ACIT, Coimbatore V. M/s. Kirtilal Kalidas & Co., Coimbatore

ITA 1576/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64513 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 07-11-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 09-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHAJI P JACOB IRS
• Assessee Lawyers: S SWAMINATHAN
• Section: 40A(3); 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ITA NO.1576(MDS)/2012 ASSESSMENT YEAR : 2008-09 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE III, COIMBATORE. VS. M/S.KIRTILAL KALIDAS & CO., 601, RAJA STREET, COIMBATORE-641 001. PAN AAFFK3030K. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SHAJI P JACOB, IR S, ADDL.CIT RESPONDENT BY : SHRI S.SWAMINATHAN, FCA DATE OF HEARING : 7 TH NOVEMBER, 2012 DATE OF PRONOUNCEMENT : 14 TH NOVEMBER, 2012 O R D E R PER DR.O.K.NARAYANAN, VICE PRESIDENT THIS APPEAL IS FILED BY THE REVENUE. THE RELEVAN T ASSESSMENT YEAR IS 2008-09. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS)-I AT COIMBATORE, DATED 18-5-2012. THE APPEAL ARISES OUT OF THE ASSESSMENT COMPLETED UNDER SECTION 143(3), READ WIT H SECTION 147 OF THE INCOME-TAX ACT, 1961. - - ITA 1576 OF 2012 2 2. THE ASSESSEE IS A PARTNERSHIP FIRM, CARRYING ON JEWELLERY AND DIAMOND BUSINESS. THE PARTNERSHIP FI RM M/S.KEERTILAL KALIDAS & CO. WAS CONVERTED INTO A PR IVATE LIMITED COMPANY ON 1 ST JANUARY, 2008. THE INCORPORATION OF THE COMPANY WAS MADE UNDER PART IX OF THE COMPANIES ACT , 1956. THE CONVERSION WAS MADE ON A GOING CONCERN BASIS, S UCH THAT THE BUSINESS CARRIED ON BY THE ERSTWHILE FIRM CONTI NUED TO BE CARRIED ON BY THE COMPANY INCORPORATED ON 1-1-2008 WITHOUT ANY INTERRUPTION. THE BUSINESS CONTINUED AS SUCH, EVEN THOUGH THE NATURE OF THE BUSINESS ORGANIZATION CHANGED FROM TH AT OF PARTNERSHIP FIRM TO THAT OF A PRIVATE LIMITED COMPA NY. 3. ALL THE ASSETS, LIABILITIES, ETC. OF THE ERSTWH ILE FIRM VESTED WITH THE COMPANY ON INCORPORATION, AS PROVID ED UNDER SECTION 575 OF THE COMPANIES ACT, 1956. 4. IN THE LIGHT OF THE ABOVE DEVELOPMENTS, THE NEW LY FORMED COMPANY M/S.KEERTILAL KALIDAS JEWELLERS PVT. LTD. FILED THE RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YE AR 2008-09, FOR THE ENTIRE PERIOD OF THE PREVIOUS YEAR CONSISTI NG OF TWELVE MONTHS FROM 1 ST APRIL, 2007 TO 31 ST MARCH, 2008. THE COMPANY, IN ITS ASSESSMENT PROCEEDINGS, SUBMITTED BEFORE THE ASSESSING - - ITA 1576 OF 2012 3 OFFICER THAT THE COMPANY BEING THE SUCCESSOR IN BUS INESS, THE ENTIRE INCOME IS ASSESSABLE IN ITS HANDS FOR THE FI RST FRACTION OF THE PREVIOUS YEAR FROM 1 ST APRIL, 2007 TO 31-12-2007 AS THE SUCCESSOR IN BUSINESS AND FOR THE SECOND FRACTION F ROM 1 ST JANUARY, 2008 TO 31 ST MARCH, 2008 AS ITS OWN BUSINESS. 5. IN THE ASSESSMENT OF THE COMPANY M/S.KEERTILAL KALIDAS JEWELLERS PVT. LTD., THE ASSESSING OFFICER PROCEEDED TO ASSESS THE INCOME FOR THE PERIOD OF THREE MONTHS FR OM 1-1-2008 TO 31-3-2008 IN THE HANDS OF THE SAID COMPANY. THE ASSESSING OFFICER HAVING JURISDICTION OVER THE ASSESSEE FIRM, ISSUED A NOTICE UNDER SECTION 142(1), REQUIRING THE FIRM TO FILE IT S RETURN OF INCOME FOR THE ASSESSMENT YEAR 2007-08 COMPRISING THE PERI OD FROM 1-4-2007 TO 31-12-2007. THEREAFTER, A NOTICE UNDER SECTION 148 WAS ISSUED TO THE ASSESSEE FIRM. THE ASSESSEE FIRM , IN RESPONSE TO THE NOTICE, FILED A LETTER BEFORE THE A SSESSING OFFICER STATING THAT THE FIRM M/S.KEERTILAL KALIDAS & CO. H AS BEEN CONVERTED INTO A COMPANY BY NAME M/S.KEERTILAL KALI DAS JEWELLERS PVT. LTD. WITH EFFECT FROM 1-1-2008 AND T HUS A CONSOLIDATED BALANCE SHEET ALONE WAS REQUIRED TO BE FILED FOR THE IMPUGNED ASSESSMENT YEAR 2008-09. HOWEVER, THE ASS ESSEE - - ITA 1576 OF 2012 4 FIRM, IN RESPONSE TO THE NOTICE ISSUED UNDER SECTIO N 148, HAS ALSO FILED A RETURN OF INCOME IN THE STATUS OF THE FIRM FOR THE PREVIOUS PERIOD OF 1 ST APRIL, 2007 TO 31 ST DECEMBER, 2007. 