Kerala H.C : The Tribunal correct in holding that on the dissolution of a firm and the distribution at cost of the closing stock among the partners for the purpose of settlement of accounts, the ‘market value’ was to be adopted for the income-tax assessment of the firm ?

Counsel Appeared

Sen, for the Assessee : P.K.R. Menon, for the Revenue

S. PARIPOORNAN, J. :

At the instance of the assessee, the Tribunal has referred the following question of law for the decision of this Court : ” On the facts and in the circumstances of the case, is the Tribunal correct in holding that on the dissolution of a firm and the distribution at cost of the closing stock among the partners for the purpose of settlement of accounts, the ‘market value’ was to be adopted for the income-tax assessment of the firm ? “

The respondent is the Revenue. We are concerned with the asst. yr. 1971-72. The applicant/assessee was a firm of retail dealers in motor vehicles’ spare parts. The firm was dissolved on March 31, 1971. For the purpose of settlement of accounts, the closing stock of spare parts of value of Rs. 43,86,572 was distributed among the partners at the price at which the firm had purchased them. In the assessment, the ITO took the view that the closing stock which was distributed among the partners on dissolution should have been valued not at the cost price but at the market price. After the applicant/assessee-firm was dissolved, two new firms, dealing in motor vehicle spare parts, were constituted. The ITO made an addition of Rs. 6,63,202 in the valuation of the closing stock of the spare parts adopting the market price. He relied on the decisions of the Madras High Court in G. R. Ramachari & Co. vs. CIT (1961) 41 ITR 142 (Mad) and A. L. A. Firm vs. CIT (1976) 102 ITR 622 (Mad). In appeal, the CIT (A) deleted the addition. In further appeal by the Revenue, the Tribunal held that the privilege of valuing the opening and closing stock in a consistent manner was available only to a continuing business and it would not be adopted where a business has come to an end and the stock on hand had to be disposed of in order to determine the exact position of the business on the date of the closure. The Tribunal adverted to the view of the Madras High Court as stated in G. R. Ramachari & Co.’s case (supra) and A. L. A. Firm’s case (supra) as also the decision of the Gujarat High Court in CIT vs. Keshavlal Chandulal (1966) 59 ITR 120 (Guj). The Cochin Bench of the Tribunal in I.T.A. No. 584(Coch.) 1977-78 has followed the Madras decision. After adverting to the above, the Tribunal held that, on dissolution, there was a transformation of the entire properties of the firm into capital assets, so that even the stock-intrade would partake of the character of capital assets and in this perspective, in the light of the decisions of the Madras High Court and the decision of the Cochin Bench of the Tribunal, the closing stock has to be valued at the market value in order to arrive at the true profit earned by the assessee during the relevant previous year. Thereafter, at the instance of the asses see/applicant, the Tribunal has referred the question of law, as formulated hereinabove, for the decision of this Court.

We heard counsel for the applicant/assessee as also counsel for the Revenue. It was brought to our notice that the decision of the Tribunal in Popular Workshops’ case, wherein the Madras High Court’s decisions were followed, was the subject-matter of IT Ref. No. 141 of 1980, and a Bench of this Court in Popular Workshops vs. CIT (1986) 54 CTR (Ker) 323 : (1987) 166 ITR 348 (Ker) held that on the dissolution of a firm, the stock-in-trade should be valued with reference to the market value and not the book value. As it is, the Bench decision of this Court in Popular Workshops vs. CIT (supra) governs the matter.

In the light of the said decision, the reasoning and conclusion of the Tribunal in this case, dated December 31, 1982, is justified in law. The question referred to us should be answered in the affirmative, in favour of the Revenue and against the assessee.

Counsel for the applicant/assessee submitted that the decision of this Court in Popular Workshops vs. CIT (supra) requires reconsideration. We were taken through the above decision as also the decisions of the Madras and Gujarat High Courts to substantiate the above plea. We perused the above decisions with care. We are not satisfied that the Bench decision of this Court in Popular Workshops vs. CIT (supra) requires reconsideration. In Muhammed Ussain Sahib vs. Abdul Gaffoor Sahib, AIR 1950 Mad 758, the Court held as follows (headnote) : “

In the absence of any provision in the articles of partnership itself or any agreement between the partners regarding the method by which accounts of the partnership are to be taken on its dissolution, the assets should be valued on the basis of its market value on the date of dissolution of the partnership. Book value cannot be adopted for that purpose even though during the subsistence of the partnership the assets were taken at their book value for the purpose of the annual accounts. “

The accounts of the firm may be conclusive for the purpose of calculating the profits to be divided among the partners, so long as the firm is unchanged. But it will not be so for the purpose of calculating the total amount to be paid to a partner on his expulsion from the firm or on dissolution of the firm, unless there is an agreement to the contrary. An agreement, express or implied, with reference to the taking of accounts, has been held to be applicable only to the case of a continuing partnership and not when the firm is finally dissolved or one of the partners retired. The general law seems to be clear on this point. [See Lindley on Partnership, 15th Edn. (1984), pp 201, 731 and 732 and Lindley on Partnership, 14th Edn. (1979), pp 183 and 650. See also Pollock and Mulla Partnership Act, 4th Edn. (1977), p 394).

In the light of the above, we are of the view that the earlier decision of this Court in Popular Workshops vs. CIT (supra) does not require reconsideration.

Our answer to the question referred to us is in the affirmative, against the assessee and in favour of the Revenue.

[Citation : 179 ITR 632]