method would lead to unfairness and glaring financial fallacies.  Application of the Cost Inflation Index in such a reversed manner for computation of land value is arbitrary, unreasonable and in violation of the mandates of article 14 of the Constitution of India.

19.From the above it is evident that their Lordships of the Jurisdictional High Court have disapproved the application of cost inflation index in the reverse direction.  Therefore, the application of the cost inflation index in a reverse direction by the A.O. being contradictory to the decision of the Honble 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 assessees 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 (vide Page 39 of the paper book provided by the assessee)

20.1We entirely agree that the above suggestion of the revenue that the proper method would be to obtain valuers 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 be evident from page 15 paragraph 5 of the order of the CIT(A) which reads as under :-

While considering the claim of the appellant for accepting the valuation report of raw and uncut diamonds as on 1-4-1981 valued by one Mansukhlal Lotai, Raipur, I find the said valuation report was never before the A.O. at the time of assessment and it has surfaced for the first time at this stage.  It is not understood how the report was not submitted before the A.O. when the valuation was made as early as 2-1-98.  The submission of the valuation report amounts to additional evidence and is subject to the conditions under Rule 46A of I.T.Rule    1962.  Since conditions specified under clauses (a)(b)(c)(d) of Rule 46A(1) are not satisfied, the additional evidence produced is not accepted.

20.2Thus the assessee has submitted the valuation report of raw and uncut diamond before the CIT(A) which probably escaped the notice of the ld. D.R. while furnishing the above written submission before us.  The ld. CIT(A) has refused to admit the same as an additional evidence on the ground that the condition specified under Rule 46A(1) are not satisfied.  Rule 46A of the I.T.Rules reads as under :-

(1)The appellant shall not be entitled to produce before the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)], any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the [Assessing Officer], except in the following circumstances, namely :-

(a)where the [Assessing Officer] has refused to admit evidence which ought to have been admitted or

(b)where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the [Assessing Officer] ; or

(c)where the appellant was prevented by sufficient cause from producing before the Assessing Officer any evidence which is relevant to any ground of appeal ; or

(d)where the [Assessing Officer] has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal.

(2)No evidence shall be admitted under sub-rule (1) unless the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] records in writing the reasons for its admission. 

(3) The [Deputy Commissioner (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 Com missioner  (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 A.O. which is relevant to any ground of appeal then the CIT(A) can admit such additional evidence.  Admittedly the valuation report of raw and uncut diamond as on 1-4-1981 is relevant for the issue under appeal before us.  We find that the stand of the assessee before the A.O. was that the fair market value of the finished diamond should be taken.  He has furnished the valuation report for the finished diamond before the A.O.  In the above circumstances there was no occasion for the assessee to produce the valuation report for raw and uncut diamond before the A.O.  Neither the A.O. asked the assessee to furnish such valuation report before him.  When the A.O. did not accept the assessees contention that the fair market value of finished diamond is to be considered, the assessee furnished the valuation report of raw and uncut diamond before the A.O.  We also find that under Rule 46A(4) the CIT(A) has the power to admit any evidence which will enable him to dispose of the appeal.  In our opinion, the valuation report of raw and uncut diamond is an important document which would be very relevant for the disposal of the appeal.  Therefore, in our opinion, CIT(A) ought to have admitted the additional evidence, which was in the form of valuation report of raw and uncut diamond.  However, as per Sub-Rule 3 of Rule 46(a) whenever any additional evidence is admitted the A.O. should also be allowed reasonable opportunity to examine such evidence.

21.In view of above factual/legal position, in our opinion, it would meet the ends of justice if the order of the lower authorities on this point is set aside and matter is restored back to the file of A.O.  The assessee is directed to produce the valuation report of raw and uncut diamond before the A.O.  Thereafter the A.O. will re-compute the capital gain after considering such valuation report as basis for determining fair market value of raw and uncut diamond as on 1-4-1981.  The A.O. will allow adequate opportunity to the assessee while giving effect to this order.

22.Grounds No.5, 6 and 7 of the assessees appeal reads as under :-

5.For that in view of payment of appeal fees at the maximum amount, the appellant may be allowed necessary cost, if the appeal is allowed.

6.For that the appellant craves leave to add/amend any of the grounds further at the time of hearing.

7.For that the appeal order is otherwise wrong, illegal and bad in law.

23.At the time of hearing before us no arguments were advanced in support of any of the above ground.  Therefore, the same are being treated as not pressed and accordingly rejected.

24.In the result assessees appeal is deemed to be partly allowed for statistical purposes.