opinion on sale and conversion-capital gain

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Ratnesh Chand Jain (Querist)
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04 November 2009 We have registered Partnership Firm having business of Construction of Residential and commercial Building and sold to various customers as a normal course of business.
The firm having land of 10000 SFT of 1000000/- for which no break up of cost is there is shown under Fixed Assets since 95-96. The firms got permission of contruction and started construction work since 95-96.The firm Followed the method of accounting as expenses incurred were transferred to WIP and in case of any sale, it was reduced from WIP and in case of negative WIP, tax was paid on profit.In 2006-07 the firm wanted to transfer the land on which costruction was made from Fixed Assets to WIP(Construction Expense Account). No depreciation was provided since now. Please tell us whether the transfer from fixed assets to P & L Account will attract Capital Gains or not.

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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04 November 2009 The method of accounting, especially revenue recognition ,is wrong. The firm has to follow, necessarily, AS-7 issued by ICAI.
Regarding taxation of land it is a transfer u/s 2(47). Therefore, the capital gain is taxable in the previous year in which converted stock is sold or otherwise transferred. In the year of sale or transfer of stock, the income shall be computed in the following manner.
a) capital gain = fair market value of the stock on conversion less cost/indexed cost of acqusition.
b) business income = consideration received on sale less FMV of capital asset on conversion.
c) indexation shall apply on the basis of the year in which conversion takes place.
For details pl see section 45(2) of The Income tax Act,1961.

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