6. IN THE COURSE OF THE ASSESSMENT, IN PURSUANCE O F THE RETURN FILED IN RESPONSE TO THE NOTICE UNDER SE CTION 148, THE ASSESSING OFFICER MADE CERTAIN ADJUSTMENTS TO THE I NCOME RETURNED BY THE ASSESSEE FIRM. THE FIRST ADJUSTMEN T BY WAY OF ADDITION HAS ITS BASIS ON THE STOCK VALUATION. THE ASSESSING OFFICER HELD THE VIEW THAT ON CONVERSION OF THE FIR M INTO A COMPANY WITH EFFECT FROM 1-1-2008, THE BUSINESS OF THE FIRM NEEDS TO BE CONSIDERED AS DISSOLVED. THE ASSESSING OFFICER ACCEPTED THE BUSINESS CARRIED ON BY THE ASSESSEE FI RM FOR THE PERIOD FROM 1-4-2007 TO 31-12-2007 AND THEREAFTER T REATED IT AS A DISSOLVED BUSINESS. AS THE FIRM WAS DISSOLVED, IT WAS THE VIEW OF THE ASSESSING OFFICER THAT THE CLOSING STOCK OF JEW ELLERY AND DIAMOND OF THE FIRM MUST BE VALUED AT MARKET PRICE AND THE PROFIT OF THE FIRM HAS TO BE COMPUTED ON THE BASIS OF THAT MARKET VALUE OF JEWELLERY. THE ASSESSING OFFICER RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT RENDERED IN THE CASE OF A.L.A .FIRM VS. CIT, 189 ITR 285, WHEREIN THE HONBLE SUPREME COURT HAS - - ITA 1576 OF 2012 5 CONSIDERED THE ISSUE OF VALUATION OF STOCK IN THE C ONTEXT OF DISSOLUTION OF A FIRM. THE HONBLE SUPREME COURT H ELD THAT WHILE THE VALUATION OF ASSETS DURING THE SUBSISTENCE OF T HE PARTNERSHIP WOULD BE IMMATERIAL AND COULD EVEN BE NOTIONAL, THE POSITION AT THE POINT OF DISSOLUTION IS TOTALLY DIFFERENT. IN TAKING ACCOUNTS FOR PURPOSES OF DISSOLUTION, THE FIRM AND THE PARTNERS, BEING COMMERCIAL MEN, WOULD VALUE THE ASSETS ONLY ON A RE AL BASIS AND NOT AT COST OR AT THEIR OTHER VALUE APPEARING I N THE BOOKS. THE REAL RIGHTS OF THE PARTNERS CANNOT BE MUTUALLY ADJUSTED ON ANY OTHER BASIS. THE SURPLUS, IF ANY, HAS TO BE CO NSIDERED AS CHARGEABLE REVENUE PROFITS OF THE FIRM. IN ADDITIO N TO THE ABOVE JUDGMENT OF THE HONBLE APEX COURT, THE ASSESSING O FFICER ALSO RELIED ON THE JUDGMENT OF THE HONBLE MADRAS HIGH C OURT RENDERED IN THE CASE OF CIT VS. INDIA REINFORCING C O., 188 ITR 651. 7. ACCORDINGLY, THE ASSESSING OFFICER REPLACED THE STOCK VALUE OFFERED BY THE ASSESSEE FIRM AND ADOPTE D THE MARKET VALUE, AS A RESULT OF WHICH AN ADDITION HAS BEEN MA DE TO THE EXTENT OF ` 26,51,49,027/-. - - ITA 1576 OF 2012 6 8. THE NEXT ADJUSTMENT OF ADDITION MADE BY THE ASSESSING OFFICER IS ON THE GROUND OF VIOLATION OF SECTION 40A(3). THE ASSESSEE IN THE COURSE OF CARRYING ON OF ITS BU SINESS, WAS COLLECTING OLD GOLD JEWELLERY FROM ITS CUSTOMERS AN D IN ITS PLACE SELLING NEW ORNAMENTS. THE DIFFERENTIAL AMOUNT ALO NE IS PAID BY THE CUSTOMERS TO THE ASSESSEE FIRM. THE ASSESSING OFFICER BIFURCATED THIS TRANSACTION INTO TWO SEGMENTS. ACC ORDING TO THE ASSESSING OFFICER, THE DELIVERY OF OLD ORNAMENTS BY THE CUSTOMERS TO THE ASSESSEE FIRM COMPRISED OF DIFFERE NT SET OF TRANSACTIONS AND THOSE TRANSACTIONS AMOUNTED TO PUR CHASE OF OLD ORNAMENTS BY THE ASSESSEE FIRM FROM ITS CUSTOMERS. THE ASSESSING OFFICER TREATED THE OTHER SEGMENT OF THE TRANSACTION AS SALE OF NEW GOLD ORNAMENTS TO THE CUSTOMERS OF THE ASSESSEE FIRM. REGARDING THE FIRST SET OF TRANSACTIONS, I.E . PURCHASE OF OLD ORNAMENTS FROM THE CUSTOMERS, THE ASSESSING OFFICER HELD THAT THE ASSESSEE FIRM WAS MAKING CASH PAYMENTS EQUIVALE NT TO THE VALUE OF THE OLD ORNAMENTS PURCHASED AND TO THAT EX TENT THERE IS VIOLATION OF SECTION 40A(3). THE ASSESSING OFFICER HELD THAT IN ALL SUCH CASES CASH PAYMENTS EXCEEDED THE LIMIT OF ` 20,000/- AND SUCH PAYMENTS NEED TO BE DISALLOWED. ON VERIFICATI ON OF THE - - ITA 1576 OF 2012 7 ACCOUNTS, THE ASSESSING OFFICER WORKED OUT THE AMOU NT COVERED BY SUCH VIOLATION UNDER SECTION 40A(3) TO THE EXTEN T OF ` 11,37,78,775/-. THE ASSESSING OFFICER ALSO FOUND T HAT NO DETAILS IN THE FORM OF BILLS OR VOUCHERS WERE AVAIL ABLE IN RESPECT OF ANOTHER SUM OF ` 13,11,390/-. THESE TWO AMOUNTS OF ` 11,37,78,775/- AND ` 13,11,390/- WERE ADDED UP AND TREATED AS THE QUANTITY OF VIOLATION UNDER SECTION 40A(3). THE TOTAL OF THESE AMOUNTS, AMOUNTING TO ` 11,50,90,165/-, HAS ALSO BEEN ADDED TO THE INCOME OF THE FIRM. 9. THE ASSESSING OFFICER HAS ALSO MADE ANOTHER ADDITION OF ` 8,74,888/- AGAINST DISALLOWANCE OF TRAVELLING EXPENDITURE. 10. THUS, THE ASSESSING OFFICER DETERMINED THE TOT AL INCOME AT ` 41,13,46,460/- AS AGAINST THE RETURNED INCOME OF ` 3,02,32,380/-. 