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 :
'... AND WHEREAS it has now been agreed between the parties hereto that the retiring partners shall also retire from the said partnership business as from Aso-Vad the 30th S. Y. 2014 and that the stock-in-trade of the said partnership be divided amongst the parties hereto in specie at cost in proportion to their respective shares in the profits of the said business and that the retiring partners shall assign to the continuing partner their respective shares in the moneys credits and effects of the said partnership and in the import quotas under the quota certificates and all other benefits to which the said partnership is entitled... AND WHEREAS the parties hereto have accordingly divided the stock-in-trade of the said partnership amongst themselves in specie and agreed to pay for the same at cost NOW THIS INDENTURE WITNESSETH that in pursuance of the said agreement and in consideration of the premises the retiring partners and the continuing partner DO HEREBY DISSOLVE the said partnership existing between them so far as the retiring partners are concerned as from Aso-Vad the 30th S. Y. 2014 (i.e., the 11th day of November, 1958).'
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 :
(1) The deed of dissolution specifically mentions that 'the stock-in-trade of the said partnership be divided amongst the parties hereto in specie at cost in proportion to their respective shares.'
(2) The nature of the stock-in-trade is such that it cannot possibly be treated as capital asset in the hands of the partners, i.e., the stock-in-trade is a perishable commodity and will not constitute a capital asset in the hands of the partners.
(3) The conduct of the assessee shows that the assessee accepted the decision of the Tribunal in the earlier year and did not go to the High Court on a reference.
(4) The assessee himself sent a letter on 13th September, 1963, to the ITO informing him that the profit of Rs. 1,40,795 shown in the kirana vepara account should be taken as business profit in view of the Tribunal's decision mentioned above.
(5) The subsequent conduct of the assessee in disposing of the stock-in-trade as mentioned by the Tribunal in its order clearly shows that the stock-in-trade was treated as the stock-in-trade of the partners and not capital asset.
3. The Tribunal, therefore, came to the conclusion that the commodities received by the assessee on the dissolution of the partnership constituted its stock-in-trade and the profits realised on the sale thereof were business profits. Consequently, the appeal filed by the assessee came to be dismissed.
4. Arising out of this order of the Tribunal, the following question has been referred to this court :
'Whether, on the facts and in the circumstances of the case, the excess realised by the assessee on sale of goods received in respect of his share in the partnership-firm on its dissolution was income, profits or gains from business or constituted capital gain ?'
5. Mr. Pandit, appearing on behalf of the assessee, contended that, notwithstanding the fact that the commodities in which the partnership originally carried on business were stock-in-trade of the partnership-firm, on dissolution they were liable to be treated as capital and, therefore, whatever profit was made from the sale of those commodities had to be treated as capital gains and not income of the assessee.
6. This submission was based mainly on a decision of the Mysore High Court in K. T. Appanna v. CIT  ITR 310.
7. There is no dispute that, prior to the dissolution, the partnership firm was carrying on business of dealing in grocery. Whatever was the stock of grocery articles left at the time when the partnership firm was dissolved was distributed between the three partners. Admittedly, it was this stock that has been sold and profit was made. The question is whether this profit should be treated as income or it should be treated as capital gains. If it has to be treated as income, then it could be so treated only if the commodities in question continued to bear the character of stock-in-trade. If initially the commodities were admittedly stock-in-trade, then unless it is possible for the assessee to show that the commodities had changed their nature and had become capital, in our view, the profit made from the sale of such commodities would have to be treated as income.
8. The crucial question which, therefore, falls for consideration is whether the commodities which have come to his share on dissolution of partnership could be said to have changed their character and become capital goods, though they undoubtedly formed the stock-in-trade of the firm of which the assessee was a partner.
9. While determining this question, we must have due regard to the nature of the commodities and the object with which the assessee has disposed of the commodities which came to his share as a result of the dissolution of the partnership. We must bear in mind the fact that grocery aricles are not purchased by a trader by way of investment to acquire a capital asset, but they are always purchased as stock-in-trade. They are purchased to be resold as a part of a scheme of profit-making. The commodities sold were admittedly the stock-in-trade of the partnership-firm. Since the grocery articles are normally held by a trader as stock-in-trade, unless there is some indication that the assessee had intended to hold his stock as capital, it will have to be held that the sales of the grocery articles by the assessee were made as a part of the trading activity. In other words, only if the sale of the commodities by the assessee can be shown to be for realisation of an investment, then only, will the profit be a profit from the sale of a capital asset and thereby it may partake the nature of a capital gain. But if the sale is of a commodity, which has not been acquired by way of investment but is always regarded as stock-in-trade, then the sale of such commodity would obviously be made as an act of making profit and the profit made from such sale would have to be treated as income. In Raja Bahadur Kamakhya Narain Singh v. CIT : 77ITR253(SC) , the Supreme Court has indicated the difference between a transaction which is intended for realisation of an investment and an act done for making profits. The Supreme Court has observed (p. 262) :
'It is fairly clear that where a person in selling his investment realises an enhanced price, the excess over his purchase price is not profit assessable to tax. But it would be so, if what is done is not a mere realisation of the investment but an act done for making profits. The distinction between the two types of transactions is not always easy to make. The distinction whether the transaction is one kind or the other depends on the question whether the excess was an enhancement of the value by realising a security or a gain in an operation of profit-making. If the transaction is in the ordinary line of the assessee's business there would hardly be any difficulty in concluding that it was a trading transaction, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade... The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction.'
