Law:

Section:

Section 10(1) of the Indian Income-tax Act, 1922 [corresponding to section 28(i) of the Income-tax Act, 1961]-Business income-Whether excess realised by ex-partner of a dissolved firm on sale of his share of what constituted stock-in-trade of the firm is profits of business or capital gains-Held, on facts, that the excess is assessable as profit of business Facts K, C, D and H were partners in a firm of grocery dealers. H retired on 11-11-1958, leaving the other three to continue the partnership business. But the latter three decided to dissolve the firm. A dissolution deed was drawn up accordingly. It provided, inter alia, that K and D too would retire from the partnership business with effect from 11-11-1958, leaving C alone to run the business. It was further provided that "the stock-in-trade of the said partnership be divided amongst the parties hereto in specie at cost in proportion of their respective shares in the profits of the said business". On the date of dissolution, the stock-in-trade of the partnership firm consisted of chores, cinnamon, saffron, etc. In the previous year relevant to the assessment year 1960-61, K, the assessee, realised a surplus of Rs. 10,329, which he wanted to be treated as his capital gains assessable under section 12B, not as trading profits under section 10. His claim was rejected by the ITO, the AAC, and even the Appellate Tribunal. The remaining stock of the commodities which had come to his share, was sold by K in the next year. The ITO treated the surplus of Rs. 1,67,035 as his profits for the assessment year 1961-62. The AAC upheld the action, subject to a reduction by only Rs. 5,240. On further appeal by K, the assessee, the Tribunal sustained the AAC's order holding that in the hands of the assessee also the commodities retained the character of stock-in-trade and that the profits realised by him on sale thereof were business profits. On reference : Held For determining whether the assessee's share of the firm's stock-in-trade had changed its character and become capital goods as claimed by him, one must have due regard to the nature of the commodities and the object with which the assessee disposed of the…

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