B.K. Mehta, J.
1. The assessment year under reference is 1970-71, the corresponding previous year being calendar year 1969. The assessee is an individual and he purchased a field bearing S. No. 624, admeasuring 67,716 sq. yards situate within the revenue limits of village Dudhraj in Surendranagar district jointly with one Shri Pranlal D. Pancholi for a sum of Rs. 6,400 from Jhala Ladhaji Deepsangji and his sons by a registered deed of conveyance of July 8, 1948. When they purchased the said land, it was in the possession of the mortgagee of the vendors who were cultivating the same. The assessee and the said Shri Pranlal Pancholi being virtually vendees of the right of redemption, filed a suit for redemption of the mortgage in which a preliminary decree was made on April 24, 1951, while the final decree was passed on November 20, 1952. There is no clear evidence to show as to what steps were taken by these vendee-decree holders for obtaining possession of the land after the final decree was passed in their favour. There were some proceedings under the Saurashtra Agricultural Debtors Relief Act, 1954, by the sellers which are not of much consequence in the present reference. It appears that out of the aforesaid land, a portion admeasuring 18,272 sq. yards was acquired by the Government for constructing staff quarters for the Western Railways. The assessee and Shri Pancholi received compensation for the acquisition of the said land from the Government. This compensation was sought to be taxed in the hands of the association of persons comprising of the assessee and Shri Pranlal Pancholi in the assessment year 1956-57. In the course of assessment, a question arose whether the surplus arising out of the compensation paid by the Government for acquisition of the said portion of land was taxable as business profit or capital gains. The question was ultimately determined by the Appellate Tribunal which by its order of October 4, 1969, held that the land purchased by the said association of persons was stock-in-trade and the surplus arising being the compensation paid by the Government was business income of the said association However, the Tribunal concluded that the surplus arising out of the compensation paid by the Government was not taxable in the assessment year 1956-57. The assessee sought reference in this matter which was however, not granted by the Tribunal. It appears that by a dissolution deed of March 7, 1965, the remaining portion of the land was divided equal] y between the assessee and said Shri Pranlal Pancholi. Two divisions were made pursuant to this dissolution. Each division admeasured 14,399 sq. yards and consisted of three plots of land. Division 'A' which inter alia, consisted of one plot admeasuring 5,203 sq. yards and two plots each admeasuring 4,598 sq. yards came to the share of the assessee. Division B land consisting of three plots went to the share of Shri Pranlal Pancholi. It appears further that out of Division 'A' land which went to the share of the assessee. two plots each admeasuring 4,598 sq. yards were again acquired by the Government for railway quarters The relevant notification under sections 4 and 6 in respect of these two plots were made respectively on November 18, 1966, and December 19,1966. The possession of these two plots of land was taken during the year of account, namely, 1969. The total area of land thus acquired was 9,196 sq. yards for which the assessee was paid compensation at the rate of Rs. 7.50 per sq. yard. The assessee was thus paid an aggregate compensation of Rs. 63,970 for the acquisition of the two plots of land besides the solatium amount of Rs. 10,345-50.
2. A question arose in the course of assessment as to whether the surplus arising out of the compensation is to be treated as a business profit or capital gains. The Income-tax User held that the surplus arising out of the sale of the land was business income since the land in question was the stock-in-trade of the assessee. He, therefore, held that the aggregate surplus of Rs. 78,115 arising out of the compensation received by the assessee was taxable as business income.
3. On appeal to the Appellate Assistant Commissioner, the contention of the assessee that on division of the land between the two members of the association, the land which came to the share of the assessee was his capital asset was accepted. He, therefore, held that the surplus arising out of the compensation is taxable as capital gains and not as business income. The Appellate Assistant Commissioner worked out the cost of the land at Rs. 4.75 per sq. yard amounting to Rs. 43,681 for the two plots, and after deducting this amount from the compensation amount, the capital gains was worked out at Rs. 35,634. The Income-tax Officer was accordingly directed to tax this sum of Rs. 35,634.
4. The Department, therefore, preferred an appeal before the Income-tax Appellate Tribunal which reversed the order of the Appellate Assistant Commissioner and held for the reasons stated in the order that the land which came to the share of the assessee continued to be stock-in-trade and, therefore, the surplus arising out of the acquisition of such land was taxable as business income of the assessee.
