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Issues Involved:
1. Valuation of closing stock on dissolution of partnership 2. Basis for computation of profits for dissolved partnership 3. Consistency in valuation method for ongoing vs. dissolved business 4. Legal principles governing stock valuation at market price Detailed Analysis: 1. Valuation of Closing Stock on Dissolution of Partnership: The primary issue was whether the valuation of closing stock as of September 11, 1944, for the branches at Bombay and Nagpur, as adopted by the Tribunal, was correct in law. The firm, consisting of two partners, was dissolved on September 11, 1944. The dispute centered on whether the closing stock should be valued at cost or market price. The Tribunal adopted the market price, adding Rs. 8,715 to the income, which was contested by the assessee. 2. Basis for Computation of Profits for Dissolved Partnership: The Tribunal and the Department held that the difference between the book value and the market value of the stock represented the "realisable position" and should be considered as profits. The Department argued that for the dissolution of a firm and the consequent division of assets and liabilities, the schedules should be prepared on the basis of the ruling market price at the date of dissolution. This approach was upheld by the Appellate Assistant Commissioner and the Tribunal, who viewed the transaction as a virtual sale by the firm to the individual partner, thus generating taxable profit. 3. Consistency in Valuation Method for Ongoing vs. Dissolved Business: The assessee contended that the valuation should be consistent with previous years, where the stock was valued at cost. However, the court noted that the privilege of valuing opening and closing stocks in a consistent manner is available only to continuing businesses. When a business ceases, the stock-in-trade must be disposed of and brought to account to balance the books. The court rejected the proposition that the stock-in-trade loses its character and becomes capital assets upon dissolution. 4. Legal Principles Governing Stock Valuation at Market Price: The court referred to several precedents, including *In re Chouthmal Golapchand* and *Chainrup Sampatram v. Commissioner of Income-tax*, to illustrate that the valuation method must reflect the true state of finances and profits. The court emphasized that the valuation of stock at market price is necessary to determine the exact position of the business on the date of closure. The court concluded that the market price alone should be taken to arrive at the trading results of the dissolved partnership. Conclusion: The court answered the question in the affirmative, upholding the Tribunal's adoption of the market price for the valuation of closing stock. The court ruled that this approach was necessary to reflect the true profits of the dissolved partnership. The assessee was ordered to pay the costs of the Department, with counsel's fee set at Rs. 250.
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