Capital Gains on Conversion of Capital Asset into Stock-In-Trade Section 45(2)
What is Stock-In-Trade?
The goods kept in hand by a business for the purposes of its trade.
For example, a person dealing in electronic items such as laptop, printers, computers will be his stock-in-trade.
With reference to Section 45(2)
At the time of business dealings, one may convert or treat his capital asset as stock-in-trade for the purpose of selling it in the normal the course of his business. This type of transaction is called a transfer for the purpose of Capital Gain.
Also, it may be seen as the profits or gains arising from such transfer by way of conversion or treating it as a stock-in-trade is charged to tax under the head “capital gains” in the previous year in which the stock-in-trade is sold or otherwise transferred by the owner.
At the time of such conversion & transfer two types of income arises:
- Capital Gain
- Profits & Gains from Business or Profession
The income arising from the above heads will be calculated as follows:
|Capital Gain||Profits & Gains from Business or Profession
|Fair Market Value of the asset on date of conversion
(-) Cost of Acquisition of Asset
(-) Cost of Indexation of Asset
|Selling price of Stock-in-Trade
(-) Fair Market Value of the asset on date of conversion
Note: If the entire stock-in-trade is not sold then Capital gain shall be taxable to the extent the converted stock-in-trade is sold in the year in which it is sold.
Let’s understand it with an example:
Mr. Sharma who owns a jewelry shop converted his own jewelry which is a capital asset as stock-in-trade for business on 15th May 2020 and sold it on 1st July 2020. It will be considered as transfer under section 2(47) during the financial year 2020-21 (AY 2021-22). However, the profits or gains arising from the above conversion will be chargeable to tax during the financial year 2020-21 (AY 2021-22), since the stock-in-trade has been sold only on 1st July 2020.
Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.