Liability of capital gain

[Ashutosh Chhawchharia]

A company has converted its listed shares from Stock-in-Trade to Investment as on 01.04.2004.Whether the difference between cost of Shares and Market value on that date shall be liable to Capital Gain?

[Surender Gupta]

As on the date of conversion there is no tax payable on capital gain. Income Tax on capital gain or business profit shall be payable only in accordance with the actual sale of such shares. At the time of sale (computation of income for the assessment year) you need to calculate the capital gain at the time of conversion and business profit accordingly. You may refer to sub section 2 of section 45 of the Income Tax Act, 1961. The provisions of this section are reproduced below: 45(2) - "Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset."

AI Summary

Shares Converted to Investment: No Immediate Capital Gain Tax, Payable on Sale per Section 45(2) of Income Tax Act A company converted its listed shares from Stock-in-Trade to Investment on April 1, 2004, raising a query about capital gain liability. The response clarified that no tax on capital gain is payable at the conversion date. Tax on capital gain or business profit is due only upon the actual sale of shares. At sale, the capital gain and business profit must be calculated, referencing Section 45(2) of the Income Tax Act, 1961, which states that profits from conversion are taxable in the year the stock-in-trade is sold, using the fair market value at conversion as the consideration value.