Firm Vs. Commissioner of Income Tax, Madras  INSC 60 (21
S. Rangnathan, S.
(J) Agrawal, S.C. (J)
1991 SCR (1) 624 1991 SCC (2) 558 JT 1991 (2) 7 1991 SCALE (1)364
Tax Act, 1961: Section 147(b)-Scope of- Assessment year
1961-62-Reassessment-Interpretation and meaning of the word
"information"-Material coming to the notice of the Income Tax Officer
subsequent to original assessment-Meaning of the word "Escape".
of Firm-Valuation of closing stoc- Principles-In continuing business closing
stock to be valued at cost or market price which ever is lower-Where business
is discontinued, the closing stock to be valued at market price.
Appellant-Assessee, a partnership firm was engaged mainly, in Malaya, in money lending business since
1949 and incidental to this business was also doing the business of sale and
purchase of house properties, gardens and estates.
reconstituted under a deed dated 26.3.1960. The firm was dissolved on 13.3.1961
and closed its accounts with effect from that date. In its income-tax return
filed on 10.4.1962 for the assessment year 1961-62 it had filed a profit and
loss account wherein amount of $.1,01,248 equivalent of Rs.1,58,057 was shown
as "difference on revaluation of the estates, gardens and house
properties" on the dissolution of the firm. In the memo of adjustment for
income-tax purposes this amount was deducted as being not assessable either as
revenue or capital. The Income Tax Officer issued notice under section 23(2) of
the Act on that very day and completed the assessment also on the same day
after making a petty addition of Rs.2088 paid as property tax in Malaya.
for the subsequent year 1962-63, the assessee filed its return showing nil
income stating in the forwarding letter that the Firm had been dissolved on
13.3.1961, the I.T.O. wrote to the assessee that the revaluation difference of
Rs.1,58,057 should have been brought to tax in the previous year. The assessee
replied that no profit or loss could be assessed on a revaluation of assets,
that the assessee was gradually winding up its business in Malaya, the surplus
would be only capital 625 gains and that revalutation had been at the market
price prevalent since 1954 and thus no capital gains were chargeable to tax.
Not satisfied, the I.T.O. issued a notice under section 148 read with Section
147(b) of the Income Tax Act, 1961. The assessee filed objections.
all the objections, the Income Tax Officer completed reassessment of the assessee
Firm adding back the sum of Rs. 1,58,057 to the previously assessed income.
failed right upto the High Court, the assessee came in appeal before this
the appeal, affirming the decision of the High Court, this Court.
(1) The proceedings u/s 147(b) were validly initiated. The facts of this case
squarely fall within the scope of propositions (2) and (4) enunciated in Kalyanji
Mavji's case. Proposition (2) may be briefly summarised as permitting action
even on a "mere change of opinion". This is what has been doubted in
the IENS case. But, even leaving this out of consideration, there can be no
doubt that the present case is squarely covered by proposition (4) set out in Kalyanji's
case. This proposition clearly envisages a formation of opinion by the
Income-Tax Officer on the basis of material already on record provided the
formation of such opinion is consequent on "information" in the shape
of some light thrown on aspects of facts or law which the Income Tax Officer
had not earlier been conscious of. [636G-637B] The difference between the
situations envisaged in propositions (2) and (4) of Kalyanji Mavji is this,
that proposition (4) refers to a case where the Income Tax Officer initiates
reassessment proceedings in the light of "information" obtained by
him by an investigation into material already on record or by research into the
law applicable thereto which has brought out an angle or aspect that had been
missed earlier. Proposition (2) no doubt covers this situation also but it is
so widely expressed as to include also cases in which the Income Tax Officer,
having considered all the facts and law, arrives at a particular conclusion,
but reinitiates proceedings because, on a reappraisal of the same material
which had been considered earlier and in the light of the same legal aspects to
which his attention had been drawn earlier, he comes to a conclusion that an
item of income which he had earlier consciously left out from the earlier assessment
should have been brought to tax. [637F-H] It is true that the return was filed
and the assessment was completed on the same date. Nevertheless, it is opposed
to normal human 626 conduct than an officer would complete the assessment
without looking at the material placed before him. It is not as if the
assessment record contained a large number of documents or the case raised
complicated issues rendering it probable that the Income Tax Officer had missed
It is a
case where there is only one contention raised before the Income Tax Officer
and it is, we think, impossible to hold that the Income-Tax Officer did not at
all look at the return filed by the assessee or the statements accompanying it.
The more reasonable view to take would, in our opinion, be that the Income-Tax
Officer looked at the facts and accepted the assessee's contention that the
surplus was not taxable. But, in doing so, he obviously missed to take note of
the law laid down in Ramachari which there is nothing to show, had been brought
to his notice. when he subsequently became aware of the decision, he initiated
proceedings under section 147(b).
material which constituted information and on the basis of which the assessment
was reopened was the decision in Ramachari. this material was not considered at
the time of the original assessment. Though it was a decision of 1961 and the
Income Tax Officer could have known of it had he been diligent, the obvious
fact is that he was not aware of the existence of that decision then and, when
he came to know about it, he rightly initiated proceedings for reassessment.
[639E-640B] The material on which the Income Tax Officer has taken action is a
judicial decision. This had been pronounced just a few months earlier to the
original assessment and it is not difficult see that the Income Tax Officer
must have missed it or else he could not have completed the assessment as he
did. Indeed it has not been suggested that he was aware of it and yet chose not
to apply it. It is therefore, much easier to see that the initiation of reassement
proceedings here is based on definite material not considered at the time of
the original assessment. [640D-E] (2) The stock-in-trade of a firm at the time
of its disolution, has to be assessed at a fair value. there can be no manner
of doubt that, in taking accounts for purposes of dissolution, the firm and the
partners, being commercial men, would value the assets only on a real basis and
not at cost or at their other value appearing in the books. The real rights of
the partners cannot be mutually adjusted on any other basis. This is what
happened in Ramachari.
