Whether when a notice issued u/s 226(3), is not pursued further by Revenue in terms of any show cause notice, assessee can still be treated as deemed assessee in default - NO: HC

THE issues before the Bench are - Whether when a notice issued u/s 226(3), is not pursued further by the Revenue in terms of any show cause notice, the assessee can still be treated as deemed 'assessee in default' qua this notice; Whether a notice can have a valid enforceable effect in law, even if it has been waived; Whether in case of a general lien, bank has a lien on the account in respect of dues of the party and the said parties are indebted to bank; Whether in absence of a garnishee order, the saving bank account and open cash credit account can be clubbed together; Whether proceedings u/s 226(3) are in nature of garnishee proceedings; Whether a person to whom garnishee notice is issued, must be in the position of a creditor with
respect to the assessee in default; Whether at the time of the garnishee notice, the sum must be due to the assessee and Whether in order to create Banker's lien on several accounts it is necessary that they must belong to the payer in one and in the same capacity. And the verdict goes in favour of the assessee.

Facts of the case

Assessee, an individual, was posted as senior manager of Canara Bank at Agra, when he was served with a notice issued u/s 226(3) by Tax Recovery Officer (TRO) for attaching the accounts of three persons namely (1) Mukesh Kumar Agrawal, proprietor of M/s. Singhal Casting Company Limited, (2) Sardar Paramjeet Singh and (3) M/s. Shivangi Steel Private Limited. It was stated that a sum of Rs.41,43,342/- with interest was due from Mukesh Kumar Agrawal, the assessee, on account of income tax dues. It was directed to pay the said sum forthwith. Promptly, the assessee submitted a reply stating that M/s. Singhal Casting Company and M/s. Shivangi Steel Private Limited were enjoying open cash credit limits with the bank and were indebted to the bank. Sardar Paramjeet Singh was not having any account with the bank. Subsequent thereto, the Branch Manager, Canara Bank was served with another notice u/s 226(3) requiring the Branch Manager to pay to the TRO forthwith any amount due from to or held by the noticee for or on account of the assessee namely M/s. Singhal Casting Company. On 8th of August, 2006 the TRO had issued a fresh notice u/s 226(3), informing the Branch Manager, Canara Bank u/s 226(3) that a sum of Rs.41,43,342 + interest was due from Sri Mukesh Kumar Agrawal, proprietor of M/s. Singhal Casting Co. Ltd. The reply filed by the assessee and bank, was not found satisfactory. Thereafter, a SCN was issued for non compliance of the letter and notice issued u/s 226 (3), as to why he should not be treated assessee in default equal to the amount allowed by him to withdrawal from the account of M/s. Shivangi Steel Private Limited and M/s. Singhal Casting Co. (the assessee) on account of income tax liability requiring the branch manager u/s 226 (3) to pay forthwith any amount due from him or held by him for, on account of the said assessee. The TRO had declared the petitioner deemed to be an assessee in default as he was posted as manager of Canara Bank at the time of service of notice u/s 226 (3), in respect of the amount of Rs.36,11,720/- for tax and interest amount u/s 220(2). It had further provided that the notice dated 22.2.2006 would had the same effect as attachment of debt by the TRO in exercise of his powers u/s 222. Against the aforesaid order, the present writ petition had been filed.