10. As pointed out by the Supreme Court in the observations quoted above, the crucial test is whether the excess was an enhancement of the value by realising a security or a gain in an operation of profit-making. Also, the question which has to be decided is whether the transaction is in the ordinary line of the assessee's business or in a given case it is in the nature of trade. There can be no doubt on facts in this case that after the dissolution of the partnership, the assessee was interested in disposing of the stock of grocery articles which came to his share as a part of his share in the stock-in-trade of the partnership. It is true that he did not purchase any additional stock of the commodities in question, but that, in our view, would not be very material because the assessee had regularly been disposing of the stocks which came to him by a series of sales throughout the year in question. He was clearly interested in disposing them of at a profit. The repeated sale transactions clearly indicated the trading nature of those transactions which were also in the ordinary line of the assessee's business, that is, the business which he was carrying on as a member of the partnership firm. There can be no doubt that if the entire stock-in-trade of the partnership firm was sold before the dissolution of the partnership and, on dissolution, moneys realised by the sale of the stock-in-trade were divided, the profit to the share of each of the partners would positively have been treated as income. Having regard tot he nature of the commodities we fail to see how the position would be different merely because instead of selling away the stock-in-trade and dividing the profits, the stock-in-trade is itself divided. The commodities in question were clearly of a perishable nature and a normal person does not invest his funds in articles or commodities of a perishable nature. Nothing has been shown on behalf of the assessee as to why, on dissolution of partnership, the nature of the commodity was changed from that of stock-in-trade into capital.
11. The decision of the Mysore High Court on which reliance has been placed is, in our view, clearly distinguishable on facts. It is no doubt true that it has been held in that case that where a partnership is dissolved and the assets of the partnership which are not yet sold are distributed amongst the partners, profits made by a partner who merely sells the assets with a view to realise the same are not profits from business, for, merely realising an asset is not trading. These observations are, however, to be read in the light of the facts before the Mysore High Court. In that case, the assessee and three others had entered into a partnership in 1949 with the object of purchasing a big site and selling it in smaller plots. A site was purchased and divided into 74 plots of which 57 were sold during the years 1949 to 1956. The partnership was dissolved in 1956. Out of the 17 plots unsold, each one of the partners took four plots and one plot was allotted to charity. The assessee had sold the plots which had come to his share and made the profits and the question was whether the profit should be treated as income. In a rather brief judgment, the Division Bench observed that it was not the case of the revenue that, after the dissolution of the partnership, the assessee had purchased any other sites or sold any sites other than those that fell to his share at the time of the dissolution of the partnership and, according to the Division Bench, from the mere fact that the assessee had sold the sites that fell to his share at the time of dissolution of the partnership, no inference could be drawn that he wanted to continue on his own the very business of the partnership of which he was a member. On the facts, in that case, the Division Bench was unable to come to the conclusion that the sales in question were effected in the course of the assessee's business. It was also found on facts that there was no evidence to show that the assessee treated real properties allotted to him to his stock-in-trade. The Division Bench had placed reliance on the observations of Rowlatt J. in Alabama Coal, Iron, Land and Colonization Co. Ltd. v. Mylam  11 TC 232 . It is not possible for us to read this decision as laying down a proposition which has been set out in the headnote of the report. The decision must be read as being given on the facts of that case. What seems to have weighed with the Bench was that the property in question was real property. It is well known that land is a peculiar asset of its own kind and where land is acquired, money is invested either with a view to make profit by resale of the land or with a view to use the land for his own purpose by the purchaser. It is only in exceptional cases that land is itself treated as a trading asset. Normally, land is treated as a capital asset except in a case where a person trades in land. The case of sale of perishable articles like grocery articles cannot be treated on the same footing as that of sale of land. The ratio of the decision in K. T. Appanna's case : 64ITR310(KAR) cannot, therefore, be applied in the present case.
12. We may also point out that the observations of Rowlatt J. on which the Mysore High Court has relied were also made in the context of sale of assets in which investments were made. It is no doubt true that Rowlatt J. has in that case observed that there cannot be a 'trade of realising'. But if the facts in that case are scrutinised, it will appear that even in the case before the learned judge, while assessing the company in that case to income-tax on the proceeds of land sales, it was held that the company was carrying on a trade and not merely realising capital assets. In that case, it was contended by the assessee-company before the Commissioners for the Special Purposes of the Income Tax Acts that it was not liable to pay income-tax on the proceeds of the sale of lands which it had received in the United Kingdom on the ground that they were not annual profits or gains but proceeds of the realisation of capital. The words 'trade of realising' were really used by the Commissioners. While rejecting the contention the Commissioners observed as follows (p. 250) :
'The appeal, however, was in effect argued before us as under Case I and we have therefore to decide whether the company is carrying on a trade and whether these proceeds of land sales are profits. From this point of view we find no difficulty in deciding (subject to the remarks in our concluding paragraph) that the proceeds of sale now being made are profits, for they are clearly surpluses after all capital expenditure has been met. But are they profits of a trade This depends upon whether the company is carrying on a trade of realising, or whether it is more correct to regard the company merely as the agent of the original bondholders. In deciding this issue we have to note that in form the company is a separately constituted entity which acquired the bonds from the bondholders; that in fact to a considerable extent the company consists of persons who or whose predecessors in title were not bondholders; that in fact money was put up to buy new lands so as to develop and nurse the property; and that in fact the company has gone to work as a land-developing company. We think, therefore, that on balance the true view to take of the facts is that these profits are the profits of a trade.'
