TMI Blog1991 (2) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 622. The appellant-assessee is a partnership firm. Since 1949, it was carrying on in Malaya a money lending business and, as part of and incidental to the said business, a business in the purchase and sale of house properties, gardens and estates. It had been reconstituted under a deed dated March 26, 1960. The firm's accounts for the year 1960-61, which commenced on April 13, 1960, would normally have come to a close on or about April 13, 1961. However, the firm closed its accounts as on March 13, 1961, with effect from which date it was dissolved. Along with its income-tax return for the assessment year 1961-62 filed on April 10, 1962, the assessee filed a profit and loss account and certain other statements. In the profit and loss account, a sum of $ 101,248 was shown as "difference on revaluation of estates, gardens and house properties" on the dissolution of the firm on March 13, 1961, such difference being $ 70,500 in respect of "house properties" and $ 30,748 in respect of estates and gardens. In the memo of adjustment for income-tax purposes, however, the above sum was deducted on the ground that it was not assessable either as revenue or capital. A statement was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, at, its instance, to the High Court having failed, the assessee is before us. Three questions of law were referred to the High Court by the Tribunal. These were ([1976] 102 ITR 622, 626) : "1. Whether, on the facts and circumstances of the case, the reassessment made on the assessee-firm for the assessment year 1961-62 under section 147 of the Income-tax Act is valid in law ? 2. 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 ? 3. Whether, on the facts and circumstances of the case, the Appellate Tribunal is right in law in sustaining the assessment of the sum of $ 101,248 after having found that the departmental officers are bound by the circular of the Central Board of Revenue?" We may deal at the outset with the third question. Though the High Court has dealt with this question at some length, we do not think any answer to this question can or need be furnished by us for the following reasons. First, the assessee has not been able to place before us the circular of the Board on which reliance is placed. It is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 34(1)(b) of the Indian Income-tax Act, 1922 ("the 1922 Act"), permits initiation of reassessment proceedings, "notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee" provided "the Income-tax Officer has, in consequence of information in his possession, reason to believe that income chargeable to tax has escaped assessment". In the present case, on the information already on record and in view of the decision in G. R. Ramachari and Co. v. CIT [1961] 41 ITR 142 (Mad), there can be no doubt that the Income-tax Officer could reasonably come to the conclusion that income, profits and gains assessable for the assessment year 1961-62 had escaped assessment. But, is that belief reached "in consequence of information in his possession"? The assessee's counsel says "no", for, says he, it is settled law that the "information" referred to in clause (b) above, should be "information" received by the Income-tax Officer after he had completed the original assessment. Here, it is pointed out that all the relevant facts as well as the decision in G. R. Ramachari and Co. v. CIT [1961] 41 ITR 142 (Mad) had been available when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s disclosed thereby or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected." (underlining ours). We may next refer to Kalyanji Mavji and Co. v. CIT [1976] 102 ITR 287 (SC). It is unnecessary to set out the facts of this case. It is sufficient to refer to the enunciation of the law regarding the scope of section 34(1)(b) as culled out from the earlier decisions of this court on the subject. At page 296, the court observed : "On a combined review of the decisions of this court the following tests and principles would apply to determine the applicability of section 34(1)(b) to the following categories of cases : (1) where the information is as to the true and correct state of the law derived from relevant judicial decisions ; (2) where in the original assessment the income liable to tax has escaped assessment due to oversight, inadvertence or a mistake committed by the Income-tax Officer. This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority ; (3) where the information is derived from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the informant gathered the information from the record, the immediate source of information to the Income-tax Officer in such circumstances is in one sense extraneous to the record. It is difficult to accept the position that while what is seen by another in the record is 'information' what is seen by the Income-tax Officer himself is not information to him. In the latter case he just informs himself. It will be information in his possession within the meaning of section 34. In such cases of obvious mistake apparent on the face of the record of assessment, that record itself can be source of information, if that information leads to a discovery or belief that there has been an escape of assessment or underassessment." A similar question arose in CIT v. Rathinasabapathy