Skip to content

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

Kaveri Textiles Ltd stops using a lot of raw-material inventory in trade and converts it into a capital asset of the company. Under section 26 of the Income-tax Act, 2025, which amount is included in business income on this conversion?

The fair market value of the inventory on the date of conversion into a capital asset, determined in the prescribed manner, is included in business income under section 26. Cost or nil is wrong because the provision expressly uses fair market value, so conversion decisions carry a tax cost.

  1. AThe cost of the inventory only
  2. BThe fair market value of the inventory on the date of conversion, determined as prescribedCorrect
  3. CNil, as no sale has occurred
  4. DThe written down value of the inventory at year end

Explanation

Section 26(2)(j) includes 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 is wrong because the provision specifically uses fair market value. A conversion is not exempt merely because no sale occurs.

Did you get it right without looking?

One question tells you little. A timed set on Tax Planning and Nature of Business shows your real accuracy, how long you take and where you lose marks.

Practise Tax Planning and Nature of BusinessFree diagnostic mock

More Tax Planning and Nature of Business questions