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Tax treatment of Capital Asset Converted into Stock in Trade

Today we are discussinng on the Tax treatment of Capital Asset Converted into Stock in Trade of business and later on sale. under which head of income tax it will be taxable on capital gain or business or profession and how to calucate the tax amount and at what time it will be payable.

When a Capital assets is converted into stock in trade then it comes within the definition of transfer u/s. 2(47) of I T Act, 1961, therefore it comes within the ambit of Capital gain Provisions.

(I) In which year the capital gain on transfer of capital assets into stock in trade arises?
Capital gain arises in the year in which capital assets is converted into stock in trade.

(II)In which year the capital gain on transfer of capital assets into stock in trade is Taxable?
Capital gain is taxable in the year in which the stock in trade (converted from capital assets)  is going to sale.

(III) How to calculate the capital gain on conversion of capital assets into stock in trade?
First find out the fair market value of capital assets on the date of conversion. This fairmarket value of assets is the full value of consideration of asset.

 Fair market value of assets(on date on conversion into stock in trade):  xxxxx

Less: Indexation of cost of acquisition:                                                           xxxxx

Less: Indexation of cost of improvement:                                                       xxxxx

Capital gain/(loss):                                                                                              xxxxx

(IV) Is any profit under the head Business or Profession also arises on sale of stock in trade (converted from capital assets)?
Yes, Profit under the head Business also arises on sale of stock in trade (converted from capital assets).

(V) How to calculate the profit under the head business on sale of converted stock in trade?

Sale Consideration:                                  xxxxx

Less: Fair Market value of assets:          xxxxx
(same as above)

Business Income:                                       xxxxx

Tax treatment of Capital Asset Converted into Stock in Trade with example:
An assessee having a building. Now he convert this building into small flats for purpose of his real estate business.

Cost of acquisition of Building : Rs. 50,00,000 (in year May, 1995)

Conversion date:   10/01/2012

Fair market value of building on conversion date: Rs. 2,20,00,000

Small flats are sold in Financial year 2013-14 for Rs. 2,70,00,000

Capital gain arises in financial year: 2011-12

Capital gain taxable in financial year: 2013-14

Profit from business arises & taxable in financial year: 2013-14

Calculation of Capital gain:

Fair market value of Assets on conversion date Rs. 2,20,00,000
Less: Indexation cost(939* 50,00,000)/281 Rs. 1,67,08,185
Capital Gain Rs.52,91,815

 

Calculation of Business Profit:

Sale Consideration Rs. 2,70,00,000
Less: Fair Market Value of Asset Rs. 2,20,00,000
Business Profit Rs. 50,00,000

 Brief –

When a capital assets is transfered in business as a stock, capital gain will be arise value of capital gain will be Fair market value less Indexed cost of acqusition. but it will taxable in the year in which stock is sale from business.
In Business tax will be arise at the time of sale of stock and amounty will be sale price of stock less Fair market value.
we can conclude that from the date of purchase of capital assets to transfer in business it is taxable under the business head and from transfer in business to sale from business is taxable under business head.

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