441. Clarification regarding tax exemption under section 54E on sale of capital assets converted into stock-in-trade

1. Section 2(47 ) of the Income-tax Act provides that any conversion of capital assets into stock-in-trade, shall be regarded as a transfer.  This transfer arises in the year in which such conversion takes place and, accordingly, capital gain would normally arise in that very year.  However, section 45(2) of the Act postpones the assessment of such capital gains to the year in which the stock-in-trade is actually sold or otherwise transferred by the assessee.

2. In order to qualify for deduction under section 54E of the Act, the investment in specified assets is required to be made within six months from the date of transfer.  A question has arisen as to whether the date of transfer, as referred to in section 54E of the Act, is the date of conversion of capital asset into stock-in-trade or the date on which the stock-in-trade is sold or otherwise transferred by the assessee.

3. The Board have considered the matter in consultation with Ministry of Law. The Board is advised that for purposes of section 54E of the Act, the date of transfer in such cases is the date on which the capital asset is converted by the assessee into stock-in-trade, and not the date on which such stock-in-trade is sold or otherwise transferred by the assessee.

Circular : No. 560, dated 18-5-1990.

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