Income Tax Appellate Tribunal - Chennai
Kirtilal Kalidas & Co.,, Coimbatore vs Department Of Income Tax on 7 November, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH, CHENNAI
BEFORE Dr. O.K.NARAYANAN, VICE-PRESIDENT AND
SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
ITA No.1576(Mds)/2012
Assessment Year : 2008-09
The Assistant Commissioner M/s.Kirtilal Kalidas & Co.,
of Income-tax, Vs. 601, Raja Street,
Circle III, Coimbatore-641 001.
Coimbatore. PAN AAFFK3030K.
(Appellant) (Respondent)
Appellant by : Shri Shaji P Jacob, IRS, Addl.CIT
Respondent by : Shri S.Swaminathan, FCA
Date of Hearing : 7th November, 2012
Date of Pronouncement : 14thNovember, 2012
ORDER
PER Dr.O.K.NARAYANAN, VICE PRESIDENT This appeal is filed by the Revenue. The relevant assessment year is 2008-09. The appeal is directed against the order of the Commissioner of Income-tax(Appeals)-I at Coimbatore, dated 18-5-2012. The appeal arises out of the assessment completed under section 143(3), read with section 147 of the Income-tax Act, 1961.
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2. The assessee is a partnership firm, carrying on jewellery and diamond business. The partnership firm M/s.Keertilal Kalidas & Co. was converted into a private limited company on 1st January, 2008. The incorporation of the company was made under Part IX of the Companies Act, 1956. The conversion was made on a going concern basis, such that the business carried on by the erstwhile firm continued to be carried on by the company incorporated on 1-1-2008 without any interruption. The business continued as such, even though the nature of the business organization changed from that of partnership firm to that of a private limited company.
3. All the assets, liabilities, etc. of the erstwhile firm vested with the company on incorporation, as provided under section 575 of the Companies Act, 1956.
4. In the light of the above developments, the newly formed company M/s.Keertilal Kalidas Jewellers Pvt. Ltd. filed the return of income for the impugned assessment year 2008-09, for the entire period of the previous year consisting of twelve months from 1st April, 2007 to 31st March, 2008. The company, in its assessment proceedings, submitted before the Assessing
-3- ITA 1576 of 2012 Officer that the company being the successor in business, the entire income is assessable in its hands for the first fraction of the previous year from 1st April, 2007 to 31-12-2007 as the successor in business and for the second fraction from 1st January, 2008 to 31st March, 2008 as its own business.
5. In the assessment of the company M/s.Keertilal Kalidas Jewellers Pvt. Ltd., the Assessing Officer proceeded to assess the income for the period of three months from 1-1-2008 to 31-3-2008 in the hands of the said company. The Assessing Officer having jurisdiction over the assessee firm, issued a notice under section 142(1), requiring the firm to file its return of income for the assessment year 2007-08 comprising the period from 1-4-2007 to 31-12-2007. Thereafter, a notice under section 148 was issued to the assessee firm. The assessee firm, in response to the notice, filed a letter before the Assessing Officer stating that the firm M/s.Keertilal Kalidas & Co. has been converted into a company by name M/s.Keertilal Kalidas Jewellers Pvt. Ltd. with effect from 1-1-2008 and thus a consolidated balance sheet alone was required to be filed for the impugned assessment year 2008-09. However, the assessee
-4- ITA 1576 of 2012 firm, in response to the notice issued under section 148, has also filed a return of income in the status of the firm for the previous period of 1st April, 2007 to 31st December, 2007.
