Civil Appeal No 570 of 1976
Appeal by Certificate from the Judgment and Order dated 921976 of the Madras High Court in Tax Case No 104 of 1969
TA Ramachandran PN Ramaligam and ATM Sampath for the Appellant
628 VGauri Shanker Manoj Arora section Rajappa and Ms
ASubhashini for the Respondent
The Judgment of the Court was delivered by RANGANATHAN J
This is the assessee s appeal form a judgment of the Madras High Court dated 1011975 answering three questions referred to it by the Income tax Appellate Tribunal in favour of the Revenue and against the assessee
The reference related to the assessment year 1961 62 the previous year in respect of which commenced on 1341960
The judgment of the High Court is reported as 1976 102 ITR622
The appellant assessee is a partnership firm
Since 1949 it was carrying on in Malaya a money lending business and as part of and incidental to the said business a business in the purchase and sale of house properties gardens and estates
It had been reconstituted under a deed dated 2631960
The firm s accounts for the year 1960 61 which commenced on 13460 would normally have come to a close on or about the 13th April 1961
However the firm closed its accounts as on 1331961 with effect from which date it was dissolved
Along with its income tax return for the assessment year 1961 62 filed on 10th April 1962 the assessee filed a profit and loss account and certain other statements
In the profit and loss account a sum of  101248 was shown as difference on revaluation of estates gardens and house properties on the dissolution of the firm on 13361 such difference being  70500 in respect of house properties and  30748 in respect of estates and gardens
In the memo of adjustment for income tax purposes however the above sum was deducted on the ground that it was not assessable either as revenue or capital
A statement was also made before the officer that partner Ramanathan Chettiar forming one group and the other partners forming another group were carrying on business separately with the assets and liabilities that fell to their shares on the dissolution of the firm
The Income tax Officer ITO issued a notice under section 232 on the same day 1041962 posting the hearing for the same day and completed the assessment also on the same day after making a petty addition of Rs 2083 paid as property tax in Malaya and recording the following note Audit assessment Lakshmanan appears return filed IT 86 acknowledged in list of books scrutinised order dictated
629 For the subsequent assessment year 1962 63 the assessee filed a return showing nil income along with a letter pointing out that the firm had been dissolved on 1331961
Thereafter on 3963 the ITO wrote a letter to the assessee to the effect that the revaluation difference of  101248 should have been brought to tax in the assessment year 1961 62 in view of the decision of the Madras High Court in Ramachari  Co vs CIT He called for the basis for the valuation and also for the assessee s objections
The assessee sent a reply stating that no profit or loss could be assessed on a revaluation of assets
Relying on a circular of the Central Board of Revenue dated 2161956 it was urged that the assessee was gradually winding up its business in Malaya and that therefore the surplus would only be capital gains
It was urged that the revaluation had been at a market price prevalent since 111954 and that therefore no capital gains were chargeable to tax
The ITO followed up his letter by a notice under section 148 read with section 147b
The assessee objected to the reassessment on two grounds 1 that the circumstances did not justify the initiation of proceedings under section 147b and 2 that no assessable profits arose to the firm on the revaluation of assets on the eve of the dissolution of the firm
Overruling these objections the ITO completed a reassessment on the firm after adding back the sum of Rs158057 the equivalent of  101248 to the previously assessed income
The assessee s successive appeals to the Appellate Assistant Commissioner and the Appellate Tribunal and reference at its instance to the High Court having failedthe assessee is before us
Three questions of law were referred to the High Court by the Tribunal
These were 1
Whether on the facts and circumstances of the case the reassessment made on the assessee firm for the assessment year 1961 62 under section 147 of the Income tax Act is valid in Law 2
Whether on the facts and circumstances of the case assessment of the sum of  101248 as revenue profit of the assessee firm chargeable to tax for the assessment year 1961 62 is justified in law 3
Whether on the facts and circumstances of the case the Appellate Tribunal is right in law in sustaining the assessment of the sum of  101348 after having found that the Department Officers are bound by the Circular of the Central Board of Revenue 630 We may deal at the outset with the third question
Though the High Court has dealt with this question at some length we do not think any answer to this question can or need be furnished by us for the following reasons
First the assessee has not been able to place before us the circular of the Board on which reliance is placed
It is not clear whether it is a circular or a communication of some other nature
Second the circular to judge from its purport set out in the High Court s judgment seems to have been to the effect that the surplus arising from the sale of properties acquired by a money lender in the course of his business would be in the nature of capital gains and not of income
Obviously such a proposition could not have been intended as a broad or general proposition of law for the nature of the surplus on sale of assets would depend on the nature of the asset sold and this in turn would depend on the facts and circumstances of each case
In this case no material was placed at any stage to show that the assets in question constituted the capital assets of the firm and not its stock in trade
Third the plea of the assessee which was in issue all through was that there was no sale of assets by the firm when its assets are distributed among its partners and that no profits whether capital or revenue could be said to arise to the firm merely because at the time of the dissolution the firm revalued its assets on the basis of market value or any other basis for adjusting the mutual rights and liabilities of the partners on the dissolution of the firm
