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In India most of the people believe in savings. This they do by depositing money mainly in the Banks. Therefore an attachment or freezing of your Bank Account can paralyze your finances just within a day as you lose access to the precious savings which you might have saved over many years for a rainy day. In this situation the most appropriate remedy will be to approach the High Court of your State for a writ of Certiorari or the Supreme Court under Article 32 of Constitution of India. It becomes all the more important as any action by the Government Authorities also affects your image in the Society which as everyone knows affects your businesses and daily lives as well.
In this Article we will see such a case and how the Petitoner averted this crisis.
Brief facts of the case:
K. M. Adam (hereinafter referred to as the Petitioner) had a business built on selling hides and skins. Assessing Officer assessed him for Income Tax for the Financial Years ranging from 1948-49 to 1953-54 and Rs. 3,00,000/- was found due by him towards arrears to the Income Tax authorities.
Now comes the second limb of this case, which will be the bedrock of our discussion in this Article. The Additional Income Tax Officer, Second Circle, Madras (hereinafter referred to as the Respondent) also became aware of the fact that the Petitioner has an Overdraft Account of Rs. 1,37,000/- with Indian Bank Limited. So Respondent served notice in terms of Section 46(5A) of Indian Income Tax Act (the erstwhile one). In essence the said Section gives power to the Income Tax Officer to recover sums due towards Income Tax liability (like arrears arising due to non-payment of Income Tax or payment of deficient Income Tax)from those persons who are indebted to the Person assessed to such arrears or liability.
To understand this let’s assume A is assessed to Income Tax and Rs. 100/- was found due by A to the Income Tax Officer. Now there is a person named B who is indebted to A for let’s say Rs.50. It essentially means today or tomorrow B will pay a sum of Rs. 50/- to A due to a pre-existing liability. In this scenario Section 46(5A) of the Indian Income Tax Act gives power to Income Tax Officer to issue notice to B that he must not pay Rs.50/-to A but rather pay the same to the IT Officer.
Now what is the effect of this notice then depends on the course of action which B takes. By way of illustrations we will see B’s actions and its likely consequences:
(I) B we will make payment of his debt, for which he is indebted to B, to the Income Tax Officer, of course to the extent of the liability of B to A. This exonerates B of any future liability or proceedings which may be arise against him for not giving A his money.(Very similar to the case of Succession Certificate where a Banks gets a good discharge even when they just pay the money in the account of the deceased according to the tenor of the said certificate).
(II) B will not pay Rs. 50/- to the IT officer. It will result in the attachment of the said amount in B’s hand and the Collector of that Circle will be entitled to proceed against B so far as the said attachment goes.
(III) B pays debt to A. This will make B personally liable to Income Tax Officer for the amount paid to A or arrears due whichever is less. So if B pays to A Rs. 50/- but the money due from A to the income tax authorities was Rs.100, B will be liable to the IT Officer only for Rs.50, i.e. the lesser amount.
These kind of provisions in the context of Civil Law as contained in Civil Procedure Code, 1908 are called Garnishing. In a Civil Suit if you win against a person, let’s say Z, and then you go into Execution you are called the Decree Holder/Judgment Creditor and Z will be the Judgment Debtor. In Execution proceedings you step into the shoes of Z so far as his debtors are concerned and therefore can recover money from them, of course up to the amount due to you from Z. The process of serving summons by the Executing Court to someone to stop him/her from paying any money to Z is called Garnishing and the said summons are called Garnishee Summons and Z’s debtor (i.e. Judgment Debtor’s Debtor) is called the Garnishee. The provisions relating to Garnishing are contained in under Order 21 Rule 46.
Now let’s come back to the facts again. The effect of Income Tax Officer’s Notice to the Bank was that the Petitioner’s Bank refused to lend him any further money on account of the overdraft extended to him. As the Petitioner was a Businessman closure of the Overdraft Account meant non lending of any money to him which will affect his business adversely, not to mention the adverse credit ratings due to the aforementioned Notice. So, the Petitioner duly challenged the notice under Article 226 of the Constitution of India, 1950 and sought it’s quashing by invoking Certiorari jurisdiction of the Madras High Court. In a case where a Governmental body while taking an action exercises its authority in excess of the power given to it under the law, Certiorari (one of the prerogative writs) for quashing/setting aside that action lies in the High Court. In this case the Certiorari was sought on the ground that the Section 46(5A) of the Indian income Tax Act does not authorise Income Tax Officer to attach an overdraft account as an overdraft account does not qualify as an account in which a debt is held (unlike a fixed deposit or savings account). As most of us are aware that the overdraft facilities are given by a Bank to its customers are not based on any deposit made by the customers. It only prescribes an upper limit whereby customers can withdraw amount up to that particular limit (in this case Rs.1,37,000/-).For securing itself the Bank hypothecates the goods of the customers so that in the event of non-payment the same can be realised by selling these hypothecated goods.
One of the interesting arguments propounded by the Respondent was that the Bank might not be a debtor of the Petitioner as nothing is held to the credit of the Petitioner but as soon as a cheque is issued by the Petitioner on the Bank and the Bank makes up its mind to credit the same to the Petitioner, at the very same moment the Bank becomes indebted to the Petitioner and Section 45 (5A) comes into operation and hence the Bank rather than crediting the same to the Petitioner must remit the said amount towards the Income Tax Officer in terms of the Section 46(5A) of the Indian Income Tax Act. But this contention is farfetched as it will mean that the Bank becomes indebted to a person who has not deposited a single penny into the Bank Account (one of the features of an overdraft account) and the Bank which has lent the money becomes a debtor itself.
In the light of these arguments the Hon’ble High Court of Judicature at Madras held that if there is no deposit of a customer in the bank account but only a limit up to which a person can withdraw an amount then holding an overdraft account does not indebt a Bank and hence the Bank cannot be considered a Garnishee and therefore Section 46(5A) of the Indian Income Tax Act is inapplicable.
In India we see that many a times an account is frozen or attached by Income Tax Officer/ Enforcement Directorate/ Provident Fund Commissioner/ Labour Commissioner/ Collector on the ground that some arrears are due or some penalty have not been paid. In these circumstances in absence of an expert Advocate, who specializes in Civil Law, you will lose not only access to your finances but also to the goodwill your name holds in the Market/Society. Hence at Uniquely Legal our endeavour is to guide Our Clients in the right direction so that they do not face these kind of adversity.
Parveen Semwal
Advocate, Delhi High Court and Supreme Court of India