2014 (11) TMI 936 - HC - Income Tax

Recovery of arrear of tax from third party - garnishee order - The contention of the petitioner is that the amount payable under the EMIs cannot be said to be the independent income of the 3rd respondent (assessee) - Held that - The 3rd respondent, which was under obligation to pay the instalments of loan to the petitioner, has chosen to channelize that liability directly from the 2nd respondent. No exception can be taken to such an arrangement. The second important factor is that the 3rd respondent is under liquidation. The companies Act stipulates the priorities of the secured and unsecured creditors vis-a-vis the assets of a company, under liquidation. Whatever may have been the permissibility and legality of the arrangement between the petitioner and respondents 2 and 3, for direct payment of EMIs to the petitioner, the same cannot be continued once the liquidation proceedings are in progress. The petitioner on the one hand and the 1st respondent on the other hand shall be entitled to submit their claims before the official liquidator and he in turn shall make the payments out of the available sources to the petitioner and the 1st respondent in accordance with the priorities that are provided for under the Companies Act. This exercise shall be completed within a period of three months.

Summary

Issues:
1. Validity of demand notice issued by the 1st respondent to the 2nd respondent.
2. Dispute over income tax dues from the 3rd respondent.
3. Priority of income tax arrears over other claims.
4. Legality of arrangement for direct payment of EMIs to the petitioner.
5. Impact of 3rd respondent's liquidation on ongoing arrangements.
6. Disbursement of funds held by the 2nd respondent during liquidation proceedings.

Analysis:
1. The petitioner, a nationalized bank, challenged a demand notice issued by the 1st respondent to the 2nd respondent, seeking a deposit. The petitioner contended that the EMIs payable were not independent income of the 3rd respondent and that the 1st respondent could pursue tax recovery through the official liquidator.

2. The 1st respondent, an assessing authority, claimed priority of income tax arrears over other claims, arguing that the arrangement between the parties was not binding. The 1st respondent issued the notice to the 2nd respondent, as property of the 3rd respondent was under the 2nd respondent's control.

3. The Court noted the machinery given to the 2nd respondent was acquired with the petitioner's financial assistance. Despite the arrangement for direct payment of EMIs, the 3rd respondent's liquidation altered the situation. The Court emphasized the priorities of secured and unsecured creditors under the Companies Act during liquidation proceedings.

4. With an interim order in place, the 2nd respondent deposited EMIs in a nationalized bank, accruing interest. The Court directed the amount, along with interest, to be transferred to the 3rd respondent under liquidation. The official liquidator was tasked with ensuring the funds became part of the company's assets, and all parties were allowed to submit claims following the Companies Act's priorities.

5. The judgment concluded by disposing of the writ petition, instructing the official liquidator to handle the disbursement of funds within three months. The miscellaneous petition in the case was also resolved, with no costs imposed on any party involved.