The terms of the circular as set out in the order of the High Court cannot therefore be of any assistance to the assessee in answering the issues in this case
We therefore do not answer the third question posed by the Tribunal
Turning now to the first question the relevant facts have already been noticed
The following relevant and material facts viz i the dissolution of the firm ii the revaluation of its assets iii the distribution thereof among two groups of its partners and iv the division and crediting of the surplus on revaluation to the partner s accounts were not only reflected in the balance sheet the profit and loss account and the profit and loss adjustment account but were also mentioned in the statement filed before the ITO along with the return
Clearly action us 148 read with clause a of s147 could not be initiated in these circumstances but is action under clause b of that section also impermissible That is the question
We may now set out the provisions of clause b of section 147 for purposes of easy reference
This clause which corresponds to section 341b of the Indian Income tax Act 1922 the 1922 Act  permits initiation of reassessment of proceedings notwithstanding 631 that there has been no omission or failure as mentioned in clause a on the part of the assessee provided the Income tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment
In the present case on the information already on record and in view of the decision in Ramachari  Co vs CIT  there can be no doubt that the ITO could reasonably come to the conclusion that income profits and gains assessable for the assessment year 1961 62 had escaped assessment
But is that belief reached in consequence of information in his posession The assessee s counsel says no for says he it is settled law that the information referred to in clause b above should be information received by the ITO after he had completed the original assessment
Here it is pointed out that all the relevant facts as well as the decision in Ramachari supra had been available when the original assessment was completed on 1041962
Action cannot be taken under this clause merely because the ITO who originally considered the surplus to be not assessable has on the same facts and the same case law which had been available to him when he completed the assessment originally changed his opinion and now thinks that the surplus should have been charged to tax
The validity of the assessee s argument has to be tested in the light of the decisions of this Court which have interpreted section 147b of the 1961 Act or its predecessor section 341b of the 1922 Act and expounded its parameters
We may start with the decision in Maharaj Kumar Kamal Singh vs ITO SC
In this case it was held that the word information would include information as to the true and correct state of the law and would also cover information as to relevant judicial decisions
In that case the ITO had re opened the assessment on the basis of a subsequent decision of the Privy Council and this was upheld
Referring to the use of the word escape in the section the Court observed
In our opinion even in a case where a return has been submitted if the income tax Officer erroneously fails to tax a part of asessable income it is a case where the said part of the income has escaped assessment
The appellant s attempt to put a very narrow and artificial limitation on the meaning of the word escape in section 341b cannot therefore succeed underlining ours 632 The meaning of the word information was again explained thus in CIT vs A Raman  Co 1968 67 ITR 11 SC The expression information  in the context in which it occurs must in our judgment mean instruction or knowledge derived from an external source concerning facts or particulars or as to law relating to a matter bearing on the assessment 
Jurisdiction of the Income tax Officer to reassess income arises if he has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment
That information must it is true have come into the possession of the Income tax Officer after the previous assessment but even if the information be such that it could have been obtained during the previous assessment from an investigation of the materials on the record or the facts disclosed thereby or from other enquiry or research into facts or law but was not in fact obtained the jurisdiction of the Income tax Officer is not affected underlining ours We may next refer to Kalyanji Mavji  Co vs CIT 1976 102 ITR 287
It is unnecessary to set out the facts of this case
It is sufficient to refer to the enunciation of the law regarding the scope of section 341b as culled out from the earlier decisions of this Court on the subject
At page 296 the Court observed On a combined review of the decisions of this Court the following tests and principles would apply to determine the applicability of section 341b to the following categories of cases 1 where the information is as to the true and correct state of the law derived from relevant judicial decisions 2 where in the original assessment the income liable to tax has escaped assessment due to oversight inadvertence or a mistake committed by the Income tax Officer
This is obviously based on the principle that the taxpayer would not be allowed to take advantage of an oversight or mistake committed by the taxing authority 633 3 where the information is derived from an external source of any kind
Such external source would include discovery of new and important matters or knowledge of fresh facts which were not present at the time of the original assessment 4 where the information may be obtained even from the record of the original assessment from an investigation of the materials on the record or the facts disclosed thereby or from other enquiry or research into facts or law Before applying the above principles to the facts of the present case we may refer to two earlier decisions of the Madras High Court which have been followed in the judgment under appeal
In Salem Provident Fund Society Ltd vs CIT  the Income tax officer in calculating the annual profits of an insurance company had under the statute to work out the difference between the deficiencies as shown in the actuarial valuation of the company in respect of two successive valuation periods
At the time of original assessment the Income tax Officer by mistake added the two deficiencies instead of subtracting one from the another
