Our client has purchased open land with co-owner before 6 years and he is having share in land 90% and co-owner is having share 10%.Our client desires to convert the above land into township that is stock-in-trade and create a partnership firm with the same co-owner.Our query is as follows:-1) conversion of capital asset into stock-in-trade is a transfer u/s. 2(47). It would be treated as a transfer in the year in which the capital asset is converted into stock-in-trade. But, u/s. 45(2), the capital gains arising from the such transfer will be chargeable to tax only in the year in which the stock-in-trade is sold. 2) indexation benefit is available only upto the year of conversion of capital asset to stock-in-trade, and not up to the year of sale of stock-in-trade. 3) stamp duty will be chargeable or not.Please suggest our future planning, effect of capital gain as well as stamp duty.

OUR CLIENT HAS PURCHASED OPEN LAND WITH CO-OWNER BEFORE 6 YEARS AND HE IS HAVING SHARE IN LAND 90% AND CO-OWNER IS HAVING SHARE 10%.

OUR CLIENT DESIRES TO CONVERT THE ABOVE LAND INTO TOWNSHIP THAT IS STOCK-IN-TRADE AND CREATE A PARTNERSHIP FIRM WITH THE SAME CO-OWNER.

OUR QUERY IS AS FOLLOWS:-

1) CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE IS A TRANSFER U/S. 2(47). IT WOULD BE TREATED AS A TRANSFER IN THE YEAR IN WHICH THE CAPITAL ASSET IS CONVERTED INTO STOCK-IN-TRADE. BUT, U/S. 45(2), THE CAPITAL GAINS ARISING FROM THE SUCH TRANSFER WILL BE CHARGEABLE TO TAX ONLY IN THE YEAR IN WHICH THE STOCK-IN-TRADE IS SOLD.

2) INDEXATION BENEFIT IS AVAILABLE ONLY UPTO THE YEAR OF CONVERSION OF CAPITAL ASSET TO STOCK-IN-TRADE, AND NOT UP TO THE YEAR OF SALE OF STOCK-IN-TRADE.

3) STAMP DUTY WILL BE CHARGEABLE OR NOT.

PLEASE SUGGEST OUR FUTURE PLANNING, EFFECT OF CAPITAL GAIN AS WELL AS STAMP DUTY.

Reply

Dear Sir,

Point no.1 & 2 mentioned in the query is correctly stated, and in respect to point no.3 i.e. chargeability of stamp duty on conversion of capital asset into stock, this power is vested with state government level (stamp duty department) so your client will have to approach stamp duty department of the concerned sate.

Our client has purchased open land with co-owner before 6 years and he is having share in land 90% and co-owner is having share 10%.Our client desires to convert the above land into township that is stock-in-trade and create a partnership firm with the same co-owner.Our query is as follows:-1) conversion of capital asset into stock-in-trade is a transfer u/s. 2(47). It would be treated as a transfer in the year in which the capital asset is converted into stock-in-trade. But, u/s. 45(2), the capital gains arising from the such transfer will be chargeable to tax only in the year in which the stock-in-trade is sold. 2) indexation benefit is available only upto the year of conversion of capital asset to stock-in-trade, and not up to the year of sale of stock-in-trade. 3) stamp duty will be chargeable or not.Please suggest our future planning, effect of capital gain as well as stamp duty.