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2015 (12) TMI 96 - ITAT CHENNAI

2015 (12) TMI 96 - ITAT CHENNAI - TMI - Valuation of property - capital gain computation - whether fair market value as on the date of dissolution of the firm shall be taken into consideration - rectification of mistake - Held that:- This Tribunal is of the considered opinion that when the partnership was dissolved, the asset of the firm has to be valued on real basis i.e at market value, and not at cost price. As observed in A.L.A Firm vs CIT [1991 (2) TMI 1 - SUPREME Court] the value reflected .....

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s rectified as follows:

At page 6, para 7, the following shall be deleted:

"Now coming to the valuation, the Assessing Officer has rightly taken the value as reflected in the balance sheet of the partnership firm and it was confirmed by the CIT(Appeals). Therefore, this Tribunal do not find any infirmity in the order of the lower authority and accordingly, the same is confirmed."

Now the following shall be inserted as para 7:

"7. Now, coming to the val .....

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idered opinion that the Assessing Officer shall find out the fair value/market value of the property as on the date of dissolution of the firm i.e 20.2.2007 and thereafter compute the capital gains in accordance with law. In the result, the appeal of the assessee is partly allowed - MP No. 84/Mds/2015, ITA No. 1097/Mds/2015 - Dated:- 28-8-2015 - N. R. S. Ganesan, JM And A. Mohan Alankamony, AM For the Appellant : Shri R Vijayaraghavan, Adv For the Respondent : Shri P Radhakrishnan, JCIT ORDER Pe .....

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eferring to section 45(4) of the Income-tax Act, 1961, the ld. Counsel submitted that when the profit or gain arises from transfer of a capital asset on dissolution of the firm, shall be chargeable to tax and for the purpose of sec. 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer. Therefore, according to the ld. Counsel, the fair market value as on the date of dissolutio .....

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heet of the firm. According to the ld. Counsel, the non-consideration of section 45(4) of the Act and the judgment of the Apex Court in A.L.A Firm(supra) constitutes a mistake apparent on the face of the record u/s 254(2) of the Act. 3. On the contrary, Shri P. Radhakrishnan, Ld. Departmental Representative submitted that section 45(4) of the Act clearly says that the profit or gain arising from transfer of a capital asset on dissolution of the firm shall be chargeable to tax as income of the fi .....

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e Apex Court, the partners of the firm revalued the stock-in-trade for the purpose of mutual adjustment. On those circumstances, the Apex Court found that since the stock had been valued at market price, the surplus had to be reflected in the profit of the firm and had to be charged to tax. In the case before this Tribunal, it is not the case of the assessee that stock-in-trade was revalued at the time of dissolution. Since the stock-in-trade and assets were not revalued, this Tribunal has right .....

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t cost or market price at the option of the assessee. After referring to the judgment of the Madras High Court in G.R. Ramachari and Co. vs CIT [1961] 41 ITR 142, the Apex Court found 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 business is discontinued, whether on account of dissolution or closure or otherwise by the assessee, t .....

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f over or under valuation is possible. Since the stock-intrade was valued at market price it has to be reflected in the profit of the firm and has to be charged to tax. After referring to the judgment of Madras High Court in Muhammad Ussain Sahib vs S.N. Abdul Gaffoor Sahib, AIR 1950 Mad 758, the Apex Court observed that when the firm was dissolved, the partners being a commercial men would value the assets only on a real basis and not at cost or at their other value appearing in the books. In f .....

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ecause its effect can be offset over a period of time. But here, where the business comes to a close, no future adjustment of an over or undervaluation is possible. In this con- text, it is difficult to see how valuation, at other than cost, can be justified on the principle of Ahmedabad New Cotton Mills' case [1930] LR 57 lA 21 (PC) ; AIR 1930 PC 56. We, however, find substance in the second consideration that prevailed with the High Court. The decision in Muhammad Ussain Sahib v. S. N. A b .....

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eal 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 courseon the basis of the market value on the date of the dissolution .... " This applies equally well to assets which constitute stockin- trade. There can be no manner of doubt that, in taking accounts for purposes of dissolution, the firm and the partners, being commercial men, would value the assets only on a real bas .....

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lities must be taken at a 'fair value' not merely a 'book value' basis, thus involving recording entries for both appreciation and depreciation of assets and liabilities. This rule is applicable, notwithstanding the omission of a particular item from the books, e.g., investments, goodwill (Cruikshank v. Sutherland [1922] 92 LJ Ch 136 (HL)). Obviously, the net effect of the revaluation will be a profit or loss divisible in the agreed profit or loss-sharing ratios." 5. In view .....

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