This mistake he committed not in one assessment year but in two assessment years
Subsequently he discovered his mistake and initiated proceedings under section 341b
The contention urged on behalf of the assessee was that all the statements on the basis of which the re assessment proceedings were taken were already on record and that in such a case there was no information  which would justify the reassessment
An argument was also raised that the rectification if any could have been carried out only under section 35 and not under section 34
These contentions were repelled
In regard to the former objection the High Court pointed out We are unable to accept the extreme proposition that nothing that can be found in the record of the assessment which itself would show escape of assessment or under assessment can be viewed as information which led to the belief that there has been escape from assessment or under assessment
Suppose a mistake in the original order of assessment is not discovered by the Income tax Officer himself on further scrutiny but it is brought to this notice by another assessee or even by a subordinate or a superior officer that would appear to be information disclosed to the Income tax Officer
if the mistake itself is not extraneous 634 to the record and the informant gathered the information from the record the immediate source of information to the Income tax Officer in such circumstances is in one sense extraneous to the record
It is difficult to accept the position that while what is seen by another in the record is information  what is seen by the Income tax Officer himself is not information to him
In the latter case he just informs himself
It will be information in his possession within the meaning of section 34
In such cases of obvious mistakes apparent on the face of the record of assessment that record itself can be a source of information if that information leads to a discovery or belief that there has been an escape of assessment or under assessment
A similar question arose in CIT vs Rathinasabapathy Mudaliar In that case the assessee who was a partner in a firm did not include in his return the income of his minor son admitted to the benefits of the partnership as required by section 163 of the 1922 Act
The minor son submitted a separate return and was assessed on this income
Subsequently the Income tax Officer discovered his error in not assessing the father thereon and started re assessment proceedings
The re assessment was upheld by the Madras High Court on the same logic as had been applied in Salem Provident Fund Society Ltd case supra
The above line of thinking has not only held the field for about thirty years now but has also received approval in Anandji Haridas and Co P Ltd vs SP Kushare Sales Tax Officer 1968 21 STC 326
This issue has further been considered in the decision of this Court in the case of Indian and Eastern Newspaper Society vs CIT the IENS case for short 1979 ITR 996
In this case the income of the assessee derived by letting out certain portions of the building owned by it to its members as well as to outsiders was being assessed as business income
In the course of audit an internal audit party expressed the view that the money realised by the assessee on account of the occupation of its conference hall and rooms should have been assessed under the head income from property and not as business income
The Income tax Officer thereupon initiated re assessment proceedings and this was upheld by the Tribunal
On a direct reference under s257 of the Act this Court held that the opinion of the audit party on a point of law could not be regarded as information and that the initiation of the reassessment proceedings was not justified
It was contended for the Revenue that the reassessment proceedings would 635 be valid even on this premise
Dealing with this argument the Court observed Now in the case before us the ITO had when he made the original assessment considered the provisions of sections 9 and 10
Any different view taken by him afterwards on the application of those provisions would amount to a change of opinion on material already considered by him
The revenue contends that it is open to him to do so and on that basis to reopen the assessment under section 147b
Reliance is placed on Kalyanji Mavji  Co vs CIT  where a Bench of two learned Judges of this Court observed that a case where income had escaped assessment due to the oversight inadvertence or mistake of the ITO must fall within section 341b of the Indian Income Tax Act 1922
It appears to us with respect that the proposition is stated too widely and travels farther than the statute warrants in so far as it can be said to lay down that if on re appraising the material considered by him during the original assessment the ITO discovers that he has committed an error inconsequence of which income has escaped assessment it is open to him to reopen the assessment
In our opinion an error discovere on a reconsideration of the same material and no more does not give him that power
That was the view taken by this Court in Maharaj Kumar Kamal Singh vs CIT 1959 35 ITR 1 CIT vs A Raman  Co and Bankipur Club Ltd vs CIT and we do not believe that the law has since taken a different course
Any observation in Kalyanji Mavji  Co vs CIT suggesting the contrary do not we say with respect lay down the correct law underlining ours The Court proceeded further to observe A further submission raised by the revenue on section 147b of the Act may be considered at this stage
It is urged that the expression information in section 147b refers to the realisation by the ITO that he has committed an error when making the original assessment
It is said that when upon receipt of the audit note the ITO discovers or realizes that a mistake has been committed in the original 636 assessment the discovery of the mistake would be information within the meaning of section 147b
The submission appears to us inconsistent with the terms of section 147b Plainly the statutory provision envisages that the ITO must first have information in his possession and then in consequence of such information he must have reason to believe that income has escaped assessment
The realisation that income has escaped assessment is covered by the words reason to believe and it follows from the information received by the ITO
