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TMI Blog2004 (8) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... Dated:- 6-8-2004 - Judge(s) : M. S. SHAH., D. A. MEHTA. JUDGMENT The judgment of the court was delivered by D.A. MEHTA J. - In this appeal the following two substantial questions of law arising from the order of the Income-tax Appellate Tribunal ("the Tribunal") have been framed at the time of admission of the appeal: "1. Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in law, in holding that the Commissioner of Income-tax has validly exercised revisional jurisdiction under section 263 of the Income-tax Act, 1961? 2. Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in law, in holding that closing stock was to be valued at market price on the ratio of the decision of the Supreme Court in A.L.A. Firm v. CIT [1991] 189 ITR 285 though the business was continued after the dissolution of the firm?" The appellant filed a return of income on October 30, 1993, showing total income at Rs. 16,41,760 for the assessment year 1993-94. The relevant previous year is the financial year 1992-93. The assessment was finalised on a total income of Rs. 20,52,210 on February 24, 1995, under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket price. That the erstwhile partnership firm consisted of two partners, i.e., the mother and son; the mother expired and the son continued the same business as a proprietor. Mr. Soparkar referred to and relied upon the additional affidavit dated February 16, 2004, filed by the appellant and referred to the deed of partnership to contend that vide clause 17 it was provided that the partnership business shall be continued by the other partner in case of sad demise or retirement of any one of the partners. Attention was invited to the accounts made up as on February 11, 1993, when one of the partners expired, and the accounts for the period from February 12, 1993, to March 31, 1993, to show that the same figure of closing stock had been shown to be the opening stock of the proprietary business to emphasis that the same business had continued. Similarly, the assessment order in the case of the proprietor was also referred to show that the same business of ship breaking was carried on by the proprietor in the light of the fact that all the assets and liabilities were willed away by the deceased partner to the surviving partner. In support of the proposition that the respondent co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the surviving partner continued the business or not, and whether, the surviving partner adopted the same figure, i.e., figure of closing stock as opening stock of the proprietary business. Mr. Nayak read extensively from page 147 of 41 ITR 142, the decision of the Madras High Court in the case of G.R. Ramachari and Company to emphasise that whether the surviving partner took over the entire stock and continued to run the business on his own or not was not relevant at all. In the case of Malabar Industrial Co. Ltd. [2000] 243 ITR 83, the apex court has enunciated the law in relation to section 263 of the Act thus: "A bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the Income-tax Officer is erroneous but is not prejudicial to the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation is that the case of a partnership concern which dissolves its business in the course of the accounting year forms a close parallel to the case of a firm which goes into liquidation. That in both cases all the assets and the stock-in-trade of the business will have to be sold and their value realised for the purpose of ascertaining the true state of the profits or losses of the business. The apex court thereafter observed that: "Even in a continuing business, the valuation at market value is permissible only when it is less than cost; it is not quite certain whether the rules permit an assessee if he so desires to value closing stock at market value where it is higher than cost. But, in either event, it is allowed to be done because its effect can be offset over a period of time. But here, where the business comes to a close, no future adjustment of an over or undervaluation is possible." It was further observed that: "We, however, find substance in the second consideration that prevailed with the High Court. The decision in N. Muhammad Ussain Sahib v. S.N. Abdul Gaffoor Sahib, AIR 1950 Mad 758; [1950] 1 MLJ 81 correctly sets out the mode of taking accounts regarding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Revenue seems to have lost sight of the purpose for which valuation of the closing stock is undertaken. The true purpose has been explained succinctly by the Supreme Court in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 in the following words: "It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the canceling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks attaching to the holding of Trading Stocks, 1919, 'As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm. In that case after dissolution, two groups were carrying on separate businesses with the assets and liabilities which fell to their shares from the dissolution of the firm. In the present case, however, though there was dissolution on account of the death of one of the partners, there was no discontinuance of the business. The unchallenged finding recorded by the Tribunal is that there was no discontinuance of business. Even as per principles laid down in A.L.A. Firm's case [1991] 189 ITR 285 (SC) in such a case the closing stock is to be valued at the cost or market price, whichever is lower. That is an established rule of commercial practice and accountancy. The High Court was clearly in error in relying upon the decisions of the Madras High Court in the cases of G.R. Ramachari and Co. [1961] 41 ITR 142 and A.L.A. Firm's case [1976] 102 ITR 622 for coming to the conclusion that assets had to be valued at market value. As already noticed, in the present case, there was no cessation of business and, therefore, the closing stock could not be directed to be valued at the market rate." Therefore, it is evident that for the purpose of valuation of closing stock in a case where ..... X X X X Extracts X X X X X X X X Extracts X X X X
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