Law:

Section:

Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of stock - Assessment year 1974-75 - Assessee-firm was valuing its closing stock on book value basis regularly - Clause 19 of partnership deed provided that in event of dissolution of firm, assets of firm, including stock in hand, shall be valued at book value and divided - By a deed of dissolution partnership was dissolved on 31-3-1974 - Whether method adopted by assessee in earlier years in matter of valuation of stocks or provision under clause 19 of partnership deed could not justify valuation of stock at book value on dissolution and, thus, it was to be valued at market value - Held, yes FACTS Clause 19 of the partnership deed of the assessee-firm provided that in the event of the dissolution of the firm, the assets of the firm, including the stock in hand, shall be valued at book value and divided. By a deed of dissolution, the partnership was dissolved on 31-3-1974 and for the assessment year 1974-75, in accordance with the prior practice and clause 19 of the deed of partnership, the assessee valued the closing stock at book value. However, while completing the assessment, the ITO revalued the closing stock on the basis of the market value. On appeal, the AAC, however, held that the closing stock should be valued at book value. On appeal, by the revenue, the Tribunal also upheld the AAC's order. On reference: HELD During the course of the carrying on of business of the firm, either due to motives of prudence, or, sound business views, the value of the stock might have been shown at the book value. The assets, on which such book value had been put, would continue to remain assets of the firm, and the benefit or loss of such fluctuations in the value of the assets, would accrue to the firm and be available to it. However, on the dissolution of the firm, there is a total disruption of the firm and its business activities and a settlement of accounts on dissolution cannot be on the footing of a notional basis but with reference to the conversion of every asset of the partnership into money and the settlement of the accounts of the partners on that basis. In the instant case, though…

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