K.R.Muralidhar, CHENNAI V. ITO, CHENNAI

MA 84/CHNY/2015

• Counselvise Citation: [2015] 124 COUNSELVISE.COM (IT) 3439 (ITAT-CHENNAI)
• Duration Of Justice: 1 month(s) 20 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 08-07-2015
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Depreciation; Fair market value

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI . . . , . ! , ' # $ [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ] M.P.NO.84/MDS/2015 [IN I.T.A.NO.1097/MDS/2015] ASSESSMENT YEAR : 2009-10 SHRI K.R.MURALIDHAR OLD NO.120, NEW NO.246 ROOM NO.24 & 25, 1 ST FLOOR GOVINDAPPA NAICKEN STREET CHENNAI 600 101 VS. THE INCOME TAX OFFICER NON-CORPORATE CIRCLE 13 CHENNAI [PAN AAGPM 90 7 0 N] ( PETITIONER ) ( R ESPONDENT) PETITIONER BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE RESPONDENT BY : SHRI P. RADHAKRISHNAN, JCIT / DATE OF HEARING : 14 - 0 8 - 2015 / DATE OF PRONOUNCEMENT : 28 - 0 8 - 2015 / O R D E R PER N.R.S.GANESAN, JUDICIAL MEMBER THE ASSESSEE FILED THE PRESENT MISCELLANEOUS PET ITION ON THE GROUND THAT THERE IS AN ERROR IN THE ORDER OF THIS TRIBUNAL DATED 26.6.2015. 2. SHRI R. VIJAYARAGHAVAN, LD. COUNSEL FOR THE ASSESSE E SUBMITTED THAT REGARDING VALUATION OF THE PROPERTY FOR COMPUTATION OF CAPITAL GAINS, THIS TRIBUNAL FOUND THAT THE VALUE A S REFLECTED IN THE MP NO.84/15 :- 2 -: BALANCE SHEET OF THE PARTNERSHIP FIRM WAS CONFIRMED BY THE CIT(A), THEREFORE, THERE WAS NO INFIRMITY IN THE ORDER OF T HE CIT(A). REFERRING TO SECTION 45(4) OF THE INCOME-TAX ACT, 1 961, THE LD. COUNSEL SUBMITTED THAT WHEN THE PROFIT OR GAIN ARISES FROM TRANSFER OF A CAPITAL ASSET ON DISSOLUTION OF THE FIRM, SHALL BE CHARGEAB LE TO TAX AND FOR THE PURPOSE OF SEC. 48, THE FAIR MARKET VALUE OF THE AS SET ON THE DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER. THEREFORE, ACCORDING TO THE LD. COUNSEL, THE FAIR MARKET VALUE AS ON THE DATE OF DISSOLUTION OF THE FIRM SHALL BE TAKEN INTO CONSIDERATION. THE LD. COUNSEL PLACED HIS RELIANCE ON THE JUDGMENT OF THE APEX COURT IN A .L.A FIRM VS CIT, 189 ITR 285 AND SUBMITTED THAT AT THE TIME OF DISSO LUTION, THE STOCK SHOULD BE VALUED AT MARKET PRICE AND NOT AS PER THE VALUE AS APPEARING IN THE BOOKS OF ACCOUNT. ACCORDING TO TH E LD. COUNSEL, THE FIRM WAS DISSOLVED ON 20.2.2007, THEREFORE, THE PRO PERTY SHOULD BE VALUED AT MARKET PRICE AS ON 20.2.2007 AND NOT AS P ER THE VALUE AS REFLECTED IN THE BALANCE SHEET OF THE FIRM. ACCORD ING TO THE LD. COUNSEL, THE NON-CONSIDERATION OF SECTION 45(4) OF THE ACT AND THE JUDGMENT OF THE APEX COURT IN A.L.A FIRM(SUPRA) CON STITUTES A MISTAKE APPARENT ON THE FACE OF THE RECORD U/S 254(2) OF T HE ACT. 3. ON THE CONTRARY, SHRI P. RADHAKRISHNAN, LD. DEPARTM ENTAL REPRESENTATIVE SUBMITTED THAT SECTION 45(4) OF THE ACT CLEARLY SAYS THAT MP NO.84/15 :- 3 -: THE PROFIT OR GAIN ARISING FROM TRANSFER OF A CAPIT AL ASSET ON DISSOLUTION OF THE FIRM SHALL BE CHARGEABLE TO TAX AS INCOME OF THE