IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 08/02/2006
CORAM
THE HON'BLE MR.JUSTICE P.D.DINAKARAN
AND
THE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA
TAX CASE No. 52 of 2000
The Commissioner of Income Tax
Madurai ..Applicant
-Vs-
Sri M.Kathiresan ..Respondent
Reference under Section 27(1) of the Wealth Tax Act, 1957 by the
Income Tax Appellate Tribunal, `A' Bench, Chennai in R.A. No. 160/Mds/9 6 in
I.T.A. No.1770/Mds/89 for the assessment year 1983-84.
!For Applicant :: Mrs. Pushya Sitaraman,
Senior Standing Counsel
^For Respondent :: No appearance
:J U D G M E N T
(Judgment of the Court was delivered by
P.D.DINAKARAN,J.)
At the instance of the Revenue, the Income-tax Appellate Tribunal has
stated a case and referred the following question of law for our
consideration:
“Whether on the facts and in the circumstances of the case, the Tribunal is
correct in law in holding that in the case of conversion of proprietary
business into partnership firm, the stock should not be valued at market
price?”.
2. The assessment year involved is 1983-84. The issue
raised in this tax case reference is regarding the method of valuation to be
adopted. In the assessment proceedings for the assessment year 1983-84 the
assessee claimed loss incurred in the sole proprietary concern, since the
proprietary concern was converted into a partnership firm. The Income-tax
Officer, completed the assessment accepting the loss returned by the assessee
in the sole proprietary concern. The Revenue carried the matter in appeal
before the Commissioner of Income Tax (Appeals) and the Commissioner of
Income-Tax (Appeals) set aside the assessment order on the ground that the
assessing officer has not revalued the stock according to market price on the
conversion of the proprietary business into a partnership business, following
the decisions in the case of G.R.Ramachari & Bros VS. (41 ITR 142) and A.L.A.
Firm v. Commissioner of Income Tax (102 ITR 622) and directed the assessing
officer to apply the ratio laid down in the above cases. On appeal by the
assessee, the Income-tax Appellate Tribunal set aside the order of the
Commissioner of Income Tax (Appeals), following the Supreme Court decision in
the case of SUNIL SIDDARTHBHAI V. COMMISSIONER OF INCOME TAX (156 ITR 509),
on the ground that though the conversion of a proprietary business into
partnership is undoubtedly a transfer, it could not be said that the nominal
value credited to capital account in the hands of the firm is the
consideration for the transfer. It is against the order of the Income-tax
Appellate Tribunal, at the instance of the Revenue, the Income-tax Appellate
Tribunal has stated a case and referred the question of law referred to above.
3. Heard Mrs.Pushya Sitaraman, learned Senior Standing counsel
for the Revenue, who fairly concedes that the issue raised in the above
question of law is covered against the Revenue by the decision of the Supreme
Court in SAKTHI TRADING CO. VS. COMMISSIONER OF INCOME TAX (25 0 ITR 871)
and the decision of this Court in K.SHANMUGANATHAN VS. COMMISSIONER OF
GIFT-TAX (264 ITR 431).
4. It is an established rule of commercial practice and accountancy
that where there was no discontinuance of business, the closing stock is to be
valued at cost or market price, whichever is lower by conversion. The Supreme
Court and this Court in the decisions cited supra, held that since there was
no cessation of business, the closing stock had to be valued at cost or market
price, whichever was lower.
5. We find that the Appellate Tribunal has rightly held that
though the conversion of a proprietary business into partnership is
undoubtedly a transfer, it could not be said that the nominal value credited
to capital account in the hands of the firm is the consideration for the
transfer. It is only when the business is closed for ever, the question of
valuing the stock at the market price might arise. In this case, it cannot be
said that the assessee has ceased to remain in the same business, when he
converted his proprietary business into a partnership. That apart the Revenue
has also not placed any material before the Appellate Tribunal to sustain its
claim that the stock should be valued at market price. In the absence of any
material placed before the Appellate Tribunal, we hold that the Appellate
Tribunal was justified in coming to the conclusion that the closing stock
should not be valued at market price. Accordingly, we answer the question of
law referred to us in the affirmative, against the Revenue and in favour of
the assessee.
Msk
Index:Yes
Internet:Yes
To
1. The Assistant Registrar,
Income-tax Appellate Tribunal,
Rajaji Bhavan, Besant Nagar,
Chennai 600 090 (five copies with records)
2. The Secretary,
Central Board of Direct Taxes, New Delhi (3 copies)
3. The Commissioner of Income-tax (Appeals),
Madurai.
4. The Income-tax Officer, Circle II(2), Madurai.