Order This appeal preferred by assessee is directed against order passed by learned CIT(A), Sambalpur, dt. 26th March, 2002 for asst. yr. 1998-99. 2 . Division Bench hearing this case had made reference to Hon ble President, Tribunal under s. 255(3) of IT Act, 1961 for consideration of Special Bench. Accordingly, Hon ble President, Tribunal was pleased to constitute Special Bench of Three Members to consider following question : "Whether on facts and circumstances of case and as per provisions o f s. 55(2)(b)(i) assessee is entitled to opt for fair market value of asset as on 1st April, 1981 or valuation arrived at by Department by applying cost inflation index method in reverse direction on valuation of assets as on 1st April, 1987, was correct method for arriving at fair market value of assets as on 1st April, 1981 ?" 3 . Vide subsequent order dt. 18th July, 2006, Hon ble President, Tribunal has further directed whole appeal to be disposed of by this Special Bench. Accordingly, as per direction of Hon ble President, Tribunal, all grounds taken by assessee are disposed of by this Special Bench. 4. Ground No. 1 of assessee s appeal reads as under : "For that in facts and circumstances of case, learned CIT(A) h s erred in not giving proper opportunity of hearing of appellant and consequently failed to appreciate certain specific contentions taken by appellant and came to finding which is submitted to be perverse and wrong." 5. At time of hearing before us learned counsel for assessee did not press above ground. Accordingly same is rejected. 6. Ground Nos. 2 to 4 of assessee s appeal read as under : "2. For that in facts and circumstances of case, learned CIT(A) as well as first assessing authority have erred in computing profit under head Capital gains . 3. For that computation of capital gain as made by learned authorities below are wrong. learned authorities below should have accepted capital loss or gain as returned by appellant. 4. For that in facts and circumstances of case, assessment as made by AO as well as appellate order passed by learned CIT(A) are submitted to be quite contrary to law as prescribed." 7 . facts, relating to these grounds are that assessee is individual who derives income from salary and interest. return was filed showing net income from salary Rs. 28,002 and interest Rs. 27,479 aggregating to Rs. 55,480. During course of assessment proceedings, it was found by AO that assessee has shown long-term capital gain on sale proceeds of diamond as under : Rs. "Sale proceeds of diamond : 20,77,670 Rs. Less : Processing and service charges : 62,783 Rs. : 20,14,887 Less : Cost index of diamond Valuation of diamond as on 1-4-1981 as per valuation report Rs. 6,37,990 Cost index = Rs. 6,37,990 x 331 100 Rs. = Rs. 21,11,746.90 : 21,11,746.90 Long-term capital gain : Rs. Nil" 7 . 1 From details filed by assessee along with return, it was observed by AO that assessee under VDIS, 1997 disclosed investment in acquisition of diamonds valued at Rs. 1,39,020 giving description as "Tejabi gold and 16 pieces of diamonds with spot and cracks for asst. yr. 1975-76 which was accepted by learned CIT, Cuttack vide certificate dt. 22nd Dec, 1997 issued under s. 68(2) of VDIS, 1997. It was further observed that assets disclosed under VDIS were processed through M/s Santosh Gem & Jewellers and thereafter same has been sold for sum of Rs. 20,77,670. In statement of computation of capital gain, assessee has taken valuation of diamond as on 1st April, 1981 on basis of valuation report of valuer dt. 26th Feb., 1998 at Rs. 6,37,990 and for this purpose, assessee has given note in computation sheet which reads as under : "Valuation of diamonds as on 1st April, 1981 is taken for capital gain purpose as because said diamonds was acquired by assessee in asst. yr. 1975-76." From above material AO was of view that assessee apparently inflated cost of diamond as on 1st April, 1981 which was disclosed to have been acquired in asst. yr. 1975-76 under VDIS. According to AO valuation shown under VDIS was Rs. 1,39,020 as on 1st April, 1987 for asst. yr. 1975-76; valuation as on 1st April, 1981 is unlikely to be Rs. 6,37,990. AO after considering assessee s submission and direction of learned Addl. CIT under s. 144A dt. 5th Feb., 2001 computed capital gain at Rs. 16,86,204 as under : Rs. Sale proceeds of 87.27 ct. of polished diamond 20,77,670 Less : Processing and 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 = Rs. 99,300. Then value as on 1-4-1981 i.e. Rs. 99,300 has been indexed Rs. 99,300 divided by 100 3,91,465 multiplied by 331 = Rs. 3,28,684 = (-) Rs. Long-term capital gain arrived at by AO 16,86,204 Accordingly, assessment was completed vide order dt. 6th Feb., 2001 passed under s. 143(3)/144A as under : (i) Income from salary : Rs. 28,002 (ii) Long-term capital gain as Rs. : above 16,86,204 (iii) Interest income as shown : Rs. 27,479 Rs. Gross total : 17,41,685 Rs. or 17,41,680 8 . assessee preferred first appeal before