Law: Income Tax Act, 1922

Section:

Income-tax--Stock-in-trade---Firm---Conversion of proprietary business into firm--­Proprietor transferring his stock-in-trade to firm at cost price ---Permissible--- It is open to proprietor to value stock-in-trade transferred to firm at market rate if it was tower than cost price. When stock-in-trade of a proprietary concern is taken over as part of the capital contribution of a partner who has earlier held the stock as proprietor and the firm continues the same business that the proprietary concern was carrying on, such stock-in-trade taken over by the firm, should be valued only at cost price unless the market price was lower in which case it would be open to the proprietor to adopt the lower of the two. A.L.A. Firm -v. CIT" (1991) 189 ITR 285 (SC); Chainrup Sampatram v. CIT (1953) 24 ITR 481 (SC); CIT v. Ahmedabad New Cotton Mills Co. Ltd. AIR 1930 PC 56; (1929) 4 ITC 245 (PC); Kikabhai Premchand v., CIT (1953) 24 ITR 506 (SC) and Whimster & Co. v. CIR (1925) 12 TC 813 (C. Sess) ref. JUDGMENT R. JAYASIMHA BABU, J.---It is the contention of the Revenue that when stock-in-trade of a proprietary concern is taken over as part of the capital contribution of a partner who has earlier held the stock as proprietor and the firm continues the same business that the proprietary concern was carrying on, such stock-in-trade taken over by the firm, should be valued at market rate and not at cost price. No statutory rule requiring valuation on that basis has been relied, upon to support that contention. Counsel for the Revenue sought to infer such a requirement from the law laid down by the Supreme Court in the case of A.L.A. Firm v. CIT (1991) 189 ITR 285. That was a case where the partners, had valued the stock-in-trade at the time of dissolution at the market rate, but had disputed the liability for tax on the amount by which the value of stock-in-trade exceeded the cost price, on the ground that the income was only notional. The Supreme Court while considering the plea elaborately considered the manner in which the stock-in-trade is to be valued and after referring to the decisions of the Supreme Court in the cases of Chainrup Sampatram v. CIT (1953) 24 ITR 481;…

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