Porbalydar Coal Agency No 2 Vs. Joint Cit - Court Judgment

Excerpt:
these cross-appeals are directed against the order of the learned commissioner (appeals), dated 3-8-1999, for assessment year 1995-96. as the issues involved are inter- connected, both the appeals are being disposed of by this combined order for the sake of convenience, in assessee's appeal, first ground is against the addition of rs. 39,83,240 made on account of alleged undervaluation of closing stock.in the departmental appeal, the revenue is aggrieved against the direction of the commissioner (appeals) to the assessing officer to verify the sale of 9,289 brass of stock upto 16-8-1995, and adopt the sale price as the correct market value of the stock by adopting 'first-in-first- out' method., the assessee-firm deals in coal ash. in the course of assessment proceedings, assessing officer observed that the gp rate in the current year was 23.93 per cent as compared to 38.50 per cent and 30.30 per cent in the preceding two years, respectively. in this connection it was explained by the assessee that it had closed its business on 1-4-1995 and had sold the entire stock to its sister-concern on 31-3-1995. since it was a bulk sale and since qualitywise segregation of stock was not made, it was sold at the 'lower price of rs. 560 per brass'. "this transaction yielded a gp of 2 per cent only as against general gp of 24 -per cent. it was noted by the assessing officer that in the immediately preceding month, the sale rate was of about rs. 960 per, brass. further, in the current month. itself, i.e., in the month of march, sales to outsiders averaged at rs. 990 per brass. the assessing officer took note of the fact that the firm was dissolved on the, next, day, i.e., 1-4-1995, as per the dissolution deed, the stamp paper for dissolution deed was already purchased on 28-3-1995. thus, according- to the assessing officer it was also determined that the firm. was going to be dissolved in the, next few days and when the firm is dissolved the stocks have to be valued at market rate in view of the decision, of the supreme court in the case of a.l.a. firm v. cit (1991) 189 itr 285 (sc). accordingly, the assessing officer adopted the rate of rs. 990 per brass and added the difference of rs. 33,83,240 to the total income.the commissioner (appeals) agreed with the assessing officer that the stock had to be valued at market rate as per, the decision in a.l.a.firm (supra). he also observed that the transaction was not at arms length because both the partners of the assesseefirm were shareholders of the successor company which took over the business of the firm from 1-4-1995. he also noted the following facts : (a) the memorandum of association for the formation of the new private limited company was signed by the two promoters on 21-3-1995. the date of incorporation was 24-3-1995; (c) on the last day of the accounting year, i.e., 31-3-1995, total stock-intrade was transferred to the company at rs. 560 per brass; (d) other moveable assets and liabilities belonging to the partnership firm were transferred to the company on 1-4-1995, at their book value.in view of the above facts, the commissioner (appeals) opined that the transactions were not in the normal course of the business. all the above actions took place in a span of one week. moreover, the stock-in-trade had been given a different treatment by transferring the same on 31-3-1995. in nutshell, he agreed with the ao that it was a design to avoid tax on transfer of stock at a lesser rate by the firm to the company. however, the commissioner (appeals) partly accepted the assessee's submission that the stock on the last day was not segregated quality-wise and hence it was unfair to value the same at rs. 990 per brass. he found that 9,263 brass of stock was transferred by the firm to the company. by 16-8-1995, the company, had sold 9,289 brass of coal ash. thus, presuming 4 that the company must have adopted fifo method he directed the assessing officer to verify the sales of 9,289 brass for rs. 72,99,975 upto 16-8-1995, by the company. if it was found that first, 9,289 brass had been sold for rs. 72,99,975 then the said figure; should be substituted for the sale shown by the company at rs., 51,87,476. accordingly, the addition was to be reduced. it is against confirming the action of the ao to value the closing stock at market value, the assessee is in appeal before us. correspondingly, it is against the direction of the commissioner (appeals) to adopt the sale price in the subsequent six months to adopt it at the market value of stock that the department is in appeal before us.the learned counsel for the assessee, at the outset, 'briefed us with the facts as narrated above. it was submitted that the principle laid down in the case of a.l.a. firm (supra) was, not applicable to the facts of the present case since there was no closing stock prior, to the dissolution of the firm. the firm was dissolved on, 1-4-1995, and the sale of coal ash to the-sister-concern had taken, place on 31-3-1995. it was not open for the department to deem the., dissolution to have taken place on 31-3-1995. further, as regards the avoidance of tax, it was contended that the company had paid tax at a higher rate by selling the stock in the subsequent year, than what would have been paid by the, firm had it sold the stock to outsiders. thus, according to him, there was no force in the revenue's argument as regards tax avoidance also. there was also no basis to adopt the sale price in the next six months as the market value of the stock as on 31-3-1995, in view of the fact that the stock was not segregated quality-wise and hence any rate taken by the department would be arbitrary.the learned departmental representative, submitted that in substance, the firm and the company were the. same. it was, a mechanism adopted by the partners of the firm who were also the only shareholders of the firm and the company to avoid tax. rebutting the argument of the learned counsel that the company paid tax at a higher rate 'it was submitted that the said fact was not material. the company paid tax at 'a- higher rate because it' was statutorily required to do so and that it was not a voluntary contribution on the part of the company. what was material was whether the firm which is the assessee before us had paid correct tax as per law or, not. it was also submitted that by transferring the stock of higher value, the shares in the company which were received by the partners were of higher intrinsic value and, therefore the, partners had received much more than what was ostensibly shown to been received. thus, though the partners and hence virtually the firm had received much more the tax, paid was not, commensurate with the actual income of the firm. it was also 'argued that' though the company paid tax at a higher rate, the same was paid in the next year, whereas had the firm shown, correct profit in the current year payment of tax on higher income would have been resulted in the current year itself. therefore, there was no doubt that the assessee-firm had avoided paying higher tax by transferring the stock at lower price than the market value. for this contention, reliance was placed on the decision of the supreme court in the case of income tax officer v. ch.atchaiah (1996) 218 itr 239 (sc). as regards the contention of the assessee that maximum material was sold on the last day, it