Mudaliar [1964] 51 ITR 204 (Mad). In that case, the assessee who was a partner in firm did not include in his return the income of his minor son admitted to the benefits of the partnership as required by section 16(3) of the 1922 Act. The minor son submitted a separate return and was assessed on this income. Subsequently, the Income-tax Officer "discovered" his error in not assessing the father thereon and sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat if, on reappraising the material considered by him during the original assessment, the Income-tax Officer discovers that he has committed an error in consequence of which income has escaped assessment, it is open to him to reopen the assessment. In our opinion, an error discovered on a reconsideration of the same material (and no more) does not give him that power. That was the view taken by this court in Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC), CIT v. A. Raman and Co. [1968] 67 ITR 11 (SC) and Bankipur Club Ltd. v. CIT [1971] 82 ITR 831 (SC) and we do not believe that the law has since taken a different course. Any observations in Kalyanji Mavji and Co. v. CIT [1976] 102 ITR 287 (SC) suggesting the contrary do not, we say with respect, lay down the correct law."(underlining ours). The court proceeded further to observe (p. 1005) : "A further submission raised by the Revenue on section 147(b) of the Act may be considered at this stage. It is urged that the expression 'information' in section 147(b) refers to the realisation by the Income-tax Officer that he has committed an error when making the original assessment. It is said that, when upon receipt of the au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC) has only indicated that proposition (2) outlined in this case and extracted earlier may have been somewhat widely stated ; it has not cast any doubt on the other three propositions set out in Kalyanji Mavji.'s case [1976] 102 ITR 287 (SC). The facts of the present case squarely fall within the scope of propositions (2) and (4) enunciated in Kalyanji Mavji's case [1976] 102 ITR 287 (SC). Proposition (2) may be briefly summarised as permitting action even on a "mere change of opinion". This is what has been doubted in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC) and we shall discuss its application to this case a little later. But, even leaving this out of consideration, there can be no doubt that the present case is squarely covered by proposition (4) set out in Kalyanji Mavji and Co. [1976] 102 ITR 287 (SC). This proposition clearly envisages a formation of opinion by the Income-tax Officer on the basis of material already on record provided the formation of such opinion is consequent on "information" in the shape of some light thrown on aspects of facts or law which the Income-tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consciously left out from the earlier assessment should have been brought to tax. In other words, as pointed out in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC), it also ropes in cases of a "bare or mere change of opinion" where the Income-tax Officer (very often a successor officer) attempts to reopen the assessment because the opinion formed earlier by himself (or, more often, by a predecessor Income-tax Officer) was, in his opinion, incorrect. Judicial decisions had consistently held that this could not be done and Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC) has warned that this line of cases cannot be taken to have been overruled by Kalyanji Mavji [1976] 102 ITR 287 (SC). The second paragraph from the judgment in Indian and Eastern Newspaper Society's case [1979] 119 ITR 996 (SC) earlier extracted has also reference only to this situation and insists upon the necessity of some information which makes the Income-tax Officer realise that he has committed an error in the earlier assessment. This paragraph does not in any way affect the principle enumerated in the two Madras cases cited with approval in Anandji Haridas [1968] 21 STC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Officer who had looked into the facts and the law could have failed to bring the surplus to tax in view of the then recent pronouncement in G. R. Ramachari's case [1961] 41 ITR 142 (Mad). Dr. Gauri Shankar submitted that the Tribunal has found that the Incometax Officer "had acted mechanically in accepting the return without bringing his mind to play upon the entry in the statement with reference to the distribution of the assets". He pointed out that there is no evidence of any enquiry with reference to this aspect and that, the amount involved being sufficiently large, the Income-tax Officer, if he had been aware of the existence of the entry would certainly have discussed it. He urged that the question whether the Income-tax Officer had considered this matter at the time of the original assessment or not is purely a question of fact and the Tribunal's conclusion thereon having been endorsed by the High Court, there is no justification to interfere with it at this stage. We think there is force in the argument on behalf of the assessee that, in the face of all the details and statement placed before the Income-tax Officer at the time of the original assessment, it is diffic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d; in the other, on a wrong construction thereof. In the present