2014 (5) TMI 859 - HC - Income Tax

Recovery of dues from third person - group company Disputed debt - Whether the TRO in its attempt to discern whether there is an apparent falsity in EMGF s affidavit objecting to the alleged liability to EHTPL, has actually adjudicated on the question of a disputed debt, thus exceeding his jurisdiction Held that - Section 226(3) does not confer any jurisdiction to adjudicate the indebtedness of a third party to the assessee and was only was confined to first, cases where the third party admits to owing money or holding money on account of the assessee - cases where it is indisputable that the third party owes money or holds money on the account of the assessee - when liability itself is disputed by the third party, Section 226(3) was no source of power to the AO to adjudicate on that question - It merely empowers the AO to discover falsity in the objections filed by the garnishee, in cases where it is an admitted or an indisputable debt. The TRO held that none of the litigation calls into question the validity of the development agreement - in any event, the debt is not susceptible to being cancelled - The Court differs from the TRO on the limited ground because it would neither be appropriate nor possible for the Court to predict the outcome of any litigation - any number of outcomes could ensue from the litigation through several contractual and other possibilities the Court reiterates that any potential effect that the litigation may have on the debts in existence, is too distant a contingency to account for, given the need to only decide the existence of an admitted or indisputable liability - the TRO s own observations, that the consequence of APIIC revoking consent could very well be considered force majeure , thus resulting in the EMGF debt continuing to be owed to EHTPL, is consistent with this line of reasoning Decided against Assessee.

Issues Involved:

1. Validity of the order under Section 226(3)(x) of the Income Tax Act, 1961.
2. Determination of liability of the petitioner (EMGF) towards the fourth respondent (EHTPL) amidst ongoing litigation.
3. Jurisdiction and power of the Tax Recovery Officer (TRO) under Section 226(3) of the Act.
4. Adjudication on disputed debt by TRO.
5. Impact of ongoing litigation on the enforceability of the debt.

Detailed Analysis:

1. Validity of the order under Section 226(3)(x) of the Income Tax Act, 1961:

The petitioner, EMGF, challenged the order issued by the Tax Recovery Officer (TRO), Hyderabad, requiring it to pay Rs. 32,82,79,787/- alleged to be due from EHTPL, the assessee-in-default. The court examined whether the TRO's order was valid under Section 226(3)(x) of the Act. The TRO, Hyderabad, declared EMGF as a defaulter and directed it to remit the amount due to EHTPL, rejecting EMGF's objections.

2. Determination of liability of the petitioner (EMGF) towards the fourth respondent (EHTPL) amidst ongoing litigation:

EMGF argued that due to ongoing litigation, the integrated project had come to a standstill, and no collections were made, thus no money was owed to EHTPL. The court noted that EMGF had admitted liability to EHTPL in its books of account, indicating an enforceable debt. The court found that the potential future cancellation of the agreement due to litigation was too distant a contingency to affect the present enforceability of the debt.

3. Jurisdiction and power of the Tax Recovery Officer (TRO) under Section 226(3) of the Act:

The court examined the jurisdiction of the TRO under Section 226(3) of the Act, which allows the TRO to proceed against a garnishee only when the debt is admitted or indisputable. The court referred to the Supreme Court's ruling in Surinder Nath Kapoor v. Union of India and this Court's decision in AAA Portfolios Pvt. Ltd. v. DCIT, emphasizing that the TRO cannot adjudicate on disputed debts.

4. Adjudication on disputed debt by TRO:

The court determined that the TRO, Hyderabad, in its attempt to discern the falsity in EMGF's affidavit, had actually adjudicated on the question of a disputed debt, thus exceeding its jurisdiction. The court held that any inquiry requiring elaborate reasoning or evidence could not be considered a facial determination of falsity.

5. Impact of ongoing litigation on the enforceability of the debt:

The court found that the ongoing litigation did not negate the present enforceability of the debt. The TRO's observations that the consequence of APIIC revoking consent could be considered "force majeure," thus resulting in the EMGF debt continuing to be owed to EHTPL, were consistent with the court's reasoning. The court reiterated that the potential future outcomes of the litigation were too distant to affect the present debt.

Conclusion:

The court dismissed the writ petition, upholding the TRO's order and rejecting EMGF's objections. The court emphasized that the existence of an admitted or indisputable liability was sufficient for the TRO to proceed under Section 226(3) of the Act, and the potential future outcomes of the litigation did not affect the present enforceability of the debt.

← Previous Next →