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Stock in trade converted into capital asset

11 November 2018

if stock is converted into capital asset then what will be the taxability year i. e. year of conversion or year of subsequent sale of capital asset?

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santhuamma415@gmail.com (223 Points)
Replied 11 November 2018

the year in which capital asset is sold

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Manish Manu (198 Points)
Replied 11 November 2018

If stock is converted into capital asset, then FMV as on the date of conversion is the cost of acquisition for the purpose of computing capital gain.

However, it is to be noted that the act is silent on the year of taxability.

In my opinion income under the head Business and Profession shall be charged to tax in which the stock is converted, if the assessee follows mercantile system of accounting. However, if cash basis of accounting is followed, then the assessee can defer tax till the converted capital asset is sold.

Further, capital gain is taxable in year in which the capital asset is sold.

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S M Raja (Article Assistant ) (165 Points)
Replied 11 November 2018

If you are converting your stock in trade to capital asset the journel entry will be

Capital asset ac Dr

To Purchases account

then automatically the purchase value and closing stock value will come down. it means there is no effect in your Profit and Loss Account on net profit.

As per me there is no tax implecation because of this transfer.

and my question is that "If I accounted my Purchase as Capital Asset purchase instead of stock purchase then it will reflect in my Balance sheet in cost only. then why should we calculate gain based on FMV and Purchase cost ?" .

Is there any rule / case / section which specifically mentioned to calculate gain?

santhuamma415@gmail.com (223 Points)
Replied 11 November 2018

this above entry is for adjued purchase n.a. sir

Manish Manu (198 Points)
Replied 11 November 2018

Sec 28 Clause [via] "the fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner;"

Thus it is specifically stated in the act to consider FMV on date of conversion.

Suppose the cost as per books of the stock is Rs. 1,00,000/- is on 10.11.2018, however the FMV on date of conversion i.e. 10.11.2018 is Rs. 1,50,000/-. The said asset is sold on 10.04.2019 at 2,10,000/-.

In such case Rs. 50,000/- should be PGBP taxable in A.Y. 19-20 and Rs. 60,000/- shall be Capital Gain chargeable in A.Y. 20-21. (assuming the assessee follows mercantile system of accounting)

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S M Raja (Article Assistant ) (165 Points)
Replied 11 November 2018

Using this entry ur going to convert ur stock purchase to capital asset purchase whats wrong in that.

Manish Manu (198 Points)
Replied 11 November 2018

The entry in the above example as stated by me should be:

Capital Asset A/c.....Dr 1,50,000/-
To Purchase A/c 1,00,000/-
To Profit on Conversion 50,000/-
(on conversion of stock to capital asset)

Bank A/c...........Dr 2,10,000/-
To Capital Asset 1,50,000/-
To STCG 60,000/-

S M Raja (Article Assistant ) (165 Points)
Replied 11 November 2018

K. Thanks Manish

santhuamma415@gmail.com (223 Points)
Replied 11 November 2018

that means when we sell the capital asset which is converted into stock capital gain tax is charged in year of sell of capital asset

Manish Manu (198 Points)
Replied 11 November 2018

Capital Gain on conversion of capital asset into stock in trade shall be chargeable to tax in the year in which stock in trade is sold.
(Sale Consideration = FMV of asset on date of conversion)

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Mayur Iyer (246 Points)
Replied 12 November 2018

When stock in trade is converted into a capital asset provision of section 45(2) comes into picture along with recent aammendment as per finance act 2018 which states

"any stock in trade converted to captial asset ,from period of stock in trade to date of conversion the appriciation in the value would be taxable under head PGBP for the Fair market value of the asset on the date of conversion#section 28(via) ( recent aammendment finance act 2018)
further:
from the date of conversion till the date such capital asset is sold capital gains would arrise and the cost of accuacition (COA) would be the fmv on date of conversion #sec 49(1).

*Note*:_

" such computation would only arrise at the date on which such capital asset is sold"

Nitesh bind (Student CA Final ) (12692 Points)
Replied 14 November 2018

It is the reverse case of Section 45(2) where capital assets is converted in Stock in trade.

In this case when Stock in Trade is converted into Capital Assets then following would be tax Consequences:

1. In the Year Of Conversion:

PGBP INCOME:

FMV of Capital Assets - Stock in trade = PGBP

[CIT vs Abhinandan Investment Ltd. (Delhi HC)]

2. In the year when Such Capital Assets Is Sold:

Capital Gains = Sale Price - Cost of Acquisition (i.e. FMV taken on the date of conversion)

Note: For the purpose of deciding LTCG OR STCG the period of Holding shall be taken from the DATE OF CONVERSION INTO CAPITAL ASSETS.

Thanks. Be Helpful to One Another!

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