Section 45(2): Capital Gains on conversion of capital assets into stock-in trade.

Section 45(2): Capital Gains on conversion of capital assets into stock-in trade.

Capital Gain shall arise where an assessee converts or treats the capital asset into Stock in trade of his business.

Capital Gain shall be taxable in the year in which such stock in trade is sold.

Capital Gain:

FMV of the asset on the date of conversion                xxx

  (-) Cost of acquisition                                                    xxx

                                       Capital Gain                             xxx

Profit and Loss on Business & Profession:

Sale price of stock in trade                                                     xxx

(-) FMV of the asset on the date of conversion                    xxx

Profit and Loss on Business & Profession              xxx

Notes:

·         The amount recorded in the books of account of the business as the value of stock-in t-rade is not relevant. Fair Market Value on date of conversion is relevant.

• ·          If entire stock-in –trade is not sold but only part thereof is sold, then only for that part capital gain shall be taxable in the year in which stock-in –trade is sold.
•     
•      Example: A Furniture business man had purchase few furniture as capital nature say, for Rs. 5 lakh on AY 2010-11.
• ·         On AY 2015-16 he converted 50% of those furniture in to Stock in trade valued as per  books of account say, for  Rs. 60000 and sold for Rs. 10Lakh.
• ·         Due to unique nature those furniture becomes antique and Fair Market value come to Rs. 8 lakh.
• ·         Now, capital gain will be (Rs.8 Lakh – Rs. 2.5 Lakh)= Rs. 5.5 Lakh, and
• ·          PGBP will be (Rs.10 Lakh – Rs. 8 Lakh)= Rs. 2 Lakh.
• ·         Again, in case rest capital assets will sale on another years so taxable income arise on those years also.