So every ‘stock’ is a ‘share’ while every ‘share’ may not be a ‘stock’. SECTION 45(2) OF THE INCOME TAX ACT,1961: Provides that when the Capital Asset is converted into Stock-in-Trade by an assessee, the profits or gains arising on such conversion shall be charged to tax as Capital Gain in the year in which such Stock-in-Trade is sold or otherwise transferred. The definition of Transfer ,Section 2(47) has been changed but hardship of payment of Capital gain shifted on the assessee converting his Capital Assets into Stock -in-trade, since the taxable event arises at the point of time of conversion of Capital Asset into Stock -in- trade. It thus represents a part of the capital of the company which is fully paid. All Rights Reserved. Since real estate business of a long term busines , the developed flats/units will be available after a long period for selling. when Resolution was passed by the Board of Directors of the assessee company, that … The processing agent then contacts a … (2) Punishment in contravention of the provision: If a company and any officer of the company who is in default contravenes the above provision, there the company or the officer shall be punishable with fine which may extend to 1,000 rupees for each day during which such default continues, or 5 lakh rupees, whichever is less. In the absence of specific provisions , out of these two formulas , the formula which was favorable to the assessee should be adopted. The conversion price is the price per share at which a convertible security, like corporate bonds or preferred shares, can be converted into common stock. The Act however does not provide for the … (iii) In case of sale of flats takes place in several years , the land shall also be treated as sold or transferred on proportionate basis and capital gain shall be chargeable to tax in different years; (iv) In case certain percentage of developed flats/units are received by the landowner as a part of Sale Consideration , land proportionate to such flats/units will not be treated as sold or transferred. What is the payment process for Offline Challan payment option? This is because the assessee can claim that the mere conversion of a capital asset into a trading asset does not amount to a transfer. The investment in capital assets will be held to get better results by selling those assets after holding short or long period of time. Mr. A has purchased a plot on 25/04/2010(FY 2010-11) for Rs. In the absence of a Specific Provisions to deal with this type of situation , a rational formula should be worked out to deal with this type of situation. Your email address will not be published. The full value of consideration for computing capital gains will be determined as fair market value as on date of conversion 26 March 2010 Shares can be converted from Stock in Trade to investments, however the value of the shares on the date of conversion will be deemed as sale value of stock in trade and the amount of profit will be Business profit and not Capital gain. Authors assume no responsibility for the consequences of the use of such information. ACIT Vs. short term or long term. Generally, no one can earn income by dealing or trading with himself. Therefore ,such conversion is tax neutral at this point of time and no tax liability may arise at the time of such conversion. 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Conversion of Shares into stock. Section 45 of the Act, inter alia, provides that capital gains arising from a conversion of capital asset into stock-in-trade shall be chargeable to tax. 9.1 In the present case, the shares and securities were acquired much earlier and all throughout they were treated as stock-in-trade. CONCLUSION: Since there was ambiguity in assessment and treatment of conversion of Capital Assets into Stock-in-Trade before Taxation Laws ( Amendment ) Act, 1984. Your preferred stock of $500 per share is paying you $25 per year in dividends, or a 5% yield, but you also get a lottery ticket that allows you to trade in your preferred stock and exchange it for 50 shares of common stock. Now let us consider Mr. A has purchased a land on 25/04/2010 for Rs. IT : For purpose of section 45(2), date of conversion of capital asset into stock-in-trade has to be determined either on basis of entry passed in books of account of assessee or intention of assessee to exploit capital asset as stock-in-trade for its business purpose BAI SHRINBAI K. KOOKA (1962) 46 ITR 86: the Apex Court held that no transfer was involved where the assessee holding by way investment shares in companies commenced a business in shares converting the shares into Stock-in-trade of the business and when he subsequently sold these shares at profit, the assessable profit was the difference between sale price of the shares and market price of the shares prevailing on the date when shares were converted into Stock-in-trade … However, the company cannot issue stock ab initio. However, such capital asset is sold /transferred at later stage ,then any profits/gains arising from sale/transfer will be treated as Capital Gains under provisions of Section45(1) of the Act,1961. Such business activity may be taken by the owner of the land himself or with a builder/developer in a Joint Development Agreement. Based on the above decision, it must be stated that the date of conversion would only be the starting point for deciding the nature of asset viz. Conversion: A conversion is the exchange of a convertible type of asset into another type of asset, usually at a predetermined price, on or before a predetermined date. The Government to solve this hardship deferred the payment of Capital gain tax the year in which the developed property received Occupancy Certificate/ Appropriate certificate from competent authorities for sale of flats. 