Income Tax Appellate Tribunal - Amritsar
The Asstt. Commr. Of Income-Tax vs Kuldip Chand And Sons on 1 December, 2004
Equivalent citations: [2005]93ITD253(ASR), (2005)94TTJ(ASR)1111
ORDER
R.S. Syal, Accountant Member
1. This appeal by the Revenue and C.O. by the assessee emanate from the order passed by the CIT (A) on 11.05.2000 in relation to the assessment year 1997-98.
2. First ground of the C.O. was not pressed by the learned. A.R. The same, therefore, stands dismissed
3. Second and the only ground of the C.O. by the assessee and ground No. 1 of the Revenue's appeal deal with the addition made on account of undervaluation of closing stock Gold and Silver ornaments.
3.1. Briefly stated, the facts of the case are that the assessee-firm was dealing in purchase and sale of gold and silver ornaments. Due to the death of one of the partners, namely, Shri Kuldip Chand, the firm was dissolved on 25.2.1997 and thereafter, the business was taken over by the sole remaining partner, Shri Varinder Kumar in his individual capacity as sole proprietor. The assessed had shown valuation of closing stock of gold at Rs. 1326403/- and that of silver at Rs. 92903/- on 25.2.1997. The AO called upon the assessee to explain the reasons as to why the closing stock be not valued at market price in view of the decision in the case of CIT v. Nathu Lal Jawarchand (1997) 227-ITR-251(MP) which in turn is based on A.L.A. Finn v. CIT (1991) 189-ITR-28S(SC). It was contended on behalf of the assessee that it was regularly valuing its closing stock by taking average price according to its true worth and the name method was followed in the instant year. It was opined by the AO that the stock was required to be valued at market price. On the instructions of the AO, the assessee computed the market rate of gold ornaments at Rs. 397/- per grain as on the closing day. The AO, however, made certain changes and calculated the market price as on the day of dissolution at Rs. 455/- per gram. Apart from others, the assessee had included labour charges @ Rs. 10/- per gram whereas the AO considered this amount at Rs. 15/- per gram. Similarly, the value of the silver ornaments in the closing stock was adopted by the AO @ Rs. 6.40 per gm. as against Rs. 4.53 per gm. computed by the assesses as the market rate of silver ornaments as on the closing day. Accordingly, an addition of Rs. 1,56,431/-was made on account of the difference in the valuation of gold ornaments and Rs. 43,716/- on account of difference in the valuation of silver ornaments. In the first appeal, the learned CIT (A) allowed partial relief in the value of the gold ornaments by holding that the labour charges should be considered at Rs. 10/- par gm. This resulted into relief of Rs. 16,295/- in the valuation of closing stock of gold, against which the Revenue is aggrieved through its ground. No relief was allowed in the valuation of the closing stock of silver ornaments against which the assessee is aggrieved in the present appeal along with the addition in the valuation of gold jewellery sustained in the first appeal.
3.2. Before us, the learned counsel for the assessee contended that the authorities below erred in valuing the closing stock at the market value of gold and silver ornaments instead of average cost method, which was regularly employed by the assessee in the past and was accepted It was stated that on the death of one of the two partners, namely, Shri Kuldip Chand, though the firm stood dissolved, but the business was taken over and carried on by the surviving partner, namely, Shri Varinder Kumar in his individual capacity. It was stated that in such circumstances the stock was required to be valued at the same method at which it was being valued in the past, namely, average cost method. By relying on the decision of the Hon'ble Supreme Court in the case of Sakthi Trading Co. v. CIT (2001) 250-ITR-871 (SC), it was contended that the valuation of closing stock at the marked price on the dissolution of the firm was not permissible if the business did not discontinue. He further relied on the decision rendered by the Hon'ble Gujarat High Court in the case of Kwality Steels Suppliers v. CIT (2004) 191-CTR (Guj) 94 to contend that when the business was continued after dissolution of the firm, the closing stock was required to be valued at cost or market price whichever is lower. It was, therefore, contended that the value of the closing stock originally reflected by the assesses in its return should have been accepted. Without prejudice to the above legal arguments, it was stated that the market value adopted by the Revenue Authorities was excessive and that shown by the assessee, pursuant to the direction given by the AO was in order. On the other counts, he relied on the impugned order.
