2024 (10) TMI 545 - HC - Income Tax

Recovery proceedings - attachment orders u/s 226(3) of Cash Credit Accounts - whether the accounts which are in the nature of Cash Credit Accounts can be attached and that there was any money due to the petitioner from the bank which can be recovered in terms of sub section (3) of Section 226 of the Act? HELD THAT - Proceedings u/ss (3) of Section 226 of the Act are in the nature of what is commonly called garnishee proceedings. Attachment of debts is a process by means of which judgment creditor is enabled to reach the money due to a judgment debtor which is in the hands of a third person. These are garnishee proceedings. To be capable of attachment, there must be in existence at the time when the attachment becomes operative, sometime which the law recognizes debt . So long as there is debt in existence, it is not necessary that it should be immediately payable. Where any existing debt is payable by future installments, the garnishee order may be made to become operative as and when installment becomes due. The debt must be one which the judgment debtor could himself enforce for his own benefit. The debt is a sum of money which is now payable or will become payable in future by reason of present obligation. In case titled K.M. Adam vs. The Income Tax Officer 1957 (10) TMI 32 - MADRAS HIGH COURT Madras High Court while dealing with a provisions under Income Tax Act, 1922 was dealing with a case where the bank had afforded the overdraft facility to its customers. The question arose whether the bank account a holds the amount, specified as that up to which the customer may draw is either ' a debtor ' of the customer or holds that money on behalf of or on account of the customer. As decided in Kaneria Granitio Ltd. 2016 (7) TMI 65 - GUJARAT HIGH COURT it was held that unless there exists a relationship of debtor and creditor the order of attachment by an authority under the provisions contained u/s 226 (3) cannot be passed. It was further held that the Cash Credit limit is a facility provided by the bank to its customers to use and utilize the money; and if such facility availed of, it would attract the interest to be charged for the same so utilized. Accordingly, the question, as framed above, is answered that mere providing a facility of an overdraft, it cannot be said that the bank is a debtor to its customers or holds the money for account of its customers, nor any point of time at which it holds any money of his on his account. The Cash Credit limit is a facility provided by the bank to its customers to use and utilize the money and if such facility availed of, it would attract the interest to be charged for the same so utilized and, therefore, the amount cannot be attached in terms of sub Section (3) of Section 226 of the Act. This Court does not find that the action on the part of respondent No. 1 in passing the order of attachment of Cash Credit Account would at all be sustainable, in view of the ratio laid down in the above noted judgments; even the meaningful reading of the language employed in Section 226 (3) does not suggest that the account like the Cash Credit or the overdraft is capable of being attached as the bank does not become a debtor. This Court, therefore, finds that the impugned orders of attachment passed by the authorities are clearly beyond the powers conferred under Section 226 (3) of the Act and, therefore, are liable to be quashed and set aside. Petition allowed.

Summary

Issues Involved:

1. Whether accounts in the nature of Cash Credit Accounts can be attached under Section 226(3) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Attachment of Cash Credit Accounts

The primary issue in this case was whether the accounts, specifically Cash Credit (CC) or Overdraft (OD) accounts, could be attached under Section 226(3) of the Income Tax Act, 1961. The petitioner challenged the attachment of these accounts by the tax authorities, arguing that such accounts do not constitute a debtor-creditor relationship necessary for attachment under the said section.

The court examined Section 226(3) of the Income Tax Act, which allows the Assessing Officer or Tax Recovery Officer to issue a notice to 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, requiring them to pay the amount due by the assessee. This provision is akin to garnishee proceedings, which enable a creditor to reach the money due to a debtor from a third party.

The court referred to several precedents to determine whether a Cash Credit account could be considered as money due to the assessee. In the case of K.M. Adam vs. The Income Tax Officer, the Madras High Court held that when a bank provides an overdraft facility and the customer is always in debit, the bank is not a debtor to the customer and does not hold any money on behalf of the customer. Thus, Section 226(3) could not be invoked to attach such accounts.

Similarly, the Bombay High Court in Sangram Foods Pvt. Ltd. vs. State of Maharashtra and the Calcutta High Court in Jugal Kishore Das vs. Union of India reiterated that Cash Credit accounts, being overdraft facilities, do not render the bank a debtor to the customer, and therefore, cannot be attached under Section 226(3).

The Gujarat High Court in Kaneria Granitio Ltd. vs. Assistant Commissioner IT also held that unless a debtor-creditor relationship exists, the attachment of Cash Credit accounts under Section 226(3) is not permissible. The Punjab and Haryana High Court in Bindal Smelting Pvt. Ltd. vs. ADG, GST Intelligence and Manish Scrap Traders vs. Principal Comm. followed the same reasoning.

Based on these precedents, the court concluded that the mere provision of an overdraft facility does not make the bank a debtor to its customers. The Cash Credit limit is a facility provided by the bank, and if utilized, attracts interest. Therefore, such accounts cannot be attached under Section 226(3) of the Act.

The court found the impugned orders of attachment passed by the authorities to be beyond the powers conferred under Section 226(3) of the Act, and thus, quashed and set aside the communications dated 08.07.2024 and 10.07.2024 issued by respondent No. 1 to respondents No. 2 and 3. Consequently, the petition was allowed, and any pending applications were disposed of.