Income Tax Appellate Tribunal - Indore
G.S. Metalica vs Income-Tax Officer on 30 August, 1996
Equivalent citations: [1997]60ITD343(INDORE)
ORDER
Shri Satish Chandra, A.M.
1. The appeal by the assessee arises out of the order dated 28-2-1992 of the Commissioner of Income-tax (hereinafter referred to as 'the Commissioner'), Bhopal under section 263 of the Act, pertaining to the assessment year 1989-90.
2. The assessee-firm derived income from manufacture of circles of non-ferrous metals. The firm consisted of four partners and had come into existence w.e.f. 16-11-1982. The said firm was, however, dissolved, as one of the partners, namely, Shri Kantilal, expired on 13-11-1988. A fresh deed of partnership was executed on 28-11-1988 between the erstwhile three partners and one, Shri Rajiv Kumar, with 25% share income each. This deed of partnership was made effective from 17-11-1988.
3. The assessee filed return for the period for 23-10-1987 to 13-11-1988 (date of death of the partner, Shri Kantilal) and the assessment was made on 26-3-1990 under section 143(3) of the Act.
4. On scrutiny of the said assessment order, the Commissioner noticed that the Assessing Officer had accepted the closing stock as shown by the assessee. He was of the view that as the firm had dissolved, its assets should have been revalued according to the market rates and the (sic) invoked the provisions of section 263 of the Act.
5. In response to the show-cause notice, it was submitted by the assessee that it is a case only of a change in the constitution of the firm and not a case of dissolution. It was further stated that the assessments have been made under special proviso to section 187(2) of the Act. It was further contended that if the valuation of the closing stock is enhanced, set off of the same will have to be given in the second period and more or less there would be no effect of the same. It was argued that revaluation of stock could be made if the business of the firm had come to an end. Reference was made to the decision in A.L.A. Firm v. CIT [1991] 189 ITR 285 (SC) and it was argued that the decision (supra) was distinguishable on facts. The submissions of the assessee did not find favour with the Commissioner. Relying on the proviso inserted by the Taxation Laws (Amendment) Act, 1984 with retrospective effect from 1-4-1975, the Commissioner observed that in the instant case business of one firm had been succeeded by that of another and that there is termination to business activity of the earlier firm. He also rejected the assessee's contention regarding set off observing that the two firms are different entities and are of different constitution. Quoting from the decision (supra) of the Apex Court, the Commissioner held that the stock should have been valued at the market price and the Assessing Officer erred in accepting the stock as shown by the assessee. He, therefore, set aside the assessment on the point. Aggrieved, the assessee is before us.
6. The learned counsel for the assessee reiterated the (sic). He emphasised that the proviso below sub-section (2) of section 187 contained deeming provision only and as a matter of fact in the case of the assessee, there was merely a change in the constitution of the firm. In this connection, he placed reliance on the recital in the partnership deed executed on 28-11-1988 to the effect that the business was continued along with the debtors and creditors. Relying on the Madras Bench decision of the Tribunal in J.A. Venkoba Rao v. ITO [1993] 44 IT 264, he vehemently argued that the decision of the Apex Court in A. L. A. Firm's case (supra) was inapplicable to the facts of the assessee's case. He made an alternative submission that if the value of the closing stock is disturbed, then adjustment should be made in the hands of the alleged successor firm. The learned D.R., on the other hand, supported the order of the Commissioner.
7. We have considered the rival submissions. The facts have already been narrated above. It is a settled position of law that when a fiction is created by a legal provision it cannot be carried beyond the purpose for which it has been created. In other words, legal fictions are only for definite purpose and they are limited to the purpose for which they are created and should not be extended beyond their legitimate field. This principle of law has been enunciated by the Supreme Court in the case of CIT. v. Amarchand N. Shroff [1963] 48 ITR 59, which has been followed in their subsequent decisions in the undermentioned cases :
(i) ITO v. M.C. Ponnoose [1970] 75 ITR 174 (SC) (at page 178), (ii) CIT v. Vadilal Lallubhai [1972] 86 ITR 2 (SC), and (iii) CIT v. Mother India Refrigeration Industries (P.) LTD [1985] 155 ITR 711/23 Taxman 8 (SC) (sic).
8. Let us now analyse the proviso below sub-section (2) of section 187 of the Act. It provides that clause (a) of section 187(2) shall not apply to a case where the firm is dissolved on the death of any of its partner. Section 187(2)(a) reads, thus :
"187(1)** ** ** (2) For the purpose of this section, there is a change in the constitution of the firm -
(a) if one or more of the partners cease to be partners or one or more new partners or more of the persons who were partners of the firm before the change continue as partner or partners after the change."
