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

This is the assessees appeal from a judgment of the Madras High Court dated January 10, 1975, 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 April 13, 1960. The judgment of the High Court is reported as A. L. A. Firm v. CIT 1976 (102) ITR 622  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 March 26, 1960. The firms accounts for the year 1960-61, which commenced on April 13, 1960, would normally have come to a close on or about April 13, 1961. However, the firm closed its accounts as on March 13, 1961, with effect from which date it was dissolved. Along with its income-tax return for the assessment year 1961-62 filed on April 10, 1962, the assessee filed a profit and loss account and certain other statements. In the profit and loss account, a sum of $ 101, 248 was shown as "difference on revaluation of estates, gardens and house properties" on the dissolution of the firm on March 13, 1961, such difference being $ 70, 500 in respect of "house properties" and $ 30, 748 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 firmThe Income-tax Officer issued a notice under section 23(2) on the same day April 10, 1962, posting the hearing for the same day and completed the assessment also on the same day, after making a petty addition of Rs. 2, 083 paid as property tax in Malaya, and recording the following note"Audit assistant-Lakshmanan appears-Return filed-I. T. 1986 acknowledged in list of books - Scrutinised - Order dictated. "For the subsequent assessment year 1962-63, the assessee filed return showing nil income along with a letter pointing out that the firm had been dissolved on March 13, 1961. Thereafter, on September 3, 1963, the Income-tax Officer wrote a letter to the assessee to the effect that the revaluation difference of $ 101, 248 should have been brought to tax in the assessment year 1961-62 in view of the decision of the Madras High Court in G. R. Ramachari and Co. v. CIT 1961 (41) ITR 142. He called for the basis for the valuation and also for the assessees objections. The assessee sent a reply stating that no profit or loss could be assessed on revaluation of assets. Relying on a circular of the Central Board of Revenue dated June 21, 1956, 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 the market price prevalent since January 1, 1954 and that, therefore, no capital gains were chargeable to tax. The Income-tax Officer followed up his letter by a notice under section 148 read with section 147(b). The assessee objected to the reassessment on two grounds : (1) that the circumstances did not justify the initiation of proceedings under section 147(b) ; 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 Income-tax Officer completed a reassessment on the firm after adding back the sum of Rs. 1, 58, 057 (the equivalent of $ 101, 248) to the previously assessed income. The assessees successive appeals to the Appellate Assistant Commissioner and the Appellate Tribunal and a reference, at, its instance, to the High Court having failed, the assessee is before usThree questions of law were referred to the High Court by the Tribunal. These were ( 1976 (102) ITR 622 , 626)"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, the assessment of the sum of $ 101, 248 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 $ 101, 248 after having found that the departmental officers are bound by the circular of the Central Board of Revenue?" *

Reasoning: 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