Court rules ADI lacked jurisdiction to order FDR encashment under Income-tax Act

The court held that the Assistant Director of Income-tax (ADI) lacked jurisdiction to order the encashment of Fixed Deposit Receipts (FDRs) under Section 132(1) of the Income-tax Act, 1961. The court directed the Income-tax Department to remit the encashed amount to the bank, instructed the bank to issue fresh FDRs to the petitioners, and allocated the financial burden of compliance to the bank officials responsible for the irregularities. The court emphasized that its directives would not impact the ongoing income-tax proceedings concerning the ownership of the FDRs and disposed of the writ petitions without costs.

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Issues Involved:
1. Legality of the premature encashment of Fixed Deposit Receipts (FDRs) by the Assistant Director of Income-tax (ADI).
2. Validity of the search and seizure operation under Section 132 of the Income-tax Act, 1961.
3. Responsibility and conduct of the bank officials in the encashment of FDRs.
4. Relief and remedy for the petitioners holding the FDRs.

Issue-wise Detailed Analysis:

1. Legality of the Premature Encashment of FDRs:
The petitioners contended that the ADI had no authority under the Income-tax Act to prematurely encash their FDRs and take away the proceeds. The court found that the ADI had a valid authorisation for searching the bank and seizing the FDRs. However, the court held that the ADI had no jurisdiction to order the encashment of the FDRs and recover the proceeds under Section 132(1) of the Act. The court cited the Patna High Court's decision in Santosh Verma v. Union of India [1991] 189 ITR 549, which established that credits in a bank are liable to attachment but such action can only be taken under Section 132(3) by passing a restraint order, not by encashment.

2. Validity of the Search and Seizure Operation:
The ADI justified the seizure by stating that the Income-tax Department had material suggesting that the FDRs were benami and actually belonged to the Anand Group, against whom search and seizure operations had been initiated. The court noted that the bank had furnished information to the Income-tax Department indicating that the FDRs belonged to the Anand Group. The authorisation warrant dated January 31, 1997, was issued based on this information, and the court found that the authorisation was valid and not in dispute.

3. Responsibility and Conduct of the Bank Officials:
The bank claimed that undue pressure was exerted by the ADI on the then chief manager to encash the FDRs and issue a draft in favor of the Income-tax Department. The court found that the bank's records were incomplete and irregular, with many account opening forms missing essential details. The court concluded that the bank officials had not followed proper procedures for opening the FDR accounts and had wrongly encashed the FDRs without a written order from the ADI. The court directed that the financial burden resulting from the premature encashment should be borne equally by the then chief manager and the branch managers responsible for the irregularities.

4. Relief and Remedy for the Petitioners:
The court ordered the following reliefs for the petitioners:
- The Income-tax Department (respondents Nos. 1, 2, and 3) was directed to remit the money from the encashment of the FDRs to the bank within one month, along with any interest earned on the amount.
- The bank (respondent No. 4) was directed to calculate the maturity value of each FDR, including interest, and issue fresh FDRs to the petitioners. These FDRs would be frozen and released only after the ownership issue is resolved in the income-tax proceedings of the Anand Group.
- The financial burden on the bank for complying with these directions would be borne equally by the then chief manager and the responsible branch managers, not by the bank itself.

Conclusion:
The court concluded that the ADI's action of encashing the FDRs was without jurisdiction, and the bank officials' conduct was improper. The court provided specific directives to remedy the situation for the petitioners while ensuring that the financial burden was appropriately allocated to the responsible individuals. The court also clarified that its observations would not prejudice the ongoing income-tax proceedings regarding the ownership of the FDRs. The writ petitions were disposed of accordingly, with no costs awarded.

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