Capital gain on conversion of capital Assets into stock-in-trade-Section 45(2) And Section 2(47)

Bai shrinbai k.Kooka(SC)

There is no transfer involved when an assesses converts a capital assets into stock in trade of the business carried on by him. The act of conversion is similar to taking out the money from on pocket and keeping the same in the other pocket of the same person.

The above judgment has been overruled w.e.f.Assessment year 1985-86 by an amendment in section 2(47) and section 45(2)

Section 2(47)

Transfer includes the conversion of capital assets into stock in trade of the business carried on by the assesses.

Section 45(2)

Notwithstanding anything contained in section 45(1), the capital gains arising from the transfer by way of conversion of a capital assets into stock in trade shall be changed to tax in the previous year in which the stock in trade is sold or otherwise transferred by the assesses for the purpose of computation of the capital gains. The FMV of the asset on the date of conversion shall be deemed to be the sales consideration for the purpose of section 48.

 POINTS TO BE NOTED

  1. Capital gains shall be taxable in the previous year in which stock in trade is sold or otherwise transferred.
  2. Section 2(47) provides that where a capital assets is converted into stock in trade then such conversion shall be treated as a transfer, Further section 45(2) provides for the taxability of capital gains on conversion of capital assets into stock in trade .However there is no provision in the Income Tax Act,1961 which provide for the taxability of transaction of conversion of stock in trade into capital assets Therefore, there is no tax treatment when stock in trade is converted into capital assets.
  3. As per supreme court, if stock in trade is acquired by the assesses otherwise than by way of purchase (e.g. gift),then the cost of acquisition of stock in trade shall be the fair market value or the date when it was acquired .i.e. FMV on the date of gift, An exception to this rule is in section 43C.
  4. If a Capital assets is converted into stock in trade of the business carried on by the assessee,then the FMV of the capital assets on the date of conversion shall be taken for computing capital gains as well as P/G/B/P .The amount recorded in the books of account of the business as the value of stock in trade is not relevant.

Example

A building has been acquired by the assesses on 01.06.1980 for Rs. 100000/- .The assesses converts the building into stock in trade of this property dealing business on 01.01.1992 when the fair market value of the building is Rs. 900000/- The stock in trade is sold by the assesses on 01.01.2013 for Rs.1300000/- (FMV as on 01.04.1981 was Rs 180000/-)

Computation for Assessment Year 2013-14

 

P/G/B/P (1300000-900000)                                                                                          Rs .400000/-

CAPITAL GAIN

Period of Holding             01.06.1980 -31.12.1991   Long Term

Sale Price as per Section 45(2)                                                    900000/-

COA as per Section 55                    180000/-

Indexed COA                                     180000/-*199/100            358200/-

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CAPITAL GAIN                                                                                                                   Rs. 541800/-

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TOTAL INCOME                                                                                                                 Rs.941800/-

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