Mettur Spinning Mills vs Commissioner of Income Tax

N.V. Balasubramanian, J.—At the instance of the assessee relating to its assessment year 1980-81, the following two questions have been referred to us for our decision :

"(a) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in confirming the addition of Rs. 4,86,339 on account of valuation of the closing stock ?

(b) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the gross interest should be disallowed u/s 40(b) of the Income Tax Act, 1961 ?"

In so far as the first question of law is concerned, the Tribunal has held that the Commissioner of Income Tax, has found as a fact that in the asses-see''s case, the partners, at the time of dissolution of the firm, have actually revalued the closing stock at market price and credited the same in the accounts of the partners. The contention raised by the assessee that the valuation of the stock should be done at the book value was not found acceptable either by the Income Tax Officer or by the Commissioner of Income Tax in the appeal. The Appellate Tribunal also rejected the contention urged on behalf of the assessee and held that the valuation of the closing stock should be done on the market value. The Supreme Court in the case of A.L.A. Firm Vs. Commissioner of Income Tax, Madras, , held that the proper practice is to value the closing stock at market value and that will eliminate entries relating to the same stock from both sides of the account. The view of the Tribunal is in accordance with the law laid down by the Supreme Court in A.L.A. Firm Vs. Commissioner of Income Tax, Madras, . Accordingly, we answer the first question referred to us in favour of the Revenue and against the assessee.

As regards the second question, the point that is raised is whether the gross interest should be disallowed u/s 40(b) of the Act or it should be the net interest. The Appellate Tribunal held on the basis of the decision in the case of Commissioner of Income Tax Vs. O.M.S.S. Sankaralinga Nadar and Co., , that the gross interest should be disallowed. The Supreme Court however, in the case of Keshavji Ravji and Co. v. CIT : [1990]183ITR1(SC) , held that net interest should be disallowed and not the gross interest. Following the decision of the Supreme Court in Keshavji Ravji and Co. v. CIT : [1990]183ITR1(SC) , we answer the second question of law referred to us in favour of the assessee.

However, in the circumstances of the case, there will be no order as to costs.