3.3 In the opposition, the learned DR contended that the stock was rightly valued at the market price and the learned CIT (A) was not justified in allowing relief of Rs. 5 per gm on the labour charges. On the other aspect, he relied on the impugned order.
3.4. We have considered the rival submissions in the light of material placed before us and precedents deliberated upon. The short question that falls for our adjudication in these grounds is to decide as to whether the closing stock of gold and silver ornaments should be valued at market price as on the closing day or at the method regularly employed by the assessee. Uncontroverted facts of this case are that the firm was constituted on 1.1.1996 consisting of S/Shri Kuldip Chand and Varinder Kumar as the partners. On 25.2.1997 Shri Kuldip Chand expired and the turn was dissolved. Thereafter, the business of the firm was taken over by the sole surviving erstwhile partner, namely, Shri. Varinder Kumar. The case of the Revenue is that on 25.2.1997 being the closing day of the period for which the return was filed, the closing stock of gold and silver ornaments should have been valued at market price. On the contrary, the stand of the assessee is that since it was regularly following the method of average cost for valuing the closing stock, the same should be considered here also.
3.5. At this juncture, it would be relevant to consider the legal position brought out by the Hon'ble Supreme Court and other High Courts in this regard. In A.L.A. Finn v. CIT (supra), the assessee firm carrying on the money-lending business and a business in purchase and sale of house properties, gardens and estates, was dissolved and the business of the firm was discontinued After dissolution, the two groups took up the separate businesses with assets and liabilities falling to their respective shares. It was eventually held that the stock-in-trade as on the date of dissolution was required to be valued at market price. Thereafter, the Hon'ble Supreme Court in the case of Sakthi Trading Co. v. CIT (supra) considered the facts of a case in which as a result of death of one out of its six partners, the firm was dissolved and was reconstituted on the next day with the remaining five partners. It was held by the tribunal that the business of the firm never discontinued but was taken over on succession by another firm and closing stock of the assessee firm as on the date of dissolution was to be valued at cost price or market price, whichever was lower. On a reference, the High Court held that the closing stock had to be valued at market price. Reversing the decision of the High Court, the Hon'ble Supreme Court observed that since there was no cessation of business, the closing stock had to be valued at cost price or market price whichever was lower. In reaching this conclusion, the earlier decision rendered in the case of A.L.A. Firm v. CIT (supra) was duly considered and was distinguished on the premise that in that case there was dissolution and also discontinuation of the business of the firm, whereas in the case under consideration, there was dissolution on account of death of one of the partners, but there was no discontinuation of the business. The leaned AR has relied on the decision of Hon'ble Gujarat High Court in the case of Kwality Steel Suppliers v. CIT (supra) wherein both the above referred decisions of the Apex Court were considered, in this case, the partnership firm was constituted with two partners, viz, mother and son. On the death of mother on 11.2.1993, leaving behind her share of assets and liabilities by 'Will' to her son, the son carried on the business thereafter who was the other partner in the erstwhile firm. The AO applied the decision of the A.L.A. Firm (supra) for valuing the closing stock as on the date of dissolution, but the Hon'ble High Court after considering both the summit court decisions, came to the conclusion that when business continued after dissolution of the firm, closing stock could be valued at cost or market price whichever is lower. In the case of Naveen Hardware And Electrical Store v. CIT and Anr. (2004) 266-ITR-308(Gau.) the assessee firm was having its H.O. at Dimapur and B.O. at Diphu. Disputes arose amongst the partners of the firm, which eventually led to its dissolution. Two of the partners took over Dimapur and Diphu branches and continued business in their individual capacity with a different entity. On the question of valuation of the closing stock on the date of dissolution, the AO opined that the closing stock be valued at the market rate as against the assessee's contention that it should be valued at cost price which was regular basis for valuing the closing stock. Ultimately, matter came up before the High Court and while considering both the above Supreme Court decisions, it was observed that after the dissolution of the firm, two of the partners decided to carry on the business separately and it was not a case of re-constitution of the firm by the erstwhile partners or some of the erstwhile partners on dissolution as in the case of Sakthi Trading Co. It was observed that 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 assesses firm ceased to exist on the date of dissolution. It was further observed that "the question would have been all together different had there been no division/distribution of the assets and liabilities of the firm between the partners". Finally, the view of the AO was upheld to the effect that the closing stock was to be valued at market price as on the date of dissolution.
