Income Tax Appellate Tribunal - Madras
Income-Tax Officer vs Preetham Pipe Syndicate on 2 December, 1992
Equivalent citations: [1993]44ITD665(MAD)
ORDER
T.N.C. Rangarajan, Vice-President
1. This appeal is directed against the addition of a sum of Rs. 1,60,301 by re-valuation of the closing stock of the assessee.
2. The assessee is a registered firm which consists of only 2 partners, Shri Preetham Singh having 75 per cent and his mother, Smt. Ishwari Bai having 25 per cent share. The assessee was carrying on business in pipes and pipe fittings. On 10-10-1980 Smt. Ishwari Bai indicated her desire to retire from the partnership with effect from Diwali year 1980, viz., 6-11-1980. In her letter dated 10-10-1980 she informed the other partner "Kindly pay all the amounts standing to the credit of my capital and current account as on Diwali 1980. As agreed to between us, this will settle our accounts and nothing will be due either by me or you". The accounts being settled on that basis, the return was filed showing the profit in the books and the assessment was completed on a total income of Rs. 1,73,080. Subsequently, the ITO was of the view that the closing stock had to be valued at market value on the date of dissolution. He accordingly made a re-assessment and by re-valuing the closing stock added the sum of Rs. 1,60,301 to the total income.
3. The assessee appealed and contended that there was no justification for this addition because there cannot be a revaluation contrary to the agreement of the partners to accept the book value for the purpose of dissolution accounts. The CIT (Appeals) accepted this claim and deleted the addition.
4. The revenue is in appeal to contend that in view of the decision of the Supreme Court in the case of A.L.A. Firm v. CIT [1991] 189 ITR 285 revaluation of the closing stock at the time of dissolution was required. On the other hand, it was contended on behalf of the assessee that that case itself pointed out that in a case where the business had come to a close, valuation other than cost could not be justified. It was also submitted that in any event the valuation must be based on the agreement of the partners which could not be substituted unless it was shown to be mala fide.
5. We have considered the submissions of both sides and perused the decision of the Supreme Court in the case of A.L.A. Firm (supra) relied on by both parties. That was a case where the partners had taken the market value for the purpose of dissolution accounts but claimed that the book value should be taken for the purpose of income-tax assessment. The Supreme Court held that such a claim cannot be accepted. But the present case is quite the reverse. The partners here have accepted the dissolution on book values. But the ITO wants to substitute the book value with the market value only in respect of closing stock. Obviously, this will result in a distortion of the results of the business and bring to tax income which has not been actually realised. What is more, since the business has been taken over as a going concern by the other partner, the same profit will be taxed again when actually realised. 48 of the Partnership Act gives the rules in settling the accounts of the firm after dissolution and is subject to the agreement by partners. Therefore, when the parties have agreed that the dissolution accounts should be made in accordance with the book values, it cannot be substituted by market value to assess the notional income which was not the real income of the firm. The Supreme Court itself has pointed out that "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". This means that when the partners have accepted the dissolution account on the value appearing in the books, it implies that they have agreed that the book value represented the real value to them. Such an acceptance has to be taken in the context of the valuation of all the assets and liabilities of the firm. Such acceptance is also evidenced by the fact that in the hands of the successor, the cost of the stock taken over is given only at the book value agreed to and not any other value. Unless the agreement of the partners is shown to be mala fide or unreal, any revaluation of the assets would be unjustified particularly if it is only of one asset, viz., closing stock. We also find that the exercise made by the Income-tax Officer taxes the same income twice - once on the notional basis in the hands of the firm and again on realisation in the hands of the successor to the business as long as the Revenue refuses to substitute the market value for the opening stock of the successor in the next year. It is this inherent unfairness which demonstrates the fact that the application of the decision of the Supreme Court to a converse case is untenable. Moreover, as observed by the Supreme Court in the case of CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 at page 299: "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision". We cannot therefore read the decision of the Supreme Court in A.L.A. Firm's case (supra) as authorising the Income-tax Officer to substitute his own estimate of the market value for the value of the closing stock as agreed to by the partners in the dissolution accounts. We have, therefore, no hesitation in confirming the order of the Commissioner (Appeals). The appeal is dismissed.