Court Finds Garnishee Notice Waived, Petitioner Not Liable for Tax Default

The court found that the first garnishee notice was effectively waived due to the Tax Recovery Officer's inaction, thus the petitioner was not deemed assessee in default. The second notice was deemed erroneous as the bank was not holding any money for the debtor at the time. The petitioner, acting as a bank officer, could not be personally liable for following bank instructions. As the tax dues were still under review, the court quashed the order deeming the petitioner in default and ordered costs to be paid to the petitioner.

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Issues Involved:
1. Effect of the first garnishee notice dated 5th of September, 2005.
2. Legal sustainability of the impugned order holding the petitioner deemed assessee in default under section 226 of the Income Tax Act.
3. Personal liability of the petitioner as deemed assessee in default under section 226 of the Income Tax Act.

Detailed Analysis:

First Point:
The first garnishee notice dated 5th of September, 2005, required the petitioner to pay any amount due from the bank to Mukesh Kumar Agrawal, proprietor of M/s. Singhal Casting Company. The petitioner replied on 8th of September, 2005, stating that M/s. Singhal Casting Company and M/s. Shivangi Steel Private Limited were enjoying open cash credit limits with the bank and were indebted to the bank. The Tax Recovery Officer did not pursue this notice further, and no show cause notice was issued treating the petitioner as deemed assessee in default. The court found that the first notice was effectively waived by the conduct of the Tax Recovery Officer, as the department did not take any further steps based on this notice.

Second Point:
The second notice dated 22.2.2006 was issued for the recovery of dues from M/s. Singhal Casting Company. The bank account of M/s. Singhal Casting Company had a debit balance of Rs.65,70,527.71 on 22.2.2006, and the bank was not a debtor but a creditor of M/s. Singhal Casting Company. The court emphasized that the garnishee notice must be directed at a person who is in the position of a creditor to the assessee. The Tax Recovery Officer erroneously clubbed the saving bank account of Mukesh Kumar Agrawal with the open cash credit account of M/s. Singhal Casting Company. The court held that the petitioner could not be deemed assessee in default as the bank was not holding any money for M/s. Singhal Casting Company at the time of the garnishee notice.

Third Point:
The court addressed whether the petitioner could be personally liable as deemed assessee in default. Section 226(3)(vi) of the Income Tax Act requires that if a statement made by the person to whom the garnishee notice is issued is found to be false in any material particular, that person can be held personally liable. The court found that the petitioner's actions were based on instructions from the bank's Head Office and that the plea of general lien on the saving bank account of Mukesh Kumar Agrawal was not proven false by the department. The petitioner, acting as a bank officer, could not be held personally liable for discharging his official duties.

Subsequent Developments:
The court noted that the income tax dues against M/s. Singhal Casting Company were either reduced, modified, or still pending final adjudication. The matter was subjudice before the Settlement Commission and/or CIT (A). Given that the assessment proceedings had not concluded, the court found it inappropriate to hold the petitioner personally liable for the disputed tax amount.

Conclusion:
The writ petition was allowed, and the impugned order dated 26.6.2007 was quashed. The respondent no.2 was ordered to pay costs of Rs.10,000/- to the petitioner.

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