Conversion of stock in trade into capital asset

[manoj gupta]

Dear Sir, thanks for the reply. But my question is reverse. It is about conversion of stock in trade into capital asset and not capital asset into stock in trade. what are the provisions for conversion of stock in trade into capital asset. what sections of income tax govern this.

[Sharad Aggarwal]

When you convert stock in trade into capital asset there is no tax effect i think. Only when you sell this asset finally, you would have to pay capital gains . The period of holding would be counted from the time of the original date when you bought the asset as stock in trade. Sharad

[Rama Krishana]

Refer the provisions of sub section 2 of section 45. Sectin 45(2) read as, ".......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"

[Rama Krishana]

In addition, Mr. Dev Kumar Kothari has addressed your issue correctly. He has answered you two question specifically. But, it happens that we need everything readymade without spending a minute on the whole issue.

AI Summary

Conversion of stock-in-trade into a capital asset triggers capital gains tax on subsequent disposal with FMV deemed for computation. Conversion of stock-in-trade into a capital asset does not trigger tax immediately; capital gains tax arises only on subsequent transfer, with the fair market value at conversion deemed as the full value of consideration for computing capital gains and the original holding period while it was stock-in-trade being relevant to holding period attribution.