Recovery Officer Can't Attach Taxpayer's Overdraft Account With Banks By Exercising Power U/s 226(3): Himachal Pradesh HC Quashes Attachment Order

Explaining the relationship between debtor & creditor, the High Court clarified that bank does not become a debtor to its customers and cannot hold money for account of its customers merely because it has provided a facility of overdraft to its customers.

Section 226(3) of Income tax Act, enables the AO/ Tax Recovery Officer by notice in writing to require any person from whom money is due or may become due to the assessee or any person who owes or may subsequently owe money for on account of assessee to pay the AO/ Tax Recovery Officer.

Single Bench of Justice Tarlok Singh Chauhan observed that “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 Section 226(3) of the Act”. (Para 21)

Facts of the case:

The petitioner company/ assessee, engaged in purchase & manufacturing of iron and steel, has bank accounts in the nature of “Over Cash Credit” (OCC Account)/ “Cash Credit (CC)” with HDFC bank (second respondent) and YES bank (third respondent). In the year 2023, the first respondent/ ITO issued a show cause notice (SCN) to petitioner, proposing a huge addition of Rs 237.53 crores, which according to the petitioner, was 90.43% of its sales and around 2.5 times of its assets. Consequently, an assessment order was passed with a notice of demand u/s 156 of Rs.17,07,97,812/- from the petitioner. This demand was challenged before the High Court, which granted interim stay on issue of 'freight income'.

However later, when employees of petitioner company approached respondent banks for routine transactions to undertaken for the business activities of petitioner, they were informed of seizure of bank account of petitioner by the ITO. On enquiry, the petitioner came to know about the communication issued by the ITO to banks u/s 226(3) of Income tax Act. Hence, the petitioner approached the High Court.

Observations of the High Court:

The question requiring consideration, is as to whether the bank accounts 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 Section 226(3) of the Act?

The Bench observed that proceedings u/s 226(3) are in the nature of what is commonly called garnishee proceedings.

Explaining the garnishee proceedings, the Bench explained that 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.

So long as there is debt in existence, it is not necessary that it should be immediately payable, and where any existing debt is payable by future instalment, the garnishee order may be made to become operative as and when instalment becomes due, added the Bench.

The Bench clarified that the debt must be one which the judgment debtor could himself enforce for his own benefit.

The Bench referred to the decision in case of Jugal Kishore Das vs. Union of India [2013 SCC Online Cal 1994], where it was held that “unless there exists a relationship of 'debtor and creditor' the order of attachment by an authority under the provisions contained under Section 226(3) of the said Act cannot be passed”.

The Bench further reiterated the decision of Gujarat High Court in Kaneria Granitio Ltd. vs. Assistant Commissioner IT, 2016 SCC Guj 10310, 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.

Thus, the High Court allowed Assessee's petition and quashed the attachment order passed by the I-T authorities u/s 226(3).

Counsel for Petitioner/ Assessee: Senior Advocate Shrawan Dogra and Advocates Manik Sethi, Tejasvi Dogra and Harsh Kalta

Counsel for Respondents/ Revenue: Advoctes Neeraj Sharma and Ishaan Kashyap

Case Title: Kundlas Loh Udyog vs. Union of India and others

Case number: CMPMO No. 418 of 2024

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