Section 45(2) - Capital Gains On Conversion of Capital Assets Into Stock-In-Trade - Income Tax - Ready Reckoner - Income Tax

Section 45(2) : CAPITAL GAINS ON CONVERSION OF CAPITAL ASSETS INTO STOCK-IN-TRADE Capital Gains shall arise where an assessee converts the capital asset into stock in trade of his business. Capital Gain = FMV of the asset on the date of conversion Cost of Acquisition PGBP = Sale Price of Stock-on-trade FMV of the asset on the date of conversion Capital gain shall be taxable in the previous year in which such converted asset is sold. The amount recorded in the books of account of the business as the value of stock-in-trade is not relevant. FMV on date of conversion is relevant. The indexation of cost in above case shall be done till the year of conversion of capital asset into stock. NOTE:- There must be a capital asset. Capital gain shall be computed in the year in which such converted asset is sold. Cost indexation shall be done till the year of conversion. FMV to be the sale consideration in case of conversion while calculating Capital Gains. Business Income also to be calculated in the year of sale. Consequential provisions for treatment on conversion of inventory into capital asset under section 28 :- Section 45 of the Income Tax Act provides, inter alia, that the Capital Gains arising from transfer of Capital Asset into Stock-in-trade shall be chargeable to tax. However, the Act did not contain any provision for taxability in the event of conversion of Stock-in-trade into or its treatment as Capital Asset. The amendments for this purpose has been brought in Section 28 and Section 2(24) of the Income Tax Act by clauses 9 and 3 respectively of the Finance Bill. There are consequential amendments in the provisions dealing with Capital Gains in Section 49 and Section 2(42A) which are brought in by clause 18 and 3 respectively. The amendments would conclude that, at the time of conversion of stock in trade into capital asset, income would be chargeable to tax under business income in the year when the conversion has taken place and income would be charged to tax under capital gain in the year of final transfer.