9911796707
TMI Blog1991 (2) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 made before the officer that partner Ramanathan Chettiar forming one group and the other partners forming another group were carrying on business separately with the assets and liabilities that fell to their shares on the dissolution of the firm. The Income-tax Officer issued a notice under section 23(2) on the same day April 10, 1962, posting the hearing for the same day and completed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, 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 clear whether it is circular or a communication of some other nature. Second, the circular, to judge from its purport set out in the High Court's judgment, seems to have been to the effect that the surplus arising from the sale of properties acquired by a money-lender in the course of his business would be in the nature of capital gains and not of income. Obviously, such a proposition could not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 original assessment was completed on April 10, 1962. Action cannot be taken under this clause merely because the Income-tax Officer, who originally considered the surplus to be not assessable, has, on the same facts and the same case law which had been available to him when he completed the assessment originally, changed his opinion and now thinks that the surplus should have been charged to tax. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 an external source of any kind. Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment ; (4) where the information may be obtained even from the record of the original assessment from the investigation of the materials on the record, or the facts disclosed thereby or from other enquiry or research into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 started reassessment proceedings. The reassessment was upheld by the Madras High Court on the same logic as had been applied in Salem Provident Fund Society Ltd.'s case [1961] 42 ITR 547 (Mad). The above line of thinking has not only held the field for about thirty years now but has also received approval in Anandji Haridas and Co. (P.) Ltd. v. S. P. Kushare, STO [1968] 21 STC 326 (SC). This issue has further been c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... j 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 audit note the Income-tax Officer discovers or realises that a mistake has been committed in the original assessment, the discovery of the mistake would be 'information' within the meaning of section 147(b). The submission appears to us inconsistent with the terms of section 147(b). Plainly, the statutory provision envisages that the Income-tax Officer must first have information in his possession, and then in consequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vji'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 had not earlier been conscious of. To give a couple of illustrations ; suppose an Income-tax Officer, in the original assessment which is a voluminous one involving several contentions accepts a plea of the assessee in regard to one of the items that the profits realised on the sale of a house is a capital realisation not chargeable to tax. Subsequently, he finds, in the forest of papers filed in connection, with the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-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 326 (SC). Even making allowances for this limitation placed on the observations in Kalyanji Mavji [1976] 102 ITR 287 (SC), the position as summarised by the High Court in the following words represents, in our view, the correct position in law (at p. 629 of 102 ITR) : "The result of these decisions is that the statute does not require that the information must be extraneous to the record. It is enough if the material, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 difficult to take the view that the Income-tax Officer had not at all applied his mind to the question whether the surplus is taxable or not. It is true that the return was filed and the assessment was completed on the same date. Nevertheless, it is opposed to normal human conduct that an officer would complete the assessment without looking at the material placed before him. It is not as if the assessment record contained a large ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 business and that where a business is discontinued, whether on account of dissolution or closure or otherwise by the assessee, then the profits cannot be ascertained except by taking the closing stock at market value. G. R. Ramachari and Co. [1961] 41 ITR 142 (Mad) has subsequently been followed by the Kerala High Court in Popular Workshops v. CIT [1987] 166 ITR 348 and in Popular Automobiles v. CIT [1989] 179 ITR 632. Shri Ramachand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cases relate to what happens after or in consequence of the dissolution of a firm whereas we are here concerned with a question that arises before or at the time of dissolution. What we have to decide is the basis on which, in making up the accounts of a firm up to the date of dissolution, the closing stock with the firm as at a point of time immediately prior to the dissolution is to be valued. It is this principle that has been dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Act, or of that Act as modified by the provisions and schedules of the Acts regulating excess profits duty, as the case may be. For example, the ordinary principles of commercial accounting require that in the profit and loss account of a merchant's or manufacturer's business the values of the stock-in-trade at the beginning and at the end of the period covered by the account should be entered at cost or market price, whichever is the lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock 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 results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question (extracted in paragraph 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 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 of the accounting year. The fact that Ramachari, one of the ex-partners, took over the entire stock and continued to run the business on his own, is not relevant at all, when we consider the profits or losses of the partnership which has come to an end. It should, therefore, follow that in order to arrive at the correct picture of the trading results of the partnership on the date when it ceases to function, the valuation of the stock in hand shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udicially 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 this case have done and, having done so, it is untenable for there to contend that the valuation should be on some other basis. Once this principle is applied and the stock-in-trade is valued at market price, the surplus, if any, has to get reflected as the profits of the firm and has to be charged to tax. The view taken by the High Court has held the field for about thirty years now and we see no reason to disagree even if a different view were possible. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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