6. In the course of the assessment, in pursuance of the return filed in response to the notice under section 148, the Assessing Officer made certain adjustments to the income returned by the assessee firm. The first adjustment by way of addition has its basis on the stock valuation. The Assessing Officer held the view that on conversion of the firm into a company with effect from 1-1-2008, the business of the firm needs to be considered as dissolved. The Assessing Officer accepted the business carried on by the assessee firm for the period from 1-4-2007 to 31-12-2007 and thereafter treated it as a dissolved business. As the firm was dissolved, it was the view of the Assessing Officer that the closing stock of jewellery and diamond of the firm must be valued at market price and the profit of the firm has to be computed on the basis of that market value of jewellery. The Assessing Officer relied on the judgment of the Hon'ble Supreme Court rendered in the case of A.L.A.Firm vs. CIT, 189 ITR 285, wherein the Hon'ble Supreme Court has
-5- ITA 1576 of 2012 considered the issue of valuation of stock in the context of dissolution of a firm. The Hon'ble Supreme Court held that while the valuation of assets during the subsistence of the partnership would be immaterial and could even be notional, the position at the point of dissolution is totally different. 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. The surplus, if any, has to be considered as chargeable revenue profits of the firm. In addition to the above judgment of the Hon'ble apex court, the Assessing Officer also relied on the judgment of the Hon'ble Madras High Court rendered in the case of CIT vs. India Reinforcing Co., 188 ITR
651.
7. Accordingly, the Assessing Officer replaced the stock value offered by the assessee firm and adopted the market value, as a result of which an addition has been made to the extent of ` 26,51,49,027/-.
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8. The next adjustment of addition made by the Assessing Officer is on the ground of violation of section 40A(3). The assessee in the course of carrying on of its business, was collecting old gold jewellery from its customers and in its place selling new ornaments. The differential amount alone is paid by the customers to the assessee firm. The Assessing Officer bifurcated this transaction into two segments. According to the Assessing Officer, the delivery of old ornaments by the customers to the assessee firm comprised of different set of transactions and those transactions amounted to purchase of old ornaments by the assessee firm from its customers. The Assessing Officer treated the other segment of the transaction as sale of new gold ornaments to the customers of the assessee firm. Regarding the first set of transactions, i.e. purchase of old ornaments from the customers, the Assessing Officer held that the assessee firm was making cash payments equivalent to the value of the old ornaments purchased and to that extent there is violation of section 40A(3). The Assessing Officer held that in all such cases cash payments exceeded the limit of ` 20,000/- and such payments need to be disallowed. On verification of the
-7- ITA 1576 of 2012 accounts, the Assessing Officer worked out the amount covered by such violation under section 40A(3) to the extent of ` 11,37,78,775/-. The Assessing Officer also found that no details in the form of bills or vouchers were available in respect of another sum of ` 13,11,390/-. These two amounts of ` 11,37,78,775/- and ` 13,11,390/- were added up and treated as the quantity of violation under section 40A(3). The total of these amounts, amounting to ` 11,50,90,165/-, has also been added to the income of the firm.
9. The Assessing Officer has also made another addition of ` 8,74,888/- against disallowance of travelling expenditure.
10. Thus, the Assessing Officer determined the total income at ` 41,13,46,460/- as against the returned income of ` 3,02,32,380/-.
11. In first appeal the assessee agitated three issues before the Commissioner of Income-tax(Appeals). The first dispute related to the addition of ` 11,50,90,165/- made by the Assessing Officer on the ground of violation of section 40A(3). The second issue agitated by the assessee related to the
-8- ITA 1576 of 2012 addition made by the Assessing Officer on account of the alleged difference in stock valuation of the jewellery at market price. This addition amounted to ` 26,51,49,027/-. The assessee has not challenged the disallowance of travelling expenditure amounting to ` 8,74,888/-, before the Commissioner of Income- tax(Appeals). The assessee further raised an additional ground before the Commissioner of Income-tax(Appeals) that the Assessing Officer having accepted that no return is required to be filed, there should not have been levy of interest under section 234A of the Act.
12. The Commissioner of Income-tax(Appeals) considered the detailed grounds, explanations and arguments of the assessee in a very extensive manner. The order of the Commissioner of Income-tax(Appeals) runs to 44 pages.