was submitted by the learned departmental representative that there was no evidence to support this contention. with regard to the direction of the commissioner (appeals) to adopt the selling rate in the next six months as the market value, the contention of the learned departmental representative was that as per the decision in a.l.a. firm's case (supra), the market value as on the date of dissolution had to be adopted. since the firm was deemed to have been dissolved on 31-3-1995, and since the goods sold to outsiders in the month of march fetched rs. 990 per brass, the latter rate was the appropriate rate to be taken as the market value for the stocks transferred to the company.in his rejoinder, the learned counsel submitted that the fact that maximum stock was sold on 31-3-1995, to the company was brought to the notice of the assessing officer as well as of the commissioner (appeals) in the course of proceedings before each of them and, in fact, the commissioner (appeals) had accepted this fact also. since the sales were to be segregated on the last day, the market rate could not be taken as was the contention of the revenue. the other moveable assets were transferred to the company on 1-4-1995, at book value with which the department had no objection, then it was a question mark why the objection for transferring the stock at a price higher than the book value. it was reiterated that there cannot be any deeming dissolution and hence the decision in a.l.a. firm (supra) could not be applied.we have duly considered the rival contentions and the material on record. the basic facts as they emerge from the record placed before us and which are not in dispute are as follows : (2) that the assessee-firm was dissolved on 1-4-1995, i.e., one day after the end of the relevant accounting year; (3) that the stock of coal ash remaining with the assessee on 31-3-1995, was sold at rs. 560 per brass to a company; 4) that other.assets of the dissolved firm were transferred at book value to the company to whom coal ash was sold on the previous day; (5) that the two partners of the firm were subscribers to the memorandum of association of the said company, viz., m/s. porbandar coal agency (p) ltd. (hereinafter referred to as pcapl).(b) that the sale of coal ash on the day prior to dissolution was an eyewash to avoid tax; (c) that the firm reaped hidden profits in the form of higher intrinsic value of the shares in the company on account of selling highly valued stock at lower price; (i) the dissolution of the firm should be deemed to have taken place on 31-3-1995; (ii) that the bulk of coal ash sold to the company should be treated as closing stock; and be valued at a market rate following the decision in the case of a.l.a. firm (supra).in the background which we have broadly laid out above, the first point which falls for our consideration is whether the dissolution of the assessee-firm can be taken as 31-3-1995, or not. the deed of dissolution is on record. the dissolution deed is in no terms ambiguous as to the date of dissolution. it clearly mentions the date of dissolution as 1-4-1995. the deed mentions that the dissolution has taken place by mutual consent of the partners. the deed further mentions that the accounts upto the date of dissolution have been made out, the bank balances, cash balances, etc., have been drawn and lists of all moveable and immovable properties have been made which the partners have seen and have agreed with them. the deed mentions that several rights like lease, licences, etc., which belong to the firm, have been dealt with by the partners with mutual consent. the deed also mentions that the accounts are closed and the amounts remaining due to both the partners in their capital accounts will be satisfied by withdrawing whatever balance remains in the bank and/or by collection of dues.the deed is very clear about not only the date of dissolution, but also as to how the partners have mutually agreed to the dissolution in respect of their rights and liabilities. the deed nowhere mentions about the transfer of assets to pcapl. be that as it may, the question arises as to whether the revenue. authorities can read the date of dissolution as 31-3-1995, instead of 4-4-1995. in our opinion, this is not permissible. a similar issue had come up before the supreme court in the case of cwt v. arvind narottam (1988) 173 itr 479 (sc). the court observed a s follows (at p. 486 of the report) "it is vehemently urged by dr. gauri shankar that the approach to be adopted in this case is not that which finds favour under the it law and different considerations prevail under the wealth tax act. as i am proceeding on the basis of the true consideration of the deeds of settlement, i fail to see any substance in that contention. reliance was also placed by learned counsel for the revenue on mcdowell & co.ltd. v. cto (1985) 154 itr 148 (sc). that decision cannot advance the case of the revenue because the language of the, deeds of settlement is plain and admits of no ambiguity." further, in his concurring but separate observations, his lordship, sabyasachi mukherji, j. observed as follows : (p. 487 of the report) : "in any event, however,, where the true effect on the construction of the deeds is clear, as in this case, the appeal to discourage the avoidance is not a relevant consideration. but since it was made, it has to be noted and rejected. with these observations i agree." thus, not only in the abovecited decision, but also in several decisions the courts have held that where language of the document is clear the same has to be given effect to and the revenue authorities cannot rewrite the agreement. on what basis, the date of dissolution be read as 31-3-1995, instead of 1-4-1995, we fail to understand.however, the contention of the department is that since the partners of the firm were, also the shareholders of the company to whom the stock was transferred, the date of dissolution should be taken as 31-3-1995.the contention of the assessee has been that the company is a separate legal entity and hence it cannot be considered as one with dissolved firm. it is true that the company is a separate legal entity, but still it is open for the courts to lift the corporate veil where the company shares the relationship with other entities aftd also to pay regard to the economic realities behind the legal facade. this view was also expressed by the supreme court in the case of union of india v.plavworld electronics (p) ltd., (1990) 184 itr 308 (sc). however, though it is admitted by the assessee that the company is an associate company, proper facts have not been brought on record to show as to what extent the erstwhile partners were interested in the new company.the facts on record merely indicate that the tow partners had subscribed to the momorandum of indicate that the two partners had subscribed to the memorandum of association and had agreed to take 10 shares each. subsequently, how many shares have been acquired by them is not on record. hence, it is difficult to measure the extent of interest or to measure the alleged gain derived by the two partners by transferring the stock at rs. 560 per brass to, the company. assuming that the partners had majority shareholding in pcapl even then it is a moot point as to how one can disregard the transaction made between two parties on a principal to principal basis. this was the view expressed by the