Year of chargebility
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
18 May 2013
Assessee is a Pvt Ltd. Co. It has given its urban agricultural land for development to a builder on revenue sharing basic. The land is long term capital asset and the value as per stamp duty rate about is 10 cr. The revenue to be received by the company is 45% of gross sales receipts. The joint dev. agreement has been entered in Apr 2013. The project would commence in about 18 months time and the revenue would be received over a period of 5 years. Kindly let me know the year of charge to tax and under what head i.e Capital gain or capital gains + business income.Whether it would be conversion of capital asset to stock in trade and then business profit on the revenue share received. Thanks
Guest
Guest
(Expert)
19 May 2013
Such amount is chargeable as per section 45(2) which states the following
[(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, 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.]
[(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, 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.]
Querist : Anonymous
Querist :
Anonymous
(Querist)
19 May 2013
My further question is that after conversion of capital asset to stock in trade the company is entering into Joint Development Agreement on Revenue Sharing Basis.
My question is what is the point of taxability of the subsequent transaction of revenue sharing which will flow in the company over a period of 5 years starting from 2 years from now. Kindly let me know the concept of revenue recognition in such a transaction.
When will the capital gain liability to be discharged
Thanks
My question is what is the point of taxability of the subsequent transaction of revenue sharing which will flow in the company over a period of 5 years starting from 2 years from now. Kindly let me know the concept of revenue recognition in such a transaction.
When will the capital gain liability to be discharged
Thanks
03 August 2025
Great question! Here’s how it works step-by-step for your case:
1. Conversion of Capital Asset to Stock-in-Trade (Section 45(2))
When your company converts the urban agricultural land (long-term capital asset) into stock-in-trade, capital gains tax arises immediately at the time of conversion.
The fair market value (FMV) on the date of conversion (i.e., date of Joint Development Agreement in April 2013) will be considered the full value of consideration for capital gains calculation.
This means:
Capital gains liability arises in FY 2013-14 (AY 2014-15) on the FMV as of April 2013, even if no actual sale or cash flow happens then.
2. Taxation of Revenue Share Income (After Conversion)
After the land is treated as stock-in-trade, the subsequent revenue sharing receipts (45% of gross sales from the builder) will be treated as business income (not capital gains).
These amounts are taxable as and when they are received or accrued over the 5-year period.
So, the revenue share income will be taxed under the head 'Profits and Gains of Business or Profession' in the respective years when the revenue is recognized.
3. Recognition of Revenue
Since this is a revenue-sharing agreement, income should be recognized as per accounting principles, generally on the basis of:
When the builder sells the developed property and generates revenue.
Your company’s share (45%) of those sales receipts becomes income in the year those sales are realized.
Tax liability on revenue share will accordingly arise year-wise over 5 years, based on actual receipt or accrual.
Summary
Transaction Stage Tax Head Year of Chargeability
Conversion of land to stock-in-trade Capital Gains (Section 45(2)) FY 2013-14 (AY 2014-15)
Revenue share receipts from builder Business Income As per year of receipt/accrual
1. Conversion of Capital Asset to Stock-in-Trade (Section 45(2))
When your company converts the urban agricultural land (long-term capital asset) into stock-in-trade, capital gains tax arises immediately at the time of conversion.
The fair market value (FMV) on the date of conversion (i.e., date of Joint Development Agreement in April 2013) will be considered the full value of consideration for capital gains calculation.
This means:
Capital gains liability arises in FY 2013-14 (AY 2014-15) on the FMV as of April 2013, even if no actual sale or cash flow happens then.
2. Taxation of Revenue Share Income (After Conversion)
After the land is treated as stock-in-trade, the subsequent revenue sharing receipts (45% of gross sales from the builder) will be treated as business income (not capital gains).
These amounts are taxable as and when they are received or accrued over the 5-year period.
So, the revenue share income will be taxed under the head 'Profits and Gains of Business or Profession' in the respective years when the revenue is recognized.
3. Recognition of Revenue
Since this is a revenue-sharing agreement, income should be recognized as per accounting principles, generally on the basis of:
When the builder sells the developed property and generates revenue.
Your company’s share (45%) of those sales receipts becomes income in the year those sales are realized.
Tax liability on revenue share will accordingly arise year-wise over 5 years, based on actual receipt or accrual.
Summary
Transaction Stage Tax Head Year of Chargeability
Conversion of land to stock-in-trade Capital Gains (Section 45(2)) FY 2013-14 (AY 2014-15)
Revenue share receipts from builder Business Income As per year of receipt/accrual
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