Residential plot sales deemed business income, ITAT directs correct valuation under Section 45(2).

The ITAT upheld the CIT(A)'s decision treating the development and sale of residential plots as "Profits & Gains of Business or Profession." The ITAT directed the CIT(A) to correctly apply Section 45(2) for determining the full value of consideration. The appeal was partly allowed for statistical purposes.

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Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act, 1961.
2. Treatment of sale of land as "Profits & Gains of Business or Profession" versus "Capital Gains".

Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee did not press this ground of appeal; hence, it was dismissed as not pressed.

2. Treatment of Sale of Land:

Background:
The assessee inherited agricultural land in Dausa Khurd, which was developed into 23 residential plots under the "Bhagwati Nagar Residential Scheme" and sold without registered sale deeds for a total consideration of Rs. 24,15,600. The assessee declared a Long Term Capital Gain (LTCG) of Rs. 85,258 after indexation and deduction of improvement/dalali expenses. The Assessing Officer (AO) invoked Section 50C of the Income Tax Act, 1961, estimating LTCG at Rs. 58,60,918 based on the prevailing DLC rate. The CIT(A) sustained an addition of Rs. 23,39,100 under the head "Profits & Gains of Business or Profession," treating the transaction as an "adventure in the nature of trade."

Arguments by the Assessee:
- The sale was not registered; hence, DLC rates should not apply.
- The amendment to Section 50C to include "assessable" value was effective from 01/10/2009, whereas the sale occurred in FY 2006-07.
- The AO did not refer the property valuation to the DVO, making the invocation of Section 50C unjustified.
- The transaction should be treated as a capital gain, not as an adventure in the nature of trade, citing various judicial precedents.

CIT(A)'s Findings:
- The CIT(A) analyzed the nature of the transaction and concluded that the development and sale of the plots under a residential scheme indicated a business motive, thus falling under "adventure in the nature of trade."
- The CIT(A) applied the parameters set by the Hon'ble Supreme Court in G. Venkataswamy Naidu vs. CIT, which include the nature of the commodity, the purchaser's intention, and subsequent actions to improve the commodity, among others.
- The CIT(A) noted that the assessee had developed the agricultural land into residential plots, indicating a business purpose and maximizing asset value.

ITAT's Decision:
- The ITAT agreed with CIT(A) that the development and sale of plots were an adventure in the nature of trade, thus taxable under "Profits & Gains of Business or Profession."
- The ITAT considered various case laws cited by the assessee but found them not applicable due to differing facts.
- The ITAT noted that Section 45(2) of the Act, which deals with the conversion of capital assets into stock-in-trade, was not considered by the CIT(A). This section mandates that the fair market value of the asset on the date of conversion should be deemed as the full value of consideration for calculating capital gains.

Conclusion:
The ITAT sustained the CIT(A)'s findings but restored the issue to the CIT(A) to apply the provisions of Section 45(2) correctly. The appeal was partly allowed for statistical purposes.

Order Pronounced:
The order was pronounced in the open court on 22/02/2018.

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