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TMI Blog1990 (10) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... (accounting period ending on March 31, 1974), in accordance with the prior practice and clause 19 of the deed of partnership, the assessee valued the closing, stock at book value. While finalising the assessment, the Income-tax Officer, following the decision in G. R. Ramachari and Co. v. CIT [1961] 41 ITR 142 (Mad), revalued the closing stock on the basis of the market value, and, after taking into account portion of the dead and unsaleable stock, inclusive of articles, which were not quick moving, made an addition of Rs. 90,468 to the income returned by the assessee from the business carried on in tyres, tubes, spare parts, etc., relating to truck spares. On appeal by the assessee before the Appellate Assistant Commissioner, he took the view that the decision in G. R. Ramachari and Co. v. CIT [1961] 41 ITR 142 (Mad) would not be applicable and that, if profits had been ascertained on the basis of a method of accounting regularly followed by the assessee, by adopting a particular method for valuing the stock and if, in every case of dissolution of partnership, the closing stock should be valued and notional profits added, it would be against the canons of justice and natural law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Venkata Subbaiah Chetty and Sons v. CIT [1988] 171 ITR 590 (AP), Popular Automobiles v. CIT[1989] 179 ITR 632 (Ker) and Spanish Prospecting Co. Ltd., In re [1911] 1 Ch 92 (CA). On the other hand, learned counsel for the assessee submitted that even during the course of the dissolution of the partnership, the method adopted by the firm earlier, had been followed, and that clause 19 of the deed of partnership sanctioned it. The further faint submission of learned counsel for the assessee was that the Revenue cannot proceed to subject to tax notional profits. Reference was made by learned counsel for the assessee to the decisions in CIT I CEPT v. Chari and Ram [1949] 17 ITR 1 (Mad) and CIT v. K. Sankarapandia Asari and Sons [1981] 130 ITR 541 (Mad). Under clause 6 of the deed of partnership, proper books of account shall be maintained for the partnership and the accounts of the partnership shall be closed for profit and loss account at the end of March 31, every year. It is not in dispute in this case that the assessee had been adopting the book value for the stocks in the prior years, while making up the accounts. However, during the course of the carrying on of the business of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be adopted. Earlier, the reason for and the effect of the adoption of the book or the market value of the assets of a firm on its business, which is continuing and on firm, which is dissolved, as the case may be had been noticed. It may be that even if the partners agree that the book value of the assets should be adopted in the case of dissolution of the firm, but such an agreement may, at best, be good only as between partners. In so far as the Revenue is concerned, it has a right to a certain percentage of the profits of the firm by way of income-tax and the profit and loss account of the firm arrived at in accordance with the provisions of the deed of partnership would in no way bind the Revenue. In view of the aforesaid considerations, the method adopted by the assessee in the earlier years in the matter of valuation of stocks or the provision under clause 19 of the deed of partnership cannot be pressed into service by the assessee to justify the valuation of the stock at cost price even on the dissolution of the firm. We may now refer to the decisions relied on by learned counsel for the Revenue. In G. R. Ramachari and Co. v. CIT [1961] 41 ITR 142 (Mad), the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses to function, the valuation of the stock in hand should be made on the basis of the prevailing market price." The aforesaid principle had been reiterated and applied in the decision in A. L. A. Firm v. CIT [1976] 102 ITR 622 (Mad). In that case, the question arose whether the difference on a revaluation of the assets of the dissolved assessee-firm credited to the profit and loss account could be subjected to tax. In dealing with this question, Muhammad Ussain Sahib v. Abdul Gaffoor Sahib [1950] 1 MLJ 81 and G. R. Ramachari and Co. v. CIT [1961] 41 ITR 142 (Mad) were referred to and it was observed that the option to value the stock at cost or market value, whichever was lower, is available to the assessee during the subsistence of the business and that there is no authority that such an option is available even at the point of termination of the business and the stock had to be valued whatever be the method of accounting, at the time of dissolution of firm, at the market price. The two decisions referred to above clearly lay down that whatever might have been the provision in the deed of partnership or even the practice during the continuance of the business of the partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are originally taken at their actual cost, though any such calculation cannot be regarded as necessarily giving their true value either in use or in exchange, and that it would only be a variation of practice resting on no settled principle. It has also been further pointed out that to render the ascertainment of the profits of the business of practical use, it is evident that the assets, whatever their nature may be, must be represented by their money value and the figure inserted to represent stock-in-trade must be arrived at by a valuation of the actual articles and though there is a wide field for variation of practice in the estimation of profit, this liberty ceases when the rights of third persons intervene, like, for instance, the Revenue, which has a right to a certain percentage of profits of the assessee-company by way of income-tax, in respect of which the actual profit and loss accounts of the company do not bind the Crown in arriving at the tax to be paid. At page 101, Fletcher Moulton L J. has categorically stated that profits in cases where the rights of third parties come in, mean actual profits and they must be calculated as closely as possible, in accordance wit ..... 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