Kerala High Court
Commissioner Of Income-Tax vs Popular Automobiles on 7 September, 2001
JUDGMENT S. Sankarasubban, J.
1. The assessment in question is for the year 1985-86. The question of law referred is as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in interfering with the direction of the Commissioner of Income-tax to value the closing stock on the date of dissolution of the firm and recompute the income for the assessment year 1985-86 and in deleting the addition ?"
2. The facts are as follows :
The assessee-firm was dissolved on May 13, 1984, i.e., in the accounting year ended on March 31, 1985. The entire assets and liabilities were distributed among the partners. The closing stock was also distributed on May 13, 1984. The assessee-firm valued the closing stock at cost or market price whichever is less. The assessee followed this method in the past for valuing its closing stock. However, the same method of valuation of the stock was followed even after the dissolution of the assessee-firm on May 13, 1984. The assessee was required to value the stock on the date of dissolution of the firm at the market price as per the decision of the Madras High Court in the case of A.L.A. Firm v. CIT [1976] 102 ITR 622 and also the decision of the Kerala High Court in the case of Popular Workshops v. CIT [1987] 166 ITR 348. According to the assessee, since the entire stock is transferred to the partners as a bulk lot, the market price would mean the price at which the assessee purchased the stock from the manufacturers, which represent the wholesale market price and it would be incorrect to value it by applying retail market price. The assessee filed an appeal before the Tribunal against the order of the Commissioner of Income-tax. The Tribunal followed the decision of the Madras Bench of the Tribunal in the case of J. A. Venkoba Rao v. ITO [1993] 44 ITD 264. It held that the valuation adopted by the firm is correct. On the basis of the above facts, the question of law has been referred to us.
3. Even though notice was served on the respondent, nobody appeared for the respondent.
4. We heard counsel for the Revenue Shri George K. George. Sri George placed before us the following decision in A. I. A. Firm v. CIT [1991] 189 ITR 285 (SC) in CIT v. Diza Electricals [1999] 238 ITR 924 (Ker) and later decision of the Supreme Court in Sakthi Trading Co. v. CIT [2001] 250 ITR 871. Learned counsel for the Revenue argued that there is a distinction between cases where there is a continuation of business after dissolution and cases where there is discontinuation of business after dissolution. According to him, in so far as the case of discontinuation of business is concerned, the closing stock has to be valued as on the market rate. In A. I. A. Firm v. CIT [1991] 189 ITR 285 (SC), it was observed as follows (headnote) :
"The proper practice is to value the closing stock at cost. That will eliminate entries relating to the same stock from both sides of the account. To this rule, custom recognises only one exception and that is to value the stock at market value if that is lower. On no principle can one justify the valuation of the closing stock at a market value higher than cost as that will result in the taxation of notional profits the assessee has not realised.
There can be no manner of doubt that, in taking accounts for purposes of dissolution, the firm and the partners, being commercial 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."
5. In CIT v. DIM Electricals [1999] 238 ITR 924, a Division Bench of this court observed as follows (headnote) :
"... in a subsisting partnership, the closing stock will be valued either at cost or market price, whichever is lower. But in the case of a dissolved firm, the closing stock will invariably be valued at the market price."
6. In Sakthi Trading Co. v. CIT [2001] 250 ITR 871, the Supreme Court held as follows (headnote) :
"It is an established rule of commercial practice and accountancy that where there is no discontinuance of business the closing stock is to be valued at cost or market price, whichever is lower."
7. At page 878, the Supreme Court observed as follows :
"From the above, it is evident that in A. L. A. Firm's case [1991] 189 ITR 285, this court was considering the question of valuation of closing stock at market value in a case where there was dissolution and also discontinuance of the business of the firm. In that case after dissolution, two groups were carrying on separate businesses with the assets and liabilities which fell to their shares from the dissolution of the firm. In the present case, however, though there was dissolution on account of the death of one of the partners, there was no discontinuance of the business. The unchallenged finding recorded by the Tribunal is that there was no discontinuance of business. Even as per principles laid down in A. L. A. Firm's case [1991] 189 ITR 285 (SC) in such a case the closing stock is to be valued at the cost or market price, whichever is lower."
8. Here the case is that the dissolution of firm is followed by discontinuation of business. Hence, we are of the view that the closing stock is to be valued as per the market rate.
9. In the above view of the facts, we answer the question in the negative and against the assessee.