3.6. On a careful perusal, the legal position enunciated in the above decisions can be easily summarised in two separate compartments. In the first situation, where the erstwhile firm is dissolved and the business of the firm is discontinued, the closing stock as on the date of dissolution is required to be valued at the market price, which is ratio decidendi of A.L.A firm (supra). In the second situation the firm is dissolved, but the business of the erstwhile firm is not discontinued but is carried on as a whole as a single unit. In such circumstances, the closing stock is to be valued at the regular method of valuation; namely, cost or market price whichever is less. It is important to note that in both the situations, the dissolution of the firm is bound to be there. The only distinguishing feature is carrying on or otherwise of the business of the erstwhile firm. If the assets and liabilities of the erstwhile firm are distributed amongst the partners and no business is continued or the business is continued by the partners in splitted form with their respective shares in the assets and liabilities received from the firm on its dissolution, the same would fall in the First category, where the business of the firm is held to be not continuing. The criteria laid down is to see the continuation of the business of the firm after its discontinuance. If the same is not continued as one composite unit or is discontinued, the closing stock would be valued at market price in accordance with the decision of A.L.A Firm (supra). If, however, the business of the erstwhile firm is continued after its dissolution either by way of reconstitution of Firm with different partners or a single partner becoming proprietor and continuing the business of the earlier firm as a whole, the same is said to be the continuation of business after the dissolution of the firm. The primary condition is the continuation of the business of the firm as a single unit after its dissolution. It is irrelevant as to whether the said business is continued after dissolution by another firm on reconstitution or by one of the partners assuming the position of a sole proprietor. So long as business of the firm goes on undisturbed without distribution of assets and liabilities amongst the partners, the same is said to be continuing and the decision of the Hon'ble Supreme Court in the case of Sakthi Trading Co. would hold the field and the closing stock need not be valued at market price, disregarding the regular method of valuation of closing stock. This is the real effect of aforenoted exception considered in Naveen Hardware (supra) also.
3.6. Adverting to the facts of the instant case, it is found an undisputed position that on the date of death of one of the two partners of the assesses firm, Shri Varinder Kumar, the sole surviving partner continued business of the erstwhile firm in his individual capacity. There is no material on record to show that any distribution of assets and liabilities of the erstwhile firm took place and the business ceased to continue as one unit. In such circumstances, it is clear that the ratio laid down in Sakthi Trading Co. (supra) would squarely apply. In this view of the matter, we are satisfied that the authorities below erred in valuing the closing stock of gold and silver ornaments at the market price disregarding the value shown by the assessee at an average cost price, which method was consistently followed by it in the past. However, we note that there is no discussion either in the assessment order or in the impugned order regarding the average cost to be applied to the closing stock. In the Statement of facts appended at pages 1 to 4 of the paper book, it is mentioned that the average cost price of gold ornament was Rs. 407 per gm and that of silver ornaments was at Rs. 5.78 per gm. Since the AO proceeded to value the closing stock at market price, the whole controversy remained centered at the market price as adopted by the AO and as suggested by the assessee on his directions. Under such circumstances, the question of valuation of dosing stock at the average cost price, remained unconsidered at the assessment level. As we have held in the foregoing para that the closing stock cannot be valued at the market price, and the same has to be valued on the average cost price, which method was consistently followed by the assessee in earlier years, we are of the considered opinion that the order of the CIT(A) cannot stand on this score. In Much circumstances, it would in the interest of justice, if the matter is restored to the file of the AO. We order accordingly and direct him to value the closing stock at the average cost price, after allowing a reasonable opportunity of being heard to the assessee to facilitate the determination of the correct average cost price as on the date of the dissolution of the firm. These grounds are disposed of in the above terms.
4. Ground Nos. 2 & 3 of the Revenue's appeal deal with relief allowed by the CIT (A) on the additions made on account of ornaments not recorded in the hading account.
