COMMISSIONER OF INCOME-TAX VS PARANJOTHI NADAR, 2001 PTD-MADRAS-HIGH-COURT-INDIA 3569 (1998)

Income‑tax‑‑‑

‑‑‑‑Firm‑‑‑Valuation of stock‑‑‑Dissolution of firm‑ ‑Stock has to be valued at market price on date of dissolution of firm‑‑‑Death of partner‑‑‑Firm was dissolved on such death‑‑‑Indian Income Tax Act, 1961.

The assessee firm claimed that on the death of one of its partners on October 31, 1981, it was dissolved. It furnished its returns for the assessment year 1982‑83 disclosing an income of Rs.22, 940 for the period from April 1, 1981 to October 31, 1981, stating that the closing stock had to be valued at market price. The Assessing Officer brought to charge an aggregate sum of Rs.71,140 being the differential arising out of the valuation of the closing stock at market price and he made assessments one for the period from April 1, 1981 to October 31, 1981, and the other for the period from November 1, 1981 to June 31, 1982. The first appellate authority confirmed the view taken by the Assessing Officer. The Tribunal found that on the death of P, the remaining four partners took one R as partner and continued the business as before and the Tribunal also found that the business of the firm having been continued, there was no necessity for valuing the closing stock as on October 31, 1981, at market price. On a reference:

Held, that on the death of the partner, the firm stood dissolved and so, the closing stock as on October 31, 1981, being the date of dissolution of the firm, should be valued on the basis of the market price.

A. L. A. Firm v. CIT (1991) 189 ITR 285 (SC) fol.

CIT v. India Reinforcing Co. (1991) 188 ITR 651 (Mad.) and G.R. Ramachari & Co. v. CIT (1961) 41 ITR 142 (Mad.) ref.

C.V. Rajan for the Commissioner.

JUDGMENT

MRS. A. SUBBULAKSHMY, J.‑‑‑The assessee‑firm filed returns of income for the year 1982‑83. During the lifetime of one Shri Paranjothi Nadar, he was one of the five partners of the assessee‑firm. He died on October 31, 1981. On the death of Paranjothi Nadar, the assessee claimed that the firm stood dissolved, and the assessee furnished returns of income disclosing an income of Rs. 22,940 for the period from April 1, 1981 to October 31, 1981, stating that closing stocks had to be valued at market price. The Assessing Officer brought to charge an aggregate sum of Rs.71,140 being the differential arising out of the valuation of the closing stock at market price and he made assessment one from April 1, 1981 to October 31, 1981, and the other from November 1, 1981 to March 31, 1982. The first appellate authority confirmed the view taken by the Assessing Officer. The Tribunal found that on the death of Paranjothi Nadar, the remaining four partners took one Ravi Gunapandian as partner and continued the business as before and the Tribunal also found that the business of the firm having been continued, there was no necessity for valuing the closing stock as on October 31, 1981 at market price. On that, the reference has arisen and at the instance of the Revenue, the following question has been referred to this Court for our opinion:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the closing stock of the firm as on October 31, 1981, being the date of dissolution of the erstwhile firm should not be valued on the basis of market price?

The claim of the assessee is that on the death of Paranjothi Nadar, the firm stood dissolved and, hence, the assessee is liable to furnish returns of income only for the period from April 1, 1981 to October 31, 1981; i.e., till the date of death of the partner, one Paranajothi Nadar. The Tribunal had found that since one partner was added on the death of the said Paranajothi Nadar and the business was continued, there is no necessity to value the closing stock as on October 31, 1981. at the market price.

In the case of CI'T v. India Reinforcing Co. (1991) 188 ITR 651, this Court has held that (headnote):

"In the case of dissolution of a firm, the closing stock had to be valued at the market value. The mere fact that some of the other items had been left untouched could not be a justification for not valuing the closing stock at the market value on the dissolution of the firm.

The apex Court has held in the case of A.L.A. Firm v. CIT (1991) 189 ITR 285, that with. a view to arrive at the correct picture of trade of the partnership on the date when it ceases to function, the valuation of stock‑in -trade should be made on the basis of the prevailing market price, affirming the view taken in the case of G.R. Ramachari & Co. v. CIT (1961) 41 ITR 142 (Mad.).

The assessee‑firm was constituted under the partnership deed, dated April 21, 1956, at will and on the death of Paranjothi Nadar, one of the partners of the firm, the firm stood dissolved and a new firm was constituted and two separate assessments were made by the Assessing Officer. Following the decision of the Supreme Court in the decision reported in A.L.A. Firm v. CIT (1991) 189 ITR 285, we hold that the closing stock of the firm as on October 31, 1981, is to be valued at market price. On the death of Paranjothi Nadar, the firm stood dissolved arid so, the closing stock ac on October 31, 1981, being the date of dissolution of the firm, should be valued on the basis of market price. The view taken by the Tribunal is not justified.

We answer the question in favour of the Revenue and against the assessee. No costs.

M.B.A./368/FC

Reference answered.