TMI Blog2012 (12) TMI 495X X X X Extracts X X X X X X X X Extracts X X X X ..... of law stated in section 40A(3). - Decided in favor of assessee. Valuation of closing stock at the time of conversion of the partnership firm into a private limited company. - held that:- All the partners of the erstwhile firm became the shareholders of the new company. Nobody else was admitted as shareholder. No asset of the old firm was distributed among the partners. No capital was withdrawn by the partners. The capital of the partners was converted into shares contributing towards the capital of the company. All other assets and liabilities were taken over by the company. - there was no cessation of business and therefore the closing stock had to be valued at cost or market price, whichever is lower. - CIT(A) rightly deleted the stock valuation addition - Decided in favor of assessee. - ITA No.1576(Mds)/2012 - - - Dated:- 14-11-2012 - O.K. Narayanan And Challa Nagendra Prasad, JJ. Appellant Rep by: Shri Shaji P. Jacob, IRS, Addl.CIT Respondent Rep by: Shri S. Swaminathan, FCA ORDER Per: O.K. Narayanan: This appeal is filed by the Revenue. The relevant assessment year is 2008-09. The appeal is directed against the order of the Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. with effect from 1-1-2008 and thus a consolidated balance sheet alone was required to be filed for the impugned assessment year 2008-09. However, the assessee firm, in response to the notice issued under section 148, has also filed a return of income in the status of the firm for the previous period of 1st April, 2007 to 31st December, 2007. 6. In the course of the assessment, in pursuance of the return filed in response to the notice under section 148, the Assessing Officer made certain adjustments to the income returned by the assessee firm. The first adjustment by way of addition has its basis on the stock valuation. The Assessing Officer held the view that on conversion of the firm into a company with effect from 1-1-2008, the business of the firm needs to be considered as dissolved. The Assessing Officer accepted the business carried on by the assessee firm for the period from 1-4-2007 to 31-12-2007 and thereafter treated it as a dissolved business. As the firm was dissolved, it was the view of the Assessing Officer that the closing stock of jewellery and diamond of the firm must be valued at market price and the profit of the firm has to be computed on the basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in all such cases cash payments exceeded the limit of Rs. 20,000/- and such payments need to be disallowed. On verification of the accounts, the Assessing Officer worked out the amount covered by such violation under section 40A(3) to the extent of Rs. 11,37,78,775/-. The Assessing Officer also found that no details in the form of bills or vouchers were available in respect of another sum of Rs. 13,11,390/-. These two amounts of Rs. 11,37,78,775/- and Rs. 13,11,390/- were added up and treated as the quantity of violation under section 40A(3). The total of these amounts, amounting to Rs. 11,50,90,165/-, has also been added to the income of the firm. 9. The Assessing Officer has also made another addition of Rs. 8,74,888/- against disallowance of travelling expenditure. 10. Thus, the Assessing Officer determined the total income at Rs. 41,13,46,460/- as against the returned income of Rs. 3,02,32,380/-. 11. In first appeal the assessee agitated three issues before the Commissioner of Income-tax(Appeals). The first dispute related to the addition of Rs. 11,50,90,165/- made by the Assessing Officer on the ground of violation of section 40A(3). The second issue agitated by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jewellery. 14. Next, the Commissioner of Income-tax(Appeals) examined the case where purchase of old gold and sale of new jewellery are made on different dates. When old gold purchases precede new jewellery sales, the Commissioner of Income tax (Appeals) found that two sets of transactions are recorded on those respective dates, but ultimately the surrender value of the old ornaments is adjusted in the sale invoice issued against the sale of new ornaments to the customers. He observed that in such cases also the assessee never makes any payment of cash to the customers. 15. The Commissioner of Income-tax(Appeals) also examined the converse position where sale of new jewellery is made first and purchase of old gold is made later. There also he found that the sale value of new ornaments and surrender value of old ornaments are also transacted through the personal accounts of the customers and ultimately the customers' accounts are settled by payment of the differential amount by the customers. In that case also the Commissioner of Income tax(Appeals) found that the assessee never paid any cash to the customers. 16. In all these cases, while examining the income entries, the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re should be actual payment of cash from one person to another. He observed that on verification of some of the transactions it was clear that there were no such cash payments made by the assessee to the customers so as to attract the provisions of law stated in section 40A(3). He also observed that the Assessing Officer has not brought on record the instances where the assessee had made actual payment of cash to the customers at the time of purchase of old jewellery. Therefore, he held that the Assessing Officer has erred in invoking the provisions of section 40A(3) of the Act. 20. But, in the case of the amount of Rs. 13,11,390/-, for which the Assessing Officer has alleged absence of any details or vouchers, the Commissioner of Income-tax(Appeals) found that the addition of the said amount is justified. The Commissioner of Income-tax(Appeals) accordingly deleted the addition of Rs. 11,37,78,775/- and upheld the addition of Rs. 13,11,390/-. 21. Regarding the question of adopting the market price of jewellery at the time of conversion of partnership firm into joint stock company, the Commissioner of Income-tax(Appeals) found that valuation of closing stock at market price is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order. 