2016 (7) TMI 65 - HC - Income Tax

Recovery of the tax dues - notice u/s. 226(3) issued to the Allahabad Bank - notice of attachment of bank account - existence of debtor-creditor relationship - Held that - Under clause (i) of sub section (3) of section 226, the Assessing Officer has power to issue notice requiring any person from whom money is due or may become due to the assessee or any person who holds or may subsequently hold money for or on account of the assessee to pay to the Assessing Officer forthwith upon the money becoming due or being held or within the specified time, so much of the money as is sufficient to pay the amount due by the assessee in respect of the arrears or the whole of the money when it is equal to or less than the amount of arrears. In other words, in the process of seeking coercive recovery, the Assessing Officer would have power to recover the same to the extent of the arrears of the assessee from any person from whom money is due or may become due to the assessee or any person who holds or may subsequently hold money for or on account of the assessee. This power is essentially in the nature of garnishee order requiring the debtor of the assessee to make direct payment to the Assessing Officer of the arrears of tax instead of paying over such amount to the assessee. In essence, therefore, this power would be available when there is person from whom money is due or may become due to the assessee or there is a person who holds or may subsequently hold for or on account of the assessee any money. In this case, admittedly, all the three bank accounts were in the nature of either the cash credit account or term loan account. In other words, the accounts were opened to enable the assessee to borrow the money from the bank for the purpose of its business. Any money, therefore, that the bank may make available to the assessee would necessarily be in the nature of a loan or a cash credit facility, in either case, would be in the nature of borrowing by the assessee from the bank. The bank and the assessee, therefore, do not have the debtor-creditor relationship. See K.M. ADAM Versus INCOME-TAX OFFICER, II ADDITIONAL II CIRCLE, MADRAS 1957 (10) TMI 32 - MADRAS HIGH COURT . In the result, impugned notice of attachment is set aside - Decided in favour of assessee

Summary

Issues:
1. Validity of notice issued under Section 226(3) of the Income Tax Act, 1961 for recovery of unpaid tax.
2. Interpretation of Section 226(3) regarding recovery of tax from bank accounts.
3. Applicability of garnishee order in tax recovery cases.
4. Consistency of High Court judgments on attachment of bank accounts for tax recovery.

Issue 1: Validity of notice under Section 226(3):
The petitioner sought to quash a notice under Section 226(3) issued by the respondent to a bank for recovery of unpaid tax. The petitioner argued that the accounts mentioned in the notice were either cash credit or term loan accounts, and thus, there was no money due to the petitioner from the bank for recovery. The Assessing Officer initiated recovery procedures despite the appeal pending before the Appellate Commissioner.

Issue 2: Interpretation of Section 226(3):
Section 226(3) empowers the Assessing Officer to recover tax by requiring any person from whom money is due to the assessee to pay the amount due. The court analyzed the provision and highlighted that the power to recover is based on the existence of money due or becoming due to the assessee. The notice operates as a garnishee order, compelling the debtor of the assessee to pay the arrears directly to the Assessing Officer.

Issue 3: Applicability of garnishee order:
The court referenced a case where a similar situation arose, emphasizing that banks providing overdraft facilities do not hold money as a debtor of the customer but rather facilitate borrowing. This interpretation was consistent with previous judgments, including those from the Madras and Bombay High Courts, which held that accounts like cash credit or overdraft cannot be attached for tax recovery purposes.

Issue 4: Consistency of High Court judgments:
The court noted the consistent view of various High Courts in setting aside attachment orders on cash credit accounts for tax recovery. Citing precedents, including a Division Bench of the Bombay High Court, the court concluded that the attachment of bank accounts for unpaid taxes, especially cash credit accounts, was not sustainable under Section 226(3) of the Income Tax Act.

In conclusion, the court set aside the impugned notice of attachment dated 15.09.2014, ruling in favor of the petitioner and disposing of the petition accordingly.