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Income Tax Appellate Tribunal - Bangalore

G.R. Mens Avenue , Bangalore vs Assessee on 18 December, 2012

Page 1 of 10                              1                     ITA No.858/Bang/2012


                IN THE INCOME TAX APPELLATE TRIBUNAL,
                         BANGALORE BENCH 'A'

        BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT
           AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER

                              ITA No.858/Bang/2012
                            (Assessment year 2005-06)

                 M/s G R Men's Avenue, No.4,           The Income Tax
                 Sujayeendra Plaza, NAT Road,          Officer, Ward-3(1),
                 Basavanagudi, Bangalore-4.       vs   Bangalore.
                 PA No.AADFG 7497 A
                          (Appellant)                      (Respondent)


                    Date of Hearing           :    18.12.2012
                    Date of Pronouncement     :    04.01.2013


                 Appellant by         : Shri Hanumesh, C.A. &
                                        Shri Chengala Rayudu, C.A.
                 Respondent by        : Shri Bijoy Kumar Panda, Addl. CIT


                                  ORDER

PER GEORGE GEORGE K :

This appeal filed by the assessee firm is directed against the order of the learned CIT (A)-II, Bangalore dated 24.5.2012. The relevant assessment year is 2005-06.

2. The assessee firm had originally raised 13 grounds in its grounds of appeal, but, subsequently came up with concise grounds, according to which, the solitary grievance of the assessee is that "the CIT (A) was not justified in sustaining the order of the AO by affirming that the impugned order of the AO was based on the direction of the Page 2 of 10 2 ITA No.858/Bang/2012 jurisdictional CIT u/s 263 of the Act and, thus, the assessee's appeal was not maintainable."

3. The issue, in brief, is as under:

The assessee firm ['the assessee' in short], a dealer in textiles and ready made garments, for the assessment year under consideration, furnished its return of income, admitting a total income of Rs.40,330/-. The return of income was originally processed u/s 143(1) of the Act and subsequently, the assessment was concluded u/s 143(3) of the Act, accepting the income returned after due consideration of the details furnished and verification of its books of account. However, it was noticed by the jurisdictional CIT that the assessment order passed by the AO was prejudicial to the interest of revenue for the reasons that the business activity of the firm was in the nature of partnership from 1.4.2004 to 31.7.2004 and later on it had become a proprietary concern and, thus, the method of valuation adopted by it for valuing closing stock at the time of dissolution was incorrect as the closing sock should have been valued at market rate in conformity with the ruling of the Hon'ble Supreme Court in the case of A.L.A Firm v. CIT reported in 189 ITR 285 (SC). Accordingly, the assessee was called upon, by issuance of a notice u/s 263 of the Act, to show-cause as to why its total income should not be revised by taking cost of closing stock at market value.

3.1. After giving due weight-age to its objections and also in conformity with the ruling of the Hon'ble Supreme Court cited supra, the learned CIT set aside the assessment order passed u/s 143(3) the Act with Page 3 of 10 3 ITA No.858/Bang/2012 a direction to the AO to reframe the assessment by working out the profit of the firm by taking the closing stock at market value as on the date of dissolution.

3.2. The AO, in the assessment, pursuant to 263 order, rejected the assessee's objections and concluded the assessment as under:

"(On page 5).................................................................................... The assessee firm has shown closing stock at Rs.9672480/- by adopting the lower of the cost or net realizable value. This is not correct method of valuation to be adopted at the time of dissolution of firm. The assessee firm will not be in existence or dissolved and in order to ascertain true profits of the firm as on the date of dissolution 31st July 2004, hence the firm should adopt the market value as on 31.7.2004 instead of cost of method of valuation. It is held by the Supreme Court that in the case of A.L.A Firm v. CIT (SC), 1991 that the valuation of stock as on date of dissolution shall be valued at market price. The assessee was asked to submit the sale bills pertaining to the sales made as on 31.7.2004 or immediately preceding the said date. The assessee has failed to produce the same. Hence, on the inability of the assessee to produce the same the gross profit ratio of 20.81% as reflected in the audited report is added to the closing stock. Hence, the valuation of closing stock is worked as under by adopting the cost price plus gross profit (100 + 20.81% = 120.81%): 9672480 x 120.81 =11685323/-

Hence, the difference of Rs.2012843/- [i.e., 11685323 - 9672480] is added to the total income.........."