25. Now, it is against the above order of the Commissioner of Income-tax(Appeals) that the Revenue has come in second appeal before the Tribunal. The Revenue has raised the following grounds of appeal before us:- "1. The learned Commissioner of Income tax (Appeals) erred in deleting the addition made on account of difference in stock valuation amounting to Rs. 26,51,49,027/- and on account of disallowance under section 40A(3) amounting to Rs. 11,50,90,165/-. 2. The learned Commissioner of Income tax (Appeals) ought to have considered that firm was converted into a company named M/s. Kirtilal Kalidas Jewellers(P) Ltd. w.e.f. 1-1-2008 and hence it was a case of dissolution of firm. 3. The learned Commissioner of Income tax (Appeals) erred in holding that it was a case of succession of firm by company and directed that stock be valued at cost price only. 4. The learned Commissioner of Income tax (Appeals) failed to appreciate that the business of the firm was taken over by a company as a going concern and the stock is to be valued at market price only as reported in the case of CIT Vs India Reinforcing Co.. 5. The learned Commissioner of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade any cash payment at the time of purchasing old jewellery from its customers. He explained that the sale bills are almost in the same pattern and, therefore, it is not necessary that the very same sale bills examined by the Assessing Officer ought to have been examined by the Commissioner of Income tax (Appeals) and generally sale bills are examined on random basis. He, therefore, contended that there is no question of any fresh evidence placed before the Commissioner of Income tax (Appeals) and the argument raised by the Revenue is only technical in nature. 28. We seriously considered the preliminary objection raised by the Revenue. Ongoing through the order of the Commissioner of Income-tax(Appeals), we find that the Commissioner of Income-tax(Appeals) has made an attempt to study the accounting method followed by the assessee while purchasing old ornaments and in place selling new ornaments. The intention of the examination made by the Commissioner of Income-tax(Appeals) was to ascertain whether the assessee was making any cash payment at any point of time to its customers at the time of purchasing old jewellery. The Commissioner of Income-tax(Appeals) has examined the cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the Revenue that there is violation of Rule 46A, in the present case. 29. Therefore, we proceed to dispose of the appeal on merits of the grounds. 30. First we will consider the addition made by the Assessing Officer on the ground of violation of section 40A(3). As already stated in paragraphs above, the Commissioner of Income-tax(Appeals) has examined the issue in a very detailed manner and has come to a finding that the assessee company did not make any cash payment to its customers while purchasing old ornaments. As a matter of fact, this is an age-old practice in jewellery business. In majority of cases the customers carry old ornaments to the jewellery shop and get them converted into new jewellery and make payments for the differential amount. Here also the assessee has followed the same practice prevalent in the industry. Wherever customers are bringing old jewellery, the assessee firm is recording it as purchase of old gold in order to satisfy statute and rule regarding sales-tax. This is because the assessee has to pay purchase tax at the time of buying of old ornaments. The expression that the assessee has purchased old ornaments' is only technical in nature an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee firm. The new company took over the business of the firm as a going concern. There was no stoppage of business. The change was only in the form of the business organization. Earlier it was a firm. Thereafter it became a company. All the partners of the erstwhile firm became the shareholders of the new company. Nobody else was admitted as shareholder. No asset of the old firm was distributed among the partners. No capital was withdrawn by the partners. The capital of the partners was converted into shares contributing towards the capital of the company. All other assets and liabilities were taken over by the company. 33. The Hon'ble Kerala High Court in the case of CIT vs. S.Koder, 233 ITR 620, had an occasion to consider a similar issue. A firm was converted into a private limited company, the erstwhile partners being the only shareholders. The business of the firm was continued by the company. The court held that section 170 of the Income-tax Act, 1961 applied and it was a case of succession of business. The court held that in such circumstances the stock of the firm could not be valued at market price. The Tribunal has observed in that case that the intention of the partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of business. In a case of succession of business the rule laid down by the Hon'ble Supreme Court in the case of A.L.A.Firm vs. CIT, 189 ITR 285, is not applicable. 37. Therefore, we find that the Commissioner of Income-tax(Appeals) has rightly deleted the stock valuation addition of Rs. 26,51,49,027/-. In fact, the fractional assessment made by the Assessing Officer in the hands of the company M/s.Kirtilal Kalidas Jewellers Pvt. Ltd. for the assessment year 2008-09 was brought before the Income-tax Appellate Tribunal A-Bench, Chennai, through the appeal filed by the Revenue in ITA No.564/Mds/2012. In that case also the Assessing Officer has alleged violation of section 40A(3) on exactly similar circumstances. The Tribunal, through their order dated 5-9-2012, accepted the contention of the assessee that entries in cash books were passed for the purchase of old gold jewellery from the customers by debiting purchase account and crediting the cash initially but at the end of the day the cash account was debited and the concerned party's account was credited as contra. The Tribunal accepted the contention of the assessee that they were all contra entries without involving movement ..... X X X X Extracts X X X X X X X X Extracts X X X X
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