Capital Gains

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prasad bhatt (Querist)
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28 June 2011 The assesee had purchased agricultural land in the year 2006. The same was converted into stock in trade (i.e. NA plot) in the year 2009. This stock in trade was sold in the year 2011.

What will be the nature of capital gain arising on the above sale? Will it be capital gain on sale of agricultural land? If yes, can exemption u/s 54B be claimed if new agricultural land is purchased within two years from date of sale?

CA Navin Jain

CA Navin Jain (Expert)
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30 June 2011 As per Section 2(47), conversion of capital asset into stock-in-trade amounts to transfer.

Exemption under Section 54B is available, if new land is purchased within two year from the date of transfer.

As per Section 45(2) capital gain arising on conversion of capital asset into stock-in-trade is taxable in the year in which stock is sold or transferred. Market value of capital asset on the date of conversion is taken as sale consideration.

1. Nature of Capital Gain:

If the difference between the date of conversion and the date of purchase is 36 months or less, then Short Term Capital Gain will arise.

If the difference between the date of conversion and the date of purchase exceeds 36 months, then Long Term Capital Gain will arise.

2. Capital gain shall arise as per Section 2(47) read with Section 45(2) in the year of conversion of land into stock but it will be taxable only in the year of sale of land.

3. In light of above provisions, although land is sold in 2011, the limit of two years will be calculated from the date of conversion of land into stock, i.e. 2009 and not from the date of sale, i.e. 2011.