supreme court in the case of union of india v., atic indusotries ltd. 3 scr 930 (sc).coupled with the above issue, another issue raised by the learned departmental representative was that the partners received shares of high intrinsic value on account of transfer of highly valued stock at lower value. in our opinion, this issue is not germane to the dispute before us, moroso, when it is not on record as to how many shares were received by the partners, whether the consideration was paid in cash or the same were allotted for consideration others than cash and if the consideration was paid in cash what was the consideration. all these facts are not on record and hence it is worthless to argue that the partners received hidden profit in the form of highly valued shares.the point of dispute is when did the dissolution take place. when the factum of dissolution is not challenged by the department, how can it change the date of dissolution on its own and attach a date different than what the parties agreed to. the undisputed fact remains that upto 31-3-1995, an ntity in the form of firm remained and continued its business. the said firm got dissolved on 1-4-1995.now, having accepted the fact that the firm was dissolved, let us examine what happens on dissolution. in this respect, the supreme court in its judgment in the case of a.l.a. firm (supra) has referred with approval the decision of madras high court in the case of muhammad ussain sahib v. s.n. abdul gaffoor sahih air 1950 mad 758. it reproduced the observations of the madras high court given on p. 759 of the report which we also reproduce below : "but the situation is totally different when the firm is dissolved or when a partner retires. the settlement of his account most be not on a notional basis but on the real basis, that is every asset of the partnership should be converted into money and the account of each partner settled on that basis. the assets have to be valued, of course, on the basis of the market value on the date of the dissolution".after reproducing the above observations, the supreme 'court held that the above principles applied equally well to stock-in-trade. in substance, what the madras high court held in muhammad ussain sahib (supra) and which received approval of the supreme court was that all the assets have to be valued at market rate on the date of dissolution.in the instant case, it is a fact that the assets other than stock-in-trade have been transferred to the new company at book value.to this, the department has not objected. we fail to understand the discrimination meted out by the department between the stock-in-trade and other assets. the stand of the department is more perplexing when we find that stocks were sold to the company at a price higher than the book value unlike the transfer of other assets.thus, if the department wanted to apply the ratio laid down in a.l.a.firm (supra), the same should have been applied wholehog to all the assets and not only the stock-in-trade.the above discussion that is relating to valuation of closing stock finds place in this order because the same was vehemently argued by the department. but the observation pales away in the light of the fact that there was no closing stock at all on the date of dissolution which is undoubtedly 1-4-1995. the stock which was there on 31-3-1995, was sold on the same day and the stock which is sold on 31-3-1995, cannot be treated as unsold on 1-4-1995. the department, in its enthusiasm to apply the ratio laid down in a.l.a. firm (supra) read much more into the entire transaction than what was required. in not very clear terms it said that the firm and the company were the same. despite this, it accepted the fact that dissolution of the firm did take place. the matter got aggravated further when it said that the dissolution took place on 1-4-1995, and not on 31-3-1995, and disregarding the sale transaction it treated the sold stock as unsold. thus, the department intended to undo everything which the parties intended to do. we, therefore, hold that the firm was dissolved on 1-4-1995, and not on 31-3-1996, as contended by the department. we further hold that there was no closing stock on the date of dissolution as the same had been sold on 31-3-1995, by the firm prior to its dissolution.having held as above, actually there is no need to deal with the ground raised by the revenue in its appeal because it merely pertains to the value to be adopted in the closing stock. however, since we have held that there was no closind stock at all, the question of valuation does not arise. nonetheless, since the same had been argued by the parties, we briefly deal with the same. the contention of the assessee is that since the entire stock was sold in a single stroke, it has to be sold at a lower price than the normal market value. there is force in the submission of the assessee that the firm would riot have been able to sell such a huge quantity at one go and hence the sale took place at a lower price. the contention of the assessee is a commercial reality which cannot be disregarded. it is also a fact that the stock which was sold to the company was not aggregated quality-wise but it was a mixed lot. hence, further discounting had to be made. the learned departmental representative pointed out that the assessee was essentially a retailer and hence the stocks should have been valued at retail price only which was rs. 990 per brass as obtaining in the month of march. for this contention, the learned departmental representative relied on the decision of the house of lords in the case of b.s.c.footwear ltd. 47 tax cases 495 (hl). in our opinion, reliance on the said decision is quite misplaced. in the case, the practice of the company was to value its closing stock at lower of cost and estimated replacement value. it was in this context that the house of lords first held that the stock should be valued at lower of cost or market value and then held that so far as the market value is concerned, the retail price should be taken because the company was a retail trader. the said decision stands clearly on a different footing and is not applicable to the issues before in the present case. therefore, in our considered view, there is no question of tax avoidance in the present case. the partners decided to dissolve the firm. they themselves or along with others (which facts are not on record), may have decided to do the same business by forming themselves into a private limited company. the steps to be taken for dissolving the firm and for incorporating the company may have proceeded simultaneously and ostensibly it may appear to be pre-ordained steps, but the same need not necessarily be termed as a colourable device to avoid tax. such steps have to be taken and generally they run parallel. we reiterate that since the factum of dissolution is not disputed by the department and since the deed of dissolution is clear, there was no closing stock on the date of dissolution, i.e., 1-4-1995 and hence there was no occasion to value or revalue the closing stock. thus, the entire addition sustained by the commissioner (appeals) is deleted.remaining grounds relating to disallowance of telephone expenses, car expenses and depreciation on car were not pressed at the time of hearing and hence the same are rejected as such.in the result, the appeal of the assessee is partly allowed and that of the department is dismissed.