The information is not the realisation the information gives birth to the realisation
 Sri Ramachandran submits that these decisions support his contention that reassessment proceeding can be validly initiated only if there is some information received by the ITO from an external source after the completion of the original assessment but not in a case like the present where there is nothing more before the ITO than what was available to him when the original assessment was completed
He also submits that the observations in the IENS case have cast doubts on the propositions enunciated in Kalyanji Mavji s case supra and reiterates the proposition that reassessment proceedings cannot be availed of to revise on the same material the opinion formed or conclusion arrived at earlier in favour of the assessee
On the other hand Dr Gaurisankar appearing for the Revenue mentioned that the decision in the IENS case holding that the opinion of an audit party would not constitute information  and qualifying the principles enunciated in Kalyanji Mavji is pending consideration by a larger Bench of this Court
He however submitted that the reassessment in this case would be valid even on the strength of the observations in the IENS case
We shall proceed to consider the correctness of this submission
We have pointed out earlier that Kalyanji Mavji supra outlines four situations in which action under S341b can be validly initiated
The IENS case has only indicated that proposition 2 outlined in this case and extracted earlier may have been somewhat widely stated it has not cast any doubt on the other three propositions set out in Kalyanji Mavji s case
The facts of the present case squarely fall within the scope of propositions 2 and 4 enunciated in Kalyanji Mavji s case
Proposition 2 may be briefly summarised as permitting action even on a mere change of opinion
This is what has been doubted in the IENS case supra and we shall discuss its application to this case a 637 little later
But even leaving this out of consideration there can be no doubt that the present case is squarely covered by proposition 4 set out in Kalyanji Mavji  Co supra
This proposition clearly envisages a formation of opinion by the Income tax Officer on the basis of material already on record provided the formation of such opinion is consequent on information in the shape of some light thrown on aspects of facts or law which the ITO had not earlier been conscious of
To give a couple of illustrations suppose an ITO in the original assessment which is a voluminous one involving several contentions accepts a plea of the assessee in regard to one of the items that the profits realised on the sale of a house is a capital realisation not chargeable to tax
Subsequently he finds in the forest of papers filed in connection with the assessment several instances of earlier sales of house property by the assessee
That would be a case where the ITO derives information from the record on an investigation or enquiry into facts not originally undertaken
Again suppose if ITO accepts the plea of an assessee that a particular receipt is not income liable to tax
But on further research into law he finds that there was a direct decision holding that category of receipt to be an income receipt
He would be entitled to reopen the assessment under s147b by virtue of proposition 4 of Kalyanji Mavji
The fact that the details of sales of house properties were already in the file or that the decision subsequently come across by him was already there would not affect the position because the information that such facts or decision existed comes to him only much later
What then is the difference between the situations envisaged in propositions 2 and 4 of Kalyanji Mavji supra The difference if one keeps in mind the trend of the judicial decisions is this
Proposition 4 refers to a case where the ITO initiates reassessment proceedings in the light of information obtained by him by an investigation into material already on record or by research into the law applicable thereto which has brought out an angle or aspect that had been missed earlier for eg as in the two Madras decisions referred to earlier
Proposition 2 no doubt covers this situation also but it is so widely expressed as to include also cases in which the ITO having considered all the facts and law arrives at a particular conclusion but reinitiates proceedings because on a reappraisal of the same material which had been considered earlier and in the light of the same legal aspects to which his attention had been drawn earlier he comes to a conclusion that an item of income which he had earlier consciously left out from the earlier assessment should have been brought to tax
In other words as pointed out in IENS case it also 638 ropes in cases of a bare or mere change of opinion where the ITO very often a successor officer attempts to reopen the assessment because the opinion formed earlier by himself or more often by a predecessor ITO was in his opinion incorrect
Judicial decisions had consistently held that this could not be done and the IENS case supra has warned that this line of cases cannot be taken to have been overruled by Kalyanji Mavji supra
The second paragraph from the judgment in the IENS case earlier extracted has also reference only to this situation and insists upon the necessity of some information which make the ITO realise that he has committed an error in the earlier assessment
This paragraph does not in any way affect the principle enumerated in the two Madras cases cited with approval in Anandji Haridas 1986 21 STC 326
Even making allowances for this limitation placed on the observations in Kalyanji Mavji the position as summarised by the High Court in the following words represents in our view the correct position in law The result of these decisions is that the statute does not require that the information must be extraneous to the record
It is enough if the material on the basis of which the reassessment proceedings are sought to be initiated came to the notice of the Income tax Officer subsequent to the original assessment
If the Income tax Officer had considered and formed an opinion on the said material in the original assessment itself then he would be powerless to start the proceedings for the reassessment