learned CIT(A). Before CIT(A) assessee filed valuation report of raw and uncut diamond as on 1st April, 1981 valued by Shri Mansukhlal Lotia, Raipur. However, CIT(A) was of opinion that valuation report amounts to additional evidence as same was never furnished before AO at time of assessment. Since conditions specified under r. 46A are not satisfied additional evidence in form of valuation report furnished by assessee was not accepted. Accordingly CIT(A) upheld order passed by AO vide findings recorded in paras 6 and 7 appearing at pp. 16 to 18 of his order which are reproduced as under : "6. It is worthwhile to mention that similar issues of possession of raw, uncut, unpolished diamond/precious stone with spots, cracks etc. as on 1st April, 1981, its processing and improvement sometime in 1998 and sales during same year have been noticed, in many cases where appeals are filed. In all these cases appellants have shown to have possessed rough, uncut, unfinished diamond pieces with spots and cracks before 1st April, 1981. After long lapse of period i.e. during 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 said concern i.e. M/s Santosh Gems & Jewellers. 6.1 In case of appellant, rough unfinished diamond pieces are capital assets which became property before first day of April, 1981. finished diamonds which surfaced in year 1998 were not having any existence as on 1st April, 1981. In view of this, question of adopting or opting for value of finished diamond as on 1st April, 1981 does not arise at all. Since capital assets in form of finished diamond was not existing on 1st April, 1981 appellant s option of adopting its fair market value is out of question. On other hand, it is undisputed fact that rough unfinished diamonds were capital asset which became property prior to 1st April, 1981 and in view of clear provision of s. 55(2)(b)(i) of Act, option is available to either adopt cost of acquisition of asset which was existing or acquired prior to 1st April, 1981 or fair market value of said asset i.e. rough, uncut, unfinished diamond with cracks, impurities, etc. law is very clear in this regard. market value of unfinished diamond/precious stone with spots and cracks has been determined by approved valuer as on 1st April, 1987 and same has also been brought to notice of AO in course of assessment proceedings. specified date i.e. 1st April, 1981 comes prior to 1st April, 1987. value therefore as on 1st April, 1981 will definitely be lower than as on 1st April, 1987. There is no such circumstances for which market value of same asset as on 1st April, 1981 will be higher than that of 1st April, 1987. 6.2 logic that unfinished diamonds and finished diamonds are precious stones which come under definition of jewellery for which appellant has freedom to adopt fair market value of non-existent finished diamond as on 1st April, 1981. 6.3 condition that both assets are same is not violated by taking fair market value of asset acquired. 6.4 Taking into account order at paras 4 to 6.3, it is concluded as under : (i) AO has only followed legal provision relating to computation of capital gain and he has not confused entire issue as contended by appellant in his grounds of appeal. (i) AO has correctly applied provision of ss. 45 to 55 of Act and has not erred in computing capital gains as has been alleged in grounds of appeal. (ii) There is no scope for misinterpretation of meaning of asset because of clear provision of Act. AO, therefore, has come to correct conclusion. (iii) In entire issue AO has not questioned disclosure made by appellant. points that have been considered relate to aftermath of disclosure. In any case provisions of ss. 64, 71 and 72 of VDIS, 1997 are very clear and AO has not gone beyond his statutory function while finishing assessment. 7. In result, order of AO is confirmed." 9. Being aggrieved by order of learned CIT(A), assessee is in appeal before us. 1 0 . At time of hearing before us learned counsel for assessee argued at length. He stated that assessee had acquired 16 pieces of diamond with cracks and spots during accounting year relating to asst. yr. 1975-76. Such diamonds were not declared before Department at that time. Therefore, same were declared by assessee under VDIS 1997. During accounting year relevant to assessment year under consideration parts of such diamonds were got processed and after processing finished diamonds were sold for sum of Rs. 20,77,607. assessee incurred expenditure of Rs. 62,783 on processing of such diamonds. That since cut and polished diamonds (i.e. finished diamonds) were sold by assessee, capital gain is to be worked out on sale of finished diamonds. capital asset which is sold by assessee is finished diamonds. That as per s. 48 as well as s. 55(2) cost of acquisition of "the asset" transferred by assessee is to be considered. asset transferred by assessee is finished diamond and, therefore, cost of acquisition of finished diamonds is to be considered while