Generally, a person invested his/her surplus assets into various types of assets to get capital appreciation and better results. The investment in capital assets will be held to get better results by selling those assets after holding short or long period of time. The treatment of income on sale of asset will depends on the period of holding of asset from the date of purchase. The asset may be any types of assets as defined under provisions of Income Tax Act, 1961.

Now let us consider Mr. A has purchased a land on 25/04/2010 for Rs. 10.00 Lakh and  now  he wants to trade in the land acquired as on 25/04/2020. Now in this case when he  decide to trade in land ( capital asset). The moment he decides so, the Capital Asset which was earlier held as investment get converted into Stock-in Trade used for carrying out business activity.

Section 45(1); is a charging section mandating charging of Capital Gains in case of transfer/sale of capital asset. The section provides that the Capital Gain is accrued and charged to tax when Capital Asset is sold or transferred, earlier not Capital Gain is payable on conversion of Capital Asset into Stock-in -trade of business ,since this transaction was not considered as transfer.

Section 45(2);  has been inserted as an overriding section with non-obstante clause stating notwithstanding anything contained in Section 45(1) by way of Section 45(2) conversion of Capital Asset into business asset has been treated as transfer of asset and Capital Gain is attracted on such conversion.

Section 2(47) ; provides that transfer in relation to Capital Assets include;

(iv) in a case where the asset is converted by the owner thereof into or treated by him as, stock-in-trade of a business carried on by him , such conversion or treatment.

The above amendment was introduced through Taxation Laws ( Amendment) Act, 1984.


CIT Vs. BAI SHRINBAI K. KOOKA (1962) 46 ITR 86 : the Apex Court held that no transfer was involved where the assessee holding by way investment shares in companies commenced a business in shares converting the shares into Stock-in-trade of the business and when he subsequently sold these shares at profit, the assessable profit was the difference between sale price of the shares and market price of the shares prevailing on the date when shares were converted into Stock-in-trade of the business in shares.

Note: from above we get that the appreciation in the value of capital asset between the date of purchase of shares and the date of its conversion into Stock-in-trade was not chargeable to tax. The conversion of capital asset into Stock-in-trade in this case not considered as transfer and hence no income was arising, and no tax will be leviable.

The Government through Taxation Laws ( Amendment ) Act, 1984 removed above lacuna and brought conversion of Capital Asset into Stock-in-trade into definition of Transfer under provisions of Section2(47) of the Act,1961.


Provisions of Section 45(2) deals with situation when Capital Asset is converted into Stock-in-trade of the business by the assessee and provides method for capitation of Capital Gain on such conversion.

In real estate business ,we generally come through this situation on various occasions in which an assessee converts his capital asset into Stock-in-trade. As per provisions of Section2(47)(iv) of the Act,1961 the moment an assessee starts treating his/her Capital Asset as Stock-in-trade for his/her business the moment liability of Capital Gain arises. But we know that real estate asset will be generated and ready for sale after a long period of time. The Landowner or assessee at the initial stage at the time of entering into a Joint Development Agreement with builder is not in a position to pay whole amount of Capital Gain Tax on conversion of his/her Capital Assets into business asset.

The provisions of Section 45(2) provides leverage in payment of Capital Gain tax to the assessee and deferred the incidence of payment of tax in future. 


CBDT vide Circular No. 397 dated 16/10/1984 explained that :

“Under section 2(47) of the Income-tax Act, 1961 (hereinafter referred to as the Act) the term transfer in relation to a capital asset, has been defined to include the sale, exchange or relinquishment of the asset ; or the extinguishment of any rights therein ; or the compulsory acquisition of the asset under any law.

Under the existing provisions, an assessee who converts a capital asset owned by him into a trading asset of his business and then sells the converted asset is able to avoid payment of tax on the capital gains represented by the appreciation in the value of the asset up to the date of its conversion.