case, on the other hand, the material on which the Incometax Officer has taken action is a judicial decision. This had been pronounced just a few months earlier to the original assessment and it is not difficult to see that the Income-tax Officer must have missed it or else he could not have completed the assessment as he did. Indeed it has not been suggested that he was aware of it and yet chose not to apply it. It is, therefore, much easier to see that the initiation of reassessment proceedings here is based on definite material not considered at the time of the original assessment. In the above view of the matter, we uphold the High Court's view on the first question. The second question raises a more difficult problem. There can be no doubt that the decision of the Madras High Court in G. R. Ramachari and Co. [1961] 41 ITR 142 (Mad) squarely covers the situation. G. R. Ramachari and Co. [1961] 41 ITR 142 (Mad) holds 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 busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such revaluation, there can be no profit, because the firm cannot make a profit out of itself vide Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC). (ii) The process of revaluation of stock by itself cannot bring in any real profits: vide CIT v. K. A. R. K. Firm [1934] 2 ITR 183 (Rang) : Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) and CIT v. Hind Construction Ltd. [1972] 83 ITR 211 (SC) ; and (iii) It is well-settled that what is taxable under the income-tax law is only real income vide CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC) and CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266 (SC). There is, therefore, no principle by which the stock-in-trade can be valued at market price so as to bring to tax the notional profits which might in future be realised as a result of the sale of the stock-in-trade. The question posed before us is a difficult one. We think, however, that the High Court was right in pointing out that the several decisions relied upon for the assessee as to the nature of the transaction by which a firm, on dissolution, distributes its assets among its partners, have no relevance in the present case. As the High Court rightly observed, those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t cite authority for the general proposition, which is admitted at the Bar, that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes." Next, the principles as to the, method of valuation of closing stock are equally well-settled. Lord President Clyde set these out in Whimster and Co. v. CIR [1925] 12 TC 813 (C Sess) in the following words (p. 132 of 53 ITR) : "In computing the balance of profits and gains for the purposes of income-tax ... two general and fundamental commonplaces have always to be kept in mind. In the first place, the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts. In the second place, the account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting, so far as applicable, and in conformity with the rules of the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure .... From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less, than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continuing business and that it cannot be adopted where the business comes to an end and the stock-in-trade has to be disposed of in order to determine the exact position of the business on the date of closure." The, second consideration which prevailed with the High Court is reflected in the following passage from the judgment (at p. 149 of 41 ITR) : "It seems to us that none of these cases has any application to the facts of the present case. There is no authority directly in point dealing with this question, where a partnership concern dissolves its business in the course of 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. The case of a firm which goes into liquidation forms a close parallel to the present case. In such a case all the stock-in-trade and other assets of the business will have to be sold and their value realised. It cannot be controverted that it is only by doing so that the true state of the profits or losses of the business can be arrived at. The position is not very different when the partnership ceases to exist in the course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue the assets only on a real basis and not at cost or at their other value appearing in the books. A short passage from Pickles on Accountancy (Third Edn.), p. 650, will make this clear : "In the event of the accounts being drawn up to the date of death or retirement, no departure from the normal procedure arises, but it will be necessary to see that every revaluation required by the terms of the partnership agreement is made. It has been laid down judicially that, in the absence of contrary agreement, all assets and liabilities must be taken at '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, not withstanding 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 profit or loss divisible in the agreed profit or loss-sharing ratios." The real rights of the partners cannot be mutually adjusted on any other basis. This is what happened in G. R. Ramachari and Co. [1961] 41 ITR 142 (Mad). Indeed, this is exactly what the partners in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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