Om Prakash, C.J. 1. Heard counsel for the parties.
2. At the instance of the Revenue, the Income-tax Appellate Tribunal, as directed by this court, referred the following questions relating to the assessment year 1988-89 (previous year being the calendar year 1987) for the opinion of this court :
"1. Whether, on the facts, and in the circumstances of the case, the Tribunal is right in law and fact in deleting the disallowance of the sales tax amount of Rs. 1,80,203 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in deleting the addition to the closing stock ?"
3. We first take up question No. 1. The relevant facts are that the assessee-firm stood dissolved on January 12, 1987, meaning thereby it continued only for 12 days in the previous year, relevant to the assessment year 1988-89. Upon dissolution, all assets and liabilities of the dissolved firm were taken over by a private limited company--one of the partners of the asses-see-firm. The sales tax liability of the firm relating to the calendar year 1986 relevant to the assessment year 1987-88 and to 12 days of the calendar year 1987, relevant to the assessment year 1988-89 was discharged by one of the partners, who took over the assets and liabilities of the firm on dissolution. The sales tax liability was discharged by the said partner during the previous year, relevant to the assessment year 1988-89. Deduction of the sales tax was claimed by the assessee-firm, which was denied to the assessee-firm for two reasons : (i) that the sales tax liability was discharged by the private limited company and not by the assessee-firm, and (ii) that the payment by the private limited company is not a payment by the assessee-firm.
4. The Appellate Tribunal negatived both the grounds raised by the Revenue holding that the sales tax liability had been discharged by the private limited company on behalf of the assessee-firm and, therefore, the latter was entitled to deduction. In this connection, the Appellate Tribunal referred to the provisions of Section 189(1) of the Income-tax Act. Section 189(1) provides that any business carried on by a firm which stood dissolved, the Assessing Officer shall make an assessment of the total income of the firm as if no such dissolution had taken place and all the provisions of the said Act including the provisions relating to the levy of a penalty under any provision of this Act shall apply, so far as may be to such assessment. What follows from Section 189(1) is that for the purpose of making the assessment, the firm notwithstanding its dissolution will be deemed to have continued and that would be subjected to assessment of the year in which the same was dissolved. If a firm is deemed to have continued for the purpose of the assessment for a particular assessment year notwithstanding its dissolution during that assessment year, we see no good reason why the firm, which is deemed to have continued under Section 189(1), is not entitled to deduction of the liability, discharged during that year. In this case, sales tax liability relating to the calendar year 1986, relevant to the assessment year 1987-88 and 12 days of the calendar year 1987, relevant to the assessment year 1988-89 was discharged during the previous year, relevant to the assessment year 1988-89. Since the firm is deemed to have continued for the purpose of assessment under Section 189(1), we are of the view that the firm on the same analogy will be entitled to deduction in respect of the liability, discharged during the year in which it stood dissolved.
5. So far as the submission of learned senior standing counsel that the liability, in fact, was discharged by the private limited company, that is, the erstwhile partner of the firm, is concerned, we are of the view that the liability to pay sales tax did not exist against the erstwhile partner, but under an agreement this liability was discharged by the erstwhile partner, inasmuch as that partner had taken over the assets and liabilities of the assessee-firm. In this situation, discharge of liability by the erstwhile partner will be deemed to have been made for and on behalf of the assessee-firm and, therefore, it is the assessee-firm alone who can claim deduction.
6. Coming to the next question, the point for consideration is as to how the closing stock is to be valued. This question is not res Integra, inasmuch as the Supreme Court in A. I. A. Firm v. CIT [1991] 189 ITR 285, reviewing the case law on the point, held that closing stock is to be valued either at cost or market price, whichever is lower. However, the Supreme Court, approvingly citing the decision of the Madras High Court in Muhammad Ussain Sahib v. S. N. Abdul Gaffoor Sahib, AIR 1950 Mad 758, held that 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 Madras High Court held at page 759 as follows :
"But 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."
7. The Supreme Court, relying on a short passage from Pickles on Accountancy (third edition), page 650, further opined that 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.
8. So, the rule laid down is that in a subsisting partnership, the closing stock will be valued either at cost or market price, whichever is lower. But, in the case of a dissolved firm, the closing stock will invariably be valued at the market price.
9. In the result, we answer the first question in the affirmative, that is, in favour of the assessee and against the Revenue. The second question is answered in the negative, that is, in favour of the Revenue and against the assessee.