13. The Commissioner of Income-tax(Appeals) first examined the issue of addition of ` 11,50,90,165/- made by the Assessing Officer on the ground of violation of section 40A(3) of the Act. The Commissioner of Income-tax(Appeals) examined the accounting entries passed by the assessee in its books of account on accepting old jewellery from the customers and in
-9- ITA 1576 of 2012 return giving new jewellery to the customers. Where in a case both purchase of old jewellery and sale of new jewellery are accounted by the assessee on the same day, the Commissioner of Income-tax(Appeals) found that the sale value of the new jewellery is adjusted against the surrender value of the old jewellery and the differential amount is received from the customers. He found that the surrender value of the old jewellery is adjusted against the sale value of new jewellery and accordingly there was no actual payment of any cash by the assessee firm while purchasing old ornaments from its customers. He found that the surrender value of the old ornaments given by the customers is adjusted in the bill issued to the customers against the sale of new jewellery. He found that these accounting entries consisted of both journal entries and cash entries. He observed that the adjustment of the surrender value of old jewellery is in the nature of journal entry, which does not involve any movement of cash from the assessee firm to its customers. He accordingly held that in such cases there is no cash payment by the assessee firm to its
-10- ITA 1576 of 2012 customers while procuring old jewellery to convert it into new jewellery.
14. Next, the Commissioner of Income-tax(Appeals) examined the case where purchase of old gold and sale of new jewellery are made on different dates. When old gold purchases precede new jewellery sales, the Commissioner of Income- tax(Appeals) found that two sets of transactions are recorded on those respective dates, but ultimately the surrender value of the old ornaments is adjusted in the sale invoice issued against the sale of new ornaments to the customers. He observed that in such cases also the assessee never makes any payment of cash to the customers.
15. The Commissioner of Income-tax(Appeals) also examined the converse position where sale of new jewellery is made first and purchase of old gold is made later. There also he found that the sale value of new ornaments and surrender value of old ornaments are also transacted through the personal accounts of the customers and ultimately the customers' accounts are settled by payment of the differential amount by the customers. In that case also the Commissioner of Income-
-11- ITA 1576 of 2012 tax(Appeals) found that the assessee never paid any cash to the customers.
16. In all these cases, while examining the income entries, the Commissioner of Income-tax(Appeals) has extracted sample transactions and confirmed his finding with evidences.
17. The assessee firm had introduced "Daily sales register method of accounting" since the relevant previous year in order to standardize the method of accounting. This was necessitated because, formerly the branches of the assessee firm had followed gross sales method of accounting. In the old method followed by the assessee, even though the surrender value of the old gold did not involve any payment of cash, such transactions were reflected in the daily cash book even though the entries were compensating entries. Under the new method introduced by the name "Daily sales register method of accounting", the assessee excluded the surrender value of old ornaments from the cash account and reflected the accounting entries more accurately to depict the exact nature of the transaction. The Commissioner of Income-tax(Appeals) examined this new method and found that the assessee has
-12- ITA 1576 of 2012 been consistently purchasing old ornaments from the customers without making any actual cash payment.
18. On further examination of the accounting method followed by the assessee, the Commissioner of Income- tax(Appeals) found that different branches of the assessee firm situated in different States had to follow marginally different accounting methods in order to conform to the local sales-tax laws of the concerned State. The Commissioner of Income- tax(Appeals) has examined this matter in respect of different branches of the assessee firm like Kochi, Hyderabad, Coimbatore, Vijayawada, Bangalore, Ludhiyana, Chennai, etc. He also found that the assessee has paid local sales-tax against purchase of old gold ornaments. These details have been examined by the Commissioner of Income-tax(Appeals) from pages 5 to 36 of his order. He has examined the models of the necessary entries made by the assessee firm in its books of account under different circumstances and in different branches in different States.
19. In the light of the above stated examination of the facts, the Commissioner of Income-tax(Appeals) found that the
-13- ITA 1576 of 2012 purchase of old gold was only part of exchange of old jewellery against sale of new jewellery to the same person and there was no de facto payment of cash by the assessee to the customers. He observed that in order to attract the provisions of section 40A(3), there should be actual payment of cash from one person to another. He observed that on verification of some of the transactions it was clear that there were no such cash payments made by the assessee to the customers so as to attract the provisions of law stated in section 40A(3). He also observed that the Assessing Officer has not brought on record the instances where the assessee had made actual payment of cash to the customers at the time of purchase of old jewellery. Therefore, he held that the Assessing Officer has erred in invoking the provisions of section 40A(3) of the Act.
