Upon dissolution of a firm, the assets should be valued at their fair market value, and the valuation of stock on hand should be made on the basis of the prevailing market price. The privilege of valuing the opening and closing stocks in a consistent manner is available only to a continuing business and not to a dissolved firm.

1. The following question has been, at the instance of the assessee, referred to us by the Income-tax Appellate Tribunal, Cochin Bench:

"Whether on the facts and circumstances of the case the closing stock should be valued at the market value as claimed by the department or at cost as claimed by the assessee for the purpose of determining its income for the assessment year under consideration?"

The assessee was a firm which was dissolved on 30-6-1971, when two of the five partners retired. The retiring partners were allowed to withdraw the closing stock valued at Rs.94,390.75. Their accounts were duly debited, On the next day, the remaining partners entered into a fresh partnership deed to carry on the same business as that of the dissolved firm For the assessment year 1972-73, which is the year in question, assessment was completed on the basis that the total income of the assessee-firm was Rs. 1,04,770/-. This was on the basis that the closing stock was correctly valued at Rs. 94,390.75. Subsequently the assessment was reopened, The Income-tax Officer held that on dissolution of the firm on 30-6-1971 the closing stock should have been taken not at the cost price as shown in the book, but at the market price. Accordingly he determined the value of the closing stock as on 30-6-1971 at Rs. 1,17,987/-, and the taxable income was determined on that basis. On appeal the Appellate Assistant Commissioner affirmed the principle followed by the Income-tax Officer, but gave some reduction by determining the market value of the stock on the closing day by adding 20 per cent to the cost. On further appeal by the assessee, the Tribunal, following the decisions of the Madras High Court in G.R. Ramachari & Co. v. Commr. of Income-tax, (1961) 41 I.T.R. 142 and A.L A. Firm v. C.I.I', (1976) 102 I.T.R. 622 (Mad.), upheld the principle followed by the authorities below and held that the closing stock of the dissolved firm should be valued only at the market rate and not at the cost price as claimed by the assessee.

2. In G.R. Ramachari & Co. v. Commr. of Income-tax, (1961) 41 I.T.R. 142 (Mad.), the Madras High Court held:

"The privilege of valuing the opening and closing stocks in a consistent manner is available only to a continuing business and it cannot be adopted where a business has come to an end and the stock on hand has to be disposed of in order to determine the exact position of the business on the date of the closure.

Where a partnership, which has been valuing its opening and closing stocks at cost price when its business was continuing, dissolves and one of the partners takes over the stock on hand, in order to arrive at the correct picture of the trading results of the partnership on the date when it ceases to function, the valuation of the stock on hand should be made on the basis of the prevailing market price. Therefore, that the partner who takes over the stock on hand values them at cost price is of no effect."

(Head Notes)

In A.L.A. Firm v. C.I T., (1976) 102 I T.R 622 (Mad.) the Madras High Court, following its earlier decision in G.R. Ramachari & Co. v. Commr. of Income-tax, (1961) 41 I.T.R. 142 (Mad.), held:

Stock-in-trade of a firm does not cease to be stock-in-trade on the dissolution of the firm. Though an assessee has an option to value the stock-in-trade at cost or market value, whichever was lower, during the subsistence of a business, that option is not available to it at the point of termination of the business, when the stock-in-trade has to be valued at market value.

.................................................... (Head Notes)

3. The assets of the partnership for the purpose of winding up after the dissolution should be taken, not at the book value, but at their fair value to the firm. The annual accounts are not the basis for determining the fights of a deceased or retiring partner. The annual settlement of account is for the purpose of determining profits at the end of the year. So long as the firm cont