According to Section 45 of the Income Tax Act, 1961 provides that capital gains arising from a conversion of capital asset into stock-in-trade shall be chargeable to tax. However, in cases where the stock in trade is converted into, or treated as, capital asset, the existing law does not provide for its taxability, according to section 48.
The fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration.
The sale of such stock-in-trade will impact with two heads viz ‘income from capital gain” and ‘income from profit and gain of business and profession’
(i) section 28 provides that any profit or gains arising from the conversion of inventory into a capital asset or its treatment as a capital asset shall be charged to tax as business income. It is also proposed to provide that the fair market value of the inventory on the date of conversion or treatment determined in the prescribed manner, shall be deemed to be the full value of the consideration received or accruing as a result of such conversion or treatment;
(ii) According to Section 2(24) so as to include such fair market value in the definition of income;
(iii) According to section 49 to provide that for the purposes of computation of capital gains arising on transfer of such capital assets,
the fair market value on the date of conversion shall be the cost of acquisition;
(iv) According to section 2(42A) to provide that the period of holding of such capital assets shall be reckoned from the date of conversion or treatment.
