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Issues Involved:
1. Whether the shares acquired by the assessee on the dissolution of the firm constituted stock-in-trade. 2. Whether the sale of 1/3rd of the shareholdings acquired by the Government from the assessee could be held as a conditional sale, and the corresponding loss disallowed. 3. Whether the entire loss of Rs. 2,25,690 could be disallowed as a capital loss. Issue-wise Detailed Analysis: 1. Whether the shares acquired by the assessee on the dissolution of the firm constituted stock-in-trade: The court analyzed whether the shares received by the assessee on the dissolution of the firm "Dayaram Surajmal" were capital assets or stock-in-trade. The judicial Member emphasized the principle that assets received by a partner on the dissolution of a firm are capital assets unless there is evidence to show they were treated as stock-in-trade. The third Member noted that the executor, Sri Bhandari, was registered as a dealer in shares and took out a similar license, suggesting that the shares might be stock-in-trade. However, the court found that the reasons provided by the third Member, such as the market value of shares at the time of acquisition and the executor's admission to the stock exchange, were not relevant to prove the conversion of capital assets into stock-in-trade. The court concluded that the shares remained capital assets in the hands of the assessee, and the burden of proof to show conversion into stock-in-trade was not met. Consequently, the court answered the first question in the negative, favoring the Department. 2. Whether the sale of 1/3rd of the shareholdings acquired by the Government from the assessee could be held as a conditional sale, and the corresponding loss disallowed: The court noted that all Members of the Tribunal agreed that the transaction relating to one-third of the shares was a sale and not a conditional sale. The Commissioner had initially held that the transaction concerning 17% of the shares was a mortgage by conditional sale, but both the Accountant Member and the judicial Member disagreed. They held that the transaction was a sale with an agreement to reconvey the shares after the Government's debt was repaid. The court did not find it necessary to record an answer to the second question due to the unanimous opinion of the Tribunal Members. 3. Whether the entire loss of Rs. 2,25,690 could be disallowed as a capital loss: Given the conclusion that the shares were capital assets, the loss incurred from their sale was deemed a capital loss. The court noted that the Commissioner was correct in distinguishing between the 17% of shares and the remaining 34%, treating the loss as a capital loss. The Tribunal's majority view that the loss was a revenue loss was found unsustainable. The court answered the third question by stating that the loss of Rs. 2,25,690 was a capital loss. Conclusion: The court concluded that the shares acquired by the assessee on the dissolution of the firm were capital assets, and the loss incurred from their sale was a capital loss. The transaction relating to one-third of the shares was a sale, not a conditional sale. The referred case was answered in favor of the Department, and the request for leave to appeal to the Supreme Court was rejected as the case did not involve any substantial question of law of general importance.
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