TaxTMI 
TaxTMI 
2012 (12) TMI 495
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....he company incorporated on 1-1-2008 without any interruption. The business continued as such, even though the nature of the business organization changed from that of partnership firm to that of a private limited company. 3. All the assets, liabilities, etc. of the erstwhile firm vested with the company on incorporation, as provided under section 575 of the Companies Act, 1956. 4. In the light of the above developments, the newly formed company M/s.Keertilal Kalidas Jewellers Pvt. Ltd. filed the return of income for the impugned assessment year 2008-09, for the entire period of the previous year consisting of twelve months from 1st April, 2007 to 31st March, 2008. The company, in its assessment proceedings, submitted before the Assessing Officer that the company being the successor in business, the entire income is assessable in its hands for the first fraction of the previous year from 1st April, 2007 to 31-12-2007 as the successor in business and for the second fraction from 1st January, 2008 to 31st March, 2008 as its own business. 5. In the assessment of the company M/s.Keertilal Kalidas Jewellers Pvt. Ltd., the Assessing Officer proceeded to assess the income for the ....
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....ial men, would value the assets only on a real basis and not at cost or at their other value appearing in the books. The real rights of the partners cannot be mutually adjusted on any other basis. The surplus, if any, has to be considered as chargeable revenue profits of the firm. In addition to the above judgment of the Hon'ble apex court, the Assessing Officer also relied on the judgment of the Hon'ble Madras High Court rendered in the case of CIT vs. India Reinforcing Co., 188 ITR 651. 7. Accordingly, the Assessing Officer replaced the stock value offered by the assessee firm and adopted the market value, as a result of which an addition has been made to the extent of Rs. 26,51,49,027/-. 8. The next adjustment of addition made by the Assessing Officer is on the ground of violation of section 40A(3). The assessee in the course of carrying on of its business, was collecting old gold jewellery from its customers and in its place selling new ornaments. The differential amount alone is paid by the customers to the assessee firm. The Assessing Officer bifurcated this transaction into two segments. According to the Assessing Officer, the delivery of old ornaments by the customers....
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....n 234A of the Act. 12. The Commissioner of Income-tax(Appeals) considered the detailed grounds, explanations and arguments of the assessee in a very extensive manner. The order of the Commissioner of Income-tax(Appeals) runs to 44 pages. 13. The Commissioner of Income-tax(Appeals) first examined the issue of addition of Rs. 11,50,90,165/- made by the Assessing Officer on the ground of violation of section 40A(3) of the Act. The Commissioner of Income-tax(Appeals) examined the accounting entries passed by the assessee in its books of account on accepting old jewellery from the customers and in return giving new jewellery to the customers. Where in a case both purchase of old jewellery and sale of new jewellery are accounted by the assessee on the same day, the Commissioner of Income-tax(Appeals) found that the sale value of the new jewellery is adjusted against the surrender value of the old jewellery and the differential amount is received from the customers. He found that the surrender value of the old jewellery is adjusted against the sale value of new jewellery and accordingly there was no actual payment of any cash by the assessee firm while purchasing old ornaments from ....
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....ven though the entries were compensating entries. Under the new method introduced by the name "Daily sales register method of accounting", the assessee excluded the surrender value of old ornaments from the cash account and reflected the accounting entries more accurately to depict the exact nature of the transaction. The Commissioner of Income-tax(Appeals) examined this new method and found that the assessee has been consistently purchasing old ornaments from the customers without making any actual cash payment. 18. On further examination of the accounting method followed by the assessee, the Commissioner of Income tax (Appeals) found that different branches of the assessee firm situated in different States had to follow marginally different accounting methods in order to conform to the local sales-tax laws of the concerned State. The Commissioner of Income tax (Appeals) has examined this matter in respect of different branches of the assessee firm like Kochi, Hyderabad, Coimbatore, Vijayawada, Bangalore, Ludhiyana, Chennai, etc. He also found that the assessee has paid local sales-tax against purchase of old gold ornaments. These details have been examined by the Commissioner ....
