## Capital Asset Converted into Stock-in-Trade [Section 45(2)]

When an assessee converts a capital asset (e.g., land held as investment) into stock-in-trade of his business (e.g., to begin a real estate business), this is treated as a 'transfer' even though no sale to a third party has occurred.

### Rules

Element	Rule
Sale Consideration	FMV of the capital asset on the date of conversion
Year of Transfer	Year of conversion (determines STCG/LTCG nature)
Year of Taxability	Year in which the converted stock is actually sold
Business Income	Sale price of stock − FMV on date of conversion = Business income (in year of sale)

### Bifurcation of Profit

The total profit gets split into two heads:

1. Capital Gain: FMV on conversion date − COA of capital asset

2. Business Income (PGBP): Sale price − FMV on conversion date

### Proportionate Treatment

If only part of the stock is sold in a year, the capital gain and business income are taxed proportionately for that part.

Worked example

### Example 1

Example: Mr. B holds land as investment since 2015 (COA ₹20 lakh). Converts into stock of real estate business on 1.4.2024 when FMV = ₹60 lakh. Sells the entire land as stock in FY 2025-26 for ₹90 lakh.

LTCG (FY 2025-26): ₹60 lakh − ₹20 lakh = ₹40 lakh (computed for conversion year FY 2024-25 but taxed in year of sale)
Business Income (FY 2025-26): ₹90 lakh − ₹60 lakh = ₹30 lakh

⚠️ Common exam mistakes

Taxing the entire profit as either fully capital gain or fully business income — it must be split.
Taxing in the year of conversion instead of year of sale.
Using FMV on date of sale instead of FMV on date of conversion for capital gain.
Forgetting to apportion when only part of the stock is sold in a year.

Bare-Act text Section 45(2) · Income-tax Act, 1961 · click to expand

Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him, shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.

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Conversion of Capital Asset into Stock-in-Trade [Section 45(2)]

Worked example

⚠️ Common exam mistakes