2013 (8) TMI 102 - HC - Income Tax

Court sets aside AO's order, notice on refund, rules escrow not held for assessee. AO lacked jurisdiction.

AAA Portfolios Pvt. Ltd. And Others Versus The Deputy Commissioner of Income Tax And Others

The court set aside the Assessing Officer's order and notice, directing the refund of the amount recovered from respondent No. 2 bank. It concluded that ... Recovery of dues - Notice u/s 226(3) - appropriating a sum of Rs. 95,85,30,934/- which was lying in escrow with the bank - Held that:- Section 226(3) of the Act neither confers jurisdiction nor provides a machinery for an Assessing Officer to adjudicate the indebtedness of a third party to the assessee and the provisions of section 226(3) must be confined to those cases where a third party admits to owing money or holding any money on account of the assessee or in cases where it is indisputable that the third party owes money to or holds money on account of the assessee. However, in cases where there are contentious issues raised by a third party who disputes his liability to pay any money to the assessee there is no mechanism provided or jurisdiction conferred upon the Assessing Officer to proceed further in the matter and take upon himself the mantle of adjudicating the said disputes. It is well settled that even in cases of garnishee proceeding under Order 21 Rule 46 of the Code of Civil Procedure (hereinafter referred to as the “CPC”), the Court may pass a garnishee order enabling a judgment creditor to obtain satisfaction of his claim only in those cases which are similar in scope as to judgments on admission under Order 12 Rule 6 of the CPC. A Court cannot issue garnishee order under Order 21 Rule 46 of the CPC against a debtor of the judgment debtor who disputes his indebtedness unless an issue in this regard is struck and tried as provided under Order 21 Rule 46C of the CPC. Unlike the CPC, Section 226(3) of the Act does not have any provision similar to Order 21 Rule 46C of the CPC which confers jurisdiction on the Assessing Officer to adjudicate the question regarding indebtedness of a third party to an assessee who disputes the same. Once the third party noticee has disputed that he owes any money or holds any money on account of the assessee, the Assessing Officer would not have any jurisdiction to proceed further against the third party. This is also abundantly clear from the language of clause (vi) of Section 226(3) of the Act. There is also no reason why either the purchaser of shares of a company or the selling shareholders have any occasion to pay any part of the consideration for sale and purchase of shares of a company to the company. A company is an independent entity completely distinct from its shareholders. A transaction relating to sale and purchase of shares is a transaction inter-se the selling shareholders and purchasers and a company cannot stake claim to any part of the consideration as shares of a company are not the assets of the company but those of its shareholders. The assessee company is neither a party to the Share Purchase Agreement or the Escrow Agreement nor can claim any sum from the parties to the Escrow Agreement. No money is due to the assessee company by respondent no.2 or is held by or may subsequently be held by Respondent no. 2 on account of the assessee company. The conclusion of the Assessing Officer that the amount of money kept with respondent no. 2 in escrow is available to the assessee for meeting its income-tax demand is thus erroneous. - revenue directed to refund the amount collected from the bank. - Decided in favor of assessee. Issues Involved:1. Legality of the Assessing Officer's order dated 01.02.2013 and the consequential notice dated 04.02.2013 under Section 226(3) of the Income Tax Act, 1961.2. Whether the escrow amount held by respondent No. 2 bank could be appropriated by the Assessing Officer for the tax liability of the assessee company.3. Jurisdiction of the Assessing Officer under Section 226(3) to adjudicate disputes regarding amounts held by third parties on account of the assessee.4. Compliance of respondent No. 2 bank with the notice under Section 226(3) despite its affidavit denying holding any money on account of the assessee company.Detailed Analysis:1. Legality of the Assessing Officer's Order and Notice:The petitioners challenged the order dated 01.02.2013 and the consequential notice dated 04.02.2013 issued under Section 226(3) of the Income Tax Act, 1961. The Assessing Officer appropriated Rs. 95,85,30,934/- lying in escrow with respondent No. 2 bank. The court examined whether the Assessing Officer's actions were within the jurisdiction conferred by Section 226(3) of the Act.2. Appropriation of Escrow Amount:The petitioners argued that the escrow amount was part of the sale consideration for shares of the assessee company, held in escrow to indemnify the purchaser against potential tax liabilities of the assessee company. The court noted that the escrow agreement specified the conditions under which the amount could be released, none of which included payment to the Income Tax Department on behalf of the assessee company. The court found that the Assessing Officer's conclusion that the escrow amount was held on account of the assessee company was patently erroneous.3. Jurisdiction under Section 226(3):Section 226(3) allows the Assessing Officer to recover tax dues from third parties holding money on account of the assessee. However, the court emphasized that this provision does not confer jurisdiction to adjudicate disputes regarding the indebtedness of third parties to the assessee. If a third party disputes holding money on account of the assessee, the Assessing Officer cannot proceed further without a mechanism to adjudicate such disputes. The court cited precedents, including the Calcutta High Court's decision in Shaw Wallace and Co. Ltd. v. Union of India, to support this interpretation.4. Compliance with Notice Despite Affidavit:Respondent No. 2 bank furnished an affidavit stating that the escrow amount was not held on account of the assessee company. The court held that, in light of this affidavit, the Assessing Officer had no jurisdiction to compel respondent No. 2 to transfer the escrow funds. The court referenced the Supreme Court's observation in Surinder Nath Kapoor v. Union of India that a garnishee's denial of liability under oath precludes the Assessing Officer from proceeding further under Section 226(3).Conclusion:The court set aside the Assessing Officer's order dated 01.02.2013 and the notice dated 04.02.2013, directing the refund of the amount recovered from respondent No. 2 bank. The court concluded that the escrow amount was not held on account of the assessee company and that the Assessing Officer lacked jurisdiction to appropriate the funds under Section 226(3). The parties were left to bear their own costs.