Arvind Shamji Chheda vs. CIT (Bombay High Court)

The correct test to be applied is whether the partnership assets were converted to capital assets of the partners at the time of dissolution. This we find, was provided for in the dissolution deed itself which records in clause (3) that the parties have agreed to take over the plots of land as co-owners and as capital assets and they shall have co-ownership and as a test of conversion if applied, the assessee has indeed provided for conversion. Hence we have no difficulty in concluding that the property does not seem to be stock-in-trade by the execution of the dissolution deed. In our view, there is no mode which provides for conversion of stock-in-trade into capital assets except by agreement of parties.

In the instant case, the deed of dissolution achieves that objective. In the case of Khatau Valabhdas, the Court was concerned with the division of stock-in-trade i.e. grocery products. In the present case, the business of the partnership was of builders / contractors and not of buying and selling the land and the partners at the material time were not engaged in any construction activity and no such construction was being carried out on the land. A building was to be put up on the land purchased by the erstwhile partnership firm but the land remained vacant and nothing is done on the land or to the land so as to show it as stock-in-trade and not treat it as capital assets share of the assessee.

In the circumstances, we answer both the questions in the negative and hold in favour of the assessee and against the revenue. We hold that the Tribunal had no material to come to the conclusion that the land sold by the applicant / assessee was stock-in-trade and the Tribunal was not justified to treat the same as business income. However, we leave open the question whether the amount in the hands of the applicant / assessee is to be treated as long term capital gains or short term capital gains to be decided by the department.