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CONVERSION OF CAPITAL ASSETS INTO STOCK IN TRADE (Income Tax)

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This query is : Resolved



( Author )
21 January 2008

An assessee held certain shares as capital assets. It was converted into stock in trade on 01.04.2006. Cost of acquisition was Rs.20.00 Lacs and f.m.v. as on date of conversion was Rs.18.00 Lacs. As per section 45(2) the capital gain is Nil (Loss of Rs. 2.00 Lacs). The assessee converted these shares on cost of acquisition of Rs.20.00 Lacs. These shares were then sold for Rs. 25.00 Lacs. Assessee declared a Profit from business of Rs. 5.00 Lacs (Rs. 25.00-Rs.20.00 Lacs). The A.O. says that capital assets has to be converted at f.m.v. only and thus there is a profit of Rs. 7.00 Lacs (Rs. 25.00 lacs - Rs. 18.00 Lacs). Is the contention of A.O. correct? Is it necessary to convert capital assets into stock in trade at f.m.v. only? or it is an option available to assessee? Can tax be levied on a profit which never accrued to assessee. His actual gain is 5.00 Lacs and he paid tax on 5.00 lacs?


Late CA Sampat Jain

( Expert )
22 January 2008

[(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48,
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the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.]
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THE CAPITAL GAIN IS DEEMED ON THE DATE OF CONVERSION ON THE BASIS OF MARKET PRICE..........HOWEVER THE TAX ON SAME IS PAID IN THE YEAR OF ACTUAL SALE AS YEAR OF TRNSFER


shekharsharad

( Author )
23 January 2008

Dear Sir, with due regards it is submitted that the query is not related to Income from Capital Gains, it is related to profit & gains of business or profession. To be more specific the query is related to the question that is it necessary that the capital assets shall be converted into stock in trade at f.m.v. only for calculation of profits and gains from business or profession?


shekharsharad

( Author )
23 January 2008

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CA. GOPAL SONIKA

( Expert )
27 February 2008

Mr Shekharsharad, A.O decision is correct. The profit from business will be Rs.(25-18) or 7 lacs as the fmv as on date of conversion shall be taken.



shekharsharad

( Author )
11 October 2009

Sir, On what basis the A.O. decision is correct? Why FMV as on date of conversion will be taken. Suppose in the above cas if FMV is 27 Lacs, then the assessee will have to pay tax on capital gains of 9 Lacs (27-18). In my opinion in that case also the assessee can compute business profit at 7 Lacs (25-18) instead of calculating business loss of 2 Lacs (27-25).


Member (Account Deleted)

( Expert )
16 January 2011

As per implied implication of Sec. 45(2), it necessary to convert capital assets into stock in trade at f.m.v. only and nooption available to assessee as provided in Sec. 45(3).


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