4. Aggrieved, the assessee took up the issue before the CIT (A) for relief. After considering the assessee's plea, as recorded in her impugned order, the CIT (A) dismissed the appeal. The reasons recorded by the CIT (A) are extracted as under:

"3...................................It is seen from records that the incumbent AO passed the reassessment order u/s 143(3) read with section 263 of the Act in compliance with the specific directions of the CIT in his order u/s 263 of the I.T. Act dated 31.3.2010. Therefore, the AO's action is in accordance with the relevant provisions of law and cannot be questioned in appeal since, as a subordinate officer, the AO was bound to do so. In this view of the matter, the appellant's appeal cannot be entertained....."

5. Aggrieved, the assessee has come up with the present appeal. The statement of facts and the submission made by the learned AR before us is summed up as under:

(i) that the assessee was a partnership firm being a retail show-room dealing in the business of retail trade of readymade garments, textiles sarees, accessories etc., and the said partnership firm was dissolved w. e. f.

31.7.2004, however, the partnership business was continued by one of the partners by taking over all the assets and liabilities of the partnership firm as a proprietary concern in the same premises and in the same name;

(ii) that the AO had considered the selling price (cost + gross profit) of the assessee to its customer (assessee being a retailer) as the market price of the closing stock held by the assessee as on the date of dissolution i.e., on 31.7.2004 and worked out the difference in the valuation of the closing stock; that the whole exercise of the AO to consider the value of closing stock by adding the GP to Page 5 of 10 5 ITA No.858/Bang/2012 the cost of the closing stock was erroneous in law and leads inflating the value of the closing stock and, consequently bring the difference for taxation;

(iii) that the CIT, while making a direction u/s 263 of the Act was relied on the decision of the Hon'ble Supreme Court in the case of A.L.A Firm (supra), but, failed to notice that the facts of the said case were distinct when compared to the assessee's case for the reasons that:

(a) the items involved with respect to valuation in the said case were estates, garden and house property which normally appreciate by efflux of time whereas in the present case the items involved were consumer items such as readymade garments, sarees etc. which deteriorate by passing of time;

(b) in the said case, on dissolution, the assessee revalued estates, garden and house property and crediting the difference into the P & L account and allotted the assets to the partners whereas no such revaluation was done in the present case;

(iv) that the assessee's case is quite different from the case of ALA Firm (supra) which was considered by the CIT while directing the AO for fresh assessment; and that the present case falls in line with the ruling of the Supreme Court in the case of Sakthi Trading Co v. CIT (2001) 250 ITR 871 (SC); &

(v) that the AO and the CIT (A) have passed the impugned orders under dispute without taking into consideration the vital facts and the circumstances of the issue; and that the order passed by the AO in valuing the closing stock by adopting cost + gross profit was patently illegal without appreciating and evaluating of all related facts.

5.1. In conclusion, it was submitted that the AO erred in working out the profits of the assessee by taking Closing Stock at market value by adopting the cost price plus gross profit as wrongly suggested by the Internal audit party of the Department; and the CIT(A) had mechanically dismissed the appeal without considering the facts and the issue involved in the assessee's case. It was, therefore, pleaded that the order passed by the AO involving erroneous computation of valuation of closing stock which was tactically sustained by the CIT (A) in dismissing the assessee's appeal require to be reversed.

5.2. The learned D R supported the stand of the authorities below on the issue.

6. We have carefully considered the rival submissions, perused the relevant case records and also the various documentary evidences produced by the learned A R in the form of a paper book.

