1996 (7) TMI 187 - AT - Income Tax

Summary

Issues Involved:
1. Valuation of closing stock on the date of dissolution of the firm.
2. Authority of the Income-tax Officer (ITO) to substitute book value with market value for closing stock.
3. Applicability of the Supreme Court's decision in A.L.A. Firm v. CIT and other relevant case laws.

Detailed Analysis:

1. Valuation of Closing Stock on the Date of Dissolution:
The primary issue in this appeal is the valuation of the closing stock as on the date of the firm's dissolution. The assessee contended that the book value adopted by the partners should be considered, while the Revenue argued for the market value.

2. Authority of the Income-tax Officer (ITO) to Substitute Book Value with Market Value:
The Tribunal noted conflicting views from various cases. The Madras Benches in Preetham Pipe Syndicate and J.A. Venkoba Rao held that while the ITO could substitute cost with market value if it was less, there was no authority to replace the agreed cost with a higher market value. Conversely, the Hyderabad Bench in Sri Krishna Crucible Works, following the Supreme Court's decision in A.L.A. Firm, held that at the termination of business, the closing stock must be valued at market price.

3. Applicability of Supreme Court's Decision in A.L.A. Firm v. CIT and Other Relevant Case Laws:
The Tribunal extensively discussed the Supreme Court's decision in A.L.A. Firm, which affirmed that at the point of dissolution, the closing stock should be valued at market value, not at cost or book value. This principle was also supported by the Andhra Pradesh High Court in Sha Raichand Chagganraj & Co. and the Kerala High Court in Popular Workshops and Popular Automobiles, reinforcing that the market value should be used to determine true profits upon dissolution.

Conclusion:
The Tribunal concluded that the valuation of the closing stock at market value is mandatory at the point of dissolution, aligning with the Supreme Court's decision in A.L.A. Firm and other high court rulings. The assessee's appeal was dismissed, upholding the CIT(A)'s decision to adopt a gross profit rate of 23% for the shop stock and 14% for the godown stock, resulting in a round sum addition of Rs. 40,000.

Final Judgment:
The Tribunal upheld the order of the Commissioner (Appeals), confirming that the market value of the closing stock should be used for arriving at the profit upon the firm's dissolution. The assessee's appeal was dismissed.