Revaluation of closing stock at market price cannot create a trading loss absent a real sale or actual loss incurred.

Where shares have consistently been valued at cost, an assessee cannot claim a deductible trading loss merely by revaluing closing stock at market price on division or dissolution without a real sale or an actual loss incurred in the accounting year. The note also states that a firm which has been dissolved in terms of its deed does not continue as a subsisting entity for renewal of registration under the Income-tax Act once it has ceased to exist. The stated ratio is that unrealised depreciation in capital value cannot be converted into a trading loss by unilateral valuation, and dissolution ends the firm for registration purposes.

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Issues: (i) whether the assessees could claim a deductible trading loss by revaluing closing stock of shares at market price when the shares had consistently been brought into account at cost; (ii) whether the dissolved firm continued to exist for purposes of renewal of registration under the Income-tax Act.

Issue (i): whether the assessees could claim a deductible trading loss by revaluing closing stock of shares at market price when the shares had consistently been brought into account at cost.

Analysis: The accounting method regularly employed had valued the shares at cost from year to year, and no change in that system had been sought or permitted. For income-tax purposes each accounting year is a self-contained period, and only losses actually incurred during that year can be set off. On the facts, there was no real sale of the shares during the year, but only a division or distribution of the assets among the partners. The assessees could not, by their own valuation, convert an unrealised depreciation in capital value into a trading loss.

Conclusion: The question was answered in the negative. The alleged loss on shares was not allowable.

Issue (ii): whether the dissolved firm continued to exist for purposes of renewal of registration under the Income-tax Act.

Analysis: The deed of dissolution provided that the partnership would cease on the specified date and would not continue for any reason whatsoever. By the date on which renewal was refused, the firm had already come to an end and could not be treated as subsisting for registration purposes under the Income-tax Act.

Conclusion: The question was answered in the affirmative against the assessees. The firm was not entitled to renewal of registration after dissolution.

Final Conclusion: The assessees failed on the substantive tax claim, and the refusal of registration after dissolution was upheld; the decision as a whole is against the assessees.

Ratio Decidendi: Where stock-in-trade has consistently been valued at cost and no change in the accounting system is allowed, an assessee cannot claim a trading loss merely by revaluing assets on division or dissolution without a real sale or an actual loss incurred during the accounting year.

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