Commissioner of Income Tax vs Venkatachalam and Co.

V.S. Sirpurkar J.

The question that is referred is as under :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the value of the stock at which

the assessee-firm which was formed on the dissolution of an erstwhile firm took over the stock and adopted in its accounts as opening stock

should be increased by Rs. 40,800 to bring it on par with the amount of valuation of the closing stock of the dissolved firm ?

The facts are that the assessee which was a partnership firm was assessed for the assessment year 1982-83 for which the accounting year was

from December 1, 1982, to April 12, 1982 (sic). The assessee had declared a total income of Rs. 36,817 in its return filed on February 26, 1983,

and the Assessing Officer completed the assessment u/s 143(3) of a total income of Rs. 35,850 by his assessment order dated January 30, 1985,

in the status of an unregistered firm. It had so happened that one of the partners had expired on January 31, 1982, and, therefore, the firm itself

had been dissolved. Thereafter the new firm was formed with the wife of the erstwhile expired partner having been taken up as a partner of the

firm. When the closing stock of the erstwhile firm was assessed, the sum of Rs. 40,800 was added to it. This was while assessing the value of the

closing stock as on January 31, 1982, when a partner died and the firm got dissolved. However, when the firm was assessed thereafter, this

enhanced value of Rs. 40,800 was ignored. Inasmuch as while assessing the opening stock of the new firm that amount was actually ignored, the

contention raised before the Deputy Commissioner (Appeals) was that the closing stock of the erstwhile firm alone should be shown as the opening

stock of the new firm and if the closing stock was enhanced by Rs. 40,800 the same credit should be given while considering the opening stock of

the new firm. That contention was rejected by the Deputy Commissioner (Appeals). In the Tribunal, however, this contention was reiterated and

the Tribunal was pleased to accept this contention. It went on to record.

There is considerable force in this submission of the assessee''s learned counsel as the value of the opening stock for the next accounting year

should be identical to the value of the closing stock of the previous accounting period. This is a settled principle of accountancy. Otherwise, there

would be a total distortion of the profits of the business. I therefore accept the contentions of learned counsel for the appellant and direct the

Assessing Officer to increase the value of the opening stock of the goods by the sum of Rs. 40,800 and allow consequential relief.

It is obvious that the assessing authorities had enhanced the closing stock of the erstwhile firm by Rs. 40,800 and that was not challenged by the

assessee and it should be held to have become final. Therefore, it was obvious that when the opening stock of the new firm, i.e., the firm which

was formed after taking the wife of the expired partner as a partner should have been the same closing stock of the erstwhile firm. In our opinion,

the Tribunal has correctly arrived at this finding and we do not see any reason to interfere with the Tribunal''s order. Accordingly, the reference is

answered that the Tribunal was right in holding that the cost at which the assessee-firm, which was formed on the dissolution of the erstwhile firm,

took over the stock and adopted in its accounts as opening stock value should be increased by Rs. 40,800 to bring it on par with the amount of

valuation of closing stock of the dissolved firm.

Before parting with the matter we must observe that the ending words of the reference to the following effect,

thus ignoring the actual cost of acquisition of the stock by assessee-firm

appear to be unnecessary and surplus because the real question only is as to whether the opening stock of the reconstituted firm should be the

closing stock of the erstwhile firm.

We answer the reference accordingly.