Conversion of capital asset into stock in trade

Dear Rashesh,

This is what i think..... Please do consider the it... Let us see what others say....

Here goes.....

3.  Transfer of a capital asset from a holding company to its wholly owned Indian subsidiary company is not regarded as transfer. So at the time of transfer of such asset from holding co. to SPV no capital gains will arise in the hands of holding company

1 & 2.  This asset will initially be treated as a capital asset in the hands of SPV. Now since you intend to use the land in real estate development and subsequently sell them for a profit this activity would be business being adventure in nature of trade or commerce. Hence the profits of SPV would be taxed under the head PGBP. Also the capital asset will have to be treated into stock in trade and capital gains would arise in the hands of SPV on such conversion. The computation of capital gains would be as follows:

Full value of sale consideration:- Fair market value of the capital asset on the date of such conversion. Since in your case the same happens immidietly on transfer of capital asset you can take the same market value that you used for transfering the capital asset from the holding company to subsidiary company.

Cost of Acquisition:-     cost to previous owner as per Section 49(1)((iii)(e).

4.  Conversion of capital asset into stock in trade is mandatory. However if the stock is disposed off within 8 years by the SPV than the capital gains which were not charged to tax in the hands of holding company by virtue of such transfer not being treated as transfer as per Section 47(iv) will be deemed to be CG of the year in which the transfer/sale of stock takes place.

This leads to double taxation of same capital since both times i.e. at time of conversion and as per Section 47A the cost of acquisition and FVSC is taken the same and two different entities are taxed i.e. holding and subsidiary....

Regards,

Chintan

Dear Rasesh,

Exemption u/s 47 on transfer between Holding & Subsidary Cos is available subject to following conditions -

1) It should be 100% Subsidary

2) Receiving Co. should be an Indian Company

3) Capital Asset transfered should be received as "Capital Asset (not as Stock in trade)" by the receiving Company

If u fulfill these 3 conditions then tranfer will be exempt in the year in which Land is transfered.

But then comes Sec 47A, WIthdrawal of Sec 47

In following cases the above exemption shall be withdrawan -

If before the expiry of 8 Years from the date of tranfer -

1) Receving co converts such Capital Asset into its Stock in trade OR

2) Dilution in 100% holding -subsidary relationship (even if Holding co. transfers single share of subsidary co. then also this provision gets attract & exemption is withdrawan)

Now ur queries -

1) SPV has to show land as capital asset otherwise Holding co. has to pay tax on tranfer. (If SPV receives Land as Stock then exemption will not be allowed)

2) If SPV do development & sell as Buildings(Stock in trade) before 8 years from the date of transfer- Exemption u/s 47 granted to Holding Co. will be withdrawan in terms of Sec 47A

3) Holding Co. has to pay tax in Following cases -

      a) SPV receives as Stock or

       b) Before 8 Years, SPV converts it into Sotck or

       c) Before 8 Years, Dilution in 100% Holding subsidary relationship takes place.

4) This automatically gets answered

Regarding Selling Price since tranfered asset is Land so keep in mind the provisions of 50 C 

NICE....