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TMI Blog1989 (8) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... n-trade as on 6-2-1984 had to be valued at market rate, following the decision of the Madras High Court in the case of A.L.A. Firm v. CIT [1976] 102 ITR 622. He held, after hearing the assessee, that the failure to take the market value of the closing stock was an error prejudicial to the Revenue and he, therefore, set aside the assessment and directed the Income-tax Officer to make a fresh assessment accordingly. 3. In the appeal before us it was contended on behalf of the assessee that the question of valuing the closing stock at market value could arise only on discontinuance of the business as such and as in the present case the business of the firm was never terminated but had been taken over on succession by another firm, the closing stock was not required to be revalued. It was submitted that the decision of the Madras High Court in the case of A.L.A. Firm did not apply to a case such as this and reliance was placed on the decision of the Tribunal in the case of ITO v. Krishna Traders [IT Appeal No. 1416 (Mad.) of 1982, dated 30-6-1983]. On the other hand it was contended on behalf of the Revenue that on the dissolution of a firm the closing stock had to be revalued and, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct from section 176, which applies to a case where a business is discontinued. Thus the Act itself recognizes that a case of a succession of the business by one firm on the dissolution of another firm is not a case of a business being discontinued. This recognition is presumably based on the long line of decisions, which have uniformly held that discontinuance did not cover mere change of ownership but referred only to complete cessation of the business---See CIT v. P.E. Polson [1945] 13 ITR 384 at 388 (PC). The provisions of section 189 make no difference to this situation for it only enables proceedings to be initiated against the dissolved firm or in respect of a discontinued business as if such discontinuance or dissolution had not taken place. 6. The income chargeable under the head " Profits and gains of business " is to be computed in accordance with the method of accounting regularly employed by the assessee as provided by section 145(1) of the Act. One of the principles adopted generally is to value the closing stock at cost or market value, whichever is less. The Supreme Court has explained this practice in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481, as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the above premise if the business itself is discontinued and the stocks are realised then the value realised would have to be substituted for the value given in the accounts. Such a realisation becomes necessary where the business is discontinued with or without dissolution of the firm. However, where the business is not discontinued, though the firm is dissolved, the question of realising the value of the goods does not arise and there is no necessity for revaluing the closing stock. This is because the value of the closing stock as shown in the books of the dissolved firm will be taken as the value of the opening stock in the hands of the successor in interest, the business continuing without any disruption. However, if the partners of the dissolved firm have in their dissolution accounts revalued the stock, then that value would have to be substituted. That was exactly the position in the case of A.L.A. Firm. The judgment notes that the firm in that case closed its accounts on 13-3-1981, the date of dissolution, and the profit was arrived at by crediting to the profit and loss account the difference on revaluation of the stock as on that date. However, for income-tax purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inuance of a business. If on dissolution of a firm the business is also discontinued and the value of the stock realised it may be possible for the Income-tax Officer to insist that the value realised should be taken as the value of the closing stock instead of any notional valuation on the regular principle of cost or market value whichever is less. But where the business is not discontinued the question of revaluing the stock cannot arise at all. In fact by requiring the revaluation of the stock at market value when the stocks have not been sold not only the anticipated loss which the assessee is entitled to take into account as an exceptional rule of accountancy practice is denied but the profit which has not actually been realised is brought to tax, which is against the principle of assessment of real income as adumbrated by the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337. Hence for all these reasons we are of the considered opinion that the valuation of the closing stock of a continuing business on the principle of cost or market value whichever is less cannot be substituted with the market value only because the firm carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X
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