COMMISSIONER OF INCOME TAX Vs. INDIA REINFORCING COMPANY

JUDGEMENT

(1.) DURING the accounting year relevant to the assessment year 1974-75, the assessee was a firm and, on January 21,1974, the firm was dissolved and its assets and liabilities as well as its entire business were taken over by M/s. Indian Reinforcing Corporation (Welded Mesh) Pvt. Ltd. as a going concern. In working out the total income of the assessee, the Income-tax Officer found that the balance-sheet, as on the day prior to the dissolution, showed the stock-in-trade as certified by the managing to the dissolution, showed the stock-in-trade as cost. the assessee was asked by the Income-tax Officer to furnish the market value of the closing stock and after furnishing the same at Rs. 11,61,259, the assessee maintained that the question of adopting the market rate for the valuation of the closing stock did not arise, as the assessee had been consistently valuing the closing stock at cost all these years, and thus had also been accepted by the Department. The Income-tax Officer, however, took the view that during the susistence of the business, the assessee firm might have had an option to value the stock-in-trade had to be valued at market value. On this basis, the difference between the closing stock value as given and the market value amounting to Rs. 2,55,081 was subjected to assessment. On appeal by the assessee before the Appellate Assistant Commissioner, he took the view that the closing stock had been properly valued at cost, thought he firm was dissolved, and deleted the addition of Rs. 2,55,081 from the total income. On further appeal by the REvenue before the Tribunal, it took the view that decision in G. R. Ramchari and Co. v. CIT [1961] 41 ITR 142 (Mad) and A. L. A. Firm v. CIT , relied on by the Department, would not be applicable and that the value adopted for closing stock, as agreed to between the parties, has to be accepted as the question of adoption of the market price, when the actual price at which it was taken over is known, cannot arise. In addition, the Tribunal also pointed out that it would be incorrect to adopt the market value only in respect of a particular type of assets without revaluing of the closing stock by the assessee from year to year by taking cost as the basis, the Tribunal dismissed the appeal. That is how the following the question of law under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue, has been referred to this court for its opinion :

(2.) RECENTLY, we had occasion in CIT v. Bharath Auto Stores, Trichy [1991] 188 ITR 477 (T. C. No. 171 of 1980, decided on October 26, 1990) to consider this identical question and, after referring to the relevant decisions rendered on the subject, we took the view that whatever may be the basis adopted for valuation of the stock during the subsistence of the firm, when the firm is dissolved, the valuation should be on the basis of the market value as on the date of dissolution. We had also further pointed out that, in order to ascertain the profits of the business, the valuation of the assets must be with reference to their money value and any valuation agreed to b the partners would be of no avail again the right of the Revenue to by the partners would be of no avail against the right of the Revenue to a certain percentage of profits by way of income-tax. This decision would apply to this case as well. However, learned counsel for the assessee contended that the business of the firm had not been totally stopped, but had been continued by a company and that would make all the difference to the applicability of the decision referred to above. We may point out that in G. R. Ramachari and Co. v. CIT [1961] 41 ITR 142 (Mad), a similar argument raised on behalf of the assessee was repelled by this court by observing that the fact that one of the ex-partners took over the entire stock and continued to run the business on his own is not relevant at all in considering the profits or losses of the partnership which had come to an end. Therefore, the circumstances that he business of the dissolved firm had been continued by a company in this case is hardly relevant for ascertaining the profits or losses of the erstwhile firm for tax treatment. Equally, we are not impressed by the other argument of learned counsel for the assessee that the valuation of one of the items, viz, the stock-in-trade alone, cannot be different treated by adopting the market value as on the date of dissolution as against its value at cost. When the basis on which, in the case of dissolution of a firm, the closing stock had to be valued is well-settled as the market value the valuation has to be done only in accordance with that. It may be that the other items may be left untouched. That, however, cannot be a justification for not valuing the series of decisions. We, therefore, answer the question referred to us in the affirmative and in favour of the Revenue. The Revenue will be entitled to the cost of this reference. Counsel fee Rs. 500.