Capital Gains Accruing u/s 45(2)

[Sanjay Aggarwal]

Section 45(2) of the Income Tax Act, 1961, Conversion of capital asset into current asset. The capital gain arises at the time of actual sale of shares. The assessee has sold shares in the market and STT has been paid. Two kind of incomes accrue to the assessee. Long term capital gain u/s 45(2) and business income on sale of shares. The query is whether such long term capital gain qualifies for exemption u/s 10(38)?

[DEV KUMAR KOTHARI]

Example: cost 100, market value as on conversion 120 net sale value 150/- (extra STT 2) On day of sale taxable business income will be 30 (150-120) and capital gains will be 20 (120-100) (minus cost inflation indexation effect, if any). On the date of conversion of capital asset there was no transfer through S/E and STT was not paid so s.10 (38) will not apply. On the date of actual sale there was no transfer of 'capital asset', but transfer was of 'stock-in-trade' therefore S. 10(38) will not apply. Hence on both events section 10(38) is not attracted. Therefore, there will be no exemption u/s 10(38) for Rs.20/- being assessed as LTCG (without STT). The point will involve disputes, where there is loss (LTC loss) the AO will try to deny set off by applying s.10(38), where there is gains, the AO will try not to apply S.10.38.

AI Summary

STT-linked exemption denied when shares converted to stock-in-trade; LTCG treated without exemption upon resale under conversion rule Conversion of listed shares into stock-in-trade produces a long-term capital gain measured to the conversion date and business income on subsequent sale; because no transfer of a capital asset with STT occurred on conversion and the actual sale is of stock-in-trade, the STT-linked exemption is not available on either event, a position that can prompt assessment disputes over set-off and exemption treatment.