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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Nature of Business

A company's managers decide to sell its stock-in-trade by converting it into a capital asset held as an investment. Under section 26 of the Income-tax Act, 2025, what is included in business income on such conversion?

The fair market value of the inventory on the date of conversion, determined in the prescribed manner, is included in business income. Section 26 treats the conversion of inventory into a capital asset as a taxable event, not as cost or later sale profit.

  1. ANothing, as conversion is not a transfer
  2. BThe fair market value of the inventory on the date of conversion, determined as prescribedCorrect
  3. CThe original cost of the inventory
  4. DOnly the profit later made on sale

Explanation

Section 26(2)(j) includes in business income the fair market value of inventory on the date it is converted into, or treated as, a capital asset, determined in the prescribed manner. Cost or later profit is not the measure.

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