TaxTMI 
TaxTMI 
2011 (3) TMI 655
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....or our consideration based on the following relevant facts which are culled out from the orders of the authorities below. 3. The assessee, who is a petitioner before us, was a partner in a firm being run under the name and style of M/s. Mehrae-Di-Hatti (in short 'firm'). The said firm at the relevant point in time consisted of two partners; these being: Shri C.L.Mehra and Smt.Madhu Rani Mehra. Each partner held 50% share in the firm. The firm was constituted under the partnership deed dated 1.5.1971. It is pertinent to note that since both the firm as well as Smt. Madhu Rani Mehra were assessed to tax, we would be referring to them in judgment as the firm and the individual, by her name. 3.1 On 10.11.1979, Shri C.L.Mehra chose to retire from the firm. Consequently, the firm was dissolved. A dissolution deed dated 10.11.1979 appears to have been drawn up, a copy of which is, however, not available on record. It appears that this was not even filed before the authorities below, as is demonstrable from the orders of the authority below; though some of the clauses of the dissolution deed have been reproduced in the assessment order. 3.2 It is not in dispute that Smt. Madhu Rani Mehr....
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....ome of the firm was concerned, the counsel appearing for the firm before Tribunal conceded the position that the addition made by the Assessing Officer in the sum of Rs 14,02,700/- had to be confirmed in view of judgment of the Supreme Court in the case of ALA Firm v. CIT 189 ITR 285. This position finds a mention in paragraph 4 of the judgment of the Tribunal dated 16.12.1991. The Tribunal, on noticing the principle set forth in A.L.A. Firm (supra) and in the other judgment of the Madras High Court in G. R. Ramachari & Co. v. CIT (1961) 41 ITR 142, came to the conclusion that the option of valuing the opening and closing stock in a consistent manner is available to an on-going business, and that this principle, would not apply where the business itself comes to an end. Accordingly, it held that stock-in-trade insofar as the firm was concerned, had to be valued at the market price prevailing on the date of closure or dissolution. 6.2 As regards the proprietorship concern, which as noticed above, is assessed through the individual Smt. Madhu Rani Mehra, the Tribunal came to the conclusion since the proprietorship concern had acquired the stock from the dissolved firm and continued ....
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....essing the proprietor/Smt. Madhu Rani Mehra. In support of this submissions, Mr.Agarwal placed reliance on the judgment of the Madras High Court in the case of CIT v. Venkatachalam & Co. 256 ITR 113. In addition he also relied upon the following judgments:- (i) Sakthi Trading Co. v. CIT 250 ITR 871 SC (ii) Sunil Suddharthbhai v. CIT 156 ITR 509. 10. As against this, Mr. Sabharwal largely relied upon the reasoning set out in the impugned judgment. Mr. Sabharwal submitted that since the business of the dissolved firm was carried on by the proprietorship concern, there was a continuity of business, and therefore, according to the well accepted principle of accountancy, the stock had to be valued at lower of the two values, which was cost or market price. He further submitted, that in any event, as the proprietor/Smt. Madhu Rani Mehra had not paid anything over and above the book value in respect of the closing stock of the dissolved firm, the opening stock of the proprietorship concern should be valued at the same value i.e., book value being: Rs 35,16,785/-. Interestingly, Mr. Sabharwal also placed reliance on the judgment of the Supreme Court in the case of Sakthi Tra....
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....of that part of the return whereby, the assessee had excluded the revaluation difference in the sum of $ 101,248/- from the profit and loss account. In other words, the Assessing Officer was of the view that the said sum ought to have been brought to tax. In this regard, the Assessing officer placed reliance on the judgment of the Madras High Court in the case of G.R.Ramachari and Co. (supra). The assessee objected to the approach adopted by the Assessing Officer both in terms of procedure as well as on merits. The assessee's objection being, that the revaluation of assets did not lead to a profit or a loss and hence, nothing was payable by way of tax. The assessee went onto say, based on a circular of the Central Board of Revenue that since, it was in the process of winding up the business in Malaya, surplus received could be taxed only as capital gains. It was further urged that valuation had been at a market price prevalent since 1.1.1954 and, therefore, no capital gains was chargeable in the facts obtaining in the said case. 12.4 The Assessing Officer, however, issued notice to the assessee under section 148 read with section 147B of the Income-tax Act, 1961 (in short T.T. Act....
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.... of conservatism, by the accountants, in drawing up accounts. Thus, the well accepted accounting principle which is applicable in most jurisdictions, is that, closing stock is valued at cost or market value whichever is lower; (v) In drawing up accounts, in particular, in valuing stock, an entity should follow a consistent method . Furthermore, the Income-tax authorities should ordinarily accept books of account drawn up in accordance with well accepted accounting principles, unless the statute makes an exception or, they run contrary to the explicit provisions of the Act; (vi) the aforesaid principle of consistency, when applied to valuation of stock is relevant qua a going concern. On dissolution of a firm closing stock has to be valued on the basis of real value i.e., market value. This is independent of the fact whether or not the erstwhile partners of a dissolved firm continue to do business with assets received on dissolution. 13. This takes us to the next judgment which is Sakthi Trading Co. (supra). In this judgment the question of law which came up for consideration before the Supreme Court was as follows:- "Whether on the facts and in the circumstances of ....
