This normally happens in cases when a business owns some Fixed Assets and Later it starts business of selling them, hence that fixed asset becomes its stock in trade.

Capital Gain

=FMV (Fair Market Value)

Less

COA (Cost of Acquisition)

Also PGBP Income will be

Sales price (Full Value of Consideration)

Less

FMV 

 

Conversion of a capital asset into Stock In Trade  - Special Cases

 

Example

Suppose a person purchases jewellery on 15 July for business for Rs 200000

.Later on  in August 20,he starts jewellery business.FMV of Jewellry on that date was 240000

On 18 Sep,he finally sells jewelley for Rs 250000

-a-

In this case,Capital Gain and PGBP both will be taxable on 18 Sept

Capital Gain

FVC=240000

Less

COA=200000

STCG=40000

 

PGBP Income

Sales Price=250000

Less

Cost *(FMV)=240000

Profit=10000

-ea-

 

How to Calculate Capital Gain  

  • Period of holding will be calculated till the date of conversion .
  • Indexation will also be done till the date of conversion
  • However, capital gains will be calculated in the year in which asset is sold
  • Fair market value  of the asset as on the date of conversion will be the full value of consideration

 

QUESTION 1

Mr A purchases a building for his personal purpose on 10 April 2008 for Rs 25 lacs
Later,on 1 May 2015 he starts Property business and keeps his property as stock in trade for sale
Fair Market value as on date was 45 lacs
On 1 June 2015 he actually sells the property for Rs 50 lacs

YEAR CII
2008-09 582
2014-15 1024
2015-16 1081

-a-

Period of holding from 10 May 2008 to 1 May 2015 is more than 36 Months 
Hence it is LTCA
Indexation wil be done only till 1 May 2015

COA=2500000*1024/582=4398625

However,Capital gain is payable on 1 May 2015 (i.e. FY 2015-16)

Capital gain will be computed as follows for 2015-16

Particulars Amt
Full Value of Consideration 4500000
Less  
Expenses of Transfer 0
ICOA 4398625
ICOI 0
Long Term Capital  Gain/(Loss) 101374.6

Also PGBP Income will be computed as follows

Particulars Amt
Selling Price 5000000
Less  
Cost(FMV of Property) 4500000
PGBP Income 500000

-ea-

  1. Income Tax
  2. Income from Capital Gains
Ask Download

About the Author

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling
CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 6 years. He provides courses for Practical Accounts, Taxation and Efiling at teachoo.com .
Jail