When a capital asset is converted into stock in trade then capital gain u/s 45(2) of Income Tax Act arises in the year of sale and not in the year of conversion. But in vice versa situation i.e conversion of stock in trade into capital asset there does not arise any capital gain. If an assessee is in the business of real estate and on closure of his business he retains the existing stock in trade of immovable properties of the business with him and holds it as investment then it will become his capital asset from the time of closure of his business.
In such case if he later on sells the same capital asset say after three years from the date of purchase of such asset then the gain arising therefrom will be a long term capital gain and and the benefit of indexation and paying of tax @ 20% instead the normal rate can be planned.
Similar case can also happen in case of a business of trading in shares. Even during the continuation of the business the assessee may transfer some of his stock in trade into his capital asset by deciding to hold it as an investment and can sell the same at a later stage and can pay tax on the profit as capital gain instead of business profit.
It is here to be noted that long term capital gain from equity shares sold in stock exchange and on which Security Transaction Tax has been paid, is liable for the benefit u/s 10(38) of Income Tax Act if the amount is upto Rs 1,00,000/- otherwise taxable. Thus in case of conversion of shares held as stock in trade into capital asset, the benefit of exemption u/s 10(38) will be available if such converted capital asset is sold later and long term capital gain arises from it.
In such cases, there will not be any capital gain at the time of conversion and if the assessee sells such converted asset at a later date, the profit will certainly give rise to capital gain and in order to ascertain whether such profit is long-term capital gain, the period of holding would have to be reckoned from the date of acquisition of the asset as stock in trade and not from the date of conversion into capital asset, as section 2(42A) does not lay down that the holding of the asset for the required period has to be as capital asset.
Thus the assessee can go for tax planning and save the tax by treating as the long term capital gain which is taxable @ 20% instead of normal rate and benefit of indexation can also be taken.
Some Related Case laws:-
- Once capital asset is converted into stock-in-trade provision of section 2(47) becomes irrelevant and does not apply
- Even introduction of stock-in-trade as capital contribution into firm attracts s. 45(3)
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Can I convert gains on stocks to buy a real estate property. As I pay GST for purchase of property can this LTCG be set off for buying residential property…
Whether the above provisons will be applicable in case where three individuals have purchased a plot about 5 years back. Now they want to form AOP to convert the said plot in residential plots to sale individual plots on development.
Whether purchased plot can be considered as stock in trade by revaluing cost of original plot in books of AOP. OR individual investors should introduce their share in asset as capital contribution for taking advantage of tax on income from capital gain as on date of formation of AOP?
Whether the above provisons will be applicable in case where three individuals have purchased a plot about 5 years back. Now they want to form AOP to convert the said plot in residential plots to sale individual plots on development.
Whether purchased plot can be considered as stock in trade by revaluing cost of original plot in books of AOP. OR individual investors should introduce their share in asset as capital contribution for taking advantage of tax on income from capital gain as on date of formation of AOP?
Dear adinarayanaji,
The capital gain will be Rs 70 (120-50) and no profits and gains from busines or profession
Can once converted Capital Asset (Land ) into Stock in trade can be convert again into Capital Asset. If Yes then what are the tax implications.
Now in example of Mr Adinarayana Rs.40 is Income form PGBP, when tax will paid, wheather in the year of transfer or in the year of sale of assets?
Dear Sir,
Please clarify on the taxation aspect of conversion of agricultural land as stock in Trade, esp. considering the fact that the definition of capital assets excludes agricultural land.
On the date of conversion of stock-in-trade into capital asset, the profit is chargeable as a business income.
Sir,
Is it possible to follow such tax planning during the continuance of the real estate business. Like hold the asset as stock for some period and then convert as capital asset and dispose and pay capital gain tax based on period of holding.
pls guide with some caselaws.
Dear Adinarayana ji
as mr bajaj said that there will be no capital gain arise in conversion of stock in trade in to capital assets but
as far as business income is concerned it will be taxable in the year of sale ie.F.Y.2010-11 whether capital gain is exempt or not.
thank u
Dear Mr. Bajaj,
This is with respect to the conversion of stock in trade, let us assume that, If an assessee is holding Equity shares as stock in trade and proposes to convert them as capital asset, it is mentioned that depending on the period of holding it will be subjected to tax if there are short term capital gains and if there are long term capital gains they will be exempt, if STT is paid.
But how about the taxability and point of taxation on the profit/gain that arise at the time of conversion:
For example ABC Ltd., is holding 1000 shares in XYZ Ltd., at a cost of Rs.50/- per share which were purchased say on 1-1-2008 and on the date of conversion say 31-3-2009 the market value of shares of XYZ Ltd., are say Rs.90/- and if these shares are sold on 15-12-2010 at Rs.120/-, The capital gain would be Rs.30/- (Rs.120 – Rs.90) and since it is a long term and as it is subjected to STT the long term capital gain of Rs.30/- would be exempt, then how about the profit/gain of Rs.40 (Rs.90-Rs.50) and when this amount will be taxable? if so will it be taxed as income from business or capital gain or is this amount also exempt?