1. This appeal raises a somewhat interesting question relating to capital gains. There was a partnership firm known as Veerji Di Hatti.
It consisted of two partners, father and son each having 50 per cent share. This was going on for several years. On 31-3-1978, however, the firm was dissolved. The son, Sardari Lal, continued the business as sole proprietor. The assessee, i.e., the father before us had a balance of Rs. 29,392 in his capital account at the time of retirement. The assessee in payment of his capital was given some gold ornaments and jewellery. Between 18-4-1978 to 7-11-1978, the assessee sold the gold ornaments and jewellery worth Rs. 27,763 to his son and the total consideration came to Rs. 45,789. The assessee declared capital gains of Rs. 18,178. The assessee further claimed that the capital gains should be treated as long-term capital gains.
2. The ITO first of all invoked the provisions of Section 52(1) of the Income-tax Act, 1961 ('the Act'). He fixed the market price of the gold ornaments and jewellery sold at Rs. 68,273. Secondly, he held that the capital gains would be short-term capital gains. On both these accounts the assessee failed before the AAC.3. Mr. M.L. Khanna, the1 learned counsel for the assessee, contended that the application of Section 52(1) is completely misconceived specially after the decision of the Supreme Court in the case of K.P.Varghese v. ITO  131 ITR 597. Secondly, he contended that the capital gains could be long-term capital gains in view of the language of Section 49 of the Act. The learned senior departmental representative submitted that the decision in K.P. Varghese's case (supra) relates to Section 52(2) and it has no application to the provisions of Section 52(1). Thirdly, he contended that the capital gains should be treated as short-term capital gains because the jewellery became the capital assets in the hands of the assessee only on 31-3-1978 at the time of dissolution of the partnership firm.
4. So far as the applicability of Section 52(1) is concerned, Mr.
Khanna is right that the matter is no longer arguable in view of the decision of the Supreme Court in K.P. Varghese's case (supra). The learned departmental representative is not right in submitting that that case has no application in interpreting Section 52(1). The principle laid down by their Lordships of the Supreme Court is applicable equally to both the Sub-sections of Section 52. The essential requisite for either of the Sub-sections is that there should be understatement of consideration. In other words, there should be evidence that the consideration received is more than what it has been declared. There must be a finding that the assessee received more than the amounts mentioned as sale price. That finding is totally absent.
Though Mr. Khanna argued that there is no finding that the transaction was with a view to avoid tax, perhaps the finding is inherent in the order of the ITO. But that question need not detain us as we have held that Section 52(1) cannot be applied in the absence of a finding with regard to the understatement of consideration.
5. The next question is whether the capital gains should be short-term capital gains or long-term. Though Mr. Khanna referred to the provisions of Section 49 to impress upon us that the cost of acquisition should be taken as the cost of acquisition in the hands of the previous owner, which only would mean that the period between the date of acquisition and the date of sale would be beyond 36 months, the crucial provision is Section 2(42A) of the Act defining the 'short-term capital assets'. But before we go to the definition and the interpretation of the provision, it is better to recapitulate some more facts. The assessee brought in some old jewellery and gold ornaments as his capital in the partnership firm formed for the purpose of carrying on business along with his son. Though at one point of time an argument was taken that when these very gold ornaments came back to the assessee, still they retained the character as capital assets in the hands of the assessee when he came out on account of the dissolution of the partnership firm. Mr. Khanna gave up that contention and proceeded on the basis that once the gold ornaments were brought by the assessee as his investment towards capital, they became the stock-in-trade of the partnership firm along with other stock. It is, therefore, unnecessary to go into the question as to the character of the gold ornaments after they were brought in by the assessee into the partnership fold. In our opinion, the gold ornaments became the stock-in-trade of the partnership firm.
6. Then the question would be what will be their character in view of return of his capital at the time of dissolution. Here also there cannot be any controversy. The gold ornaments would become capital assets after the assessee received them on dissolution unless an intention is there to carry on some business taking the ornaments as stock-in-trade but no such situation has arisen in this case. Here again, the authorities and the commentaries relied on by the learned departmental representative as to whether the stock-in-trade would become capital assets and vice versa are not necessary to be discussed at all. In the absence of any other material, it is safe and proper to proceed on the basis that the gold ornaments became the capital assets of the assessee on the receipt of the same at the time of dissolution.
