The conversion by the owner of a capital asset into or treatment of such asset as stock-in-trade of a business carried on by him is treated as a ‘transfer’ within the meaning of Section 2(47). Under Section 45(2), such conversion of capital asset into stock-in-trade will be deemed a transfer of the previous year in which the asset is so converted or treated as stock-in-trade.
However, the capital gains arising from such a transfer will be taxable in the previous year when such converted asset is sold or otherwise transferred. The excess of the sale price over the fair market value as of the date of conversion would be treated as business income and taxed under the head ‘profits and gains of business or profession’.
The particulars in Clause 15 should be furnished with respect to the previous year in which the asset has been converted into stock-in-trade. The Clause does not require details regarding in a vice-versa situation where the stock-in-trade is converted into capital assets. Thus, the conversion of stock-in-trade into capital assets is not reported in the tax audit report.