Case: A. L. A. Firm Vs. Commissioner of Income Tax

* From these observations, the High Court inferred (at p. 147 of 41 ITR) "It is obvious from the above that the privilege of valuing the opening and closing stocks 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 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 (at p. 149 of 41 ITR) "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 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 New Cotton Mills case [1930] LR 57 IA 21 (PC) ; 1930 AIR(PC) 56We, however, find substance in the second consideration that prevailed with the High Court. The decision in Muhammad Ussain Sahib v. S. N. Abdul Gaffoor Sahib, 1950 AIR(Mad) 758 ; 1950 (1) MLJ 81 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 (at p. 759) "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 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 men, 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 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, not withstanding the omission of a particular item from the books, e.g., investments, goodwill (Cruikshank v. Sutherland 1922 (92) LJ(Ch) 136 (HL)). Obviously, the net effect of the revaluation will be profit or loss divisible in the agreed profit or loss-sharing ratios." * The real rights of the partners cannot be mutually adjusted on any other basis. This is what happened in G. R. Ramachari and Co. 1961 (41) ITR 142 (Mad) . Indeed, this is exactly what the partners in this case have done and, having done so, it is untenable for there 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

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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 circular or a communication of some other nature. Second, the circular, to judge from its purport set out in the High Courts 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 the 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 TribunalTurning 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 partners 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 Income-tax Officer along with theare 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 or Under valuation isreal rights of the partners cannot be mutually adjusted on any other basis. This is what happened in G. R. Ramachari and Co. 1961 (41) ITR 142 (Mad) . Indeed, this is exactly what the partners in this case have done and, having done so, it is untenable for there 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