Capital asset- stock-in-trade

[DEVKUMAR KOTHARI]

For brain storming: Does the A.O. has jurisdiction and power to treat a 'capital asset' as stock-in-trade? In my view -no. Every property is a capital asset, except some excluded items. Whether,an item is stock-in-trade or not will depend on the basis of items for which any person is known as trader or dealer, so long he continue business as a trader, stockist, distributor or a person open to buy and sell such items he is dealer in such item and such items will be his stock-in-trade , in normal course of business. Pool of cars used to run on hire are capital asset, the same person may trade in cars, cars kept for selling are only his stock-in-trade. In cases where a person is not a trader of any item say shares , units, his holding will be capital assets, unless he has treated or converted such assets into stock-in-trade and S. 45(2) is attracted. The assesee has option u/s 45(2) to treat or convert a capital asset into stock-in-trade, but the AO has no such power or option. Sale of a 'capital asset' require computation under head' capital gains' and AO should not make it under head business. A person is engaged in business of cars, he purchases cars and is known as dealer of cars, - cars purchased by him will be his stock-in-trade in natural commercial way. He can treat some cars as his capital assets by transferring to fixed asset account. If he sells such a car (F/A)the computation will be under head 'capital gains'. If he again convert such a car (F/A) into stock-in-trade, then computation will be under head 'capital gains' and business income on application of S. 45(2). A furniture show room purchases furniture and is known as seller of furniture in market and commercial world, furniture purchased is his stock-in-trade in natural and commercial way, if he want to use some furniture for furnishing of showroom, or office he can either directly treat them as furniture (F/A)at point of purchase or can convert some of his stock in trade into furniture (F/A)

AI Summary

Assessing Officer Cannot Reclassify Capital Asset as Stock-in-Trade; Taxpayer's Discretion Under Section 45(2) Prevails. The discussion addresses whether an Assessing Officer (AO) has the authority to classify a 'capital asset' as 'stock-in-trade' for tax purposes. The consensus is that the AO lacks this power. A capital asset is defined by its nature and the business activities of the owner. For instance, cars used for hire are capital assets, while cars for sale are stock-in-trade. A taxpayer can convert a capital asset into stock-in-trade under Section 45(2) of the Income Tax Act, but this is at the taxpayer's discretion, not the AO's. The computation of gains depends on the asset's classification and conversion.