Judgment:
These cross-appeals are directed against the order of the learned Commissioner (Appeals), dated 3-8-1999, for assessment year 1995-96. As the issues involved are inter- connected, both the appeals are being disposed of by this combined order for the sake of convenience, In assessee's appeal, first ground is against the addition of Rs. 39,83,240 made on account of alleged undervaluation of closing stock.

In the departmental appeal, the revenue is aggrieved against the direction of the Commissioner (Appeals) to the assessing officer to verify the sale of 9,289 brass of stock upto 16-8-1995, and adopt the sale price as the correct market value of the stock by adopting 'first-in-first- out' method., The assessee-firm deals in coal ash. In the course of assessment proceedings, assessing officer observed that the GP rate in the current year was 23.93 per cent as compared to 38.50 per cent and 30.30 per cent in the preceding two years, respectively. In this connection it was explained by the assessee that it had closed its business on 1-4-1995 and had sold the entire stock to its sister-concern on 31-3-1995. Since it was a bulk sale and since qualitywise segregation of stock was not made, it was sold at the 'lower price of Rs. 560 per brass'. "This transaction yielded a GP of 2 per cent only as against general GP of 24 -per cent. It was noted by the assessing officer that in the immediately preceding month, the sale rate was of about Rs. 960 per, brass. Further, in the current month. itself, i.e., in the month of March, sales to outsiders averaged at Rs. 990 per brass. The assessing officer took note of the fact that the firm was dissolved on the, next, day, i.e., 1-4-1995, as per the dissolution deed, The stamp paper for dissolution deed was already purchased on 28-3-1995. Thus, according- to the assessing officer it was also determined that the firm. was going to be dissolved in the, next few days and when the firm is dissolved the stocks have to be valued at market rate in view of the decision, of the Supreme Court in the case of A.L.A. Firm v. CIT (1991) 189 ITR 285 (SC). Accordingly, the assessing officer adopted the rate of Rs. 990 per brass and added the difference of Rs. 33,83,240 to the total income.