A counter affidavit had been filed by the Department wherein it had been stated that, three separate notices were issued to the then branch manager of Canara Bank in respect of Sri Mukesh Kumar Agrawal, Proprietor of M/s. Singhal Casting Company, Sardar Paramjeet Singh and M/s. Shivangi Steel Private Limited. These notices were prepared and issued in statutory format. The amounts due from the defaulter assessees were mentioned in the prescribed column. Further it was pointed out that there was a credit balance of Rs.94,031.04 in the Saving Bank Account of Sri Mukesh Agrawal and as per section 226(3) the petitioner was required to remit the said amount of Rs.94,031.04 to the Department and also required to stop all the debits from the account. But the petitioner had not complied with the notice u/s 226(3) dated 5th of September, 2005. The notice dated 22.2.2006 was issued for or on account of defaulter assessee namely Sri Mukesh Agrawal and his proprietorship Firm M/s. Singhal Casting Company. It had been pleaded that the Saving Bank Account in the name of Mukesh Agrawal and cash credit account in the name of his proprietary Firm M/s. Singhal Casting Company should not had been clubbed by the petitioner for the purposes of notice issued u/s 226(3). Along with the counter affidavit a copy of the notice u/s 226 (3) for Shivangi Steels Private Limited had been annexed. The stand taken in the counter affidavit in brief was that in pursuance of the second notice dated 22.2.2006 u/s 226 (3), the Saving Bank Account of Sri Mukesh Agrawal should had been attached and he should not had been permitted to operate the same. Further, no lien was recorded over the said account by the bank and as such, the petitioner was deemed assessee in default as he failed to comply with the second notice dated 22.2.2006.

Before HC, assessee had submitted that after service of the impugned order dated 26th of June, 2007 inquired from Mukesh Kumar Agrawal, Proprietor of M/s. Singhal Casting Company about the status of their case/appeal in respect of which the petitioner had been treated as assessee in default. Sri Mukesh Kumar Agrawal had handed over a copy of the order passed by the Tribunal in respect to the block period 1st of April, 1989 to 16th of February, 2000. The matter was pending and subjudice before the CIT (A) in pursuance of the order passed by the Tribunal vide para 38 of the writ petition. Mukesh Kumar Agrawal, proprietor of M/s. Singhal Casting Company had also moved an application for settlement of the case u/s 243 C (1) in the Settlement Commission and had deposited a sum of Rs.8,70,000/- before the SETCOMM. It was submitted that in any case, the petitioner cannot be held personally liable. He was discharging the duties as an officer of the bank. He had acted in the light of the instructions issued by the Head Office from time to time. It was also submitted that no personal liability can be fastened on the petitioner who had discharged the duties in the official functioning of the bank for which he cannot be made personally liable. On the other hand, Revenue's counsel had submitted that on a true and correct reading of the second notice dated 22.2.2006, it would be clear that through this notice, the branch manager, Canara Bank was required to attach the account of Mukesh Kumar Agrawal as his name finds mention in the notice though as proprietor of M/s. Singhal Casting Company. It was submitted that the Saving Bank Account of Mukesh Kumar Agrawal was not within the purview of open cash credit facility granted to M/s. Singhal Casting Company and as such, the impugned order holding that the petitioner was deemed as assessee in default was correct. The petitioner in view of section 226(3) (ix) was personally liable.

Held that,

++ the Court was taken through all the three notices issued from time to time u/s 226(3) and it was submitted that the first notice dated 5th September, 2005 was not pursued any further by the department as no show cause notice etc. was given treating the petitioner as deemed assessee in default qua this notice. The notice shall be deemed to had been waived. The impugned order and the correspondence entered into in between the petitioner and bank and the TRO, would show that the impugned order has been passed on the basis of the alleged non compliance of the second notice dated 22.2.2006. The said notice is in respect of M/s. Singhal Casting Co., who had a debit balance of Rs.65,70,527.71 on 22.2.2006. The account holder was enjoying the open cash credit facility from the bank. The TRO was informed about this factual position but wrongly proceeded to hold the petitioner deemed assessee in default. He has proceeded on the footing that at some point of time subsequent to 22.2.2006 there was a credit balance in the Saving Bank Account of Mukesh Kumar Agrawal. The submission is that the second notice does not purport to attach the Saving Bank Account of Mukesh Kumar Agrawal. Even otherwise also, submission is that the bank had a general lien over all the accounts in view of the open cash credit facility granted to M/s. Singhal Casting Company Limited, including the Saving Bank Account. By the third attachment notice u/s 226(3), the Branch Manager of Canara Bank was informed that a sum of Rs.41,43,342 + interest is due from Mukesh Kumar Agrawal, proprietor of M/s.Singhal Casting Company. Therefore, the petitioner who was subsequently transferred from the present branch could not be held deemed assessee in default;

