Income Tax Appellate Tribunal - Hyderabad
Sha Raichand Chagganraj And Co. vs Income-Tax Officer on 23 April, 1986
Equivalent citations: [1986]18ITD167(HYD)
ORDER
T. Venkatappa, Judicial Member
1. The issue that arises for consideration in this appeal is with regard to the valuation of the closing stock when the firm is dissolved.
2. The assessee is a firm of jewellers consisting of four partners. The accounting year ended on 7-11-1980. The partnership was dissolved on 7-11-1980. The assets and liabilities of the firm were taken over by one of the partners, viz., Shri Chagganraj. The assessee had valued the closing stock on the average cost basis. The ITO did not accept this valuation of the assessee. He held that as the firm was dissolved on the last day of the accounting year the closing stock has to be valued as per the market rate but not at the cost price. He placed reliance on the decision of the Madras High Court in G.R. Ramachari & Co. v. CIT [1961] 41 ITR 142. Accordingly, he made the assessment. On appeal, the Commissioner (Appeals) held that the firm was dissolved on 7-11-1980. On a perusal of the journal entries, he found that the cash book clearly shows that the jewellery has been sold to Shri Chagganraj and in the books of Chagganraj there are corresponding suitable entries debiting stock account and crediting purchase account. He held that all these transactions clearly show that there was an outright sale of jewellery by the firm to Shri Chagganraj when the partner took over the business and it is difficult to accept that there was a succession of the business. With regard to the assessee's submission that the partners had always agreed to value the stock at cost he held that there is no evidence whatsoever in support of this except that in the past years stocks were being valued at cost. He also found that the partnership deed dated 7-2-1977 does not contain any provision relating to the winding up of the firm or regarding the valuation of stock. It has been admitted that there is no deed of dissolution. He held that the ITO was justified in valuing the closing stock at market value when the assessee-firm was dissolved on 7-11-1980. He placed reliance on the decisions in G.R. Ramachari & Co.'s case (supra), A.L.A. Firm v. CIT [1976] 102 ITR 622 (Mad.) and CIT v. Keshavlal, Chandulal [1966] 59 ITR 120 (Guj.). Thus, he upheld the assessment order. Against the same the assessee has preferred this appeal.
3. The learned counsel for the assessee strongly urged that the decisions relied on by the learned Commissioner (Appeals) do not support the view that in all cases of dissolution closing stock should be valued at market rate. Secondly, he urged that when business is taken over by one of the partners and it is continued as a whole the principle of valuing closing stock at market rate does not arise as there is succession of the business. He urged that in cases of this type a pragmatic view should be taken. The learned departmental representative submitted that the firm is dissolved. The closing stock has necessarily to be valued at the market rate. He strongly supported the order of the learned Commissioner (Appeals).
4. We have considered the rival submissions. It is not disputed before us that the firm was dissolved on 7-11-1980 which is the last day of the accounting period. The learned Commissioner (Appeals) in his very exhaustive order after perusal of the journal entries has found that the jewellery has been sold to Shri Chagganraj who is one of the partners and in his books suitable entries debiting stock account and credit purchase account have been made. These facts are not disputed. These facts would clearly establish that there was an outright sale of the jewellery by the firm to Shri Chagganraj. Admittedly, there was dissolution of the firm on 7-11-1980. So the only question is whether the closing stock should be valued at the market rate or cost price when the firm was dissolved on 7-11-1980. In our view when a firm is dissolved the closing stock has to be valued at the market rate but not at the cost price. The principle of valuing the closing stock at the cost price or market price, whichever is lower, would be applicable only to a continuing business by the same entity but not when the firm is dissolved. When the firm is dissolved it ceases to carry on business. When it ceases to carry on business its stock-in-trade has to be disposed of and brought to account in order to arrive at the correct picture of trading results of the partnership. That would involve naturally valuation of closing stock. For ascertaining the profits it is absolutely necessary that the market value should be taken into account in valuing the closing stock when the firm is dissolved in order to arrive at the true profits. When the firm is dissolved the settlement of accounts of partners must be on a real basis but not on notional basis. That can be done only when the closing stock is valued at market value on the date of dissolution.
5. In G.R. Ramachari & Co.'s case (supra), the firm which consisted of two partners was dissolved and one of the partners took over the entire stock. The question arose whether the closing stock on the date of dissolution of the firm should be valued at market price or cost price. The Madras High Court held that the valuation of the stock in hand should be made on the basis of the prevailing market rate. It was observed as under :
The case of a firm which goes into liquidation forms a close parallel to the present case. In such a case all the stock-in-trade and other assets of the business will have to be sold and their value realised. It cannot be controverted that it is only by doing so that the true state of the profits or losses of the business can be arrived at. The position is not very different when the partnership ceases to exist in the course of the accounting year. The fact that Ramachari, one of the ex-partners, took over the entire stock and continued to run the business on his own, is not relevant at all, when we consider the profits or losses of the partnership which has come to an end. It should, therefore, follow that in order to arrive at the correct picture of the trading results of the partnership on the date when it ceases to function, the valuation of the stock in hand should be made on the basis of the prevailing market price.(p.149) In that case it was noticed that Shri Ramachari who took over the closing stock and carried on the business had valued them at cost price in his books. Dealing with those facts the Madras High Court held that it is not a factor that can affect the conclusion as to the principle on which the closing stock has to be valued in the case of a dissolved partnership in order to arrive at the true position of the profits of the partnership. In N. Muhammad Ussain Sahib v. S.N. Abdul Gaffoor Sahib AIR 1950 Mad.758, the Madras High Court held that the assets have to be valued on the basis of market value on the date of dissolution of the partnership. The above decisions were followed by the Madras High Court in A.L.A. Firm's case (supra). It was held therein that the closing stock at the time of dissolution of the firm has to be valued at the market price. The ratio laid down in the above cases would squarely apply to the facts of the instant case. As stated already there was dissolution of the firm as on 7-11-1980. No formal deed of dissolution was executed. We are unable to accept the submission of the assessee's counsel that the partners had agreed to value the closing stock at cost price as there is no written agreement or evidence to prove the same. The fact that the closing stock was valued at cost price in the past will have no relevancy while valuing the closing stock when the firm itself is dissolved. The conduct of passing entries evaluating the closing stock at cost price which was accepted by the partners will not go to prove that when the firm was constituted there was an agreement to value the closing stock at the cost price when it is dissolved. Even if such entries are made it is not a factor that can affect the principle that the closing stock has to be valued at market rate in the case of dissolved partnership. Even if it is to be considered as a succession by Shri Chagganraj to the business of the firm, the closing stock on the date of dissolution of the firm has to be valued at market price. This is clear from the decision of the Madras High Court in the case of G.R. Ramachari & Co. (supra). When the law is clear, the question of taking any pragmatic view as contended by the learned counsel for the assessee does not arise. The decision of the Madras High Court in N. Muhammad Ussain Sahib's case (supra) relied on by the assessee's counsel does not support him in any way. We have already referred to this decision. It was clearly held there in that the assets have to be valued on the basis of market value on the date of dissolution of the partnership. The decision relied on in the case of CIT v. P.E. Poison [1945] 13 ITR 384 (PC) is a case dealing with Sections 25 and 26 of the Indian Income-tax Act, 1922 and it has no application to the facts of the instant case. The learned Commissioner (Appeals) has exhaustively considered in his order all the contentions of the assessee. We agree with his order.
6. In the result, the appeal fails and is dismissed.