5. It is in fact in this situation that the following question has been referred to us for our opinion under section 256(1) of the Income-tax Act, 1961 :
'Whether the Tribunal was right in holding that the land in question was stock-in-trade of the assessee and, therefore, the surplus arising out of the compensation received by the assessee from the Government was taxable as his business income ?'
6. We are of the opinion that this reference should be accepted and the question should be answered in favour of the assessee for the following reasons :
7. The legal position is not capable of being disputed that stock-in-trade of a joint family or a firm when allotted to a member on partition or dissolution, would become capital asset in his hands, and the subsequent sales by him would result in capital gains, unless there is evidence to show that the member or partner receiving the property as his share treated it as his stock-in-trade [see Kannappa Chettiar v. CIT : 46ITR576(Mad) ); Murugappa Chettiar v. CIT : 46ITR797(Mad) ); M. S. M. M. Firm, Ipoh v. CIT : 72ITR14(Mad) ) and Subramanian Chettiar v. CIT : 70ITR262(Mad) ]. The principle Underlying these decisions is that on the dissolution of a partnership firm, or a partition of a joint Hindu family, the property received by a quondam partner, or a member of the family, as his share in the stock-in-trade of the business, or the property of the firm, or family, would be his capital asset according to recognised accountancy principles, subject, however, to the intention otherwise established by clear and cogent evidence, circumstantial or otherwise It is no doubt true that the Tribunal has emphasised the following factors as circumstantial evidence to indicate the intention that the assessee treated Division 'A' land as his stock-in-trade :
8. The first circumstance which has been emphasised by the Tribunal is that the association of persons consisting of the assessee and Shri Pranlal Pancholi was not agriculturist, and it purchased this land in the fast developing town of Surendranagar at that time and, therefore, its intention was to resell the said land at profit. The second circumstance which has been emphasised is the non-agricultural use permission for which was granted by the Collector, Surendranagar, under section 66 of the Bombay Land Revenue Code, and in the statement given by the assessee recorded on September 2, 1965, he sought the permission because many housing co-operative societies were then round the corner, and they thought it wise to seek the N. A. permission as the price of the land in the vicinity was going up. He also admitted that they were doing business in land as clearly disclosed from the exercise books produced by him pertaining to the periods 1948 to 1965, and that he decided to join hands with Shri Pancholi with a view to do business. The inference that was drawn from the circumstantial as well as oral evidence was to the effect that the land was stock-in-trade of the association of persons.
9. The Tribunal thereafter posed a question as to what is the effect of partition of this stock-in-trade. After posing this question, the Tribunal considered the contention urged on behalf of the assessee that on a division of the property between the members of the association, the property coming to the share of either of them was a capital asset, which did not find favour with the Tribunal. The reasons which prompted the Tribunal to reject this contention should be set out for their appreciation :
'10.... We do not see any substance in this contention. The land was held as stock-in-trade by the association of persons of which the assessee was a member. As pointed out above, the assessee became a member of the association of persons only with the intention of dealing in land. He was himself a dealer in land. Therefore, the only inference which can be drawn is that the land which the assessee received at the division was held by him as stock-in-trade. This conclusion is strengthened by the fact that in the past surplus arising out of sale of land by the assessee was treated as his business. As pointed out above, in the assessment years 1963-64 and 1967-68, surplus arising out of sale of land by the assessee was treated as his business income. We do not agree with Mr. Patel that the treatment given to the surplus in these years is of no relevance. It is true that in these years, the assessee himself had sold the lands, while in the present year the lands have been acquired by the Government, but that fact, in our opinion, will not go to prove that the surplus was capital gains and not business profits. We have held that the lands which came to the share of the assessee was held by him as stock-in-trade. Whether the stock-in-trade is sold or acquired, the surplus would be business income. The fact that the assessee has not sold the third plot admeasuring 5,203 sq. yards is also of no consequence. This will not go to prove that the entire land allotted to the assessee was his capital asset. It may be that the assessee has not sold the third plot to earn higher profits...'
