Case: Commissioner of Income Tax-Gujarat-II Vs. Kwality Steel Suppliers Complex

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".X X X33. We, however, find substance in the second considerations that prevailed with the High Court. The decision in Muhammad Ussain Sahib v. N. Abdul Gaffor Sahib, AIR 1950 Mad 758 ; [1950] 1 ML J 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 national, 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 a national basis but on a real basis, that is every asset into money and the account of each partner settled on that basis... The assets have to be valued of course, on 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 and not at cost or at their other value appearing in the books."15. It is clear from the above that the judgment in ALA Firms case proceeds on the basis that with the dissolution of the firm, the business of the firm comes to an end and in that situation, the cost method of valuing the stock was not permissible.16. The question is as to whether this situation would apply in the instant case where the partnership firm stood dissolved by the operation of law in view of the death of one of the partners, i.e., the mother, but the business did not come to an end as the other partner, viz., son, who inherited the share of the mother, continued with the business. In a situation like this, there was no question of selling the assets of the firm including stock-in-trade and, therefore, it was not necessary to value stock-in-trade at market price.17. The purpose of adopting a particular valuation of the closing stock is succinctly explained by this Court in the case of Sampatram v. Commissioner of Income Tax, West Bengal [1953 (24) ITR 481 ] as follows:"8. 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 accounts 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 transaction on which there have been actual sales in the course of the year showing the profit or loss actually realized on the year trading. As pointed out in paragraph 8 of the Report of the Committee Financial Risks attaching to the holding of the 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 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 the 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 the following year, and may even have the effect, if prices rise again, of attributing to the following years results a greater amount of profit than the actual cost price of the good in question (extracted in paragraph 281 of the report Committee of 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 it actual realization. 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 practise and accountancy. As profits for income tax purposes are to be computed in conformity with the ordinary principles of commercial accounting. Unless of course, such principles have been superseded or modified by legislative enactments, unrealized profits by legislative enactment, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following years account in a business that is continuing are not brought into the charge as a matter of practise, though as already stated loss due to a fall in price below cost is allowed even if such loss has not been actually realized."18. It is this legal position which was reiterated in Sakthi Trading Co. (supra).19. The position which emerges from the aforesaid is that when a business continues, it may not be necessary to follow the market rate to value the closing stock as the reasons because of which the same is to be done are not available.20. When this position becomes clear, it follows that in the instant case the view taken by the Assessing Officer in accepting the book value of the stock-in-trade was a plausible and permissible view. In this scenario, the CIT could not exercise his powers under Section 263 of the Act.21.

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

Explanation:
0[ds]It is clear from the above that where two view are possible and the Assessing Officer has taken one view and the CIT again revised the said order on the ground that he does not agree with the view taken by the Assessing Officer, in such circumstances the assessment order cannot be treated as an order erroneous orprejudicial to the interest of the Revenue.Reason is simple. While exercising the revisionary jurisdiction, the CIT is not sitting incan be no doubt that the provisions cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of acts or an incorrect application of law will satisfy the requirements of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.In the instant case, as already noted above, thewas constituted with two partners viz., mother and son and it came to be dissolved during assessment year because of the demise of one of the partners. The assessee in the return had valued the closing stock at cost price. This method of valuation was accepted by the Assessing Officer. According to CIT, the aforesaid method could not be adopted in the case of a dissolved firm as in such a situation closing stock is to be valued at market rate. If the approach of the Assessing Officer in accepting the cost based valuation of closing stock was totally impermissible, then CIT was perhaps right inasmuch as in such a situation, order of the Assessing Officer becomes erroneous and alsoprejudicial to the interest of the Revenue.It is clear from the above that the judgment in ALA Firms case proceeds on the basis that with the dissolution of the firm, the business of the firm comes to an end and in that situation, the cost method of valuing the stock was nota situation like this, there was no question of selling the assets of the firm includingand, therefore, it was not necessary to valueThe position which emerges from the aforesaid is that when a business continues, it may not be necessary to follow the market rate to value the closing stock as the reasons because of which the same is to be done are not available.When this position becomes clear, it follows that in the instant case the view taken by the Assessing Officer in accepting the book value of thewas a plausible and permissible view. In this scenario, the CIT could not exercise his powers under Section 263 of the Act.