CIT v Kulu Valley Transport Co

Facts

• Kulu Valley Transport operated a bus service in Himachal Pradesh
• It periodically sold old buses and replaced them with new ones
• The CIT treated the proceeds from sale of old buses as business income (revenue receipt)
• The assessee contended the buses were capital assets and sale proceeds were capital receipts

Issues

1. Whether sale proceeds of buses (capital assets used in business) are revenue or capital receipts
2. Whether regular replacement of fleet assets converts them into stock-in-trade

Held

• Buses are capital assets employed as tools of the trade; they are not stock-in-trade
• Regular replacement does not change their character from capital to revenue
• Sale proceeds are capital receipts (taxable as capital gains, if applicable, not as business income)
• The test is the purpose of holding: for use in business (capital) vs for sale in the course of business (stock)

Ratio Decidendi

An asset held for use in business operations is a capital asset regardless of how frequently it is turned over. The frequency of replacement is an incident of the asset's useful life, not evidence of trading intent. Stock-in-trade is what a business sells to its customers; capital assets are what it uses to conduct that selling.