High Court Of Gauhati
Naveen Hardware & Electrical Stores vs. CIT & Anr.
Sections 145, 263
Asst. Year 1992-93
D. Biswas & S.K. Kar, JJ.
IT Appeal No. 13 of 2002
22nd December, 2003
Counsel Appeared
R.P. Agarwalla & D.K. Mishra, for the Appellant : U. Bhuyan, for the Respondents
JUDGMENT
D. Biswas, J. :
This appeal by M/s Naveen Hardware & Electrical Stores preferred under s. 260A of the IT Act, 1961 (hereinafter referred to as the Act), is directed against the judgment and order dt. 11th Dec., 2001, passed by the Tribunal, Gauhati Bench, Guwahati, in ITA No. 132/Gau/1996 relatable to the asst. yr. 1992-93.
2. The appeal was admitted by this Court by the order dt. 28th March, 2003, for hearing on the following questions of law :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal having not found the order dt. 8th Feb., 1994, passed by the ITO, Dimapur, to be erroneous has not erred in upholding the order of the CIT passed under s. 263 of the IT Act, 1961?
Whether, on the facts and circumstances of the case, the valuation of closing stock as on 31st March, 1992, as adopted/directed by the CIT and the Tribunal was correct in law?
Whether, on the facts and circumstances of the case, the orders passed by the CIT and the Tribunal are not vitiated due to perversity wholly ignoring the relevant material on record?”
The appellant-firm was a registered partnership firm having its head office at Dimapur and branch office at Diphu. The firm was dealing in hardware and electrical goods. Disputes and differences arose amongst the four partners of the firm which eventually led to its dissolution by the deed dt. 5th April, 1992, w.e.f. 31st March, 1992. The partners of the appellant-firm while finalising the accounts as on 31st March, 1992, for the purpose of income-tax for the asst. yr. 1992-93 valued the closing stock at cost price as per cl. 3 of the deed of dissolution. The ITO, Dimapur, assessed the income of the appellant-firm vide order dt. 8th Feb., 1994, accepting the value of the closing stock at cost price. Thereafter, the CIT, North Eastern Region, Shillong, issued the notice dt. 20th Jan., 1995, intending to exercise powers under s. 263 of the Act. The CIT on conclusion of hearing, by the order dt. 28th March, 1996, directed the ITO, Dimapur, to reassess the income by revaluing the stock of the appellant-firm at market price as on 31st March, 1992, and to allocate the profits arising thereupon amongst the partners. The order passed by the CIT on 28th March, 1996, was challenged in ITA No. 132/Gau/1996. The learned Tribunal dismissed the appeal (ITA No. 132/Gau/1996) affirming the order passed by the CIT. During the pendency of the said appeal, the ITO, Dimapur, issued notice under s. 143(3) of the Act and reassessed the income after valuing the stock-in-trade at market price and allocated the profits to the partners vide order dt. 27th March, 1998. This order is also in challenge in an appeal pending before the Tribunal.
The questions of law formulated in this appeal basically relate to the question of valuation of the stock-in-trade on the effective date of dissolution of the firm, i.e., 31st March, 1992. According to Shri Agarwalla, the business of the firm was continued by two partners after dissolution and the stock-in-trade was valued at the cost price as per cl. 3 of the deed of dissolution. This valuation has been reflected by the partners, who carried on the same trade after dissolution, in their income-tax returns for the successive year and, hence, no prejudice has been caused to the interests of the Revenue. Mr. R.P. Agarwalla, referred to the decisions in G.R. Ramachari & Co. vs. CIT (1961) 41 ITR 142 (Mad); A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC); Malabar Industrial Co. Ltd. vs. CIT (2000) 159 CTR (SC) 1 : (2000) 243 ITR 83 (SC) and Sakthi Trading Co. vs. CIT (2001) 169 CTR (SC) 297 : (2001) 250 ITR 871 (SC) and argued that the case at hand is distinguishable on facts from A.L.A. Firm (supra) and Sakthi Trading Co. (supra). Mr. Bhuyan, learned counsel for the Revenue, however, emphasised that the decisions referred to and relied upon on behalf of the assessee clearly indicate that the normal practice of valuation of stock-in-trade at the cost price is available in a continuing business and this privilege is not available where a firm is dissolved resulting into complete cessation of business. According to Shri Bhuyan, the erstwhile firm, M/s Naveen Hardware & Electrical Stores, ceased to exist on dissolution w.e.f. 31st March, 1992, and, therefore, the stock-in-trade as on that day ought to have been valued at market price, and the resultant profit in the hands of the partners was exigible to tax during the relevant assessment year, i.e., 1992-93.
