2017 (7) TMI 620 - SC - Income Tax

Revision u/s 263 - whether the view taken by the Assessing officer in accepting the valuation of the closing stock at cost price was a plausible view in the circumstances of this case? - Held that - In the instant case where the partnership firm stood dissolved by the operation of law in view of the death of one of the partners, i.e., the mother, but the business did not come to an end as the other partner, viz., son, who inherited the share of the mother, continued with the business. In a situation like this, there was no question of selling the assets of the firm including stock-in-trade and, therefore, it was not necessary to value stock-in-trade at market price. When a business continues, it may not be necessary to follow the market rate to value the closing stock as the reasons because of which the same is to be done are not available. When this position becomes clear, it follows that in the instant case the view taken by the Assessing Officer in accepting the book value of the stock-in-trade was a plausible and permissible view. In this scenario, the CIT could not exercise his powers under Section 263 of the Act. - Decided in favour of assessee.

Issues Involved:
1. Validity of exercise of revisional jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Appropriate method for valuing closing stock upon the dissolution of a partnership firm.

Detailed Analysis:

1. Validity of Exercise of Revisional Jurisdiction under Section 263 of the Income Tax Act, 1961:

The core issue was whether the Commissioner of Income Tax (CIT) validly exercised his revisional jurisdiction under Section 263 of the Act. Section 263 empowers the CIT to revise an order passed by the Assessing Officer if it is "erroneous in so far as it is prejudicial to the interests of the revenue." The CIT deemed the original assessment order erroneous because the closing stock was valued at cost price instead of market price, referencing the Supreme Court decision in 'A.L.A. Firm v. Commissioner of Income Tax [(1991) 189 ITR 285].'

However, the High Court, while overturning the CIT's order, referred to the Supreme Court decision in 'Sakthi Trading Co. v. Commissioner of Income Tax [(2001) 250 ITR 871],' which held that the valuation method adopted by the Assessing Officer was permissible. The Supreme Court reiterated that for the CIT to invoke Section 263, two conditions must be satisfied: (i) the order must be erroneous, and (ii) it must be prejudicial to the interests of the revenue. The Court emphasized that the CIT cannot exercise revisional jurisdiction simply because he disagrees with one of the permissible views taken by the Assessing Officer.

2. Appropriate Method for Valuing Closing Stock Upon the Dissolution of a Partnership Firm:

The second issue was whether the closing stock should be valued at market price upon the dissolution of the partnership firm. The CIT argued that upon dissolution, the stock should be valued at market price based on the decision in 'A.L.A. Firm v. Commissioner of Income Tax,' which held that upon dissolution, the business ends, and thus, the stock should be valued at market price to determine the true state of profits or losses.

However, the High Court, supported by the Supreme Court, found that in this case, although the firm was dissolved due to the death of one partner, the business continued with the surviving partner. Thus, the rationale for valuing the closing stock at market price was not applicable. The Court referred to 'Sampatram v. Commissioner of Income Tax, West Bengal [1953 (24) ITR 481],' which explained that the purpose of valuing closing stock is to balance the cost of goods entered at the time of purchase, and in a continuing business, it is not necessary to adopt market value unless it is lower than the cost.

The Supreme Court concluded that the view taken by the Assessing Officer in accepting the cost-based valuation was a plausible and permissible view. Consequently, the CIT's exercise of revisional jurisdiction under Section 263 was not justified.

Conclusion:

The Supreme Court upheld the High Court's judgment, stating that the CIT could not exercise his revisional jurisdiction under Section 263 as the view taken by the Assessing Officer was permissible. The appeals were dismissed with costs, affirming that the valuation of closing stock at cost price in a continuing business, even after the dissolution of the partnership due to the death of a partner, was appropriate.

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