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
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 627 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 was possible. [642B-D, 647E,648A-C] Popular Automobiles v. Commissioner of
Income-Tax,  179 I.T.R. 632; Sunil Siddharthbhai v. Commissioner of
Income Tax,  156 I.T.R. 509; Pupular Workshops v. Commissioner of
Income-Tax  166 I.T.R. 348; Malabar Fisheries Co. v. Commissioner of
Income Tax,  120 I.T.R. 49; Indian & Eastern Newspaper Society v.
Commissioner of Income Tax,  119 I.T.R. 996; Kalyanji Mavji & Co. v.
Commissioner of Income Tax,  102 I.T.R. 287; M/s A.L.A. Firm v. The
Commissioner of Income Tax, Madras 
I.T.R. 622; Commissioner of Income Tax v. Hind Construction Ltd.,  83
I.T.R. 211; Commissioner of Income Tax v. Birla Gwalior (P) Ltd.,  89
I.T.R. 266; Anandji Haridas & Co. (P) Ltd. v. S.P. Kushare, Sales Tax
Officer,  21 S.T.C. 326; Commissioner of Income Tax v. Dewas Cine
Corporation,  68 I.T.R. 240; Ramachari & Co. v. Commissioner of
Income Tax,  41 I.T.R. 142; Maharaj Kumar Kamal Singh v. Income Tax
Officer,  35 I.T.R. 1 S.C.; Commissioner of Income Tax v. A Raman &
Co.,  67 I.T.R. 11 S.C.; Salem
Provident Fund Society Ltd. v. Commissioner of Income Tax,  42 I.T.R. 547;
Commissioner of Income Tax v. Rathinasabapathy Mudaliar,  51 I.T.R. 204; Addanki
Narayanappa v. Bhaskara Krishnappa,  3 S.C.R. 400; Commissioner of Income
Tax v. Bankey Lal Vaidya  79 I.T.R. 594; Kikabhai Premchand v.
Commissioner of Income Tax,  24 I.T.R. 506 (S.C.); Commissioner of Income
tax v. K.A.R.K. Firm,  2 I.T.R. 183; Chainrup Sampathram v. Commissioner
of Income Tax,  24 I.T.R. 481; Commissioner of Income Tax v. M/s. Shoorji
Vallabhadas & Co.,  46 I.T.R. 144, Commissioner of Income Tax v. Krishnaswamy
Muldaliar,  53 I.T.R. 122; Commissioner of Income Tax v. Ahmedabad New
Cotton Mills Co. Ltd.,  L.R. 57 I.A. 21; Muhammad Hussain Sahib v. Abdul Gaffor
Sahib,  1 M.L.J. 81.
APPELLATE JURISDICTION: Civil Appeal No. 570 of 1976.
by Certificate from the Judgment and Order dated 9.2.1976 of the Madras High
Court in Tax Case No. 104 of 1969.
P.N. Ramaligam and A.T.M. Sampath for the Appellant.
Shanker, Manoj Arora, S. Rajappa and Ms.A.Subhashini for the Respondent.
Judgment of the Court was delivered by RANGANATHAN, J. This is the assessee's
appeal form a judgment of the Madras High Court dated 10.1.1975 answering three
questions referred to it by the Income-tax Appellate Tribunal in favour of the
Revenue and against the assessee.
reference related to the assessment year 1961-62, the previous year in respect
of which commenced on 13.4.1960.
judgment of the High Court is reported as (1976) 102 I.T.R.622.
appellant-assessee is a partnership firm. Since 1949, it was carrying on, in Malaya, a money lending business and, as
part of and incidental to the said business, a business in the purchase and
sale of house properties, gardens and estates. It had been reconstituted under
a deed dated 26.3.1960. The firm's accounts for the year 1960-61, which
commenced on 13.4.60, would normally have come to a close on or about the 13th
the firm closed its accounts as on 13.3.1961 with effect from which date it was
dissolved. Along with its income-tax return for the assessment year 1961-62
filed on 10th April
1962, the assessee
filed a profit and loss account and certain other statements. In the profit and
loss account, a sum of $ 1,01,248 was shown as "difference on revaluation
of estates, gardens and house properties" on the dissolution of the firm
on 13.3.61, such difference being $ 70,500 in respect of "house
properties" and $ 30,748 in respect of estates and gardens. In the memo of
adjustment for income-tax purposes, however, the above sum was deducted on the
ground that it was not assessable either as revenue or capital. A statement was
also made before the officer that partner Ramanathan Chettiar, forming one group
and the other partners forming another group, were carrying on business
separately with the assets and liabilities that fell to their shares on the
dissolution of the firm.
Income-tax Officer (I.T.O.) issued a notice under section 23(2) on the same day
(10.4.1962) posting the hearing for the same day and completed the assessment
also on the same day, after making a petty addition of Rs. 2083 paid as
property tax in Malaya, and recording the following note:
assessment-Lakshmanan appears-return filed- I.T. 86 acknowledged in list of
books-scrutinised- order dictated".
For the subsequent assessment year 1962-63, the assessee filed a return showing
nil income along with a letter pointing out that the firm had been dissolved on
13.3.1961. Thereafter, on 3.9.63, the I.T.O. wrote a letter to the assessee to
the effect that the revaluation difference of $ 1,01,248 should have been
brought to tax in the assessment year 1961-62 in view of the decision of the
Madras High Court in Ramachari & Co. v. C.I.T.,  41 I.T.R. 142. He
called for the basis for the valuation and also for the assessee's objections.
The assessee sent a reply stating that no profit or loss could be assessed on a
revaluation of assets. Relying on a circular of the Central Board of Revenue
dated 21.6.1956, it was urged that the assessee was gradually winding up its
business in Malaya and that therefore, the surplus would only be capital gains.
