2013 (4) TMI 548 - HC - Income Tax

Attachment of account - recovery notice - petitioner a senior manager of Kamla Nagar Branch of Canara Bank at Agra served with a notice by Tax Recovery Officer for attaching the accounts of three persons Mukesh Kumar Agrawal,proprietor of M/s. Singhal Casting Company Limited, Sardar Paramjeet Singh and M/s. Shivangi Steel Private Limited - It was stated that a sum of Rs.41,43,342/- with interest is due from Mukesh Kumar Agrawal, the assessee, on account of income tax dues - What would be the effect of the first garnishee notice dated 5th of September, 2005 issued for recovery of dues from the bank account of Mukesh Kumar Agrawal with the petitioner s bank? - Whether the impugned order holding the petitioner deemed assessee in default under section 226 of the Act is legally sustainable or not - Held that - Sufficient force in the argument of the petitioner s that the bank was maintaining multiple accounts of different natures and all these accounts belong to the respective entities. The garnishee notice dated 22.2.2006 being in the name of M/s. Singhal Casting Company, the bank was not supposed to attach the saving bank account of Mukesh Kumar Agrawal in pursuance of the said garnishee notice, even if Mukesh Kumar Agarwal happens to be proprietor of M/s. Singhal Casting Company, specially, when the first garnishee notice was in the name of Mukesh Kumar Agrawal, was not pursued any further by the department. No show cause notice was issued nor further action was taken in pursuance of the first notice after passing of the judgment by this Court in Civil Misc. The petitioner cannot be held as deemed assessee in default in view of the fact that the bank was not debtor of the said assessee on the date of garnishee notice. The position of the bank qua the assessee M/s. Singhal Casting Company was that of creditor of the assessee. The assessee company was indisputably enjoying the open cash credit limit and had debit balance at the relevant point of time. The saving bank account no.9313 which had even if a credit balance on 8th of May, 2006 or 6th June, 2006 belongs to Mukesh Kumar Agrawal, a separate entity, who was not assessee in default, could not be clubbed with the bank account of M/s. Singhal Casting Company. Bankers have a right to combine one or more accounts of the same customer. But it cannot combine the account belonging to another or to himself alone with another account which is the joint account with another and third person. Since the very inception, plea of Banker s lien was set up as a defence by the petitioner. The said plea has not been meted out by the respondent no.2, properly. Such a vital issue, touching the jurisdictional fact, has been disposed off with the remark that no lien was recorded with respect to saving bank account of Mukesh Kumar. The plea should have been considered in the light of the loan agreement and other related documents. The department has failed to discharge its burden that plea in defence is false. It would not be appropriate to hold the petitioner deemed assessee in default to make him personally liable to pay a sum as demanded when the matter relating to determination of tax liability of M/s. Singhal Casting Company is subjudice before the Settlement Commission and/or CIT (A) as admitted by the parties - the writ petition succeeds and is allowed and the impugned order dated 26.6.2007 passed by the respondent no.2 is quashed with cost of Rs.10,000/- payable by the respondent no.2 to the petitioner.

Summary

Issues Involved:
1. Effect of the first garnishee notice dated 5th of September, 2005.
2. Legal sustainability of the impugned order holding the petitioner deemed assessee in default under section 226 of the Income Tax Act.
3. Personal liability of the petitioner as deemed assessee in default under section 226 of the Income Tax Act.

Detailed Analysis:

First Point:
The first garnishee notice dated 5th of September, 2005, required the petitioner to pay any amount due from the bank to Mukesh Kumar Agrawal, proprietor of M/s. Singhal Casting Company. The petitioner replied on 8th of September, 2005, stating that M/s. Singhal Casting Company and M/s. Shivangi Steel Private Limited were enjoying open cash credit limits with the bank and were indebted to the bank. The Tax Recovery Officer did not pursue this notice further, and no show cause notice was issued treating the petitioner as deemed assessee in default. The court found that the first notice was effectively waived by the conduct of the Tax Recovery Officer, as the department did not take any further steps based on this notice.

Second Point:
The second notice dated 22.2.2006 was issued for the recovery of dues from M/s. Singhal Casting Company. The bank account of M/s. Singhal Casting Company had a debit balance of Rs.65,70,527.71 on 22.2.2006, and the bank was not a debtor but a creditor of M/s. Singhal Casting Company. The court emphasized that the garnishee notice must be directed at a person who is in the position of a creditor to the assessee. The Tax Recovery Officer erroneously clubbed the saving bank account of Mukesh Kumar Agrawal with the open cash credit account of M/s. Singhal Casting Company. The court held that the petitioner could not be deemed assessee in default as the bank was not holding any money for M/s. Singhal Casting Company at the time of the garnishee notice.

Third Point:
The court addressed whether the petitioner could be personally liable as deemed assessee in default. Section 226(3)(vi) of the Income Tax Act requires that if a statement made by the person to whom the garnishee notice is issued is found to be false in any material particular, that person can be held personally liable. The court found that the petitioner's actions were based on instructions from the bank's Head Office and that the plea of general lien on the saving bank account of Mukesh Kumar Agrawal was not proven false by the department. The petitioner, acting as a bank officer, could not be held personally liable for discharging his official duties.

Subsequent Developments:
The court noted that the income tax dues against M/s. Singhal Casting Company were either reduced, modified, or still pending final adjudication. The matter was subjudice before the Settlement Commission and/or CIT (A). Given that the assessment proceedings had not concluded, the court found it inappropriate to hold the petitioner personally liable for the disputed tax amount.

Conclusion:
The writ petition was allowed, and the impugned order dated 26.6.2007 was quashed. The respondent no.2 was ordered to pay costs of Rs.10,000/- to the petitioner.