2014 (6) TMI 373 - HC - Income Tax

Garnishee notice issued for FDRs Deposits yet to mature Liability to pay for the proceeds Held that - There is no lockin period insofar as fixed deposit of the assessee is concerned - the period of fixed deposit is stipulated in the fixed deposit receipts, it does not prevent the depositor namely assessee to seek for premature withdrawal of the fixed deposit - he or she as the case may be has to forego the interest for the remaining period and also in view of the fact that the guidelines issued by the Reserve Bank of India enabling the depositors to withdraw the fixed deposit prematurely they can withdraw the amounts deposited by them prematurely Relying upon VYSYA BANK LTD., VS. JOINT COMMISSIONER OF INCOME TAX AND ANOTHER 1999 (8) TMI 26 - KARNATAKA High Court - jurisdiction to attach the fixed deposit by the Department and obligation of the Bank to make payment of the amount even before maturity of the fixed deposit receipts cannot be found fault with. The assessee did not file objection to the Garnishee notice issued u/s 226 (3)(1) by raising an objection as required u/s 226 (3) (vi) and for this precise reason and also for the reason that the assessee-Bank did not dispute the relationship between it and the assessees including Shivaganga Multi-purpose Co-operative Society Limited it enabled the Department to arrive at a conclusion that petitioner is to be treated as an assessee in default and accordingly an order came to be passed u/s 226 (3) (x) - the assessee does not dispute about deposits held by it on behalf of the assessee and the same being payable by the assessee to the assessee and non-compliance of the demand notice raised by the Department u/s 226 (3), revenue have rightly held that assessee is to be treated as an assessee in default - There is no infirmity in the order passed by the revenue calling for exercise of extra-ordinary jurisdiction - whatever the amounts that are held by the assessee either on behalf of the assesee or on behalf of M/s Shivaganga Multi-purpose Co-operative Society Limited ultimately payable to assessees would be the amounts payable by the assessee to the Department Decided against Assessee.

Issues Involved:
1. Validity of Garnishee notices issued under Section 226(3) of the Income Tax Act, 1961.
2. Treatment of the petitioner-Society as an assessee in default.
3. Premature withdrawal of fixed deposits and its implications.
4. Legal obligations of the petitioner-Society towards the Income Tax Department.

Detailed Analysis:

1. Validity of Garnishee Notices Issued Under Section 226(3):
The Department issued Garnishee notices to the petitioner-Society under Section 226(3) of the Income Tax Act, 1961, demanding payment of the amounts held by the petitioner on behalf of the assessee. The petitioner argued that the fixed deposits (FDRs) had not yet matured, and thus, premature payment was not feasible. The Department contended that since the assessment proceedings had concluded, the Tax Recovery Officer had jurisdiction to recover the tax demanded. The Court examined Section 226(3), which allows the Assessing Officer or Tax Recovery Officer to issue notices to any person from whom money is due or may become due to the assessee. The Court found that the Department was within its rights to issue Garnishee notices as the petitioner-Society held the undisclosed income of the assessees in the form of fixed deposits.

2. Treatment of the Petitioner-Society as an Assessee in Default:
The petitioner-Society was treated as an assessee in default under Section 226(3)(x) for not complying with the demand made in the Garnishee notices. The petitioner had failed to reply to the initial notice within the stipulated time, leading to the issuance of the default order. The Court noted that the petitioner did not dispute the relationship between itself and the assessees, nor did it object to the notice under Section 226(3)(i) as required under Section 226(3)(vi). Consequently, the Department rightly treated the petitioner as an assessee in default.

3. Premature Withdrawal of Fixed Deposits and Its Implications:
The petitioner argued that the fixed deposits had not matured and thus could not be withdrawn prematurely. The Court referred to the judgment in UNIT TRUST OF INDIA VS. B.M.MALANI AND OTHERS, which dealt with a lock-in period for investments. However, the Court found that in the present case, there was no lock-in period for the fixed deposits. The Court also referred to the judgment in VYSYA BANK LTD. VS. JOINT COMMISSIONER OF INCOME TAX AND ANOTHER, which held that the Department could attach fixed deposits and the bank was obligated to make payments even before maturity. The Court concluded that the petitioner-Society was liable to pay the amounts held on behalf of the assessees, even if the fixed deposits had not matured.

4. Legal Obligations of the Petitioner-Society Towards the Income Tax Department:
The Court emphasized that under Section 226(3), the Assessing Officer or Tax Recovery Officer could require any person holding money on behalf of the assessee to pay the amount due. The petitioner-Society, holding the fixed deposits of the assessees, was obligated to comply with the Department's demand. The Court dismissed the writ petitions, stating that the petitioner-Society must pay the amounts held on behalf of the assessees to the Department, either immediately or as the fixed deposits mature.

Conclusion:
The Court upheld the validity of the Garnishee notices issued under Section 226(3) and the treatment of the petitioner-Society as an assessee in default. The Court dismissed the writ petitions, affirming the Department's right to recover the tax dues from the amounts held by the petitioner-Society on behalf of the assessees. The petitioner-Society was directed to comply with the Department's demands, either immediately or upon the maturity of the fixed deposits.

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