Where however the Income tax Officer had not considered the material and subsequently come by the material from the record itself then such a case would fall within the scope of section 147b of the Act
 Let us now examine the position in the present case keeping in mind the narrow but real distinction pointed out above
On behalf of the assessee it is emphasised a that the amount of surplus is a very substantial amountb that full details of the manner in which it had resulted had been disclosed c that the profit and loss account the profit and loss adjustment account and statement made before the ITO had brought into focus the question of taxability of the surplus and d that decision in Ramachari s case had been reported by 1041962
No Income tax Officer can be presumed to have completed the assessment without looking at all this material and the said decision
No doubt some doubt had been thrown as to whether a statement had been given at the time of original assessment that the amount 639 of surplus was not taxable as an income or a capital gain but the case has proceeded on the footing that such a statement was there before the officer
This therefore is nothing but a case of change of opinion
On the other hand the authorities and the Tribunal have drawn attention to the fact that the return the section 1432 notice and assessment were all on the same day and counsel for the Revenue urged that obviously in his haste the ITO had not looked into the facts at all
It is urged that no Income tax Officer who had looked into the facts and the law could have failed to bring the surplus to tax in view of then recent pronouncement in Ramachari s case
Dr Gaurishankar submitted that the Tribunal has found that the ITO had acted mechanically in accepting the return without bringing his mind to play upon the entry in the statement with reference to the distribution of the assets
He pointed out that there is no evidence of any enquiry with reference to this aspect and that the amount involved being sufficiently large the ITO if he had been aware of the existence of the entry would certainly have discussed it
He urged that the question whether the ITO had considered this matter at the time of the original assessment or not is purely a question of fact and the Tribunal s conclusion thereon having been endorsed by the High Court there is no justification to interfere with it at this stage
We think there is force in the argument on behalf of the assessee that in the face of all the details and statement placed before the ITO at the time of the original assessment it is difficult to take the view that the Income tax Officer had not at all applied his mind to the question whether the surplus is taxable or not
It is true that the return was filed and the assessment was completed on the same date
Nevertheless it is opposed to normal human conduct that an officer would complete the assessment without looking at the material placed before him
It is not as if the assessment record contained a large number of documents or the case raised complicated issues rendering it probable that the ITO had missed these facts
It is a case where there is only one contention raised before the ITO and it is we think impossible to hold that the Income tax Officer did not at all look at the return filed by the assessee or the statements accompanying it
The more reasonable view to take would in our opinion be that the Income tax Officer looked at the facts and accepted the assessee s contention that the surplus was not taxable
But in doing so he obviously missed to take note of the law laid down in Ramachari which there is nothing to show had been brought to his notice
When he subsequently became aware of the decision he initiated proceedings under section 147b
The material which constituted information and on 640 the basis of which the assessment was reopened was the decision in Ramachari
This material was not considered at the time of the original assessment
Though it was a decision of 1961 and the ITO could have known of it had he been diligent the obvious fact is that he was not aware of the existence of the decision then and when he came to know about it he rightly initiated proceedings for assessment
We may point out that the position here is more favorable to the Revenue than that which prevailed in the Madras cases referred to earlier
There what the ITO had missed earlier was the true purport of the relevant statutory provisions
It seems somewhat difficult to believe that the ITO could have failed to read properly the statutory provisions applicable directly to facts before him though that is what seems to have happened
Perhaps an equally plausible view on the facts could have been taken that he had considered them and decided in one case not to apply them and in the other on a wrong construction thereof
In the present case on the other hand the material on which the ITO has taken action is a judicial decision
This had been pronounced just a few months earlier to the original assessment and it is not difficult to see that the ITO must have missed it or else he could not have completed the assessment as he did
Indeed it has not been suggested that he was aware of it and yet chose not to apply it
It is therefore much easier to see that the initiation of reassessment proceedings here is based on definite material not considered at the time of the original assessment
In the above view of the matter we uphold the High Court s view on the first question
The second question raises a more difficult problem
There can be no doubt that the decision of the Madras High Court in Ramachari squarely covers the situation
Ramachari holds that the principle of valuing the closing stock of a business at cost or market at the option of the assessee is a principle that would hold good only so long as there is a continuing business and that where a business is discontinued whether on account of dissolution or closure or otherwise by the assessee then the profits cannot be ascertained except by taking the closing stock at market value
Ramachari has subsequently been followed by the Kerala High Court in Popular Workshops vs Commissioner of Income Tax and in Popular Automobiles vs Commissioner of Income Tax Shri Ramachandran contends that the decision in Ramachari 641 does not lay down the correct law
