Shah Raichand Chaggan Raj and Co. Vs. Commissioner of Income Tax - Court Judgment

Excerpt:
direct taxation - valuation - section 28 of income tax act, 1961 - at instance of assessee question of law referred to high court for its opinion - whether closing stock has to be valued at market price when firm is dissolved - madras high court in a decided case held that closing stock should be valued at marker rate and principle of book value would apply only in case of running concern - supreme court in another decided case agreed with view taken by madras high court - in view of position of law laid down by supreme court high court expressed its inability to take contrary view - question answered in affirmative in favour of revenue. head note: income tax accounting method--valuation of closing stock--dissolution of firm. ratio & held : closing stock has to be valued at the market price when the firm is dissolved. case law analysis : a. l. a. firm v. cit (1991) 189 itr 285 (sc) followed. application : also to current assessment years. a. y. : 1981-82 income tax act 1961 s.145 - all india services act, 1951.sections 8 & 11 & a.p. buildings (lease, rent and eviction) control rules, 1961, rule 5: [v.v.s. rao, g. yethirajulu & g. bhavani prasad, jj] refusal by landlord to receive rent - deposit of rent in court - held, a tenant has the option to take recourse to section 8 in case of refusal or evasion by landlord to receive rent and if landlord were to not name a bank or refuse even the money order of rent, the tenant can deposit the rent in accordance with sub-rules (1) to (3) of rule 5. the notice to person entitled to rent and proper maintenance of accounts of such deposits under sub-rules (4) and (5) of rule 5 are solely dependent on compliance with sub-rule (3) by the tenant. the payment or deposit of rent under section 11 read with sub-rule (6) of rule 5 arises only in respect of a tenant who did not take recourse to section 8 or section 9 before an application for eviction has been made against him in respect of any rent in arrears by date of that application, whereas in respect of rent that becomes subsequently due since date of application for eviction, the tenant is bound to pay or deposit regularly until termination of proceedings in order to enable him to contest the application. any violation of section 11(1) to (3) and sub-rule (6) of rule 5 makes the tenant liable for the adverse consequences under sub-section (4) of section 11. thus, the provisions of section 11 and sub-rule (6) of rule 5 are intended only to ensure the payment and deposit of rent including arrears during pendency and till termination of proceedings for eviction. the forfeiture of right of tenant to contest in case of default is to protect the rights and interests of landlord pending such an application for eviction, but not to confer any right on tenant to plead that all defaults committed by him prior to application for eviction can never be considered wilful, if he were to deposit all arrears of rent due within fifteen days under rule 5(6) read with sub-section (1) of section 11. the object and effect of section 11 and sub-rules (1) to (5) to rule 5, the former being for protection of landlord during pendency of eviction proceedings and the later being for protection of tenant to avoid any liability for eviction on ground of wilful default. consequently, while taking recourse to section 8 by tenant is optional, once that option is exercised, compliance with sub-rules (1) to (5) of rule 5 becomes mandatory in the sense that any non-compliance with prescribed procedure will positively indicate the wilful nature of default committed in paying or tendering rent as prescribed. while deposit of rent in terms of provisions of act and the rules amounts to valid tender of rent to landlord, the failure to comply with rule 5 (3) requiring delivery of a copy of the challan for deposit of rent in office of controller or appellate authority, as the case may be, so as to enable controller or appellate authority to cause maintenance of proper accounts under sub-rule (5) and give notice of deposit to person amounts to wilful default in making valid payment or lawful tender of the rent by the tenant to the landlord. thus, where a tenant obtains an order to deposit rent, same shall be deposited at least by the last day of the month following that for which rent is payable and rent challan shall be delivered in the office of controller within a reasonable time so that rent controller can take necessary action for service of notice of deposit under sub-rule (4) of rule 5 of the rules within seven days of such delivery. in the absence of compliance in so depositing rent and delivering challan in the office of controller, tenant shall be deemed to have committed wilful default. - the assessee's appeal to the cit(a) having failed, it filed second appeal before the tribunal. 's case (supra) did not lay down the correct law and that the principle that the closing stock had to be valued at cost or market price whichever is lower being a well settled principle there was no justification for the madras high court for laying down a different principle for valuation of the closing stock at the point of discontinuance of business unless the goods were actually sold by the assessee at the time of discontinuance.syed shah mohammed quadri, j.1. the question referred to this court under s. 256(1) of the it act, 1961, at the instance of the assessee, reads thus : 'whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the closing stock has to be valued at the market price when the firm is dissolved ?' 