Bona fide distribution of partnership trading stock on discontinuance is a business transaction, but agreed book value governs taxation.

On discontinuance of a partnership business, a bona fide distribution in specie of trading stock among partners is treated as a commercial transaction, not a mere self-dealing adjustment, so the Revenue may treat it as a business dealing. However, where the distribution is made at an agreed and genuine book value, the taxing authority cannot substitute a higher market value unless the arrangement is shown to be sham or unreal. The valuation for assessment therefore follows the agreed book figure rather than a notional market surplus when the transaction is bona fide.

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Issues: (i) Whether distribution in specie of the remaining shops among the partners amounted to a business transaction in respect of the twenty-eight shops. (ii) Whether, on such distribution on discontinuance of the business, the shops were to be valued at the book figure of Rs. 89,000 or at the market price of Rs. 1,70,000.

Issue (i): Whether distribution in specie of the remaining shops among the partners amounted to a business transaction in respect of the twenty-eight shops.

Analysis: The assets were trading stock of the firm. When the partners decided to discontinue the business, they mutually distributed the shops, fixed their values, and adjusted the accounts by carrying the surplus to profit and loss. The transaction was not a case of a person dealing with himself, nor a mere withdrawal to a non-trading use. It was a commercial adjustment made by business persons on discontinuance of the venture.

Conclusion: The distribution in specie was a business transaction, in favour of the Revenue and against the Assessee.

Issue (ii): Whether, on such distribution on discontinuance of the business, the shops were to be valued at the book figure of Rs. 89,000 or at the market price of Rs. 1,70,000.

Analysis: Where a bona fide transaction disposes of assets at an agreed book value, the taxing authority cannot substitute market value merely because it is higher. No sham transaction or unreal price was established. The surplus arising from the agreed valuation as entered in the books was the proper figure for assessment, and not a notional surplus based on market price.

Conclusion: The shops were to be taken at the book figure of Rs. 89,000, in favour of the Assessee and against the Revenue.

Final Conclusion: The reference was answered by recognising the distribution as a business transaction, while rejecting substitution of market value for the agreed book value; the assessee succeeded on the principal valuation issue.

Ratio Decidendi: On discontinuance of a partnership business, a bona fide distribution of trading stock among partners is a business transaction, but taxing authorities cannot substitute market value for an agreed book value unless the transaction is shown to be sham or unreal.

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