TMI Blog1975 (1) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... t $ 72,196.47. This sum was arrived at by crediting, to the profit and loss account, the difference on revaluation of estates and gardens and house properties on dissolution of the firm on 13th March, 1961. The difference on revaluation of estates and gardens and house properties on dissolution of the firm was written back with the result that the adjusted profit for purposes of income-tax was shown as $ 4,604.88. It was also stated before the Income-tax Officer that out of the four partners, Ramanathan Chettiar formed one group, and the other partners, another group, and that the two groups were carrying on business separately with the assets and liabilities that fell to their shares on the dissolution of the firm. These statements were furnished along with the return on 10th April, 1962. On the same day the Income-tax Officer issued a notice under section 23(2), Indian Income-tax Act, 1922, posting the hearing for the same day. He completed the assessment on the same day by adding back a sum of Rs. 2,083 representing municipal tax paid in respect of the properties in Malaya. According to the Income-tax Officer, this amount was not admissible as a deduction in arriving at the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s revenue profits or capital gains, as they had been distributed in specie on dissolution of the partnership. It was also submitted that the reassessment proceedings were only due to change of opinion and that no reassessment could be done for giving effect to a change of opinion. The Income-tax Officer rejected these submissions and brought to tax the aforesaid sum of $ 101,248 along with the other amounts which were already assessed under the original assessment. The assessee contested the reassessment before the Appellate Assistant Commissioner without success. Thereafter, the assessee appealed to the Appellate Tribunal. Several contentions were taken before it. The Tribunal held that the proceedings under section 147(b) had been validly taken and that the surplus of $ 101,248 was rightly brought to tax. At the instance of the assessee, the following three questions have been referred for the opinion of this court : "(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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would proceed on the basis that the statement with the overtyping was there before the Income-tax Officer at the time when he made the original assessment. Even on that footing the point that arises is whether the reassessment proceedings are valid. It is now well-settled that the Income-tax Officer cannot take up the proceedings for reassessment of an income merely because there was a change of opinion. The decision of the Supreme Court in Commissioner of Income-tax v. Dinesh Chandra H. Shah is clear on this point. In that case the assessee, who was assessed at Calcutta, had disclosed in his return his share income from a firm in Madras. In completing the assessment the Income-tax Officer failed to include the assessee's share from the Madras firm. His successor took action under section 34(1)(b) of the Indian Income-tax Act, 1922, to include the said share of profits. In the appeal against the reassessment, the Income-tax Officer sought to justify the reopening of the assessment merely on the ground of change of opinion. The Supreme Court held that the power to reassess was not available in the said circumstances. At page 371 it was observed as follows : "In our judgment it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r case he just informs himself. It will be information in his possession within the meaning of section 34. In such cases of obvious mistakes apparent on the face of the record of assessment that record itself can be a source of information, if that information leads to a discovery or belief that there has been an escape of assessment or under-assessment." The High Court upheld the reassessment. A similar problem arose in Commissioner of Income-tax v. Rathinasabapathy Mudaliar . In that case there was a partition between a Hindu father and his sons, one of whom was a minor. The business was carried on by a partnership after the partition and the minor had been admitted to the benefits of the partnership. The father also was a partner. The Income-tax Officer registered the firm. The father had not included in his return the income of the minor son from the firm as required by section 16(3) of the Act of 1922. 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 question before this court was whether there was "information" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer 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. There is no evidence of any enquiry having been made with reference to this aspect. The amount involved is sufficiently large, so that if the Income-tax Officer was aware of the existence of this entry, he would have discussed it. At that stage the Income-tax Officer does not also appear to have been aware of the decision of this court in G. R. Ramachari Co. v. Commissioner of Income-tax to which we shall refer presently. Thus, taking into account all these factors, we are satisfied that there was information which came to the notice of the Income-tax Officer subsequent to the original assessment. In the course of the reassessment proceedings, the Income-tax Officer had called for the particulars of the valuation of the estate, etc. The absence of any such query at the original stage would clearly go to show that the Income-tax Officer had not at all applied his mind to this aspect. The reassessment proceedings are validly taken. This takes us to the second question. The problem that has to be considered here is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the assets should be considered in arriving at the profits. In that case the distinction between the stock-in-trade and other assets was not the subject of consideration. At page 82 the distinction between the object of the annual settlement of accounts and the settlement of accounts at a time when a partner retired was pointed out. As regards the annual settlement of accounts, it was observed as follows : "The object of the annual settlement is only for the definite purpose of assessing the profits at the end of the year and so long as the partnership is continued, it does not make any difference to the partners even if notional value is taken as the value of the assets. The asset at that book value continues to belong to the firm and whatever fluctuations there may be in the value of that asset, the benefit or the loss of it would accrue to the firm." As regards the dissolution, it was pointed out : "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de lost its character and became capital assets was rejected. The relevant passage runs as follows : "It is obvious that when a business ceases, all its stock-in-trade has to be disposed of and brought into account in order to balance the books. The goods on hand do not lose the character of stock-in-trade, and this proposition put forward by the