Neo Corp International Ltd. vs Assistant Commissioner of Income Tax and Another

P.K. Jaiswal, J.—The petitioner is partly aggrieved by the garnishee orders/notices dt. 7th March, 2013 issued by the respondent No. 1 vide Annex. P/1 to P/4, by which overdraft and credit facility have also been considered as the money of defaulter/customer on the ground that the returns were filed by the petitioner but he is not making payment of taxes even on the return on income. Brief facts of the case are that on the date of issuance of impugned orders/notices on 7th March, 2013, a sum of Rs. 5,15,00,862 is due for the period from 1995-96 to 2011-12. Respondent No. 1 directed the petitioner to forthwith pay the amount and discharge his liability of tax.

Clauses 3 and 4 of the impugned garnishee orders/notices reads as under:

In case of cash deposit account, term loan account and overdraft a/c or any other type of bank a/c, the payment received by you from assessee/on behalf of assessee from different parties through clearing/banking channel may be allowed and the amount received may be credited. The payment whatsoever against check issue by assessee should not be allowed and payment after realizing loan/OD is due for payment to assessee that amount should be remitted by way of banking check in the name of Asstt. CIT-4(1), Indore. Please note if it is found that you made payment to assessee after receiving this notice the coercive action may be taken against you under s. 222 to realize the outstanding demand as mentioned above.

It is also requested to furnish the detail of credit/debit amount in account of above mentioned assessee company.

Please note any explanation or suggestion/advice taken from other than competent authority is not expectable. Please follow the provision of IT Act contained in s. 222. The advise letter dt. 23rd Sept., 2011 issued by this office is withdrawn with immediate effect since this letter has not been issued by a competent authority under IT Act.

It is submitted that under s. 226(3) of the IT Act, 1961, the respondent No. 1 attached/freezed the credit facilities allowed by the banks to the petitioner and the same is patently outside the scope of the powers of respondent No. 1.

He further submitted the similar action has been taken earlier also by the Department by passing similar order dt. 12th Sept., 2011 and when the petitioner represented the clarification issued by the respondent No. 1 on 23rd Sept., 2011 (Annex. P/7) the Department was not entitled to attach the account having debit balance.

He further submitted that the provisions of s. 226(3) of the IT Act, 1961 empower the AO or the TRO to require any person 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 such money to the AO or to the TRO towards arrears of taxes, as such, for action under s. 226(3) existence of money due or money which may become due to the assessee is a condition precedent.

His next submission is that an unutilized overdraft account does not render the banker a debtor in any sense and the banker is therefore, not a person from whom any money is due to the customer nor is the banker in such a case a person from whom the money may become due and thus, the respondents have committed a serious error in issuing garnishee orders/notices for attachment and/or freezing the overdraft facilities with the bank.

In support of the said contention, learned counsel for the petitioner placed reliance on the decision of Madras High Court in the case of K. M. Adam Vs. Income Tax Officer, II Additional II Circle, Madras, and decision of the Karnataka High Court in the case of Karnataka Bank Ltd. vs. Commr. of Commercial Taxes & Ors. (1999) 114 STC 19 (Kar).

The learned Single Judge of the Madras High Court in the case of K.M. Adam vs. ITO (supra) observed that; "When a bank lends money on overdraft and the customer is always in debit there is no stage at which the bank is a debtor to its customer, nor any point of time at which it holds any money of his on his account. Sec. 46(5A) cannot on any construction be intended as a credit-freeze, with this feature super added, that if there was any thawing the resultant credit released became immediately payable to the Department. Of course, if at any stage the account of the customer is in credit, s. 46(5A) would come into play and the sum so standing to the credit of the assessee might be directed to be paid over.

In the case of Karnataka Bank Ltd. vs. Commr. of Commercial Taxes & Ors. (supra), the learned Single Judge observed that "a credit facility by way of overdraft or otherwise, cannot be considered to be authorizing the Department to release the amount for which the bank has aggrieved to give the loan". If the amount of the defaulter runs in debit and there has been no credit in his account they should not be considered as the money belonging to defaulter. The bank is under no obligation to make payment to the Commercial Tax Department. It is only when the bank or other person holds any money on behalf of the defaulter or may be found subsequently holding. If at any particular point of time the bank overdraft limits are availed, it cannot be considered that the money which is being drawn from the bank belong to the defaulter. The bank does not owe the money to the defaulter. Sanction of overdraft facility creates an agreement between the bank and the borrower and it cannot be considered that the bank is owing the money with the borrower simply because overdraft facility has been given.

He further submitted that the amount standing to the credit of account with Kotak Mahindra Bank, an account opened in statutory compliance of the provisions of s. 205A of the Companies Act, 1956, for transfer of dividends declared by the company can also not be subject matter of action under s. 226(3) of the IT Act and prayed for quashment of garnishee orders/notices (Annex. P/1 to P/4).

On the other hand, learned senior counsel has submitted that since 1994-95, the petitioner is not depositing any amount towards taxes and he is a habitual defaulter and thus, the impugned garnishee orders/notices (Annex. P/1 to P/4) has been issued on 7th March, 2013.

He further submitted that in identical circumstances, the learned Single Bench of Karnataka High Court in the case of IT Appeal No. 31 of 2013 vide order dt. 4th Feb., 2013 directed the petitioner for depositing of 50 per cent of the amount of dues and for balance 50 per cent security to be given to the surety section of the Revenue.

