COMMISSIONER OF INCOME TAX Vs. R VENKATACHARI

JUDGEMENT

(1.) IT is the contention of the Revenue that when stock-in-trade of a proprietary concern is taken over as part of the capital contribution of a partner who has earlier held the stock as proprietor and the firm continues the same business that the proprietary concern was carrying on, such stock-in-trade taken over by the firm, should be valued at market rate and not at cost price. No statutory rule requiring valuation on that basis has been relied upon to support that contention.

(2.) COUNSEL for the Revenue sought to infer such a requirement from the law laid down by the Supreme Court in the case of A.L.A. Firm v. CIT [1991] 189 ITR 285. That was a case where the partners had valued the stock-in-trade at the time of dissolution at the market rate, but had disputed the liability for tax on the amount by which the value of stock-in-trade exceeded the cost price, on the ground that the income was only notional. The Supreme Court while considering the plea elaborately considered the manner in which the stock-in-trade is to be valued and after referring to the decisions of the Supreme Court in the cases of Chainrup Sampatram v. CIT, 1953 24 ITR 481 ; Kikabhai Premchand v. CIT [1953] 24 ITR 506, the decision of the Privy Council in the case of CIT v. Ahmedabad New Cotton Mills Co. Ltd., AIR 1930 PC 56, and the decision of the court in the case of Wimster and Co. v. CIR [1925] 12 TC 813 (C. Sess) held that (page 304) : "the proper practice is to value the closing stock at cost. That will eliminate entries relating to the same stock from both sides of the account. To this rule, custom recognises only one exception and that is to value the stock at market value if that is lower. But on no principle can one justify the valuation of the closing stock at a market value higher than the cost as that will result in the taxation of notional profits the assessee has not realised". To that general rule, the court recognised an exception in the case of dissolution of firms brought about by the death of a partner or by agreement or otherwise. In such cases, it was held that the adjustment of mutual rights of the persons entitled to the assets of the firm would require the valuation of the closing stock at the market rate as on the date of dissolution as unless all the assets of the firm are valued at that rate, the mutual adjustment of the rights of the parties cannot be correctly effectuated. The court observed that (page 307) : "the real rights of the partners cannot be mutually adjusted on any other basis".