Stock in a new business to be taken on market value basis rather than cost basis: Delhi High Court

Madhu Rani Mehra v. CIT, decided on 21^st March, 2011

ITR No. 541/1992

Assessment Year: 1980-81

Relevant Facts:

1. The assessee was one of the 2 partners in a firm being run under the name and style of M/s. Mehrae-Di-Hatti holding 50% share in the firm. Consequently, the firm was dissolved.

3.2 It is not in dispute that the Petitioner took over the assets and liabilities of the dissolved firm and carried on the same sort of business which related to gold and diamond jewellery.

3.3 On the date of dissolution of the firm i.e., 10.11.1979, the firm had in its possession stock, comprising of gold and diamond jewellery of a substantial value. The said stock was evidently valued at average cost price by the firm. As per the books the closing stock was valued by the firm as on 10.11.1979 at Rs 35,16,785/-. It is not in dispute that the market price of the firms closing stock, as on 10.11.1979 was Rs 49,19,491/-

Questions of law:

1. Whether on the facts and in the circumstances of the case, the ITAT was correct in law in taking the value of the opening stock in law in taking the value of the opening stock as on 11.11.1979 at Rs. 35,16,785/- which stock was received by the assessee on dissolution of the firm M/s Mehrae-Di-Hatti on 10.11.1979, at which point of the dissolution the said stock was valued at market price of Rs.49,19,491/-?

2. Whether, on the facts and in the circumstances of the case, the Income-Tax Appellate Tribunal was correct in law in valuing the opening stock at cost though the said stock was received on the dissolution of the firm as capital by the assessee, which was converted by her into stock-in-trade?

Upholding the appeal of the assessee, the Hon’ble Court held that:

Para 19: “The partnership firm was dissolved. One individual of the erstwhile firm continued to make a living out of a business, which by sheer coincidence happened to be again jewellery business, in which, distributed capital was introduced in the form of stock. The stock on introduction in the business, stood converted into stock-in-trade. The value of this stock will have to be the market value on the date of introduction. In the facts of this case, the undisputed market value of the stock is Rs.49,19,491.”

Para 20: “A business has attributes of physicality as well as form. For continuation of business both have to remain intact, at least in large measure. In the instant case, the erstwhile firm disappeared on its dissolution. The proprietorship business gave birth to new business, in a different form. A somewhat similar situation obtained in ALA Firm's (supra) case, where the court was called upon to determine the value of the closing stock though of the dissolved firm. A converse situation arose in Sakthi Trading Co. Ltd. (supra) case where substantially both in terms of its physicality and form the business remained the same. We are thus of the opinion that the Tribunals decision to value the stock at cost rather than the market value cannot be sustained.”

The decision is available here.