THE issue before the Bench is - Whether the sovereign power of a State to levy tax can be extended to the level of regulating the conduct of a citizen to such an extent of verification that is equivalent to the one which is made by the police officials vis-a-vis a person, who committed the crime. NO is the answer.
Facts of the case
The assessees are the members of the Hindu Undivided Family, with Karta of the family being also an independent assessee. All the assesses had availed the benefit under Voluntary Disclosure of Income Scheme (VDIS) by declaring their items, which were mostly of jewellery, namely gold and
diamonds and received certificates of disclosure. In the meanwhile, the assesses sold away the jewellery declared by them under the VDIS and the sale proceeds of the jewellery were shown in the respective returns, as capital gains. Subsequently, an enquiry was conducted against the genuinity of sale of diamonds at Surat, and disatisfied, the AO held that the sale proceeds of diamonds as unexplained cash credit. On appeal, the CIT(A) confirmed the order of the AO. On further appeal, the Tribunal however allowing the appeal of the assessees, set aside the order of the CIT(A).
Having heard the parties, the High Court held that,
++ it is seen that the starting point for the doubt of the AO was as to the very separation of diamonds from jewellery. The next was about the actual sale at Surat. It may be true that the assessees did not declare the diamonds in their unused and unembedded form. When jewellery of such a huge value is declared, it is axiomatic that the items of jewellery are studded with diamonds and other precious stones. No effort was made to have a detailed account of the nature of jewellery that was declared. There is no dispute that what was declared by the assessees was in the form of ornaments. It is just unthinkable that the ornaments of such huge value and quantity would be in the form of pure gold;
++ there is ample evidence to show that all the three assesses have sold the diamonds, that are separated from the jewellery, at Surat. It is a place known for voluminous business in diamonds. Not only the particulars of the persons, who purchased the diamonds was furnished, but also the manner of payment was disclosed. The entire payments were through demand drafts. The cross verification undertaken by the AO, did not result in noticing of any discrepancy. The bank accounts of the purchasers were verified and the demand drafts issued to the assessees, towards consideration, corresponded to the entries in the bank accounts;
+ in these circumstances, unable to find any discrepancy in such important aspects, the AO started the verification of travel particulars of the assessees. The record discloses that the sale of diamonds did not take place at a time and it was in a phased manner. The purchaser was undoubtedly a dealer in diamond. Even assuming that on certain occasions, the corresponding assessee did not proceed to Surat, it cannot be a factor to disbelieve the transaction. When not only the assessees have disclosed the wealth under VDIS, but also have shown sale proceeds as capital gains, it was far fetched, if not unreasonable, on the part of the AO, to doubt their honesty in this behalf. For all practical purposes, the AO subjected the assessees herein to a verification equivalent to the one which is made by the police officials vis-a-vis a person, who committed the crime. Though it is prerogative of the State to levy tax, referable to its sovereign power, it cannot be extended to the level of regulating the conduct of a citizen to such minute extents; The relief granted by the Tribunal is based its findings on pure question of fact. Even before us, no question of law is argued. Except that the AO intended to treat the sale proceeds of jewellery u/s 68, no other provision of law is invoked, nor any principle is projected
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