computing capital gain. That admittedly capital assets were acquired before 1st April, 1981, therefore, fair market value of assets as on 1st April, 1981 is to be considered at option of assessee. It is further contended by learned counsel that by process of cutting and polishing, no new assets come into existence. In support of this contention he relied upon decision of Hon ble apex Court in case of CIT vs. Gem India Manufacturing Co. (2002) 172 CTR (SC) 615 : (2001) 249 ITR 307 (SC). asset acquired by assessee during financial year 1974-75 (i.e. asst. yr. 1975-76) was raw diamond which after process of improvement has resulted into finished diamonds which was sold by assessee. Therefore, fair market value of finished diamond as on 1st April, 1981 should be taken. In support of this contention learned counsel for assessee has relied upon following decisions : (i) Harish Mahindra & Anr. vs. CIT (1981) 25 CTR (Bom) 168 : (1982) 135 ITR 191 (Bom); (ii) CIT vs. Shakuntala Kantilal (1991) 190 ITR 56 (Bom). 10.1 It is further contended by learned counsel that by process of improvement old diamond i.e. raw diamond did not remain in existence and replaced by finished diamond. Therefore, fair market value of raw diamond cannot be taken. It is held by Hon ble apex Court in case of CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) that if computation provision fails, capital gain cannot be levied. That if stand of Revenue is accepted that fair market value of raw diamond is to be taken then computation provision will fail and capital gain cannot be levied upon assessee. computation provision would be workable only when cost of acquisition or fair market value of assets transferred i.e. finished diamond is taken into account while computing capital gain. 10.2 Learned counsel further contended that AO has worked out fair market value of diamond as on 1st April, 1981 by applying cost inflation index in reverse direction. He stated that Hon ble jurisdictional High Court has held in case of Jogat Mohan Kapur vs. WTO (1995) 125 CTR (Cal) 428 : (1995) 211 ITR 721 (Cal) that cost inflation index cannot be applied in reverse direction. Therefore, action of AO is contrary to decision of jurisdictional High Court and deserves to be quashed. 10.3 It is stated by learned counsel that AO has adopted value disclosed by assessee for determining fair market value of asset as on 1st April, 1981 by applying inflation index in reverse direction. He stated that CBDT had issued Circular No. 754, dt. 10th June, 1997 [(1997) 140 CTR (St) 15] clarifying voluntary disclosure scheme in 1997. In reply to question No. 16 it is stated that value adopted as on 1st April, 1987 is for limited purpose of scheme. Thus as per circular of CBDT value disclosed by assessee for purpose of VDIS cannot be utilized for any other purpose. Therefore, action of AO in reverse working of fair market value of capital asset on basis of value disclosed in VDIS is contrary to Board circular and deserves to be cancelled. 10.4 In view of above it is contended by learned counsel that computation of capital gain made by assessee is correct and same should be upheld. 11. Learned Departmental Representative on other hand also argued at length. His argument can be summarized as follows. At outset he fairly admitted that asset was acquired in year 1975-76. Therefore, assessee is entitled to opt for fair market value of asset as on 1st April, 1981 as per provision of s. 55(2)(b)(i) of IT Act. However question is fair market value of which asset is to be taken ? He contended that fair market value of raw diamond with spots and cracks which was acquired by assessee in 1975-76 can only be taken and not of polished diamond. Sec. 48 provides for deduction of cost of acquisition as well as cost of improvement. That under s. 55(2)(b)(i) assessee has option for substitution of cost of acquisition with fair market value of asset as on 1st April, 1981 if it was acquired prior to 1st April, 1981. Therefore, fair market value of asset acquired by assessee prior to 1st April, 1981 is to be taken. asset acquired prior to 1st April, 1981 was raw and uncut diamond, which was got cut/polished in accounting year relevant to asst. yr. 1998-99. Therefore, finished diamond was not in existence as on 1st April, 1981. In support of this contention learned Departmental Representative has relied upon following decisions : (i) Meccane Industries Ltd. vs. CIT (2002) 174 CTR (Mad) 70 : (2002) 254 ITR 175 (Mad); (ii) M. Nachiappan vs. CIT (1998) 144 CTR (Mad) 359 : (1998) 230 ITR 98 (Mad); (iii) Keshavji Karsondas vs. CIT (1994) 120 CTR (Bom) 109 : (1994) 207 ITR 737 (Bom); (iv) B.N. Vyas vs. CIT (1985) 49 CTR (Guj) 100 : (1986) 159 ITR 141 (Guj); (v) ITO vs. Deepak Raj Narang (1988) 27 ITD 139 (Del); (vi) CIT vs. Smt. M. Subaida Beevi (1986) 57 CTR (Ker) 324 : (1986) 160 ITR 557 (Ker); (vii) Ranchhodbhai Bhaijibhai Patel vs. CIT (1971) 81 ITR 446 (Guj); (viii) CIT vs. Steel Group Ltd. (1981) 22 CTR (Cal) 354 : (1981) 131 ITR 234 (Cal). 