Capital gains on partitioned assets and genuine partnership contribution were not taxable on these facts.

Precious stones received on HUF partition retained their capital asset character, with holding period and cost base carried forward from the HUF under the applicable partition rules. Their later conversion into stock-in-trade did not trigger capital gains for the assessment year concerned because the deeming amendment treating such conversion as a transfer was not yet in force. Introduction of the assets into a genuine partnership firm also did not yield taxable capital gains, as the consideration was only notional and the computation provisions could not operate in the ordinary way. The department's appeal failed, and the assessee obtained partial relief.

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Issues: Whether the precious stones received on partition retained the character of capital assets, and whether the subsequent conversion of those assets into stock-in-trade and their introduction into a genuine partnership firm gave rise to capital gains tax.

Analysis: The assets had already been recognised as capital assets in the hands of the bigger HUF, and on partition the same character continued in the hands of the assessee. The period of holding was to be reckoned with reference to the holding in the HUF, and the cost base was governed by the relevant provision dealing with assets acquired on partition. The conversion of a capital asset into stock-in-trade did not attract capital gains on the facts of the year under appeal, because the amendment treating such conversion as a transfer was not then in force. As to the introduction of the assets into a partnership firm, the firm was found to be genuine and the transaction real. In such a case, the partner's credit entry represented only a notional figure, the consideration being the partner's right in the partnership, and the computation provisions for capital gains could not be worked in the ordinary manner.

Conclusion: The transaction did not attract capital gains tax; the departmental appeal failed and the assessee obtained partial relief.

Final Conclusion: The decision affirmed that, on the facts of a genuine partnership and the law applicable to the assessment year, neither the conversion of the capital asset into stock-in-trade nor its contribution to the firm resulted in taxable capital gains.

Ratio Decidendi: Where a genuine partnership transaction involves introduction of a capital asset and the consideration is only notional, the charging and computation provisions for capital gains do not apply in the absence of a then-effective statutory deeming provision treating conversion as a transfer.

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