TMI Blog1996 (7) TMI 187X X X X Extracts X X X X X X X X Extracts X X X X ..... ote dated 10-3-1995, noted below: "3. After hearing the parties, we came across two diametrically opposite views taken by the Tribunal. The Madras Benches of the Tribunal in the case of Preetham Pipe Syndicate 44 ITD 665, and in the case of J.A. Venkoba Rao 44 ITD 264, held that while it is possible for the Income-tax Officer to substitute the cost by withdrawing the privilege to value the closing stock at market value which is less than cost as on the date of dissolution, there is no authority for the proposition that the cost as agreed to by the partners in the dissolution account should be substituted by market value which was higher. Hyderabad Bench 'B', in the case of M/s. Deccan Engineers, ITA Nos. 1778 and 1779/Hyd/1989, order dated 14-9-1994 followed the aforesaid two decisions. Both the Madras Benches and the Hyderabad Bench 'B' have taken into consideration the decision of the Supreme Court in the case of A.L.A. Firm . The matter came up before Hyderabad Bench 'A' of the Tribunal again in the case of M/s. Sri Krishna Crucible Works, ITA No. 1330/Hyd/1991, order dated 9-11-1994, wherein the Tribunal, after noticing the aforesaid two decisions of the Madras Benches and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer made an addition of Rs. 51,820 to the income of the assessee, by taking the value of the closing stock at market price. 3. Aggrieved by the said addition, assessee preferred appeal before the CIT(A) contending inter alia that revaluation of closing stock is not relevant as the business continued even after the death of Mohd. Sahib and with the same stock, etc. and as such the valuation of closing stock by increasing the same by gross profit should not have been done; and that the closing stock consisted of several items of lenses, frames, glasses, etc., some of them represent old and out-dated stock, the value of which should not be as much as the value of the frames or glasses sold in the market, as there would be changes in fashion and requirements of customers, and as such there should not be any presumption that the entire stock would fetch a gross profit of 23% as shown by the assessee. Calling for bifurcation of the stock in shop and in godown of the assessee, and adding 23% gross profit to the value of stock in shop of Rs. 94,447 and 14% gross profit to the value of stock in godown of Rs. 1,31,074, the CIT(A) sustained a round sum addition of Rs. 40,000, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he book value represented the real value to them. Such an acceptance had to be taken in the context of the valuation of all the assets and liabilities of the firm. Such an acceptance was also evidenced by the fact that in the hands of the successor, the cost of the stock taken over was given only at the book value agreed to and not at any other value. Unless the agreement of the partners was shown to be mala fide or unreal, any revaluation of the assets would be unjustified particularly if it was only of one asset, viz., closing stock. Moreover, the exercise made by the ITO taxed the same income twice - once on the notional basis in the hands of the firm and again on realisation in the hands of the successor to the business as long as the revenue refused to substitute the market value for the opening stock of the successor in the next year. "Similarly, the Madras Bench of the Tribunal in the case of J.A. Venkoba Rao v. ITO [1993] 44 ITD 264 held as follows--- "The normal method of accounting with reference to the valuation of the closing stock is to take it at cost. However, custom has recognised the privilege of the assessee to value the stock at cost or market value, whicheve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposition that the cost as agreed to by the partners in the dissolution accounts could be substituted by market value which was higher." Relying on the aforesaid observations, the Tribunal decided the matter in favour of the assessee in the case of Deccan Engineers v. ITO [IT Appeal Nos. 1778 and 1779 (Hyd.) of 1989, dated 14-9-1994] by observing as under--- "Respectfully following the above decisions of the Tribunal, which squarely apply to the facts of the case on hand, we set aside the order of the CIT(A) on this point, and direct the Assessing Officer to reframe the assessment, valuing the closing stock at cost price. The impugned addition is accordingly deleted, and assessee's ground of appeal is allowed." The matter came up before the Tribunal again in the case of Sri Krishna Crucible Works [IT Appeal No. 1330 (Hyd.) of 1991] where in the Tribunal, after noticing the aforesaid two decisions of the Madras Bench of the Tribunal, has taken a contrary view, vide order dated 9-11-1994, with the following observations in para 8 thereof --- "With regard to the valuation of stock-in-trade, on the dissolution of the firm, as held by the Madras High Court in the case of A.L.A. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Sahib AIR 1950 Mad. 758 correctly sets out the mode of taking accounts regarding the assets of a firm. While the valuation of assets during the subsistence of the partnership would be immaterial and could even be notional, the position at the point of dissolution is totally different. The following passage from the said decision, at page 759 of the Reports (AIR 1950) was quoted--- "But the situation is totally different when the firm is dissolved or when a partner retires. The settlement of his account must be not on a notional basis but on a real basis, that is every asset of the partnership should be converted into money and the account of each partner settled on that basis. .. The assets have to be valued, of course, on the basis of the market value on the date of the dissolution...." This, their Lordships of the Supreme Court held, applies equally well to assets which constitute stock-in-trade. There can be no manner of doubt that, in taking accounts for the purposes of dissolution, the firm and the partners, being commercial men, would value the assets only on a real basis and not at cost or at their other value appearing in the books. At page 307 of the Reports (189 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied with reference to taking of accounts has been held to be applicable only to the case of a continuing partnership and not when the firm is finally dissolved or when one of the partners has retired. Therefore, on the dissolution of a firm, the stock-in-trade has to be valued with reference to the market value and not with reference to the book value in order to arrive at the true profit earned by the firm during the relevant previous year. 9. Similarly, the Andhra Pradesh High Court in its recent decision in the case of Sha Raichand Chagganraj Co., following the decisions of the Supreme Court and the Kerala High Court discussed above, held that the closing stock should be valued at the market rate and the principle of book value would apply in the case of a running concern and would have no application on the dissolution of the firm. The decisions of the Madras Bench of the Tribunal have also been cited by the learned counsel for the assessee before the A.P. High Court in that case. However, the High Court considering the position of law laid down by the Supreme Court, declined to take a different view. 10. In these circumstances, we are of the opinion that the view expre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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