Madras High Court
Income-Tax Officer vs Wilson Press Tools. on 11 May, 1989
Equivalent citations: [1989]30ITD409(MAD)
ORDER
Per Shri R. Parthasarathy, Accountant Member - This is a departmental appeal and it has been preferred against the order dt. 14-5-86 in ITA No. 383-C/84-85 of the Commissioner (A), Coimbatore deleting the addition of Rs. 24,088 made by the ITO in his assessment order dt. 12-7-84.
2. The assessment year involved in this appeal is 1982-83 and the previous year relevant to the same was 1-4-81 to 30-9-81, on which date the firm was dissolved. The issue involved in this appeal is whether or not the stock should be valued at market rate in accordance with the decision of the Madras High Court in the case of A. L. A. Firm v. CIT [1976] 102 ITR 622 in so far as the assessee-firm been dissolved on 30-9-81.
3. The assessee-firm was carrying on business in partnership under the name the style of Wilson Press Tools under the partnership dt. 15-5-77. It consisted of the following four partners :
(i) Shri M. R. Sadagopan
(ii) Shri S. Reginald
(iii) Shri V. Vidayathil and
(iv) Shri V. J. John On 30-9-81, S/Shri M. R. Sadagopan, S. Reginald and V. Vidayathil retired from the firm and Sri V. J. John took over the assessee-firms assets and liabilities and carried on the business thereafter as a sole proprietor. The terms and conditions of such arrangement were reduced to writing through a deed of retirement dt. 30-9-81. On the ground that the entire rights in respect of the assets had been taken over as per the deed on retirement by Sri V. J. John and there was a transfer, the ITO was of the opinion that the closing stock of finished goods on 30-9-81 should be valued at market rate and the difference should be brought to assessment. For the said purpose, he took the gross profit at 32 per cent of Rs. 75,275 being the value of finished goods as on 30-9-81 shown by the assessee and brought to assessment a sum of Rs. 24,088.
4. In the appeal against the assessment, the assessee contended before the Commissioner (Appeals) that the ITO was not correct in bringing to assessment unrealised profit on the value of closing stock of finished goods. He further contended that as per the decision of the Supreme Court in the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49, there was no transfer when a dissolution took place between the partners and they shared the assets and liabilities of the partnership; thus when there was no transfer, no profit was assessable on the value of the closing stock transferred to any one of the partners as per the terms of the dissolution deed. In other words, it was contended before the Commissioner (A) that there was no transfer of closing stock or assets on the dissolution of the firm but only an adjustment of the rights deed. In his order, the Commissioner (A) referred to clause (1) of the retirement deed dt. 30-9-81, as per which Sri V. J. John agreed to pay each of the three retiring partners their respective share of capital as share of profit up to 30-9- 81 and share of goodwill in cash of Rs. 5,000 each and the retiring partners had agreed to release all their rights, interest and title over the partnership assets in favour of Sri V. J. John. Thereafter, purporting to apply the ratio of the decision of the Supreme Court laid down in the case of CIT v. Bankey Lal Vaidya [1971] 79 ITR 594, the Commissioner (A) held that the transfer of closing stock to Mr. V. J. John, one of the partners, was nothing but a receipt of his share in the distributed assets of the firm and there was neither transfer nor sale generating any profits to be assessed. In the above view of the matter, he deleted the addition of Rs. 24,088. It is against the aforesaid finding of the Commissioner (A) that the revenue has come up in appeal before us.
5. The learned Departmental Representative vehemently and forcefully contended before us that the Commissioner (A) erred in deleting the addition made by revaluing the closing stock at market rates on the dissolution of the firm. He further contended that the Commissioner (A) failed to note that what was done by the ITO was in accordance with the decision of the Madras High Court in the cases of G. R. Ramachari & Co. v. CIT [1961] 41 ITR 142 and A. L. A. Firms case (supra). In fact, as per the decision of the Madras High Court in A. L. A. Firms case (supra) the stock- in-trade should be valued at market rate at the time of dissolution of the firm. He also referred to the decision of the Kerala High Court in the case of Popular Workshops v. CIT [1987] 166 ITR 348 and in particular to page 351, wherein their Lordships had, after observing that for the purpose of assessment of a dissolved firm under sec. 189 of IT Act, 1961, the income of the firm had to be computed with reference to the market value of the closing stock and not the book value of such stock and then referring to the Supreme Court decision in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509, held that the observations made in the Supreme Courts case supported the contention of the Revenue that the value of stock at the time of dissolution of the firm had to be determined according to its true worth and not according to the book value and thus followed the decisions of the Madras High Court cited earlier. Reference was also made to the decision of ITAT, Hyderabad in the case of K. P. Yeriswamy & Sons v. ITO [1984] 9 ITD 372.
6. On his part, the assessees representative strenuously argued that in so far as the deed of retirement was drawn and the settlement of accounts between the partners took place as per that deed, the ITO was not justified in bringing to assessment any profit with reference to the closing stock of finished goods. According to him, since there was thus an adjustment of accounts between the partners on the retirement of three of them, there was no question of any transfer of any assets including closing stock and hence assessment of anything by way of profit with reference to stock as on 30-9- 81 would not be correct. He also argued that the business carried on by the assessee firm up to 30-9-81 was continued thereafter by the partner Sri V. J. John as sole proprietor and thus the business was still continuing and therefore the decision of the Madras High Court that at the time of dissolution the stock should be valued at market rate would not apply. In particular he referred to page 635 of 102 ITR, wherein their Lordships of the Madras High Court had referred, to the decision of the Gujarat High Court in CIT v. Keshvalal Chandulal [1966] 59 ITR 120 and contended that no profits with reference to stock-in-trade as on 30-9-81 could be brought to tax. Thereafter, he feebly argued that at the time of the dissolution of the firm on 30-9-81, the finished goods had already been valued at market rate for the purpose of settlement of accounts and therefore there was no question of making any further addition to the same.
7. We have carefully considered the rival submissions and feel that the Revenue should succeed. In the decision of the Madras High Court in A. L. A. Firms case (supra) it had been clearly held :
"as the stock-in-trade of a firm does not cease to become stock-in-trade on its dissolution and there is no authority for the proposition that the option to value the stock-in-trade at cost or market value whichever is lower is available to the firm even at the point of termination of the business, the re-valuation of the properties at the prevailing market value was justified and the assessment of the profit arising on such revaluation was justified."
In the present case, three of the four partners had retired and the fourth partner had taken over the assets and liabilities of the firm. Thus there was a clear case of dissolution of the assessee-firm and in these circumstances the decision of the Madras High Court would squarely apply to the assessees case and the ITO was justified in re-valuing the closing stock of finished goods as on 30-9-81 at market rate and bringing to assessment the difference between the book value and market value. Actually the above view of the Madras High Court had the tacit support of Supreme Court in Sunil Siddharthbhais case (supra) as was pointed out by the Kerala High Court in the case of Popular Workshops (supra). Hence, in the light of the decision of the Madras High Court referred to earlier, the other contentions raised by the assessees representative have to be rejected. The feeble attempt made by the assessees representative that the stock of finished goods as on 30-9-81 had already been valued at market rate and on that basis only adjustment of accounts between the partners took place is a new case made out for the first time before us and is not supported by the terms and conditions of the retirement deed dt. 30-9-81 or any other material and further there was no whisper of any such argument at any stage either before the ITO or before the Commissioner (A). Hence this argument is not entertained. In commissioner (A) and restore the order of the ITO bringing to assessment a sum of Rs. 24,088 by valuing the stock of finished goods as on 30-9-81 at market rate.
8. In the result, the departmental appeal is allowed.