2017 (11) TMI 743 - HC - Income Tax

Recovery of income tax with interest recoverable from the judgment debtor - seized amount appropriation towards tax demand in terms of Section 132B on determination of the tax liability of the Judgment Debtor pursuant to the assessment of its undisclosed income determined on completion of the assessment proceeding - Held that - As refer to Section 226 of the Income Tax Act, 1961 which relate to other modes of recovery. Under Section 226 Rule 4 the assessing officer may apply to the Court in whose custody there is money belonging to the assessee for payment to it of the entire amount of such money or if it is more than the tax amount, an amount sufficient to discharge the tax. The section rather clarifies the money which belong to the assessee shall only be available for payment as tax to the Income Tax Department, but what if money found in possession of the assessee does not belong to him or he is holding such money in trust/constructive or otherwise. To my mind such money can t be adjusted against tax liability of the assessee. Further the plea of revenue that the decree holder ought to have applied u/s 132(11) per Rakesh Kumar Aggarwal (2013 (9) TMI 1194 - DELHI HIGH COURT) is also not sustainable, per Section 132(11) stands omitted by the Finance Act of 2002 w.e.f. 01.06.2002 and hence decree holder could not have availed of such provision in any case. Lastly the plea of the Income Tax Department that it being a secured creditor, would not be of any benefit to the revenue in view of the fact the money seized to the extent of decree does not belong to assessee being obtained by fraud as discussed above. The assessee though was in possession of it but at best can said to have held it only in constructive trust. Application is thus dismissed for reasons aforesaid.

Issues Involved:

1. Recovery of income tax with interest from the judgment debtor.
2. Appropriation of seized amount towards tax demand.
3. Allegations of fraud and cheating by the judgment debtor.
4. Execution of a money decree against the judgment debtor.
5. Attachment of bank accounts by the Income Tax Department.
6. Applicability of Section 293 of the Income Tax Act.
7. Proprietary interest of the decree holder in the seized amount.
8. Constructive trust and fraud in financial transactions.
9. Jurisdiction of civil courts in cases involving fraud.

Detailed Analysis:

1. Recovery of Income Tax with Interest from the Judgment Debtor:
The Deputy Commissioner of Income Tax, Central Circle-3, New Delhi, filed an application under Section 226(4) of the Income Tax Act, 1961, to recover income tax with interest from the judgment debtor for the assessment years 2010-2011 and 2011-2012. The total sum recoverable was ?345,97,46,125/-.

2. Appropriation of Seized Amount Towards Tax Demand:
A search and seizure operation under Section 132 of the Income Tax Act, 1961, was conducted on 18.01.2011, resulting in the seizure of ?34,69,00,000/-. The seized amount was to be appropriated towards the tax demand as per Section 132B of the Income Tax Act, 1961.

3. Allegations of Fraud and Cheating by the Judgment Debtor:
The judgment debtor, a partnership firm, was accused of accepting deposits from the public under false pretenses and not reflecting the correct income in its books of accounts. The decree holder, one of the investors, alleged that the judgment debtor had defrauded him, leading to a money decree of ?1.60 crore passed by the court on 16.08.2012.

4. Execution of a Money Decree Against the Judgment Debtor:
The decree holder sought to execute the money decree through the present execution application. The court had previously ordered the HDFC Bank not to release any payments from the judgment debtor's account without the court's permission, considering the attachment orders by the Income Tax Department.

5. Attachment of Bank Accounts by the Income Tax Department:
The Income Tax Department had attached the judgment debtor's bank accounts under Section 226 of the Income Tax Act, 1961, to secure the tax demand. The department sought a direction from the court to release the attached amount to meet the tax liability.

6. Applicability of Section 293 of the Income Tax Act:
The Income Tax Department argued that the execution proceedings to recover the attached amount were barred by Section 293 of the Income Tax Act. However, the court disagreed, stating that Section 293 did not apply as the decree holder had not filed any suit in a civil court against the revenue authorities.

7. Proprietary Interest of the Decree Holder in the Seized Amount:
The court recognized the decree holder's proprietary interest in the seized amount, as the money was obtained by the judgment debtor through fraud. The court noted that the judgment debtor held the money in trust for the decree holder.

8. Constructive Trust and Fraud in Financial Transactions:
The court referred to Section 86 of the Indian Trusts Act, 1882, and relevant case law to establish that money obtained by fraud is held in constructive trust for the victim. The court cited the case of The National Crime Agency v. Gary John, where it was held that fraud unravels all transactions and the fraudulent recipient holds the money in trust for the victim.

9. Jurisdiction of Civil Courts in Cases Involving Fraud:
The court highlighted Rule 9 of the Second Schedule of the Income Tax Act, which allows civil suits on the grounds of fraud. The court emphasized that the decree holder's case was based on fraud, making the jurisdiction of the civil court applicable.

Conclusion:
The court dismissed the application of the Income Tax Department, stating that the money seized did not belong to the judgment debtor but was held in constructive trust for the decree holder. The court ruled that the decree holder had a proprietary interest in the amount to the extent of his decree and that the money could not be adjusted against the tax liability of the judgment debtor. The court also noted that Section 132(11) of the Income Tax Act, 1961, had been omitted and was not applicable in this case. The application was dismissed with no order as to costs. Further proceedings were scheduled for 15.02.2018.

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