It was urged that the revaluation had been at a market price prevalent since
1.1.1954 and that, therefore, no capital gains were chargeable to tax. The
I.T.O. followed up his letter by a notice under S. 148 read with S. 147(b). The
assessee objected to the reassessment on two grounds:
the circumstances did not justify the initiation of proceedings under S.
no assessable profits arose to the firm on the revaluation of assets on the eve
of the dissolution of the firm.
these objections, the I.T.O. completed a reassessment on the firm after adding
back the sum of Rs.1,58,057 (the equivalent of $ 1,01,248) to the previously
assessed income. The assessee's successive appeals to the Appellate Assistant
Commissioner and the Appellate Tribunal and reference, at its instance, to the
High Court having failed, the assessee is before us.
questions of law were referred to the High Court by the Tribunal. These were:
Whether, on the facts and circumstances of the case, the reassessment made on
the assessee firm for the assessment year 1961-62 under section 147 of the
Income-tax Act is valid in Law?
Whether, on the facts and circumstances of the case, assessment of the sum of $
1,01,248 as revenue profit of the assessee firm chargeable to tax for the
assessment year 1961-62 is justified in law?
on the facts, and circumstances of the case, the Appellate Tribunal is right in
law in sustaining the assessment of the sum of $ 1,01,348 after having found
that the Department Officers are bound by the Circular of the Central Board of
Revenue?" 630 We may deal at the outset with the third question.
the High Court has dealt with this question at some length, we do not think any
answer to this question can or need be furnished by us for the following
reasons. First, the assessee has not been able to place before us the circular
of the Board on which reliance is placed. It is not clear whether it is a
circular or a communication of some other nature. Second, the circular, to
judge from its purport set out in the High Court's judgment, seems to have been
to the effect that the surplus arising from the sale of properties acquired by
a money-lender in the course of his business would be in the nature of capital
gains and not of income. Obviously such a proposition could not have been
intended as a broad or general proposition of law, for the nature of the
surplus on sale of assets would depend on the nature of the asset sold and
this, in turn, would depend on the facts and circumstances of each case. In
this case, no material was placed at any stage to show that the assets in
question constituted the capital assets of the firm and not its stock-in-trade.
Third, the plea of the assessee which was in issue all through was that there
was no sale of assets by the firm when its assets are distributed among its
partners and that no profits-whether capital or revenue- could be said to arise
to the firm merely because, at the time of the dissolution, the firm revalued
its assets on the basis of market value or any other basis, for adjusting the
mutual rights and liabilities of the partners on the dissolution of the firm.
The terms of the circular, as set out in the order of the High Court, cannot
therefore be of any assistance to the assessee in answering the issues in this
case. We, therefore, do not answer the third question posed by the Tribunal.
now to the first question, the relevant facts have already been noticed. The
following relevant and material facts viz. (i) the dissolution of the firm,
(ii) the revaluation of its assets, (iii) the distribution thereof among two
groups of its partners, and (iv) the division and crediting of the surplus on
revaluation to the partner's accounts were not only reflected in the balance
sheet, the profit and loss account and the profit and loss adjustment account
but were also mentioned in the statement filed before the I.T.O. along with the
return. Clearly, action u/s 148 read with clause (a) of s.147 could not be
initiated in these circumstances but is action under clause (b) of that section
also impermissible? That is the question.
now set out the provisions of clause (b) of section 147 for purposes of easy
reference. This clause- which corresponds to s. 34(1)(b) of the Indian
Income-tax Act, 1922 (`the 1922 Act') permits-initiation of reassessment of proceedings,
"notwithstanding 631 that there has been no omission or failure as
mentioned in clause (a) on the part of the assessee" provided "the
Income-tax Officer has, in consequence of information in his possession, reason
to believe that income chargeable to tax has escaped assessment".
present case, on the information already on record and in view of the decision
in Ramachari & Co. v. C.I.T.,  41 I.T.R. 142, there can be no doubt
that the I.T.O. could reasonably come to the conclusion that income, profits
and gains assessable for the assessment year 1961-62 had escaped assessment.
But is that belief reached "in consequence of information in his posession"?
The assessee's counsel says "no", for, says he, it is settled law
that the "information" referred to in clause (b) above, should be
"information" received by the I.T.O. after he had completed the
original assessment. Here it is pointed out that all the relevant facts as well
as the decision in Ramachari (supra) had been available when the original
assessment was completed on 10.4.1962. Action cannot be taken under this clause
merely because the I.T.O., who originally considered the surplus to be not
assessable, has on the same facts and the same case law which had been
available to him when he completed the assessment originally, changed his
opinion and now thinks that the surplus should have been charged to tax.
validity of the assessee's argument has to be tested in the light of the
decisions of this Court which have interpreted S. 147(b) of the 1961 Act or its
predecessor S. 34(1)(b) of the 1922 Act and expounded its parameters. We may
start with the decision in Maharaj Kumar Kamal Singh v. I.T.O.,  35
I.T.R. 1 S.C. In this case it was held that the word "information"
would include information as to the true and correct state of the law and would
also cover information as to relevant judicial decisions. In that case the
I.T.O. had re-opened the assessment on the basis of a subsequent decision of
the Privy Council and this was upheld. Referring to the use of the word
"escape" in the section, the Court observed.
our opinion, even in a case where a return has been submitted, if the
income-tax Officer erroneously fails to tax a part of asessable income, it is a
case where the said part of the income has escaped assessment. The appellant's
attempt to put a very narrow and artificial limitation on the meaning of the
word "escape" in section 34(1)(b) cannot, therefore, succeed." (underlining
ours) 632 The meaning of the word "information" was again explained
thus in C.I.T. v. A. Raman & Co.,  67 I.T.R. 11 SC:
expression `information' in the context in which it occurs must, in our
judgment, mean instruction or knowledge derived from an external source
concerning facts or particulars, or as to law relating to a matter bearing on
of the Income-tax Officer to reassess income arises if he has in consequence of
information in his possession reason to believe that income chargeable to tax
has escaped assessment. That information, must, it is true, have come into the
possession of the Income-tax Officer after the previous assessment, but even if
the information be such that it could have been obtained during the previous
assessment from an investigation of the materials on the record, or the facts
disclosed thereby or from other enquiry or research into facts or law, but was
not in fact obtained, the jurisdiction of the Income-tax Officer is not
affected." (underlining ours) We may next refer to Kalyanji Mavji &
Co. v. C.I.T., [1976-102] I.T.R. 287. It is unnecessary to set out the facts of
this case. It is sufficient to refer to the enunciation of the law regarding
the scope of section 34(1)(b) as culled out from the earlier decisions of this
Court on the subject. At page 296 the Court observed:
a combined review of the decisions of this Court the following tests and
principles would apply to determine the applicability of section 34(1)(b) to
the following categories of cases:
the information is as to the true and correct state of the law derived from
relevant judicial decisions;
in the original assessment the income liable to tax has escaped assessment due
to oversight, inadvertence or a mistake committed by the Income-tax Officer.
