TaxTMI 
TaxTMI 
2018 (12) TMI 217
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....assessee is a partnership firm carrying on three major lines of businesses viz., execution of civil contracts, real estate and computer education centres as franchise. For the assessment year under consideration, 2002-03, the assessee filed return of income on 22.10.2002 declaring a total income of Rs. 10,08,64,490/-. The partners of the assessee firm entered into a Memorandum of Understanding (MOU) on 01.08.2002 deciding to re-organize their businesses whereby, couple of partners retired, fresh partners were inducted and the firm stood re-constituted and the re-constituted firm was permitted to carry on business in the same name and style and essentially, the three lines of businesses were to be carried on by the newly re-constituted partnership. 4. From the Memorandum of Understanding, it is seen that all the assets and liabilities of the business of computer education and execution of real estate project as existing in the books of the assessee firm as on 31.03.2002, were transferred to the new firm with effect from 01.04.2002. The assessee firm after re-constitution, continued the business of execution of civil contracts. The Assessing Officer while completing the assessment, ....
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....before carrying on the same business. 7. The CIT(A) agreed with the contentions advanced by the assessee and allowed the appeal by order dated 21.07.2006. Aggrieved by the same, the Revenue preferred appeal to the Tribunal contending that the business of the assessee was split up, and assets and liabilities were divided among the two newly constituted firms and in the decision relied on by the CIT(A), after the dissolution, there was division of business and the decision in the case of A.L.A. Firm (supra) was squarely applicable to the case of the assessee. 8. The Tribunal held that the MOU was prepared in lieu of dissolution deed, and the assets and liabilities were divided between the two groups and the business was also divided and it would be necessary to look into the surrounding circumstances to know the real position and intent of parties. Further, it was pointed out that the real right of the partners cannot be mutually adjusted on any other basis, qua the old firm, the business was discontinued in relation to real estate project to computer education centres and the decision in the case of A.L.A. Firm (supra) is fully applicable to the facts of the case. Accordingly, the....
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....t consider the specific case of the assessee that the re-constitution of the firm with effect from 01.04.2002 should not lead to valuation of the closing work in progress as on 31.03.2002 at net realisable value/market value, since the Act recognises each year as a self-contained year and the happenings of later year should not be superimposed on the preceding year. 14. Considering the factual position, we agree with the assessee's stand that the decision in the case of A.L.A. Firm (supra) can have no application to the facts of the case, as we are convinced that there has been no dissolution in the assessee's case and only some partners retired and few partners were inducted and the firm continued with those businesses. Furthermore, there is no material to show that the assets were revalued at the time of re-constitution and as pointed out, re-constituted firm continued to exist as before and was carrying on the same business. 15. The learned counsel appearing for the Revenue referred to the findings recorded by the Assessing Officer and emphasised that there is a clear splitting up of the business of the original firm stood dissolved, and the finding of the Assessing Of....
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..... (supra). 20. It was further pointed out that the principle of valuing the closing stock of a business at cost or market price at the option of the assessee firm is a principle that would hold good only as long as there is continuance of 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. It was further held that when there is no cessation of business, the closing stock could not be valued at the market rate. 21. The decision in Sakthi Trading Co. (supra) was followed by the Hon'ble Supreme Court in Commissioner of Income-tax, Gujarat-II vs. Kwality Steel suppliers Complex, [2017] 395 ITR 1. 22. As pointed out by us earlier, the firm did not stand dissolved. The CIT(A), on perusal of the audited balance sheet of the partnership firm as on 31.03.2002, and the balance sheet of the de-merged as well as the existing business as on 1st April 2002, concluded that the audited accounts of the assessee firm as on March 31, 2002 shall be the basis for de-merging the business in to an independent unit and it is clear tha....