9. It is, thus, obvious that the purpose of the proviso to section 187(2) inserted with retrospective effect from 1-4-1975 is to provide that there does not take place a change in the constitution of the firm as contemplated by section 187(2)(a) in a case where the firm is dissolved on the dead of any of its partner. The effect of the said proviso to section 187(2) has been considered in a series of judgments delivered by the Hon'ble High Court of Madhya Pradesh. In the case of CIT v. Jasumal Devandas [1985] 156 ITR 551, their Lordships of Madhya Pradesh High Court have held that where a firm was dissolved on the death of any one of its partners and there was no contract to the contrary in the partnership deed, for and from assessment year 1975-76, it would be a case one of succession governed by section 188 and not a case of change in the constitution governed by section 187. In the instant case, the assessee has not brought on record the partnership deed executed on 16th November, 1982. However, the assessee has filed a copy of computation of income of the assessee-firm for the period from 23-10-1987 to 13-11-1988 [copy at page (sic)] :
"Partner, Shri Kantilal, has been expired on 13-11-1988 and hence, this firm is dissolved on 13-11-1988."
10. It is inferred from the above recital that there was no provision in the deed of partnership executed on 16-11-1982 that the firm shall not stand dissolved on the death of any of the partners. In this view of the matter and in the light of the decision (supra) of the jurisdictional High Court, the contention of the assessee that in its case it is merely change in the constitution of the firm has to be rejected. It is hereby held that the firm as constituted by deed of partnership executed on 16-11-1982 stood dissolved on the death of one of its partners on 13-11-1988.
11. Now the next question which arises for our consideration is whether the Commissioner is correct in his view in holding that the closing stock has to be valued at the market price when the firm is dissolved. In the case of G.R. Ramachari & Co. v. CIT [1961] 41 ITR 142 (Mad.), a partnership firm had been valuing its opening and closing stock at the cost price when the firm was carrying on business. On the dissolution of the firm, one of the partners took over the stock on hand and valued at the cost price. However, revenue authorities valued the stock at the market price. The issue of valuation of stock in the case of a dissolved firm was referred to the Madras High Court under section 66(2) of the Income-tax Act, 1922. After considering various authorities, a Division Bench of the Madras High Court held that the closing stock should be valued at the market rate and the principle of book value would apply in (sic) laid down by the Madras High Court in that case was followed by another Division Bench of the same High Court in A.L.A. Firm v. CIT [1976] 102 ITR 622 (Mad). In that case, following the principle laid down in G.R. Ramachari & Co.'s case (supra), the Court reiterated the principle that the stock-in-trade of a firm did not cease to be stock-in-trade on the dissolution of the firm and though an assessee had an option to value the stock-in-trade at cost or market value, whichever is lower, during the subsistence of a business, yet that option was not available to it at the point of termination of the business when stock-in-trade had to be valued at the market value. The above view has been followed by the High Court of Kerala in Popular Workshops v. CIT [1987] 166 ITR 348/30 Taxman 16 and Popular Automobiles v. CIT [1989] 179 ITR 632/44 Taxman 261 (Ker.).
12. We have gone through thoroughly the decision of the Apex Court in A. L. A. Firm's case (supra). We noticed that after considering the judgment in G.R. Ramachari & Co.'s case (supra) and also various other authorities, the Hon'ble Supreme Court laid down the following law in the decision (supra) (page 307 of the report) :
"Once this principle is applied and the stock-in-trade is valued at market price, the surplus, if any, has to get reflected as the profit of the firm and has to be charged to tax. The view taken by the High Court has held the field for about 30 years now and we see no reason to disagree even if a different view were possible."
13. With the above observations, the Hon'ble Supreme Court agreed with the view taken by the Madras High court in G.R. Ramachari & Co.'s case (supra). In this view of the matter and on the face of the law enunciated by the Hon'ble Supreme Court, it is difficult for us to persuade ourselves to take a different view in the light of the decision of Madras Bench of the Tribunal in the case of J.A. Venkoba Rao (supra).
14. We are inclined to agree with the view of the Commissioner that the benefit of any set off could not be allowed to the successor-firm on account of valuation of the closing stock of the old firm for the simple reason that the successor-firm is an entirely different entity with different constitution.
15. For the reasons aforesaid, we do not find any substance in the appeal of the assessee, which is hereby rejected.
16. In the result, the appeal stands dismissed.