2014 (4) TMI 849 - HC - Income Tax

Validity of order u/s 263 - valuation of stock on discontinuation one business of partnership firm Book value or market value - Held that - The entire discussion of A.L.A Firm case refers to different situations depending upon continuance of business or discontinuance of business - Though all partners are members of one family, so far as their tax liability, as an individual or as partners will not depend upon their relationship with each other, but depends upon the income they derive as their individual income whether through partnership or through other sources - if the firms were to transfer closing stock especially an item like gold, to an outsider, definitely book value will not be the value at which the stock would be transferred - partners are members of the same family, their liabilities and assets would depend upon their share capital etc.- it is not open to them to say that one of the partners being head of the family is continuing Dona Gold business as a proprietary concern at their choice, at what value they transfer the entire closing stock they have transferred - there is no justification in the stand of the assessee in contending that only the book value of closing stock has to be taken into consideration - the Tribunal was justified in rejecting the appeals Decided against Assessee.

Summary

Issues:
Assessment order under Section 143(3) of the Income Tax Act canceled by Commissioner under Section 263 - Appellants running partnership business in gold and other items - Discontinuation of gold business by appellants - Valuation of stock-in-trade at closure - Interpretation of judgment in A.L.A Firm v. Commissioner of Income Tax - Applicability of market value for stock transfer - Tax liability on deemed income - Valuation of closing stock at market value.

Analysis:

The judgment concerns the cancellation of assessment orders for the year 2008-2009 under Section 143(3) of the Income Tax Act by the Commissioner under Section 263. The appellants, who were running partnership businesses dealing in gold and other items, had their assessment canceled on the grounds of being erroneous and prejudicial to revenue. The Commissioner's decision was upheld by the Appellate Tribunal, leading the appellants to challenge the orders before the High Court.

The main contention raised by the appellants was regarding the interpretation of the judgment in A.L.A Firm v. Commissioner of Income Tax, where they argued that the principle applied in that case was not relevant to their situation. They emphasized that their firms were not dissolved, and the decision in A.L.A Firm pertained to dissolved firms, whereas they had transferred their stock-in-trade to one partner due to the discontinuation of the gold business. They asserted that the valuation of stock-in-trade should not be based on market value but on book value.

On the other hand, the Department's Standing Counsel argued that once a business is discontinued, irrespective of the reason, the stock transfer should be valued based on market value, not book value. They contended that the principle from A.L.A Firm was applicable to the present case due to the discontinuation of the gold business by the appellants.

The High Court analyzed the facts and legal precedents, noting that the closure of a business, in this case, the gold business, was crucial for valuing the closing stock. Referring to the judgment in A.L.A Firm and subsequent decisions, the court emphasized that when a business is discontinued, profits can only be ascertained by valuing the closing stock at market value, not book value. The court also highlighted that the tax liability of individual partners depends on their income, regardless of their familial relationship.

Ultimately, the High Court upheld the Tribunal's decision, emphasizing that the valuation of closing stock at market value was justified in cases of business discontinuation. The court directed the assessing authority to determine the value of the closing stock at market rate, rejecting any predetermined formula suggested by the Commissioner. The appeals were disposed of in favor of the revenue, affirming the principle of valuing closing stock at market value in cases of business discontinuation.