1984 (8) TMI 170 - AT - Income Tax

Summary

Issues: Valuation of stock-in-trade upon conversion of proprietary business into a partnership firm.

In this case, the appeal was against the order of the Commissioner of Income Tax (CIT) under section 263 of the Income-tax Act, dated 22-11-1983. The issue revolved around the valuation of stock-in-trade upon the conversion of a proprietary business into a partnership firm. The CIT initiated revisionary proceedings based on the contention that the stock should be valued at market price upon the termination of the business, relying on specific court decisions. The assessee argued that there was no transfer of assets to the partnership firm on the last day of the accounting year but only on the subsequent day when the partnership officially began. The assessee also contended that the conversion did not involve a transfer of assets since the proprietor continued as a partner in the new firm. The Commissioner set aside the assessment, directing a reassessment based on market value.

The main submission by the assessee was that the valuation method used by the Income Tax Officer (ITO) was not erroneous and prejudicial to the revenue, thus challenging the invocation of section 263. The assessee maintained that the normal valuation method was cost price, which was lower for the closing stock valuation. It was argued that the newly formed firm had taken over assets and liabilities at market value, and the business was ongoing at the time of valuation. The departmental representative supported the Commissioner's order.

The Appellate Tribunal disagreed with the Commissioner's order, stating that the valuation of the closing stock at cost price by the assessee was appropriate, as the conversion into a partnership firm occurred after the valuation date. The Tribunal highlighted that the business was taken over as a going concern by the new firm, with the assessee remaining a partner. The Tribunal distinguished the cited court decisions, emphasizing that they were not applicable to the present case. The Tribunal referenced other court decisions to support the conclusion that the conversion from a proprietary business to a partnership did not constitute a sale, and the valuation method agreed upon by the partners should be upheld. Therefore, the Tribunal canceled the Commissioner's order, ruling in favor of the assessee.