Tax treatment in case of Conversion of Capital Asset into Stock in Trade u/s 45(2)

  1. Transfer: Conversion of Capital Asset into Stock in Trade is a transfer u/s 2(47).
  2. Year of Chargeability: The Capital Gain is taxable in the previous year in which converted stock is sold or otherwise transferred.
  3. Computation: In the year of sale or transfer of stock, the income shall be computed in the following manner
    Capital Gain = FMV of stock on date of conversion Less Cost or Indexed cost of acquisition.
    Business Income = Consideration received on sale Less FMV of Capital   Asset on date of conversion.
  4. Benefit of Indexation: Indexation shall apply on the basis of the year in which conversion takes place.

Chargeability of introduction of a Capital Asset by the partner into the firm or by a member in AOP or BOI u/s 45(3)

  1. Transfer: Introduction of a Capital Asset by the partner into the firm or by a member in AOP or BOI is a Transfer.
  2. Year of Taxability: Capital Gain shall be charged to tax in the previous year in which such transfer takes place.
  3. Capital Gain: Amount credited in the books of the partners’ capital account
    Less Cost or Indexed cost of acquisition

Tax treatment of distribution of Capital Asset to partners / members on dissolution of Firm / AOP / BOI u/s 45(4)

  1. Transfer: Distribution of Capital Asset to partners / members on its dissolution or otherwise is a transfer.
  2. Year of taxability: Capital gain shall be chargeable to tax in the hands of Firm/ AOP/ BOI in the previous year in which such transfer takes place.
  3. Capital Gain: FMV on date of transfer Less Cost or Indexed Cost of Acquisition.
  4. Depreciable Assets: Transfer of depreciable asset results in short term capital gain or loss u/s 50.

Tax treatment of Compulsory Acquisition of capital asset by Government or any other approved authority u/s 45 (5)

  1. Chargeability: It is a transfer chargeable to tax to tax under the head Capital Gains.
  2. Nature of Transfer:
    A. Compulsory Acquisition under any law (or)
    B. Sale Consideration on transfer is determined or approved by central  Government or RBI
  3. Taxability of Normal / Original Compensation
    A. Normal / Original Compensation is taxable in the previous year in  which it is received.
    B. Whole of the Compensation is taxable even if a portion of amount is
    Received
    C. Capital Gain = Whole of the normal compensation Less Cost or  Indexed cost of acquisition.
  4. Taxability of Enhanced compensation
    A. Enhanced compensation can be taxable in the year in which it is actually received.
    B. The Cost of acquisition and the Cost of Improvement shall be taken as ‘NIL’
    C. Capital Gain = Enhanced compensation received Less Expenses on Receipt of Enhanced Compensation.
  5. Compensation received by Legal Heirs: The compensation receive subsequent to the death of assessee is taxable in the hands of his legal heirs under the head capital gains.
  6. Reduction of compensation: Where normal compensation or enhanced compensation is reduced by Court or tribunal, then the capital gain assessed in the year of receipt shall be recomputed accordingly and rectification of assessment shall be made.
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