11.1 Learned Departmental Representative further stated that second question is how to determine fair market value of raw and uncut diamond. written submission furnished by learned Departmental Representative in this regard reads as under : "(a) fair market value of raw diamonds would no doubt be price that willing purchaser would pay to willing seller of raw diamonds in question, having due regard to its existing conditions with all its advantages, potentialities, etc. fair market value of rough diamonds is now to be determined as on 1st April, 1981. (b) There are only two actual values in our hands value disclosed by assessee of rough diamonds as on date of purchase (i.e. financial year 1975-76) and value which was all fair market value of same rough diamonds as consciously disclosed by assessee in VDIS, 1997, that is fair market value as on 1st April, 1987. It is another matter that both these values are same i.e. Rs. 1,39,020. All other values are just deemed/calculated and hypothetical values. cost of acquisition as in financial year 1975-76 or fair market value as on 1st April, 1987 have to be basis for arriving at fair market value as on 1st April, 1981 for purpose of calculation of capital gains/loss in this particular case. As it happens both these final values are one and same i.e. Rs. 1,39,020. (c) possibly acceptable valuation of asset under question would have been actual valuation of rough diamonds through personal evaluation of approved valuer. This unfortunately did not take place in this particular case. As per assessee s own valuer (Government approved valuer) declaration to be given by valuer requires personal inspection of property, which is mandatory as per Form No. 1, r. 8D of WT Rules, 1957 and thus without physical verification valuation of any capital asset is impossibility (vide p. 39 of paper book provided by assessee). (d) twist to whole question is provision of s. 73 of VDIS, 1997 read with Circulars 753, 754 and 755 of CDBT, which provide that undisclosed income represented by jewellery acquired prior to 1st April, 1981 is required to be disclosed (by assessee) at market value as on 1st April, 1987. And assessee has consciously declared fair market value of rough diamonds at Rs. 1,39,020 as on 1st April, 1987. (e) It is impossible that fair market value of rough diamonds declared as on 1st April, 1987 at Rs. 1,39,020 and fair market value of same diamonds would be Rs. 6,37,990 as on 1st April, 1981. (f) In answer to question No. 16 of CBDT Circular/Clarification No. 754, dt. 10th June, 1997, that is, will value of assets declared be accepted by Department as it is or will it be necessary to file valuer s certificate along with declaration ? Can matter be referred by Department to Valuation Cell ? Is any evidence required to be filed regarding year or purchase of jewellery or other assets ? Whether value of jewellery as on 1st April, 1987 will be adopted only for purposes of VDIS or will it also be adopted for wealth-tax in subsequent years, Board replied that In respect of immovable property, Department will not insist upon any valuation certificate along with declaration. It is responsibility of declarant to declare correct value. In respect of jewellery if it has been acquired prior to 1st April, 1987, value will be taken as on 1st April, 1987 as certified by valuer. Further, value adopted as on 1st April, 1987 is for limited purpose of scheme. This matter is to be understood in depth, particularly phrase limited purpose of scheme . closer look at whole answer of Board, reveals that this declaration of fair market value of asset in question as on 1st April, 1987 by assessee had to be correct value , as duly certified by valuer. So far as limited purpose is concerned, it clearly implies that limited purpose was 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. limited purpose in no way implies that value so disclosed will not be of any consequence in income-tax or wealth-tax proceedings in future years. And limited purpose phrase used in Circular No. 754 of Board, in no way precludes use of disclosed value for being used for any logically correct purpose like determining fair market value of asset in question as on particular date, if need arose, as it has done in this instant case. More so because there is no other way available. Moreover, only fact is being utilized for purpose of quantifying fair market value of rough diamonds as on 1st April, 1981. And fact cannot change. (g) There cannot be two cost of acquisition. Cost of acquisition of asset is always one. It cannot be more than one. Only fair market value can be is always one. It cannot be more than one. Only fair market value can be different for different years." 