20. But, in the case of the amount of ` 13,11,390/-, for which the Assessing Officer has alleged absence of any details or vouchers, the Commissioner of Income-tax(Appeals) found that the addition of the said amount is justified. The Commissioner of Income-tax(Appeals) accordingly deleted the
-14- ITA 1576 of 2012 addition of ` 11,37,78,775/- and upheld the addition of ` 13,11,390/-.
21. Regarding the question of adopting the market price of jewellery at the time of conversion of partnership firm into joint stock company, the Commissioner of Income-tax(Appeals) found that valuation of closing stock at market price is applicable only in cases where the business is discontinued. He found that in the present case the business carried on by the firm was never discontinued, but, on the other hand, the business was taken over by a successor company without any interruption. He observed that all the assets and liabilities of the firm were vested with the company and as per section 575 of the Companies Act, 1956, all properties vest with the company at the time of registration pursuant to Part IX of the Companies Act and therefore there is no cessation or discontinuance of business. He accordingly held that the decision of the Hon'ble Supreme Court in the case of A.L.A.Firm vs. CIT, 189 ITR 285 is not applicable to the present case. He, on the other hand, relied on the judgment of the Hon'ble Kerala High Court in the case of CIT vs. S.Koder, 233 ITR 620, wherein the court has held that in the
-15- ITA 1576 of 2012 case of conversion of firm to private limited company, with erstwhile partners being the only shareholders and the business of the firm continued by the company, section 170 of the Income- tax Act, 1961 applied and, therefore, stock of the firm could not be valued at market price. The Commissioner of Income- tax(Appeals) also relied on the judgment of the Hon'ble Supreme Court in the case of Sakthi Trading Co. vs. CIT, 250 ITR 871, wherein the Hon'ble apex court held that where a firm is reconstituted with the remaining partners on dissolution of firm on death of one of the partners and without discontinuance of business, the closing stock of the firm needs to be valued at cost or market price, whichever is lower. He also relied on the judgment of the Hon'ble Madras High Court in the case of CIT vs. Standard Printing Machinery, 260 ITR 268 in support of the above proposition.
22. In the light of the facts and judicial pronouncements stated above, the Commissioner of Income-tax(Appeals) held that the Assessing Officer has gone wrong in valuing the closing stock at market price and accordingly he deleted the corresponding addition of ` 26,51,49,027/-.
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23. Accordingly, the major additions made by the Assessing Officer have been deleted by the Commissioner of Income-tax(Appeals).
24. Regarding the additional ground raised by the assessee on levy of interest under section 234A, he directed the Assessing Officer to compute the interest under section 234A after giving effect to the appellate order.
25. Now, it is against the above order of the Commissioner of Income-tax(Appeals) that the Revenue has come in second appeal before the Tribunal. The Revenue has raised the following grounds of appeal before us:-
"1. The learned Commissioner of Income- tax(Appeals) erred in deleting the addition made on account of difference in stock valuation amounting to ` 26,51,49,027/- and on account of disallowance under section 40A(3) amounting to ` 11,50,90,165/-.
2. The learned Commissioner of Income- tax(Appeals) ought to have considered that firm was converted into a company named M/s. Kirtilal
-17- ITA 1576 of 2012 Kalidas Jewellers(P) Ltd. w.e.f. 1-1-2008 and hence it was a case of dissolution of firm.
3. The learned Commissioner of Income- tax(Appeals) erred in holding that it was a case of succession of firm by company and directed that stock be valued at cost price only.
4. The learned Commissioner of Income- tax(Appeals) failed to appreciate that the business of the firm was taken over by a company as a going concern and the stock is to be valued at market price only as reported in the case of CIT Vs India Reinforcing Co. (55 Taxnman 358).
5. The learned Commissioner of Income- tax(Appeals)ought to have appreciated the decision of the Hon'ble Supreme Court in the case of ALA Firm reported in 189 ITR 285 wherein the firm is dissolved by operation of law and taken over by a company where there is no capital, no stock and no partners of the firm.
