Quiz for the week (25 Nov 2024):

Ravindran a resident individual acquired a vacant land for Rs.50 lakhs in April,2022. The land was measuring 12,500 sq.ft and the stamp duty value was Rs.400 per sq.ft. He already owned 2 agricultural lands measuring 2 acres and 3 acres respectively acquired earlier for Rs.20 lakhs and 30 lakhs. These agricultural lands are adjacent to the vacant land acquired in April,2022. At the time of acquisition of these 2 lands they were treated as agricultural lands as per revenue records. In November,2024 Ravindran decided to convert all the lands as stock in trade and plot the lands and do development works. The stamp duty value at the time of conversion was Rs.500 per sq.ft and their fair market value is Rs.600 per sq.ft.

Suggest the tax consequence of conversion of all the lands in to stock in trade.

Best Answer :

This query seeks application of section 45(2) dealing with conversion of capital asset into stock in trade of a business carried on by the assessee. It says that the income by way of capital gain is chargeable to tax as income of the previous year in which such stock in trade is sold. The fair market value of the asset on the date of conversion of capital asset into stock in trade shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. The value for the purpose of stamp duty on the date of conversion of capital asset into stock in trade would not be considered.

Therefore, the tax consequence of conversion of all lands into stock in trade would mean computation of capital gain. However, the capital gain is chargeable when the converted capital asset is sold as stock in trade of the business of the assessee. In other words, the taxation of such deemed capital gain is deferred to the previous year relevant to the assessment year in which it was sold as stock in trade.

In this case, the assessee has 1 vacant land measuring 12,500 sq.ft which was acquired in April, 2022. The details of date of acquisition of the other 2 lands being agricultural lands is not given in the query.  However, it is stated that they were acquired before acquisition of the said vacant land. Let us assume that those agricultural lands were also held from April, 2022 since the exact date of acquisition is not given in the query.  All the lands (vacant land and agricultural lands) were converted into stock in trade in November, 2024.  With this assumption we can proceed with the query.

It is obvious that all of them were held for more than 2 years and therefore the resultant capital gain is a long-term capital gain.  The Finance (No.2) Act, 2024 has provided for omission of indexation benefit in respect of capital assets acquired after 23.07.2024. In respect of capital assets acquired prior to that date, provisos to section 112(1)(a) have to be applied which say that the income-tax without indexation @ 12.5% of the long-term capital gain if exceeds income tax with indexation @20% then such excess shall be ignored. Therefore, computation with indexation and without indexation must be made as under.

The assessee must prefer to pay tax without indexation as the tax liability is less in such option. The assessee would be converting 2,30,300 sq.ft of land into plots.  The cost of acquisition of the said land would be the fair market value on the date of conversion being Rs.13,81,80,000.  However, the effective area after conversion would be around 70% of the land leaving aside space for road, park and other amenities.  The cost of 1 sq.ft of land hence would be Rs. 13,81,80,000 / 1,61,210 (70% of land area) Rs.857 (approx.). As and when the plot is sold the corresponding capital gain has to be admitted and tax has to be paid. For example if 14,000 sq.ft is sold, it has to be grossed up say 14,000 x 100/70 =20,000 sq.ft for computing the capital gain by adopting fair market value and its proportionate part of cost of acquisition.  

Hemal J Raiyani,
Rajkot