Section 45(2): Income Tax Treatment of Capital Gain arising from the transfer (conversion) of a capital asset into stock-in-trade

By | May 31, 2016

Whenever any capital asset is converted into stock-in-trade by an assessee, it attracts the provisions of S. 45(2). Capital gain arising from the transfer (conversion) of a capital asset into stock-in-trade shall be charged to tax in the P.Y. in which stock-in-trade is sold or otherwise transferred. The consideration in such case shall be the fair market value of such asset as existing on the date of such conversion. In this case the even though the capital gain would be calculated in the year when the stock is sold, but the indexation of Cost of acquisition and improvement will be done by considering the Cost Inflation Index of the year of conversion.

S. 2(22B) defines Fair Market Value as:

  • The price that the capital asset would fetch on sale in the open market on the relevant date;
  • Where the price referred to in sub-clause (i) is not ascertainable, such price as may be determined  in accordance with the rules made under this Act.

From the above relevant provisions the following points can be summed up:

1There must be a capital asset.
2Capital Gain shall be computed in the year when such converted asset is sold.
3Cost indexation shall be done till the year of conversion.
4F.M.V to be the sale consideration in case of conversion while calculating capital gains.
5Business Income also to be calculated in the year of sale.
6Conversion of stock in trade into capital Asset.

Related Cases:

S. 2(47), 28(i), 45(2) & 45(3) of IT Act, 1961—Capital gain—Where land held by assessee company as stock-in-trade has been contributed as capital in a firm after revaluing the same at higher figure and same has been taxed by treating the transaction as a trading or commercial transaction, the same can be taxed as capital gains u/s 45(3) of the Act—DLF Universal Ltd. vs. DCIT (2010) 128 TTJ 121 (ITAT-Delhi)

S. 28(i), 45(1) & 45(2) of the IT Act, 1961—Capital gain—The provisions laid down u/s 45(2) of the Act are applicable only in the case where investment is converted into stock-in-trade and not vice versa—ACIT vs. Bright Star Investment Pvt. Ltd.


As Per Section 45(2), of the Income Tax Act, 1961-

Capital gains.

45(2). Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as 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 and, for the purposes of 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 received or accruing as a result of the transfer of the capital asset.

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