Sunny Jacob Jewellers & Wedding Centre v. Cit

Dr. Manjula Chellur, C.J.

1. We are concerned with assessment order of 2008-09 in all these appeals. A common order was passed by the Tribunal pertaining to these three appeals. Therefore, these appeals are heard and are disposed by a common order. The brief facts that led to filing of the present appeals are as under:

2. All the appellants/assessees were running partnership business in gold and also other items. Assessment for the above year came to be completed under section 143(3) of the Income Tax Act (hereinafter referred to as the Act). Commissioner invoking the powers under section 263 of the Act cancelled the assessment on the ground that assessment orders passed by the assessing authority were erroneous and prejudicial to the interest of the Revenue. Aggrieved by the same, appellant firms approached the Tribunal which confirmed the orders of Commissioner. Therefore, appellants are before us.

3. We heard learned counsel for appellant firms and also learned standing counsel for the Revenue. According to learned counsel arguing for appellant firms, opinion of the CIT which came to be confirmed by the Tribunal is based on a wrong interpretation so far as judgment in A.L.A. Firm Vs. Commissioner of Income Tax, Madras, . According to appellants, appellant/assessee firms were never dissolved, therefore, question of working out assets and liabilities would not arise. The decision in A.L.A. Firm (supra) pertains to a situation of dissolved firm and profit was worked out for the purpose of distribution among the partners. In that view of the matter, the principle laid down in the said decision is not at all applicable to the facts of the present case. So far as factual situation to support the above contention, learned counsel for appellant submits, all partnership firms consist of only family members as partners. On account of various reasons, the firms decided to discontinue the business carried on by them in gold. Therefore, as all the partners, being members of one family, decided to transfer the stock in all the firms to one of the partners Mr. Sunny Jacob who was carrying on gold business in proprietary concern by name M/s. Dona Gold. Therefore, it cannot be considered as a situation on par with the dissolved firm, hence, there is no justification in the orders of the Commissioner which came to be confirmed by the Tribunal. He further contends that even if the Commissioner were to cancel and remand the matter to the assessing authority for fresh consideration, it was not open to the Commissioner to indicate any formula how the calculations have to be adopted in order to compute the tax liability. Therefore, viewed from any angle, the orders of the Tribunal deserve to be set aside.

4. As against this argument of appellants/assessees, learned standing counsel for Department contends that though the factual situation discussed in A.L.A. Finn (supra) is different from the factual situation of the present cases, the fact remains, the business of gold is discontinued in the assessees firm. Therefore, irrespective, whether it is by virtue of dissolution or otherwise, once a particular business is discontinued, the stock transfer has to be valued based on market value and not on book value. He further reiterates that the principle laid down in A.L.A. Firm (supra) is applicable to the facts of the present appeal.

5. We have gone through the abovesaid judgment and also orders of the Commissioner under section 263 of the Act as well as orders of the Tribunal. The genesis for the present situation seems to be a search conducted in the business premises and residences of the appellants on 21-8-2007. According to them, subsequent to the search, from 5-12-2007, appellant firms discontinued their gold business and closing stock of gold was transferred to the proprietary concern belonging to one of the partners by name Mr. Sunny Jacob. It is also contended by the appellants/assessees before Commissioner as well as Tribunal that though no amount becomes taxable in the hands of partnership firms, proprietary concern doing business in gold will be liable to pay tax depending upon the profit and income earned from the same goods which are transferred from partnership firms to proprietary concern. Therefore, no loss as such is caused to the Revenue. The substantial questions of law raised in these appeals are as under :

"(i) Has not the Tribunal gone wrong in relying on the decision of the Honourable Supreme Court in A.L.A. Firm Vs. Commissioner of Income Tax, Madras, to come to the conclusion that the order passed by the assessing officer was erroneous and prejudicial to the Revenue

(ii) Has not the Tribunal gone wrong in omitting to notice that the appellant firm was not dissolved and it had not ascertained its assets and liabilities to distribute among its partners and therefore the decision in respect of a dissolved firm cannot be applied to the case of the appellant

(iii) Whether the appellant is liable to pay income-tax on a deemed income which has not accrued to the appellant

(iv) Has not the authorities below gone wrong in determining market value on the basis of gross profit determined by the assessing authority at the time of assessment which is under challenge when gold is a standard commodity having definite market value"

