Law: Income Tax Act, 1961

Section: 263

Income-tax----Valuation of stock---Proper practice---To value closing stock at cost or market price whichever is lower---Firm---Dissolution on death of one partner---Reconstituted with remaining partners without discontinuance of business---Closing stock of firm---to be valued at cost or market price whichever is lower.---[CIT v. Sakthi Trading Co. (2000) 242 ITR 468 reversed]. The assessee was a registered firm. As' a result of death of one out of its six partners on February 6, 1984, the firm was dissolved. It was reconstituted with effect from the next day, February 7, 1984, with the remaining five partners. The Tribunal held that, as the business of the firm was never discontinued but was taken over on succession by another firm, the closing stock of the assessee firm as on February 6, 1984, had to be valued at cost or market price whichever was lower. On a reference, the High Court held that the closing stock had to be valued at market price. On appeal to the Supreme Court: Held, reversing the decision of the Madras High Court, that since there was no cessation of business, the closing stock had to be valued at cost or market price, whichever was lower. It is an established rule of commercial practice and accountancy that where there is no discontinuance of business the closing stock is to be valued at cost or market price, whichever is lower. G.R. Ramachari & Co. v. CIT (1961) 41 ITR 142 (Mad.) and A.L.A. Firm v. CIT (1976) 102 ITR 622 (Mad.) distinguished. A.L.A. Firm v. CIT (1991) 189 ITR 285 (SC); Chainrup Sampatram v: CIT (1953) 24 ITR 481 (SC) and Sir Kikabhai Premchand v. CIT (1953) 24 I T R 506 (SC) ref. JUDGMENT Y: 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 (see (2000) 242 ITR 468, 469): "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…

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