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TMI Blog1987 (1) TMI 137X X X X Extracts X X X X X X X X Extracts X X X X ..... r specific performance of the contract dated 9-11-1963 against the vendor. During the pendancy of this suit, the firm was dissolved in May 1978. Thereafter, the erstwhile partners contained the suit by amending the plaint. A compromise took place between the partners and the vendor and consent terms were drawn up on 20-7-1978. It was agreed that the agreement to sell dated 9-11-1963 subsisted. 5. Fresh acquisition proceedings commenced in 1977. The Special Land Acquisition Officer gave award under section 11 of the Land Acquisition Act on 19-2-1979. Under the said award the assessee as partner of the dissolved firm got compensation at Rs. 4,67,000 on 22-2-1979. 6. The plea of the assessee before the Income-tax Officer was that the said amount of Rs. 4,67,000 was a capital receipt not subject to tax. The alternate plea was that receipt of said amount gave rise to capital gains tax and not business income. The assessee claimed deduction under section 54E of the Income-tax Act, 1961. The working regarding capital gains given by the assessee was as under: Rs. Rs. Capital receipt in Feb. 1979 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. He negatived the contention of the assessee that section 176(3A) applied only in those cases where the firm had maintained accounts on cash basis. He, accordingly, brought the said amount to tax as business income and rejected the submissions that the amount represented capital gains and not business income. 8. The assessee filed appeal before the Commissioner of Income-tax (Appeals). Before the Commissioner of Income-tax (Appeals), the assessee did not press his earlier plea that amount was not taxable at all. The only ground pressed by him was that the amount in question gave rise to capital gains and that tax should be determined in accordance with the provisions regarding capital gains tax including section 54E of the Act. 9. Before the Commissioner of Income-tax (Appeals) it was admitted on behalf of the assessee that provisions of section 176(3A) were attracted and the submission before him was that even under that provision the amount in question would be regarded as capital gains and not business income. 10. The Commissioner of Income-tax (Appeals) observed that the firm was carrying on business as builders and contractors and it was in the course of this business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 ITR 23 where it was held that when a dealer in land enters into an agreement to purchase a piece of land, the land itself does not become his stock of trade because on entering into agreement he does not get any legal title to the land. This decision supports the view which we have taken on the question whether the land itself was stock-in-trade of the firm at any moment of time. 13. Besides, we have to make distinction between any commercial commodity and real estate person dealing in land may purchase a piece of land for mere investment without any intention to treat it as stock-in-trade. All lands purchased by a dealer in lands do not automatically become his stock-in-trade. The surrounding circumstances are to be seen. In the present case acquisition proceedings started within three months of entering into agreement. Only earnest money had been paid. The price had not been paid. It cannot, therefore, be inferred that there was intention to treat it as stock-in-trade. 14. We shall now consider the question as to what was the nature of property received by the assessee on dissolution of partnership. 15. The deed of dissolution is dated 31-5-1978. It is mentioned therein t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see on the date of dissolution and the gains received by him on receipt of his share of compensation, would, therefore, be capital gains chargeable under section 45 of the Act. 17. Before arriving at above conclusion, we have duly considered the arguments advanced by the learned counsel for the department. His contention was that right to receive compensation could never be a capital asset. For this proposition he relied on the decision of Delhi High Court in CIT v. J. Dalmia (1984) 149 ITR 215 and section 6 of the Transfer of Property Act. In the said decision, the assessee had given up claim for specific performance and had retained only right to damages. Damages were awarded by the arbitrator. The High Court held that right to damages being a mere right to sue cannot be transferred in view of section 6 read with section 5 of the Transfer of Property Act with the result that no capital gains arose to assessee on receipt of damages awarded. Ours is not a case where the assessee had a mere right to sue for damages. The assessee and other partners were pursuing the remedy of obtaining specific performance and ultimately they received compensation as a result of compulsory acquisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then carried on by the firm and as such, the said provision would not be inapplicable in the present case merely because under clause 7 of deed of dissolution the benefit of one project (which has no concern with agreement dated 9-11-1963) are assigned to one of the partners. 20. It was contended on behalf of the assessee that even if the business of the firm had not been discontinued and if the firm had received the compensation, that amount would have given rise to capital gains and not business income. The submission on behalf of department, on the other hand, was that said compensation would have resulted in business income and not in capital gains. On behalf of department reliance was placed on sections 28(i) and 28(ii) of the Act. Decisions on which department relied were Khatau Vallabhdas v. CIT [1979] 119 ITR 846 (Bom.) and Donald Miranda v. CIT [1961] 42 ITR 166 (SC). On behalf of the assessee these decisions were distinguished and it was submitted that section 28(iv) would not apply when cash was received because the words therein, viz., " any benefit or perquisite whether convertible into money or not" excluded cash receipts. Reliance was placed on decision of the Bomb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arison of these sub-sections with sub-sections (1) to (4) of section 41 which deal with similar items of statutory receipts. Those sub-sections lay down that such items of receipts or in the year when they became due under the head "business or profession". There is no such express mention about the head "business or profession " in sub-sections (3A) and (4) of section 176. Recipient of the amounts may not be the person who carried on business or profession but may be a person who had stepped into his shoes as legal representative. The ambiguity has risen, as rightly observed by the learned author in Sampath Iyengar's Law of Income-tax, page 3845 cited on behalf of the assessee, because of the introduction in an essentially procedural section like 176, charging provisions which should really find place elsewhere. In fact Choksi Committee drew attention to this aspect and suggested that sub-sections (3A) and (4) should be deleted from section 176 and appropriate provisions should be made in section 28. We, therefore, hold that income which would have been charged as business income in the hands of the firm had the firm continued need not necessarily fall under the same head when rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om other sources. This was no the facts of that case. In our case the share of assessee in the interest of the firm under the agreement dated 9-11-1963 allotted to assessee on dissolution of the firm was his capital asset (and not stock-in-trade) and as such gains arising on receipt of his share of compensation would be assessable as capital gains and not as business income. 25. We consider it necessary to make special reference to decision of Bombay High Court in Khatau Vallabhdas' case on which great emphasis was laid by the learned counsel for the department. In that case on dissolution of the firm the partner received grossery articles of large value at cost which had been stock-in-trade of the firm and the partner then sold said articles and made gains. The controversy was whether the gains would be chargeable as business income or capital gains. The High Court observed that we have to look to the nature of commodities. The grossery articles are never purchased by way of investment. The High Court found that they had been acquired to make profit by sale as a part of profit-making scheme. Consequently, the profits were business profits. At pages 854 and 855, the High Court ob ..... X X X X Extracts X X X X X X X X Extracts X X X X
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