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Conversion of stock in trade in to capital asset


Vani Sundaram   09 August 2020

Vani Sundaram

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A real estate company purchases a piece of land. And later converts it into investment and holds it for period of 5 years as investment. Subsequently, it converts the investment into stock in trade and develops a building and sells the flats. What are the income tax implications in this scenario?

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rama krishnan   10 August 2020

rama krishnan

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Conversion of capital asset in to stock in trade is transfer within the meaning of section 45(2) and capital gains tax will attract in the year of sale

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Yudhishthir Sharma (Article)     10 August 2020

Yudhishthir Sharma
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  @ Vani Sundaram

The profits or gains arising from the transfer by way of conversion of a capital asset into stock-in-trade shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion shall be deemed to be the full value of the consideration.
Although conversion of a capital asset into stock in trade is treated as transfer in relation to a capital asset but section 45(2) provides that capital gain/loss shall be calculated on such converted asset in the year in which such asset is actually sold.such income taxable under the head of Capital Gain.
After the conversion of capital asset into stock in trade, fair market value is considered as cost of such asset as converted into stock in trade in the books of accounts and at the time of sale of such stock in trade the sale price (as realized from sale of such stock)  will be deducted from the fair market value of such asset and the profit arising therefrom, if any shall be treated as Income Under head business and profession.

As per provision, when a real state company convert land into stock-in-trade, it's treated as transfer in the year of conversion and fair market value of that date is considered as FVOC.
After that such land treated as stock-in-trade and company developed building and sale flates than sale of flates consider as sale of stock-in-trade and cost of such stock-in-trade considered FMV on conversion date and profit/loss arise therefrom shall be treated as income from business and profession.

Best regards
Yudhishthir Sharma
CA Finalist

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