Section 226(3) recovery limits prevent tax authorities from compelling a stranger to the assessment to withhold payments.

Section 226(3) permits tax recovery only from a person who owes money to, or holds money for, the assessee. A third party with no contractual or legal relationship to the assessee cannot be directed to withhold amounts merely because private agreements allocate tax liability between contracting parties. Such inter se arrangements do not enlarge the statutory recovery powers of the revenue. On that basis, the recovery letter was held to be without authority of law and could not be used to compel the third party to retain payments due to the petitioner.

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Issues: Whether a recovery direction could be issued to a third party under section 226(3) of the Income-tax Act, 1961, and whether private agreements shifting tax liability could be used by the revenue to compel withholding of amounts payable to the petitioner.

Analysis: Section 226(3) authorises recovery only from a person from whom money is due or may become due to the assessee, or who holds money for or on account of the assessee. The third party in this case had no contractual or legal relationship with the assessee and did not owe or hold any money on its behalf. A private arrangement between contracting parties for discharge of tax liability cannot enlarge the statutory recovery powers of the income-tax authorities. The cited decisions were relied upon to reinforce that tax recovery must rest on statutory authority and cannot be founded on inter se contractual arrangements.

Conclusion: The recovery letter was without authority of law and could not be used to require the third party to withhold amounts payable to the petitioner. The relief was granted in favour of the assessee.

Ratio Decidendi: Section 226(3) can be invoked only against a person who owes money to, or holds money for, the assessee, and private agreements cannot be relied upon to expand statutory tax recovery powers against a stranger to the assessment.

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