11. IN FIRST APPEAL THE ASSESSEE AGITATED THREE IS SUES BEFORE THE COMMISSIONER OF INCOME-TAX(APPEALS). TH E FIRST DISPUTE RELATED TO THE ADDITION OF ` 11,50,90,165/- MADE BY THE ASSESSING OFFICER ON THE GROUND OF VIOLATION OF SEC TION 40A(3). THE SECOND ISSUE AGITATED BY THE ASSESSEE RELATED T O THE - - ITA 1576 OF 2012 8 ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT O F THE ALLEGED DIFFERENCE IN STOCK VALUATION OF THE JEWELLERY AT M ARKET PRICE. THIS ADDITION AMOUNTED TO ` 26,51,49,027/-. THE ASSESSEE HAS NOT CHALLENGED THE DISALLOWANCE OF TRAVELLING EXPEN DITURE AMOUNTING TO ` 8,74,888/-, BEFORE THE COMMISSIONER OF INCOME- TAX(APPEALS). THE ASSESSEE FURTHER RAISED AN ADDIT IONAL GROUND BEFORE THE COMMISSIONER OF INCOME-TAX(APPEALS) THAT THE ASSESSING OFFICER HAVING ACCEPTED THAT NO RETURN IS REQUIRED TO BE FILED, THERE SHOULD NOT HAVE BEEN LEVY OF INTERE ST UNDER SECTION 234A OF THE ACT. 12. THE COMMISSIONER OF INCOME-TAX(APPEALS) CONSIDERED THE DETAILED GROUNDS, EXPLANATIONS AND A RGUMENTS OF THE ASSESSEE IN A VERY EXTENSIVE MANNER. THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS) RUNS TO 44 PAGE S. 13. THE COMMISSIONER OF INCOME-TAX(APPEALS) FIRST EXAMINED THE ISSUE OF ADDITION OF ` 11,50,90,165/- MADE BY THE ASSESSING OFFICER ON THE GROUND OF VIOLATION OF SEC TION 40A(3) OF THE ACT. THE COMMISSIONER OF INCOME-TAX(APPEALS) E XAMINED THE ACCOUNTING ENTRIES PASSED BY THE ASSESSEE IN IT S BOOKS OF ACCOUNT ON ACCEPTING OLD JEWELLERY FROM THE CUSTOME RS AND IN - - ITA 1576 OF 2012 9 RETURN GIVING NEW JEWELLERY TO THE CUSTOMERS. WHER E IN A CASE BOTH PURCHASE OF OLD JEWELLERY AND SALE OF NEW JEWE LLERY ARE ACCOUNTED BY THE ASSESSEE ON THE SAME DAY, THE COMM ISSIONER OF INCOME-TAX(APPEALS) FOUND THAT THE SALE VALUE OF THE NEW JEWELLERY IS ADJUSTED AGAINST THE SURRENDER VALUE O F THE OLD JEWELLERY AND THE DIFFERENTIAL AMOUNT IS RECEIVED F ROM THE CUSTOMERS. HE FOUND THAT THE SURRENDER VALUE OF TH E OLD JEWELLERY IS ADJUSTED AGAINST THE SALE VALUE OF NEW JEWELLERY AND ACCORDINGLY THERE WAS NO ACTUAL PAYMENT OF ANY CASH BY THE ASSESSEE FIRM WHILE PURCHASING OLD ORNAMENTS FROM I TS CUSTOMERS. HE FOUND THAT THE SURRENDER VALUE OF TH E OLD ORNAMENTS GIVEN BY THE CUSTOMERS IS ADJUSTED IN THE BILL ISSUED TO THE CUSTOMERS AGAINST THE SALE OF NEW JEWELLERY. HE FOUND THAT THESE ACCOUNTING ENTRIES CONSISTED OF BOTH JOU RNAL ENTRIES AND CASH ENTRIES. HE OBSERVED THAT THE ADJUSTMENT OF THE SURRENDER VALUE OF OLD JEWELLERY IS IN THE NATURE O F JOURNAL ENTRY, WHICH DOES NOT INVOLVE ANY MOVEMENT OF CASH FROM TH E ASSESSEE FIRM TO ITS CUSTOMERS. HE ACCORDINGLY HEL D THAT IN SUCH CASES THERE IS NO CASH PAYMENT BY THE ASSESSEE FIRM TO ITS - - ITA 1576 OF 2012 10 CUSTOMERS WHILE PROCURING OLD JEWELLERY TO CONVERT IT INTO NEW JEWELLERY. 14. NEXT, THE COMMISSIONER OF INCOME-TAX(APPEALS) EXAMINED THE CASE WHERE PURCHASE OF OLD GOLD AND SA LE OF NEW JEWELLERY ARE MADE ON DIFFERENT DATES. WHEN OLD GO LD PURCHASES PRECEDE NEW JEWELLERY SALES, THE COMMISSIONER OF IN COME- TAX(APPEALS) FOUND THAT TWO SETS OF TRANSACTIONS AR E RECORDED ON THOSE RESPECTIVE DATES, BUT ULTIMATELY THE SURRENDE R VALUE OF THE OLD ORNAMENTS IS ADJUSTED IN THE SALE INVOICE ISSUE D AGAINST THE SALE OF NEW ORNAMENTS TO THE CUSTOMERS. HE OBSERVE D THAT IN SUCH CASES ALSO THE ASSESSEE NEVER MAKES ANY PAYMEN T OF CASH TO THE CUSTOMERS. 15. THE COMMISSIONER OF INCOME-TAX(APPEALS) ALSO EXAMINED THE CONVERSE POSITION WHERE SALE OF NEW JE WELLERY IS MADE FIRST AND PURCHASE OF OLD GOLD IS MADE LATER. THERE ALSO HE FOUND THAT THE SALE VALUE OF NEW ORNAMENTS AND SURR ENDER VALUE OF OLD ORNAMENTS ARE ALSO TRANSACTED THROUGH THE PE RSONAL ACCOUNTS OF THE CUSTOMERS AND ULTIMATELY THE CUSTOM ERS ACCOUNTS ARE SETTLED BY PAYMENT OF THE DIFFERENTIAL AMOUNT BY THE CUSTOMERS. IN THAT CASE ALSO THE COMMISSIONER OF I NCOME- - - ITA 1576 OF 2012 11 TAX(APPEALS) FOUND THAT THE ASSESSEE NEVER PAID ANY CASH TO THE CUSTOMERS. 16. IN ALL THESE CASES, WHILE EXAMINING THE INCOME ENTRIES, THE COMMISSIONER OF INCOME-TAX(APPEALS) HA S EXTRACTED SAMPLE TRANSACTIONS AND CONFIRMED HIS FINDING WITH EVIDENCES. 17. THE ASSESSEE FIRM HAD INTRODUCED DAILY SALES REGISTER METHOD OF ACCOUNTING SINCE THE RELEVANT P REVIOUS YEAR IN ORDER TO STANDARDIZE THE METHOD OF ACCOUNTING. THIS WAS NECESSITATED BECAUSE, FORMERLY THE BRANCHES OF THE ASSESSEE FIRM HAD FOLLOWED GROSS SALES METHOD OF ACCOUNTING. IN THE OLD METHOD FOLLOWED BY THE ASSESSEE, EVEN THOUGH THE SU RRENDER VALUE OF THE OLD GOLD DID NOT INVOLVE ANY PAYMENT O F CASH, SUCH TRANSACTIONS WERE REFLECTED IN THE DAILY CASH BOOK EVEN THOUGH THE ENTRIES WERE COMPENSATING ENTRIES. UNDER THE N EW METHOD INTRODUCED BY THE NAME DAILY SALES REGISTER METHOD OF ACCOUNTING, THE ASSESSEE EXCLUDED THE SURRENDER VA LUE OF OLD ORNAMENTS FROM THE CASH ACCOUNT AND REFLECTED THE A CCOUNTING ENTRIES MORE ACCURATELY TO DEPICT THE EXACT NATURE OF THE TRANSACTION. THE COMMISSIONER OF INCOME-TAX(APPEAL S) EXAMINED THIS NEW METHOD AND FOUND THAT THE ASSESSE E HAS - - ITA 1576 OF 2012 12 BEEN CONSISTENTLY PURCHASING OLD ORNAMENTS FROM THE CUSTOMERS WITHOUT MAKING ANY ACTUAL CASH PAYMENT. 