The main legal point established is that despite the dissolution of a partnership firm, the firm continues to hold properties as the owner until the completion of the winding up process, and the valuation of closing stock should be based on cost, with an exception for market value if lower.

G. C. BHARUKA, J.

( 1 ) ON an application made by the Commissioner of Income-tax under Section 256 (1) of the income-tax Act, 1961 (in short, "the Act"), the Tribunal has referred the following questions of law seeking opinion of this court :

" (i) Whether, on the facts and circumstances of the case, the Tribunal was right in setting aside the order of the Commissioner under Section 263 ? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was nothing wrong in the asses-see valuing the closing stock at cost instead of at market price ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that there was no transfer of capital assets of the firm to the partners even though the assessee-firm stood dissolved on December 18, 1987 ?"

( 2 ) IN order to answer the above questions of law, we need to narrate the relevant facts to the extent those are found necessary for the purpose. The present reference relates to the assessment year 1989-90.

( 3 ) SOME time in 1939, the late S. Raghuram Prabhu started the business of manufacturing beedies. Subsequently, his brother-in-law, Sri Madhav Shenoy also joined him in the business as a partner. Thus, M/s. Mangalore Ganesh Beedi Works (hereinafter in short, "the firm"), came into existence with effect from March 28, 1940. Thereafter, it was reconstituted from time to time. The last reconstitution of the firm is evidenced by a partnership deed dated June 30, 1982. According to the averments made in the deed, the last reconstitution of the firm became effective from June 6, 1982. According to the deed of partnership, the firm comprised of the following 13 partners : s. No. Name of the partners Percentage of share 1. B. Raghurama Prabhu 14. 50 % 2. M. Janardhana Rao 7. 65 % 3. M. Ananda Rao 7. 65 % 4. M. Vinoda Rao 7. 50 % 5. M. Pushpalatha, W/o. Subraya Baliga 12. 50 % 6. Hemalatha, W/o. Raghunath Shenoy 12. 50 % 7. M. Suresh Rao 7. 55 % 8. M. Vishwanath Rao 7. 55 % 9. M. Ramanatha Rao 2. 50 % 10. Jaganath Shenoy 2. 50 % 11. Vatsala Shenoy 7. 55 % 12. M. Gopinath Shenoy 2. 50 % 13. Arathi Shenoy, D/o. M. Janardhana Rao 7. 55 %

( 4 ) CLAUSE (3) of the partnership deed provides for the duration of the firm. This clause reads as under :

" (3) The duration of the partnership shall be five years in the first instance ; but by mutual agreement the parties hereto may extend the said duration. If during the subsistence of this partnership any of the partners desire to retire from the partnership he or she can do so, if all the other partners agree to the said retirement. However, if all the other partners do not agree to the said retirement, the partner intending to retire shall give six month's notice in writing of his or her intention to retire and on expiration of the period of the said notice the said partner shall cease to be a partner and subject to para. 14 infra from that date all his or her liabilities and rights as a partner of the firm shall come to an end. "

( 5 ) ACCORDING to the above Clause (3) of the partnership deed, the partnership was to dissolve on june 5, 1987. But, because of mutual agreement between the partners as provided in the above clause (3) itself, the duration was extended for a further period of six months,. e. , up to december 5, 1987. Therefore, in terms of Section 39 read with Sections 40 and 42 (a) of the partnership Act, 1932, the firm stood dissolved with effect from December 6, 1987. As a consequence of the dissolution of the firm, the affairs of the firm were required to be wound up in the manner provided in the partnership deed.

( 6 ) CLAUSE (16) of the partnership deed has made specific provisions for the manner in which the affairs of the firm were to be wound up after its dissolution. It reads as under :

" (16 ). If the partnership is dissolved, the going concern carried on under the name of the firm, mangalore Ganesh Beedi Works, and all the trade m

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