COMMISSIONER OF INCOME-TAX VS NATHULAL JAWARCHAND
1999 P T D 2195
[227 I T R 251]
[Madhya Pradesh High Court (India)
Before A. K. Mathur, C. J. and N. K. Jain, J
COMMISSIONER OF INCOME-TAX
Versus
NATHULAL JAWARCHAND
Miscellaneous Civil Case No. 258 of 1993, decided on 25/06/1996.
Income-tax---
----Firm---Dissolution---Valuation of stock-in-hand---To be done on the basis of prevailing market rate.
The original assessment of the assessee-firm (which was the last year of the firm since the firm was to be dissolved) was found to be erroneous and prejudicial to the interests of the Revenue by the Commissioner who issued notice to the assessee stating that the Income-tax Officer had erred in accepting the valuation of the closing stock of silver weighing 108 kgs. at Rs.250 per kg and that since the purchase price during the accounting year relevant to the assessment year 1984-85 was Rs.2,143 per kg., the average sale rate at Rs.2,630 per kg and the market rate as at the close of the accounting period, i.e., Diwali, 1983, at Rs.3,605 per kg., the acceptance of the valuation of the closing stock at Rs.250 per kg. was not correct. The assessee stated in its reply to the notice issued by the Commissioner that the method of valuation of the closing stock of silver was cost price and the same method had been followed by the assessee for the last many years, that the assessee had filed the closing stock inventory of silver ornaments before the Income-tax Officer at the time of assessment in which the assessee had shown year-wise purchases of silver ornaments remaining in stock and that the value of the closing stock shown by the assessee was more than the purchase price of stock-in-hand and as such there was no under valuation of closing stock. The Commissioner, however, found that the valuation of the closing stock was not in order and hence, set aside the assessment and directed the Income tax Officer to make fresh assessment in accordance with law. The Tribunal confirmed the order of the Commissioner. On a reference:
Held, that in order to arrive at the correct picture of the trading results of a partnership on the date when it ceases to function, the valuation of the stock in hand should be made on the basis of the prevailing market price. Therefore, the Tribunal did not err in law in holding that the closing stock of silver had to be valued at the market rate.
A.L.A. Firm v. CIT (1991) 189 ITR 285 (SC) fol.
S.C. Goyal for the Assessee.
D. D. Vyas for the Commissioner.
JUDGMENT
N. K. JAIN, J.---At the instance of the applicant-assessee, the Income-tax Appellate Tribunal, Indore Bench, Indore, has under section 256(1) of the Income Tax Act, 1961 (for short "the Act") stated the case and referred the undernoted questions said to be of law to this Court, arising out of its order dated May 26, 1992 in I.T.A. No.773/Ind. of 1986:
"(a) Whether, on the facts and in the circumstances of the case, the order passed by the Commissioner of Income-tax is bad in law and vitiated, in exercise of his jurisdiction under section 263, without showing cause and affording proper opportunity on the ground on which the order of the Income-tax Officer is set aside?
(b) Whether, on the facts and in the circumstances of the case and on the face of dissolution deed authorising to value closing stock on cost price, the Tribunal erred in law in holding that the closing stock is to be valued at market rate?
(c) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that even in case of distribution of assets (silver in specie) on cost rate, the valuation is to be made at market rate."
The assessee was a registered firm. The relevant year of assessment is 1984-85, the previous year ending Diwali, 1983. This was the last year of the firm since the firm was dissolved, vide deed of dissolution dated November 4, 1983.
The original assessment in the case of the assessee-firm was framed by the Income-tax Officer, Ujjain, on January 4, 1985.