This is obviously based on the principle that the taxpayer would not be allowed
to take advantage of an oversight or mistake committed by the taxing authority;
the information is derived from an external source of any kind. Such external
source would include discovery of new and important matters or knowledge of
fresh facts which were not present at the time of the original assessment;
the information may be obtained even from the record of the original assessment
from an investigation of the materials on the record, or the facts disclosed
thereby or from other enquiry or research into facts or law." Before
applying the above principles to the facts of the present case, we may refer to
two earlier decisions of the Madras High Court which have been followed in the
judgment under appeal.
Salem Provident Fund Society Ltd. v. C.I.T.,  42 ITR 547, the Income-tax
officer, in calculating the annual profits of an insurance company, had, under
the statute to work out the difference between the deficiencies as shown in the
actuarial valuation of the company in respect of two successive valuation
periods. At the time of original assessment, the Income-tax Officer, by
mistake, added the two deficiencies instead of subtracting one from the another.
This mistake he committed not in one assessment year but in two assessment
years. Subsequently, he discovered his mistake and initiated proceedings under
section 34(1)(b). The contention urged on behalf of the assessee was that all the
statements, on the basis of which the re-assessment proceedings were taken,
were already on record and that, in such a case, there was no `information'
which would justify the reassessment. An argument was also raised that the
rectification, if any, could have been carried out only under section 35 and
not under section 34.
contentions were repelled. In regard to the former objection, the High Court
are unable to accept the extreme proposition that nothing that can be found in
the record of the assessment, which itself would show escape of assessment or
under-assessment, can be viewed as information which led to the belief that
there has been escape from assessment or under-assessment.
a mistake in the original order of assessment is not discovered by the
Income-tax Officer himself on further scrutiny but it is brought to this notice
by another assessee or even by a subordinate or a superior officer, that would
appear to be information disclosed to the Income- tax Officer. if the mistake
itself is not extraneous 634 to the record and the informant gathered the
information from the record, the immediate source of information to the
Income-tax Officer in such circumstances is in one sense extraneous to the
record. It is difficult to accept the position that while what is seen by
another in the record is `information' what is seen by the Income-tax Officer
himself is not information to him. In the latter case he just informs himself.
It will be information in his possession within the meaning of section 34. In
such cases of obvious mistakes apparent on the face of the record of assessment
that record itself can be a source of information, if that information leads to
a discovery or belief that there has been an escape of assessment or
similar question arose in CIT v. Rathinasabapathy Mudaliar,  51 I.T.R.
204. In that case the assessee, who was a partner in a firm, did not include in
his return the income of his minor son admitted to the benefits of the partnership
as required by section 16(3) of the 1922 Act.
minor son submitted a separate return and was assessed on this income.
Subsequently, the Income-tax Officer "discovered" his error in not
assessing the father thereon and started re-assessment proceedings. The
re-assessment was upheld by the Madras High Court on the same logic as had been
applied in Salem Provident Fund Society Ltd. case (supra). The above line of
thinking has not only held the field for about thirty years now but has also
received approval in Anandji Haridas and Co. (P) Ltd. v. S.P.
Sales Tax Officer,  21 S.T.C. 326.
issue has further been considered in the decision of this Court in the case of
Indian and Eastern Newspaper Society v. C.I.T. (the IENS case, for short)
 I.T.R. 996. In this case the income of the assessee derived by letting
out certain portions of the building owned by it to its members as well as to
outsiders was being assessed as business income. In the course of audit, an
internal audit party expressed the view that the money realised by the assessee
on account of the occupation of its conference hall and rooms should have been
assessed under the head "income from property" and not as business
income. The Income-tax Officer thereupon initiated re-assessment proceedings
and this was upheld by the Tribunal. On a direct reference under s.257 of the
Act, this Court held that the opinion of the audit party on a point of law
could not be regarded as "information" and that the initiation of the
reassessment proceedings was not justified. It was contended for the Revenue,
that the reassessment proceedings would 635 be valid even on this premise.
Dealing with this argument, the Court observed:
in the case before us, the ITO had, when he made the original assessment,
considered the provisions of sections 9 and 10. Any different view taken by him
afterwards on the application of those provisions would amount to a change of
opinion on material already considered by him. The revenue contends that it is
open to him to do so, and on that basis to reopen the assessment under s.
147(b). Reliance is placed on Kalyanji Mavji & Co. v. CIT,  102
I.T.R. 287, where a Bench of two learned, Judges of this Court observed that a
case where income had escaped assessment due to the "oversight,
inadvertence or mistake" of the ITO must fall within s. 34(1)(b) of the
Indian Income Tax Act, 1922. It appears to us, with respect, that the
proposition is stated too widely and travels farther than the statute warrants
in so far as it can be said to lay down that if, on re- appraising the material
considered by him during the original assessment, the ITO discovers that he has
committed an error inconsequence of which income has escaped assessment, it is
open to him to reopen the assessment. In our opinion, an error discovere on a
reconsideration of the same material (and no more) does not give him that
power. That was the view taken by this Court in Maharaj Kumar Kamal Singh v.
CIT,  35 I.T.R. 1; CIT v. A. Raman & Co.,  67 ITR 11 and Bankipur
Club Ltd. v. CIT  82 ITR 831 and we do not believe that the law has since
taken a different course. Any observation in Kalyanji Mavji & Co. v. CIT,
 102 I.T.R. 287 suggesting the contrary do not, we say with respect, lay
down the correct law." (underlining ours) The Court proceeded further to
further submission raised by the revenue on s.
of the Act may be considered at this stage.
urged that the expression "information" in s. 147(b) refers to the realisation
by the ITO that he has committed an error when making the original assessment.
