1989 (5) TMI 143 - AT - Income Tax

A Partner, Assessment Year, Closing Stock, Dissolution Of Firm, Market Value, Partnership Firm

Summary

Issues:
- Valuation of stock at market rate on dissolution of a firm
- Assessment of unrealized profit on closing stock of finished goods
- Interpretation of retirement deed and settlement of accounts between partners
- Application of Madras High Court decision in A.L.A. Firm's case
- Relevance of revaluation of properties at prevailing market value
- Justification of bringing the difference between book value and market value to assessment

Analysis:
The case involves a departmental appeal against the deletion of an addition made by the Income Tax Officer (ITO) regarding the valuation of stock at market rate on the dissolution of a firm. The assessment year in question is 1982-83, with the relevant previous year ending on 30-9-81 when the firm was dissolved. The primary issue is whether the stock should be valued at market rate as per the decision of the Madras High Court in the A.L.A. Firm's case. The ITO had valued the closing stock of finished goods at market rate, resulting in an addition of Rs. 24,088 to the assessment.

The assessee contended that there was no transfer of assets on dissolution, citing the Supreme Court decision in Malabar Fisheries Co. case. The Commissioner (A) agreed with the assessee, holding that the transfer of closing stock was merely a distribution of assets among partners and not a sale generating profits. The Revenue challenged this decision, arguing that the stock should be valued at market rate on dissolution, as per relevant court decisions and ITAT judgments.

The Tribunal found in favor of the Revenue, emphasizing the Madras High Court's ruling in A.L.A. Firm's case that stock-in-trade retains its nature even on dissolution. The Tribunal held that the ITO was justified in re-valuing the closing stock at market rate and bringing the difference to assessment. The Tribunal rejected the assessee's argument that the stock had already been valued at market rate during settlement, as it was not supported by evidence or raised at earlier stages. Consequently, the Tribunal allowed the departmental appeal and restored the addition of Rs. 24,088 to the assessment.

In conclusion, the Tribunal upheld the revaluation of the closing stock at market rate on the dissolution of the firm, in line with the Madras High Court's decision. The judgment highlights the importance of accurately valuing stock on dissolution and assessing any unrealized profits arising from such valuations.