The said original assessment was considered erroneous and prejudicial to the interests of the Revenue by the Commissioner of Income tax, Bhopal. He, therefore, served upon the assessee a notice dated May 16, 1986, to show cause as to why a remedial order in respect of the said assessment be not passed. In the said notice, it was stated that the Income-tai Officer had erred in accepting the valuation of the closing stock of silver weighing 108 kgs. at Rs.250 per kg. The said notice further mentioned that since the purchase price during the accounting year relevant for the assessment year 1984-85 was Rs.2,143 per kg., the average sale rate at Rs.2,630 per kg. and the market rate as at the close of the accounting period, i.e., Diwali, 1983, at Rs.3,605 per kg., the acceptance of the valuation of the closing stock at Rs.250 per kg. was not correct. It was also made clear that since the Income-tax Officer had failed to consider the point regarding valuation of closing stock correctly, the order of assessment passed by the Income-tax Officer was considered erroneous, in so far as it was prejudicial to the interests of the Revenue.
The assessee filed a written reply dated August 24, 1986, before the Commissioner of Income-tax. In the said reply, it was stated that the method of valuation of closing stock of silver was cost price and the same method had been followed by the assessee for the last many years. It was also stated that the assessee had filed the closing stock inventory of silver ornaments before the Income-tax Officer at the time of the assessment in which the assessee had shown the year-wise purchases of silver ornaments remaining in stock. It was also contended that the value of closing stock shown by the assessee was more than the purchase price of stock in hand and as such there was no under valuation of closing stock.
The Commissioner of Income-tax having considered the objection of the assessee reached the conclusion that the valuation of closing stock was not in order. He, therefore, set aside the assessment with a direction to the Income-tax Officer to make a fresh assessment in accordance with law.
In appeal, the order of the Commissioner was confirmed by the Tribunal, feeling aggrieved whereby the assessee made an application under section 256(1) of the Act, thus giving rise to this reference.
We have heard Shri S.C. Goyal, learned counsel for the applicant assessee. and Shri D. D. Vyas, learned counsel for the non-applicant/ department.
At the very threshold of the hearing learned' counsel for the applicant-assessee conceded that only question No.(b) as extracted below needs to be answered. The remaining two questions, he conceded, would not then survive:
"Whether; on the facts and in the circumstances of the case and on the face of dissolution deed authorising to value closing stock on cost price, the 'Tribunal erred in law in holding that the closing stock is to be valued at market rate?"
The point projected in this reference stands resolved by a decision of the Supreme Court in A.L.A. Firm v. CIT (1991) 189 ITR 285, which the Tribunal has also relied upon while disallowing the appeal of the applicant assessee. Their Lordships of the apex Court held (headnote):
"It is settled law that the true 'trading results of a business for an accounting period cannot be ascertained without taking into account the value of the stock-in-trade remaining at the end of the period."
Their Lordships further observed (headnote):
"There can be no manner of doubt that, in taking accounts for purposes of dissolution, the firm and the partners, being commercial men, would value the assets only on a real basis and not at cost or at their other value appearing in the books. The real rights of the partners cannot be mutually adjusted on any other basis."
Shri Goyal, learned counsel for the applicant-assessee, pointed out that as per the agreement between the parties (dissolution deed) it has been made clear as to how the stock, assets, credits, etc., have to be distributed amongst the partners at the time of dissolution. The closing stock of silver, he further submitted, was thus valued at cost rate and distributed amongst the partners. Under the circumstances, learned counsel maintained, the ratio in the case of A.L.A. Firm (19911 189 ITR 285 (SC). does not apply to the present case.
We do not, however, feel persuaded by the arguments. The case before the Supreme Court also related to a partnership firm which had come to an end. Under the circumstance, observed the apex Court (page 305):,
"It should, therefore, follow that in order to arrive at the correct picture of the trading results of the partnership on the date when it ceases to function, the valuation of the stock in hand should be made on the basis of the prevailing market price."
From the foregoing discussion, it, therefore, inevitably follows that the question as extracted above in paragraph 9 (at page 254) deserves to be answered in the negative, i.e., against the assessee and in favour of the Revenue.
The reference thus stands disposed of as aforesaid but without any order as to costs.
A copy of this order be transmitted to the Tribunal.
M.B.A./2053/FCReference answered.