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....f is discontinued and the stocks are realized, then the value realized, would have to be substituted for the value given in the accounts, but where the business was not discontinued, though the firm was dissolved, the question of realizing the value of the stock does not arise and therefore, there was no necessity, to revalue the closing stock. In other words, the Tribunal was of the view that there was no need for revaluation of stock in a continuing business and that the Assessing Officer having accepted the principle adopted by the assessee for valuation of stock i.e., on cost or market value whichever was lower, which was the method regularly followed by it; no error had been committed. The Tribunal, therefore, was of the view that the exercise of revisionary power by the CIT under section 263 of the I.T. Act was uncalled for. 15. Since the High Court had reversed the view of the Tribunal, the assessee had preferred the appeal to the Supreme Court. 15.1 The Supreme Court raised the following poser before it:- "In this appeal the question is not whether two assessment orders were required to be passed or not but is as to whether the value of the closing stock was required to....
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....le Rs 30,000/- was debited to the account of semi-processed needles and credited to Semi-Processed Needles Gift Account. 16.2 The said goods, which were received as a gift from the West German collaborator were utilized by the assessee in the manufacture of finished products. The finished products were sold in the market and the sale proceeds received therefrom credited to the trading account maintained by the assessee in its books of account. On the last day of the accounting year i.e., 31.3.1962, the assessee closed the "wire and strip gift account" and the "semi-processed needles gift account" by transferring the respective sums in each of these accounts to the credit of the Capital Reserve Account, and debited the aggregated sum of Rs 74,448.20/- to the trading account by making a corresponding entry in the accounts of "wire and strips" and "semi-processed needles". The net effect of these entries was that, the profit of the assessee was reduced by a sum of Rs 74,448.20. The Assessing Officer, however, concluded that since the assessee had not expended any money in acquiring the raw material and semi-finished needles as they were received as gifts from the West German collabor....
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.... the account or accounts in which credit entries were made was not material. What was decisive is that amounts were debited to the respective accounts concerning wire and strip and semi- processed goods on 30.9.1961 at their real values. 16.4 The next case i.e., Sunil Suddharthbhai (supra) primarily dealt with the issue whether transfer of personal assets, being shares of two companies introduced by a partner in the firm by way of his capital contribution; would constitute a transfer in law and hence, be amenable to capital gains. The Assessing Officer took the view that not only did the transaction constitute a transfer within the meaning of sub-section (47) of section 2 of the I. T. Act but also held that the assessee would be liable to capital gains, on the differential between the market price, at which shares were entered into books of the partnership firm, and the cost of said shares to the assessee. The matter reached the Supreme Court. The Supreme Court upheld the contention of the revenue insofar as whether the transaction constitute a transfer within the meaning of section 45 read with section 2(47) of the Income-tax Act. As regards whether the assessee had received any ....
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....ip firm when neither the date of dissolution or retirement can be envisaged nor can there be any ascertainment of liabilities and prior charges which may not have even arisen yet. In the circumstances, we are unable to hold that the consideration which a partner acquires on making over his personal asset to the partnership firm as his contribution to its capital can fall within the terms of section 48. And as that provision is fundamental to the computation machinery incorporated in the scheme relating to the determination of the charge provided in section 45, such a case must be regarded as falling outside the scope of capital gains taxation altogether." 16.5 As regards the third aspect whether the assessee had earned any profit or acquired any gain, the court observations are contained in paragraph 19, the relevant portion of which is extracted hereinbelow:- "What is the profit or gain which can be said to accrue or arise to the assessee when he makes over his personal asset to the partnership firm as his contribution to its capital? The consideration, as we have observed, is the right of a partner during the subsistence of the partnership to get his share of profits from time ....
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....we proceed further, it may be pertinent to briefly refer also to the relevant accounting standard ( in short, 'AS') issued by the Institute of Chartered Accountants of India ( in short, 'ICAI'). Valuation of inventories is subject matter of AS-2 issued by the ICAI. AS-2 prescribes valuation of inventories at cost or net realisable value whichever is less. Amongst other aspects it mandates that inventories ought not to be carried in financial statements at values in excess of the value which is expected to be realized from their sale or use. 19. The Tribunal in the broad manner seems to have applied this principle. But would this principle apply when what is required to be done is to determine cost at which stock is introduced in the business. In that context referring to the stock introduced by Smt. Madhu Rani Mehra in the proprietorship concern as opening stock is a little but of misnomer, in the sense, it tends to connect that stock with the business of the dissolved firm. The moment one refers to it as opening stock (having its origin in the closing stock of erstwhile firm), it conjures up a scenario of continuation of business. Because, if that position obtains then Ms. Madhu ....