2003 (8) TMI 20 - HC - Income Tax

Garnishee Proceedings - failure of the petitioner to pay in its capacity of garnishee - notice under section 226(3) issued by TRO - The Legislature while making the garnishee at default a deemed assessee, has restricted the right to recover the money due from him within the four comers of sections 222 to 225 of the Act and did not extend the same also to section 226 Legislature did not permit initiation of a garnishee proceeding against the creditors of the garnishee who has become an assessee in default Hence, Tax Recovery Officer could not issue the notice under section 226(3) to APBCL for failure of the petitioner

Issues Involved:
1. Recovery of dues under Section 226 of the Income-tax Act, 1961.
2. Validity of garnishee proceedings against a creditor of a garnishee.
3. Petitioner's defense against the Tax Recovery Officer's claim.
4. Petitioner's obligation to pay interest as reflected in the balance sheet.
5. Petitioner's compliance with previous court directives.
6. Interpretation and application of Rule 26 and Rule 37 of the Second Schedule to the Income-tax Act.

Issue-wise Detailed Analysis:

1. Recovery of dues under Section 226 of the Income-tax Act, 1961:
The income-tax authorities claimed that Visisth Chay Vyapar Ltd. (VCVL) showed a sum in excess of Rs.27 crores due from the petitioner, and VCVL owed a similar amount in arrear tax. Steps were taken under Section 226 to recover this amount from the petitioner. Section 226 authorizes the Assessing Officer to require any person from whom money is due to the assessee to pay the amount due. The petitioner filed a statement on oath but did not state that the sum demanded was not due to VCVL or that the petitioner was not holding any money for VCVL. The court held that the petitioner's statement did not meet the parameters of Section 226 and thus had no defense to the demand made by the Tax Recovery Officer.

2. Validity of garnishee proceedings against a creditor of a garnishee:
The petitioner challenged the validity of the notice issued under Section 226(3) to Andhra Pradesh Beverage Corporation Limited (APBCL), arguing that Section 226 does not permit garnishee proceedings against a creditor of a garnishee. The court concluded that while Section 226(3) allows garnishee proceedings against a person liable to pay money to the assessee, it does not extend to the creditors of the garnishee. Therefore, the Tax Recovery Officer could not issue the notice to APBCL for the petitioner's failure to pay.

3. Petitioner's defense against the Tax Recovery Officer's claim:
The petitioner contended that the Assessing Officer had doubted the transaction between the petitioner and VCVL, and until this doubt was resolved by the appellate authority, no steps should be taken to recover money. The court rejected this defense, stating that the petitioner's obligation to VCVL as reflected in the balance sheets was not affected by the Assessing Officer's doubts. The court emphasized that the petitioner's defense should be against the creditor's claim, not the tax authorities' assessment.

4. Petitioner's obligation to pay interest as reflected in the balance sheet:
The petitioner argued that a scheme reduced the interest amount payable to VCVL. However, this scheme was not disclosed to the Division Bench, the Income-tax Commissioner, or in the present writ petition. The court inferred that no such scheme existed and thus upheld the petitioner's obligation to pay the interest amount as reflected in the balance sheet.

5. Petitioner's compliance with previous court directives:
The petitioner had previously approached the Delhi High Court and this court, where it was directed to clarify its stand regarding the conflicting positions of the Assessing Officers of VCVL and the petitioner. The petitioner failed to comply with these directives and did not take a clear stand. The court noted that the petitioner's investigation of its own conduct could not stall the creditor's claim, which had already obtained a decree against the petitioner.

6. Interpretation and application of Rule 26 and Rule 37 of the Second Schedule to the Income-tax Act:
The court explained that under Rule 26, the Tax Recovery Officer could attach a debt by prohibiting the creditor from recovering it and the debtor from paying it until further notice. Sub-rule (3) allows the debtor to pay the amount to the Tax Recovery Officer voluntarily. If the debtor does not pay, Rule 37 authorizes the Tax Recovery Officer to sell the attached debt. The court directed the Tax Recovery Officer to issue a notice to APBCL, treating the earlier notice as an attachment notice, and informing APBCL of its right to pay the attached amount or face the sale of the debt.

Conclusion:
The writ petition was disposed of with no order as to costs. The petitioner was allowed to file a fresh statement on oath if it wished to change its stand, and the Tax Recovery Officer was directed to comply with the court's directions forthwith. All parties were to act on a xerox signed copy of the dictated order on the usual undertaking.

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