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....gly held that the decision of the Hon'ble Supreme Court in the case of A.L.A.Firm vs. CIT, 189 ITR 285 is not applicable to the present case. He, on the other hand, relied on the judgment of the Hon'ble Kerala High Court in the case of CIT vs. S.Koder, 233 ITR 620, wherein the court has held that in the case of conversion of firm to private limited company, with erstwhile partners being the only shareholders and the business of the firm continued by the company, section 170 of the Income tax Act, 1961 applied and, therefore, stock of the firm could not be valued at market price. The Commissioner of Income tax (Appeals) also relied on the judgment of the Hon'ble Supreme Court in the case of Sakthi Trading Co. vs. CIT, 250 ITR 871, wherein the Hon'ble apex court held that where a firm is reconstituted with the remaining partners on dissolution of firm on death of one of the partners and without discontinuance of business, the closing stock of the firm needs to be valued at cost or market price, whichever is lower. He also relied on the judgment of the Hon'ble Madras High Court in the case of CIT vs. Standard Printing Machinery, 260 ITR 268 in support of the above proposition. 22. ....
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....uance of business, the stock should be valued at market price. 7. The learned Commissioner of Income tax (Appeals) erred in deleting the addition on account of disallowance made u/s 40A(3) of Rs. 11,50,90,165/- on the basis of self-serving statement of the assessee. 8. The learned Commissioner of Income tax (Appeals) ought to have afforded the Assessing Officer an opportunity of rebuttal under Rule 46A of the Income-tax Rules on the fresh evidence produced before him." 26. Shri Shaji P Jacob, the learned Commissioner of Income-tax appearing for the Revenue, contended that he is seriously pressing the ground raised by the Revenue that the Commissioner of Income-tax(Appeals) has violated Rule 46A while deciding the appeal after accepting fresh evidence produced by the assessee firm. The learned Commissioner of Income-tax produced before us a copy of letter issued by the Assistant Commissioner of Income-tax, Circle III at Coimbatore, dated 31-10-2012, wherein the Assistant Commissioner of Income-tax has listed the fresh materials placed by the assessee before the Commissioner of Income-tax(Appeals), which were not made available to the As....
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....which were examined by the Commissioner of Income-tax(Appeals), were not placed before the assessing authority. We find that the turnover of the assessee being huge and having lot of branches in different States, the assessee is having innumerable sale invoices and purchase invoices. It is also true that the pattern of accounting is common everywhere. The assessee had changed from the earlier gross accounting to daily sales register method of accounting. Another difference in the sale bills is on account of the local sales-tax law of different States. For the above nominal differences, in pith and substance, the bills and vouchers maintained by the assessee in different branches are in the same manner. In such circumstances, there is no point in arguing that the assessee has produced sale bill No.1 before the Assessing Officer and sale bill No.5 before the Commissioner of Income-tax(Appeals). There is no fundamental difference between sale bill No.1 and sale bill No.5. The assessee has produced sale bills both before the Assessing Officer and before the Commissioner of Income tax (Appeals) on random basis. Bills may not be produced strictly according to serial numbers. Therefore, t....
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.... provided by the assessee firm. Where the surrender value of the old jewellery entrusted by the customers to the assessee firm is Rs. 100/- and the value of new jewellery returned by the assessee is Rs. 200/-, the differential amount of Rs. 100/- alone is paid by the customers to the assessee. The assessee is not making payment of Rs. 100/- to the customer at the time of accepting the old ornaments. That is why the Commissioner of Income tax (Appeals) has correctly appreciated that the entire transaction consisted of cash entries as well as journal entries. The cash entries related to the payment of the differential amount by the customers to the assessee firm. There is no payment of cash by the assessee firm to its customers at the time of receipt of old ornaments. 31. Therefore, we find that the Commissioner of Income-tax(Appeals) has correctly appreciated the facts of the case and has rightly come to the conclusion that the assessee has not made payments to the customers at the time of purchase of old jewellery. Therefore, there is no question of the assessee violating the provisions of law stated in section 40A(3). The order of the Commissioner of Income-tax(Appeals) deletin....
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.... Court held that there was no compulsion to value the closing stock at market price. 34. In a slightly different context, the very same issue was considered by the Hon'ble Supreme Court in the case of Sakthi Trading Co. vs. CIT, 250 ITR 871. In that case the assessee was a registered firm. One of the partners expired. As a result of the death, the firm was dissolved. It was reconstituted the next day with the remaining partners. The Tribunal held that as the business of the firm was never discontinued, but was taken over on succession by another firm, the closing stock of the assessee firm on the date of dissolution was sought to be valued at cost or market price, whichever was lower. The Hon'ble Madras High Court held that the closing stock had to be valued at market price. The Hon'ble Supreme Court upheld the decision of the Tribunal holding that there was no cessation of business and therefore the closing stock had to be valued at cost or market price, whichever is lower. It is in this case that the Hon'ble Supreme Court has declared the relevant law that "it is an established rule of commercial practice and accountancy that where there is no discontinuance of business the cl....