2001 (7) TMI 13 - HC - Income Tax

Recovery of Tax - Garnishee Proceedings - All these petitions seek a direction through prayer clause (a) to prohibit respondent No. 1-- Government of India (for the canteen stores department of Ministry of Defence) from withholding the payments of the amounts which are due and which may become due to the petitioners on the basis of the notices issued by the income-tax authorities - it is desirable that the petitioners should approach the Income-tax Officer, place all necessary additional material before him and persuade him to revoke the notice. This will also avoid conflicting orders. In this view of the matter, if the petitioners so desire, they may alternatively raise their objections under section 226(3)(vi) of the Act before the Assessing Officer and the Assessing Officer will decide those objections on hearing the parties and pass appropriate orders.

Summary

Issues Involved:
1. Prohibition of withholding payments by the Government of India (Canteen Stores Department) to the petitioners.
2. Validity of the garnishee notice under Section 226(3) of the Income-tax Act, 1961.
3. Relationship between the petitioners and Shaw Wallace and Company (SWC) regarding tax liabilities.
4. Petitioners' right to object to the garnishee notice and the appropriate forum for such objections.

Detailed Analysis:

1. Prohibition of Withholding Payments by the Government of India:
The petitioners sought a direction to prohibit the Government of India (Canteen Stores Department) from withholding payments due to them based on notices issued by the income-tax authorities. The petitioners argued that their income is independent of SWC, despite being subsidiaries or franchisees of SWC. They contended that the withholding of payments was unjustified as the money owed to them was not meant for SWC.

2. Validity of the Garnishee Notice under Section 226(3) of the Income-tax Act, 1961:
The Tax Recovery Officer issued a notice under Section 226(3) of the Income-tax Act to the Canteen Stores Department to stop payments due to SWC for recovering outstanding tax liabilities of Rs. 93,23,43,357. The petitioners argued that the garnishee notice was invalid as their income was independent of SWC. However, the court found that the entire contractual relationship for the supply of Indian Manufactured Foreign Liquor (IMFL) was between SWC and the Canteen Stores Department. The court held that the money in the petitioners' hands was due and held on behalf of SWC, justifying the garnishee notice.

3. Relationship between the Petitioners and Shaw Wallace and Company (SWC) Regarding Tax Liabilities:
The court examined the contractual relationship and found that all necessary documents, orders, and communications regarding the supply of IMFL were made by SWC. The agreements and invoices indicated that SWC was responsible for obtaining orders, excise permits, and collecting sale proceeds. The court concluded that the supplies made by the petitioners were on behalf of SWC, and the payments due to the petitioners were effectively due to SWC. Therefore, the Tax Recovery Officer was justified in issuing the garnishee notice to recover SWC's tax liabilities.

4. Petitioners' Right to Object to the Garnishee Notice and the Appropriate Forum for Such Objections:
The petitioners argued that they had no forum to object to the garnishee notice under Section 226(3) of the Income-tax Act. The court noted that Section 226(3)(vi) allows a person to whom a notice is sent to object to the notice. While the notice was sent to the Canteen Stores Department, which chose to comply, the court held that the petitioners, as affected parties, could raise objections before the Assessing Officer. The court suggested that the petitioners could approach the Assessing Officer, present additional material, and persuade him to revoke the notice. The court directed that if the petitioners filed objections, the Assessing Officer should hear and decide them within four weeks.

Conclusion:
The court dismissed all the petitions, upholding the validity of the garnishee notice and the withholding of payments by the Canteen Stores Department. The court provided the petitioners with the option to file objections before the Assessing Officer, who would decide based on the merits of the documentary evidence. The court emphasized that the petitioners could take appropriate proceedings, including filing a suit, to recover the amounts if they were aggrieved by the action of the Canteen Stores Department.