11.2 It is further contended by learned Departmental Representative that assessee himself has shown fair market value of asset in question at Rs. 1,39,020 as on 1st April, 1987 while filing declaration under VDIS. Therefore, now fair market value as on 1st April, 1981 claimed by assessee at Rs. 6,37,990 is very unlikely proposition. He stated that when assessee himself has declared fair market value of assets as on 1st April, 1987 for purpose of VDIS, AO was fully justified in determining fair market value as on 1st April, 1981 by making pro rata calculation on basis of available inflation index. He also explained rational behind indexation is to set off against inflation and fall in purchasing power of money. He, therefore, stated that use of inflation index by AO in reverse direction was practical necessity to arrive at just value of capital asset as on 1st April, 1981. He, therefore, stated that order of AO is quite fair and reasonable. same should be upheld. 12. We have carefully considered arguments of both sides and perused material placed before us. Sec. 48 provides mode of computation of capital gain. same is reproduced below : "The income chargeable under head Capital gains shall be computed, by deducting from full value of consideration received or accruing as result of transfer of capital asset following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) cost of acquisition of asset and cost of any improvement thereto : Provided that in case of assessee, who is non-resident, capital gains arising from transfer of capital asset being shares in, or debentures of, Indian company shall be computed by converting cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and full value of consideration received or accruing as result of transfer of capital asset into same foreign currency as was initially utilized in purchase of shares or debentures, and capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that 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, Indian company : Provided further that where long-term capital gain arises from transfer of long-term capital asset, other than capital gain arising to non-resident from transfer of shares in, or debentures of, Indian company referred to in first proviso, provisions of cl. (ii) shall have effect as if for words cost of acquisition and cost of any improvement , words indexed cost of acquisition and indexed cost of any improvement had respectively been substituted : Provided also that nothing contained in second proviso shall apply to long-term capital gain arising from transfer of long-term capital asset being bond or debenture other than capital indexed bonds issued by Government : Provided also that where shares, debentures or warrants referred to in proviso to cl. (iii) of s. 47 are transferred under gift or irrevocable trust, market value on date of such transfer shall be deemed to be full value of consideration received or accruing as result of transfer for purposes of this section." 12.1 From above it is evident that for computing capital gain from full value of consideration received or receivable by 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 meaning of words "cost of acquisition" and "cost of improvement" etc. Clause (b)(i) of sub-s. (2) of s. 55 reads as under : "in relation to any other capital asset, (i) where capital asset became property of assessee before 1st day of April, 1981 means cost of acquisition of asset to assessee or fair market value of asset on 1st day of April, 1981, at option of assessee." 12.2 Thus where capital asset was acquired by assessee before 1st April, 1981 assessee has option to take either (i) actual cost of acquisition of asset or (ii) fair market value of asset on 1st April, 1981. In case under consideration before us admittedly asset in form of raw and uncut diamond was acquired during financial year relating to asst. yr. 1975- 76. Such raw and uncut diamond was got processed during accounting year relevant to asst. yr. 1998-99. By such processing polished and cut diamond was received by assessee which was sold. Thus as on 1st April, 1981 raw and uncut diamond was in possession of assessee. Sec. 55(2)(b)(i) gives option to assessee to adopt fair market value of asset as on 1st April, 1981 as against cost of acquisition. Thus fair market value of asset acquired by assessee is to be taken and not fair market value of asset which is sold by assessee after improvement. "Fair market value" of capital asset as on 1st April, 1981 is to be substituted for cost of acquisition at option of assessee. Therefore, it has to be linked to asset originally acquired by assessee. asset sold by assessee after improvement cannot be said to be asset acquired by assessee and, therefore, fair market value of asset acquired by assessee is to be taken into account and not fair market value of finished diamond sold by assessee. Sec. 48 provides deduction not only for cost of acquisition but also for cost of improvement. If contention of learned counsel is accepted that as against fair market value of original asset fair market value of improved asset is to be considered then allowing further deduction for cost of improvement would amount to allowing double deduction for same. By providing separate deduction for cost of acquisition as well as cost of improvement, intention of legislature is clear that cost of acquisition of original asset is to be allowed and thereafter further deduction for improvement in original asset is to be allowed. 