Gauhati High Court
Naveen Hardware And Electrical Stores vs Commissioner Of Income-Tax And Anr. on 22 December, 2003
Equivalent citations: (2004)188CTR(GAU)19, (2005)1GLR376, [2004]266ITR308(GAUHATI)
Author: D. Biswas
Bench: D. Biswas, S.K. Kar
JUDGMENT
D. BISWAS J.
1. This appeal by M/s. Naveen Hardware and Electrical Stores preferred under Section 260A of the Income-tax Act, 1961 (hereinafter referred to as the Act), is directed against the judgment and order dated December 11, 2001, passed by the Income-tax Appellate Tribunal, Gauhati Bench, Guwahati, in I. T. A. No. 132/Gauhati of 1996 relatable to the assessment year 1992-93. The appeal was admitted by this court by the order dated March 28, 2003, for hearing on the following questions of law :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal having not found the order dated February 8, 1994, passed by the Income-tax Officer, Dimapur, to be erroneous has not erred in upholding the order of the Commissioner passed under Section 263 of the Income-tax Act, 1961 ?
2. Whether, on the facts and circumstances of the case, the valuation of closing stock as on March 31, 1992, as adopted/directed by the Commissioner of Income-tax and the Tribunal was correct in law ?
3. Whether, on the facts and circumstances of the case, the orders passed by the Commissioner of Income-tax and the Tribunal are not vitiated due to perversity wholly ignoring the relevant material on record ?"
2. The appellant-firm was a registered partnership firm having its head office at Dimapur and branch office at Diphu. The firm was dealing in hardware and electrical goods. Disputes and differences arose amongst the four partners of the firm which eventually led to its dissolution by the deed dated April 5, 1992, with effect from March 31, 1992. The partners of the appellant firm while finalising the accounts as on March 31, 1992, for the purpose of income-tax for the assessment year 1992-93 valued the closing stock at cost price as per clause 3 of the deed of dissolution. The Income-tax Officer, Dimapur, assessed the income of the appellant firm vide order dated February 8, 1994, accepting the value of the closing stock at cost price. Thereafter, the Commissioner of Income-tax, North-Eastern Region, Shillong, issued the notice dated January 20, 1995, intending to exercise powers under Section 263 of the Act. The Commissioner on conclusion of hearing, by the order dated March 28, 1996, directed the Income-tax Officer, Dimapur, to reassess the income by revaluing the stock of the appellant firm at market price as on March 31, 1992, and to allocate the profits arising thereupon amongst the partners. The order passed by the Commissioner on March 28, 1996, was challenged in I.T.A. No. 132/ Gauhati of 1996. The learned Tribunal dismissed the appeal (I. T. A. No. 132/ Gauhati of 1996) affirming the order passed by the Commissioner. During the pendency of the said appeal, the Income-tax Officer, Dimapur, issued notice under Section 143(3) of the Act and reassessed the income after valuing the stock-in-trade at market price and allocated the profits to the partners vide order dated March 27, 1998. This order is also in challenge in an appeal pending before the Income-tax Appellate Tribunal.
3. The questions of law formulated in this appeal basically relate to the question of valuation of the stock-in-trade on the effective date of dissolution of the firm, i.e., March 31, 1992. According to Shri Agarwalla, the business of the firm was continued by two partners after dissolution and the stock-in-trade was valued at the cost price as per Clause 3 of the deed of dissolution. This valuation has been reflected by the partners, who carried on the same trade after dissolution, in their income-tax returns for the successive year and, hence, no prejudice has been caused to the interests of the Revenue. Mr. R. P. Agarwalla, referred to the decisions in G. R. Ramachari and Co. v. CIT [1961] 41 ITR 142 (Mad) ; A. L. A. Firm v. CIT [1991] 189 ITR 285 (SC) ; Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) and Sakthi Trading Co. v. CIT [2001] 250 ITR 871 (SC) and argued that the case at hand is distinguishable on facts from A. L. A. Firm [1991] 189 ITR 285 (SC) and Sakthi Trading Co. [2001] 250 ITR 871 (SC). Mr. Bhuyan, learned counsel for the Revenue, however, emphasised that the decisions referred to and relied upon on behalf of the assessee clearly indicate that the normal practice of valuation of stock-in-trade at the cost price is available in a continuing business and this privilege is not available where a firm is dissolved resulting into complete cessation of business. According to Shri Bhuyan, the erstwhile firm, M/s. Naveen Hardware and Electrical Stores, ceased to exist on dissolution with effect from March 31, 1992, and, therefore, the stock-in-trade as on that day ought to have been valued at market price, and the resultant profit in the hands of the partners as exigible to tax during the relevant assessment year, i.e., 1992-93.