18. ON FURTHER EXAMINATION OF THE ACCOUNTING METHO D FOLLOWED BY THE ASSESSEE, THE COMMISSIONER OF INCOM E- TAX(APPEALS) FOUND THAT DIFFERENT BRANCHES OF THE A SSESSEE FIRM SITUATED IN DIFFERENT STATES HAD TO FOLLOW MARGINAL LY DIFFERENT ACCOUNTING METHODS IN ORDER TO CONFORM TO THE LOCAL SALES-TAX LAWS OF THE CONCERNED STATE. THE COMMISSIONER OF I NCOME- TAX(APPEALS) HAS EXAMINED THIS MATTER IN RESPECT OF DIFFERENT BRANCHES OF THE ASSESSEE FIRM LIKE KOCHI, HYDERABAD , COIMBATORE, VIJAYAWADA, BANGALORE, LUDHIYANA, CHENN AI, ETC. HE ALSO FOUND THAT THE ASSESSEE HAS PAID LOCAL SALE S-TAX AGAINST PURCHASE OF OLD GOLD ORNAMENTS. THESE DETAILS HAVE BEEN EXAMINED BY THE COMMISSIONER OF INCOME-TAX(APPEALS) FROM PAGES 5 TO 36 OF HIS ORDER. HE HAS EXAMINED THE MO DELS OF THE NECESSARY ENTRIES MADE BY THE ASSESSEE FIRM IN ITS BOOKS OF ACCOUNT UNDER DIFFERENT CIRCUMSTANCES AND IN DIFFER ENT BRANCHES IN DIFFERENT STATES. 19. IN THE LIGHT OF THE ABOVE STATED EXAMINATION O F THE FACTS, THE COMMISSIONER OF INCOME-TAX(APPEALS) FOUN D THAT THE - - ITA 1576 OF 2012 13 PURCHASE OF OLD GOLD WAS ONLY PART OF EXCHANGE OF O LD JEWELLERY AGAINST SALE OF NEW JEWELLERY TO THE SAME PERSON AN D THERE WAS NO DE FACTO PAYMENT OF CASH BY THE ASSESSEE TO THE CUSTOMERS. HE OBSERVED THAT IN ORDER TO ATTRACT THE PROVISIONS OF SECTION 40A(3), THERE SHOULD BE ACTUAL PAYMENT OF CASH FROM ONE PERSON TO ANOTHER. HE OBSERVED THAT ON VERIFICATION OF SO ME OF THE TRANSACTIONS IT WAS CLEAR THAT THERE WERE NO SUCH C ASH PAYMENTS MADE BY THE ASSESSEE TO THE CUSTOMERS SO AS TO ATTR ACT THE PROVISIONS OF LAW STATED IN SECTION 40A(3). HE ALS O OBSERVED THAT THE ASSESSING OFFICER HAS NOT BROUGHT ON RECORD THE INSTANCES WHERE THE ASSESSEE HAD MADE ACTUAL PAYMENT OF CASH TO THE CUSTOMERS AT THE TIME OF PURCHASE OF OLD JEWELLERY. THEREFORE, HE HELD THAT THE ASSESSING OFFICER HAS ERRED IN INVOKI NG THE PROVISIONS OF SECTION 40A(3) OF THE ACT. 20. BUT, IN THE CASE OF THE AMOUNT OF ` 13,11,390/-, FOR WHICH THE ASSESSING OFFICER HAS ALLEGED ABSENCE OF ANY DETAILS OR VOUCHERS, THE COMMISSIONER OF INCOME-TAX(APPEALS ) FOUND THAT THE ADDITION OF THE SAID AMOUNT IS JUSTIFIED. THE COMMISSIONER OF INCOME-TAX(APPEALS) ACCORDINGLY DEL ETED THE - - ITA 1576 OF 2012 14 ADDITION OF ` 11,37,78,775/- AND UPHELD THE ADDITION OF ` 13,11,390/-. 21. REGARDING THE QUESTION OF ADOPTING THE MARKET PRICE OF JEWELLERY AT THE TIME OF CONVERSION OF PARTNERSH IP FIRM INTO JOINT STOCK COMPANY, THE COMMISSIONER OF INCOME-TAX(APPEA LS) FOUND THAT VALUATION OF CLOSING STOCK AT MARKET PRICE IS APPLICABLE ONLY IN CASES WHERE THE BUSINESS IS DISCONTINUED. HE FO UND THAT IN THE PRESENT CASE THE BUSINESS CARRIED ON BY THE FIR M WAS NEVER DISCONTINUED, BUT, ON THE OTHER HAND, THE BUSINESS WAS TAKEN OVER BY A SUCCESSOR COMPANY WITHOUT ANY INTERRUPTIO N. HE OBSERVED THAT ALL THE ASSETS AND LIABILITIES OF THE FIRM WERE VESTED WITH THE COMPANY AND AS PER SECTION 575 OF THE COMP ANIES ACT, 1956, ALL PROPERTIES VEST WITH THE COMPANY AT THE T IME OF REGISTRATION PURSUANT TO PART IX OF THE COMPANIES A CT AND THEREFORE THERE IS NO CESSATION OR DISCONTINUANCE O F BUSINESS. HE ACCORDINGLY HELD THAT THE DECISION OF THE HONBL E SUPREME COURT IN THE CASE OF A.L.A.FIRM VS. CIT, 189 ITR 28 5 IS NOT APPLICABLE TO THE PRESENT CASE. HE, ON THE OTHER H AND, RELIED ON THE JUDGMENT OF THE HONBLE KERALA HIGH COURT IN TH E CASE OF CIT VS. S.KODER, 233 ITR 620, WHEREIN THE COURT HAS HEL D THAT IN THE - - ITA 1576 OF 2012 15 CASE OF CONVERSION OF FIRM TO PRIVATE LIMITED COMPA NY, WITH ERSTWHILE PARTNERS BEING THE ONLY SHAREHOLDERS AND THE BUSINESS OF THE FIRM CONTINUED BY THE COMPANY, SECTION 170 O F THE INCOME- TAX ACT, 1961 APPLIED AND, THEREFORE, STOCK OF THE FIRM COULD NOT BE VALUED AT MARKET PRICE. THE COMMISSIONER OF INC OME- TAX(APPEALS) ALSO RELIED ON THE JUDGMENT OF THE HON BLE SUPREME COURT IN THE CASE OF SAKTHI TRADING CO. VS. CIT, 25 0 ITR 871, WHEREIN THE HONBLE APEX COURT HELD THAT WHERE A FI RM IS RECONSTITUTED WITH THE REMAINING PARTNERS ON DISSOL UTION OF FIRM ON DEATH OF ONE OF THE PARTNERS AND WITHOUT DISCONT INUANCE OF BUSINESS, THE CLOSING STOCK OF THE FIRM NEEDS TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS LOWER. HE ALSO RELIE D ON THE JUDGMENT OF THE HONBLE MADRAS HIGH COURT IN THE CA SE OF CIT VS. STANDARD PRINTING MACHINERY, 260 ITR 268 IN SUP PORT OF THE ABOVE PROPOSITION. 