He submits than while it is no doubt true that the closing stock has to be valued the well settled principle is that it should be valued at cost or market whichever is lower and there is no justification for laying down a different principle for valuation of the closing stock at the point of discontinuance of business unless the goods are actually sold by the assessee at the time of discontinuance
Further it has been held by a series of decisions of this Court that when a firm is dissolved and the assets are distributed among the partners there is no sale or transfer of the assets of the firm to the various partners vide Addanki Narayanppa vs Bhaskara Krishnappa   CIT vs Dewas Cine Corporation  CIT vs 2Bankey Lal Vaidya  Malabar Fisheries Co vs CIT and in Sunil Siddharthbhai vs CIT He submits that in logical sequence dissolution comes first and distribution of assets comes later
Therefore revaluation of the assets of a firm which is only for the division of the assets among the partners on a real and not a notional basis is part of the division of the assets and therefore logically in point of time subsequent to the dissolution of the firm
Since the revaluation takes place after the dissolution no profits can be said to have accrued to the firm by the process of revaluation
The revaluation of the assets is not in the course of business and is not an activity which can partake of the nature of trade
Assuming but not conceding that it is possible to have a revaluation of the assets for example stock in trade before dissolution any excess which arises on the revaluation is only an imaginary or notional profit and cannot be brought to tax for the following reasons i As a result of such revaluation there can be no profit because the firm cannot make a profit out of itself Vide Kikabhai Premchand vs CIT ii The process of revaluation of stock by itself cannot bring in any real profits vide CIT vs KARK Firm 19342 ITR 183 Chainrup Sampatram vs CIT 1953 and CIT V Hind Construction ltd 1972 83 ITR 211 and iii It is well settled that what is taxable under the income tax law is only real income vide CIT vs Ms Shoorji Vallabhdas and Co 1962 46 ITR 144 and CIT vs Birla Gwalior P Ltd There is therefor no principle by which the stock in trade can be valued at market price so as to bring to tax the notional profits which might in future be realised as a result of the sale of the stock in trade
642 The question posed before us is a difficult one
We think however that the High Court was right in pointing out that the several decisions relied upon for the assessee as to the nature of the transaction by which a firm on dissolution distributes its assets among its partners have no relevance in the present case
As the High Court rightly observed those cases relate to what happens after or in consequence of the dissolution of a firm whereas we are here concerned with a question that arises before or at the time of dissolution
What we have to decide is the basis on which in making up the accounts of a firm upto the date of dissolution the closing stock with the firm as at a point of time immediately prior to the dissolution is to be valued
It is this principle that has been decided in Ramachari and the High Court decisions following it including the one under appeal and the question is whether they lay down the correct law
In the first place 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
Though as pointed out by this Court in Chainrup Sempatram vs CIT it is a misconception to think that any profit arises out of the valuation of closing stock it is equally true that such valuation is a necessary element in the process of determining the trading results of the period
This is true in respect of any method of accounting and in CIT vs Krishnaswamy Mudaliar this Court pointed out that even where the assessee is following the cash system of accounting the valuation of closing stock cannot be dispensed with
In this decision this Court quoted with approval the following observations in CIR vs Cock Russel  Co Ltd There is no word in the statutes or rules which deals with this question of valuing stock in trade
There is nothing in the relevant legislation which indicates that in computing the profits and gains of a commercial concern the stock in trade at the start of the accounting period should be taken in and that the amount of the stock in trade at the end of the period should also be taken in
It would be fantastic not to do it it would be utterly impossible accurately to assess profits and gains merely on a statement of receipts and payments or on the basis of turnover
It has long been recognised that the right method of assessing profits and gains is to take into account the value of the stock in trade at the beginning and the value of the stock in trade at the 643 end as two of the items in the computation
I need not cite authority for the general proposition which is admitted at the Bar that for the purposes of ascertaining profits and gains the ordinary principles of commercial accounting should be applied so long as they do not conflict with any express provision of the relevant statutes
 Next the principles as to the method of valuation of the closing stock are equally well settled
Lord President Clyde set these out in Whimster  Co vs CIR in the following words In computing the balance of profits and gains for the purposes of income tax two general and fundamental commonplaces have always to be kept in mind
In the first place the profits of any particular year or accounting period must be taken to consist of the difference between the receipts from the trade or business during such year or accounting period and the expenditure laid out to earn those receipts
In the second place the account of profit and loss to be made up for the purpose of ascertaining that difference must be framed consistently with the ordinary principles of commercial accounting so far as applicable and in conformity with the rules of the Income tax Act or of that Act as modified by the provisions and schedules of the Acts regulating excess profits duty as the case may be
For example the ordinary principles of commercial accounting require that in the profit and loss account of a merchant s manufacturer s business the values of the stock in trade at the beginning and at the end of the period covered by the account should be entered at cost or market price whichever is the lower although there is nothing about this in the taxing statutes
