A trader converted a plot of land held as capital asset into stock-in-trade of the business during P.Y. 2023-24. The converted stock was sold during P.Y. 2025-26. The capital gains arising on conversion are chargeable to tax in:
AP.Y. 2023-24, the year the conversion took place
BEqual instalments over the two intervening years
CThe year the assessee opts for, at their choice
DP.Y. 2025-26, the year the stock-in-trade was sold
Answer & Solution
Correct answer: D. P.Y. 2025-26, the year the stock-in-trade was sold
1. Under section 45(2), conversion of a capital asset into stock-in-trade is a transfer in the year of conversion.
2. The charge is however postponed: the capital gains are taxed only in the previous year in which the converted stock is actually sold.
3. Full value of consideration is the FMV of the asset on the date of conversion; any excess of sale price over that FMV is business income of the year of sale.
4. Option A states the transfer year, not the chargeability year — that is precisely the trap in section 45(2).
_Source: ICAI CA Inter P3(A) Income-tax SM (May 2026), Ch 3 Unit 4 Capital Gains, PDF p. 18_
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