++ the first garnishee notice was replied by the petitioner on 8th of September, 2005 informing that M/s. Singhal Casting Company and M/s. Shivangi Steel Private Limited are enjoying the open credit limits with the bank and indebted to the bank and bank has general lien. Thereafter, it appears that being aggrieved by the recovery proceedings, M/s. Singhal Casting Company filed a writ petition no.1356 of 2005 before this Court impleading the Tax Recovery Officer and Branch Manager, Canara Bank as respondents, for quashing of the notice dated 5th of September, 2005 and 13th of September, 2005 issued by the TRO, Kanpur. The writ petition was allowed in part and it was disposed of with the direction that an early date be fixed by the CIT(A) for disposal of the stay application till the orders are passed on the stay application the TRO, Kanpur shall keep in abeyance the notices dated 5th of September, 2005 and 13th of September, 2005. Subsequently, the Appeal was dismissed by the CIT(A). TRO had not proceed further in the matter on the basis of the aforesaid notices dated 5th of September, 2005 and 13th of September, 2005. Instead another notice dated 22.2.2006 was issued. The second notice alleges that a sum of Rs.41,43,342/- plus interest is due from M/s. Singhal Casting Company of which proprietor is Mukesh Kumar Agrawal. The first notice dated 5th of September, 2005 wherein it was stated that the sum is due from Mukesh Kumar Agrawal was not pressed any further. We find sufficient force in the argument of the petitioner's counsel that the first notice dated 5th of September, 2005 was waived and shall be deemed to have been waived in the facts and circumstances of the case;

++ it is interesting to note that the present writ petition was earlier heard by us on 05.3.2013 and the judgment was reserved. During the course of argument, neither the counsel for petitioner nor the counsel for respondents had advanced any argument on the basis of the first notice and the hearing of the writ petition proceeded and concluded on the basis of the second notice. While preparing the judgment, we could lay our hands on the first notice dated 5th of September, 2005. Thereupon, the matter was refixed for further arguments. This also shows that the respondent department is not placing any reliance upon the said first notice. A perusal of the impugned order would show that the petitioner has been deemed assessee in default on the basis of the second notice dated 22.2.2006. Reference can be made to ultimate paragraph i.e. paragraph 14 of the impugned order. No show cause notice etc. or any further steps was taken by the respondent no.2 with reference to the first notice dated 5th of September, 2005. Therefore, irresistible conclusion is that the notice dated 5th of September, 2005 is of no avail to the respondent department, as it was waived by the conduct of the Tax Recovery Officer;

++ from the above quoted portion of the notice, it is crystal clear that the said notice was given in respect of dues from M/s. Singhal Casting Company, proprietor Mukesh Kumar Agrawal. The bank was having a bank account of M/s. Singhal Casting Company, which had a debit balance of Rs. Rs.65,70,527.71 as on 22.2.2006. The bank in its reply has stated that the subject parties are enjoying open cash credit facility which is granted against hypothecation of stock such as raw material, work in progress, finished goods and stock in trade. The said facility is extended to a party to meet their working capital requirement. In this regard we further clarify that the subject parties are enjoying OCC facility from our branch. This facility is granted against the hypothecation of stock such as raw materials, work-in-progress, finished goods and stock in trade. OCC Account is a credit facility extended to a party to meet their working capital requirement. Hence, in general this account will be having debit balance and the credit balance, if any, should be adjusted against the liabilities of the party lying in various accounts. It may be noted that as a creditor bank has a lien on the account in respect of dues of the party. Hence, those who are enjoying OCC facility will be indebted to bank, not vice versa;