 The principle behind permitting the assessee to value the stock at cost is very simple
In the words of Bose J In Kikabhai Premchand vs CIT 1953 24 ITR 506 SC it is this The appellant s method of book keeping reflects the true position
As he makes his purchases he enters his stock at the cost price on one side of the accounts
At the close of the year he enters the value of any unsold stock at cost on the other side of the accounts thus cancelling out the entries relating to the sum unsold stock earlier in the 644 accounts and then that is carried forward as the opening balance in the next year s account
This cancelling out of the unsold stock from both sides of the accounts leaves only the transactions on which there have been actual sales and gives the true and actual profit or loss on his year s dealings
 As against this the valuation of the closing stock at market value invariably will create a problem
For if the market value is higher than cost the accounts will reflect notional profits not actually realised
On the other hand if the market value is less the assessee will get the benefit of a notional loss he has not incurred
Nevertheless as mentioned earlier the ordinary principles of commercial accounting permit valuation at cost or market whichever is the lower
The rationale behind this has been explained by Patanjali Sastri CJ in Chainrup Sampatram vs CIT  SC where an attempt was made to value the closing stock at a market value higher than cost
The learned Chief Justice observed It is wrong to assume that the valuation of the closing stock at market rate has for its object the bringing into charge any appreciation in the value of such stock
The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year s trading
As pointed out in paragraph 8 of the Report of the Committee on Financial Risks attaching to the holding of Trading Stocks 1919 As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold it should necessarily represent the cost of the goods
If it is more or less than the cost then the effect is to state the profit on the goods which actually have been sold at the incorrect figure 
From this rigid doctrine one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom viz the adoption of market value at the date of making up accounts if that value is less than cost
It is of course an anticipation of the loss that may be made on those goods in 645 the following year and may even have the effect if prices rise again of attributing to the following year s results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question extracted in paragraph 281 of the Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April 1951
While anticipated loss is thus taken into account anticipated profit in the shape of appreciated value of the closing stock is not brought into the account as no prudent trader would care to show increased profit before its actual realisation
This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower and it is now generally accepted as an established rule of commercial practice and accountancy
 From the above passage it will be seen that 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 cost as that will result in the taxation of notional profits the assessee has not realised
The High Court in Ramachari has however outlined another exception and seems to have rested this on two considerations
The first is the observation of Lord Buckmaster in CIT vs Ahmedabad New Cotton Mills Co Ltd 1930 LR 57 IA 21 to the following effect The method of introducing stock into each side of a profit and loss account for the purpose of determining the annual profits is a method well understood in commercial circles and does not necessarily depend upon exact trade valuations being given to each article of stock that is so introduced
The one thing that is essential is that there should be a definite method of valuation adopted which should be carried through from year to year so that in case of any division from strict market values in the entry of the stock at the close of one year it will be rectified by the accounts in the next year
 From these observations the High Court inferred It is obvious from the above that the privilege of valuing 646 the opening and closing stock in a consistent manner is available only to continuing business and that it cannot be adopted where the business comes to an end and the stock in trade has to be the disposed of in order to determine the exact position of the business on the date of closure  The second consideration which prevailed with the High Court is reflected in the following passage from the judgment It seems to us that none of these cases has any application to the facts of the present case 
There is no authority directly in point dealing with this question where a partnership concern dissolves its business in the course of the accounting year what is the basis on which the stock in trade has to be valued as on the date of dissolution
We have accordingly to deal with the matter on first principles
The case of a firm which goes into liquidation forms a close parallel to the present case
In such a case all the stock in trade and other assets of the business will have to be sold and their value realised
It cannot be controverted that it is only by doing so that the true state of the profits or losses of the business can be arrived at
The position is not very different when the partnership ceases to exist in the course of the accounting year
The fact that Ramachari one of the ex partners took over the entire stock and continued to run the business on his own is not relevant at all when we consider the profits or losses of the partnership  which has come to an end
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
 We are not quite sure that the first of the considerations that prevailed with the High Court is relevant in the present case
Even in a continuing business the valuation at market value is permissible only when it is less than cost it is not quite certain whether the rules permit an assessee if he so desires to value closing stock at market value where it is higher than cost
But in either event it is allowed to be done because its effect can be offset over a period of time
But here where the business comes to a close no future adjustment of an over 647 or under valuation is possible In this context it is difficult to see how valuation at other than cost can be justified on the principle of Ahmedabad Advance Mills case supra