4. The intention of the parties has to be ascertained from the deed of dissolution. The following excerpts relevant for the issue at hand are quoted below :
"Whereas on account of difference among the partners of the firm as to the conduct of the business of the firm, the parties hereto agreed and decided among themselves to dissolve the partnership firm with effect from the expiry of the accounting year ended on 31st March, 1992.
Whereas it has been considered expedient by the parties hereto to reduce the terms and conditions agreed among them in writing to avoid complication in future, Now this deed of dissolution witnesses as hereunder :
1. That the parties hereto declare that the partnership business so long carried on in the name and style of M/s. Naveen Hardware and Electrical Stores, with its head office at Dimapur, Nagaland and branch at Diphu, Assam, with effect from 1st day of January, 1982, under the partnership agreement entered into between the said parties hereto which is duly embodied in the deed of partnership has been closed and the partnership dissolved by mutual consent of all the parties hereto on and from the date of expiry of 31st March, 1992.
2. That the final accounts of the said firm up to the date of its dissolution, i.e., March 31, 1992, have been prepared and gone into by the parties hereto and found to represent true and correct state of affairs of the partnership, the shares of the profit and loss of the partner have been carried over to their respective account and the account have been settled, the books of account and other records its whatsoever shall be kept by the under noted parties :
for Dimapur business : Smti. Sarala Devi Jain, for Diphu branch ; Shri Vijay Kumar Jain.
3. That the assets of the firm have been valued at cost and liabilities of the firm shall be undertaken by the second party for Diphu branch of the third party for Dimapur branch as per the books of account as on the date of its dissolution that all other partners hereto declare that they have not contracted or incurred any debts or obligation or liabilities outside the books of account of the partnership firm and that if any such debt or obligation is found the same shall be paid/met and discharged by the party incurred or contracted that said debt or obligation or liabilities and that the said party hereto undertake to indemnify the other parties in respect thereof.".
5. The terms and conditions of the deed of dissolution, as quoted above, clearly indicate that the partners agreed and decided to dissolve the partnership firm with effect from March 31, 1992, and close the business. Final accounts of the firm were also settled as on March 31, 1992. Smt. Sarala Devi Jain and Shri Vijay Kumar Jain, two of the four partners of the erstwhile firm, took over the business at Dimapur and Diphu branch, respectively. This otherwise means that the business of the erstwhile firm came to an end on the expiry of March 31, 1992, and there was complete cessation of business of this firm. Though the deed of dissolution was executed on April 5, 1992, the effective date being March 31, 1992, will be determinative of the successive course of action. The decision of the Commissioner as well as the learned Tribunal that the date of execution of the deed of dissolution is irrelevant for the purpose at hand appears to be just and proper. Smt. Sarala Devi Jain and Shri Vijay Kumar Jain, who took over Dimapur and Diphu branch, respectively, continued with the business in their individual capacity with a different entity and the continuance of the business by them in their individual capacity after March 31, 1992, will have no effect in so far the question of valuation of stock-in-trade as on March 31, 1992, is concerned.
6. In G.R. Ramachari [1961] 41 ITR 142, the Madras High Court clearly held that the privilege of valuing the opening and closing stock in a consistent manner is available only to a continuing business and this mode of valuation cannot be adopted where a business has come to an end. In the latter case, the stock-on-hand has to be disposed of in order to determine the exact position of the business on the date of closure after valuation at the prevailing market price. This decision was rendered in a case where after dissolution of the firm, one of the partners took over the stock-in-trade.