1 3 . Learned counsel for assessee in support of his contention has relied upon decision of Hon ble Bombay High Court in case of Harish Mahindra & Anr. (supra). facts in that case were assessee had acquired 500 shares before 1st Jan., 1954. shares were sub-divided after that date. bonus shares also issued subsequent to 1st April, 1954. On above facts dispute was about determination of fair market value of shares as on 1st April, 1954. On above facts their Lordships held as under : "For purposes of ascertainment of fair market value of shares on 1st Jan., 1954, any issue of bonus shares subsequent to that date is wholly extraneous and irrelevant and cannot be taken into consideration." 1 4 . In our opinion ratio of above decision does not help contention of assessee that fair market value of finished diamond as on 1st April, 1981 is to be considered and not fair market value of raw and uncut diamond. On other hand, this decision would support case of Revenue because it is contention of Revenue that subsequent processing of diamond is irrelevant for determining fair market value of raw diamond as on 1st April, 1981. Hon ble Bombay High Court has also held that subsequent event after 1st Jan., 1954 is irrelevant and cannot be taken into consideration. 14.1 Learned counsel has also relied upon another decision of Hon ble Bombay High Court in case of CIT vs. Shakuntala Kantilal (supra). facts of case are that assessee owned piece of land. In 1963, she entered into agreement of sale of said property with R. Disputes subsequently arose. R filed suit for specific performance and eventually, there was settlement whereby assessee agreed to pay Rs. 35,504 to R. In meantime, assessee entered into another agreement of sale in 1967 in respect of same property with C. C had to give assurance to R that, on completion of sale, they would deduct Rs. 35,504 from total consideration and pay it to R. assessee claimed that this amount of Rs. 35,504 should be allowed as deduction for purpose of computing her income under head "Capital gains" and this claim was accepted by Tribunal. On reference held : "that, unless assessee had settled dispute with R, sale transaction with C could not have materialized. sale consideration had to be reduced by amount of compensation paid to R." 15. From above it is evident that facts of assessee s case are altogether different and, therefore, above decision would not support contention of assessee that fair market value of finished diamond as on 1st April, 1981 is to be considered. 1 6 . On other hand learned Departmental Representative has relied upon decision of Meccane Industries Ltd. (supra) wherein assessee had purchased agricultural land but subsequently it was sold for non-agricultural purpose. It was claim of assessee that for determining capital gain fair market value of land on date of its conversion into non- agricultural land is to be taken as notional cost of acquisition of capital asset. Hon ble High Court rejected assessee s contention and held as under : "That assessee had acquired lands at certain value and when assessee sold those lands, they were sold at much higher value. cost of acquisition did not change. It remained constant. fact that by time assessee sold them, they were to be put to use for non-agricultural purposes did not involve any additional cost being incurred by assessee. object of applying commercial principles of accounting is to ascertain real profit which can appropriately be regarded as capital gain and brought to tax. Here, in this case, real extent of gain was obviously difference between price at which assessee sold property and price which assessee had paid for acquiring property. cost of acquisition was cost of acquisition of agricultural land and not notional cost as on date lands were put to non-agricultural use." 16.1 Similar view was taken by Hon ble Madras High Court in case of M. Nachiappan (supra) and by Hon ble Gujarat High Court in case of B.N. Vyas (supra). 