13. The observations made by Rowlatt J. were in respect of the language used by the Commissioners, as will be clear from the following observations (p. 252) :
'Mr. Latter's argument really starts with some criticism of the question propounded to themselves by the Commissioners or at any rate of the terms in which that question is expressed. I think it is useful to be precise about the question for one's own purposed and I do not want Mr. Latter to think that I am not looking at the question as he puts it to me, because I think he has put it to me rightly. The Commissioners say the question is 'Are they profits of a trade This depends upon whether the company is carrying on a trade of realizing, or whether it is more correct to regard the company merely as the agent of the original bondholders.' Some criticism I think may be fairly made upon that language, but it is only really verbal. Of course when they say 'trade of realizing', if they are using the word 'realizing' in its very correct sense you get a contradiction in terms because merely realizing is not trading. It is no good saying it is a trade of realizing. But I think what they mean is : they have taken a process of realizing and embedded it in a trade so that in the course of carrying on a trade they have in fact done some realizing. That is what I think they mean, using the word 'realizing' not in the narrow and exclusive sense.'
14. Rowlatt J. found that the company had conducted a trading concern as opposed to mere realisation. The above-quoted observations in which Rowlatt J. explained the words 'trade of realizing' are really not of any assistance to the assessee. We have already found in the instant case that the assessee when he was selling off perishable articles was disposing them of by trading transactions. The grocery articles were not converted into capital assets so far as the assessee was concerned and there was no question of realising any investment by him.
15. The learned counsel appearing on behalf of the assessee has also relied on a decision in Alagappa Chettiar v. CIT : 59ITR440(Mad) . In that case, the two assessees were partners along with four other partners in a partnership firm and the partnership was doing business in money-lending and also in the purchase and sale of real properties in Malaya. At the time of dissolution one-sixth share both in money-lending business as well as in the real properties was allotted to each assessee. The assessee sold certain items of real properties and worked out a net surplus. The surplus sale proceeds were claimed as being in the nature of capital receipts. On facts, it was held that when the real properties were allotted to the assessee at the time of the dissolution of the firm, they held the properties as ordinary private owners and as there was no evidence to show that the assessees treated the real properties allotted to them as stock-in-trade of the money-lending business and sold the properties in the course of any trade or business, the surplus amount realised on sale of properties was held to be not revenue receipts and, therefore, not assessable under the I. T. Act. In arriving at this conclusion, it is important to refer to the test which was followed by the Madras High Court. The test followed was the one laid down by Lord Justice Clerk in Californian Copper Syndicate v. Harris  5 TC 159 , which is as follows :
'It is quite a well settled principle in dealing with questions of assessment of income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit...... assessable to income-tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.'
16. The Madras High Court : 59ITR440(Mad) also reproduced the following passage from a judgment of Farwell L. J. in Hudson's Bay Co. v. Stevens  5 TC 424 :
'It is clear, therefore, that a man who sells his land, or pictures or jewels, is not chargeable with income-tax on the purchase-money or on the difference between the amount that he gave and the amount that he received for them. But if instead of dealing with his property as owner he embarks on a trade in which he uses that property for the purposes of his trade, then he becomes liable to pay, not on the excess of sale prices over purchase prices, but on the annual profits or gains arising from such trade, in ascertaining which those prices will no doubt come into consideration.'
17. The passages extracted above will clearly indicate that the tests laid down there were the same as in Raja Bahadur Kamakhya Narain Singh's case : 77ITR253(SC) . The observations of Lord Justice Clerk and Farwell L. J. also indicate that so far as land is concerned, normally, purchase thereof is treated as an investment and sale thereof is treated as recovery of the investment. As already pointed out, we are in the instant case concerned not with land which is normally a capital asset but with perishable articles. Though the assessee had ceased to carry on his trade as a partner in the partnership firm, when he was trying to dispose of the commodities which came to him by way of his share in the trading assets of the partnership for the purposes of disposing of that stock-in-trade, he was carrying on a trading activity. The profits earned from the sale of these commodities would, therefore, have to be clearly treated as income.
18. In this view of the matter, we answer the question referred to us by holding that the excess realised by the assessee on sale of goods received in respect of his share in the partnership firm on its dissolution was income, profits or gains from business and did not constitute capital gains. The assessee to pay the costs of this reference.