It is said that, when upon receipt of the audit note the ITO discovers or
realizes that a mistake has been committed in the original 636 assessment, the
discovery of the mistake would be "information" within the meaning of
s. 147(b). The submission appears to us inconsistent with the terms of s.
147(b) Plainly, the statutory provision envisages that the ITO must first have
information in his possession, and then in consequence of such information he
must have reason to believe that income has escaped assessment. The realisation
that income has escaped assessment is covered by the words "reason to
believe", and it follows from the "information" received by the
ITO. The information is not the realisation, the information gives birth to the
realisation." Sri Ramachandran submits that these decisions support his
contention that reassessment proceeding can be validly initiated only if there
is some information received by the I.T.O. from an external source after the
completion of the original assessment but not in a case like the present where
there is nothing more before the I.T.O. than what was available to him when the
original assessment was completed.
also submits that the observations in the IENS case have cast doubts on the
propositions enunciated in Kalyanji Mavji's case (supra) and reiterates the
proposition that reassessment proceedings cannot be availed of to revise, on
the same material, the opinion formed or conclusion arrived at earlier in favour
of the assessee.
other hand, Dr. Gaurisankar, appearing for the Revenue, mentioned that the
decision in the IENS case holding that the opinion of an audit party would not
constitute `information' and qualifying the principles enunciated in Kalyanji Mavji
is pending consideration by a larger Bench of this Court. He, however,
submitted that the reassessment in this case would be valid even on the
strength of the observations in the IENS case. We shall proceed to consider the
correctness of this submission.
have pointed out earlier that Kalyanji Mavji (supra) outlines four situations
in which action under S.34(1)(b) can be validly initiated. The IENS case has
only indicated that proposition (2) outlined in this case and extracted earlier
may have been somewhat widely stated; it has not cast any doubt on the other
three propositions set out in Kalyanji Mavji's case. The facts of the present
case squarely fall within the scope of propositions 2 and 4 enunciated in Kalyanji
Mavji's case. Proposition (2) may be briefly summarised as permitting action
even on a "mere change of opinion". This is what has been doubted in
the IENS case (supra) and we shall discuss its application to this case a 637
little later. But, even leaving this out of consideration, there can be no
doubt that the present case is squarely covered by proposition (4) set out in Kalyanji
Mavji & Co. (supra). This proposition clearly envisages a formation of
opinion by the Income-tax Officer on the basis of material already on record
provided the formation of such opinion is consequent on "information"
in the shape of some light thrown on aspects of facts or law which the I.T.O.
had not earlier been conscious of. To give a couple of illustrations, suppose
an I.T.O., in the original assessment, which is a voluminous one involving
several contentions, accepts a plea of the assessee in regard to one of the
items that the profits realised on the sale of a house is a capital realisation
not chargeable to tax.
he finds, in the forest of papers filed in connection with the assessment,
several instances of earlier sales of house property by the assessee. That
would be a case where the I.T.O. derives information from the record on an
investigation or enquiry into facts not originally undertaken. Again, suppose
if I.T.O. accepts the plea of an assessee that a particular receipt is not
income liable to tax. But, on further research into law he finds that there was
a direct decision holding that category of receipt to be an income receipt. He
would be entitled to reopen the assessment under s.147(b) by virtue of
proposition (4) of Kalyanji Mavji. The fact that the details of sales of house
properties were already in the file or that the decision subsequently come
across by him was already there would not affect the position because the
information that such facts or decision existed comes to him only much later.
then, is the difference between the situations envisaged in propositions (2)
and (4) of Kalyanji Mavji (supra)? The difference, if one keeps in mind the
trend of the judicial decisions, is this. Proposition (4) refers to a case
where the I.T.O. initiates reassessment proceedings in the light of
"information" obtained by him by an investigation into material
already on record or by research into the law applicable thereto which has
brought out an angle or aspect that had been missed earlier, for e.g., as in
the two Madras decisions referred to earlier.
(2) no doubt covers this situation also but it is so widely expressed as to
include also cases in which the I.T.O., having considered all the facts and
law, arrives at a particular conclusion, but reinitiates proceedings because,
on a reappraisal of the same material which had been considered earlier and in
the light of the same legal aspects to which his attention had been drawn
earlier, he comes to a conclusion that an item of income which he had earlier
consciously left out from the earlier assessment should have been brought to
tax. In other words, as pointed out in IENS case, it also 638 ropes in cases of
a "bare or mere change of opinion" where the I.T.O. (very often a
successor officer) attempts to reopen the assessment because the opinion formed
earlier by himself (or, more often, by a predecessor I.T.O.) was, in his
opinion, incorrect. Judicial decisions had consistently held that this could
not be done and the IENS case (supra) has warned that this line of cases cannot
be taken to have been overruled by Kalyanji Mavji (supra). The second paragraph
from the judgment in the IENS case earlier extracted has also reference only to
this situation and insists upon the necessity of some information which make
the ITO realise that he has committed an error in the earlier assessment. This
paragraph does not in any way affect the principle enumerated in the two Madras
cases cited with approval in Anandji Haridas,  21 S.T.C.
