Madhu Rani Mehra vs. CIT (Delhi High Court)

DATE: (Date of pronouncement)
DATE: March 22, 2011 (Date of publication)

Click here to download the judgement (madhu_rani_stock_valuation.pdf)

Capital asset treated as stock-in-trade of proprietary business has to be valued at market value

The assessee, a partner of a firm, received stock-in-trade on dissolution of the firm. The stock was used by the assessee to start a proprietorship business. In the assessment of the firm, the Tribunal held, following ALA Firm 189 ITR 285 (SC), that the option to value stock at the lower of cost or market was available only to a going concern and as the firm had dissolved, the stock had to be valued at the market value. However, in the assessment of the assessee’s proprietorship business, it was held that as the proprietorship concern had acquired the stock from the dissolved firm and continued the same business, the opening stock could not be valued at a price higher than the book value as the assessee had not paid anything in excess of the said amount. On appeal to the High Court, HELD allowing the appeal:

When a partnership firm is dissolved and the erstwhile partner receives stock, it is a capital asset in his hands. When that asset is introduced into a business as stock, it gets converted into stock-in-trade. The value of this stock will have to be the market value on the date of introduction. The Tribunal’s reasoning that the assessee cannot value the stock introduced in the business at market value because that was not the price she paid for it is flawed because if the assessee on having received her distributed share of stock of jewellery from the dissolved firm had sold it, and thereafter commenced her proprietorship business of jewellery again; within short span; by buying the jewellery from the market from the proceeds of stock sold on dissolution of the erstwhile firms, the stock of the proprietorship concern would without doubt be valued at market value. The same principle would apply if the assessee used her share of the stock obtained from the dissolved firm in the new business.

Note: The conversion of capital asset into stock is a “transfer” u/s 2(47)(iv) & 45(2) though the principle of valuation in Shirinbai Kooka 46 ITR 86 (SC) applies to the computation of business profits. See also DLF Universal vs. DCIT 128 TTJ 121 (Delhi)(SB) where the introduction of stock-in-trade as capital contribution into a firm was held to attract s. 45(3)

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