Considering stock in trade as capital asset

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kornica jain (Querist)
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15 May 2017 Hello, I am having this query in regard to a pvt ltd company carrying on the business of marble processing. The company is having some marble blocks as stock in trade, but since 2014 it has stopped trading in marbles. Since then it is carrying on marble processing business on job basis. But the stock is present both physically and in books too. So can the company now treat it as a capital asset as it is no more a stock in trade. Books of accounts for the year 2016-17 are yet to be closed. Please advise asap.

kornica jain

kornica jain (Querist)
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15 May 2017 Please reply its a bit urgent

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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20 July 2024 In the scenario you've described, where a private limited company has stopped trading in marble blocks since 2014 and is now engaged in marble processing on a job basis, the treatment of marble blocks previously held as stock in trade is a significant decision. Here are some key points to consider:

### Treatment of Marble Blocks as Capital Asset

1. **Definition of Stock in Trade vs. Capital Asset:**
- **Stock in Trade:** Marble blocks held for resale or processing into finished goods for sale constitute stock in trade. They are generally held for the purpose of generating profit through resale or processing.
- **Capital Asset:** A capital asset is typically held for long-term investment or for the company's own use and is not intended for resale in the ordinary course of business.

2. **Intent and Usage:**
- The treatment of marble blocks as either stock in trade or capital asset depends largely on the company's intention and usage:
- If the company intends to sell the marble blocks or process them for resale (even on a job basis), they should continue to be classified as stock in trade.
- If the company has ceased the trading activity of marble blocks and now uses them solely for processing on a job basis or for any other non-trading purpose, there may be grounds to consider them as a capital asset.

3. **Financial Reporting and Tax Implications:**
- **Financial Reporting:** The company's financial statements, including its balance sheet, should accurately reflect the nature and classification of assets. If marble blocks are to be reclassified as a capital asset, appropriate adjustments should be made in the financial records.
- **Tax Implications:** Converting stock in trade to a capital asset can have tax implications, especially in terms of capital gains tax if the asset is eventually sold. Consultation with a tax advisor or accountant is recommended to understand the implications fully.

4. **Accounting Treatment:**
- For the financial year 2016-17, if the decision is made to treat marble blocks as a capital asset:
- Adjust the accounting records to reclassify the marble blocks from stock in trade to a capital asset.
- Ensure compliance with accounting standards and disclose the change in accounting policy if necessary.

### Steps Forward

- **Review Intentions:** Clarify the company's current intention with respect to the marble blocks—whether they are held for resale or for any other purpose.
- **Consult Professionals:** Engage with a qualified accountant or tax advisor to assess the implications of reclassification, both from an accounting and tax perspective.
- **Document Decision:** Document the rationale and decision-making process for reclassifying marble blocks, especially for future reference and audit purposes.

By carefully considering these factors and seeking professional advice, the company can make an informed decision regarding the treatment of marble blocks as either stock in trade or capital assets. This approach ensures compliance with accounting standards and appropriate tax management.

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