COMMISSIONER OF INCOME TAX Vs. APPU CHETTIAR A V

JUDGEMENT

(1.) THIS consolidated reference arises out of assessment proceedings relating to years 1951-52 and 1952-53 of A. V. Appu Chettiar firm which carries on business in art silk goods at Salem. The question referred to us for our opinion is "Whether the assessee is entitled to show its first purchase from the estate of the aforesaid is entitled to show its first purchase from the estate of the aforesaid testator (Appu Chettiar) at the market price of Rs. 3,53,064 on the date of such purchase." The assessee firm was constituted on January 22, 1951; it consists of two partners, Venkatammal and Lakshmi, the daughters of one Appu Chettiar who originally owned the business. Appu Chettiar died on January 6, 1951, leaving a will dated June 13, 1945, under which the aforesaid two daughters became the residuary legatees. The will directed the two daughters to carry on the business under the vilasam of the testator as partners, each of them being entitled to a half share. It also provided that as the legatees were ladies the actual management of the business should be with their husbands, acting subject to the supervision of the former.

(2.) SOON after the death of Appu Chettiar an inventory of his stock in trade was taken as on January 6, 1951, and the stock was valued at Rs. 2,78,866. There was a temporary cessation of the business on Appu Chettiars death but it was recommenced by the two daughters on January 22, 1951, when they formed themselves into a partnership as provided for in the will of their deceased father. The assessee opened new books of accounts as and from that date continuing the mercantile system of accounting adopted by the deceased. The entire closing stock of the deceaseds business was taken over by the new business as its opening stock, but the inventory value of the previous business was however not adopted. Instead, the market price of the stock in trade as on January 6, 1951, was taken as the value of the opening stock of the new partnership business; that was Rs. 3,53,064. There is no dispute now that this sum represents the actual market value of the stock as on January 6, 1951.

(3.) BEFORE considering these two contentions raised on behalf of the department, it would be useful to state a few principles in regard to valuation of stock. It needs no saying that for the due computation of profits under the mercantile system of accounting, the value of the stock in trade at the beginning of the year, and the value of the unsold stock at the end of the year will have to be ascertained. It appears to be fairly well established that on general principles of commercial accounting, the value of the trading stock on hand at the beginning and at the end of the accounting year should be entered at cost or the market value whichever is lower, the market value being ascertained as at the close of the accounting year and not at any intermediate date during the year. In Kikabhai Premchand v. Commissioner of Income-tax the Supreme Court observed :