Stock-in-trade sold after partnership dissolution can yield business income, not capital gains, when disposed of as trading stock.

Stock-in-trade distributed on dissolution of a partnership remains trading stock if later sold in the ordinary course of business. The decisive test is whether the assessee is merely realising an investment or carrying on a trading operation for profit. Where perishable goods held for resale are repeatedly sold after dissolution, the surplus is business income and not capital gains. Authorities concerning land or real property are distinguishable because they involve capital realisation on different facts.

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Issues: Whether the excess realised by the assessee on sale of goods received on dissolution of the partnership was income, profits or gains from business or capital gains.

Analysis: The goods distributed on dissolution were admittedly the stock-in-trade of the partnership. The character of those commodities did not change merely because they were allotted to the partners in specie instead of being sold by the firm and the proceeds divided. The decisive test was whether the assessee was merely realising an investment or was engaged in a trading operation for profit. As the goods were perishable grocery articles ordinarily held for resale, and the assessee disposed of them by repeated sales in the ordinary course of the same trading activity, the surplus arose from a trading operation and not from the realisation of a capital asset. The authorities relied on for the assessee were distinguishable on their facts because they concerned assets such as land or real properties, where the question of investment or capital realisation stood on a different footing.

Conclusion: The excess realised on sale of the goods constituted income, profits or gains from business and did not amount to capital gains, in favour of the Revenue.

Ratio Decidendi: Where stock-in-trade of a business is distributed among partners on dissolution and is thereafter sold in the ordinary course as trading stock, the profit realised remains business income unless the assessee shows that the asset was converted into capital and held merely for realisation of investment.

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