6.1. Briefly, the assessee's firm was reconstituted with five partners w.e.f 31.3.2003 by a Deed of Partnership and, subsequently, by a Deed of Dissolution dated 26.2.2004, the partners have agreed to disallow the partnership firm w.e.f. 31.7.2004 and that all the assets and liabilities of the partnership firm shall be taken over by one of the partners Shri M.S. Prahallad and shall carry on the business in the same name of G.R. Men's Avenue as a proprietorship concern [Courtesy: P 9 - 11 of PB]. Accordingly, a return of income for the assessment year under consideration was filed, admitting a total income of Rs.40,330/-, the assessment of which was concluded u/s 143(3) of the Act on 25.5.2007, accepting the income Page 7 of 10 7 ITA No.858/Bang/2012 returned. However, the jurisdictional CIT initiated proceedings u/s 263 of the Act and for the reasons discussed supra, the assessment was set aside with a direction to the AO to reframe the assessment by working out the profit of the firm by taking closing stock at market value as on the date of dissolution. The above direction was given by the learned CIT, keeping the ruling of the Hon'ble Supreme Court in the case of A.L.A Firm (supra) in view. However, the AO had, while reframing the assessment order, instead of following the directions contained in the order of the CIT u/s 263 of the Act, proceeded to value the closing stock by adopting the cost price plus gross profit i.e., (100 + 20.81% = 120.81). Incidentally, the AO, in the absence of sale bills pertain to the sales made as on 31.7.2004, the gross profit ratio of 20.81% as reflected in the audited report was added to the closing stock to arrive at the closing stock at Rs.1,16,85,323/- and the difference of Rs.20,12,843/- [ Rs.11685323 - 9672480 (closing stock shown by the assessee in its return of income]. In fact, the AO had adopted different via-media to arrive at the difference in valuation of stock instead of carrying out the CIT's directions contained in the order passed u/s 263 of the Act.

6.2. At this point of time, we would like to reiterate that, as rightly highlighted by the learned AR; the ruling of the Hon'ble Supreme Court in the case of A.L.A. Firm (supra) is not applicable to the facts of the issue under consideration. While referring to the ruling of the earlier Bench of the Supreme Court in the case of A.L.A. Firm v. CIT (1991) 189 ITR 0285 (SC), the Hon'ble Court in the case of Sakthi Trading Co. v. CIT reported in (2001) 250 ITR 871 (SC) had observed thus:

"There is no authority directly in point dealing with this question, where a partnership concern dissolves its business in the course of the accounting year, what is the basis on which the stock-in-trade has to be value as on the date of dissolution. We have to deal with the matter on first principles. "16.From the above, it is evident that in A.L.A Firm's case (supra) 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. Though there was dissolution on account of the death of one of the partners, but there was no discontinuance of the business. Even as per principles laid down in A.L.A. Firm's case (supra) in such a case the closing stock is to be valued at the cost or market price, whichever is lower.

As already noticed, in the present case, there has no cessation of business and the closing stock could not be directed to be valued at the market rate....."

6.3. It is evident from the assertion of the Hon'ble Court (supra) that even after the dissolution of the partnership firm, there was no cessation/ discontinuance of the business in the case under consideration. Though the AO had concluded the assessment u/s 143 (3) r. w. s. 263 of the Act, interestingly, she had not complied with the specific directions of the CIT [(on page 2) "For these reasons, the assessment order is being set aside with a direction to the AO to reframe the assessment by working out profit of the firm by taking closing stock at market value as on the date of dissolution"] with letter and spirit, instead, she had valued the closing stock by adopting the cost price plus gross profit [source: P 5 last paragraphs of the assessment order].

6.4. Primarily, as already pointed out earlier, the Hon'ble Supreme Court had, in the case of A L A Firm (supra), explicitly observed that "Even in a continuing business, the valuation at market value is permissible only when it is less than cost; it is not quite certain whether the rules permit an assesee if he so desires to value closing stock at market value where it is higher than cost."

6.5. Be it as it may, as deliberated upon in the fore-going paragraphs, the AO had not reframed the assessment by working out the profit of the assessee firm by taking closing stock at market value as on the date of dissolution as expressly directed by the CIT by his order u/s 263 of the Act and also the observations of the Hon'ble Supreme Court in the case of Sakthi Trading Company v. CIT (supra), we are of the firm view that the learned CIT (A) was not justified in dismissing the appeal on technicality without considering the issue on merits. 6.6. Taking into account the facts and circumstances of the issue as discussed above and also in keeping the principles of natural justice in view, the issue is restored to the file of the learned CIT (A) with a specific direction to consider the matter on merits and take appropriate action in accordance with the provisions of the Act. It is ordered accordingly.

7. In the result, the assessee's appeal is treated as allowed for statistical purpose.

The order pronounced on the 4th day of January, 2013 at Bangalore.

            Sd/-                                Sd/-
       (N BARATHVAJA SANKAR)               (GEORGE GEORGE K)
           VICE PRESIDENT                   JUDICIAL MEMBER



Copy to :

1. The Revenue 2. The Assessee 3. The CIT concerned. 4. The CIT(A) concerned. 5. DR 6. GF MSP/ By order Senior Private Secretary, ITAT, Bangalore.