Rationalisation of provision relating to conversion of stock-in-trade into Capital Asset
Section 45 of the Act, inter alia, provides that capital gains arising from a conversion of capital asset into stock-in-trade shall be chargeable to tax. However, in cases where the stock in trade is converted into, or treated as, capital asset, the existing law does not provide for its taxability.
In order to provide symmetrical treatment and discourage the practice of deferring the tax payment by converting the inventory into capital asset, it is proposed to amend the provisions of —
(i) section 28 so as to provide that any profit or gains arising from conversion of inventory into capital asset or its treatment as capital asset shall be charged to tax as business income. It is also proposed to provide that the fair market value of the inventory on the date of conversion or treatment determined in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of such conversion or treatment;
(ii) clause (24) of section 2 so as to include such fair market value in the definition of income;
(iii) section 49 so as to provide that for the purposes of computation of capital gains arising on transfer of such capital assets, the fair market value on the date of conversion shall be the cost of acquisition;
(iv) clause (42A) of section 2 so as to provide that the period of holding of such capital asset shall be reckoned from the date of conversion or treatment.
These amendments will take effect, from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.
Extract of Clause 3, 9 & 18 of Finance Bill 2018
Clause 3 of the Bill seeks to amend section 2 of the Income-tax Act relating to definitions.
Clause (22) of the said section provides the definition of the term “dividend”. Explanation 2 to the said clause clarifies the expression “accumulated profits” for the purposes of the said clause.
It is proposed to insert a new Explanation to the said clause to provide that in the case of an amalgamated company, accumulatedprofits or loss in the hands of the amalgamated company shall be increased by the accumulated profits of the amalgamating company, whether capitalised or not, on the date of amalgamation.
This amendment will take effect from 1st April, 2018 and will accordingly apply in relation to the assessment year 201 8-2019 and subsequent years.
Clause (24) of the said section defines the expression “income”.
It is proposed to insert a new sub-clause (xiia) in the said clause (24) so as to include the fair market value of inventory referred to in Clause (via) of section 28, also within the definition of income.
It is further proposed to insert a new sub-clause (xviib) in the said clause (24) so as to include any compensation or other payment referred to in clause (xi) of sub-section (2) of section 56, also within the definition of income.
Clause (42A) of the said section, inter alia, provides for determination of period for which the capital asset is held by the assessee.
It is proposed to insert a new sub-clause (ba) in clause (i) of Explanation 1 of the said clause (42A) so as to provide that in case inventory is converted into or treated as a capital asset under the proposed new clause (via) of section 28, the period shall be reckoned from the date of its conversion or the treatment.
These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019- 2020 and subsequent years.
Clause 9 of the Bill seeks to amend section 28 of the Income-tax Act relating to profits and gains of business or profession.
The said section, inter alia, provides that certain types of compensation receipts as set out in sub-clauses (a) to (d) of clause (ii) of the said section are taxable under the head “Profits and gains of business or profession”.
It is proposed to insert a new sub-clause (e) in the said clause (ii) so as to provide that any compensation due or received by any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, as the case may be, of any contract relating to his business shall be chargeable to tax under the head “Profits and gains of business or profession”.
It is further proposed to amend the said section so as to provide that the fair market value determined in the prescribed manner ofthe inventory as on the date of its conversion or treatment as capital assets shall be chargeable to tax under the head “Profit and gains of business and profession”.
These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent years.
Clause 18 of the Bill seeks to amend section 49 of the Income-tax Act relating to cost with reference to certain modes of acquisition.
It is proposed to amend the said section so as to provide that where the capital gain arises from the transfer of a capital asset, referred to in clause (via) of section 28, the cost of acquisition of such asset shall be deemed to be the fair market value which has been taken into account for the purposes of the said clause.
This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-2020 and subsequent years.