Even making allowances for this limitation placed on the observations in Kalyanji
Mavji, the position as summarised by the High Court in the following words
represents, in our view, the correct position in law:
result of these decisions is that the statute does not require that the
information must be extraneous to the record. It is enough if the material, on
the basis of which the reassessment proceedings are sought to be initiated,
came to the notice of the Income-tax Officer subsequent to the original
assessment. If the Income-tax Officer had considered and formed an opinion on
the said material in the original assessment itself, then he would be powerless
to start the proceedings for the reassessment. Where, however, the Income-tax
Officer had not considered the material and subsequently come by the material
from the record itself, then such a case would fall within the scope of section
147(b) of the Act." Let us now examine the position in the present case
keeping in mind the narrow but real distinction pointed out above. On behalf of
the assessee, it is emphasised (a) that the amount of surplus is a very
substantial amount,(b) that full details of the manner in which it had resulted
had been disclosed, (c) that the profit and loss account, the profit and loss
adjustment account and statement made before the I.T.O. had brought into focus
the question of taxability of the surplus and (d) that decision in Ramachari's
case had been reported by 10.4.1962. No Income-tax Officer can be presumed to
have completed the assessment without looking at all this material and the said
decision. No doubt, some doubt had been thrown as to whether a statement had
been given at the time of original assessment that the amount 639 of surplus
was not taxable as an income or a capital gain but the case has proceeded on
the footing that such a statement was there before the officer. This,
therefore, is nothing but a case of "change of opinion". On the other
hand, the authorities and the Tribunal have drawn attention to the fact that
the return, the S. 143(2) notice and assessment were all on the same day and
counsel for the Revenue urged that obviously, in his haste, the I.T.O. had not
looked into the facts at all. It is urged that no Income-tax Officer who had
looked into the facts and the law could have failed to bring the surplus to tax
in view of then recent pronouncement in Ramachari's case. Dr. Gaurishankar
submitted that the Tribunal has found that the I.T.O. "had acted
mechanically in accepting the return without bringing his mind to play upon the
entry in the statement with reference to the distribution of the assets".
He pointed out that there is no evidence of any enquiry with reference to this
aspect and that, the amount involved being sufficiently large, the I.T.O., if
he had been aware of the existence of the entry would certainly have discussed it.
He urged that the question whether the I.T.O. had considered this matter at the
time of the original assessment or not is purely a question of fact and the
Tribunal's conclusion thereon having been endorsed by the High Court, there is
no justification to interfere with it at this stage.
think there is force in the argument on behalf of the assessee that, in the
face of all the details and statement placed before the I.T.O. at the time of
the original assessment, it is difficult to take the view that the Income-tax
Officer had not at all applied his mind to the question whether the surplus is
taxable or not. It is true that the return was filed and the assessment was
completed on the same date. Nevertheless, it is opposed to normal human conduct
that an officer would complete the assessment without looking at the material
placed before him. It is not as if the assessment record contained a large
number of documents or the case raised complicated issues rendering it probable
that the I.T.O. had missed these facts. It is a case where there is only one
contention raised before the I.T.O. and it is, we think, impossible to hold
that the Income-tax Officer did not at all look at the return filed by the assessee
or the statements accompanying it. The more reasonable view to take would, in
our opinion, be that the Income-tax Officer looked at the facts and accepted
the assessee's contention that the surplus was not taxable. But, in doing so,
he obviously missed to take note of the law laid down in Ramachari which there
is nothing to show, had been brought to his notice. When he subsequently became
aware of the decision, he initiated proceedings under S. 147(b). The material
which constituted information and on 640 the basis of which the assessment was
reopened was the decision in Ramachari. This material was not considered at the
time of the original assessment. Though it was a decision of 1961 and the
I.T.O. could have known of it had he been diligent, the obvious fact is that he
was not aware of the existence of the decision then and, when he came to know
about it, he rightly initiated proceedings for assessment.
point out that the position here is more favorable to the Revenue than that
which prevailed in the Madras cases referred to earlier. There,
what the I.T.O.
missed earlier was the true purport of the relevant statutory provisions. It
seems somewhat difficult to believe that the I.T.O. could have failed to read
properly the statutory provisions applicable directly to facts before him
(though that is what seems to have happened). Perhaps an equally plausible
view, on the facts, could have been taken that he had considered them and
decided, in one case, not to apply them and, in the other, on a wrong
construction thereof. In the present case, on the other hand, the material on
which the I.T.O. has taken action is a judicial decision. This had been
pronounced just a few months earlier to the original assessment and it is not
difficult to see that the I.T.O. must have missed it or else he could not have completed
the assessment as he did. Indeed it has not been suggested that he was aware of
it and yet chose not to apply it. It is therefore much easier to see that the
initiation of reassessment proceedings here is based on definite material not
considered at the time of the original assessment.
above view of the matter, we uphold the High Court's view on the first
second question raises a more difficult problem.
can be no doubt that the decision of the Madras High Court in Ramachari
squarely covers the situation. Ramachari holds that the principle of valuing
the closing stock of a business at cost or market at the option of the assessee
is a principle that would hold good only so long as there is a continuing
business and that where a business is discontinued, whether on account of
dissolution or closure or otherwise, by the assessee, then the profits cannot
be ascertained except by taking the closing stock at market value. Ramachari
has subsequently been followed by the Kerala High Court in Popular Workshops v.
Commissioner of Income-Tax,  166 ITR 348 and in Popular Automobiles v.
Commissioner of Income-Tax,  179 ITR 632.
contends that the decision in Ramachari 641 does not lay down the correct law. He
submits than, while it is no doubt true that the closing stock has to be
valued, the well settled principle is that it should be valued, at cost or
market whichever is lower and there is no justification for laying down a
different principle for valuation of the closing stock at the point of
discontinuance of business unless the goods are actually sold by the assessee
at the time of discontinuance.
it has been held by a series of decisions of this Court that when a firm is
dissolved and the assets are distributed among the partners, there is no sale
or transfer of the assets of the firm to the various partners: vide, Addanki Narayanppa
v. Bhaskara Krishnappa,  3 SCR 400; CIT v. Dewas Cine Corporation, 
68 ITR 240; CIT v. 2Bankey Lal Vaidya,  79 ITR 594; Malabar Fisheries Co.
v. C.I.T.,  120 ITR 49 and in Sunil Siddharthbhai v. C.I.T.,  156
ITR 509. He submits that, in logical sequence, dissolution comes first and
distribution of assets comes later. Therefore, revaluation of the assets of a
firm, which is only for the division of the assets among the partners on a real
and not a notional basis, is part of the division of the assets and therefore
logically, in point of time, subsequent to the dissolution of the firm. Since
the revaluation takes place after the dissolution no profits can be said to
have accrued to the firm by the process of revaluation. The revaluation of the
assets is not in the course of business and is not an activity which can
partake of the nature of trade. Assuming but not conceding that it is possible
to have a revaluation of the assets, for example, stock in trade before
dissolution, any excess which arises on the revaluation is only an imaginary or
notional profit and cannot be brought to tax for the following reasons:
a result of such revaluation, there can be no profit, because the firm cannot
make a profit out of itself: Vide Kikabhai Premchand v. C.I.T.,  24
I.T.R. 506 (S.C.).
