Madras High Court
Commissioner Of Income-Tax vs Sakthi Trading Co. on 1 December, 1998
Equivalent citations: [2000]242ITR468(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT A. Subbulakshmy, J.
1. The assessee is a registered firm. For the assessment year 1984-85, the assessee had filed a return showing the income of Rs. 1,37,810 from its business in turmeric. The Income-tax Officer made the assessment under Section 143(3) on May 30, 1984, accepting the income as returned. The Commissioner of Income-tax on a review of that assessment order, noticed that the assessee-firm had been dissolved on February 6, 1984, on the death of one of the partners of the firm and the firm had been reconstituted on the next day with the remaining five partners and that the assessment of the income for the period of February 7, 1984, to March 31, 1984, had to be made separately. He was of the view that in making the present assessment, the stock-in-trade as on February 6, 1984, had to be valued at market rate and the Commissioner had set aside the assessment and directed the Income-tax Officer to make a fresh assessment holding that failure to take the market value of the closing stock was an error prejudicial to the Revenue. On appeal, the Tribunal found that there being no warrant for revaluation of stock in a continuing business, the order of the Income-tax Officer accepting the profit shown by the assessee on the method of accounting regularly followed was not in any way erroneous and did not require to be revised under Section 263. On that, the reference has arisen and at the instance of the Revenue the following question has been referred to this court for our opinion :
"Whether, on the facts and in the circumstances of the case where on the dissolution of the firm the business is taken over by a partner without discontinuance and the value of the closing stock determined under the regular method of accounting is accepted by the partners in the settlement of accounts for dissolution purposes, the Income-tax Officer can substitute the market value in respect of the closing stock alone for the purpose of determining the income of the firm up to the date of dissolution ?"
2. On the death of one of the partners, the assessee-firm stood dissolved on February 6, 1984, and there was reconstitution of the firm with the remaining partners from February 7, 1984. The assessment for the accounting period up to February 6, 1984, and from February 7, 1984, to March 31, 1984, had to be made separately and the Commissioner was of the view that in making the assessment, the closing stock as on February 6, 1984, had to be valued at market rate.
3. In the case of C/Tv. India Reinforcing Co. [1991] 188 ITR 651, this court has held that (headnote) :
"In the case of dissolution of a firm, the closing stock had to be valued at the market value. The mere fact that some of the other items had been left untouched could not be a justification for not valuing the closing stock at the market value on the dissolution of the firm."
4. The apex court has held in the case of A I. A. Firm v. CIT [1991] 189 ITR 285, that with a view to arrive at the correct picture of trade of the partnership on the date when it ceases to function, the valuation of stock-in-trade should be made on the basis of the prevailing market price, affirming the view taken in the case of G. R. Ramachari and Co. v. CIT [1961] 41 ITR 142 (Mad).
5. The asses see-firm was constituted under the partnership deed dated April 1, 1983. It was a partnership at will and on the death of one of the partners P. Chenniappan on February 6, 1984, the firm stood dissolved, a new firm was constituted on the next day and two separate assessments were ordered to be made by the Commissioner following the decision of the Supreme Court in the decision reported in A L. A Firm's case . We hold that the closing stock of the firm as on February 6, 1984, is to be valued at market price. On the death of P. Chenniappan on February 6, 1984, the firm stood dissolved and so, the closing stock as on February 6, 1984, being the date of dissolution of the firm, should be valued on the basis of market price. The view taken by the Tribunal is not justified.
6. We answer the question in favour of the Revenue and against the asses-see. No costs.