1991 (2) TMI 1 - SC - Income Tax

Reassessment under Section 147(b) upheld; dissolution requires market valuation of closing stock, surplus taxable as revenue profit

SC upheld the validity of reassessment u/s 147(b), holding that the ITO's subsequent awareness of a prior judicial decision on valuation of closing stock ... Validity of the reassessment made on the assessee-firm u/s 147 - chargeable to tax - dissolution of the firm - method of valuation of closing stock - Whether, the assessment of the sum as revenue profit of the assessee-firm chargeable to tax for the assessment year 1961-62 is justified in law ? - HELD THAT:- It is a case where there is only one contention raised before the Income-tax Officer and it is, we think, impossible to hold that the Income-tax Officer did not at all look at the return filed by the assessee or the statements accompanying it. The more reasonable view to take would, in our opinion, be that the Income-tax Officer looked at the facts and accepted the assessee's contention that the surplus was not taxable. But, in doing so, he obviously missed to take note of the law laid down in G. R. Ramachari and Co. [1960 (9) TMI 95 - MADRAS HIGH COURT] which, there is nothing to show, had been brought to his notice. When he subsequently became aware of the decision, he initiated proceedings under section 147(b). The material which constituted information and on the basis of which the assessment was reopened was the decision in G. R. Ramachari and Co.. This material was not considered at the time of the original assessment. Though it was a decision of 1961 and the Income-tax Officer could have known of it had he been diligent, the obvious fact is that he was not aware of the existence of that decision then and, when he came to know about it, he rightly initiated proceedings for reassessment. We may point out that the position here is more favourable to the Revenue than that which prevailed in the Madras cases referred to earlier. There, what the Income-tax Officer had missed earlier was the true purport of the relevant statutory provisions. It seems somewhat difficult to believe that the Income-tax Officer could have failed to read properly the statutory provisions applicable directly to the facts before him (though that is what seems to have happened). Perhaps, an equally plausible view on the facts could have been taken that he had considered them and decided, in one case, not to apply them and; in the other, on a wrong construction thereof. In the present case, on the other hand, the material on which the Incometax Officer has taken action is a judicial decision. This had been pronounced just a few months earlier to the original assessment and it is not difficult to see that the Income-tax Officer must have missed it or else he could not have completed the assessment as he did. Indeed it has not been suggested that 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. Thus, we uphold the High Court's view on the first question. There can be no doubt that the decision of the Madras High Court in G. R. Ramachari and Co. squarely covers the situation. G. R. Ramachari and Co. 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. 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. We are not quite sure that the first of the considerations that prevailed with the High Court is relevant in the present case. Even in a continuing business, the valuation at market value is permissible only when it is less than cost ; it is not quite certain whether the rules permit an assessee if he so desires to value closing stock at market value where it is higher than cost. But, in either event, it is allowed to be done because its effect can be offset over a period of time. But here, where the business comes to a close, no future adjustment of an over or Under valuation is possible. In this context, it is difficult to see how valuation, at other than cost, can be justified on the principle of Ahmedabad New Cotton Mills' case [1929 (11) TMI 1 - PRIVY COUNCIL]. 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. For these reasons, we agree with the answer given by the High Court to the second question as well. The appeal fails and is dismissed. Issues involved:1. Validity of reassessment under section 147 of the Income-tax Act.2. Assessment of revaluation surplus as revenue profit.3. Applicability of the Central Board of Revenue circular.Issue-wise detailed analysis:1. Validity of reassessment under section 147 of the Income-tax Act:The primary issue was whether the reassessment made on the assessee-firm for the assessment year 1961-62 under section 147 of the Income-tax Act was valid. The court examined the relevant facts, including the dissolution of the firm, revaluation of its assets, and distribution among partners. It was noted that the relevant facts were disclosed in the balance-sheet and profit and loss account filed with the return. The court discussed whether action under section 147(b) was permissible, given that the information was already on record. The court referred to the provisions of section 147(b), which allows reassessment if the Income-tax Officer has information leading to the belief that income has escaped assessment. The court considered various precedents, including Maharaj Kumar Kamal Singh v. CIT and CIT v. A. Raman and Co., which defined 'information' to include judicial decisions and knowledge derived from external sources. The court concluded that the reassessment was valid as the Income-tax Officer acted based on the decision in G. R. Ramachari and Co., which was not considered during the original assessment.2. Assessment of revaluation surplus as revenue profit:The second issue was whether the assessment of the sum of $101,248 as revenue profit for the assessment year 1961-62 was justified. The court referred to the decision in G. R. Ramachari and Co., which held that the closing stock of a business should be valued at market value if the business is discontinued. The court discussed the principles of valuing closing stock at cost or market price, whichever is lower, and noted that this principle applies to a continuing business. However, in the case of dissolution, the valuation should be at market price to determine the true state of profits or losses. The court emphasized that the revaluation of assets at market value was necessary for a real basis of settlement among partners. The court upheld the High Court's view that the revaluation surplus should be treated as revenue profit and charged to tax.3. Applicability of the Central Board of Revenue circular:The third issue was whether the Appellate Tribunal was right in sustaining the assessment despite the circular of the Central Board of Revenue. The court noted that the circular's details were not provided and its purport, as set out in the High Court's judgment, seemed to suggest that the surplus from the sale of properties acquired by a money-lender would be capital gains. However, the court pointed out that the nature of the surplus depends on the facts and circumstances of each case, and no material was placed to show that the assets were capital assets and not stock-in-trade. The court concluded that the circular could not assist the assessee in this case and did not answer the third question.Conclusion:The appeal was dismissed, and the High Court's judgment was upheld. The reassessment under section 147 was deemed valid, the revaluation surplus was correctly assessed as revenue profit, and the Central Board of Revenue circular was not applicable to the case.