The process of revaluation of stock by itself cannot bring in any real profits:
vide C.I.T. v. K.A.R.K. Firm, 2 I.T.R. 183; Chainrup Sampatram v. C.I.T.,
[1953) 24 I.T.R. 481 and C.I.T. V. Hind Construction ltd.,  83 I.T.R.
It is well settled that what is taxable under the income tax law is only real
income vide C.I.T. v. M/s Shoorji Vallabhdas and Co.,  46 I.T.R. 144 and
C.I.T. v. Birla Gwalior (P) Ltd.,  89 I.T.R. 266. There is, therefor, no
principle by which the stock-in-trade can be valued at market price so as to
bring to tax the notional profits which might in future be realised as a result
of the sale of the stock in trade.
The question posed before us is a difficult one. We think, however, that the
High Court was right in pointing out that the several decisions relied upon for
the assessee as to the nature of the transaction by which a firm, on
dissolution, distributes its assets among its partners, have no relevance in
the present case. As the High Court rightly observed, those cases relate to
what happens after or in consequence of the dissolution of a firm whereas we
are here concerned with a question that arises before or at the time of
dissolution. What we have to decide is the basis on which, in making up the
accounts of a firm upto the date of dissolution, the closing stock with the
firm as at a point of time immediately prior to the dissolution is to be
valued. It is this principle that has been decided in Ramachari and the High
Court decisions following it (including the one under appeal) and the question
is whether they lay down the correct law.
first place, it is settled law that the true trading results of a business for
an accounting period cannot be ascertained without taking into account the
value of the stock-in-trade remaining at the end of the period.
as pointed out by this Court in Chainrup Sempatram v. C.I.T.,  24 I.T.R.
481 it is a misconception to think that any profit arises out of the valuation
of closing stock, it is equally true that such valuation is a necessary element
in the process of determining the trading results of the period. This is true
in respect of any method of accounting and in C.I.T. v. Krishnaswamy Mudaliar,
 53 I.T.R. 122 this Court pointed out that, even where the assessee is
following the cash system of accounting, the valuation of closing stock cannot
be dispensed with. In this decision, this Court quoted with approval the
following observations in C.I.R. v. Cock, Russel & Co. Ltd.  29 T.C.
is no word in the statutes or rules which deals with this question of valuing
is nothing in the relevant legislation which indicates that in computing the
profits and gains of a commercial concern the stock-in-trade at the start of
the accounting period should be taken in and that the amount of the
stock-in-trade at the end of the period should also be taken in. It would be
fantastic not to do it: it would be utterly impossible accurately to assess
profits and gains merely on a statement of receipts and payments or on the
basis of turnover. It has long been recognised that the right method of
assessing profits and gains is to take into account the value of the
stock-in-trade at the beginning and the value of the stock-in trade at the 643
end as two of the items in the computation. I need not cite authority for the
general proposition, which is admitted at the Bar, that for the purposes of
ascertaining profits and gains the ordinary principles of commercial accounting
should be applied, so long as they do not conflict with any express provision
of the relevant statutes." Next the principles as to the method of
valuation of the closing stock are equally well settled. Lord President Clyde
set these out in Whimster & Co. v. C.I.R., (1925) 12 T.C. 813 in the
computing the balance of profits and gains for the purposes of income-tax,...
two general and fundamental commonplaces have always to be kept in mind. In the
first place, the profits of any particular year or accounting period must be
taken to consist of the difference between the receipts from the trade or
business during such year or accounting period and the expenditure laid out to
earn those receipts. In the second place, the account of profit and loss to be
made up for the purpose of ascertaining that difference must be framed
consistently with the ordinary principles of commercial accounting, so far as
applicable, and in conformity with the rules of the Income-tax Act, or of that
Act as modified by the provisions and schedules of the Acts regulating excess
profits duty, as the case may be. For example, the ordinary principles of
commercial accounting require that in the profit and loss account of a
merchant's manufacturer's business the values of the stock-in-trade at the
beginning and at the end of the period covered by the account should be entered
at cost or market price, whichever is the lower; although there is nothing
about this in the taxing statutes." The principle behind permitting the assessee
to value the stock at cost is very simple. In the words of Bose, J. In Kikabhai
Premchand v. C.I.T.,  24 I.T.R. 506 S.C. it is this:
appellant's method of book-keeping reflects the true position. As he makes his
purchases he enters his stock at the cost price on one side of the accounts. At
the close of the year he enters the value of any unsold stock at cost on the
other side of the accounts thus cancelling out the entries relating to the sum
unsold stock earlier in the 644 accounts; and then that is carried forward as
the opening balance in the next year's account. This cancelling out of the
unsold stock from both sides of the accounts leaves only the transactions on
which there have been actual sales and gives the true and actual profit or loss
on his year's dealings." As against this, the valuation of the closing
stock at market value invariably will create a problem. For if the market value
is higher than cost, the accounts will reflect notional profits not actually realised.