22. IN THE LIGHT OF THE FACTS AND JUDICIAL PRONOUN CEMENTS STATED ABOVE, THE COMMISSIONER OF INCOME-TAX(APPEAL S) HELD THAT THE ASSESSING OFFICER HAS GONE WRONG IN VALUIN G THE CLOSING STOCK AT MARKET PRICE AND ACCORDINGLY HE DELETED TH E CORRESPONDING ADDITION OF ` 26,51,49,027/-. - - ITA 1576 OF 2012 16 23. ACCORDINGLY, THE MAJOR ADDITIONS MADE BY THE ASSESSING OFFICER HAVE BEEN DELETED BY THE COMMISSI ONER OF INCOME-TAX(APPEALS). 24. REGARDING THE ADDITIONAL GROUND RAISED BY THE ASSESSEE ON LEVY OF INTEREST UNDER SECTION 234A, HE DIRECTED THE ASSESSING OFFICER TO COMPUTE THE INTEREST UNDER SEC TION 234A AFTER GIVING EFFECT TO THE APPELLATE ORDER. 25. NOW, IT IS AGAINST THE ABOVE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS) THAT THE REVENU E HAS COME IN SECOND APPEAL BEFORE THE TRIBUNAL. THE REV ENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL BEFORE US:- 1. THE LEARNED COMMISSIONER OF INCOME- TAX(APPEALS) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF DIFFERENCE IN STOCK VALUATION AMOUNTING TO ` 26,51,49,027/- AND ON ACCOUNT OF DISALLOWANCE UNDER SECTION 40A(3) AMOUNTING TO ` 11,50,90,165/-. 2. THE LEARNED COMMISSIONER OF INCOME- TAX(APPEALS) OUGHT TO HAVE CONSIDERED THAT FIRM WAS CONVERTED INTO A COMPANY NAMED M/S. KIRTILAL - - ITA 1576 OF 2012 17 KALIDAS JEWELLERS(P) LTD. W.E.F. 1-1-2008 AND HENCE IT WAS A CASE OF DISSOLUTION OF FIRM. 3. THE LEARNED COMMISSIONER OF INCOME- TAX(APPEALS) ERRED IN HOLDING THAT IT WAS A CASE OF SUCCESSION OF FIRM BY COMPANY AND DIRECTED THAT STOCK BE VALUED AT COST PRICE ONLY. 4. THE LEARNED COMMISSIONER OF INCOME- TAX(APPEALS) FAILED TO APPRECIATE THAT THE BUSINESS OF THE FIRM WAS TAKEN OVER BY A COMPANY AS A GOING CONCERN AND THE STOCK IS TO BE VALUED AT MARKET PRICE ONLY AS REPORTED IN THE CASE OF CIT VS INDIA REINFORCING CO. (55 TAXNMAN 358). 5. THE LEARNED COMMISSIONER OF INCOME- TAX(APPEALS)OUGHT TO HAVE APPRECIATED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ALA FIRM REPORTED IN 189 ITR 285 WHEREIN THE FIRM IS DISSOLVED BY OPERATION OF LAW AND TAKEN OVER BY A COMPANY WHERE THERE IS NO CAPITAL, NO STOCK AND NO PARTNERS OF THE FIRM. - - ITA 1576 OF 2012 18 6. THE LEARNED COMMISSIONER OF INCOME- TAX(APPEALS) OUGHT TO HAVE APPRECIATED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF ALA FIRM REPORTED IN 189 ITR 285 THAT WHENEVER THERE IS DISCONTINUANCE OF BUSINESS, THE STOCK SHOULD BE VALUED AT MARKET PRICE. 7. THE LEARNED COMMISSIONER OF INCOME- TAX(APPEALS) ERRED IN DELETING THE ADDITION ON ACCOUNT OF DISALLOWANCE MADE U/S 40A(3) OF ` 11,50,90,165/- ON THE BASIS OF SELF- SERVING STATEMENT OF THE ASSESSEE. 8. THE LEARNED COMMISSIONER OF INCOME- TAX(APPEALS) OUGHT TO HAVE AFFORDED THE ASSESSING OFFICER AN OPPORTUNITY OF REBUTTAL UNDER RULE 46A O F THE INCOME-TAX RULES ON THE FRESH EVIDENCE PRODUCED BEFORE HIM. 26. SHRI SHAJI P JACOB, THE LEARNED COMMISSIONER O F INCOME-TAX APPEARING FOR THE REVENUE, CONTENDED THA T HE IS SERIOUSLY PRESSING THE GROUND RAISED BY THE REVENUE THAT THE - - ITA 1576 OF 2012 19 COMMISSIONER OF INCOME-TAX(APPEALS) HAS VIOLATED RU LE 46A WHILE DECIDING THE APPEAL AFTER ACCEPTING FRESH EVI DENCE PRODUCED BY THE ASSESSEE FIRM. THE LEARNED COMMISS IONER OF INCOME-TAX PRODUCED BEFORE US A COPY OF LETTER ISSU ED BY THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE III AT COIMBATORE, DATED 31-10-2012, WHEREIN THE ASSISTANT COMMISSIONE R OF INCOME-TAX HAS LISTED THE FRESH MATERIALS PLACED BY THE ASSESSEE BEFORE THE COMMISSIONER OF INCOME-TAX(APPEALS), WHI CH WERE NOT MADE AVAILABLE TO THE ASSESSING OFFICER AT THE TIME OF THE ASSESSMENT. THE LEARNED COMMISSIONER OF INCOME-TAX CONTENDED THAT AS THE COMMISSIONER OF INCOME-TAX(AP PEALS) HAS DECIDED THE ISSUE ON THE BASIS OF FRESH MATERIALS F ILED BY THE ASSESSEE, THE ISSUES MAY BE REMITTED BACK TO THE AS SESSING OFFICER FOR RECONSIDERATION IN THE LIGHT OF SUCH FR ESH MATERIAL. 