X, Y and Z are three partners of a partnership firm. Y and Z retired from the partnership with effect from November 30, 2009. X took over the business and continued as proprietor. The stock-in-trade as at November 30, 2009 was valued at average purchase price for settlement of accounts, which was the system consistently followed by partnership firm.
- Under which provisions, the income of partnership firm for the period April 1, 2009 to March 31, 2010 shall be assessed for the assessment year 2010-11?
- Can the Assessing Officer dispute the stock valuation in the assessment of the firm?
As per section 189, where any business or profession carried on by a firm has been discontinued, the Assessing Officer shall make an assessment of the total income of the firm as if no such discontinuance had taken place, and all the provisions of the Act including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of the Act, shall apply, so far as may be, to such assessment. Every person who was at the time of such discontinuance is a partner of the firm, shall be jointly and severally liable for the amount of tax, penalty or other sum payable, and all the provisions of the Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum.
The Chunilal Khushaldas Patel v. CIT  66 ITR 522 (Guj.), it was held that in case a partnership firm is converted into a proprietary concern of one of the partners and closing stock is taken over by the partner (who takes over) at cost then no profit is said to accrue to the partnership firm. The taxpayer will be assessed as a partnership firm as per section 189 for the period April 1, 2009 to March 31, 2010 since the partnership firm was discontinued on December 31, 2009 and the proprietary concern came into existence with effect from January 1, 2010. Therefore, there was a discontinuance of the firm. The Assessing Officer cannot dispute the stock valuation as per the ruling given in Chunilal Khushaldas Patel’s case (supra). Discontinuance is different from dissolution and, therefore, the principle given in ALA Firm v. CIT  189 ITR 285 (SC) is not applicable.
By :Dr. Vinod K. Singhania