16.2 In case of Keshavji Karsondas (supra) agricultural land was acquired by grandfather of assessee prior to 1941 and assessee became owner of land by devolution. agricultural land was not included within definition of capital asset till 1st April, 1970 and it was only by Finance Act, 1970 certain agricultural lands in India were included in definition of capital asset. assessee transferred agricultural land during previous year relevant to asst. yr. 1972-73. He claimed that fair market value of land on date on which it became capital asset should be considered. Hon ble Bombay High Court rejected assessee s claim and held as under : "that what was relevant was cost of acquisition and not date on which asset became capital asset for purpose of levy of capital gains tax. cost of acquisition did not change. It was cost on date when asset was actually acquired by assessee or by his grandfather. property which was transferred could become property of assessee only at one point of time. It would not become property of assessee as non-capital asset at one point of time and as capital asset at another point of time. date of acquisition of land for purposes of s. 48 r/w s. 49(2) of Act was date when land in question was acquired by grandfather of assessee prior to 1941. assessee, therefore, had option, either to take original cost of acquisition or its fair market value as on 1st Jan., 1954. Therefore, for purpose of determining capital gains, cost of acquisition of agricultural land belonging to assessee had to be taken as on 1st Jan., 1954, and not as on 1st April, 1970." 16.3 Similar view is also taken by Hon ble Kerala High Court in case of Smt. M. Subaida Beevi (supra). 16.4 Hon ble jurisdictional High Court in case of Steel Group Ltd. (supra) held as under : "While computing capital gains assessee is concerned with cost of acquisition, that is, price which was paid by assessee for acquiring capital asset on date it was acquired subject to adjustment laid down under s. 55. assessee has no concern with what would be value of that asset on some subsequent occasion, in other words, subsequent events affecting its value need not be taken into consideration." 1 7 . ratio of above decisions relied upon by learned Departmental Representative fully supports case of Revenue that cost of original asset viz., raw and uncut diamond is to be substituted by fair market value of same as on 1st April, 1981 and, therefore, for determining capital gain in case of assessee, fair market value of raw and uncut diamond as on 1st April, 1981 is to be taken and not fair market value of polished and finished diamond. 1 8 . Now second question arises, how to determine fair market value of raw and uncut diamond as on 1st April, 1981. AO has taken value of diamond as declared for purpose of VDIS as on 1st April, 1987 and has applied cost inflation index in reverse direction. We find that Hon ble jurisdictional High Court has considered similar issue in case of Jogat 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, inflation is to be calculated by appropriately inflating cost of acquisition of capital in accordance with declared index. There is no warrant for reversing operation of cost inflation index, and treating it in reversed manner as shrinkage index for purpose of computing past land value. This method would lead to unfairness and glaring financial fallacies. Application of cost inflation index in such reversed manner for computation of land value is arbitrary, unreasonable and in violation of mandates of Art. 14 of Constitution of India." 19. From above it is evident that their Lordships of jurisdictional High Court have disapproved application of cost inflation index in reverse direction. Therefore, application of cost inflation index in reverse direction by AO being contradictory to decision of Hon ble jurisdictional High Court cannot be sustained. 20. Now question still remains how to determine fair market value of raw and uncut diamond as on 1st April, 1981. We find that Revenue in its written reply at p. 6 has given suggestion in this regard which reads as under : "A possibly acceptable valuation of asset under question would have been actual valuation of rough diamonds through personal evaluation of approved valuer. This unfortunately did not take place in this particular case. As per assessee s own valuer (Government approved valuer) declaration to be given by valuer requires personal inspection of property, which is mandatory as per Form No. 1, r. 8D of WT Rules, 1957 and thus without physical verification valuation of any capital asset is impossibility (vide p. 39 of paper book provided by assessee)." 20.1 We entirely agree that above suggestion of Revenue that proper method would be to obtain valuer s report in respect of raw and uncut diamond determining fair market value of such diamond as on 1st April, 1981. We find that in case under consideration before us assessee has submitted such valuation report before CIT(A) which would be evident from p. 15, para 5 of order of CIT(A) which reads as under : "While considering claim of appellant for accepting valuation report of raw and uncut diamonds as on 1st April, 1981 valued by one Mansukhlal Lotai, Raipur, I find said valuation report was never before AO at time of assessment and it has surfaced for first time at this stage. It i s not understood how report was not submitted before AO when valuation was made as early as 2nd Jan., 1998. submission of valuation report amounts to additional evidence and is subject to conditions under r. 46A of IT Rules, 1962. Since conditions specified under cls. (a), (b), (c) and (d) of r. 46A(1) are not satisfied, additional evidence produced is not accepted." 