7. This decision of the Madras High Court was considered by the hon'ble Supreme Court in A. L. A. Firm [1991] 189 ITR 285. In A. L. A. Firm's case [1991] 189 ITR 285, the Supreme Court affirmed the principle enunciated in G. R. Ramachari [1961] 41 ITR 142 (Mad) and has held that on dissolution, the stock-in-trade of the dissolved firm for the purpose of mutual adjustment amongst the partners has to be valued at the market price and the surplus thereof has to be treated as profit. Valuation of stock-in-trade at cost or market price, whichever is lower, is invariable when business is continued. The decision in G. R. Ramachari [1961] 41 ITR 142 (Mad) and A. L. A. Firm [1991] 189 ITR 285 (SC) were also considered in Sakthi Trading Co. [2001] 250 ITR 871 (SC). The case before the Supreme Court in Sakthi Trading Co. [2001] 250 ITR 871 was that the firm stood dissolved on the death of one of the partners on February 6, 1984. The firm was reconstituted with effect from February 7, 1984, with the remaining partners. The Tribunal was of the view that as the business of the firm was not discontinued, but was taken over on succession by another firm, the closing stock of the assessee-firm as on February 6, 1984, has to be valued at cost or market price, whichever is lower. This decision of the Tribunal was reversed by the High Court. On appeal, the Supreme Court reversing the decision of the High Court held that since there was no cessation of business, the partners were within their right to value the closing stock at cost or market price, whichever was lower. The Supreme Court made it emphatically clear that where there is no discontinuance of business, the closing stock is to be valued at cost or market price, whichever is lower. It would be apt to refer here to the relevant observations of the Supreme Court (page 878) :
"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. That is an established rule of commercial practice and accountancy. The High Court was clearly in error in relying upon the decisions of the Madras High Court in the cases of G. R. Ramachari and Co. [1961] 41 ITR 142 and A. L, A. Firm [1976] 102 ITR 622 for coming to the conclusion that assets had to be valued at market value. As already noticed, in the present case, there was no cessation of business and, therefore, the closing stock could not be directed to be valued at the market rate."
8. Now coming to the case at hand, it would appear that after dissolution of the firm, two of the four partners decided to carry on the business separately. Clause 7 of the deed of dissolution clearly indicates that the decision was to continue the business in personal/individual capacity or in partnership with anybody. It is not a case of reconstitution of the firm by the erstwhile partners or some of the erstwhile partners on dissolution as the case was in Sakthi Trading Co. [2001] 250 ITR 871 (SC). The distribution of assets and liabilities between the two partners with the authority to run independent and separate business taking over the assets and liabilities of the branches separately conclusively proves that the assessee-firm ceased to exist on the expiry of March 31, 1992. The question would have been altogether different had there been no division/distribution of assets and liabilities of the firm between the partners. In this context, keeping in mind the judgments referred to above, it can be concluded that the stock-in-trade as on March 31, 1992, ought to have been valued at the market price.
9. Mr. Agarwalla argued that the partners after dissolution reflected the value of the stock-in-trade as settled by the deed of dissolution in the income-tax return filed by them in the successive year and, therefore, there has been no prejudice to the interests of the Revenue since the profit and gain that might have arisen out of the trade in the successive year has been accounted for the purpose of income-tax. But the fact remains that the profits that might have arisen on valuation of stock-in-trade at market price in the accounting year 1991-92 ought to have been brought to tax in the assessment year 1992-93. There is obviously prejudice to the interests of the Revenue in so far the accounting year 1991-92 is concerned. Therefore, the Commissioner was not in error in invoking his jurisdiction under Section 263 of the Act in directing the Income-tax Officer for reassessment at market price. The decision in Malabar Industrial Company [2000] 243 ITR 83 (SC), interprets the provisions of Section 263 of the Income-tax Act. There is no dispute that the twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous ; and (ii) it is prejudicial to the interests of the Revenue, are essential concomitants for exercise of powers under this section. In the instant case, in view of the discussion above, the initial order of assessment of the Income-tax Officer was obviously erroneous and consequently prejudicial to the interests of the Revenue. Therefore, no fault can be found with the order passed by the Commissioner of Income-tax in directing the Income-tax Officer to go for reassessment on valuation at the market price.
10. In the light of the discussion above, all the questions formulated in this appeal are answered in favour of the Revenue and against the assessee.