He also placed strong reliance upon the decision of the apex Court in the case of Assistant Collector of Central Excise, Chandan Nagar, West Bengal Vs. Dunlop India Ltd. and Others, and submitted that the apex Court has held that normally, the High Court should not, as a rule, in proceedings under Art. 226 of the Constitution, grant any stay of recovery of tax save, under very exceptional circumstances. The grant of stay, in such matters, should be an exception and not a rule. A levy or impost does not become bad as soon as a writ petition is instituted in order to assail the validity of the levy as bad at the very threshold of the proceedings. In the aforesaid case, the stay order was subject to furnishing of the bank guarantee to the satisfaction of the Court. The apex Court observed that Governments are not run on mere bank guarantees. No governmental business or for that matter no business, of any kind can be run on mere bank guarantees. Liquid cash is necessary for the running of a Government as indeed any other enterprise.

He submitted that the petitioner be directed to deposit 50 per cent amount in question and if, he will deposit the same within the time limit, then the respondent No. 1 will consider the reply to the Garnishee orders/notices issued vide Annex.-P/1 to P/4 and pass appropriate orders therein.

As per the return filed by the respondents, earlier also, action was taken under s. 226(3) of the IT Act, 1961. The petitioner filed a request letter dt. 27th June, 2012 for uplifting the attachment from the United Indian Insurance Company and made a promise to make the outstanding payment of income tax demand of Rs. 4,86,00,000 as per the schedule of payment given by him in his previous letter dt. 11th July, 2012.

The respondents/Department uplifted the attachment of the order on the basis of the undertaking given by the petitioner by adopting liberal view in the matter. After uplifting the attachment, the petitioner did not make payment of arrears demand according to the schedule given by the petitioner.

Three post dated cheques were also issued by the petitioner amounting to Rs. 3,86,00,000 and when the aforesaid three cheques were deposited by the respondents to the concerned bank for payment, all those cheques bounced. The aforesaid impugned action has been taken after considering the track record of the petitioner. It is also alleged in the reply that the petitioner is not paying even self admitted liability.

As per return filed by the respondents, the petitioner''s company is earning good profit from his business and filing the return on income without making payment of taxes.

Due to the aforesaid reasons, the Department had no alternative except to issue garnishee orders/notices under s. 226(3) of the IT Act, 1961.

In respect of attaching the account of overdraft and credit facilities, the reply of the Department is that the overdraft facilities have been availed by the petitioner on profit as per record of the petitioner. Thus, it is the duty and statutory liability of the petitioner to pay the due amount of taxes on its earned income within prescribed statuary due date.

As per return for the asst. yrs. 2008-09 to 2012-13, the sale in profit has been increasing every year. The details are as under:

From the aforesaid, it is clear that the sale and profit of the company is increasing year to year.

In respect of garnishee orders/notices in Kotak Mahindra Bank, the stand of the Department is that the account was opened for dividend purpose. It is necessary to the company that advance tax and self assessment tax should be paid by the petitioner and only then remaining profit company can be distributed as dividend to its shareholders. Therefore, the bank accounts were rightly attached by the respondent No. 1.

It is alleged that the shareholders are the effective owners of the company and consequently effective owners of the net asset of the company, including bank deposits, they cannot shirk from the statutory duty of payment of due taxes to the exchequers especially the self admitted taxes. The shareholders have the rightful claim on net assets and the dividend declared by the company only after discharging all due taxes to all Government authorities as per law. The interests of the shareholders in no case can supersede the payment of due taxes to the exchequer.

In respect of overdraft account attached, the stand of the Department is that they have not asked the banks to make payment to the Department. The respondent No. 1 has only directed the bank to remit the amount to the exchequer as and when the amount is deposited by the petitioner in the overdraft account over and above the amount borrowed by the petitioner from the overdraft account.

As per the earlier affidavit filed by the petitioner vide letter dt. 11th Sept., 2012, he made a promise that entire demand will be paid by his company but, he failed to fulfill the aforesaid promise.

The return, assessment orders, affidavit, letters issued and the undertaking given by the petitioner are on record.

These facts are not disputed by the petitioner by filing any counter affidavit or any rejoinder to the return filed on behalf of the respondents.

Considering the aforesaid and looking to the fact that blanket stay order has been passed on 26th March, 2013, by which the operation of the impugned garnishee orders/notices dt. 7th March, 2013 (Annex. P/1 to P/4) has been stayed, we direct the petitioner to deposit 50 per cent of the amount in question as mentioned in Annex.-P/1 to P/4 expeditiously as early as possible and in case if, the said amount is deposited by the petitioner then, the respondent authorities shall consider the detailed objection filed by the petitioner vide letter dt. 11th March, 2013 before the respondent No. 1 and pass appropriate orders, as passed earlier vide Annex. P/7 on 23rd Sept., 2012.

It is made it clear that we have not expressed any opinion on merits of the case. This writ petition has been filed on the found that the garnishee orders/notices issued by the Department is wholly without jurisdiction but, on going through the relevant provisions of the IT Act, 1961, we are of the view that the respondent authorities are competent to take such type of action considering the fact that earlier also, similar actions were taken in the year 2011 and on the basis of promise made by the petitioner, they have withdrawn part of the said garnishee orders/notices vide Annex. P/7 but, inspite of that the petitioner failed to make the payment as per the assurance given and, therefore, due to the aforesaid circumstances, the respondents has to take stern action of issuing such impugned order. With the aforesaid, the writ petition is disposed of.