20.2 Thus assessee has submitted valuation report of raw and uncut diamond before CIT(A) which probably escaped notice of learned Departmental Representative while furnishing above written submission before us. learned CIT(A) has refused to admit same as additional evidence on ground that conditions specified under r. 46A(1) are not satisfied. Rule 46A of IT Rules reads as under : "(1) appellant shall not be entitled to produce before Dy. CIT(A) or, as case may be, CIT(A), any evidence, whether oral or documentary, other than evidence produced by him during course of proceedings before AO, except in following circumstances, namely : (a) where AO has refused to admit evidence which ought to have been admitted; or (b) where appellant was prevented by sufficient cause from producing evidence which he was called upon to produce by AO; or (c) where appellant was prevented by sufficient cause from producing before AO any evidence which is relevant to any ground of appeal; or (d) where AO has made order appealed against without giving sufficient opportunity to appellant to adduce evidence relevant to any ground of appeal. (2) No evidence shall be admitted under sub-r. (1) unless Dy. CIT(A) o r , as case may be, CIT(A) records in writing reasons for its admission. (3) Dy. CIT(A) or, as case may be, CIT(A) shall not take into account any evidence produced under sub-r. (1) unless AO has been allowed reasonable opportunity (a) to examine evidence or document or to cross-examine witness produced by appellant, or (b) to produce any evidence or document or any witness in rebuttal of additional evidence produced by appellant. (4) Nothing contained in this rule shall affect power of Dy. CIT(A) or, as case may be, CIT(A) to direct production of any document, or examination of any witness, to enable him to dispose of appeal, or for any other substantial cause including enhancement of assessment or penalty (whether on his own motion or on request of AO) under cl. (a) of sub-s. (1) of s. 251 or imposition of penalty under s. 271." Clause (c) of r. 46A(1) provides where appellant was prevented by sufficient cause from producing any evidence before AO which is relevant to any ground of appeal then CIT(A) can admit such additional evidence. Admittedly valuation report of raw and uncut diamond as on 1st April, 1981 is relevant for issue under appeal before us. We find that stand of assessee before AO was that fair market value of finished diamond should be taken. He has furnished valuation report for finished diamond before AO. In above circumstances there was no occasion for assessee to produce valuation report for raw and uncut diamond before AO. Neither AO asked assessee to furnish such valuation report before him. When AO did not accept assessee s contention that fair market value of finished diamond is to be considered, assessee furnished valuation report of raw and uncut diamond before CIT(A). CIT(A) did not accept same being additional evidence in violation of r. 46A. Considering facts of case, in our opinion, there was reasonable cause for assessee s failure to furnish valuation report of raw and uncut diamond before AO. We also find that under r. 46A(4) CIT(A) has power to admit any evidence which will enable him to dispose of appeal. In our opinion, valuation report of raw and uncut diamond is important document which would be very relevant for disposal of appeal. Therefore, in our opinion, CIT(A) ought to have admitted additional evidence, which was in form of valuation report of raw and uncut diamond. However, as per sub-r. (3) of r. 46A whenever any additional evidence is admitted AO should also be allowed reasonable opportunity to examine such evidence. 21. In view of above factual/legal position, in our opinion, it would meet ends of justice if order of lower authorities on this point is set aside and matter is restored back to file of AO. assessee is directed to produce valuation report of raw and uncut diamond before AO. Thereafter AO will recompute capital gain after considering such valuation report as basis for determining fair market value of raw and uncut diamond as on 1st April, 1981. determining fair market value of raw and uncut diamond as on 1st April, 1981. AO will allow adequate opportunity to assessee while giving effect to this order. 22. Ground Nos. 5, 6 and 7 of assessee s appeal read as under : "5. For that in view of payment of appeal fees at maximum amount, appellant may be allowed necessary cost, if appeal is allowed. 6. For that appellant craves leave to add/amend any of grounds further at time of hearing. 7. For that appeal order is otherwise wrong, illegal and bad in law." 2 3 . At time of hearing before us no arguments were advanced in support of any of above grounds. Therefore, same are being treated as not pressed and accordingly rejected. 24. In result, assessee s appeal is deemed to be partly allowed for statistical purposes. *** HIRALAL LOKCHANDANI v. INCOME TAX OFFICER