Section 46(5A) notice binds only pre-existing liabilities; payments under contracts made after notice cannot be recovered.

The phrase "may become due" in section 46(5A) of the Income-tax Act is confined to liabilities that already subsist on the date of service and which will become payable thereafter; it does not extend to obligations created only by contracts entered into after service of the notice. Section 46(5A) therefore targets garnishee-style amounts due or held for the assessee at the notice date and does not freeze a third party's future freedom to contract. Payments made under a contract formed after the notice cannot be recovered under the earlier notice; recourse lies by judicial review under Article 226.

---

---

Issues: Whether a notice under section 46(5A) of the Income-tax Act, 1961 served on a person prior to the formation of a contract bars that person from making payments under a contract subsequently entered into with the assessee, and whether payments made pursuant to such subsequent contract can be recovered by the department under the earlier notice.

Analysis: The statutory mechanism of section 46(5A) is modelled on garnishee procedures and targets amounts which are due or may become due to the assessee from a person who, on the date of service of the notice, is under an existing obligation to pay the assessee. The key word is "due", which denotes an existing liability or an obligation payable either immediately or at a future date arising from a subsisting relationship. The provision contemplates collection from persons who are debtors or who hold money for or on account of the assessee; it does not, by plain or permissible construction, freeze the alleged garnishee's future freedom to contract. Extending "may become due" to include liabilities that come into existence only after the notice (i.e., obligations created by contracts entered into subsequent to the notice) would unreasonably impair ordinary contractual rights and unduly burden commercial activity. Article 226 of the Constitution furnishes the forum for challenging an improper demand under section 46(5A).

Conclusion: The words "may become due" in section 46(5A) of the Income-tax Act, 1961 mean liabilities which, on the date of service of the notice, are already subsisting and will become payable in future; they do not cover liabilities which arise only after the service of the notice by virtue of contracts entered into subsequently. The department is not entitled to recover the Rs. 20,000 paid pursuant to a contract entered into after the notice. Decision is in favour of the assessee.

---