The Commissioner (Appeals) agreed with the assessing officer that the stock had to be valued at market rate as per, the decision in A.L.A.Firm (supra). He also observed that the transaction Was not at arms length because both the partners of the assesseefirm were shareholders of the successor company which took over the business of the firm from 1-4-1995. He also noted the following facts : (a) The memorandum of association for the formation of the new private limited company was signed by the two promoters on 21-3-1995. The date of incorporation was 24-3-1995; (c) On the last day of the accounting year, i.e., 31-3-1995, total stock-intrade was transferred to the company at Rs. 560 per brass; (d) Other moveable assets and liabilities belonging to the partnership firm were transferred to the company on 1-4-1995, at their book value.

In view of the above facts, the Commissioner (Appeals) opined that the transactions were not in the normal course of the business. All the above actions took place in a span of one week. Moreover, the stock-in-trade had been given a different treatment by transferring the same on 31-3-1995. In nutshell, he agreed with the AO that it was A design to avoid tax on transfer of stock at a lesser rate by the firm to the company. However, the Commissioner (Appeals) partly accepted the assessee's submission that the stock On the last day was not segregated quality-wise and hence it was unfair to value the same at Rs. 990 per brass. He found that 9,263 brass of stock was transferred by the firm to the company. By 16-8-1995, the company, had sold 9,289 brass of coal ash. Thus, presuming 4 that the company must have adopted FIFO method he directed the assessing officer to verify the sales of 9,289 brass for Rs. 72,99,975 upto 16-8-1995, by the company. If it was found that first, 9,289 brass had been sold for Rs. 72,99,975 then the said figure; should be substituted for the sale shown by the company at Rs., 51,87,476. Accordingly, the addition was to be reduced. It is against confirming the action of the AO to value the closing stock at market value, the assessee is in appeal before us. correspondingly, it is against the direction of the Commissioner (Appeals) to adopt the sale price in the subsequent six months to adopt it at the market value of stock that the department is in appeal before us.

The learned counsel for the assessee, at the outset, 'briefed us with the facts as narrated above. It was submitted that the principle laid down in the case of A.L.A. Firm (supra) was, not applicable to the facts of the present case since there was no closing stock prior, to the dissolution of the firm. The firm was dissolved on, 1-4-1995, and the sale of coal ash to the-sister-concern had taken, place on 31-3-1995. It was not open for the department to deem the., dissolution to have taken place on 31-3-1995. Further, as regards the avoidance of tax, it was contended that the company had paid tax at a higher rate by selling the stock in the subsequent year, than what would have been paid by the, firm had it sold the stock to outsiders. Thus, according to him, there was no force in the revenue's argument as regards tax avoidance also. There was also no basis to adopt the sale price in the next six months as the market value of the stock as on 31-3-1995, in view of the fact that the stock was not segregated quality-wise and hence any rate taken by the department would be arbitrary.