6. On perusal of orders of the Commissioner, what we notice is, Form No. 3CB furnished by the assessees pertaining to audit report, is signed by both auditor and Mr. Sunny Jacob indicating business of the firm was discontinued by transferring the stock-in-trade to the proprietary concern. In that context, Commissioner was of the opinion, nothing more was required to be established as the firms discontinued their gold business. The question before us is whether closure of a business is relevant or dissolution of the firm is relevant. With reference to closing stock with the firm, irrespective of them continuing business in other items under the same name, so far as business in gold is concerned, it comes to an end. Therefore, closing stock or stock-in-trade has to be with reference to gold and not other business. Valuation of stock-in-trade at the closure or discontinuance of business has to be with reference to the items which are relevant for transfer.

7. We note from the entire judgment of A.L.A. Firm (supra), their Lordships, while referring to the facts placed before them pertaining to A.L.A. Firm (supra) had an occasion to refer to several judgments of the High Courts and also Apex Court on the issue. Ultimately, while referring to an issue similar to the present one, their Lordships were of the opinion, with reference to G. R. Ramachari and Co. Vs. Commissioner of Income Tax, Madras, , the principle of valuing closing stock of a business at cost price is a principle that would hold good only so long as there is continuing business but where a business is discontinued whether on account of dissolution or closure or otherwise by the assessee, then profits cannot be ascertained except by taking closing stock at market value. This decision of Ramachari (supra) was subsequently followed by the Kerala High Court in Popular Workshops Vs. Commissioner of Income Tax, and also in Popular Automobiles Vs. Commissioner of Income Tax, .

8. Learned counsel for appellants took us to the last para of judgment in A.L.A. Firm (supra) to contend that what was decided among the partners, that is at what rate the stock has to be transferred alone will hold good and there is no rule that it should always be at the market price. The said para reads as under :

"The real rights of the partners cannot be mutually adjusted on any other basis. This is what happened in G. R. Ramachari and Co. Vs. Commissioner of Income Tax, Madras, . Indeed, this is exactly what the partners in this case have done and, having done so, it is untenable for them to contend that the valuation should be on some other basis. Once this principle is applied and the stock- in-trade is valued at market price, the surplus, if any, has to get reflected as the profits of the firm and has to be charged to tax. The view taken by the High Court has held the field for about thirty years now and we see no reason to disagree even if a different view were possible. For these reasons, we agree with the answer given by the High Court to the second question as well.

The appeal fails and is dismissed. But we would make no order regarding costs."

9. The entire discussion of A.L.A Firm case refers to different situations depending upon continuance of business or discontinuance of business. If the business is continued, it is altogether a different situation. If business is discontinued, then value of closing stock has to be ascertained. How it should be ascertained has to be seen. Though all partners are members of one family, so far as their tax liability, as an individual or as partners will not depend upon their relationship with each other, but depends upon the income they derive as their individual income whether through partnership or through other sources. Similarly, if the firms were to transfer closing stock especially an item like gold, to an outsider, definitely book value will not be the value at which the stock would be transferred. So far as partners are concerned, in the present case, though they are members of the same family, their liabilities and assets would depend upon their share capital etc. Therefore, it is not open to them to say that one of the partners being head of the family is continuing Dona Gold business as a proprietary concern, therefore, at their choice, at what value they transfer the entire closing stock they have transferred.

10. Having regard to discontinuance of entire business in gold, we have to analyse the entire issue from that point and not with the decision of both the partners. Therefore, there is no justification in the stand of the appellants in contending that only the book value of closing stock has to be taken into consideration. The law discussed and laid down at A.L.A. Firm clearly indicates, if there is discontinuance of business, either by dissolution or otherwise, the closing stock have to be valued at market value and not otherwise.

11. In that view of the matter, we are of the opinion, the Tribunal was justified in rejecting the appeals. So far as observation of the Commissioner while passing orders under section 263, we accept and agree with the challenge raised by the learned counsel for appellants that he should not have indicated a formula without leaving the matter open to the assessing officer how the assessment has to be proceeded, with. So far as the formula referred to at para 3 of the orders of the Commissioner, we direct the assessing authority not to rely upon said formula. In the light of the discussion above, he has to proceed with the matter by taking value of the closing stock at market rate at the relevant point of time.

12. With these observations, these appeals are disposed of answering the questions in favour of the Revenue.-