2. Dear Sir, thanks for the reply. Unlike section 45(2), there is no provision under the Income-tax Act, when the stock-in-trade is converted into capital asset. The moment ownership of land stands transferred in favor of Builder/Developer , tax liability relating to Capital Gains on conversion as well as relating to business profits subsequent to conversion shall be attracted in the hands of the landowner in the year in which such transfer takes place. It should be in the name of the owner of Capital Asset/Land. 82,69,462/- is chargeable to tax in the FY 2020-21, Sale consideration of converted plot in the Financial Year 2020-21, Less: Cost of Acquisition ( which has been treated as Stock-in-trade after conversion at FMV on the date of conversion). In real estate business ,we generally come through this situation on various occasions in which an assessee converts his capital asset into Stock-in-trade. The burden of payment of Capital Gain tax arises when landowner enters into an agreement with Builder/Developer and the amount will be huge. The Landowner or assessee at the initial stage at the time of entering into a Joint Development Agreement with builder is not in a position to pay whole amount of Capital Gain Tax on conversion of his/her Capital Assets into business asset. As per Section 61, Companies Act, 2013, the company can convert its shares which are fully paid up, into stock. Hence, when the converted capital asset is sold by him as stock-in-trade, only the difference between sale price and market value of the stock-in-trade on the date of the conversion of the capital asset can be regarded as profit accruing to the assessee from the transaction. (i) Section 45 (2) of the Act provides for 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 as chargeable to income-tax. The treatment of income on sale of asset will depends on the period of holding of asset from the date of purchase. With a view to preventing the avoidance of tax on such capital gains through the device of converting a capital asset into a trading asset, the Amending Act has substituted the definition of transfer in section 2(47) of the Act by a new definition to provide that, in a case where a capital asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment shall also be regarded as a transfer of the asset.”. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. After the consent of the resolution, the company closes its transfer books and informs the shareholders to submit the share certificate. But it is important that the ownership of the land should not be transferred to the Builder/Developer through Joint Development Agreement. CIT Vs. Yatish Trading Co. P. Ltd.[2013] 359 ITR 320 (Bom.) it was held that in case of conversion of shares from Stock in Trade to investment , difference between Sale Price of Shares and Market Value Shares as on the date of conversion was assessable as Capital Gain. However in the extant case, BP was holding shares of listed companies as stock-in-trade and he had converted the same into capital asset as on October 30, 2013, which he wants to sell through stock exchange. Keane on Company Law. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. The section provides that the Capital Gain is accrued and charged to tax when Capital Asset is sold or transferred, earlier not Capital Gain is payable on conversion of Capital Asset into Stock-in -trade of business ,since this transaction was not considered as transfer. Updates and Q & A for Finance Professionals and Students including CA India ,CS,CMA,Advocate,MBA etc. Copyright © TaxGuru. Think about that for a moment. Section 2(47) ; provides that transfer in relation to Capital Assets include; (iv) in a case where the asset is converted by the owner thereof into or treated by him as, stock-in-trade of a business carried on by him , such conversion or treatment. what sections of income tax govern this. For how many years, cess will be levied on supplies of goods or services or both. An entity can convert the fully paid-up shares into stock by passing a resolution in the meeting of share-holders. It must issue shares and after they are fully paid up, convert them into stock. So, section 64 of the Companies Act, 2013 seeks to provide for the companies to give notice to the registrar of alteration or increase of share capital along with an altered memorandum. There is no provision under the act treating such conversion of stock in trade into capital asset falling with the definition of transfer. i) One formula which had been deployed the Assessing officers i.e., considering difference between the book value of the shares and the Market Value of Shares on the date of conversion, be taken as business income and the difference between the Sale Price of the shares and the Market Value of shares at