7. The third question is whether the gold ornaments received by him are all old ornaments or not. Evidence has been produced that the very same gold ornaments have been shown for the last seven, to eight years and they have come in the hands of the assessee. At this stage, the learned departmental representative pointed out that some gold ornaments are new ones which have also been divided and they have come to the share of the assessee. The learned departmental representative appears to be right. Mr. Khanna also admitted that some new ornaments were also there. However, on this question, there is no specific finding by either of the authorities below in the view they have taken. But as to whether this matter will have to be looked into or not would depend upon the further findings to be given by us as to whether the capital gains should be short term or long term. At this stage we, therefore, do not want to say anything. We will revert back to this matter after the decision on the legal issue.
8. With the above background, we wish to quote the relevant portions of the definition of 'short-term capital asset' : 2(42A). 'short-term capital asset' means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer.
Explanation : (i) In determining the period for which any capital asset is held by the assessee- (b) in the case of a capital asset which becomes the property of the assessee in the circumstances mentioned in Sub-section (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 ; This leads to the provisions of Section 49. There again the relevant portion with which we are concerned in Section 49(1)(iii)(b), which is as under : (b) on any distribution of assets on the dissolution of a firm, body of individuals or other association of persons, or The scheme of levy of capital gains is self-contained in Sections 45 to 55A of the Act. There is no controversy that capital gains arose on the sale of gold ornaments by the assessee to his son. As already stated, the controversy is whether the assessee held the capital assets for more than 36 months. Without looking to Explanation (i)(b) read with Section 49, it may look superficially that the assessee has not held the capital asset for more than 36 months. But the Explanation makes an artificial rule for the purpose of determining the period of 36 months.
Evidently the Parliament thought of taking the period as inclusive of the period during which the previous owner held the asset. That is why Clause (b) to Explanation (i) is inserted. This has obvious application to a situation arising before us.
The learned departmental representative's argument is simple. The gold ornaments became the capital asset of the assessee on 31-3-1978. This asset was not held by the previous owner as capital asset as already held by us. It was held as stock-in-trade. Mr. Khanna's argument is that when the assessee brought the gold ornaments as his capital, though they were converted into stock-in-trade of the partnership firm, they continued to be capital asset. This argument is fallacious. When once the assessee parted with the gold ornaments, it became the stock-in-trade of the partnership firm. They did not retain their separate identity. They became the property of the partnership firm.
They were merged with the stock-in-trade of the firm. The assessee cannot claim ownership or any right to the specific properties belonging to the partnership firm and this is a well settled principle.
Therefore, there can be no doubt that the previous owner of the gold ornaments was the partnership firm. The partnership firm obviously did not hold it as capital asset.
9. If the interpretation of Clause (b), referred to above, is that previous owner should have also held the asset as capital asset in his hands, the assessee would undoubtedly lose. However, from a careful analysis of the provisions of Section 2(42A), it appears to us that the previous owner need not have held the asset as capital asset in his hands. The language used is the 'asset was held'. The learned departmental representative argued that when the words 'the asset' is used, it should mean only the capital asset. We are afraid such an interpretation is not possible. No doubt in Clause (b) the words 'a capital asset' are mentioned, while using the word 'asset' with the article 'the' in the latter portion of the provision, it cannot be said that the Legislature used the asset as the capital asset. According to us, 'the asset' must be understood in a generic sense as asset of any kind. The asset must be understood as an asset appearing on the right hand side of the balance sheet which means also stock-in-trade.
Stock-in-trade is also an asset. In our opinion, therefore, the word 'asset' in Clause (b) should not be understood as a capital asset and it should be only understood as any asset. Since admittedly the gold ornaments were held by the partnership firm which was the previous owner for more than 36 months, the assessee would be certainly entitled to claim that to the extent of such ornaments held by the partnership firm and which came into his hands, the sale would result in long-term capital gains.
10. So far as which are the ornaments held by the partnership firm for more than 36 months or to put it differently, whether in determining the period for the purpose of Section 2(42A), the matter requires scrutiny by the ITO, we have already mentioned about this earlier. The ITO is directed to specifically find out as to what were the ornaments held by the partnership and for which period and after considering the date of sale of such ornaments, he will determine whether the period of 36 months is over or not. In case he finds that the period exceeds 36 months, the capital gains to that extent shall be treated as long-term capital gains and in respect of others, it should be short-term capital gains. For this limited purpose, the matter is remitted back to the ITO.