COMMISSIONER OF INCOME TAX Vs. BHARATH AUTO STORES

JUDGEMENT

(1.) THE assessee was a partnership firm, which consisted of two partners and was constituted under a deed of partnership dated April 1, 1972. Under a codicil dated April 1, 1973, clause 9 was introduced into the deed of partnership to the effect that from April 1, 1972 in the event of dissolution of the firm, the partners agreed that the assets of the firm, including are stock on hand, shall be valued at book value and divided. THE partnership business was carried on at two places under the name and styled of "Bharat Auto Stores" and "Balaji Automobiles", and by a deed of dissolution, the partnership was dissolved on March 31, 1974. Subsequent to the dissolution, one of the partners continued the business under the name and style of "Bharat Auto Stores", while the other partner took over the business under the name and style of "Balaji Automobiles". For the assessment year 1974-75 (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. Raachari 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 a 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 proofs 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 cannons of justice and natural law. In this view, the Appellate Assistant Commissioner allowed the appeal and deleted the addition. On further appeal to the Tribunal by the Revenue, after referring to the decisions reported in G. R. Ramachari v. CIT [1961] 41 ITR 142 (Mad) and A. L. A. Firm v. CIT , the Tribunal took the view that the rights of the parties will be governed by the provision in clause 19 of the deed of partnership, and, therefore, the assets, including the stock-in-trade, were properly valued on the basis of the book value. so holding, the Tribunal dismissed the appeal. That is how the following question of law under section 256(1) of the Income-tax Act. 1961 (hereinafter referred to as "the Act"), at the instance of the Revenue, has been referred to this court for its opinion :

(2.) LEARNED counsel for the Revenue contended that though it may be open to the partners to value the stock either at books value or at market value, whichever is more advantageous, during the continuance of the business of the partnership, yet, on dissolution of the partnership, the only method which could be adopted in the valuation of assets was the market value, as the settlement of accounts at the point of dissolution could not be on a notional basis, and every asset of the partnership should be converted in terms of money and the account of the partner settled on that footing. It was also further submitted that the provision under clause 19 of the deed of partnership would not, in any manner, enable the assessee to justify the valuation of the assets on the date of dissolution according to the book value, as such an arrangement might at best hold good between partners, but no be binding on the Revenue, and that would also result in the profits of the firm being omitted to be brought to tax. Strong reliance in support of these contentions was placed upon the decisions in G. R. Ramachari and Co. v. CIT [1961] 41 ITR (Mad), A. L. A, Firm v. CIT , Popular Workshops v. CIT , V. C. Venkata Subbaiah Chetty and Sons v. CIT , Popular Automobiles v. CIT and Spanish Prospecting Co. Ltd., In re [1911] 1 Ch 92 (CA).

(3.) 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 that arose for consideration was whether the valuation of the closing stock at average cost on September 11, 1944, with reference to the branches at Bombay and Nagpur was correct. There was a dissolution of a firm through a decree of the court with effect from September 11, 1944. The firm had places of business at Madurai, Bombay and Nagpur. The valuation of the closing stock in the Bombay and Nagpur shops was given as Rs. 22,286 being its book value. In respect of the assessment year 1945-46, the assessee-firm admitted an income of Rs. 6,281, to which the Income-tax Officer added Rs. 8,715, being the difference between the value as per the books and the market value of the assets. All the authorities concurred in holding that the addition so made was in order and when the matter came up to this court, this court held that the privilege of valuing the opening and closing stocks in a consistent method is available only to a continuing business and it cannot be adopted where the business comes to an end and the stock-in-trade has to be disposed of in order to determine the exact position of the business on the date of closure. Adverting to the argument that the assessee is entitled to adopt the same method as before, even when the business is closed and the assessable entity ceases to exist, this court pointed out that that proposition cannot be accepted and it is obvious that, when a business ceases, all its stock-in-trade has to be disposed of and brought into account in order to balance the books. At page 149, this court observed as follows :