The learned Departmental Representative, submitted that in substance, the firm and the company were the. same. It was, a mechanism adopted by the partners of the firm who were also the only shareholders of the firm and the company to avoid tax. Rebutting the argument of the learned counsel that the company paid tax at a higher rate 'it was submitted that the said fact was not material. The company paid tax at 'a- higher rate because it' was statutorily required to do so and that it was not a voluntary contribution on the part of the company. What was material was whether the firm which is the assessee before us had paid correct tax as per law or, not. It was also submitted that by transferring the stock of higher value, the shares in the company which were received by the partners were of higher intrinsic value and, therefore the, partners had received much more than what was ostensibly shown to been received. Thus, though the partners and hence virtually the firm had received much more the tax, Paid was not, commensurate with the actual income of the firm. It was also 'argued that' though the company paid tax at a higher rate, the same was paid in the next year, whereas had the firm shown, correct profit in the current year payment of tax on higher income would have been resulted in the current year itself. Therefore, there was no doubt that the assessee-firm had avoided paying higher tax by transferring the stock at lower price than the market value. For this contention, reliance was placed on the decision of the Supreme Court in the case of Income Tax Officer v. Ch.

Atchaiah (1996) 218 ITR 239 (SC). As regards the contention of the assessee that maximum material was sold on the last day, it was submitted by the learned Departmental Representative that there was no evidence to support this contention. With regard to the direction of the Commissioner (Appeals) to adopt the selling rate in the next six months as the market value, the contention of the learned Departmental Representative was that as per the decision in A.L.A. Firm's case (supra), the market value as on the date of dissolution had to be adopted. Since the firm was deemed to have been dissolved on 31-3-1995, and since the goods sold to outsiders in the month of March fetched Rs. 990 per brass, the latter rate was the appropriate rate to be taken as the market value for the stocks transferred to the company.

In his rejoinder, the learned counsel submitted that the fact that maximum stock was sold on 31-3-1995, to the company was brought to the notice of the assessing officer as well as of the Commissioner (Appeals) in the course of proceedings before each of them and, in fact, the Commissioner (Appeals) had accepted this fact also. Since the sales were to be segregated on the last day, the market rate could not be taken as was the contention of the revenue. The other moveable assets were transferred to the company on 1-4-1995, at book value with which the department had no objection, then it was a question mark why the objection for transferring the stock at a price higher than the book value. It was reiterated that there cannot be any deeming dissolution and hence the decision in A.L.A. Firm (supra) could not be applied.

We have duly considered the rival contentions and the material on record. The basic facts as they emerge from the record placed before us and which are not in dispute are as follows : (2) that the assessee-firm was dissolved on 1-4-1995, i.e., one day after the end of the relevant accounting year; (3) that the stock of coal ash remaining with the assessee on 31-3-1995, was sold at Rs. 560 per brass to a company; 4) that other.assets of the dissolved firm were transferred at book value to the company to whom coal ash was sold on the previous day; (5) that the two partners of the firm were subscribers to the memorandum of association of the said company, viz., M/s. Porbandar Coal Agency (P) Ltd. (hereinafter referred to as PCAPL).

(b) that the sale of coal ash on the day prior to dissolution was an eyewash to avoid tax; (c) that the firm reaped hidden profits in the form of higher intrinsic value of the shares in the company on account of selling highly valued stock at lower price; (i) the dissolution of the firm should be deemed to have taken place on 31-3-1995; (ii) that the bulk of coal ash sold to the company should be treated as closing stock; and be valued at a market rate following the decision in the case of A.L.A. Firm (supra).

In the background which we have broadly laid out above, the first point which falls for our consideration is whether the dissolution of the assessee-firm can be taken as 31-3-1995, or not. The deed of dissolution is on record. The dissolution deed is in no terms ambiguous as to the date of dissolution. It clearly mentions the date of dissolution as 1-4-1995. The deed mentions that the dissolution has taken place by mutual consent of the partners. The deed further mentions that the accounts upto the date of dissolution have been made out, the bank balances, cash balances, etc., have been drawn and lists of all moveable and immovable properties have been made which the partners have seen and have agreed with them. The deed mentions that several rights like lease, licences, etc., which belong to the firm, have been dealt with by the partners with mutual consent. The deed also mentions that the accounts are closed and the amounts remaining due to both the partners in their capital accounts will be satisfied by withdrawing whatever balance remains in the bank and/or by collection of dues.