FIRM OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TOOK PLACE . FOR ASSESSING THE FIRM, THE FAIR MARKET VALUE OF THE ASSET AS ON THE DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDE RATION RECEIVED OR ACCRUING AS A RESULT OF TRANSFER. IN THE PRESENT C ASE, IT IS NOT THE CASE OF ASSESSMENT OF THE FIRM BUT IT IS A CASE OF ASSE SSMENT OF THE INDIVIDUAL PARTNER. REFERRING TO THE JUDGMENT OF T HE APEX COURT IN A.L.A FIRM (SUPRA), THE LD. DR SUBMITTED THAT THE I N THE CASE BEFORE THE APEX COURT, THE PARTNERS OF THE FIRM REVALUED T HE STOCK-IN-TRADE FOR THE PURPOSE OF MUTUAL ADJUSTMENT. ON THOSE CIRCUMS TANCES, THE APEX COURT FOUND THAT SINCE THE STOCK HAD BEEN VALUED AT MARKET PRICE, THE SURPLUS HAD TO BE REFLECTED IN THE PROFIT OF THE FI RM AND HAD TO BE CHARGED TO TAX. IN THE CASE BEFORE THIS TRIBUNAL, IT IS NOT THE CASE OF THE ASSESSEE THAT STOCK-IN-TRADE WAS REVALUED AT TH E TIME OF DISSOLUTION. SINCE THE STOCK-IN-TRADE AND ASSETS W ERE NOT REVALUED, THIS TRIBUNAL HAS RIGHTLY CONFIRMED THE ORDER OF TH E LOWER AUTHORITY. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE QUESTION ARISES FOR CONSIDERATION IS WITH REGARD TO VALUATION OF THE PR OPERTY. IT IS NOT THE CASE OF THE ASSESSEE THAT ON THE DATE OF DISSOLUTI ON THE PROPERTY WAS REVALUED. WE HAVE GONE THROUGH THE JUDGMENT OF THE APEX COURT IN MP NO.84/15 :- 4 -: A.L.F FIRM (SUPRA). IN THE CASE BEFORE THE APEX CO URT, THE ISSUE WAS VALUATION OF CLOSING STOCK OF A BUSINESS AT COST OR MARKET PRICE AT THE OPTION OF THE ASSESSEE. AFTER REFERRING TO THE JU DGMENT OF THE MADRAS HIGH COURT IN G.R. RAMACHARI AND CO. VS CIT [1961] 41 ITR 142, THE APEX COURT FOUND THAT THE PRINCIPLE OF VALUING THE CLOSING STOCK OF A BUSINESS AT COST OR MARKET PRICE AT THE OPTION OF T HE ASSESSEE IS A PRINCIPLE THAT WOULD HOLD GOOD ONLY SO LONG AS THER E IS A CONTINUING BUSINESS AND THAT WHERE BUSINESS IS DISCONTINUED, WHETHER ON ACCOUNT OF DISSOLUTION OR CLOSURE OR OTHERWISE BY THE ASSE SSEE, THEN THE PROFIT CANNOT BE ASCERTAINED EXCEPT BY TAKING THE CLOSING STOCK AT MARKET VALUE. THEREFORE, THE APEX COURT FOUND THAT TRUE T RADING RESULT OF A BUSINESS FOR AN ACCOUNTING PERIOD CANNOT BE ASCERTA INED WITHOUT TAKING INTO ACCOUNT THE VALUE OF THE STOCK-IN-TRADE REMAINING AT THE END OF THE PERIOD. THE APEX COURT FOUND THAT EVEN IN A CONTINUING BUSINESS, THE VALUATION AT MARKET VALUE IS PERMISSI BLE ONLY WHEN IT IS LESS THAN THE COST. WHEN THE BUSINESS COMES TO A C LOSE, NO FURTHER ADJUSTMENT OF OVER OR UNDER VALUATION IS POSSIBLE. SINCE THE STOCK-IN- TRADE WAS VALUED AT MARKET PRICE IT HAS TO BE REFLE CTED IN THE PROFIT OF THE FIRM AND HAS TO BE CHARGED TO TAX. AFTER REFER RING TO THE JUDGMENT OF MADRAS HIGH COURT IN MUHAMMAD USSAIN SAHIB VS S. N. ABDUL GAFFOOR SAHIB, AIR 1950 MAD 758, THE APEX COURT OBS ERVED THAT WHEN THE FIRM WAS DISSOLVED, THE PARTNERS BEING A COMMER CIAL MEN WOULD MP NO.84/15 :- 5 -: VALUE THE ASSETS ONLY ON A REAL BASIS AND