Profits and gains resulting from the transfer of capital assets during the fiscal year are subject to taxation under the head of "Capital Gains". On occasion, a proprietor of a capital asset may exchange that asset for shares of stock in the course of conducting business. Therefore, the transformation of a capital asset into stock in trade is likewise classified as a transfer and is subject to taxation.
Section 45(2) of Income Tax Act 1961 deals with taxation of capital asset converted into stock in trade.
When is the sale of a capital asset regarded as a stock in trade for a business? as well as the schedule and its income tax implications? Learn more
This document covers
- Taxation at the time of conversion of capital asset into stock in trade
- Taxation at the time of Sale of Stock in Trade
1. Taxation at the time of conversion of capital asset into stock in trade
When the capital asset is converted into stock in trade, every taxpayer needs to pay the taxes under the head "Capital Gains".
- Sale Consideration (Full value of consideration): The fair market value (FMV) of the asset on the date of conversion shall be deemed to be sale consideration.
- Indexation Benefit: Indexation benefit for cost of acquisition and improvement will be considered upto the year of conversion of capital asset into stock in trade
- Year of Taxability: Capital Gains will be taxable in the year in which stock in trade is sold.
2. Taxation at the time of Sale of Stock in Trade
When the stock in trade is sold, the taxpayer needs to pay the taxes under the head "Business Income".
- Sale Consideration (Full value of consideration): The Sale proceeds of stock in trade will be considered as Sale consideration.
- Purchase Cost: The purchase cost of stock in trade is Fair Market Value on the date of conversion.
- Year of Taxability: The business income will be taxable in the year in which stock in trade is sold.
Example: Mr Krishna has a urban agriculture land and he has converted the same into Non Agriculture land in May 2020 and transferred the same as stock in trade to his real estate business. He has acquired the Urban agriculture land in June 2015 at 20 lakhs. The fair market value of the urban agriculture land on the date of conversion is 75 lakhs i.e., on May 2020. Later he sold the plots at 1.20 crore in June 2022.
- Sale Value is 75 lakhs (June 2020- Date of Conversion)
- Purchase Cost is 20 lakhs (June 2015- Date of Purchase
- Indexed Purchase Cost – 23,70,078 (20 lakhs*301/254) (Year of Indexation should be taken for 2015-16 and 2020-21)
- Capital Gains = 51,29,921 (75,00,000-23,70,078)
- Sale of Stock in Trade – Rs 1.20 Crores
- Purchase Cost – 75 lakhs (Value as on date of conversion)
- Business income – 45 lakhs (1.20 Crores-75 lakhs)
Both Capital Gains and Business income tax is required to be paid in FY 2022-23