This is because the assessee can claim that the mere conversion of a capital asset into a trading asset does not amount to a transfer. The assessee can also claim that for the purposes of determining his business profits from the sale of the converted asset, the cost of such asset should be taken as its market value on the date of its conversion into a trading asset and not  its actual cost of acquisition to him. Hence, when the converted capital asset is sold by him as stock-in-trade, only the difference between sale price and market value of the stock-in-trade on the date of the conversion of the capital asset can be regarded as profit accruing to the assessee from the transaction.

 With a view to preventing the avoidance of tax on such capital gains through the device of converting a capital asset into a trading asset, the Amending Act has substituted the definition of transfer in section 2(47) of the Act by a new definition to provide that, in a case where a capital asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried  on by him, such conversion or treatment shall also be regarded as a transfer of the asset.”

SECTION 45(2) OF THE INCOME TAX ACT,1961:  Provides that when the Capital Asset is converted into Stock-in-Trade by an assessee, the profits or gains arising on such conversion shall be charged to tax as Capital Gain in the year in which such Stock-in-Trade is sold or otherwise transferred.


1. for calculation of the Capital Gain arising from such transfer. Fair Market Value of the asset as on the date of conversion shall be deemed to be full value of consideration accrued or received from such transfer.

2. However ,such Capital Gain shall be chargeable to tax in the year in which the converted asset is sold or otherwise transferred.


Mr. A has purchased a plot on 25/04/2010(FY 2010-11)  for Rs. 10.00 Lakhs and converted the same plot into Stock-in-trade of his real estate business in the financial year 2019-20. The FMV( Fair Market Value) of such plot at the date of conversion was Rs. 100.00 Lakhs. Now such plot after conversion is sold for Rs.150.00 Lakhs in Financial Year 2020-21.

The Capital Gain and Business Income shall be computed as follows;


Fair Market Value as on the date of conversion of Capital Asset into Stock-in-Trade i.e., in the Financial Year 2019-20 as Deemed Sale Consideration 1,00,00,000.00
Less: Indexed Cost of Acquisition ( 10,00,000*289/167) 17,30,538.00
LTCG computed in the Financial Year 2019-20 82,69,462.00
Note: Rs. 82,69,462/- is chargeable to tax in the FY 2020-21  


Sale consideration of converted plot in the Financial Year 2020-21 1,50,00,000.00
Less: Cost of Acquisition ( which has been treated as Stock-in-trade  after conversion at FMV on the date of conversion) 1,00,00,000.00
 Business Income Taxable in FY 2020-21    50,00,000.00


The provisions of Section 45(2) is applicable when Capital Asset is converted into business asset by the owner of asset/land and subsequently asset is used by him by undertaking business activity. Such business activity may be taken by the owner of the land himself or with a builder/developer in a Joint Development Agreement. But it is important that the ownership of the land should not be transferred to the Builder/Developer through Joint Development Agreement. It should be in the name of the owner of Capital Asset/Land.

The moment ownership of land stands transferred in favor of Builder/Developer , tax liability relating to Capital Gains on conversion as well as relating to business profits subsequent to conversion shall be attracted in the hands of the landowner in the year in which such transfer takes place.

Therefore, landowner can take advantage of the provisions of Section45(2) only when terms of Joint Development Agreement are drafted carefully and in the guarded manner keeping in mind above mentioned provisions.

NOTE:  The terms of Joint Development Agreement entered between the landowner and the developer would determine at what point and in which manner transfer of land from the landowner has taken place. Depending upon the terms of the Joint Development Agreement and other documents executed between the parties, the ownership of land may be treated as transferred from the landowner in different manner and in different years as follows;

(i) At the time of entering into Joint Development Agreement;

(ii) At the time of sale or transfer of developed real estate to the customers. In such case ,land proportionate to the total real estate developed on such land be treated as the land transferred at the time of sale or transfer of a particular flat or unit.

