TaxTMI 
TaxTMI 
2017 (7) TMI 620
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....inafter referred to as 'Act') accepting the method of valuation adopted by the respondent-assessee. Subsequently, the Commissioner of Income Tax (CIT) in exercise of his revisional jurisdiction under section 263 of the Act issued show cause notice dated 27.02.1997 and directed the Assessing Officer to value the closing stock at the time of dissolution at the market price. He further observed in his order that the Assessing Officer had erred while passing the assessment order for the year 1993-1994. According to him, during the accounting year under consideration, the firm was dissolved, and therefore, the closing stock was to be valued at market rate in view of the decision of this Court in the case of 'A.L.A. Firm v. Commissioner of Income Tax [(1991) 189 ITR 285]. So, he added the average gross profit of 15 per cent to the disclosed value of the closing of Rs. 12 crores and the same resulted in addition of Rs. 1,82 crores. The respondent-assessee questioned the validity of the order passed under Section 263 of the Act taking the plea that revisional jurisdiction could not be exercised in this manner. However, the CIT rejected the contention of the assessee and set ....
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....eding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment. Explanation.-For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Principal Chief Commissioner or Chief Commissione....
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.... excluded." This provision has come for interpretation time and again before this Court. Such a power given to the Commissioner to revise the order of the Assessing Officer is held to be constitutionally valid having regard to the fact that the Department has no right of appeal to the CIT (A) against any order passed by the Assessing Officer. It is for this reason, Section 263 is enacted to empower the Commissioner with the authority of revising the order of Assessing Officer, where the order is erroneous and the error has resulted in prejudice to the interests of the Revenue. As is clear from the language of the provision, there has to be a proper application of mind by the Commissioner to come to a firm conclusion that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue. Thus, two conditions need to be satisfied for invoking such a power by the Commissioner, which are: (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. (See 'Malabar Industrial Co. Ltd. v. Commissioner of Income Tax' [(2000) 243 ITR 83]) At the same time,....
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....ation of mind. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax." "The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed as a consequence of an order of the interests of the Revenue. For example, when an Income Tax and it has resulted in loss of Revenue; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income Tax Officer is unsustainable in law." In the instant case, as already noted above, the assessee-firm was constituted with two partners viz., m....
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....essee 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". XXX We, however, find substance in the second considerations that prevailed with the High Court. The decision in Muhammad Ussain Sahib v. N. Abdul Gaffor Sahib, AIR 1950 Mad 758; [1950] 1 ML J 81 correctly sets out the mode of taking accounts regarding the assets of a firm. While the valuation of assets during the subsistence of the partnership would be immaterial and could even be national, the position at the point of dissolution is totally different.(at p. 759): But the situation is totally different when the firm is dissolved or when a partner retires. The settlement of his account must be not on a national basis but on a real basis, that is every asset into money and the account of each partner settled on that basis... The assets have to be valued of course, on basis of the market value on the date of the dissolution..." This applies equally well to assets which c....
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.... now fully sanctioned by custom, viz., the adoption of the market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the actual cost price of the good in question (extracted in paragraph 281 of the report Committee of the Taxation of Trading Profits presented to British Parliament in April 1951). While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before it actual realization. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income tax purposes are to be computed in conformity with the ordinary principles of commercial accounting. Unless of course, such principles have been superseded ....