442. Whether the date of transfer, as referred to in section 54E of the Act, is the date of conversion of the capital asset into stock-in-trade or the date on which the stock-in-trade is sold or otherwise transferred by the assessee
Circular No. 791 was issued by the Central Board of Direct Taxes on 2 June 2000. Its subject is 442. Whether the date of transfer, as referred to in section 54E of the Act, is the date of conversion of the capital asset into stock-in-trade or the date on which the stock-in-trade is sold or otherwise transferred by the assessee.
Fixes the start of the six-month investment window where a capital asset is converted into stock-in-trade. Section 2(47) treats the conversion itself as a transfer, arising in the year of conversion, but section 45(2) postpones assessment of the capital gain to the year in which the stock-in-trade is actually sold or otherwise transferred. Circular No. 560 dated 18 May 1990 had held, for section 54E, that the date of transfer is the date of conversion, not the date of sale of the stock-in-trade; the circular notes section 54E became inoperative for transfers made on or after 1 April 1992. For sections 54EA, 54EB and 54EC, which also require investment in specified assets within six months of the date of transfer, the Board has reconsidered the matter in consultation with the Ministry of Law and decided that the six months run from the date the stock-in-trade is sold or otherwise transferred, in terms of section 45(2). The reason given is that an assessee cannot invest at the point of conversion, because the right to collect the sale consideration arises only when the stock-in-trade is sold or otherwise transferred.
The earlier position, taken for section 54E, made the investment window run from a date at which the assessee had no sale proceeds to invest, so the Board considered the question afresh with the Ministry of Law for the later sections.
442. Whether the date of transfer, as referred to in section 54E of the Act, is the date of conversion of the capital asset into stock-in-trade or the date on which the stock-in-trade is sold or otherwise transferred by the assessee
1. Section 2(47 ) of the Income-tax Act provides that any conversion of capital assets into stock-in-trade shall be regarded as a transfer. This transfer arises in the year in which such conversion takes place and, accordingly, capital gain would normally arise in that very year. However, section 45(2) of the Act postpones the assessment of such capital gains to the year in which the stock-in-trade is actually sold or otherwise transferred by the assessee.
2. In order to qualify for deduction under section 54E of the Act, the investment in specified assets was required to be made within six months from the date of transfer. A question had arisen as to whether the date of transfer, as referred to in section 54E of the Act, is the date of conversion of the capital asset into stock-in-trade or the date on which the stock-in-trade is sold or otherwise transferred by the assessee.
3. The Board had earlier issued a Circular No. 560 dated 18-5-1990, in consultation with Ministry of Law, clarifying that for purposes of section 54E of the Act, the date of transfer in such cases is the date on which the capital asset is converted by the assessee into stock-in-trade and not the date on which such stock-in-trade is sold or otherwise transferred by the assessee. Section 54E became inoperative for transfers made on or after 1-4-1992.
4. Sections 54EA, 54EB and 54EC also provide deduction from long-term capital gain if the sale proceeds/long-term capital gain is invested in specified assets within a period of 6 months from the date of transfer. It is not possible for an assessee to make the required investment under the aforesaid sections at the point of conversion of capital asset into stock-in-trade because the right to collect sales consideration in such cases arises only at the point of sale or transfer otherwise of stock-in-trade. The board has considered the matter afresh in consultation with the Ministry of Law and has decided that the period of 6 months for making investments in specified assets for the purpose of sections 54EA, 54EB and 54EC should be taken from the date such stock-in-trade is sold or otherwise transferred, in terms of section 45(2) of the Act.Circular : No. 791, dated 2-6-2000.
In an assessment for the year in which converted stock-in-trade is sold, where the exemption is refused as the investment was made more than six months after conversion.
An assessee converts land into stock-in-trade in June 1996 and sells it in December 1998. Under section 45(2) the capital gain is assessed in the year of sale. For a claim under section 54EA or 54EC, the six months for investing in the specified assets run from December 1998, not from the June 1996 conversion.
Source: the Income Tax Department’s own published text — its page for this instrument.