++ there appears to be no dispute that there was debit balance in the bank account of M/s. Singhal Casting Company. The said difficulty has been tried to overcome by the respondent no.2 by taking a resort to the Saving Bank Account of Mukesh Kumar Agrawal that is saving bank account No.9319. It would be clear from a perusal of the impugned order that the TRO has proceeded in the matter on the premise that Mukesh Kumar Agrawal on two occasions i.e. on 8th of May, 2006 and 6th of June, 2006 had credit balance of Rs.20,04,727.44 and Rs.10,02,045.44 respectively in his saving bank account. If the saving bank account and open cash credit account are clubbed together, there would be credit balance. Firstly, we find that there being no garnishee notice in respect of the saving bank account of Mukesh Kumar Agrawal, the same cannot be clubbed with the account of M/s. Singhal Casting Company. The second garnishee notice is in respect of M/s. Singhal Casting Company and the bank itself was in the position of its creditor;

++ sub section (3) of section 226 of the Act enables the Assessing Officer or the 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 or on account of assessee to pay to the Assessing Officer or Tax Recovery Officer. Proceedings under Sub section (3) of section 226 of the Act are in nature of what is commonly called garnishee proceedings;

++ attachment of debts is a process by means of which judgement creditor is enabled to reach the money due to a judgment debtor which is in the hands of a third person. These are garnishee proceedings. To be capable of attachment, there must be in existence at the time when attachment becomes operative something which the law recognises as a debt. So long as there is a debt in existence, it is not necessary that it should be immediately payable. Where any existing debt is payable by future instalments, the garnishee order may be made to become operative as and when each instalment becomes due. The debt must be one which the judgment debtor could himself enforce for his own benefit. A debt is sum of money which is now payable or will become payable in future by reason of present obligation (See Hyderabad Cooperative Commercial Corporation Limited Vs. Sayeed Mohit Khadir, AIR 1975 SC 2254). The crux appears to be that the person to whom garnishee order/notice is issued must be in the position of a creditor with respect to the assessee in default;

++ the use of words 'due to the assessee' is important. At the time of the garnishee notice, the sum must be due to the assessee. In this context the counsel for the petitioner submitted that on the date of second notice as also on the date of first notice, nothing was due from the bank to the assessee i.e. M/s. Singhal Casting Co. Ltd.. The bank had provided open cash credit limit and there was debit balance in the account of the assessee namely M/s. Casting Co. Limited. This was so stated in reply to the first notice (which has not been pursued any further and is not basis of the impugned order). The basis of the impugned order is the second notice dated 22.2.2006 in reply whereof, the petitioner submitted that nothing was due from the bank to M/s. Singhal Casting Co. Limited, a fact which has not been found to be incorrect even in the order impugned in the writ petition, thus, stands unchallenged. As pointed out herein above, and keeping the very nature of the garnishee proceedings in the background of mind, as also the observation by the Apex Court in the case of Hyderabad Commercial Corporation as in the case of Budha Pictures, we find sufficient force in the argument of the petitioner that on the date of garnishee notice, the bank was not in a position of a debtor of the assessee but was in the position of a creditor as the assessee had open cash credit limit and debit balance in its account;

++ the burden of showing that the statement on oath is false in any material particular would be on revenue, as held by the Apex Court in Behari Lal Ram Charan Vs. I.T.O., (1981) 131 ITR 129. Revenue would be bound to disclose to garnishee all such material or evidence on which it proposes to rely. It would have to be shown by the revenue on the basis of relevant evidence or material that the statement on oath is false in any material particular and that a certain definite amount is due from the garnishee to the assessee. It is only then that personal liability for payment can be imposed on the garnishee u/s 226(3)(vi). Here the words "false in any material particular" are important. The word 'false' is stronger word than the word 'wrong'. Some-kind of intention of making a wrong statement is essential to construe a statement as false. Here, the petitioner being in a position of Manager of the Bank took the precautionary steps to communicate the garnishee notice to its Head Office and sought guidance therefrom. The petitioner contends that all the material time he acted as per guidance provided by the Head Office from time to time. Being a bank employee, the petitioner was required to follow the instructions of its Head Office. Coupled with this fact, the bank account of the assessee M/s. Singhal Casting Company was in red. The stand of the bank that it has general lien on the saving bank account of Mukesh Kumar Agrawal as per banking practice, cannot be said to be totally untrue;