The intention of the parties has to be ascertained from the deed of dissolution. The following excerpts relevant for the issue at hand are quoted below : “Whereas on account of difference among the partners of the firm as to the conduct of the business of the firm, the parties hereto agreed and decided among themselves to dissolve the partnership firm with effect from the expiry of the accounting year ended on 31st March, 1992. Whereas it has been considered expedient by the parties hereto to reduce the terms and conditions agreed among them in writing to avoid complication in future. Now this deed of dissolution witnesses as hereunder : That the parties hereto declare that the partnership business so long carried on in the name and style of M/s Naveen Hardware & Electrical Stores, with its head office at Dimapur, Nagaland and branch at Diphu, Assam, w.e.f. 1st day of January, 1982, under the partnership agreement entered into between the said parties hereto which is duly embodied in the deed of partnership has been closed and the partnership dissolved by mutual consent of all the parties hereto on and from the date of expiry of 31st March, 1992. That the final accounts of the said firm upto the date of its dissolution, i.e., 31st March, 1992, have been prepared and gone into by the parties hereto and found to represent true and correct state of affairs of the partnership, the shares of the profit and loss of the partner have been carried over to their respective accounts and the accounts have been settled, the books of account and other records its whatsoever shall be kept by the undernoted parties : for Dimapur business : Smt. Sarala Devi Jain, for Diphu branch : Shri Vijay Kumar Jain.
3. That the assets of the firm have been valued at cost and liabilities of the firm shall be undertaken by the second party for Diphu branch of the third party for Dimapur branch as per the books of account as on the date of its dissolution, that all other partners hereto declare that they have not contracted or incurred any debts or obligation or liabilities outside the books of account of the partnership firm and that if any such debt or obligation is found, the same shall be paid/met and discharged by the party incurred or contracted that said debt or obligation or liabilities and that the said party hereto undertakes to indemnify the other parties in respect thereof.”
The terms and conditions of the deed of dissolution, as quoted above, clearly indicate that the partners agreed and decided to dissolve the partnership firm w.e.f. 31st March, 1992, and close the business. Final accounts of the firm were also settled as on 31st March, 1992. Smt. Sarala Devi Jain and Shri Vijay Kumar Jain, two of the four partners of the erstwhile firm, took over the business at Dimapur and Diphu branch, respectively. This otherwise means that the business of the erstwhile firm came to an end on the expiry of 31st March, 1992, and there was complete cessation of business of this firm. Though the deed of dissolution was executed on 5th April, 1992, the effective date being 31st March, 1992, will be determinative of the successive course of action. The decision of the CIT as well as the learned Tribunal that the date of execution of the deed of dissolution is irrelevant for the purpose at hand appears to be just and proper. Smt. Sarala Devi Jain and Shri Vijay Kumar Jain, who took over Dimapur and Diphu branch, respectively, continued with the business in their individual capacity with a different entity and the continuance of the business by them in their individual capacity after 31st March, 1992, will have no effect insofar the question of valuation of stock-in-trade as on 31st March, 1992, is concerned.
