25/02/2019
Capital gain in certain special cases :-
• Computation of capital gain in the case of conversion of capital asset into stock-in-trade [Sec 45(2)] The provisions of section 45(2) are given below :-
• SUPREME COURT RULING RESPONSIBLE FOR THIS RULE The Supreme Court in CITV. Bai Shirinbai K. Kooka [1962] 46 ITR 86 had held that where the assessee, holding by way of investment shares in companies commenced a business in shares converting the shares into stock-in-trade of the business and subsequently sold these shares at profit, the assessable profit was the difference between the sale price of the shares and market price of the shares prevailing on the date when shares were converted into stock-in-trade of the business in shares. In other words, the appreciation in the value of the capital asset between the date of purchase of shares and the date of its conversion into stock is not chargeable to tax.
RULE OF SECTION 45(2) :-The effect of this judgment has been nullified by the Taxation Laws (Amendment) Act, 1984 by amending sections 2(47) and 45 on the following lines :-
• With effect from the assessment year 1985-86, conversion of investment into stock-in-trade of a business is treated as transfer under section 2(47). It is treated as transfer in the year in which capital asset is converted into stock-in-trade.
• The notional capital gain arising from transfer by way of conversion of a capital asset into stock-in-trade is chargeable to tax in the year in which the stock-in-trade is sold [sec. 45(2) inserted with effect from the assessment year 1985-86].
• For the purpose of computing the capital gain in such cases, the fair market value of the capital asset 0n the date on which it was converted or treated as stock-in-trade shall be deemed to be the full value of the consideration received or occurring as a result of the transfer of the capital asset.
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