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TMI BlogValuation of closing stock on dissolution or taking over of the firm or conversion into a Co.X X X X Extracts X X X X X X X X Extracts X X X X ..... of the transfer/succession or the same persons continuing their same business in another form. 3. The opinion of the Ministry of Law which is self-explanatory is enclosed for information. DEPARTMENT OF LEGAL AFFAIRS ADVICE SECTION The question for consideration is as to whether the value of the stock is to be taken at cost price or market price when: 1) a proprietary business of an individual is taken over by a partnership firm (partnership deed dated 1-4-1983) and 2) when a partnership firm is converted, or taken over by a Private Limited Company. Both these questions have arisen as a result of objections from the audit. Full facts have been given in UO. No. 236/103/87-A PAC-II dated 24-1-1990 bearing our Dy. No. 2037/90. 2. It has also been indicated that earlier acquisition had arisen relating to the valuation of closing stock of a partnership firm in the event of dissolution. The said question also arose as a result of Audit objections. This Ministry had then opined "The safer course for the Department would, therefore, be to value the closing stock at the market rate till such time there is a clear judicial pronouncement to the contrary." 3) The matter was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assets at the book value continue to belong to the firm and the benefit or the loss as arising from fluctuations in their value would accrue to the firm. But the position is entirely different upon dissolution of the firm or upon retirement of a partner. The accounts in such an event must be settled not on a notional basis, that is, the book value, but on the real basis, that is, by conversion of every asset into money and the account of each partner settled on that basis. For this purpose, the assets have to be valued on the basis of the market value as on the date of the dissolution (see Muhammed Ussain Sahib V. Abdul Safoor Sahib, AIT 1950 Mad 758; Lindley on the law of Partnership, 14th edn. p. 878). Upon dissolution of a firm, the share of each partner is his proportion of the assets of the firm after they are realised and converted into money and after the debts and liabilities of the firm have been paid and discharged (see Addanki Narayanappa V. Bhaskara Krishnappa, AIR 1966 SC 1300)." 9. Reference may now be made to some other cases which are not directly on the point. In the case of CIT V.R.H. Chamber(1965) ITR vol. 55 p.674, transfer was made by a father of a son. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... succession in a given case or not. The test of change of ownership integrity, identity and continuity of a business have to be satisfied before it can be said that a person 'succeeded' to the business of another. It further observed that the tests crystallised by decision had given a legal context to the expression 'succession' within the meaning of Sec. 25(4) of the Act and whether the facts proved satisfied these facts is a mixed question of law and fact. 14. In view of the above, though we agree with the views of the Audit that when a case falls u/s.170, the market value of the assets needs to be seen, yet it will remain a question for determination in each case whether on the facts and circumstances of the case, the said section is applicable or not. 15. In the case of Sunit Siddarthbhai vs. CIT 156(1935) ITR 509(S.C.) it was held that where a partner of a firm makes over capital assets which are sold by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of sec. 45 of the I.T. Act, 1961 because an exclusive interest of the partner in personal assets is reduced on their entry into the firm, into a share certificate. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the personal asset is sold by the partnership firm soon after it is transferred by the assessee to it, whether the partnership firm has no substantial or real business or the record shows that there was no real need for the partnership firm for such capital contribution from the assessee. All these and other pertinent considerations may be taken into regard when the ITO enters upon a scrutiny of the transaction, for, in the task of determining whether a transaction is a sham or illusory transaction or a device or ruse, he is entitled to penetrate the evil converting it and ascertain the truth." 17. In the case of CIT vs. Morning Star Bus Service (49) 1963 ITR 927, an association consisting of five persons who were carrying on transport business formed themselves into a private limited company and the assets of the association including 7 buses were transferred to the company. The written down value of the buses in the books of association was Rs. 24,302 and their value was shown in the books of the company as Rs. 70,000. The income-tax authorities assessed the difference as profits of the association of the year in which transfer took place. The court cited the following o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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