NOT AT CO ST OR AT THEIR OTHER VALUE APPEARING IN THE BOOKS. IN FACT, THE APEX COU RT OBSERVED AS FOLLOWS AT PAGE 306 OF THE ITR: WE ARE NOT QUITE SURE THAT THE FIRST OF THE CONSID ERATIONS THAT PREVAILED WITH THE HIGH COURT IS RELEVANT IN T HE PRESENT CASE. EVEN IN A CONTINUING BUSINESS, THE VALUATION AT MARKET VALUE IS PERMISSIBLE ONLY WHEN IT IS LESS THAN COST ; IT IS NOT QUITE CERTAIN WHETHER THE RULES PERMIT AN ASSESSEE IF HE SO DESIRES TO VALUE CLOSING STOCK AT MARKET VALUE W HERE IT IS HIGHER THAN COST. BUT, IN EITHER EVENT, IT IS ALLOWE D TO BE DONE BECAUSE ITS EFFECT CAN BE OFFSET OVER A PERIOD OF T IME. BUT HERE, WHERE THE BUSINESS COMES TO A CLOSE, NO FUTUR E ADJUSTMENT OF AN OVER OR UNDERVALUATION IS POSSIBLE . IN THIS CON- TEXT, IT IS DIFFICULT TO SEE HOW VALUATION, AT OTHER THAN COST, CAN BE JUSTIFIED ON THE PRINCIPLE OF AHMEDABA D NEW COTTON MILLS' CASE [1930] LR 57 LA 21 (PC) ; AIR 1930 PC 56. WE, HOWEVER, FIND SUBSTANCE IN THE SECOND CONSIDERA TION THAT PREVAILED WITH THE HIGH COURT. THE DECISION IN MUHAMMAD USSAIN SAHIB V. S. N. A BDUL CAFFOOR SAHIB, AIR 1950 MAD 758 ; [19501 1 MLJ 81 CORRECTLY SETS OUT THE MODE OF TAKING ACCOUNTS REGARDING THE ASSET S OF A FIRM. WHILE THE VALUATION OF ASSETS DURING THE SUBSISTENCE OF THE PARTNERSHIP WOULD BE IMMATERIAL AND COULD EV EN BE NOTIONAL, THE POSITION AT THE POINT OF DISSOLUTION IS TOTALLY DIFFERENT (AT P. 759) : 'BUT THE SITUATION IS TOTALLY DIFFERENT WHEN THE FIR M IS DISSOLVED OR WHEN A PARTNER RETIRES. THE SETTLEMENT OF HIS ACCOUNT MUST BE NOT ON A NOTIONAL BASIS BUT ON A RE AL BASIS, THAT IS EVERY ASSET OF THE PARTNERSHIP SHOULD BE CO NVERTED INTO MONEY AND THE ACCOUNT OF EACH PARTNER SETTLED ON THAT BASIS .... THE ASSETS HAVE TO BE VALUED, OF COURSE\ON THE BASIS OF THE MARKET VALUE ON THE DATE OF THE DI SSOLUTION .... ' THIS APPLIES EQUALLY WELL TO ASSETS WHICH CON STITUTE STOCK- IN-TRADE. THERE CAN BE NO MANNER OF DOUBT THAT, IN TAKING MP NO.84/15 :- 6 -: ACCOUNTS FOR PURPOSES OF DISSOLUTION, THE FIRM AND THE PARTNERS, BEING COMMERCIAL MEN, WOULD VALUE THE ASS ETS ONLY ON A REAL BASIS AND NOT AT COST OR AT THEIR OTHER VALU E APPEARING IN THE BOOKS. A SHORT PASSAGE FROM PICKLE S ON ACCOUNTANCY (THIRD EDN.), P. 650, WILL MAKE THIS CLEAR : 'IN THE EVENT OF THE ACCOUNTS BEING DRAWN UP TO TH E DATE OF DEATH OR RETIREMENT, NO DEPARTURE FROM THE NORMAL PROCEDURE ARISES, BUT IT WILL BE NECESSARY TO SEE T HAT EVERY REVALUATION REQUIRED BY THE TERMS OF THE PARTNERSHI P AGREEMENT IS MADE. IT HAS BEEN LAID DOWN JUDICIALLY THAT, IN THE ABSENCE OF CONTRARY AGREEMENT, ALL ASSETS AND L IABILITIES MUST BE TAKEN AT A 'FAIR VALUE' NOT MERELY A 'BOOK VALUE' BASIS, THUS INVOLVING RECORDING ENTRIES FOR BOTH AP PRECIATION AND DEPRECIATION OF ASSETS AND LIABILITIES. THIS RU LE IS APPLICABLE, NOTWITHSTANDING THE OMISSION OF A PARTI CULAR ITEM FROM THE BOOKS, E.G., INVESTMENTS, GOODWILL (CRUIKS HANK V. SUTHERLAND [1922] 92 LJ CH 136 (HL)). OBVIOUSLY, THE NET EFFECT OF THE REVALUATION WILL BE A PROFIT OR LOSS DIVISIBLE IN THE AGREED PROFIT OR LOSS-SHARING RATIOS.' 