2017 (2) TMI 461 - HC - Income Tax

Recovery proceedings - eligible creditor - Held that - The date on which the notice was issued, admittedly in view of the correspondence which has come on record, and complete documentary evidence clearly established that petitioner was creditor and fixed deposit receipt lien was with the petitioner bank. The Department has seized fixed deposit receipt, which was not proper. Therefore, the bank was a creditor and notice under section 226 of the Act and recovery pursuant thereto is misconceived and not proper. Therefore, order at annexure E against the petitioner is misconceived and ought not to have been issued under section 226(3). Assuming even if there are some fixed deposit receipts in the name of Shri Om Prakash Agrawal, i.e., also encashed. Therefore, the order is required to be quashed and set aside. Accordingly, order dated December 14/18, 2000 together with notice of the same date, which is at annexure A to the petition, is quashed and set aside.

Issues Involved:
1. Legality of the Income-tax Department's attachment and demand notices concerning fixed deposit receipts.
2. Petitioner's right to set off the amounts against dues recoverable from Shri Om Prakash Agrawal and his group.
3. Compliance with principles of natural justice.
4. Validity of the attachment and prohibitory orders under the Income-tax Act.
5. Petitioner's status as a deemed assessee in default.

Detailed Analysis:

1. Legality of the Income-tax Department's attachment and demand notices concerning fixed deposit receipts:
The petitioner, a co-operative bank, challenged the letter/order dated December 14/18, 2000, and the notice of the same date, seeking prohibition against the respondent from demanding payment related to the dues of Shri Om Prakash Agrawal and his group. The petitioner argued that the fixed deposit receipts were pledged with the bank and that the Income-tax Department's seizure and subsequent demand for these amounts were unauthorized and illegal. The court found that the fixed deposit receipts were improperly seized by the Department, and hence, the notices issued under section 226(3) of the Income-tax Act were misconceived and not proper.

2. Petitioner's right to set off the amounts against dues recoverable from Shri Om Prakash Agrawal and his group:
The petitioner claimed the right to set off the amounts of the fixed deposit receipts against the dues recoverable from Shri Om Prakash Agrawal and his group under the provisions of the Gujarat Co-operative Societies Act and the Contract Act. The court noted that the petitioner had a statutory right to set off these amounts, which was not abrogated by the Income-tax Act. The court also referenced the Supreme Court's decision in Syndicate Bank v. Vijay Kumar, which upheld the bank's right to a general lien over fixed deposit receipts, allowing the bank to adjust the amounts against dues before any attachment by the Income-tax Department.

3. Compliance with principles of natural justice:
The petitioner argued that the impugned order was passed without following the principles of natural justice, as no notice or opportunity for hearing was provided before issuing the order. The court found merit in this argument, noting that after the initial correspondence and the court's direction in 1999, the respondent did not issue any further notice before passing the impugned order, thereby violating the principles of natural justice.

4. Validity of the attachment and prohibitory orders under the Income-tax Act:
The petitioner contended that the attachment orders under section 132(3) of the Income-tax Act were not valid as they were not extended beyond the initial period, and no valid attachment order was served on the bank. The court agreed, stating that the life of the attachment order was limited and there was no evidence of its extension. The court also highlighted that even if there were valid attachment orders, they would not prohibit the bank from exercising its right to set off the amounts against the dues recoverable from Shri Om Prakash Agrawal and his group.

5. Petitioner's status as a deemed assessee in default:
The respondent argued that under section 226(3)(x) of the Income-tax Act, the petitioner was deemed to be an assessee in default for the amount due from Shri Om Prakash Agrawal. However, the court found that the petitioner had demonstrated that it did not hold any money for or on account of Shri Om Prakash Agrawal and had already adjusted the amounts against the dues. Therefore, the petitioner could not be treated as an assessee in default.

Conclusion:
The court quashed and set aside the order dated December 14/18, 2000, and the notice of the same date, ruling in favor of the petitioner. The court held that the Income-tax Department's actions were unauthorized and that the petitioner had the right to set off the amounts against dues recoverable from Shri Om Prakash Agrawal and his group. The court also emphasized the importance of compliance with principles of natural justice and the invalidity of the attachment orders under the Income-tax Act. The rule was made absolute with no order as to costs.

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