the date of conversion be taken as Capital gain; ii) Other formula which generally adopted by Assessing Officer i.e., the difference between the Sale Price of the Shares and the Cost of acquisition of share, which was the book value on the date of conversion with indexation from the date of conversion ,should be computed as a Capital Gain. Section 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 … Kikabhai Premchand (Sir) Vs. CIT (1953) 24 ITR 506(SC); it was held by the Apex Court that on the date of conversion of Stock-in-trade to Capital Asset , there shall be no business income. Showing Replies 1 to 3 of 3 Records Capital gain will be computed in the year in which such converted stock is sold. The info related to the conversion to be sent to the Registrar within a month of conversion. as on date of conversion was Rs.18.00 Lacs. Therefore, landowner can take advantage of the provisions of Section45(2) only when terms of Joint Development Agreement are drafted carefully and in the guarded manner keeping in mind above mentioned provisions. Note: for the purpose of computation of Capital gain, Cost of Acquisition of such converted Capital Asset would be considered that was the Cost of Acquisition of Stock-in-trade. For example, if shares in a company are held by two different people, and the company wants to pay different dividends to the two shareholders, the company might decide to set up two classes of ordinary shares, A shares and B shares, equal in all respects, except that the directors (or the shareholders) are given power in the articles to vary the dividends between the two classes. A question arises in such circumstances as to what the tax implications of such conversion of stock in trade into capital would be. A ‘Share‘ is the smallest unit into which the company’s capital is divided, representing the ownership of the shareholders in the company.A ‘Stock‘ on the other hand is a collection of shares of a member that are fully paid up. (b) an order made by the Government under section 62 has the effect of increasing authorised capital of a company; or. The asset may be any types of assets as defined under provisions of Income Tax Act, 1961. Can a Company convert its stock in trade into capital asset? NOTE: The terms of Joint Development Agreement entered between the landowner and the developer would determine at what point and in which manner transfer of land from the landowner has taken place. The process of converting the physical shares of a company into an electronic form is commonly known as dematerialization. Provisions of Section 45(2) deals with situation when Capital Asset is converted into Stock-in-trade of the business by the assessee and provides method for capitation of Capital Gain on such conversion. Under the existing provisions, an assessee who converts a capital asset owned by him into a trading asset of his business and then sells the converted asset is able to avoid payment of tax on the capital gains represented by the appreciation in the value of the asset up to the date of its conversion. Professional Tax Consultant and Article Writer, Goods & Service Tax, CBIC, Government of India :: Union Territory Tax Notifications, Export Import HS code for oils etc from high temp coal tar, sim aromatic etc, High Power Group on Infrastructure Leasing & Financial Services Limited (IL&FS) Matter – (11-10-2018), Deposits not to be invited without issuing an advertisement, ânon-taxable supplyâ means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act, ← Further issue of Capital (Right Shares i.e. 113”) defines a share as being a “share in the share capital … Author: Brian Hutchinson Publisher: Bloomsbury Professional Edition: Fifth edition Law Stated At: 1 November 2016 KIND OF ASSETS WHICH GENERALLY CONVERTED FROM CAPITAL TO BUSINESS ASSET; i) Land acquired as investment converted as business asset to be used for business of real estate developer/builder; ii) Investment in shares converted as business asset to be used for dealing in business of shares; iii) Investment in jewelry/bullions converted as business asset for use in business as a jeweler. Shares - stock to investment - conversion. Note: from above we get that the appreciation in the value of capital asset between the date of purchase of shares and the date of its conversion into Stock-in-trade was not chargeable to tax. Conversion of shares into stock and reconversion of stock into shares. what are the provisions for conversion of stock in trade into capital asset. (c) a company redeems any redeemable preference shares. How the holding period for conversion of stock in trade into capital asset is computed? DISCLAIMER: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. But my question is reverse. As per provisions of Section2(47)(iv) of the Act,1961 the moment an assessee starts treating his/her Capital Asset as Stock-in-trade for his/her business the moment liability of Capital Gain arises. The above amendment was introduced through Taxation Laws ( Amendment) Act, 1984. LET’S CONSIDER A SITUATION IN WHICH A BUSINESS ASSET IS CONVERTED INTO CAPITAL ASSET; There may be situations in which a real estate company developed a project for sale and after some time it has decided one of unit to be used as its office. The user of the information agrees that the information is not professional advice and is subject to change without notice. 