5. IN VIEW OF THE ABOVE OBSERVATION, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT WHEN THE PARTNERSHIP WAS DI SSOLVED, THE ASSET OF THE FIRM HAS TO BE VALUED ON REAL BASIS I.E AT M ARKET VALUE, AND NOT AT COST PRICE. AS OBSERVED BY THE APEX COURT, THE VALUE REFLECTED IN THE BOOKS OF ACCOUNT CANNOT REFLECT THE FAIR MARKET VALUE. THEREFORE, THE PROPERTY HAS TO BE VALUED ON THE DATE OF DISSOL UTION IN VIEW OF THIS JUDGMENT OF THE APEX COURT WHICH WAS NOT BROUGHT TO THE NOTICE AT THE TIME OF HEARING OF THE APPEAL. THIS TRIBUNAL IS O F THE CONSIDERED OPINION THAT THERE IS AN ERROR IN THE ORDER OF THIS TRIBUNAL DATED 26.6.2015. ACCORDINGLY, IN EXERCISE OF THE JURISDI CTION CONFERRED ON THIS MP NO.84/15 :- 7 -: TRIBUNAL U/S 254(2) OF THE ACT, THE ORDER OF THIS TRIBUNAL DATED 26.6.2015 IS RECTIFIED AS FOLLOWS: AT PAGE 6, PARA 7, THE FOLLOWING SHALL BE DELETED: NOW COMING TO THE VALUATION, THE ASSESSING OFFICER HAS RIGHTLY TAKEN THE VALUE AS REFLECTED IN THE BALANCE SHEET OF THE PARTNERSHIP FIRM AND IT WAS CONFIRMED BY THE CIT(APPEALS). THEREFORE, THIS TRIBUNAL DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LOWER AUTHORITY AND A CCORDINGLY, THE SAME IS CONFIRMED. NOW THE FOLLOWING SHALL BE INSERTED AS PARA 7: 7. NOW, COMING TO THE VALUATION, ADMITTEDLY, THE RE WAS DISSOLUTION OF THE FIRM AND THE PARTNERSHIP FIRM CE ASED TO EXIST. THEREFORE, AS OBSERVED BY THE APEX COURT IN A.L.A FIRM VS CIT, [1991]189 ITR 285, THE VALUE OF THE AS SET HAS TO BE REVALUED AND THE FAIR VALUE ON THE DATE OF DI SSOLUTION HAS TO BE TAKEN INTO CONSIDERATION. AS OBSERVED BY THE APEX COURT, THE PARTNER OF THE FIRM BEING A COMMERCIAL MAN, WILL VALUE THE ASSET ONLY ON REAL PRICE AND NOT AT COST OR AT ANY OTHER VALUE. THEREFORE, THIS TRIBUNAL IS OF THE C ONSIDERED OPINION THAT THE ASSESSING OFFICER SHALL FIND OUT T HE FAIR VALUE/MARKET VALUE OF THE PROPERTY AS ON THE DATE O F DISSOLUTION OF THE FIRM I.E 20.2.2007 AND THEREAFTE R COMPUTE THE CAPITAL GAINS IN ACCORDANCE WITH LAW. 6. AT PARA 8, PAGE 7, THE FOLLOWING SHALL BE DELETED: 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE I S DISMISSED. NOW THE FOLLOWING SHALL BE INSERTED: MP NO.84/15 :- 8 -: 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 7. THE ORDER OF THIS TRIBUNAL DATED 26.6.2015 IS RECTI FIED ACCORDINGLY. IT IS MADE CLEAR THAT IN RESPECT OF T HE OTHER PART OF THE ORDER, IT WILL REMAIN AS SUCH WITHOUT ANY CHANGE. 8. IN THE RESULT, THE MISCELLANEOUS PETITION FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH OF AUGUST, 2015, AT CHENNAI. SD/- SD/- ( . ! ) (A. MOHAN ALANKAMONY) ' / ACCOUNTANT MEMBER ( . . . ) ) (N.R.S. GANESAN) / JUDICIAL MEMBER / CHENNAI / DATED: 28 TH AUGUST, 2015 RD !' / COPY TO: 1 . PETITIONER 4. # # $ / CIT 2. %#&' / RESPONDENT 5. ()*# +, / DR 3. # # $ (! *) / CIT(A) 6. )./ 0 / GF