1. This appeal is by the assessee. The appeal relates to the assessment year 1980-81.
2. The ITO originally made an assessment on 18-11-1980 on the entire income of the firm from 1-11-1978 to 20-10-1979. One of the partners had died on 25-8-1979 and the assessee had pleaded that two separate assessments should be made which Avas eventually upheld in appeal and, consequently, the ITO made a revised assessment for the period 1-11-1978 to 25-8-1979 in conformity with the appellate decision. The firm had dissolved on the day the partner Shi K. Sankarappa died. The ITO was of the view that since the firm had dissolved, the value of the stocks which were valued at cost should be taken at market price. For this proposition, he relied on the decisions in the cases of G.R.Ramachari & Co. v. CIT  41 ITR 142 (Mad.) and A.L.A. Finn v. CIT  102 ITR 622 (Mad.). To evaluate the market value what the ITO did was to take the value of stock on hand and make addition equivalent to the percentage of gross profit disclosed in the trading accounts to which such closing stock pertained. On this basis, the ITO computed the addition as under:The closing stock of wholesale cloth is Rs. 2,91,587 and grossprofit at 8.6 per cent works out to Rs. 25,100 25,100Closing stock of handloom cloth is Rs. 32,358 and grossprofit at 12.9 per cent works out to Rs. 4,165 4,165Closing stock of banians is Rs. 12,756 and gross profitat 17 per cent works out to Rs. 2,175 2,175 Total 31,440 Thereafter the ITO gave a relief of Rs. 6,000 which it was stated was towards overhead expenditure and brought to tax the balance of Rs. 25,440.
3. The assessee appealed and it was contended that there was no justification to value the closing stock at market rate. The assessee also emphasised that the succeeding partners took over the stock only at the cost price. Since, therefore, stock was taken over at a lower price, it was contended that the valuation was not proper. The AAC did not agree. In particular he also referred to a decision of the Tribunal in the case of V.C. Venkata Subbaiah Shetty & Sons [IT Appeal No. 1068 (Hyd.) of 1981, dated 22-9-1982] which, according to him, supported the stand of the ITO. The AAC confirmed the order of the ITO and dismissed the appeal.
4. The assessee is in appeal before us and the learned Counsel reiterated that any change in valuation was not permissible because the stock was taken over by the successor firm at the same value. The learned Counsel submitted that even if the revaluation was permissible, the market value alone had to be taken for the stock. He submitted that the assessee-firm had been in existence for several years. At no stage the dead stock had been written off. Business done was in cut pieces.
He stated that where cut pieces remained unsold for any length of time, the value would even come below the cost of stock. Therefore, he stated that adopting a uniform rate of gross profit in valuation of closing stock with reference to cost would be most unrealistic. He further submitted that for determining the market value, the price of each item was not to be taken but what the entire stock would fetch if put for sale then and there in which case only others dealing on a wholesale basis would have made the purchases. Therefore, the market rate, he submitted, would not be the individual selling prices. For all these reasons he stated that on facts also no addition was warranted.
5. The learned departmental representative submitted that the ITO had already given a deduction of Rs. 6,000 though it was stated that deduction was with reference to overheads. He, therefore, stated that in any view of the matter no further deduction was warranted.
6. We have considered the rival submissions. When a firm is dissolved even if stock was earlier valued at cost price, the ratio of the decisions referred to go to show that the market value of the stock would have to be taken. What the ITO did was to apply the rate of gross profit of the year to the entire closing stock. The points emphasised by the learned Counsel, viz., this does not make allowance for dead stock, etc., in the business particularly because the value of closing stock was in excess of Rs. 3 lakhs whereas the turnover was in the region of about Rs. 7 lakhs. There is bound to be some amount of dead stock in a business of this type. Straightaway adopting the rate of gross profit disclosed in the relevant trading account in respect of the value of closing stock disclosed would not be indicative of the trade and also the trade being cut piece business, there is also no facts available of the nature of stock. But still some appreciable discount has to be made for the factors emphasised by the learned Counsel. With reference to aggregate figure of addition of Rs. 31,440, we consider that a deduction of about 50 per cent would be a realistic appraisal of the market value of the stock giving due consideration for the factors urged and the fact that the value taken originally was only the cost price. In round figures deduction to be given would be Rs. 15,000. Since the ITO has already given Rs. 6,000, we would allow a further deduction of Rs. 9,000.