Equitable assignment in favour of a lender bars revenue attachment of contract payments under garnishee recovery proceedings.

An irrevocable power of attorney executed to secure a bank and authorising receipt and appropriation of identified contract monies can operate as an equitable assignment of an actionable claim, including future sums as they accrue. On that footing, the contractor divests the beneficial interest in the relevant fund in favour of the bank, so the revenue cannot treat those amounts as attachable assets of the contractor. Section 226(3) garnishee-style notices issued against the contract debtors were therefore unsustainable because the money was already subject to the bank's prior equitable interest.

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Issues: (i) whether the irrevocable powers of attorney executed by the contractor in favour of the bank constituted an equitable assignment of the monies due and accruing due under the contract bills; (ii) whether, in view of such assignment, the Income-tax Department could validly issue and enforce notices under section 226(3) of the Income-tax Act against the contract debtors.

Issue (i): whether the irrevocable powers of attorney executed by the contractor in favour of the bank constituted an equitable assignment of the monies due and accruing due under the contract bills.

Analysis: The recitals in the instruments showed an intention to secure the bank by authorising it to receive the bills and appropriate the proceeds towards the contractor's indebtedness. The amounts were referable to a specific fund, and the arrangement was not a mere revocable mandate to pay. A power of attorney executed in such circumstances can operate as a transfer of an actionable claim and as an equitable assignment, including in respect of future debts when the subject-matter comes into existence.

Conclusion: The powers of attorney constituted an equitable assignment in favour of the bank, creating an enforceable interest in the monies due and becoming due to the contractor.

Issue (ii): whether, in view of such assignment, the Income-tax Department could validly issue and enforce notices under section 226(3) of the Income-tax Act against the contract debtors.

Analysis: Once the contractor had transferred the beneficial interest in the relevant fund to the bank, the contractor no longer retained an attachable interest in those amounts to which the revenue could attach under section 226(3). The departmental notices were therefore directed against money that had already been subjected to the bank's prior equitable interest, and the subsequent acceptance by the contract debtors did not confer priority on the revenue.

Conclusion: The notices issued by the Income-tax Department were not sustainable and the department could not recover those amounts from the contract debtors.

Final Conclusion: The original petition succeeded, the departmental notices were quashed, and the bank was held entitled to the amounts recovered from the contract debtors with interest.

Ratio Decidendi: An irrevocable power of attorney executed to secure a lender and authorising receipt of monies from identified contract funds can amount to an equitable assignment of an actionable claim, and once such prior interest is created the revenue cannot attach the same amounts under garnishee-type recovery proceedings.

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