(iii) In case of sale of flats takes place in several years , the land shall also be treated as sold or transferred on proportionate basis and capital gain shall be chargeable to tax in different years;

(iv) In case certain percentage of developed flats/units are received by the landowner as a part of Sale Consideration , land proportionate to such flats/units will not be treated as sold or transferred. Land proportionate to such flats/units shall be treated as sold or transferred when such flats are eventually sold by the landowner.


i) Land acquired as investment converted as business asset to be used for business of real estate developer/builder;

ii) Investment in shares converted as business asset to be used for dealing in business of shares;

iii) Investment in jewelry/bullions converted as business asset for use in business as a jeweler.


There may be situations in which a real estate company developed a project for sale and after some time it has decided one of unit to be used as its office. In this case conversion of a business asset into Capital Asset held. A question arises in such circumstances as to what the tax implications of such conversion of stock in trade into capital would be. There is no provision under the act treating such conversion of stock in trade into capital  asset falling with the definition of transfer. Therefore ,such conversion is tax neutral at this point of time and no tax liability may arise at the time of such conversion. However, such capital asset is sold /transferred at later stage ,then any profits/gains arising from sale/transfer will be treated as Capital Gains under provisions of Section45(1) of the Act,1961.

Note: for the purpose of computation of Capital gain, Cost of Acquisition of such converted Capital Asset would be considered that was the Cost of Acquisition of Stock-in-trade.

Kikabhai Premchand (Sir) Vs. CIT (1953) 24 ITR 506(SC);  it was held by the Apex Court that on the date of conversion of Stock-in-trade to Capital Asset , there shall be no business income. Generally, no one can earn income by dealing or trading with himself.

CIT Vs. Yatish Trading Co. P. Ltd.[2013] 359 ITR 320 (Bom.)   it was held that in case of conversion of shares from Stock in Trade to investment , difference between Sale Price of Shares and Market Value Shares as on the date of conversion was assessable as Capital Gain.

ACIT Vs. Bright Star Investment (P.) Ltd. (2008) 24 SOT 288 ( Mum);  it was held that while incorporating provisions of Section 45(2) of the Act, 1961 the legislature has not visualized the situation in other way around ,where Stock-in-trade is to be converted into the investment and later investment sold at profit.

 In the absence of a Specific Provisions to deal with this type of situation , a rational formula should be worked out to deal with this type of situation.

i) One formula which had been deployed the Assessing officers i.e., considering difference between the book value of the shares and the Market Value of Shares on the date of conversion, be taken as business income and the difference between the Sale Price of the shares and the Market Value of shares at the date of conversion be taken as Capital gain;

ii) Other formula which generally adopted by Assessing Officer i.e., the difference between the Sale Price of the Shares and the Cost of acquisition of share, which was the book value on the date of conversion with indexation from the date of conversion ,should be computed as a Capital Gain.

In the absence of specific provisions , out of these two formulas , the formula which was favorable to the assessee should be adopted. Therefore, the CIT(Appeals) has properly examined this issue in the present situation and directed the Assessing Officer to accept the Capital Gain offered by the assessee.

CONCLUSION:  Since there was ambiguity in assessment  and treatment of conversion of Capital Assets into Stock-in-Trade before Taxation Laws ( Amendment ) Act, 1984. The definition of Transfer ,Section 2(47) has been changed but hardship of payment of Capital gain shifted on the assessee converting his Capital Assets into Stock -in-trade, since the taxable event arises at the point of time of conversion of Capital Asset into Stock -in- trade. Since real estate business of a long term busines , the developed flats/units will be available after a long period for selling. The burden of payment of Capital Gain tax arises when landowner enters into an agreement with Builder/Developer and the amount will be huge. The Government to solve this hardship deferred  the payment of Capital gain tax the year in which the developed property received Occupancy Certificate/ Appropriate certificate from competent authorities for sale of flats.


DISCLAIMER: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Authors assume no responsibility for the consequences of the use of such information.

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A Qualified Company Secretary, LLB from Purvanchal University UP and a Science Graducate , Alumni of Banaras Hindu University (Bsc.), having more than 19 years of experience in the field of Secretarial Practice, Project Finance, Direct Taxes ,GST, Accounts & Finance and recently working as a M View Full Profile

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