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6. The learned Commissioner of Income-
tax(Appeals) ought to have appreciated the decision of the Hon'ble Supreme Court in the case of ALA Firm reported in 189 ITR 285 that whenever there is discontinuance of business, the stock should be valued at market price.
7. The learned Commissioner of Income- tax(Appeals) erred in deleting the addition on account of disallowance made u/s 40A(3) of ` 11,50,90,165/- on the basis of self-serving statement of the assessee.
8. The learned Commissioner of Income- tax(Appeals) ought to have afforded the Assessing Officer an opportunity of rebuttal under Rule 46A of the Income-tax Rules on the fresh evidence produced before him."
26. Shri Shaji P Jacob, the learned Commissioner of Income-tax appearing for the Revenue, contended that he is seriously pressing the ground raised by the Revenue that the
-19- ITA 1576 of 2012 Commissioner of Income-tax(Appeals) has violated Rule 46A while deciding the appeal after accepting fresh evidence produced by the assessee firm. The learned Commissioner of Income-tax produced before us a copy of letter issued by the Assistant Commissioner of Income-tax, Circle III at Coimbatore, dated 31-10-2012, wherein the Assistant Commissioner of Income-tax has listed the fresh materials placed by the assessee before the Commissioner of Income-tax(Appeals), which were not made available to the Assessing Officer at the time of the assessment. The learned Commissioner of Income-tax contended that as the Commissioner of Income-tax(Appeals) has decided the issue on the basis of fresh materials filed by the assessee, the issues may be remitted back to the Assessing Officer for reconsideration in the light of such fresh material.
27. Shri S.Swaminathan, the learned chartered accountant appearing for the respondent-assessee, on the other hand, submitted that the assessee had furnished all the details requisitioned by the Assessing Officer in the course of assessment. The learned chartered accountant explained that the assessee had produced a number of sale bills before the
-20- ITA 1576 of 2012 Assessing Officer to prove its case that the assessee firm had not made any cash payment at the time of purchasing old jewellery from its customers. He explained that the sale bills are almost in the same pattern and, therefore, it is not necessary that the very same sale bills examined by the Assessing Officer ought to have been examined by the Commissioner of Income- tax(Appeals) and generally sale bills are examined on random basis. He, therefore, contended that there is no question of any fresh evidence placed before the Commissioner of Income- tax(Appeals) and the argument raised by the Revenue is only technical in nature.
28. We seriously considered the preliminary objection raised by the Revenue. On going through the order of the Commissioner of Income-tax(Appeals), we find that the Commissioner of Income-tax(Appeals) has made an attempt to study the accounting method followed by the assessee while purchasing old ornaments and in place selling new ornaments. The intention of the examination made by the Commissioner of Income-tax(Appeals) was to ascertain whether the assessee was making any cash payment at any point of time to its customers at
-21- ITA 1576 of 2012 the time of purchasing old jewellery. The Commissioner of Income-tax(Appeals) has examined the cash entries as well as the journal entries reflected in the books of account of the assessee firm. It is in the process of examining these accounting entries that the Commissioner of Income- tax(Appeals) has verified the sale bills in the form of evidences to support such accounting entries. Now, the case of the Revenue is that certain bills of different branches like Bangalore, Chennai, Coimbatore, Hyderabad, Kochi, Vijayawada and Ludhiyana, which were examined by the Commissioner of Income-tax(Appeals), were not placed before the assessing authority. We find that the turnover of the assessee being huge and having lot of branches in different States, the assessee is having innumerable sale invoices and purchase invoices. It is also true that the pattern of accounting is common everywhere. The assessee had changed from the earlier gross accounting to daily sales register method of accounting. Another difference in the sale bills is on account of the local sales-tax law of different States. For the above nominal differences, in pith and substance, the bills and vouchers maintained by the assessee in
-22- ITA 1576 of 2012 different branches are in the same manner. In such circumstances, there is no point in arguing that the assessee has produced sale bill No.1 before the Assessing Officer and sale bill No.5 before the Commissioner of Income-tax(Appeals). There is no fundamental difference between sale bill No.1 and sale bill No.5. The assessee has produced sale bills both before the Assessing Officer and before the Commissioner of Income- tax(Appeals) on random basis. Bills may not be produced strictly according to serial numbers. Therefore, there is no force in the argument of the Revenue that the sale bill bearing the same number produced before the Assessing Officer should be produced before the Commissioner of Income-tax(Appeals) as well. This argument carries weight only if sale bills were issued at different points of time and have any substantial difference in their substance. Here the method followed by the assessee is common. Therefore, it is not possible to hold that the assessee has produced additional and fresh evidences before the Commissioner of Income-tax(Appeals) only for the reason that the bills produced before the Assessing Officer and the bills produced before the Commissioner of Income-tax(Appeals) are
-23- ITA 1576 of 2012 different. Therefore, we are not inclined to accept the argument of the Revenue that there is violation of Rule 46A, in the present case.
