No Plot, No Profit, Still Taxed :When AO Shoots the Wrong Person: Middleman Dragged into 56(2)(ix) Tax Trap

Saroj Devi Haldiya Vs ITO (ITAT Jaipur)

No Plot, No Profit, Still Taxed :When AO Shoots the Wrong Person: Middleman Dragged into 56(2)(ix) Tax Trap; Two-Day Show Cause, Zero Natural Justice: ITAT Called to Restore Fair Play!

Background

• Assessee filed return declaring ₹13.37 lakh.
• Reassessment u/s 147/144B completed at ₹88.72 lakh.
• Major addition: ₹75,00,000 u/s 56(2)(ix) (forfeited advance).
• Other disallowances: ₹34,647 (u/s 57) & ₹83,453 (capital loss restriction).
• CIT(A), NFAC dismissed the appeal ex-parte, stating no proper submissions were filed.

Key Facts of the Transaction

• Plot originally allotted to Medical Design India Pvt Ltd in 1987.
• Allotment cancelled in 2006; appeal pending before RIICO.
• Assessee agreed to purchase plot from Medical Design India (agreement 10.12.2014) & paid ₹75 lakh.
• Simultaneously acting only as middleman for Dr. Anil Tambi/Jagdish Health Care Pvt Ltd.
• Since Medical Design India failed to get clearance within 3 months, ₹75 lakh paid by assessee was forfeited there.
• Later Dr. Tambi’s company reimbursed ₹75 lakh to assessee (24.02.2015).
• Assessee never owned the plot & never received any advance for transfer of capital asset.

Assessee’s Legal Arguments Before ITAT

(A) Reopening u/s 147 invalid

• AO relied only on Investigation Wing report – borrowed satisfaction.
• No independent enquiry; reasons recorded do not show “reason to believe”.
• Approval u/s 151 was mechanical.

(B) Objections to 148 not disposed properly

• AO violated GKN Driveshaft (SC) – passed non-speaking order.

(C) Violation of Natural Justice

• Show-cause notice dated 03.09.2021 giving only two effective working days.
• CBDT guidelines & multiple HC/SC rulings require minimum 7 days.
• Hence, assessment order void ab initio.

(D) Incorrect addition u/s 56(2)(ix)

• Assessee never received any “advance” for transfer of capital asset.
• It was mere reimbursement of earlier payment made on behalf of Dr. Tambi.
• Real beneficiary of forfeited amount is Medical Design India Pvt Ltd, not assessee.
• Therefore, section 56(2)(ix) not applicable.

CIT(A) Order Criticized

• CIT(A) passed ex-parte order.
• Failed to consider written submissions/statement/evidence.
• Merely repeated AO’s findings without independent reasoning.

Relief Sought

• Quash reassessment notice u/s 148.
• Alternatively, delete ₹75 lakh addition.
• Delete disallowances u/s 57 & capital loss restriction.
• Drop penalty proceedings 271(1)(c).

Essence of the Case

• A pure middleman reimbursement transaction has been wrongly treated as advance forfeited from sale of capital asset & taxed u/s 56(2)(ix).
• Assessee never owned the property & never derived any benefit.
• Reopening & assessment both suffer from borrowed satisfaction + violation of natural justice.

FULL TEXT OF THE ORDER OF ITAT JAIPUR