SAKTHI TRADING CO. versus COMMISSIONER OF INCOME TAX, COIMBATORE

Citation: [2001] SUPP. 1 S.C.R. 214 · Decided: 02-08-2001 · Supreme Court of India · Bench: Y.K. SABHARWAL · Disposal: Appeal(s) allowed
Open in Lexace · Ask the AI about this case
Judgment (excerpt)

A 
SAKTHI TRADING CO. 
v. 
COMMISSIONER OF INCOME TAX, COIMBATORE 
AUGUST 2, 2001 
B 
[Y.K. SABHARWAL AND BRIJESH KUMAR, JJ.] 
Income Tax: 
Income Tax Act, 1961-Partnershipfirm-Dissolution of firm on death 
C of partner-Reconstitution of firm with remaining partners without 
discontinuance of business-Valuation of closing stock on dissolution of firm-
Revenue valuing ii at market value-Maintainability of-Held, valuation of 
closing stock should be valued at cost or market value, whichever is lower as 
there is no discontinuance of business. 
D 
Appellant-assessee firm was dissolved due to the death of one of the 
partners. The firm was reconstituted with the remaining partners from next 
day itself without discontinuance of business. Assessments were made by the 
Income Tax Officer for the two periods of the assessment year-one for the 
period ending the date of dissolution and other for the period from the date 
E of reconstitution to the end of the previous year. The closing stock for the 
period ending the date of dissolution was valued at cost or market value, 
whichever was lower. Commissioner of Income Tax, utilising the powers under 
Section 263 of the Act, set aside the assessments and directed the Income Tax 
Officer to make fresh assessments by valuing the closing stock at market value. 
F The assessee-firm challenged the order of the Commissioner before Income 
Tax Appellate Tribunal. The tribunal allowed the appeal of the assessee 
holding that the valuation of the closing stock at market value cannot be 
adopted since. the assessee-firm continued to carry on its business with the 
remaining partners. In appeal, High Court held in favour of the Revenue. 
G 
In appeal to this Court, Revenue contended that the closing stock has 
to be valued at market value on the basis of the decision in A.LA Firm v. 
Commissioner of Income Tax, (1991) 189 ITR 285 SC. 
Allowing the appeal, the Court 
H 
214 
... 
-
SAKTHI TRADING CO. v. C.l.T. [Y.K. SABHARWAL, l.] 
215 
HELD 1.1. In A.l.A Firm v. Commissioner of Income Tax, (1991) 189 ITR A 
285 SC this Court was considering the question of valuation of closing stock 
at market value where there was dissolution and also discontinuance of the 
business of the firm. In the present case, though there was dissolution on 
account of the death of one of the partners, there was no discontinuance of 
the business, which was the unchallenged finding of the tribunal. Even as per B 
the principles laid down in A.l.A. Firm's case, the closing stock is to be valued 
at cost or market value, whichever is lower, which is the established rule of 
commercial practice and accountancy. The High Court was in error in coming 
to the conclusion that the assets had to be valued at market value. In the 
present case, there has been no cessation of business and, therefore, the closing 
stock could not be valued at the market rate. (222-F-H; 223-A( 
C 
A.l.A Firm v. Commissioner of Income Tax, (1991) 189 ITR 285 SC G.R. 
Ramchari and Co. v. Commissioner of Income Tax, Madras (1961) 41 ITR 142 
(Mad), distinguished. 
Kikabhai Premchand v. CIT, (1953) 24 ITR 506 (SC) and Chainrup D 
Sampatram v. CIT (1953) 24 ITR 481 (SC), referred to. 
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3818 of 
1999. 
From the Judgment and Order dated 1.12.98 of the Madras High Court E 
in T.C. No. 954 of 1992. 
R. Venkataraman, V. Prabhakar and Reva thy Raghavan for the 
Appellant. 
Dr. V. Gauri Shankar, Neera Gupta and Ms. Sushma Suri for the F 
Respondent. 
The Judgment of the Court was delivered by 
Y. K. SABHARW AL, J. At the instance of the Revenue the question, 
in respect of the assessment year 1984-85, that was referred for the opinion G 
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 H 
216 
SUPREME COURT REPORTS [2001] SUPP. 1 S.C.R. 
A 
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?" 
Briefly; the facts are as follows : 
B 
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, howeve
Excerpt shown. Read the full judgment & AI analysis in Lexace.