|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. However, in cases where the stock in trade is converted into, or treated as, capital asset, the existing law does not provide for its taxability or otherwise.
Hence the tax treatment on the same was a matter of controversy:
Cost of Acquisition and Period of Holding:
· Where stock in trade is converted into capital asset, the holding period for the purposes of classifying it as long-term or short-term capital asset shall be reckoned excluding the period for which it was held as stock-in-trade prior to conversion.
· In other words, holding period of asset converted into investment from Stock-in-trade to be reckoned from date of such conversion.
Alternate View-in favour of assessee:
Commissioner Of Income Tax vs Jannhavi Investments (P) Ltd. on 8 January, 2008.
Ques: Whether the assessee was entitled to opt for the fair market value of certain shares as on the statutory date i.e. 1st April 1981, even though the said shares were held as stock-in-trade as on that date?
· The respondents acquired certain shares of M/s Bharat Forge Ltd. in the year 1977.
· On the original holding they received bonus shares in the financial year 1981-82 and additional bonus shares in the financial year 1989-90.
· All the shares were held as stock-in-trade till 6th Nov., 1987. On the sale of the shares while working out capital gain, assessee computed fair market price as on 1st April, 1981.
· The AO held that since the assessee was holding the shares as stock-in-trade upto 2nd Nov., 1987 and as the said shares were not capital assets as on 1st April, 1981, the option adopted as fair market price as on 1st April, 1981 was not available to the assessee
Held that the Assessee was entitled to adopt cost of acquisition as on 1st April 1981. Cost of acquisition can only be the cost on the date of the actual acquisition—In the present case there was no acquisition of the shares on 6th Nov., 1987 when the same were converted from stock-in-trade to a capital asset. In other words, date of conversion is irrelevant for the purpose of computing period of holding or cost of acquisition.