Conversion of Capital Assets in to Stock In Trade: Investment for the purpose of capital gain exemption can be done from the date of sale of Stock in Trade
There are instances where the date of tax payment could be different from the date of accruing of capital gain. One such section is section 2(47) of the Income Tax Act – 1961.
Section 2(47) of the Income-tax Act provides that any conversion of capital assets into stock-in-trade shall be regarded as a transfer. This transfer arises in the year in which such conversion takes place and, accordingly, capital gain would normally arise in that very year.
However, section 45(2) of the Act postpones the assessment of such capital gains to the year in which the stock-in-trade is actually sold or otherwise transferred by the assessee.
Often, the capital gain exemption u/s 54, 54F, 54EC, etc requires the investment of the fund which is not possible in case of conversion of assets.
Such exemption provision provides for exemption from long-term capital gain if the sale proceeds/long-term capital gain is invested in specified assets within a period of 6 months or 2 year or 3 year from the date of transfer.
It is not possible for an assessee to make the required investment under the aforesaid sections at the point of conversion of capital asset into stock-in-trade because the right to collect sales consideration in such cases arises only at the point of sale or transfer otherwise of stock-in-trade.
CBDT has given a relaxation for all such cases and has provided that the period for making investments in specified assets for the purpose of exemption should be taken from the date such stock-in-trade is sold or otherwise transferred, in terms of section 45(2) of the Act. Circular No. 791 Dated 2nd June 2000 issued by the CBDT is reproduced hereunder:
CIRCULAR NO. 791 DT. 2ND JUNE, 2000
Tax exemption on the sale of capital assets converted into stock-in-trade: Clarification regarding section 45(2) read with sections 54E, 54EA, 54EB & 54EC of the Income-tax Act, 1961
02/06/2000
CAPITAL GAINS
SECTION 45(2), SECTION 54E, SECTION 54EA, SECTION 54EB, SECTION 54EC
Section 2(47) of the Income-tax Act provides that any conversion of capital assets into stock-in-trade shall be regarded as a transfer. This transfer arises in the year in which such conversion takes place and, accordingly, capital gain would normally arise in that very year. However, section 45(2) of the Act postpones the assessment of such capital gains to the year in which the stock-in-trade is actually sold or otherwise transferred by the assessee.
- In order to qualify for deduction under section 54E of the Act, the investment in specified assets were required to be made within six months from the date of transfer. A question had arisen as to whether the date of transfer, as referred to in section 54E of the Act, is the date of conversion of the capital asset into stock-in-trade or the date on which the stock-in-trade is sold or otherwise transferred by the assessee.
- The Board had earlier issued a Circular No. 560 dated 18th May, 1990, in consultation with Ministry of Law, clarifying that for purposes of section 54E of the Act, the date of transfer in such cases is the date on which the capital asset is converted by the assessee into stock-in-trade and not the date on which such stock-in-trade is sold or otherwise transferred by the assessee. Section 54E became inoperative for transfers made on or after 1st April, 1992.
4. Sections 54EA, 54EB and 54EC also provide deduction from long-term capital gain if the sale proceeds/long-term capital gain is invested in specified assets within a period of 6 months from the date of transfer. It is not possible for an assessee to make the required investment under the aforesaid sections at the point of conversion of capital asset into stock-in-trade because the right to collect sales consideration in such cases arises only at the point of sale or transfer otherwise of stock-in-trade. The Board has considered the matter afresh in consultation with the Ministry of Law and has decided that the period of 6 months for making investments in specified assets for the purpose of sections 54EA, 54EB and 54EC should be taken from the date such stock-in-trade is sold or otherwise transferred, in terms of section 45(2) of the Act.
- This may be brought to the knowledge of all officers of your region.
[F. No. 225/98/2000/ITA-II—From Central Board of Direct Taxes]
The earlier Circular No. 560 Dated 18.05.1990 is also reproduced hereunder:
CIRCULAR No. 560 DATED 18TH MAY, 1990
Tax exemption on the sale of capital assets converted into stock- in-trade—Clarification regarding s. 45(2) r/w s. 54E of the IT Act, 1961.
CAPITAL GAINS, SECTION 45
Sec. 2(47) of the IT Act provides that any conversion of capital assets into stock-in-trade shall be regarded as a transfer. This transfer arises in the year in which such conversion takes place and, accordingly, capital gain would normally arise in that very year. However, s. 45(2) of the Act postpones the assessment of such capital gains to the year in which the stock-in-trade is actually sold or otherwise transferred by the assessee.
- In order to qualify for deduction under s. 54E of the Act, the investment in specified assets is required to be made within six months from the date of transfer. A question has arisen as to whether the date of transfer, as referred to in s. 54E of the Act, is the date of conversion of the capital asset into stock-in-trade or the date on which the stock-in-trade is sold or otherwise transferred by the assessee.
3. The Board has considered the matter in consultation with Ministry of Law. The Board is advised that for purposes of s. 54E of the Act, the date of transfer in such cases is the date on which the capital asset is converted by the assessee into stock- in-trade, and not the date on which such stock-in-trade is sold or otherwise transferred by the assessee.
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