2004 (8) TMI 82 - HC - Income Tax

Continuance of business even after dissolution of firm - respondent passed an order under section 263 setting aside the assessment order as it was prejudicial to the interests of the Revenue - According to the respondent, during the accounting year, the firm was dissolved and therefore, the closing stock should have been valued at market rate in view of the decision of the hon ble Supreme Court in the case of A.L.A. Firm v. CIT - In these circumstances, it is not possible to state that the order of the Assessing Officer was in any manner prejudicial to the interests of the Revenue, there being no error in the assessment order. - The Tribunal was not right in law in upholding the exercise of revisional jurisdiction under section 263 of the Act. The Tribunal was also not right in law in holding that the closing stock had to be valued at market price on the basis of the ratio of the decision of the Supreme Court in A.L.A. Firm though the business was continued after the dissolution of the firm. assessee s appeal is allowed

Summary

Issues Involved:

1. Validity of the Commissioner's exercise of revisional jurisdiction under section 263 of the Income-tax Act, 1961.
2. Valuation of closing stock at market price following the dissolution of a firm when the business was continued thereafter.

Issue-wise Detailed Analysis:

1. Validity of Revisional Jurisdiction under Section 263:

The Commissioner issued a notice under section 263 of the Income-tax Act, 1961, on the grounds that the Assessing Officer (AO) had erred in the assessment order by not valuing the closing stock at market price following the firm's dissolution. The appellant argued that the Commissioner wrongly assumed revisional jurisdiction as the business continued after the dissolution, and thus the decision in A.L.A. Firm v. CIT [1991] 189 ITR 285 was not applicable. The appellant cited Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, arguing that if two views are possible and the AO adopts one, the order cannot be considered erroneous or prejudicial to the Revenue.

The court reiterated that for section 263 to apply, the order must be both erroneous and prejudicial to the Revenue. It emphasized that not every loss of revenue qualifies; only unsustainable views by the AO can be corrected under section 263. The court found that the AO's view was sustainable in law, considering the business continued, and thus, the Commissioner could not invoke section 263.

2. Valuation of Closing Stock:

The Tribunal upheld the Commissioner's order, directing valuation of closing stock at market price based on A.L.A. Firm [1991] 189 ITR 285, despite the business continuing post-dissolution. The appellant contended that the business continuation meant closing stock should be valued at cost or market price, whichever is lower, as per Sakthi Trading Co. v. CIT [2001] 250 ITR 871.

The court clarified that in cases of dissolution without business discontinuance, closing stock should be valued at cost or market price, whichever is lower. It noted that the Tribunal erred by not recognizing the business continuation and misapplying A.L.A. Firm's ratio. The court emphasized that valuation should reflect commercial practice and accountancy principles, which do not bring unrealized profits into charge unless business ceases.

Conclusion:

The court concluded that the Tribunal erred in upholding the revisional jurisdiction under section 263 and in directing valuation of closing stock at market price. Both questions were answered in favor of the appellant, and the appeal was allowed. The court emphasized that the established rule of valuing closing stock at cost or market price, whichever is lower, applies when business continues post-dissolution.