Garnishee Proceedings For Tax Arrears
Section 226(3) of the Income-tax Act, 1961, empowers the Assessing Officer (AO) or Tax Recovery Officer to direct any person from whom money is due to the tax-payer who is in default, to pay such amount directly to the tax department. For doing so, a notice in writing has to be issued to the person from whom recovery is to be made of the dues of an assessee. The essential criterion for a notice is that, on the date of service of notice, the person served should be under an existing liability to pay an amount to the assessee (P K Trading v. I.T.O. (78 I.T.R. 427)), though the liability may be required to be discharged (i.e. the amount may become payable to the assessee) at a later date. However, the notice cannot operate in respect of a liability which is not in existence at all on the date the notice is served (Buddha v. I.T.O. (52 I.T.R. 321)), nor in respect of a time-barred debt (Rajakumari v. T.R.C. (116 I.T.R. 306)).
A notice under this sub-section cannot be issued to the Official Liquidator appointed by the Court for winding up a company, without prior leave of the Court (State v. Topno (36 I.T.R. 135)). Section 226(3) cannot be resorted to as a credit-freeze in the case of an unutilized overdraft account in a bank (Adam v. I.T.O. (33 I.T.R. 26)), or for appropriating a grant due from a statutory authority to the assessee which the authority can legally give, and the assessee is bound to use, only for certain specific purposes (Coal Products v. I.T.O. (85 I.T.R. 347)).
If a person to whom a notice is sent and who does not deny his liability to the assessee, fails to make payment as demanded, he would be deemed to be an assessee in default and recovery proceedings may be taken against him for realization of the amount as if it were an arrear of tax due from him (Lakshmi Comm Bank v. Dharam Singh (94 I.T.R. 416)). If the person in disregard of the notice makes the payment to the assessee he would be personally liable to the extent of the payment made to the assessee or to the extent of the amount of tax or other sum due from the assessee, whichever is less.
However, if it is discovered that his statement was false in any material particular, he would be personally liable to the Department to the extent of his own liability to the assessee, or to the extent of the assessee’s liability for any sum due under the Act, whichever is less (Southern Textiles v. I.T.O. (83 I.T.R. 790)).
The burden of showing that the statement is false is on the AO or the TRO; he is bound to conduct a quasi-judicial inquiry, disclosing to the person concerned all relevant material on which he proposes to rely, and reach a quasi-judicial decision (Beharilal v. I.T.O. (131 I.T.R. 129 (SC))). The person making such a false statement may also be liable to prosecution under section 277. In Raj Breweries Ltd. v. Government of India ((2003) 128 Taxman 501), the facts were that the petitioners were companies with dominant shareholding by a company ‘SW’. The petitioners supplied liquor to the respondent, Canteen Stores Department of the Ministry of Defence. An amount was outstanding from the assessee towards income-tax and to recover it, a notice had been issued by the TRO under section 226(3) to the respondent directing it to stop payment which was due to the assessee.
The grievance of the petitioners was that on the basis of that notice, the respondent stopped making any payment to them for the supplies which they had already made to the respondent. They contended that their income was independent of that of the ‘SW’ and, therefore, if ‘SW’ was in default of any amount as arrived at by its AO, the recovery could not be transferred and effected against them.
On the other hand, the respondent submitted that the entire contractual relationship with respect to supply of liquor was between the Defence Ministry and company ‘SW’. All necessary documents were signed by company ‘SW’ with the respondent. All the supplies made by the present petitioners were on behalf of the company ‘SW’.
The Bombay High Court held that the language of section 226(3)(vi) permits a person to whom a notice is sent to lodge his objections and, after those objections are raised, there is also a provision under clause (vii) that thereafter the notice can be revoked. Undoubtedly, the section provides for these objections being raised by a person to whom the notice is sent. In the instant case, respondent No. 1 to whom the notice was sent had chosen to abide by it and not raise objections.
However, it was the petitioners who were the affected parties and, therefore, the provision could be read to permit such sufferers to raise objections before the AO. In fact, the petitioners contended that even if their predominant shareholding was by ‘SW’ (except in the case of two companies), they were assessed to income-tax independently and the amounts attached under the impugned notices were their income. As against that, the AO had placed sufficient material before the High Court to atleast prima facie satisfy that the entire disputed earning was out of the contractual relationship between the Canteen Stores Department and ‘SW’ and that it was the income of ‘SW’. Having been satisfied that there was sufficient material before the AO to justify his action, the Court held that his order was valid.
The High Court therefore held that the Tax Recovery Officer was fully justified in invoking his power under section 226(3) by issuing a notice to the Canteen Stores Department, Government of India.