29. Therefore, we proceed to dispose of the appeal on merits of the grounds.
30. First we will consider the addition made by the Assessing Officer on the ground of violation of section 40A(3). As already stated in paragraphs above, the Commissioner of Income-tax(Appeals) has examined the issue in a very detailed manner and has come to a finding that the assessee company did not make any cash payment to its customers while purchasing old ornaments. As a matter of fact, this is an age-old practice in jewellery business. In majority of cases the customers carry old ornaments to the jewellery shop and get them converted into new jewellery and make payments for the differential amount. Here also the assessee has followed the same practice prevalent in the industry. Wherever customers are bringing old jewellery, the assessee firm is recording it as purchase of old gold in order to satisfy statute and rule regarding sales-tax. This is because the assessee has to pay purchase
-24- ITA 1576 of 2012 tax at the time of buying of old ornaments. The expression that 'the assessee has purchased old ornaments' is only technical in nature and meant only to satisfy sales-tax law. This is necessary because the assessee is bound to pay purchase tax on the value of the old jewellery received from the customers. The sales-tax law treats it as a purchase. But for all practical purposes the customer is entrusting the old jewellery to the assessee firm for converting it into new jewellery and the actual sale and purchase transactions take place only in respect of the additional gold provided by the assessee firm. Where the surrender value of the old jewellery entrusted by the customers to the assessee firm is ` 100/- and the value of new jewellery returned by the assessee is ` 200/-, the differential amount of ` 100/- alone is paid by the customers to the assessee. The assessee is not making payment of ` 100/- to the customer at the time of accepting the old ornaments. That is why the Commissioner of Income- tax(Appeals) has correctly appreciated that the entire transaction consisted of cash entries as well as journal entries. The cash entries related to the payment of the differential amount by the customers to the assessee firm. There is no payment of cash by
-25- ITA 1576 of 2012 the assessee firm to its customers at the time of receipt of old ornaments.
31. Therefore, we find that the Commissioner of Income-tax(Appeals) has correctly appreciated the facts of the case and has rightly come to the conclusion that the assessee has not made payments to the customers at the time of purchase of old jewellery. Therefore, there is no question of the assessee violating the provisions of law stated in section 40A(3). The order of the Commissioner of Income-tax(Appeals) deleting the addition of ` 11,37,78,775/- is upheld. The grounds raised by the Revenue on this issue fail.
32. Next we will consider the question of valuation of closing stock at the time of conversion of the partnership firm into a private limited company. The firm continued the business in that status till 31-12-2007. The firm has been converted into a private limited company with effect from 1-1-2008. It is on that date that the company was incorporated. All the assets and liabilities of the erstwhile firm were taken over by the company. They all vested in the hands of the company. The conversion of the firm into a company was in consonance with section 575 of
-26- ITA 1576 of 2012 the Companies Act, 1956. There is no interruption to the business carried on by the assessee firm. The new company took over the business of the firm as a going concern. There was no stoppage of business. The change was only in the form of the business organization. Earlier it was a firm. Thereafter it became a company. All the partners of the erstwhile firm became the shareholders of the new company. Nobody else was admitted as shareholder. No asset of the old firm was distributed among the partners. No capital was withdrawn by the partners. The capital of the partners was converted into shares contributing towards the capital of the company. All other assets and liabilities were taken over by the company.