In G.R. Ramachari (supra), the Madras High Court clearly held that the privilege of valuing the opening and closing stock in a consistent manner is available only to a continuing business and this mode of valuation cannot be adopted where a business has come to an end. In the latter case, the stock-on-hand has to be disposed of in order to determine the exact position of the business on the date of closure after valuation at the prevailing market price. This decision was rendered in a case where after dissolution of the firm, one of the partners took over the stock-in- trade. This decision of the Madras High Court was considered by the Hon’ble Supreme Court in A.L.A. Firm (supra). In A.L.A. Firm’s case (supra), the Supreme Court affirmed the principle enunciated in G.R. Ramachari (supra) and has held that on dissolution, the stock-in-trade of the dissolved firm for the purpose of mutual adjustment amongst the partners has to be valued at the market price and the surplus thereof has to be treated as profit. Valuation of stock-in-trade at cost or market price, whichever is lower, is invariable when business is continued. The decisions in G.R. Ramachari (supra) and A.L.A. Firm (supra) were also considered in Sakthi Trading Co. (supra). The case before the Supreme Court in Sakthi Trading Co. (supra) was that the firm stood dissolved on the death of one of the partners on 6th Feb., 1984. The firm was reconstituted w.e.f. 7th Feb., 1984, with the remaining partners. The Tribunal was of the view that as the business of the firm was not discontinued, but was taken over on succession by another firm, the closing stock of the assesseefirm as on 6th Feb., 1984, has to be valued at cost or market price, whichever is lower. This decision of the Tribunal was reversed by the High Court. On appeal, the Supreme Court, reversing the decision of the High Court, held that since there was no cessation of business, the partners were within their right to value the closing stock at cost or market price, whichever was lower. The Supreme Court made it emphatically clear that where there is no discontinuance of business, the closing stock is to be valued at cost or market price, whichever is lower. It would be apt to refer here to the relevant observations of the Supreme Court : “From the above, it is evident that in A.L.A. Firm vs. CIT (1991) 93 CTR (SC) 133 : (1991) 189 ITR 285 (SC), this Court was considering the question of valuation of closing stock at market value in a case where there was dissolution and also discontinuance of the business of the firm. In that case after dissolution, two groups were carrying on separate businesses with the assets and liabilities which fell to their shares from the dissolution of the firm. In the present case, however, though there was dissolution on account of the death of one of the partners, there was no discontinuance of the business. The unchallenged finding recorded by the Tribunal is that there was no discontinuance of business. Even as per principles laid down in A.L.A. Firm’s case (supra) in such a case the closing stock is to be valued at the cost or market price, whichever is lower. That is an established rule of commercial practice and accountancy. The High Court was clearly in error in relying upon the decisions of the Madras High Court in the cases of G.R. Ramachari & Co. vs. CIT (1961) 41 ITR 142 (Mad) and A.L.A. Firm (supra) for coming to the conclusion that assets had to be valued at market value. As already noticed, in the present case, there was no cessation of business and, therefore, the closing stock could not be directed to be valued at the market rate.” Now coming to the case at hand, it would appear that after dissolution of the firm, two of the four partners decided to carry on the business separately. Clause 7 of the deed of dissolution clearly indicates that the decision was to continue the business in personal/individual capacity or in partnership with anybody. It is not a case of reconstitution of the firm by the erstwhile partners or some of the erstwhile partners on dissolution as the case was in Sakthi Trading Co. (supra). The distribution of assets and liabilities between the two partners with the authority to run independent and separate business taking over the assets and liabilities of the branches separately conclusively proves that the assessee-firm ceased to exist on the expiry of 31st March, 1992. The question would have been altogether different had there been no division/distribution of assets and liabilities of the firm between the partners. In this context, keeping in mind the judgments referred to above, it can be concluded that the stock-in-trade as on 31st March, 1992, ought to have been valued at the market price.
Mr. Agarwalla argued that the partners after dissolution reflected the value of the stock-intrade as settled by the deed of dissolution in the IT return filed by them in the successive year and, therefore, there has been no prejudice to the interests of the Revenue since the profit and gain that might have arisen out of the trade in the successive year has been accounted for for the purpose of income-tax. But the fact remains that the profits that might have arisen on valuation of stock-in-trade at market price in the accounting year 1991-92 ought to have been brought to tax in the asst. yr. 1992-93. There is obviously prejudice to the interests of the Revenue insofar as the accounting year 1991-92 is concerned. Therefore, the CIT was not in error in invoking his jurisdiction under s. 263 of the Act in directing the ITO for reassessment at market price. The decision in Malabar Industrial Co. (supra), interprets the provisions of s. 263 of the IT Act. There is no dispute that the twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue, are essential concomitants for exercise of powers under this section. In the instant case, in view of the discussion above, the initial order of assessment of the ITO was obviously erroneous and consequently prejudicial to the interests of the Revenue. Therefore, no fault can be found with the order passed by the CIT in directing the ITO to go for reassessment on valuation at the market price.
11. In the light of the discussion above, all the questions formulated in this appeal are answered in favour of the Revenue and against the assessee.
[Citation : 266 ITR 308]
