Cash Credit or term loan account can’t be attached to recover taxes

JUDGMENT

Akil Kureshi, J. – The petitioner has made following prayers:

“7. The Petitioner accordingly prays that this Hon’ble Court may be pleased to issue a writ of Certiorari or any other writ in the nature of Certiorari and; to issue a writ of Mandamus or any other writ in the nature of Mandamus:

2. These prayers are made in following factual background:

The petitioner is a company registered under the Companies Act. For the assessment year 2011-12, the petitioner had filed a return of income declaring loss of Rs. 5.42 crores (rounded off). The Assessing Officer framed assessment under Section 143(3) of the Income Tax Act, 1961 [‘the Act’ for short] computing total income of the assessee for the said year at Rs. 12.10 crores. He raised a demand of Rs. 5.86 crores (rounded off). Against such order of assessment, the petitioner has filed appeal before the Appellate Commissioner which appeal is pending. At that stage, the Assessing Officer started the procedure for recovery of the unpaid tax. By way of coercive measures, he issued notice under Section 226(3) of the Act to the Allahabad Bank, Girdhar Chambers, Vadodara Branch, conveying to him that a sum of Rs. 5.86 crores is due from the petitioner to the Income Tax department for the assessment year 2011-12. He was called upon to pay to the department forthwith any amount due from the bank or held by the petitioner for or on account of the petitioner upto the limit of arrears of tax shown above. In such notice, the Assessing Officer had mentioned following three accounts of the petitioner maintained by the said bank:

“Bank A/c. No. 50003026922 Cash Credit

Bank A/c. No. 50003178046 T/L

Bank A/c. No. 50017597471 T/L”

3. Case of the petitioner is that such accounts were either in the nature of cash credit account or term loan account and that, therefore, it cannot be stated 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.

4. Having heard learned counsel for the parties and having perused the materials on record we may notice that Section 226 of the Act pertains to other modes of recovery. Under sub section (1) of Section 226, where no certificate, as mentioned in Section 222 of the Act, is drawn up, the Assessing Officer may recover the tax by one or more of the modes provided in this section. The portion of Section 226, which is relevant for our purpose, reads as under:

“(3) (i) The [Assessing] Officer [or Tax Recovery Officer] may, at any time or from time to time, by notice in writing require 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 to pay to the [Assessing] Officer [or Tax Recovery Officer] either forthwith upon the money becoming due or being held or at or within the time specified in the notice (not being before the money becomes due or is held) so much of the money as is sufficient to pay the amount due by the assessee in respect of arrears or the whole of the money when it is equal to or less than that amount.

(ii) A notice under this sub section may be issued to any person who holds or may subsequently hold any money for or on account of the assessee jointly with any other person and for the purposes of this sub section, the shares of the joint holders in such account shall be presumed, until the controversy is proved, to be equal.

(iii) … … … … …

(iv) Save as otherwise provided in this sub section every person to whom a notice is issued under this sub section shall be bound to comply with such notice and in particular where any such notice is issued to a post office, banking company or an insurer, it shall not be necessary for any pass book, deposit receipt, policy or any other document to be produced for the purpose of any entry, endorsement or the like being made before payment is made, notwithstanding any rule, practice or requirement to the contrary.”

5. Under clause (i) of sub section (3) of section 226, the Assessing Officer has power to issue notice requiring 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 to pay to the Assessing Officer forthwith upon the money becoming due or being held or within the specified time, so much of the money as is sufficient to pay the amount due by the assessee in respect of the arrears or the whole of the money when it is equal to or less than the amount of arrears. In other words, in the process of seeking coercive recovery, the Assessing Officer would have power to recover the same to the extent of the arrears of the assessee from 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. This power is essentially in the nature of garnishee order requiring the debtor of the assessee to make direct payment to the Assessing Officer of the arrears of tax instead of paying over such amount to the assessee. In essence, therefore, this power would be available when there is person from whom money is due or may become due to the assessee or there is a person who holds or may subsequently hold for or on account of the assessee any money.

6. In this case, admittedly, all the three bank accounts were in the nature of either the cash credit account or term loan account. In other words, the accounts were opened to enable the assessee to borrow the money from the bank for the purpose of its business. Any money, therefore, that the bank may make available to the assessee would necessarily be in the nature of a loan or a cash credit facility, in either case, would be in the nature of borrowing by the assessee from the bank. The bank and the assessee, therefore, do not have the debtor-creditor relationship.

7. Somewhat similar situation arose before the learned Single Judge of Madras High Court in case of K.M. Adam v. ITO [1958] 33 ITR 26. The Assessing Officer desired to invoke powers analogous to Section 226(3) of the Act for recovery of the tax dues of the assessee from the overdraft account that the assessee maintained with its bank. In such background, referring to similar provisions contained in Section 46 of the Income Tax Act, 1922, it was observed as under:

‘It will be seen that this provision is analogous to an attachment of a debt or what is commonly terms a garnishee summons. The classes of persons to whom such notice could be served are two: (i) any person from whom money is due or may become due to the assessee; and (2) any person who holds or may subsequently hold money for or on account of the assessee. The question which arises for consideration in the present case is, as to whether a bank, which has afforded overdraft facilities to its customer, holds the amount, specified as that up to which the customer may draw as either “a debtor” of the customer or holds that money on behalf of or on account of the customer.’

8. This decision was followed by the learned Single Judge of Bombay High Court in reported judgement of Calcutta High Court in case of Jugal Kishore Das v. Union of India [W.P. No. 22899 of 2013, dated 8-10-2013]. In the said case, the Assessing Officer had tried to recover the tax dues of the assessee in exercise of powers under Section 226(3) of the Act by attaching the cash credit account of the assessee. Following the decision of Madras High Court in case of K.M. Adam(supra), it was observed as under:

“In view of the above, this Court does not find that the action on the part of the respondents 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 report; even the meaningful reading of the language employed in Section 226(3) of the said Act 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.”

9. Division Bench of Bombay High Court in case of Sargam Foods (P.) Ltd. v. State of Maharashtra [WP No. 4313 of 2008, dated 8-7-2010] also considered the similar issue and set aside the attachment of the petitioner’s cash credit account for recovery of the unpaid taxes.

10. Such being the consistent view of various High Courts of the country, we have no hesitation in adopting similar line, also looking to the phraseology used in the statutory provisions contained in sub section (3) of Section 226.

11. In the result, impugned notice of attachment dated 15.09.2014 is set aside. Petition is disposed of accordingly.