KHATAU VALLABHDAS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee was a partner in a firm known as Messrs. Vallabhdas Tejpal along with three other persons, namely, Chatrabhuj Vallabhdas, Dharamsey Khatau and Harendra Khatau. Harendra Khatau retired from the partnership with effect from 11th November, 1958, and the three other partners continued to be the partners of the firm. The three other partners, that is, the assessee, Chatrabhuj, and Dharamsey decided to dissolve the partnership and a deed of dissolution came to be made on 5th November, 1958, in which the assessee and Dharamsey came to be referred to as retiring partners and Chatrabhuj was referred to as a continuing partner. The relevant part of the said deed of dissolution is as follows :

(2.) ON the date of dissolution, the stock -in -trade of the partnership -firm consisted of cloves, cinnamon, saffron, etc. In the assessment year 1960 -61, the assessee had realised a surplus amount of Rs. 10,329 which he wanted to be treated as capital gains assessable under s. 12B and not as trading profits under s. 10 of the Indian I. T. Act, 1922. This contention was rejected by the ITO, the AAC and even the Income -tax Appellate Tribunal. The remaining stock of the commodities which had come to the share of the assessee was sold by him in the assessment year in question, that is, 1961 -62, and the ITO treated the profits received by the assessee to the tune of Rs. 1,67,035 as income of the assessee. The AAC reduced the income by Rs. 5,240 but held that the profit earned by the assessee was liable to be treated as income. In the appeal before the Tribunal, it was contended by the assessee that the commodities received by the partners on dissolution of the partnership were capital assets in the hands of the partners and profits on sale thereof would be capital gains and there was nothing to show that the partners on receipt of the assets or commodities had converted the same into their stock -in -trade. The Tribunal took the view that there was nothing to support the proposition that, on dissolution of the firm, the stock -in -trade became capital assets in the hands of the partners. The circumstances relied upon by the Tribunal in support of the conclusion that the commodities received by the partners were treated as stock -in -trade were as follows :

(3.) ARISING out of this order of the Tribunal, the following question has been referred to this court :