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Conversion of fixed capital assets in to stock in trade

Amit (Accountant) (261 Points)

29 November 2014

I wish to know the answers to the following question.

1) What is the procedure to convert the fixed capital asset held by an individual as stock in trade

2) And, if such fixed capital assests being residential property is converted as stock in trade, will the rent income be treated as income from house property or income from business and profession?

3)If the income from rent is treated as income from business and profession, will the benefit of startard deduction etc be available?

Pl. answer citing the relevent section of the income act.

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5 Replies

Rohit Gupta (Audit Executive) (271 Points)
Replied 29 November 2014

Dear Amit,

i) There is no specific procedure in Income Tax Act regarding Conversion of fixed capital assets into stock in trade. You can simply do this by passing a Journal Entry.
ii) As per Section 22 of Income Tax Act the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head “Income from house property”.

There is no provision of charging the rental income of property under the head Income from business & profession even if properrty is held as stock in trade. Many case laws are also there in support of my answer.

iii) Since you cannot show as your business your 3rd question becomes redundant.

Regards

Rohit Gupta

RHT1203 @ GMAIL.COM

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Amit (Accountant) (261 Points)
Replied 30 November 2014

Dear Rohitsir,

I thank you for your answers and agree with most of what you said.

I just want to add that the there is a provision for taxability matter of capital assets converted in to stock in trade and it is covered under section 45(2) of Income tax act.

And, you are right that the rent from property held as stock in trade is charged under the head "income from property.

This is my understanding. Pl. correct if required

Thanks again for your answers.

Rohit Gupta (Audit Executive) (271 Points)
Replied 30 November 2014

Dear Amit,

As per Section 45(2) of Income Tax Act, 1961 the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him. For the purposes of section 48, the fair market value of the asset on the date of such conversion shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

This means that the Capital Gain is chargeable to tax in the year in which the capial asset is sold to thir party. You need to calculate the Capital Gain after considering the FMV of asset on date of conversion and the purchase value of asset and then you need to calulate the PGBP income after considering Sale of the asset and the FMV on the date of conversion. The notable point is both Capital Gain and PGBP income are taxable in the year of Sale of Asset/ Stock in Trade.

Regards

Rohit Gupta

RHT1203 @ GMAIL.COM

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