4.1. Briefly stated, the facts of these grounds are that the AO found certain discrepancies in Register GS-11 & GS-12. On being called upon to reconcile the difference, it was stated on behalf of the assessee that Shri Kuldip Chand, the partner and his two daughter-in-law, namely, Smt. Simmi Chandok and Smt. Aruna had their personal gold ornaments which was kept with the firm merely for displaying purpose and to ensure the safe custody of their jewellery. The remaining discrepancy was stated to be on account of the jewellery of two Kargars, namely, Balraj and Subhash Chander which was received from them for sale. The AO made addition of Rs 11,17,214/- on the basis of excess weight of gold ornaments credited in the stock register. The detailed chart was made available showing date-wise receipt of jewellery by the assessee-firm, from these five persons in total and the returns made, as under:
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Name Credit Gms IN AY DEBIT A.Y. Balance Value
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Simmi 649.500 212.100 437.3100 198972/-
Chandok
(64.92) 93-94 (16.9.94) 95-96
Aruna 300,020 - 300.020 136309/-
(25.8.92) 93-94
Kuldip 785.000
Chand (11.4.94) 95-96 - -
568.950 - (1353.950) 258872/-
(10.4.96) 97-98
Subash 288.500 - 288.500 - 131268/-
Chander (22.4.96) 97-98 97-98
Balraj 150.400 150.400 150.400
(9.12.96) 97-98 (9.4.97) (31.3.97) 68432/-
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It was contended before the first appellate authority that the gold ornaments of family members were received for safe custody as well as for display purposes in the year under consideration and earlier years as well. It was further pointed out that Smt. Simmi was assessed to Wealth tax for assessment year 1987-88 declaring her personal gold ornaments at 724 gms out of which she originally gave 649.500 gms to the assessee on 6.4.92 and had taken back 212.200 gms on 16.9.94 thereby leaving balance of 437.300 gms with the assessee firm. Similarly, with regard to Smt. Aruna, it was stated that she was assessed to Wealth-tax for the assessment year 1985.86, in which she had declared her personal gold ornaments at 731.200 gms out of which 300.020 gms were given to the firm for safe custody on 25.8.92 and the same remained with the firm since then. Similarly position was explained with regard to Shri Kuldip Chand, who was assessed to Wealth-tax in 1992-93 declaring gold ornaments of 2270 gms including that of his wife who expired on 21.1.1995. Out of the total possession, he deposited 785 gms. with the assessee firm on 11.4.1994 and further deposited 568.950 gms. on 10.4.96, the learned CIT (A) held that out of total addition of Rs. 11,17,234/-, a sum of Rs. 6,58,662/- representing the deposit made in the earlier assessment years by the said three persons was not liable to be considered in this year. This addition came to be deleted. The addition of Rs. 2,58,872/- representing the gold deposit by Shri Kuldip Chand in the year under consideration was restored to the file of the AO for fresh investigation. Regarding the receipt of jewellery from Karigars, mainly S./Shri Subhash Chander was Balraj, the learned CIT(A) deleted the addition in respect of gold ornaments kept by them with the assessee-firm amounting to Rs. 1,99,699/- and received back in the same year itself. The department is aggrieved in ground No. 2 against the relief allowed by the CIT (A) of Rs. 6,58,662/-. It is obvious that this amount represents the deposit of gold jewellery by Shri Kuldip Chand, Smt. Simmi Chandok and Smt. Aruna in earlier years. From the perusal of the details recorded in the impugned order, which remained uncontroverted before us, it is clearly borne out that all the three persons were assessed to Wealth-tax and had declared gold ornaments worth much more than that given to the assessee-firm for safe custody in the earlier years. Apart from that, it is noted that the addition of Rs. 2,58,872/- representing gold jewellery deposited by Shri Kuldip Chand in the instant year restored to the file of the AO, was decided vide order dated 12.03.2002, a copy of which has been placed at page 9 of the assessee's paper book. On going through this order, giving effect to the direction given by the CIT (A), the income already determined was maintained and the addition of Rs. 2,58,872/- was not made. It, therefore, becomes apparent that the department has accepted the assessee's contention with regard to the receipt of gold from Shri Kuldip Chand in the year under consideration for the safe custody. That being so, we fail to understand any logic in agitating the deletion of addition by the CIT (A) on similar facts though representing gold ornaments received from these persons in earlier years. This ground is, therefore, not allowed.
4.2. Coming to last ground of the Revenue's appeal, it is noted that the addition of Rs. 1,99,699/- was deleted by the CIT (A) representing the receipt of jewellery from two Karigars which was received and returned in the instant year itself. Both the said Karigars made the statements on oath through affidavits which were filed before the AO and such affidavits have remained unchallenged by the AO. In this view of the matter, we are unable to find any fallacy in the order of the CIT (A) on this ground.
ITA No. 347(ASR)/2000 & C.O. 49(ASR)/2000
5. In the result, both the appeals are partly allowed for statistical purposes.