10.00 Lakhs and converted the same plot into Stock-in-trade of his real estate business in the financial year 2019-20. However ,such Capital Gain shall be chargeable to tax in the year in which the converted asset is sold or otherwise transferred. In case of a business of trading in shares assessee may transfer some of his stock in trade into his capital asset by deciding to hold it as an investment or on discontinue of delivery based trading of shares, convert the stock of shares into investments and sell the same at a later stage and pay tax on the profit as capital gain instead of business profit. The assessee can also claim that for the purposes of determining his business profits from the sale of the converted asset, the cost of such asset should be taken as its market value on the date of its conversion into a trading asset and not its actual cost of acquisition to him. In order to submit a comment to this post, please write this code along with your comment: c375dcebf6a17c6e588a4263bccc567a. The moment he decides so, the Capital Asset which was earlier held as investment get converted into Stock-in Trade used for carrying out business activity. A company may, if so authorised by its Articles, convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination. The FMV( Fair Market Value) of such plot at the date of conversion was Rs. For Acme, let's say the conversion ratio is 6.5, which allows investors to trade in the preferred shares for 6.5 shares of Acme stock. Asset should be converted into stock in trade. Right of Pre-emption or Pre-emptive Right), Whether any ITC pertains to FY 2017-18 but claimed subsequently in GSTR-3B of Ap, What is the consequence, where a taxable person fails to obtain registration ev. In this case conversion of a business asset into Capital Asset held. It also has a special conversion privilege, which says that you can convert each share of preferred stock into 50 shares of common stock. Join our newsletter to stay updated on Taxation and Corporate Law. 10.00 Lakh and now he wants to trade in the land acquired as on 25/04/2020. 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 abusiness 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 otherwisetransferred by him and, for … The conversion of capital asset into Stock-in-trade in this case not considered as transfer and hence no income was arising, and no tax will be leviable. The Company by ordinary resolution may convert any paid up Shares into stock and reconvert any stock into paid up Shares of any denomination. How long does it take for Cheque/ DD payments to get updated in MCA21 system? Now in this case when he decide to trade in land ( capital asset). Whenever a capital asset whether short term or long term is converted into stock in trade by an assessee it is deemed as transfer of capital asset and attracts capital gain as per the provisions of the Act, in spite of the fact that the ownership of such capital asset doesn’t change by such conversion. Depending upon the terms of the Joint Development Agreement and other documents executed between the parties, the ownership of land may be treated as transferred from the landowner in different manner and in different years as follows; (i) At the time of entering into Joint Development Agreement; (ii) At the time of sale or transfer of developed real estate to the customers. If they are treated as business fixed assets, Section 45(2) not applicable. Land proportionate to such flats/units shall be treated as sold or transferred when such flats are eventually sold by the landowner. Conversion of Shares into Stock : “Stock” is an aggregate of fully paid shares that have been legally consolidated. Now such plot after conversion is sold for Rs.150.00 Lakhs in Financial Year 2020-21. 21 January 2008 An assessee held certain shares as capital assets. But we know that real estate asset will be generated and ready for sale after a long period of time. Cost of acquisition was Rs.20.00 Lacs and f.m.v. Fair Market Value of the asset as on the date of conversion shall be deemed to be full value of consideration accrued or received from such transfer. It thus represents a part of the capital of the company which is fully paid. Since the stock in trade was converted into capital asset in June 2007 on its transfer in May 2009, the capital gain is taxable as short term capital gain. Shares held as Stock-in-Trade as per the Income Tax Return of FY 2016-17, is now being Converted into Investments on 01-April 2017 and then Such Shares are Sold during FY 2017-18 so that TAX BENEFIT of Long Term Capital Gain on sale of Shares held for a period of more than 1 Year can be availed. Section 45(1); is a charging section mandating charging of Capital Gains in case of transfer/sale of capital asset. The Government through Taxation Laws ( Amendment ) Act, 1984 removed above lacuna and brought conversion of Capital Asset into Stock-in-trade into definition of Transfer under provisions of Section2(47) of the Act,1961. The consolidated amount is divisible into fractions of any amount, regardless of the nominal value of the shares that have been consolidated. As per section 45 (2) the capital gain is …
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