Conversion of land held as stock in trade to investment

[satbir singhwahi]

Mr A is trading in land, and land is held as stock in trade. This practice is done since last 20 years. Now during FY 2025-26, wants to convert stock of land as fixed assets to claim ltcg in future year sales. When taxability will arise in Fy 2025-26 or when sale made in tax year 2028-29

[YAGAY and SUN]

Where land is held as stock-in-trade (inventory) of a land trading business for the last 20 years, its conversion into a capital asset during FY 2025-26 attracts the specific provisions of Section 28(via) of the Income-tax Act, 1961. The Fair Market Value (FMV) of the inventory on the date of conversion is deemed to be business income chargeable under the head “Profits and Gains of Business or Profession”. The statutory scheme introduced by the Finance Act, 2018 was specifically enacted to tax such conversion in the year of conversion itself, and not to defer taxation until the eventual sale of the asset.

Accordingly, in the facts stated, the taxability under Section 28(via) would arise in FY 2025-26 on the FMV of the land as on the date of conversion. Thereafter, upon sale of the land in FY 2028-29, the asset would be treated as a capital asset; by virtue of Section 49(9), the FMV adopted at the time of conversion shall be deemed to be the cost of acquisition, and as per Section 2(42A), the holding period for determining whether the gain is long-term or short-term shall be reckoned from the date of conversion into a capital asset. Consequently, only the appreciation (or depreciation) from the date of conversion till the date of sale would be taxable under the head “Capital Gains”, and LTCG benefit would be available only if the prescribed holding period is satisfied after the date of conversion.

[YAGAY and SUN]

One additional professional point: the conversion from stock-in-trade to capital asset should be supported by a clear and contemporaneous board resolution/proprietor's declaration, proper accounting entries, and a defensible FMV determination (preferably through an independent registered valuer, particularly where the value is significant). Since the FMV on the conversion date becomes the basis for both business income under Section 28(via) and the deemed cost under Section 49(9), valuation documentation assumes critical importance in any future assessment proceedings.

Further, under the current provisions of the Income-tax Act, 1961, the position is fairly settled that (i) business income is taxable in the year of conversion, and (ii) the holding period for capital gains purposes commences from the date of conversion. Therefore, a conversion in FY 2025-26 followed by sale in FY 2028-29 would generally satisfy the long-term holding requirement for land, subject to the law prevailing in the year of transfer and the specific facts of the case.

[satbir singhwahi]

Thanks Sir

AI Summary

Stock-in-trade conversion of land is taxed on fair market value at conversion, with later capital gains measured from that date. Conversion of land from stock-in-trade to a capital asset is taxed in the year of conversion on the fair market value as business income. On later sale, the same fair market value becomes the deemed cost of acquisition, and the holding period for capital gains is counted from the date of conversion. Accordingly, only the post-conversion appreciation is taxed under capital gains, subject to the prescribed long-term holding period.