++ in order to create Banker's lien on several accounts it is necessary that they must belong to the payer in one and in the same capacity. Where the person has two accounts, one a trustee account and another private account at a Bank, deposits in the two accounts cannot be set off, the one against the other (see AIR 1934 Rang 66). Bankers have a right to combine one or more accounts of the same customer. But it cannot combine the account belonging to another or to himself alone with another account which is the joint account with another and third person, vide Radha Raman v. Chota Nagpur Banking Association Ltd., AIR 1944 Pat. 368 and Punjab National Bank Ltd. v. Satyapal Virmani, AIR 1956 Punj 118. Similarly, the Banks have no lien, on the deposit of a partner, on his separate account, for a balance due to the Bank from the firm. Therefore the banker is entitled to combine all accounts kept in the same right by the customer. It does not matter whether the accounts are current or deposit or whether they are in the same or different branches (Garnett v. Mckewan (1872), 8 Ex. 10). It is of essence to the validity of a banker's lien, that there should be a mutually of claim between the Bank and the depositor. In order that it should be permissible to set off one demand against another both must mutually exist between the same parties;

++ since the very inception, plea of Banker's lien was set up as a defence by the petitioner. The said plea has not been meted out by the respondent no.2, properly. Such a vital issue, touching the jurisdictional fact, has been disposed off with the remark that no lien was recorded with respect to saving bank account of Mukesh Kumar. The plea should have been considered in the light of the loan agreement and other related documents. The department has failed to discharge its burden that plea in defence is false. The rule of English law that the Bank has a lien or more appropriately, a right to set off against all monies of his customers in his hands has been accepted as the rule in India. According to this rule when monies are held by the Bank in one account and the depositor owes the Bank on another account, the Banker by virtue of his lien has a charge on all monies of the depositor in his hands and is at liberty to transfer the monies to whatever account, the banker may like with a view to set off or liquidate the debts: vide Llyods Bank Ltd. v. Administrator General of Burma, AIR 1934 Rang 66 and Devendrakumar Lalchandji v. Gulabsingh, AIR 1946 Nag. 114.

++ from the pleadings of the parties, as they stand, it is clear that the income tax dues against the assessee either has been reduced, modified or still pending final adjudication. In para 39 of the writ petition it has been stated that M/s. Singhal Casting Company has moved an application for settlement of the case under section 243-C (1) of the Income Tax Act in the Settlement Commission on 28.5.2007 and has deposited a sum of Rs.8,70,000/-. The contents of the said paragraphs have not been denied and only this much in reply has been stated, that it is a matter of record, by the respondents. The another aspect of the matter is that in pursuance of the order dated 28.2.2007 passed by the Income Tax Appellate Tribunal in respect of block period 1st April, 1989 to 16th February, 2000 the matter has been restored back to the file of CIT (A) to decide the appeal afresh on merits. The said appeal is said to be pending when the petition was filed and was still pending when the counter affidavit was filed by the respondents. We have noted these facts with a view to show that the assessment proceeding does not appear to have been concluded. In this factual matrix, it would not be appropriate to hold the petitioner deemed assessee in default to make him personally liable to pay a sum of Rs.36,11,720/- which includes Rs.7,52,329/- towards the interest when the matter relating to determination of tax liability of M/s. Singhal Casting Company is subjudice before the Settlement Commission and/or CIT (A) as admitted by the parties. After all, the department is interested to recover the money due to it as per law and not otherwise. Section 226, as its heading suggests is one of the modes for recovery of outstanding tax dues which in the case on hand has not yet crystallized to a definite figure or attained the finality so far. Viewed as above, we find sufficient force in the petition and the grounds raised therein. In the result, the writ petition succeeds and is allowed and the impugned order dated 26.6.2007 passed by the respondent no.2 is quashed with cost of Rs.10,000/- payable by the respondent no.2 to the petitioner.