CA Intermediate · Taxation · Capital Gains
Mr. Harsh Malhotra, a resident individual, bought a plot of land in 2016 for ₹40,00,000. In tax year 2025-26 he converted it into stock-in-trade of his real estate business when its fair market value was ₹90,00,000. In tax year 2026-27 he sold it as stock-in-trade for ₹1,10,00,000. What is the amount taxable as business income on this sale in tax year 2026-27?
The business income is ₹20,00,000. On conversion into stock-in-trade, the fair market value of ₹90,00,000 becomes the stock's cost and the full value for the capital gain, which is taxed in the year of sale. The business profit is the sale price of ₹1,10,00,000 less ₹90,00,000.
- A₹70,00,000
- B₹50,00,000
- C₹20,00,000Correct
- DNil
Explanation
Conversion of a capital asset into stock-in-trade is treated as a transfer, but the capital gain is taxed in the year the stock is sold. The full value of consideration for that gain is the fair market value at conversion, ₹90,00,000. The business income is the sale price less that fair market value: 1,10,00,000 − 90,00,000 = ₹20,00,000. The ₹50,00,000 difference between the fair market value and the original cost is the capital gain, not business income.
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