10. In other words, what has weighed with the Tribunal are the two circumstances, namely, the assessee himself was a dealer in land, and that he had sold some plots and treated the proceeds as his income. In view of these two circumstances, the Tribunal did not think it fit to attach any importance as to whether the two plots, out of the land allotted to the share of the assessee on the dissolution of the association, were sold or acquired. In our opinion, with respect to the Tribunal, the approach is erroneous. What has to be determined in such a case is, whether that particular property which has come to the share of the member or the partner has been treated as stock-in-trade or not. In other words, is the intention to treat a property allotted to a member or a partner as a stock in business That intention can be gathered, no doubt from the facts and circumstances of a given case, such as a part of such property sold in the course of business so as to indicate that the intention was to treat that property as stock-in-trade. The fact that the assessee was, de hors this property in question, a dealer in land is absolutely an irrelevant circumstance, which could not be germane to the question which has been rightly posed by the assessee (sic) was treated as stock-in-trade. The very fact that the assessee had retained these three plots of Division-A land with him till two of them were acquired by the Government in November/December, 1966, and the possession was taken over in 1969 clearly indicates that if the assessee had really intended to treat this as his stock-in-trade, he would have at least attempted to dispose of the third plot after the two plots were put under acquisition. The very fact which has been recorded by the Tribunal that the third plot was not disposed of goes to show that the intention of the assessee was not to treat this land as stock-in-trade. The two circumstance which have been emphasised by the Tribunal in the course of its decision which had arisen before the partition was effected cannot be said to be relevant for the purposes of determining as to what was the intention of the assessee qua this Division-A land, which came to his share, on the dissolution of his association. The evidence which could have clinched the issue as to whether the property which had been allotted to the assessee on the dissolution of the association had been treated as stock-in-trade, namely, his conduct qua this land, clearly indicates that the intention of the assessee was not to treat this land as stock-in-trade.
11. The learned counsel for the Revenue invited our attention to the decision of the Bombay High Court in Khatau Vallabhdas v. CIT : 119ITR846(Bom) . The facts before the Division Bench of the Bombay High Court in that case were that under the deed of dissolution of November 5, 1958, of a partnership firm dealing in grocery, the stock-in-trade was divided amongst the three partners in specie who agreed to pay for the same at cost. In the assessment year 1960-61, the assessee, one of the partners, had realised a surplus amount of Rs. 10,329 on the sale of some stock which he wanted to treat as capital gain under section 12B and not as trading profits under section 10 of the Indian Income- tax Act, 1922. The remaining stock, which had come to the share of the assessee, was so] d by him in the assessment year 1961-62, and the Income-tax officer treated the profits received by the assessee to the tune of Rs. 1,67,035 as income of the assessee. The decision of the Income-tax Officer was confirmed up to the level of the Tribunal. On a reference, the Division Bench, speaking through Chandurkar J. (as he then was), held that the partnership firm was carrying on business of dealing in grocery which is not purchased by a trader by way of investment to acquire a capital asset, but they are always purchased as stock-in-trade to be resold as a part of a scheme of profit-making, and it is only if the sale of the commodities by the assessee could be shown to be for realisation of an investment, the profits will be a profit from the sale of a capital asset and thereby it may partake of the nature of a capital gain. It is further held that if the sale is of a commodity, which has not been acquired by way of investment but 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 the facts of the case, the Division Bench found that the assessee was interested in disposing of at a profit the stock of grocery articles which came to his share as a part of his share in the stock-in-trade of the partnership and, therefore, 'having regard to the nature of the commodities', the position could not be different merely because, instead of selling away the stock-in-trade and dividing the profits, the stock-in-trade itself was divided. We fail to appreciate how this decision can be of any assistance to the case of the Revenue which the learned counsel is pleading before us. The Division Bench of the Bombay High Court has been careful enough to distinguish the decision of the Mysore High Court in K. T. Appanna v. CIT : 64ITR310(KAR) , which was a case of division of the stock-in-trade of the firm consisting, inter alia, of the land purchased for development, on dissolution of the firm, and a partner receiving the land as his share selling the same. The Division Bench of the Bombay High Court, while distinguishing this case, observed as under (p. 852);
'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...'
12. In our opinion, therefore, this decision of the Bombay High Court cannot take the case of the Revenue any further.
13. As pointed out by us above, the clinching circumstances of the conduct on the part of the assessee inasmuch as he did not make any attempt to sell the third plot situate in the fast developing urban area and which remained with him out of Division-A land coming to his share, even after acquisition of two other plots would go a long way in establishing that the assessee had no intention to treat this land as stock-in-trade. In that view of the matter, therefore, we are of the opinion that the question referred to us should be and is answered in the negative, that is, in favour of the assessee and against the Revenue. The Commissioner shall pay the cost of this reference to the assessee.