On the other hand, if the market value is less, the assessee will get the
benefit of a notional loss he has not incurred.
as mentioned earlier, the ordinary principles of commercial accounting permit
valuation "at cost or market, whichever is the lower". The rationale
behind this has been explained by Patanjali Sastri, C.J. in Chainrup Sampatram
v. C.I.T.,  24 I.T.R. 481, S.C. where an attempt was made to value the
closing stock at a market value higher than cost. The learned Chief Justice
is wrong to assume that the valuation of the closing stock at market rate has,
for its object, the bringing into charge any appreciation in the value of such
stock. The true purpose of crediting the value of unsold stock is to balance
the cost of those goods entered on the other side of the account at the time of
their purchase, so that the cancelling out of the entries relating to the same
stock from both sides of the account would leave only the transactions on which
there have been actual sales in the course of the year showing the profit or
loss actually realised on the year's trading. As pointed out in paragraph 8 of
the Report of the Committee on Financial Risks attaching to the holding of
Trading Stocks, 1919, "As the entry for stock which appears in a trading
account is merely intended to cancel the charge for the goods purchased which
have not been sold, it should necessarily represent the cost of the goods.
is more or less than the cost, then the effect is to state the profit on the
goods which actually have been sold at the incorrect figure.......... From this
rigid doctrine one exception is very generally recognised on prudential grounds
and is now fully sanctioned by custom, viz., the adoption of market value at
the date of making up accounts, if that value is less, than cost. It is of
course an anticipation of the loss that may be made on those goods in 645 the
following year, and may even have the effect, if prices rise again, of
attributing to the following year's results a greater amount of profit than the
difference between the actual sale price and the actual cost price of the goods
in question" (extracted in paragraph 281 of the Report of the Committee on
the Taxation of Trading Profits presented to British Parliament in April 1951).
anticipated loss is thus taken into account, anticipated profit in the shape of
appreciated value of the closing stock is not brought into the account, as no
prudent trader would care to show increased profit before its actual realisation.
is the theory underlying the rule that the closing stock is to be valued at
cost or market price whichever is the lower, and it is now generally accepted
as an established rule of commercial practice and accountancy." From the
above passage, it will be seen that the proper practice is to value the closing
stock at cost. That will eliminate entries relating to the same stock from both
sides of the account. To this rule custom recognises only one exception and
that is to value the stock at market value if that is lower. But on no
principle can one justify the valuation of the closing stock at a market value
higher than cost as that will result in the taxation of notional profits the assessee
has not realised. The High Court in Ramachari has, however, outlined another
exception and seems to have rested this on two considerations. The first is the
observation of Lord Buckmaster in C.I.T. v. Ahmedabad New Cotton Mills Co.
Ltd.,  L.R. 57 I.A. 21 to the following effect:
method of introducing stock into each side of a profit and loss account for the
purpose of determining the annual profits is a method well understood in
commercial circles and does not necessarily depend upon exact trade valuations
being given to each article of stock that is so introduced. The one thing that
is essential is that there should be a definite method of valuation adopted
which should be carried through from year to year, so that in case of any
division from strict market values in the entry of the stock at the close of
one year it will be rectified by the accounts in the next year." From
these observations, the High Court inferred:
is obvious from the above that the privilege of valuing 646 the opening and
closing stock in a consistent manner is available only to continuing business
and that it cannot be adopted where the business comes to an end and the
stock-in-trade has to be the disposed of in order to determine the exact
position of the business on the date of closure. " The second
consideration which prevailed with the High Court is reflected in the following
passage from the judgment:
seems to us that none of these cases has any application to the facts of the
present case .
is no authority directly in point dealing with this question, where a
partnership concern dissolves its business in the course of the accounting
year, what is the basis on which the stock-in-trade has to be valued as on the
date of dissolution. We have accordingly to deal with the matter on first
case of a firm which goes into liquidation forms a close parallel to the
present case. In such a case all the stock-in-trade and other assets of the
business will have to be sold and their value realised. It cannot be controverted
that it is only by doing so that the true state of the profits or losses of the
business can be arrived at. The position is not very different when the
partnership ceases to exist in the course of the accounting year. The fact that
Ramachari, one of the ex-partners, took over the entire stock and continued to
run the business on his own, is not relevant at all, when we consider the
profits or losses of the partnership' which has come to an end. It should,
therefore, follow that in order to arrive at the correct picture of the trading
results of the partnership on the date when it ceases to function, the
valuation of the stock in hand should be made on the basis of the prevailing
market price." We are not quite sure that the first of the considerations
that prevailed with the High Court is relevant in the 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 where it is higher than
in either event, it is allowed to be done because its effect can be offset over
a period of time. But here, where the business comes to a close, no future
adjustment of an over 647 or under valuation is possible, In this context, it
is difficult to see how valuation, at other than cost, can be justified on the
principle of Ahmedabad Advance Mills case (supra).
however, find substance in the second consideration that prevailed with the
High Court. The decision in Muhammad Hussain Sahib v. Abdul Gaffor Sahib,
 1 M.L.J.81 correctly sets out the mode of taking accounts regarding the
assets of a firm. While the valuation of assets during the subsistence of the
partnership would be immaterial and could even be notional, the position at the
point of dissolution is totally different:
the situation is totally different when the firm is dissolved or when a partner
retires. The settlement of his account must be not on a notional basis but on a
real basis, that is every asset of the partnership should be converted 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
dissolution ......" This applies equally well to assets which constitute
stock-in-trade. There can be no manner of doubt that, in taking accounts for
purposes of dissolution, the firm and the partners, being commercial man, would
value the assets only on a real basis and not at cost or at their other value
appearing in the books. A short passage from Pickles on Accountancy (Third Edn),
p. 650 will make this clear:
the event of the accounts being drawn up to the date of death or retirement, no
departure from the normal procedure arises, but it will be necessary to see
that every revaluation required by the terms of the partnership agreement is
made. It has been laid down judicially that, in the absence of contrary
agreement, all assets and liabilities must be taken at a "fair
value," not merely a "book value" basis, thus involving
recording entries for both appreciation and depreciation of assets and
liabilities. This rule is applicable, notwithstanding the omission of a
particular item from the books, e.g. investments, goodwill (Cruikshank v.
Sutherland). Obviously, the net effect of the revaluation will be a profit or
loss divisible in the agreed profit-or loss-sharing ratios." 648 The real
rights of the partners cannot be mutually adjusted on any other basis. This is
what happened in Ramachari. 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.
appeal fails and is dismissed. But we would make no order regarding costs.