The deed is very clear about not only the date of dissolution, but also as to how the partners have mutually agreed to the dissolution in respect of their rights and liabilities. The deed nowhere mentions about the transfer of assets to PCAPL. Be that as it may, the question arises as to whether the revenue. authorities can read the date of dissolution as 31-3-1995, instead of 4-4-1995. In our opinion, this is not permissible. A similar issue had come up before the Supreme Court in the case of CWT v. Arvind Narottam (1988) 173 ITR 479 (SC). The court observed a s follows (at p. 486 of the report) "It is vehemently urged by Dr. Gauri Shankar that the approach to be adopted in this case is not that which finds favour under the IT law and different considerations prevail under the Wealth Tax Act. As I am proceeding on the basis of the true consideration of the deeds of settlement, I fail to see any substance in that contention. Reliance was also placed by learned counsel for the revenue on McDowell & Co.

Ltd. v. CTO (1985) 154 ITR 148 (SC). That decision cannot advance the case of the revenue because the language of the, deeds of settlement is plain and admits of no ambiguity." Further, in his concurring but separate observations, His Lordship, Sabyasachi Mukherji, J. observed as follows : (p. 487 of the report) : "In any event, however,, where the true effect on the construction of the deeds is clear, as in this case, the appeal to discourage the avoidance is not a relevant consideration. But since it was made, it has to be noted and rejected. With these observations I agree." Thus, not only in the abovecited decision, but also in several decisions the courts have held that where language of the document is clear the same has to be given effect to and the revenue authorities cannot rewrite the agreement. On what basis, the date of dissolution be read as 31-3-1995, instead of 1-4-1995, We fail to understand.

However, the contention of the department is that since the partners of the firm were, also the shareholders of the company to whom the stock was transferred, the date of dissolution should be taken as 31-3-1995.

The contention of the assessee has been that the company is a separate legal entity and hence it cannot be considered as one with dissolved firm. It is true that the company is a separate legal entity, but still it is open for the courts to lift the corporate veil where the company shares the relationship with other entities aftd also to pay regard to the economic realities behind the legal facade. This view was also expressed by the Supreme Court in the case of Union of India v.Plavworld Electronics (P) Ltd., (1990) 184 ITR 308 (SC). However, though it is admitted by the assessee that the company is an associate company, proper facts have not been brought on record to show as to what extent the erstwhile partners were interested in the new company.

The facts on record merely indicate that the tow partners had subscribed to the momorandum of indicate that the two partners had subscribed to the memorandum of association and had agreed to take 10 shares each. Subsequently, how many shares have been acquired by them is not on record. Hence, it is difficult to measure the extent of interest or to measure the alleged gain derived by the two partners by transferring the stock at Rs. 560 per brass to, the company. Assuming that the partners had majority shareholding in PCAPL even then it is a moot point as to how one can disregard the transaction made between two parties on a principal to principal basis. This was the view expressed by the Supreme Court in the case of Union of India v., Atic Indusotries Ltd. 3 SCR 930 (SC).

Coupled with the above issue, another issue raised by the learned Departmental Representative was that the partners received shares of high intrinsic value on account of transfer of highly valued stock at lower value. In our opinion, this issue is not germane to the dispute before us, moroso, when it is not on record as to how many shares were received by the partners, whether the consideration was paid in cash or the same were allotted for consideration others than cash and if the consideration was paid in cash what was the consideration. All these facts are not on record and hence it is worthless to argue that the partners received hidden profit in the form of highly valued shares.

The point of dispute is when did the dissolution take place. When the factum of dissolution is not challenged by the department, how can it change the date of dissolution on its own and attach a date different than what the parties agreed to. The undisputed fact remains that upto 31-3-1995, an ntity in the form of firm remained and continued its business. The said firm got dissolved on 1-4-1995.

Now, having accepted the fact that the firm was dissolved, let us examine what happens on dissolution. In this respect, the Supreme Court in its judgment in the case of A.L.A. Firm (supra) has referred with approval the decision of Madras High Court in the case of Muhammad Ussain Sahib v. S.N. Abdul Gaffoor Sahih AIR 1950 Mad 758. It reproduced the observations of the Madras High Court given on p. 759 of the report which we also reproduce below : "But the situation is totally different when the firm is dissolved or when a partner retires. The settlement of his account most be not on a notional basis but on the real basis, that is every asset of the partnership should be converted into money and the account of each partner settled on that basis. The assets have to be valued, of course, on the basis of the market value on the date of the dissolution".

