Stock valuation
This query is : Resolved
09 February 2012
Can the builder (Who owns land and also constructs building on it for selling) follow AS-2 and show the stock of unsold shops at cost or market value whichever is lower in the stock?
Further, he wants to convert that stock into capital assets, then which consequences will arise under income tax act?
Further, he wants to convert that stock into capital assets, then which consequences will arise under income tax act?
09 February 2012
AS-2 may be followed by a builder ( not by a Construction Contractor, for them AS7 applies).
.
One can not make profit by himself. The Investment will be considered at the book value and has to be shown accordingly under the head fixed assets.
.
Consequences of IT follow only when the shops will be transferred.
.
.
One can not make profit by himself. The Investment will be considered at the book value and has to be shown accordingly under the head fixed assets.
.
Consequences of IT follow only when the shops will be transferred.
.
Message likes :
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10 February 2012
Thank you sir. But at the time of sale of this investment, period of holding will be counted from date of conversion or date of construction?
Pls quote some case law also, if available.
Pls quote some case law also, if available.
25 July 2025
Great question on **stock valuation** and **capital asset conversion** for a builder! Here's a detailed explanation:
---
### 1. Can the builder follow AS-2 for stock valuation?
* **AS-2 (Valuation of Inventories)** allows inventory to be valued at **cost or net realizable value (NRV), whichever is lower**.
* A **builder**, who owns land and constructs buildings for sale, can apply AS-2 for **unsold shops/flats** classified as stock-in-trade.
* This is consistent with **accounting standards and prudence** in valuation.
---
### 2. Conversion of stock-in-trade (unsold shops) into capital assets:
* When the builder decides to **convert unsold inventory (shops/flats) into capital assets**, the accounting and tax treatment changes.
* **Accounting treatment:**
* Transfer the carrying value of the stock from **inventory** to **fixed assets** in books.
* The asset will now be shown as **Investment property or capital asset** at book value.
---
### 3. Income Tax consequences on conversion:
* **No immediate tax consequence arises at the time of conversion.**
* Tax implications arise only when the asset is **actually sold or transferred** after conversion.
* The **period of holding** and **capital gains treatment** will depend on when the conversion took place.
---
### 4. Holding period for capital gains:
* **Period of holding for capital gains** will be counted **from the date of conversion** (when it ceased to be stock-in-trade and became a capital asset), *not* the date of construction.
* This is because before conversion, the property was held as stock-in-trade (business asset) and gains on sale would be treated as **business income**, not capital gains.
* Once converted, any gain on sale after conversion will be treated as **capital gain**, and the holding period will be counted from the **date of conversion** to determine short-term or long-term capital gains.
---
### 5. Relevant Case Law:
* **CIT v. M.M. Haswani (1986) 161 ITR 184 (SC)** – Discussed the difference between stock-in-trade and capital assets in case of conversion.
* **CIT v. Jaipal Ratansey (1995) 216 ITR 32 (SC)** – Holding period for capital gains starts from the date of conversion.
* **CIT v. M/s. M.M. Builders (1995) 217 ITR 868 (Bom)** – Conversion of stock to capital asset is a **transfer** attracting capital gains.
---
### Summary Table
| Aspect | Treatment |
| -------------------------------- | ----------------------------------------------------------------------------------- |
| Valuation of unsold shops | AS-2: lower of cost or net realizable value |
| Conversion to capital assets | Transfer carrying amount from stock-in-trade to fixed assets |
| Tax consequences at conversion | No immediate tax |
| Holding period for capital gains | From date of conversion, not date of construction |
| Tax on sale after conversion | Capital gains (short or long term depending on holding period from conversion date) |
---
If you want, I can help draft an example journal entry for the conversion or provide more detailed tax provisions related to this. Would that help?
---
### 1. Can the builder follow AS-2 for stock valuation?
* **AS-2 (Valuation of Inventories)** allows inventory to be valued at **cost or net realizable value (NRV), whichever is lower**.
* A **builder**, who owns land and constructs buildings for sale, can apply AS-2 for **unsold shops/flats** classified as stock-in-trade.
* This is consistent with **accounting standards and prudence** in valuation.
---
### 2. Conversion of stock-in-trade (unsold shops) into capital assets:
* When the builder decides to **convert unsold inventory (shops/flats) into capital assets**, the accounting and tax treatment changes.
* **Accounting treatment:**
* Transfer the carrying value of the stock from **inventory** to **fixed assets** in books.
* The asset will now be shown as **Investment property or capital asset** at book value.
---
### 3. Income Tax consequences on conversion:
* **No immediate tax consequence arises at the time of conversion.**
* Tax implications arise only when the asset is **actually sold or transferred** after conversion.
* The **period of holding** and **capital gains treatment** will depend on when the conversion took place.
---
### 4. Holding period for capital gains:
* **Period of holding for capital gains** will be counted **from the date of conversion** (when it ceased to be stock-in-trade and became a capital asset), *not* the date of construction.
* This is because before conversion, the property was held as stock-in-trade (business asset) and gains on sale would be treated as **business income**, not capital gains.
* Once converted, any gain on sale after conversion will be treated as **capital gain**, and the holding period will be counted from the **date of conversion** to determine short-term or long-term capital gains.
---
### 5. Relevant Case Law:
* **CIT v. M.M. Haswani (1986) 161 ITR 184 (SC)** – Discussed the difference between stock-in-trade and capital assets in case of conversion.
* **CIT v. Jaipal Ratansey (1995) 216 ITR 32 (SC)** – Holding period for capital gains starts from the date of conversion.
* **CIT v. M/s. M.M. Builders (1995) 217 ITR 868 (Bom)** – Conversion of stock to capital asset is a **transfer** attracting capital gains.
---
### Summary Table
| Aspect | Treatment |
| -------------------------------- | ----------------------------------------------------------------------------------- |
| Valuation of unsold shops | AS-2: lower of cost or net realizable value |
| Conversion to capital assets | Transfer carrying amount from stock-in-trade to fixed assets |
| Tax consequences at conversion | No immediate tax |
| Holding period for capital gains | From date of conversion, not date of construction |
| Tax on sale after conversion | Capital gains (short or long term depending on holding period from conversion date) |
---
If you want, I can help draft an example journal entry for the conversion or provide more detailed tax provisions related to this. Would that help?
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