2010 (3) TMI 836 - HC - Income Tax

Search and seizure under section 132 of the Income-tax Act - block assessment under section 158BC of the Act - bank guarantee - recovery of tax - default - attachment of property - held that - Default would arise only when there is a demand. Admittedly, on November 18/21, 2005, the assessee was not in default or deemed default of any tax due. Thus, no order or direction could have been given for such payment to the bank. - section 226(3) of the Act is not attracted Regarding attachment u/s 281B - held that - The language of the above provision is plain and simple. It provides for the attachment of the property of the assessee only and of no one else. The golden rule of interpretation of statutes is that the statute has to be construed according to its plain, literal and grammatical meaning unless its leads to absurdity. The fixed deposits of the petitioners not being the property of the assessee as such were not open to attachment. Action of the bank - held that - the attachment was illegal and does not have the effect of authorising payment ; and had lapsed on the expiry of six months from the date of attachment. Thus, the action of the bank in releasing the amount under the fixed deposits was patently illegal and in clear violation of the terms and conditions of the contract of the bank guarantee. While allowing writ petition, bank directed to refund the petitioners the amount of their fixed deposits which were encashed on November 1, 2006, within a period of one month with simple interest at 8 per cent. per annum, with effect from November 1, 2006, till the date of refund. - bank at liberty to claim the amount with interest from the department.

Summary

Issues Involved:
1. Locus of the petitioners to maintain the writ petition.
2. Validity of the attachment dated November 18/21, 2005, of the bank guarantee/fixed deposits.
3. Whether the fixed deposits furnished as security could be encashed after the expiry of the bank guarantee period.

Issue-wise Detailed Analysis:

1. Locus of the Petitioners:
The court examined whether the petitioners had the locus standi to file the writ petition. It was determined that although the petitioners were not explicitly named in the bank guarantee contract, they had a judicially enforceable right to reclaim their fixed deposits if misappropriated or unauthorizedly encashed. The court referenced the Division Bench decision of the Calcutta High Court in State Bank of India v. Economic Trading Co. S. A. A., AIR 1975 Cal 145, which supported the petitioners' locus standi.

2. Validity of the Attachment:
The court scrutinized the attachment order dated November 18/21, 2005, under sections 281B and 226(3) of the Income-tax Act, 1961. It was found that section 226(3) could only be invoked when tax was due, and the assessee was in default, which was not the case on the said date. Additionally, section 281B allows for the provisional attachment of the assessee's property only, not third-party property like the petitioners' fixed deposits. Thus, the attachment order was deemed illegal.

3. Encashment of Fixed Deposits:
The court analyzed whether the fixed deposits could be encashed after the expiry of the bank guarantee period. The bank guarantee was valid until November 21, 2005, and was not extended. The attachment order, being provisional, was valid for only six months and had expired by November 1, 2006. The court concluded that the bank's action in releasing the fixed deposits was illegal and violated the terms of the bank guarantee.

Conclusion:
The court summarized its findings as follows:
1. There can be a fourth party in a bank guarantee contract, as in this case.
2. The bank guarantee was valid only until November 21, 2005.
3. Section 226(3) of the Act was not applicable.
4. The attachment order under section 281B was illegal.
5. The attachment was provisional and expired before November 1, 2006.
6. Attachment only restricts dealing with the property and does not authorize encashment.
7. The encashment of the fixed deposits was unjustified after the expiry of the bank guarantee and the lapse of the provisional attachment.

Judgment:
The court allowed the writ petition, quashing the attachment order dated November 18/21, 2005, and directed the respondents to refund the encashed fixed deposits with 8% simple interest per annum from November 1, 2006, within one month. If not refunded within this period, further interest at 10% per annum would apply. The primary liability for the refund was placed on the respondent bank, which could claim the amount from the other respondents as per law. The petition was allowed with no order as to costs.