TaxTMI 
TaxTMI 
2001 (8) TMI 5
X X X X Extracts X X X X
X X X X Extracts X X X X
....ry 6, 1984, the firm was dissolved. It was, however, reconstituted with effect from the next day, that is, February 7, 1984, with the remaining five partners. Two orders of assessments were made : one for the period up to February 6, 1984, and the other for the period from February 7, 1984 to March 31, 1984. The Commissioner of Income-tax made an order under section 263 of the Income-tax Act, 1961, as according to him the assessment order made by the Income-tax Officer was erroneous and prejudicial to the interests of the Revenue in valuing the stock in trade as on February 6, 1984 on the basis of cost or market rate, whichever is lower as that was the usual method the assessee used to adopt in valuing its stock. The Commissioner of Income-tax relying upon the decision of the Madras High Court in A. L. A. Firm v. CIT [1976] 102 ITR 622 came to the conclusion that the Income-tax Officer ought to have valued the closing stock at its market rate as on February 6, 1984. Thus, setting aside the assessment order dated May 30, 1984, the Income-tax Officer was directed to pass a fresh order. The order of the Commissioner of Income-tax was challenged by the assessee in appeal before the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lier decision in G. R. Ramachandran and Co. v. CIT [1961] 41 ITR 142 (Mad) held that when there is a dissolution, the stock in trade should be valued at market value. In these cases, the Tribunal noticed that the question posed was whether, where the value of the stock had been accepted by the partners upon dissolution, it could not be varied by the Income-tax Officer. The Tribunal was of the view that if on the dissolution of a firm, the business is also discontinued and the value of the stock realised, it may be possible for the Income-tax Officer to insist that the value realised shall be taken as the value of the closing stock instead of any notional value on the regular principle of cost or market value, whichever is less. But where the business is not discontinued, the question of revaluing the stock cannot arise at all. The Tribunal held that the valuation of the closing stock of a continued business on the principle of cost or market value whichever is less cannot be substituted with the market value only because the firm carrying on that business is dissolved and the business is taken over by another firm consisting of the remaining partners. In respect of A. L. A. Firms c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n in A. L. A. Firm's case [1991] 189 ITR 285 (SC) deserves to be examined in some detail. In that case three questions of law were referred for the opinion of the High Court but we are concerned with the second question which was as under : "Whether on the facts and circumstances of the case, the assessment of the sum of $ 101,248 as revenue profit of the assessee-firm chargeable to tax for the assessment year 1961-62 is justified in law. The facts under which this question arose were that the assessee, a partnership firm, was carrying on money-lending business in Malaya and as part of and incidental to the said business, it was also carrying on the business of the purchase and sale of house properties, gardens and estates. The assessee firm was reconstituted under a deed dated March 26, 1960. The firm's accounts for the year 1960-61, which commenced on April 13, 1960 would normally have come to a close on or about April 13, 1961. However, the firm closed its accounts as on March 13, 1961, with effect from which date it was dissolved. Along with its income-tax return for the assessment year 1961-62 filed on April 10, 1962, the assessee filed a profit and loss account and c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ontinuing 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. The contention of the assessee was that while it is true that the closing stock has to be valued, the well settled principle is that it would be valued at cost or market price, whichever is lower, and there is no justification for laying down a different Principle for valuation of the closing stock at the point of discontinuance of the business unless the goods are actually sold by the assessee at the time of discontinuance. Reliance was also placed on a series of decisions holding that when a firm is dissolved and assets are distributed among the partners, there is no sale or transfer of the assets of the firm to the various partners. The submission was that revaluation of the assets of a firm which is only for the division of the assets among the partners on a real and not a notional basis is part of the division of the assets and, therefore, logically, in point of time, subsequent to the dissolution of the firm and since the revaluation takes place after ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....C) wherein it was observed that : "It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks Attaching to the Holding of Trading Stocks, 1919, 'As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure . . . From this rigid doctrine one exception is very generally recognised on prudenti....