IMPORTANT POINT
Where business is not discontinued on the dissolution of the firm, the question of valuing the closing stock on market value is to be answered in negative. The closing stock is to be valued at the cost or market price, whichever is lower.

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:-

"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 Officer can substitute the market value in respect of the closing stock alone for the purpose of determining the income of the firm upto the date of dissolution?"

2. Briefly, the facts are as follows:

The assessee is a registered firm. As a result of the death of one out of its six partners, on February 6, 1984, the firm was dissolved. It was, however, reconstituted with effect from the next day, that is, 7th February, 1984 with the remaining five partners. Two orders of assessments were made: one for the period upto February 6, 1984 and the other for the period from 7th February, 1984 to 31st March, 1984. The Commissioner of Income Tax made an order under Section 263 of the Income Tax Act, 1961 as according to him the assessment order made by the Income Tax Officer was erroneous and prejudicial to the interest of the Revenue in valuing the stock in trade as on 6th February, 1984 on the basis of cost or market rate, whichever is lower as that was the usual method the assessee used to adopt in valuing its stock. The Commissioner of Income Tax relying upon the decision of the Madras High Court in A.L.A. Firm v. Commissioner of Income-tax1 came to the conclusion that the Income Tax Officer ought to have valued the closing stock at its market rate as on 6th February, 1984. Thus, setting aside the assessment order dated 30th May, 1984, the Income Tax Officer was directed to pass a fresh order.

3. The order of the Commissioner of Income Tax was challenged by the assessee in appeal before the Income Tax Appellate Tribunal. The contention of the assessee before the Tribunal was that the question of valuing the closing stock at the market value can arise only on discontinuance of the business and as the business of the firm was never discontinued but was taken over on succession by another firm, the closing stock was not required to be revalued at the market value. The Tribunal found that the firm was reconstituted with the remaining five partners under the partnership deed 6th March, 1984 w.e.f. 7th February, 1984. The new deed recited that:

"Whereas the above said parties were carrying on business in Erode in the name "Sakthi Trading Company" along with one Shri P. Chinniappan S/o late Sri Palanippa Gounder, Erode and whereas the above said P. Chenniappan died on 6.2.1984, the parties hereto having decided to continue the business with all assets and liabilities in partnership from 7.2.1984 as orally agreed, this deed is drawn up reducing the oral agreement between the parties hereto taking effect from 7.2.1984, to carry on business in partnership upon the following terms and conditions."

4. The Tribunal came to the conclusion that if the business itself is discontinued and the stocks are realised then the value realised would have to be substituted for the value given in the accounts but where the business was not discontinued though the firm was dissolved, the question of realising the value of the goods does not arise and there was no necessity for revaluing the closing stock. According to the Tribunal, there was no warrant for revaluation of stock in a continuing business and the order of the Income Tax Officer accepting the profit shown by the assessee, on the method of accounting regularly followed, was not in any way erroneous and did not require to be revised under Section 263. In respect of the decision of the Madras High Court in A.L.A. Firm s case (supra), the Tribunal noticed that the firm in the said case had cl