CONVERSION OF CAPITAL ASSET INTO STOCK

[Asked by Guest]

SIR

AN INDIVIDUAL ENGAGED IN REAL ESTATE BUSINESS PURCHASED A LAND AS AN INVESTMENT IN THE MID OF YEAR SAY SEPT. LAND WAS PURCHASED IN CASH.HOWEVER, ON CLOSURE OF ACCOUNTS HE REVIEWED AND CONVERTED CAPITAL ASSET PURCHASED INTO STOCK.

CASH WAS WITHDRAWN FROM BANK ON DATE OF PURCHASE OF LAND ADN INTENTION WAS INVESTMENT.

NOW CAN AO DISALLOW SUCH PURCHASES ON HOLDING THAT IT WAS BUSINESS ASSET AND PURCHASE IN CASH WAS DISALLOWABLE??

PLZ GUIDE

[Rama Krishana]

In tax laws it is well established that Substance is more relevant over form.

As long as it is on record you have purchased the Land as capital asset, the event of conversion the same as Stock in trade later would not entitle the AO to disallow the same as Cash Purchase exceeding ₹ 20,000.

AI Summary

Substance over form: documented capital asset purchase should not be disallowed after later conversion to stock in trade.
If contemporaneous records and the initial intention at acquisition show the land was purchased as a capital asset, a later conversion into stock in trade does not, by itself, permit disallowance of the original cash purchase under the cash purchase disallowance rule; the Assessment Officer's ability to disallow hinges on the factual matrix and documentary evidence at the time of purchase rather than subsequent reclassification.