assessee has no authority to sustain it." This point as to whether the entire assets are metamorphosed into capital on the dissolution of a firm is concluded by an earlier decision of the Privy Council in Commissioner of Income-tax v. Muthukaruppan Chettiar. In that case, the question was whether the interest received by a partner on the dissolution of the firm was a capital receipt. The Privy Council held that what the partner received was income and not capital. The analogy of the distribution of assets on liquidation of a company being applicable to the distribution of the profits on dissolution of a firm was rejected. Thus, the contention that the stock-in-trade got transformed into capital assets is not tenable. The Supreme Court's decision in Commissioner of Income-tax v. Madurai Mills Co. Ltd. does not in any way run counte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the option to value the stock-in-trade at the cost or the market value, whichever is lower, is available to it even at the point of termination of the business. The decision of the Bench of this court is against this contention and we do not think that there is any merit in the submission to the contrary. The learned counsel for the assessee next submitted that this decision is inconsistent with the later decisions of the Supreme Court, so that it cannot be treated as good law at present. The counsel drew our attention to two decisions of the Supreme Court as supporting him. The first case is Commissioner of Income-tax v. Dewas Cine Corporation. There the partnership consisted of two persons each of whom brought a cinema theatre into the firm at the time of its formation. This firm was dissolved and it was agreed between the partners that the theatres should be returned to the original owners. In the books of account maintained by the partnership, the theatres were shown to have been returned to the partners at the original price at which they were brought into the firm. The Income-tax Officer applied the proviso to section 10(2)(vii) of the Act of 1922, under which where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax Officer sought to tax the difference between the said sum of Rs, 15,000 and the written down value of the lorries as shown in the individual assessment file in the hands of the partner. The attempt to tax the said amount was by application of the proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. After considering the cases cited, it was observed at page 532 as follow : " ...... When A, as an individual, hands over his property to A and B, constituting a firm of partnership, there is no transfer of property involved. In any event, there is no such transfer of property so as to constitute a sale of goods ......." We do not see how this decision has any application to the facts herein. As indicated earlier, we are not concerned with the question whether there was a sale at all. We are concerned with the assessment of the firm up to the point of dissolution and the valuation of the stock-in-trade as on that date. We may in this connection point out that a case similar to the one cited above arose in the Supreme Court in Commissioner of Income-tax v. Hind Constructions Ltd. In that case the assessee was interested in a joint venture for purchase and sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when they decide to discontinue the business and make up accounts and distribute its assets and liabilities amongst themselves." We would apply the above passage with reference to stock-in-trade. We are, however, not to be understood as holding that the above passage applied with reference to assets other than the stock-in-trade. It is now well settled by the decision of the Supreme Courtin Commissioner of Income-tax v. A. Krishnaswami Mudaliar, that whichever method of book-keeping is adopted in the case of a trading venture for computing the true profits of the year, the stock-in-trade must be taken into account. The learned counsel for the assessee submitted that under the system of accounting adopted by the assessee the valuation of the stock-in-trade was never done. In other words, no trading account is prepared. The result of this method of accounting is that the stock-in-trade is taken at cost both at the commencement and at the end of the relevant year. If there was any sale of the properties, then to that extent either the profit or the loss is accounted for in the profit and loss account. That is how in this particular case, as mentioned earlier, there has been an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company had accumulated profits. In other words, the provision was designed to bring to tax as dividends any amount which had been drawn as a loan by a shareholder and which was outstanding in his account to the extent of the accumulated profits available in the hands of the company. At the time of the introduction of this provision, the Hon'ble Minister gave an assurance that outstanding loans and advances which were otherwise liable to be taxed as dividends in the assessment year 1955-56, would not be subjected to tax if it was shown that they had been genuinely refunded to the respective companies before the 30th June, 1955. To this effect a circular was issued on 10th May, 1955. Before the Supreme Court the question was regarding the validity of the said provisions and not of the circular. In the course of the judgment, reference was made to the circular issued in pursuance of the assurance of the Minister concerned and it was pointed out at page 203 as follows : "It is clear that a circular of the kind which was issued by the Board would be binding on all officers and persons employed in the execution of the Act under section 5(8) of the Act of 1922." This decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and directions of the Central Board might control the exercise of the power of the officers of the department in matters administrative but not quasi-judicial and that the section did not imply that the Board might give any directions or instructions to the Wealth-tax Officers or to the Commissioner in the exercise of his quasi-judicial functions. In that case the Commissioner had sought instructions from the Board as to how certain revision application filed before him should be decided. The Supreme Court set aside the orders of the Commissioner on appeal under article 136 of the Constitution and directed him to hear the revision applications and dispose of them according to law and uninfluenced by any instructions or directions given by the Board. In J. K. Synthetics Ltd. v. Central Board of Direct Taxes the Supreme Court again considered the question of the applicability of the circular of the Central Board of Direct Taxes in the matter of construction of section 80J of the Income-tax Act. The Supreme Court held that the Central Board was not competent to give directions regarding the exercise of any judicial power by its subordinate authorities. Thus, the above three cases esta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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