We however find substance in the second consideration that prevailed with the High Court
The decision in Muhammad Hussain Sahib vs Abdul Gaffor Sahib 1950 1 MLJ81 correctly sets out the mode of taking accounts regarding the assets of a firm
While the valuation of assets during the subsistence of the partnership would be immaterial and could even be notional the position at the point of dissolution is totally different But the situation is totally different when the firm is dissolved or when a partner retires
The settlement of his account must be not on a notional basis but on a real basis that is every asset of the partnership should be converted into money and the account of each partner settled on that basis 
The assets have to be valued of course on the basis of the market value on the date of the dissolution   This applies equally well to assets which constitute stock in trade
There can be no manner of doubt that in taking accounts for purposes of dissolution the firm and the partners being commercial man would value the assets only on a real basis and not at cost or at their other value appearing in the books
A short passage from Pickles on Accountancy Third Edn p 650 will make this clear In the event of the accounts being drawn up to the date of death or retirement no departure from the normal procedure arises but it will be necessary to see that every revaluation required by the terms of the partnership agreement is made
It has been laid down judicially that in the absence of contrary agreement all assets and liabilities must be taken at a fair value not merely a book value basis thus involving recording entries for both appreciation and depreciation of assets and liabilities
This rule is applicable notwithstanding the omission of a particular item from the books eg investments goodwill Cruikshank vs Sutherland
Obviously the net effect of the revaluation will be a profit or loss divisible in the agreed profit or loss sharing ratios
 648 The real rights of the partners cannot be mutually adjusted on any other basis
This is what happened in Ramachari
Indeed this is exactly what the partners in this case have done and having done so it is untenable for them to contend that the valuation should be on some other basis
Once this principle is applied and the stock in trade is valued at market price the surplus if any has to get reflected as the profits of the firm and has to be charged to tax
The view taken by the High Court has held the field for about thirty years now and we see no reason to disagree even if a different view were possible
For these reasons we agree with the answer given by the High Court to the second question as well
The appeal fails and is dismissed
But we would make no order regarding costs
RNJ Appeal dismissed


Summary:
The point in controversy in these petitions was the con stitutional validity of the Punjab Security of Land Tenure Act Punj
X Of 1953 as amended by Act XI of 1955 which sought to provide for the security of land tenure and other incidental matters 
The impugned Act which admittedly dealt with holdings as defined by the Punjab Land Revenue Act 1887 limited the area which might be held by a land owner for the purpose of self cultivation and thereby released surplus area to be utilised for resettling ejected tenants  and by section 18 conferred upon the tenants the right to purchase from the land owners the lands held by them and thus themselves to become the landowners on prices which would be below the market value
It was contended on behalf of the petitioners who werelandowners affected by the impugned Act that under Entry 18 in List II of the Seventh Schedule to the Constitution the State Legislature was incompetent to enact a law limiting the extent of the land to be held by a land owner and that the provisions of the impugned Act contravened the petitioners  fundamental rights under articles 14 191fand 31 of the Constitution
Held that the contentions must fail
The words  rights in or over land  and  land tenures occurring in Entry 18 in List 11 of Seventh Schedule to the Constitution were sufficiently comprehensive to include measures of land tenure reforms such as the impugned Act that sought to limit the extent of land in cultivating possession of the landowner in order to release larger areas of land to be made available for cultivation by tenants and that Entry read with article 2463 of the Constitution gave the State Legislature exclusive power to enact such measures
Such determination of the relation of landlord and tenant as was contemplated by section 18 and other provisions of the impugned Act which sought to convert a tenant into a land owner was well within the ambit of Entry 18
749 The United Provinces vs Mst
Atiqa Begum and Megh Raj vs Allah Rakhi 1946 LR 74 IA 12 referred to
It was beyond doubt that the impugned Act substantially modified the land owner s rights to hold and dispose of his property in any estate or portion thereof and thus fell within the purview of article 31A1a of the Constitution and was immune from any attack on the ground that it contravened articles 14 19and 31 of the Constitution
The observations made by this Court in Thakur Raghubir Singh vs Court of Wards Ajmer   in connection with another Act with absolutely different provisions must be limited to the facts of that case and were wholly inapplicable
Thakur Raghubir Singh vs Court of Wards Ajmer   distinguished and held inapplicable
The words  any estate or of any rights therein  occurring in article 31A1a read in the light of article 31A2 included any kinds of rights either quantitative or qualitative in the area encompassed by an estate or any portion of it and thus included holdings as defined by the Punjab Land Revenue Act 1887 and any shares or portions thereof
Regard being had to the legal maxim that the greater must include the less it was inappropriate to suggest that the Constitution should have specifically mentioned portion of an estate in article 31A if it intended to give that Article such a comprehensive construction
Bhagirath Ram Chand vs State of Punjab AIR 1954 Pun 167 approved
State of Punjab vs section Kehar Singh 1958 60PLR 461 dis approved
Ram Narain Medhi vs The State of Bombay 1959 SUPP
1 SCR 489 applied
Hukam Singh vs The State of Punjab  referred to