Case of conversion of capital asset into stock in trade

Tax queries 744 views 3 replies

binal salot

income tax audit consultant project fi

157 Points Joined August 2009

hii all,

i would like to state a following case where the land is owned by father for resi. purpose bt later on same is developed

by his son with some commercial shops and residential flats and same is sold by the father commercially

other facts are all the exp. of development is incurred by the son having loans and advances from father

my queries are:

1.How can i account for the money received to son from his father where it can term as advances for development of land and later on at the time of sales by sale deed son will account for his commission income.

2. whether the commission income paid to son is allowable to father or not?

3. The same is case of conversion of capital asset into stock in trade ? so father will be taxed in both ways as capital gain and business income but whether he would get deduction of whatever he pays to his son for development from his business income.??

reply soon with details

thanks

for any further clarification pls ask for the same.

Replies (3)

Ankit

CA CS

3064 Points Joined June 2009

Dear Binal,

1. since the land is owned by the father and also subsequently sold by the father. except for the fact that it is developed by the son.

So, the money received by the son may be shown as fees paid by father to the son for construction of the land.....

since, commission would be correct if the land were to be sold by the son

2. The answer to this depends upon the treatment you take under point 3. i.e. if you take it as conversion into stock in trade, it will be allowable as business expense and if not, then Cost of Improvement under Capital Gains

But the same will be chargeable in the hands of the son as business income

3. Now this may be a debatable point...

according to me, it would not be conversion into Stock in Trade...since the land is once and for all constructed and sold off...and the father is not into regular construction business, it may not be taken as stock in trade....

hence, according to me, it should be taxed under capital gains only and not under B&P.

however, as i said, whatever treatment you take here, would affect your decision under point 2..

If you have any further doubt, or want clarification, you can reply back..

- Ankit

binal salot

income tax audit consultant project fi

157 Points Joined August 2009

Thanks Ankit,

If payment by the father to son is taken as fees paid by the father to son for construction under the name as "xyz developer" owned by son than it is actually termed as Contractor for construction.??

You are right that it cannot be conversion of capital asset into stock in trade as father is not in regular business of construction but i just want to provide some more details and thereby want to confirm this that actually though the father is not in this business regularly still the land is developed in the way having some residential flats and commercial shops too. And all were sold by father individually to third party where there is no role of son.

So do u think still it cannot be termed as Conversion of Capital Asset into Stock in Trade??

If i will take that father will show the income under capital gain head than the payments made to son is termed as cost of improvement in father's books and contract income in the son's books. Correct??

Now can i account for the contract income in the books of son as and when the concerned flat or shop is sold and till that date i will account for the money received under loans and advances? As TDS is not deducted at the time of each payment.

Ankit

CA CS

3064 Points Joined June 2009

Dear Binal,

you are welcome....

Still, According to me, it will be capital gains since this is a one off transaction....though the income tax dept may take it as business income also since as per the income tax act, even one off transactions may be considered as business income...

but nonethelass, you can still claim the same as capital gains. at the most, you may keep yourself ready to convince the income tax dept.

As i told you earlier, this does remain a moot point....

Yes..if you take the fees to son as cost of improvement in the books of the father, you can show it as contract income in the books of the son.

Yes you may take it as loans and advances...

Also remember, that if the father shows the transaction under income fom B&P, then, assuming the value of the transaction exceeding 1 cr, tax audit, and TDS will become applicable.

If you have any further doubt or want any clarification, please feel free to ask....you can send me an email on

ankitanjaria @ gmail.com

- Ankit