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

ee was a registered firm engaged in the business of sale of scrap of ship materials. The firm was constituted with two partners, i.e., mother and son. During the period under consideration, the firm was dissolved on 01.02.1993 on account of the death of one of the partners. At the time of dissolution, the firm had valued the closing stock at cost price. Thefiled return of income showing total income of Rs.16,41,760/for assessment yearThe relevant previous year is financial yearOn this return, the assessment order was passed by the Assessing Officer on 24.02.1995 under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) accepting the method of valuation adopted by theSubsequently, the Commissioner of Income Tax (CIT) in exercise of his revisional jurisdiction under section 263 of the Act issued show cause notice dated 27.02.1997 and directed the Assessing Officer to value the closing stock at the time of dissolution at the market price. He further observed in his order that the Assessing Officer had erred while passing the assessment order for the yearAccording to him, during the accounting year under consideration, the firm was dissolved, and therefore, the closing stock was to be valued at market rate in view of the decision of this Court in the case of A.L.A. Firm v. Commissioner of Income Tax [(1991) 189 ITR 285]  . So, he added the average gross profit of 15 per cent to the disclosed value of the closing of Rs.12 crores and the same resulted in addition of Rs.1,82 crores.2. Thequestioned the validity of the order passed under Section 263 of the Act taking the plea that revisional jurisdiction could not be exercised in this manner. However, the CIT rejected the contention of the assessee and set aside the assessment order with a direction to the Assessing Officer to pass fresh order in accordance with the direction given in the order passed by CIT. This order of CIT is dated 20.03.1997. The assessee challenged the said order dated 20.03.1997 by filing appeal before the Income Tax Appellate Tribunal (ITAT). ITAT dismissed the appeal on 28.04.2000. This order of ITAT was challenged before the High Court in the form of statutory appeal under Section 260A of the Act. The High Court has accepted the contention of the assessee and, thereby, set aside the revisional order dated 20.03.1997 passed by CIT. Against this order, the instant appeal arises.

Court's reasoning:
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.