Closing stock valuation on firm dissolution follows lower of cost or market price; higher market value cannot replace agreed book value.

On dissolution of a firm, closing stock could not be revalued at market price where the partners continued the business in the same name under a fresh partnership deed, as there was no cessation of business. The governing valuation principle remained cost or market price, whichever is lower. Since the book value reflected the lower figure, there was no basis to substitute the higher market value merely because dissolution accounts were prepared. The closing stock therefore did not require revaluation at market price, and the issue was decided in favour of the assessee and against the Revenue.

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Issues: Whether, on dissolution of a firm and preparation of dissolution accounts, the closing stock could be revalued at market price instead of the book value agreed between the partners.

Analysis: The relevant assessment year was 1985-86. The firm dissolved on the death of one partner, but the business was continued by the remaining partners in the same name under a fresh partnership deed. In such circumstances, there was no cessation of business. The applicable principle is that closing stock is to be valued at cost or market price, whichever is lower. Since the book value taken represented the lower figure, there was no basis for substituting the market value merely because it was higher.

Conclusion: The closing stock was not required to be revalued at market price and the issue was answered in favour of the assessee and against the Revenue.

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