27. SHRI S.SWAMINATHAN, THE LEARNED CHARTERED ACCOUNTANT APPEARING FOR THE RESPONDENT-ASSESSEE, O N THE OTHER HAND, SUBMITTED THAT THE ASSESSEE HAD FURNISHED ALL THE DETAILS REQUISITIONED BY THE ASSESSING OFFICER IN THE COURS E OF ASSESSMENT. THE LEARNED CHARTERED ACCOUNTANT EXPLA INED THAT THE ASSESSEE HAD PRODUCED A NUMBER OF SALE BILLS BE FORE THE - - ITA 1576 OF 2012 20 ASSESSING OFFICER TO PROVE ITS CASE THAT THE ASSESS EE FIRM HAD NOT MADE ANY CASH PAYMENT AT THE TIME OF PURCHASING OLD JEWELLERY FROM ITS CUSTOMERS. HE EXPLAINED THAT TH E SALE BILLS ARE ALMOST IN THE SAME PATTERN AND, THEREFORE, IT IS NO T NECESSARY THAT THE VERY SAME SALE BILLS EXAMINED BY THE ASSESSING OFFICER OUGHT TO HAVE BEEN EXAMINED BY THE COMMISSIONER OF INCOME- TAX(APPEALS) AND GENERALLY SALE BILLS ARE EXAMINED ON RANDOM BASIS. HE, THEREFORE, CONTENDED THAT THERE IS NO Q UESTION OF ANY FRESH EVIDENCE PLACED BEFORE THE COMMISSIONER OF IN COME- TAX(APPEALS) AND THE ARGUMENT RAISED BY THE REVENUE IS ONLY TECHNICAL IN NATURE. 28. WE SERIOUSLY CONSIDERED THE PRELIMINARY OBJECT ION RAISED BY THE REVENUE. ON GOING THROUGH THE ORDER O F THE COMMISSIONER OF INCOME-TAX(APPEALS), WE FIND THAT T HE COMMISSIONER OF INCOME-TAX(APPEALS) HAS MADE AN ATT EMPT TO STUDY THE ACCOUNTING METHOD FOLLOWED BY THE ASSESSE E WHILE PURCHASING OLD ORNAMENTS AND IN PLACE SELLING NEW O RNAMENTS. THE INTENTION OF THE EXAMINATION MADE BY THE COMMIS SIONER OF INCOME-TAX(APPEALS) WAS TO ASCERTAIN WHETHER THE AS SESSEE WAS MAKING ANY CASH PAYMENT AT ANY POINT OF TIME TO ITS CUSTOMERS AT - - ITA 1576 OF 2012 21 THE TIME OF PURCHASING OLD JEWELLERY. THE COMMISSI ONER OF INCOME-TAX(APPEALS) HAS EXAMINED THE CASH ENTRIES A S WELL AS THE JOURNAL ENTRIES REFLECTED IN THE BOOKS OF ACCOU NT OF THE ASSESSEE FIRM. IT IS IN THE PROCESS OF EXAMINING T HESE ACCOUNTING ENTRIES THAT THE COMMISSIONER OF INCOME- TAX(APPEALS) HAS VERIFIED THE SALE BILLS IN THE FO RM OF EVIDENCES TO SUPPORT SUCH ACCOUNTING ENTRIES. NOW, THE CASE OF THE REVENUE IS THAT CERTAIN BILLS OF DIFFERENT BRANCHES LIKE BANGALORE, CHENNAI, COIMBATORE, HYDERABAD, KOCHI, VIJAYAWADA A ND LUDHIYANA, WHICH WERE EXAMINED BY THE COMMISSIONER OF INCOME-TAX(APPEALS), WERE NOT PLACED BEFORE THE ASS ESSING AUTHORITY. WE FIND THAT THE TURNOVER OF THE ASSESS EE BEING HUGE AND HAVING LOT OF BRANCHES IN DIFFERENT STATES, THE ASSESSEE IS HAVING INNUMERABLE SALE INVOICES AND PURCHASE INVOI CES. IT IS ALSO TRUE THAT THE PATTERN OF ACCOUNTING IS COMMON EVERYWHERE. THE ASSESSEE HAD CHANGED FROM THE EARLIER GROSS ACC OUNTING TO DAILY SALES REGISTER METHOD OF ACCOUNTING. ANOTHER DIFFERENCE IN THE SALE BILLS IS ON ACCOUNT OF THE LOCAL SALES-TAX LAW OF DIFFERENT STATES. FOR THE ABOVE NOMINAL DIFFERENCES, IN PITH AND SUBSTANCE, THE BILLS AND VOUCHERS MAINTAINED BY THE ASSESSEE IN - - ITA 1576 OF 2012 22 DIFFERENT BRANCHES ARE IN THE SAME MANNER. IN SUCH CIRCUMSTANCES, THERE IS NO POINT IN ARGUING THAT TH E ASSESSEE HAS PRODUCED SALE BILL NO.1 BEFORE THE ASSESSING OFFICE R AND SALE BILL NO.5 BEFORE THE COMMISSIONER OF INCOME-TAX(APPEALS) . THERE IS NO FUNDAMENTAL DIFFERENCE BETWEEN SALE BILL NO.1 AN D SALE BILL NO.5. THE ASSESSEE HAS PRODUCED SALE BILLS BOTH BE FORE THE ASSESSING OFFICER AND BEFORE THE COMMISSIONER OF IN COME- TAX(APPEALS) ON RANDOM BASIS. BILLS MAY NOT BE PRO DUCED STRICTLY ACCORDING TO SERIAL NUMBERS. THEREFORE, THERE IS N O FORCE IN THE ARGUMENT OF THE REVENUE THAT THE SALE BILL BEARING THE SAME NUMBER PRODUCED BEFORE THE ASSESSING OFFICER SHOULD BE PRODUCED BEFORE THE COMMISSIONER OF INCOME-TAX(APPE ALS) AS WELL. THIS ARGUMENT CARRIES WEIGHT ONLY IF SALE BI LLS WERE ISSUED AT DIFFERENT POINTS OF TIME AND HAVE ANY SUBSTANTIA L DIFFERENCE IN THEIR SUBSTANCE. HERE THE METHOD FOLLOWED BY THE A SSESSEE IS COMMON. THEREFORE, IT IS NOT POSSIBLE TO HOLD THAT THE ASSESSEE HAS PRODUCED ADDITIONAL AND FRESH EVIDENCES BEFORE THE COMMISSIONER OF INCOME-TAX(APPEALS) ONLY FOR THE RE ASON THAT THE BILLS PRODUCED BEFORE THE ASSESSING OFFICER AND THE BILLS PRODUCED BEFORE THE COMMISSIONER OF INCOME-TAX(APPE ALS) ARE - - ITA 1576 OF 2012 23 DIFFERENT. THEREFORE, WE ARE NOT INCLINED TO ACCEP T THE ARGUMENT OF THE REVENUE THAT THERE IS VIOLATION OF RULE 46A, IN THE PRESENT CASE. 29. THEREFORE, WE PROCEED TO DISPOSE OF THE APPEAL ON MERITS OF THE GROUNDS. 