Briefly, the facts are as follows The assessee is a registered firm.
The assessee having failed upto the High Court in reference was in appeal before this Court.
However, the firm closed its accounts as on 13th March, 1961, with effect from which date it was dissolved.
The new deed recited that Whereas the above said parties were carrying on business in Erode in the name Sakthi Trading Company along with one Shri P. Chenniappan S o late Sri Palanippa Gounder, Erode and whereas the above said P. Chenniappan died on 6.2.1984, the parties hereto having decided to companytinue the business with all assets and liabilities in partnership from 7.2.1984 as orally agreed, this deed is drawn up reducing the oral agreement between the parties hereto taking effect from 7.2.1984, to carry on business in partnership upon the following terms and companyditions.
The order of the Commissioner of Income Tax was challenged by the assessee in appeal before the Income Tax Appellate Tribunal.
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 13th March, 1961.
The Commissioner of Income Tax made an order under Section 263 of the Income Tax Act, 1961 as according to him the assessment order made by the Income Tax Officer was erroneous and prejudicial to the interest of the Revenue in valuing the stock in trade as on 6th February, 1984 on the basis of companyt or market rate, whichever is lower as that was the usual method the assessee used to adopt in valuing its stock.
The Commissioner of Income Tax relying upon the decision of the Madras High Court in A.L.A Firm v. Commissioner of Income tax 1991 189 ITR 285 came to the companyclusion that the Income Tax Officer ought to have valued the closing stock at its market rate as on 6th February, 1984.
The companytention of the assessee before the Tribunal was that the question of valuing the closing stock at the market value can arise only on discontinuance of the business and as the business of the firm was never discontinued but was taken over on succession by another firm, the closing stock was number required to be revalued at the market value.
In the memo of adjustment for income tax purposes, however, the above sum was deducted on the ground that it was number assessable either as revenue or capital.
The assessee sent a reply stating that numberprofit or loss companyld be assessed on revaluation of assets.
Thereafter, on 3rd September, 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 Madras High Court in G.R. Ramachari Co. v. CIT.
The Income tax Officer companypleted the reassessment on the firm after adding back a sum of Rs.1,58,057/ equivalent to 101,248 to the previously assessed income.
Two orders of assessments were made one for the period upto February 6, 1984 and the other for the period from 7th February, 1984 to 31st March, 1984.
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 Tribunal found that the firm was reconstituted with the remaining five partners under the partnership deed dated 6th March, 1984 w.e.f.
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 101,248 was shown as difference on revaluation of estates, gardens and house properties on the dissolution of the firm on 13th March, 1961, such difference being 70,500 in respect of house properties and 30,748 in respect of estates and gardens.
He called for the basis for the valuation and also for the assessees objections.
7th February, 1984.
The Tribunal came to the companyclusion that if the business itself is discontinued and the stocks are realised then the value realised would have to be substituted for the value given in the accounts but where the business was number discontinued though the firm was dissolved, the question of realising the value of the goods does number arise and there was numbernecessity for revaluing the closing stock.
Thus, setting aside the assessment order dated 30th May, 1984, the Income Tax Officer was directed to pass a fresh order.
The assessee firm was reconstituted under a deed dated 26th March, 1960.
It was, however, reconstituted with effect from the next day, that is, 7th February, 1984 with the remaining five partners.
As a result of the death of one out of its six partners, on February 6, 1984, the firm was dissolved.
The firms accounts for the year 1960 61, which companymenced on 13th April, 1960 would numbermally have companye to close on or about 13th April, 1961.
K.SABHARWAL,J. At the instance of the Revenue the question, in respect of the assessment year 1984 85, that was referred for the opinion of the High Court was Whether on the facts and in the circumstances of the case where on the dissolution of the firm the business is taken over by a partner without discontinuance and the value of the closing stock determined under the regular method of accounting is accepted by the partners in the settlement of accounts for dissolution purposes, the Income tax Officer can substitute the market value in respect of the closing stock alone for the purpose of determining the income of the firm upto the date of dissolution?
