TMI Blog2001 (8) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounting is accepted by the partners in the settlement of accounts for dissolution purposes, the Income-tax Officer can substitute the market value in respect of the closing stock alone for the purpose of determining the income of the firm up to the date of dissolution ?" Briefly, the facts are as follows : The assessee is a registered firm. As a result of the death of one out of its six partners, on February 6, 1984, the firm was dissolved. It was, however, reconstituted with effect from the next day, that is, February 7, 1984, with the remaining five partners. Two orders of assessments were made : one for the period up to February 6, 1984, and the other for the period from February 7, 1984 to March 31, 1984. The Commissioner of Income-tax made an order under section 263 of the Income-tax Act, 1961, as according to him the assessment order made by the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue in valuing the stock in trade as on February 6, 1984 on the basis of cost or market rate, whichever is lower as that was the usual method the assessee used to adopt in valuing its stock. The Commissioner of Income-tax relying upon the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l noticed that the firm in the said case had closed its accounts on March 13, 1961, the date of dissolution and the profit was arrived at by crediting to the profit and loss account the difference on revaluation of stock as on that date, but for income-tax purposes, the firm claimed that the difference should be written back and the profit adjusted. The High Court did not countenance such a claim and following its earlier decision in G. R. Ramachandran and Co. v. CIT [1961] 41 ITR 142 (Mad) held that when there is a dissolution, the stock in trade should be valued at market value. In these cases, the Tribunal noticed that the question posed was whether, where the value of the stock had been accepted by the partners upon dissolution, it could not be varied by the Income-tax Officer. The Tribunal was of the view that if on the dissolution of a firm, the business is also discontinued and the value of the stock realised, it may be possible for the Income-tax Officer to insist that the value realised shall be taken as the value of the closing stock instead of any notional value on the regular principle of cost or market value, whichever is less. But where the business is not discontinue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missed by this court. According to the contention urged on behalf of the Revenue, the question in the present case is squarely covered by the decision in the case of A. L. A. Firm's case [1991] 189 ITR 285 (SC). Refuting this contention, learned counsel for the appellant contends that the facts of said case are. clearly distinguishable and, in fact, the principles laid down therein support the assessee. The decision in A. L. A. Firm's case [1991] 189 ITR 285 (SC) deserves to be examined in some detail. In that case three questions of law were referred for the opinion of the High Court but we are concerned with the second question which was as under : "Whether on the facts and circumstances of the case, the assessment of the sum of $ 101,248 as revenue profit of the assessee-firm chargeable to tax for the assessment year 1961-62 is justified in law. The facts under which this question arose were that the assessee, a partnership firm, was carrying on money-lending business in Malaya and as part of and incidental to the said business, it was also carrying on the business of the purchase and sale of house properties, gardens and estates. The assessee firm was reconstituted u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up to the High Court in reference was in appeal before this court. This court held that the question is squarely covered by the decision of the Madras High Court in G. R. Ramachari and Co.'s case [1961] 41 ITR 142 wherein it had been held that the principle of valuing the closing stock of a business at cost or market price at the option of the assessee is a principle that would hold good only so long as there is a continuing business and that where a business is discontinued, whether on account of dissolution or closure or otherwise by the assessee, then the profits cannot be ascertained except by taking the closing stock at market value. The contention of the assessee was that while it is true that the closing stock has to be valued, the well settled principle is that it would be valued at cost or market price, whichever is lower, and there is no justification for laying down a different Principle for valuation of the closing stock at the point of discontinuance of the business unless the goods are actually sold by the assessee at the time of discontinuance. Reliance was also placed on a series of decisions holding that when a firm is dissolved and assets are distributed among th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounts will reflect notional profits not actually realised. On the other hand, if the market value is less, the assessee will get the benefit of a notional loss he has not incurred. Nevertheless, the ordinary principles of commercial accounting permit valuation "at cost or market, whichever is the lower". The rationale behind it was explained by Patanjali Sastri C.J. in Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) wherein it was observed that : "It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks Attaching to the Holding of Trading Stocks, 1919, 'As the entry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the accounting year, what is the basis on which the stock-in-trade has to be valued as on the date of dissolution. We have accordingly to deal with the matter on first principles." This court while dismissing the appeal of the assessee found substance in this consideration that prevailed with the High Court. From the above, it is evident that in A. L. A. Firm's case [1991] 189 ITR 285, this court was considering the question of valuation of closing stock at market value in a case where there was dissolution and also discontinuance of the business of the firm. In that case after dissolution-, two groups were carrying on separate businesses with the assets and liabilities which fell to their shares from the dissolution of the firm. In the present case, however, though there was dissolution on account of the death of one of the partners, there was no discontinuance of the business. The unchallenged finding recorded by the Tribunal is that there was no discontinuance of business. Even as per principles laid down in A. L. A. Firm's case [1991] 189 ITR 285 (SC) in such a case the closing stock is to be valued at the cost or market price, whichever is lower. That is an established ..... X X X X Extracts X X X X X X X X Extracts X X X X
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