Recovery Officer cannot attach Taxpayer's OD Account with Banks by Exercising Power u/s  226(3) of Income Tax Act: Himachal Pradesh HC [Read Order]

The Himachal Pradesh High Court recovery officer cannot attach taxpayer's over draft account with banks by exercising powers under section 226(3) of Income Tax Act,1961. 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.

The petitioner company/ assessee,Kundlas Loh Udyog  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 under section 156 of Rs.17,07,97,812/- from the petitioner.

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 under section 226(3) of Income tax Act. Hence, the petitioner approached the High Court.

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Section 226(3) of the Income Tax Act specifies that any person who is responsible for paying any income which is subject to deduction of tax at source (TDS) must furnish a certificate to the payee. This certificate should provide details of the tax deducted at source and other relevant information.

The Bench observed that proceedings under section 226(3) are in the nature of what is commonly called garnishee proceedings. Further 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. It was viewed that 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.

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], 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”.

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A 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”.

The court further reiterated the decision of Gujarat High Court in Kaneria Granitio Ltd. vs. Assistant Commissioner IT, 2016 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 under section 226(3) of the act.

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