30. FIRST WE WILL CONSIDER THE ADDITION MADE BY TH E ASSESSING OFFICER ON THE GROUND OF VIOLATION OF SEC TION 40A(3). AS ALREADY STATED IN PARAGRAPHS ABOVE, THE COMMISSI ONER OF INCOME-TAX(APPEALS) HAS EXAMINED THE ISSUE IN A VER Y DETAILED MANNER AND HAS COME TO A FINDING THAT THE ASSESSEE COMPANY DID NOT MAKE ANY CASH PAYMENT TO ITS CUSTOMERS WHIL E PURCHASING OLD ORNAMENTS. AS A MATTER OF FACT, THI S IS AN AGE-OLD PRACTICE IN JEWELLERY BUSINESS. IN MAJORITY OF CAS ES THE CUSTOMERS CARRY OLD ORNAMENTS TO THE JEWELLERY SHOP AND GET THEM CONVERTED INTO NEW JEWELLERY AND MAKE PAYMENTS FOR THE DIFFERENTIAL AMOUNT. HERE ALSO THE ASSESSEE HAS FO LLOWED THE SAME PRACTICE PREVALENT IN THE INDUSTRY. WHEREVER CUSTOMERS ARE BRINGING OLD JEWELLERY, THE ASSESSEE FIRM IS RE CORDING IT AS PURCHASE OF OLD GOLD IN ORDER TO SATISFY STATUTE AN D RULE REGARDING SALES-TAX. THIS IS BECAUSE THE ASSESSEE HAS TO PAY PURCHASE - - ITA 1576 OF 2012 24 TAX AT THE TIME OF BUYING OF OLD ORNAMENTS. THE EX PRESSION THAT THE ASSESSEE HAS PURCHASED OLD ORNAMENTS IS ONLY TECHNICAL IN NATURE AND MEANT ONLY TO SATISFY SALES-TAX LAW. TH IS IS NECESSARY BECAUSE THE ASSESSEE IS BOUND TO PAY PURCHASE TAX O N THE VALUE OF THE OLD JEWELLERY RECEIVED FROM THE CUSTOMERS. THE SALES-TAX LAW TREATS IT AS A PURCHASE. BUT FOR ALL PRACTICAL PURPOSES THE CUSTOMER IS ENTRUSTING THE OLD JEWELLERY TO THE ASS ESSEE FIRM FOR CONVERTING IT INTO NEW JEWELLERY AND THE ACTUAL SAL E AND PURCHASE TRANSACTIONS TAKE PLACE ONLY IN RESPECT OF THE ADDI TIONAL GOLD PROVIDED BY THE ASSESSEE FIRM. WHERE THE SURRENDER VALUE OF THE OLD JEWELLERY ENTRUSTED BY THE CUSTOMERS TO THE ASS ESSEE FIRM IS ` 100/- AND THE VALUE OF NEW JEWELLERY RETURNED BY T HE ASSESSEE IS ` 200/-, THE DIFFERENTIAL AMOUNT OF ` 100/- ALONE IS PAID BY THE CUSTOMERS TO THE ASSESSEE. THE ASSESSEE IS NOT MAK ING PAYMENT OF ` 100/- TO THE CUSTOMER AT THE TIME OF ACCEPTING THE OLD ORNAMENTS. THAT IS WHY THE COMMISSIONER OF INC OME- TAX(APPEALS) HAS CORRECTLY APPRECIATED THAT THE ENT IRE TRANSACTION CONSISTED OF CASH ENTRIES AS WELL AS JOURNAL ENTRIE S. THE CASH ENTRIES RELATED TO THE PAYMENT OF THE DIFFERENTIAL AMOUNT BY THE CUSTOMERS TO THE ASSESSEE FIRM. THERE IS NO PAYMEN T OF CASH BY - - ITA 1576 OF 2012 25 THE ASSESSEE FIRM TO ITS CUSTOMERS AT THE TIME OF R ECEIPT OF OLD ORNAMENTS. 31. THEREFORE, WE FIND THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS CORRECTLY APPRECIATED THE F ACTS OF THE CASE AND HAS RIGHTLY COME TO THE CONCLUSION THAT TH E ASSESSEE HAS NOT MADE PAYMENTS TO THE CUSTOMERS AT THE TIME OF PURCHASE OF OLD JEWELLERY. THEREFORE, THERE IS NO QUESTION OF THE ASSESSEE VIOLATING THE PROVISIONS OF LAW STATED IN SECTION 4 0A(3). THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS) DE LETING THE ADDITION OF ` 11,37,78,775/- IS UPHELD. THE GROUNDS RAISED BY THE REVENUE ON THIS ISSUE FAIL. 32. NEXT WE WILL CONSIDER THE QUESTION OF VALUATIO N OF CLOSING STOCK AT THE TIME OF CONVERSION OF THE PART NERSHIP FIRM INTO A PRIVATE LIMITED COMPANY. THE FIRM CONTINUED THE BUSINESS IN THAT STATUS TILL 31-12-2007. THE FIRM HAS BEEN CON VERTED INTO A PRIVATE LIMITED COMPANY WITH EFFECT FROM 1-1-2008. IT IS ON THAT DATE THAT THE COMPANY WAS INCORPORATED. ALL THE AS SETS AND LIABILITIES OF THE ERSTWHILE FIRM WERE TAKEN OVER B Y THE COMPANY. THEY ALL VESTED IN THE HANDS OF THE COMPANY. THE C ONVERSION OF THE FIRM INTO A COMPANY WAS IN CONSONANCE WITH SECT ION 575 OF - - ITA 1576 OF 2012 26 THE COMPANIES ACT, 1956. THERE IS NO INTERRUPTION TO THE BUSINESS CARRIED ON BY THE ASSESSEE FIRM. THE NEW COMPANY TOOK OVER THE BUSINESS OF THE FIRM AS A GOING CONCE RN. THERE WAS NO STOPPAGE OF BUSINESS. THE CHANGE WAS ONLY I N THE FORM OF THE BUSINESS ORGANIZATION. EARLIER IT WAS A FIR M. THEREAFTER IT BECAME A COMPANY. ALL THE PARTNERS OF THE ERSTWHIL E FIRM BECAME THE SHAREHOLDERS OF THE NEW COMPANY. NOBODY ELSE WAS ADMITTED AS SHAREHOLDER. NO ASSET OF THE OLD F IRM WAS DISTRIBUTED AMONG THE PARTNERS. NO CAPITAL WAS WIT HDRAWN BY THE PARTNERS. THE CAPITAL OF THE PARTNERS WAS CONVERTE D INTO SHARES CONTRIBUTING TOWARDS THE CAPITAL OF THE COMPANY. A LL OTHER ASSETS AND LIABILITIES WERE TAKEN OVER BY THE COMPANY. 33. THE HONBLE KERALA HIGH COURT IN THE CASE OF C IT VS. S.KODER, 233 ITR 620, HAD AN OCCASION TO CONSID ER A SIMILAR ISSUE. A FIRM WAS CONVERTED INTO A PRIVATE LIMITED COMPANY, THE ERSTWHILE PARTNERS BEING THE ONLY SHAREHOLDERS. TH E BUSINESS OF THE FIRM WAS CONTINUED BY THE COMPANY. THE COURT H ELD THAT SECTION 170 OF THE INCOME-TAX ACT, 1961 APPLIED AND IT WAS A CASE OF SUCCESSION OF BUSINESS. THE COURT HELD THAT IN SUCH CIRCUMSTANCES THE STOCK OF THE FIRM COULD NOT BE VA LUED AT MARKET - - ITA 1576 OF 2012 27 PRICE. THE TRIBUNAL HAS OBSERVED IN THAT CASE THAT THE INTENTION OF THE PARTNERS IN TRANSFERRING THE BUSINESS TO A P RIVATE LIMITED COMPANY WAS TO CHANGE THE FORM OF ORGANIZATION. TH E TRIBUNAL HAD RECORDED A FINDING THAT THE DISSOLUTION WAS CON SEQUENTIAL TO THE TRANSFER OF BUSINESS TO THE COMPANY. IT WAS IN THOSE CIRCUMSTANCES THAT THE HONBLE KERALA HIGH COURT FO UND THAT IT WAS A CLEAR CASE OF SUCCESSION OF BUSINESS, INASMUC H AS IT WAS NOT A CASE WHERE DISSOLUTION PRECEDED THE TRANSFER. THEREFORE, THE HONBLE HIGH COURT HELD THAT THERE WAS NO COMPU LSION TO VALUE THE CLOSING STOCK AT MARKET PRICE. 