Written on : August 11th 1997

We have been discussing as to what income should or can be disclosed by you under VDIS. A question that is often asked is whether it is necessary to disclose wealth that has not been disclosed earlier.

For example, a question recently asked was this: a lady received substantial jewellery as gift on her wedding and thereafter. However, it was not ‘shown’ to the department at any time. Is she required to show this? If so, should and can she disclose this as income and make a declaration under VDIS?

Now, if the lady had received gifts of jewellery, it has not been her income. There is no reason in law that she should disclose it as her income and pay tax on it. However, the issue is not that simple.

Suppose the department knows about the jewellery and asks her to prove the gifts. She is required to show the nature and source of the gifts. The donors will also have to explain the source of funds from which the jewellery was purchased and gifts made. Then the question of gift tax may also arise (though not always).

If she is unable to explain the source of gifts properly, or her donor refuses to confirm the gifts, or the donor is unable to explain the source of funds for the gifts, there will be trouble for someone - either the lady or her donor. The lady will have to pay income tax on the value of jewellery found as if it were her jewellery acquired from undisclosed sources. And she may suffer interest and penalty. Or the donor may face this problem.

If the lady is not certain that she will be able to explain the gifts, she might find it worthwhile to disclose the jewellery as her income under VDIS and ‘regularise’ it. That is, by owning up the jewellery as having been acquired out of her own funds, paying taxes for that, she can become a ‘declared owner’. The VDIS will, in such circumstances, be of great help.

However, if the lady can explain the source of jewellery properly, she need not disclose it as her income under VDIS and pay taxes. But if she has not disclosed it as her wealth and paid taxes on it (assuming she has wealth in excess of Rs.15 lakhs currently), VDIS does not offer the chance of disclosing undisclosed wealth. She will have to regularise the wealth under normal wealth tax laws.

Let us today explore the special way in which VDIS allows you to disclose jewellery and regularise it, if you have not already done so.

Suppose the department finds out that for assessment year 1980-81 you had undisclosed income. What can it do? Precious little. The tax officer can reopen an assessment for a period of ten years and no more. Thus, if the income concealed pertains to a year prior to that, the officer can do nothing.

In the context of jewellery, if it is found that you had acquired it before ten years, the tax officer cannot ask you to explain its source etc. However, with jewellery there is a peculiar problem: How do you prove the year of purchase, especially if you have not kept any bills of purchase? Jewellery, being what it is, does not have a make, model or batch number of manufacture for someone to trace even its approximate date of making or purchase. How then can you establish that it was purchased in a given year? You will agree it is difficult.

With immovable property, it is easy to find out the date of purchase - the sale deed or agreement will be proof enough. With other items of movable property also it will be not too difficult - some evidence of its year of manufacture etc will lead us to an approximate date of purchase. But with jewellery, as we saw, it is difficult to prove date of purchase.

VDIS recognises this and offers an easy way out. It says that if you had purchased jewellery any time before April 1, 1987, you may make a declaration of the jewellery as your income, pay taxes based on the values on April 1, 1987 and regularise it.

The assumptions behind this seem to be: (i) there exists old jewellery; (ii) which cannot be brought to tax by the department because it was acquired before 1987; (iii) you will want to regularise it, as in the normal course it will be difficult for you to prove its date and cost of purchase; and (iv) the department will find it worthwhile to allow you to do so easily.

So, the department says that if you have acquired undisclosed jewellery prior to 1.4.87, then you should make a declaration under VDIS of income at the market values as on 1.4.87, pay taxes at 30% or 35%, as the case may be and get benefit of the immunities offered.

Every declaration you file for jewellery - whether acquired before 1987 or after that - should be accompanied by a certificate from a registered valuer. The certificate should show the particulars of the jewellery declared and its value.

If the jewellery pertains to before April 1, 1987 then the certificate should show the value as on 1.4.87. But, if the jewellery pertains to after 1.4.87, then the value should be of that particular date.

The idea of having the jewellery valued by a registered valuer is that some independent expert should value it as of an old date and such value should be accepted by the department. A declaration without a valuer's certificate will be invalid

What does jewellery mean? We need to understand the legal meaning of jewellery, as the special consideration that VDIS allows is only for jewellery.

In law, jewellery means ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into any wearing apparel.

Jewellery also includes precious or semi-precious stones, whether or not set in any furniture, utensils or other article or worked or sewn into any wearing apparel.

Thus, jewellery includes even loose precious stones like diamonds. But jewellery does not include furniture or utensils - even if made of gold or silver - which do not have precious stones embedded in it.

If you make a declaration of jewellery prior to 1987, do you need to prove the date of purchase of jewellery? The Scheme was silent on this. The clarifications first issued had a question asking whether it was required to enclose evidence of year of purchase. The answer was that only the valuer's certificate was required to be filed. The department's explanations - in public and private - indicated that there was no requirement to have or file evidence of year of purchase. Now, the department has come out with another set of clarifications. These recent clarifications have a question and an answer that need to be reproduced verbatim.

"Q. Whether any evidence regarding purchase of jewellery is to be furnished?"

"A. It will be in the interest of the declarant to disclose the true year of purchase/acquisition. In case the jewellery declared is in respect of an assessment year prior to assessment year 1987-88, the value for the purposes of declaration shall be taken as on 1.4.1987. Some evidence to show the year of acquisition has to be filed in all cases of declaration of jewellery."

This stand is in direct contradiction to the earlier stand that there need not be any evidence filed or kept with regard to year of purchase of jewellery.

There are various questions that come up, like: Can you be expected to have evidence of jewellery purchased out of undisclosed income?

• What does 'some evidence' mean? Does it mean bills of purchase or will something else do?
• What about declarations already filed without 'some evidence to show the year of acquisition' ?
• What will happen to declarations filed without such evidence? Will they be rejected?

We shall not deal with such questions now, but shall wait for more clarifications on this sensitive issue.