After reproducing the above observations, the Supreme 'Court held that the above principles applied equally well to stock-in-trade. In substance, what the Madras High Court held in Muhammad Ussain Sahib (supra) and which received approval of the Supreme Court was that all the assets have to be valued at market rate on the date of dissolution.

In the instant case, it is a fact that the assets other than stock-in-trade have been transferred to the new company at book value.

To this, the department has not objected. We fail to understand the discrimination meted out by the department between the stock-in-trade and other assets. The stand of the department is more perplexing when we find that stocks were sold to the company at a price higher than the book value unlike the transfer of other assets.

Thus, if the department wanted to apply the ratio laid down in A.L.A.Firm (supra), the same should have been applied wholehog to all the assets and not only the stock-in-trade.

The above discussion that is relating to valuation of closing stock finds place in this order because the same was vehemently argued by the department. But the observation pales away in the light of the fact that there was no closing stock at all on the date of dissolution which is undoubtedly 1-4-1995. The stock which was there on 31-3-1995, was sold on the same day and the stock which is sold on 31-3-1995, cannot be treated as unsold on 1-4-1995. The department, in its enthusiasm to apply the ratio laid down in A.L.A. Firm (supra) read much more into the entire transaction than what was required. In not very clear terms it said that the firm and the company were the same. Despite this, it accepted the fact that dissolution of the firm did take place. The matter got aggravated further when it said that the dissolution took place on 1-4-1995, and not on 31-3-1995, and disregarding the sale transaction it treated the sold stock as unsold. Thus, the department intended to undo everything which the parties intended to do. We, therefore, hold that the firm was dissolved on 1-4-1995, and not on 31-3-1996, as contended by the department. We further hold that there was no closing stock on the date of dissolution as the same had been sold on 31-3-1995, by the firm prior to its dissolution.

Having held as above, actually there is no need to deal with the ground raised by the revenue in its appeal because it merely pertains to the value to be adopted in the closing stock. However, since we have held that there was no closind stock at all, the question of valuation does not arise. Nonetheless, since the same had been argued by the parties, we briefly deal with the same. The contention of the assessee is that since the entire stock was sold in a single stroke, it has to be sold at a lower price than the normal market value. There is force in the submission of the assessee that the firm would riot have been able to sell such a huge quantity at one go and hence the sale took place at a lower price. The contention of the assessee is a commercial reality which cannot be disregarded. It is also a fact that the stock which was sold to the company was not aggregated quality-wise but it was a mixed lot. Hence, further discounting had to be made. The learned Departmental Representative pointed out that the assessee was essentially a retailer and hence the stocks should have been valued at retail price only which was Rs. 990 per brass as obtaining in the month of March. For this contention, the learned Departmental Representative relied on the decision of the House of Lords in the case of B.S.C.Footwear Ltd. 47 Tax Cases 495 (HL). In our opinion, reliance on the said decision is quite misplaced. In the case, the practice of the company was to value its closing stock at lower of cost and estimated replacement value. It was in this context that the House of Lords first held that the stock should be valued at lower of cost or market value and then held that so far as the market value is concerned, the retail price should be taken because the company was a retail trader. The said decision stands clearly on a different footing and is not applicable to the issues before in the present case. Therefore, in our considered view, there is no question of tax avoidance in the present case. The partners decided to dissolve the firm. They themselves or along with others (which facts are not on record), may have decided to do the same business by forming themselves into a private limited company. The steps to be taken for dissolving the firm and for incorporating the company may have proceeded simultaneously and ostensibly it may appear to be pre-ordained steps, but the same need not necessarily be termed as a colourable device to avoid tax. Such steps have to be taken and generally they run parallel. We reiterate that since the factum of dissolution is not disputed by the department and since the deed of dissolution is clear, there was no closing stock on the date of dissolution, i.e., 1-4-1995 and hence there was no occasion to value or revalue the closing stock. Thus, the entire addition sustained by the Commissioner (Appeals) is deleted.

Remaining grounds relating to disallowance of telephone expenses, car expenses and depreciation on car were not pressed at the time of hearing and hence the same are rejected as such.

In the result, the appeal of the assessee is partly allowed and that of the department is dismissed.