2. the assessee's accounting year which ended on 7th nov., 1980 was the previous year for the asst. yr. 1981-82. the assessee, a partnership firm, was dissolved on that day, i.e., 7th nov., 1980. it valued its closing stock on average cost basis but that was not accepted by the ito. he assessed the closing stock as per the market rate on the ground that the business was dissolved on the last day of the accounting year. the assessee's appeal to the cit(a) having failed, it filed second appeal before the tribunal. by order dt. 23rd april, 1986 the tribunal dismissed the appeal upholding the view of the ito as confirmed by the cit(a). it is from that order the above said question has arisen. 3. shri y. ratnakar, the learned counsel for the assessee, has strenuously contended that if the closing stock in the case of a dissolved partnership is valued at market rate there will be notional profit on which the firm would be made to pay tax without having the benefit of claiming the deduction which the firm would have been entitled to had it sold the stock in the course of business. therefore, the closing stock will have to be valued only at the book value and not at the market rate. the learned standing counsel submits that valuation of the closing stock in the case of dissolved firm at the market rate had the approval of the judicial authority and the same method is applied in this case by all the authorities under the it act. therefore, the petitioner cannot find fault with the order of the tribunal. 4. the question is of some practical importance and, therefore, we shall examine the authorities which dealt with that question. the first case which deals with this issue was decided by the madras high court in g. r. ramachari & co. vs . cit : [1961]41itr142(mad) . in that case, a partnership firm had been valuing its opening and closing stocks at the cost price when the firm was carrying on business. on the dissolution of the firm one of the partners took over the stock on hand and valued it at the cost price. however, the authorities under the it act valued the stock at the market price. the question of valuation of the stock in the case of a dissolved firm was referred to the madras high court under s. 66(2) of the it act, 1922. after considering various authorities, a division bench of the madras high court rejected a similar submission and held that the closing stock should be valued at the market rate and the principle of book value would apply in the case of a running concern and would have no application on the dissolution of the firm. the principle laid down by the madras high court in that case was followed by another division bench of the same high court in a. l. a. firm vs . cit : [1976]102itr622(mad) . in that case following the principle laid down in ramachari & co's case (supra), the division bench of the madras high court reiterated the principle that the stock-in-trade of a firm did not cease to be stock-in-trade on the dissolution of the firm and that though an assessee had an option to value the stock-in-trade at cost or market value, whichever is lower during the subsistence of a business, yet that option was not available to it at the point of termination of the business when stock-in-trade had to be valued at the market value. the madras view has been followed by the high court of kerala in popular workshops vs . cit : [1987]166itr348(ker) and popular automobiles vs . cit : [1989]179itr632(ker) . 5. in view of the recent pronouncement of the supreme court in a. l. a. firm vs . cit : [1991]189itr285(sc) this issue is no longer open for any exhaustive debate. in the case before the supreme court one of the questions urged and dealt with was the principle of valuing the closing stock of a business at cost or market price at the option of the assessee when the business was discontinued. it was urged before the supreme court that ramachari & co.'s case (supra) did not lay down the correct law and that the principle that the closing stock had to be valued at cost or market price whichever is lower being a well settled principle there was no justification for the madras high court for laying down a different principle for valuation of the closing stock at the point of discontinuance of business unless the goods were actually sold by the assessee at the time of discontinuance. it was further contended that revaluation of the assets of a firm, which was only for the division of the assets among the partners, must be done on a real and not on a notional basis as logically, in point of time, the division is subsequent to the dissolution of the firm consequently, no profit could be said to have accrued to the firm by the process of revaluation as the revaluation could not partake the nature of trade and any excess which would arise on the revaluation was only an imaginary or notional profit and could not be brought to tax for various reasons. after considering the judgment of the madras high court in ramachari & co.'s case (supra) and also the various other authorities the supreme court laid down : 'once this principle is applied and the stock-in-trade is value at market price the surplus, if any, has to get reflected as the profits of the firm and has to be charged to tax. the view taken by the madras high court has held the field for about thirty years now and we see no reason to disagree even if a different view were possible.' thus observing the supreme court agreed with the view taken by the madras high court. the learned counsel for the assessee relied on the judgments of the tribunal, madras bench, to take a contrary view. in view of the above position of law laid down by the supreme court, we are not persuaded to take a different view, so we have no option but to hold that the approach of the tribunal is correct in law. 6. for the above reasons, the question is answered in the affirmative, i.e., in favour of the revenue and against the assessee.