33. The Hon'ble Kerala High Court in the case of CIT vs. S.Koder, 233 ITR 620, had an occasion to consider a similar issue. A firm was converted into a private limited company, the erstwhile partners being the only shareholders. The business of the firm was continued by the company. The court held that section 170 of the Income-tax Act, 1961 applied and it was a case of succession of business. The court held that in such circumstances the stock of the firm could not be valued at market
-27- ITA 1576 of 2012 price. The Tribunal has observed in that case that the intention of the partners in transferring the business to a private limited company was to change the form of organization. The Tribunal had recorded a finding that the dissolution was consequential to the transfer of business to the company. It was in those circumstances that the Hon'ble Kerala High Court found that it was a clear case of succession of business, inasmuch as it was not a case where dissolution preceded the transfer. Therefore, the Hon'ble High Court held that there was no compulsion to value the closing stock at market price.
34. In a slightly different context, the very same issue was considered by the Hon'ble Supreme Court in the case of Sakthi Trading Co. vs. CIT, 250 ITR 871. In that case the assessee was a registered firm. One of the partners expired. As a result of the death, the firm was dissolved. It was reconstituted the next day with the remaining partners. The Tribunal held that as the business of the firm was never discontinued, but was taken over on succession by another firm, the closing stock of the assessee firm on the date of dissolution was sought to be valued at cost or market price, whichever was lower. The
-28- ITA 1576 of 2012 Hon'ble Madras High Court held that the closing stock had to be valued at market price. The Hon'ble Supreme Court upheld the decision of the Tribunal holding that there was no cessation of business and therefore the closing stock had to be valued at cost or market price, whichever is lower. It is in this case that the Hon'ble Supreme Court has declared the relevant law that "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".
35. The above judgment of the Hon'ble Supreme Court has been later followed by the Hon'ble Madras High Court in the case of CIT vs. Standard Printing Machinery, 260 ITR 268, in an exactly similar case where the firm was reconstituted and business was continued without interruption on the death of one of the partners of the firm.
36. The judgment of the Hon'ble Supreme Court in the case of A.L.A.Firm vs CIT, 189 ITR 285, relied on by the Assessing Officer, provides rules for another set of circumstances. The rule of valuing the closing stock at market value was declared by the Hon'ble Supreme Court to be followed
-29- ITA 1576 of 2012 in a case where there is dissolution of the firm and discontinuance of business. In a case of succession of business the rule laid down by the Hon'ble Supreme Court in the case of A.L.A.Firm vs. CIT, 189 ITR 285, is not applicable.
37. Therefore, we find that the Commissioner of Income-tax(Appeals) has rightly deleted the stock valuation addition of ` 26,51,49,027/-. In fact, the fractional assessment made by the Assessing Officer in the hands of the company M/s.Kirtilal Kalidas Jewellers Pvt. Ltd. for the assessment year 2008-09 was brought before the Income-tax Appellate Tribunal A-Bench, Chennai, through the appeal filed by the Revenue in ITA No.564/Mds/2012. In that case also the Assessing Officer has alleged violation of section 40A(3) on exactly similar circumstances. The Tribunal, through their order dated 5-9-2012, accepted the contention of the assessee that entries in cash books were passed for the purchase of old gold jewellery from the customers by debiting purchase account and crediting the cash initially but at the end of the day the cash account was debited and the concerned party's account was credited as contra. The Tribunal accepted the contention of the assessee
-30- ITA 1576 of 2012 that they were all contra entries without involving movement of any cash from the assessee to its customers. We find that the argument of the assessee has been accepted by the Tribunal in the said order. The said decision is also binding on this co- ordinate Bench.
38. In result, both the issues raised by the Revenue in the present appeal are decided against the Revenue and the appeal of the Revenue is dismissed.
Orders pronounced on Wednesday, the 14thof November, 2012 at Chennai.
Sd/- Sd/-
(Challa Nagendra Prasad) (Dr. O.K.Narayanan)
Judicial Member Vice-President
Chennai,
Dated, the 14th November, 2012.
V.A.P.
Copy to: 1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
6. GF.