34. IN A SLIGHTLY DIFFERENT CONTEXT, THE VERY SAME ISSUE WAS CONSIDERED BY THE HONBLE SUPREME COURT IN THE CASE OF SAKTHI TRADING CO. VS. CIT, 250 ITR 871. IN THAT C ASE THE ASSESSEE WAS A REGISTERED FIRM. ONE OF THE PARTNER S EXPIRED. AS A RESULT OF THE DEATH, THE FIRM WAS DISSOLVED. IT WAS RECONSTITUTED THE NEXT DAY WITH THE REMAINING PARTNERS. THE TRIB UNAL HELD THAT AS THE BUSINESS OF THE FIRM WAS NEVER DISCONTINUED, BUT WAS TAKEN OVER ON SUCCESSION BY ANOTHER FIRM, THE CLOSI NG STOCK OF THE ASSESSEE FIRM ON THE DATE OF DISSOLUTION WAS SO UGHT TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER WAS LOWER . THE - - ITA 1576 OF 2012 28 HONBLE MADRAS HIGH COURT HELD THAT THE CLOSING STO CK HAD TO BE VALUED AT MARKET PRICE. THE HONBLE SUPREME COURT UPHELD THE DECISION OF THE TRIBUNAL HOLDING THAT THERE WAS NO CESSATION OF BUSINESS AND THEREFORE THE CLOSING STOCK HAD TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS LOWER. IT IS IN THIS CASE THAT THE HONBLE SUPREME COURT HAS DECLARED THE RELEVANT LAW THAT IT IS AN ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACCO UNTANCY THAT WHERE THERE IS NO DISCONTINUANCE OF BUSINESS THE CL OSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS LOWER. 35. THE ABOVE JUDGMENT OF THE HONBLE SUPREME COUR T HAS BEEN LATER FOLLOWED BY THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. STANDARD PRINTING MACHINERY, 260 IT R 268, IN AN EXACTLY SIMILAR CASE WHERE THE FIRM WAS RECONSTITUT ED AND BUSINESS WAS CONTINUED WITHOUT INTERRUPTION ON THE DEATH OF ONE OF THE PARTNERS OF THE FIRM. 36. THE JUDGMENT OF THE HONBLE SUPREME COURT IN T HE CASE OF A.L.A.FIRM VS CIT, 189 ITR 285, RELIED ON B Y THE ASSESSING OFFICER, PROVIDES RULES FOR ANOTHER SET O F CIRCUMSTANCES. THE RULE OF VALUING THE CLOSING STO CK AT MARKET VALUE WAS DECLARED BY THE HONBLE SUPREME COURT TO BE FOLLOWED - - ITA 1576 OF 2012 29 IN A CASE WHERE THERE IS DISSOLUTION OF THE FIRM AN D DISCONTINUANCE OF BUSINESS. IN A CASE OF SUCCESSIO N OF BUSINESS THE RULE LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF A.L.A.FIRM VS. CIT, 189 ITR 285, IS NOT APPLICABLE. 37. THEREFORE, WE FIND THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS RIGHTLY DELETED THE STOCK V ALUATION ADDITION OF ` 26,51,49,027/-. IN FACT, THE FRACTIONAL ASSESSMEN T MADE BY THE ASSESSING OFFICER IN THE HANDS OF THE C OMPANY M/S.KIRTILAL KALIDAS JEWELLERS PVT. LTD. FOR THE AS SESSMENT YEAR 2008-09 WAS BROUGHT BEFORE THE INCOME-TAX APPELLATE TRIBUNAL A-BENCH, CHENNAI, THROUGH THE APPEAL FILED BY THE R EVENUE IN ITA NO.564/MDS/2012. IN THAT CASE ALSO THE ASSESSI NG OFFICER HAS ALLEGED VIOLATION OF SECTION 40A(3) ON EXACTLY SIMILAR CIRCUMSTANCES. THE TRIBUNAL, THROUGH THEIR ORDER DATED 5-9-2012, ACCEPTED THE CONTENTION OF THE ASSESSEE T HAT ENTRIES IN CASH BOOKS WERE PASSED FOR THE PURCHASE OF OLD GOLD JEWELLERY FROM THE CUSTOMERS BY DEBITING PURCHASE ACCOUNT AND CREDITING THE CASH INITIALLY BUT AT THE END OF THE DAY THE CA SH ACCOUNT WAS DEBITED AND THE CONCERNED PARTYS ACCOUNT WAS CREDI TED AS CONTRA. THE TRIBUNAL ACCEPTED THE CONTENTION OF TH E ASSESSEE - - ITA 1576 OF 2012 30 THAT THEY WERE ALL CONTRA ENTRIES WITHOUT INVOLVING MOVEMENT OF ANY CASH FROM THE ASSESSEE TO ITS CUSTOMERS. WE FI ND THAT THE ARGUMENT OF THE ASSESSEE HAS BEEN ACCEPTED BY THE T RIBUNAL IN THE SAID ORDER. THE SAID DECISION IS ALSO BINDING ON THIS CO- ORDINATE BENCH. 38. IN RESULT, BOTH THE ISSUES RAISED BY THE REVEN UE IN THE PRESENT APPEAL ARE DECIDED AGAINST THE REVENUE AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDERS PRONOUNCED ON WEDNESDAY, THE 14 TH OF NOVEMBER, 2012 AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (DR. O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED, THE 14 TH NOVEMBER, 2012. V.A.P. COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR 6. GF.