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

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 the escrow amount was not held on account of the assessee company, and the Assessing Officer lacked jurisdiction to appropriate the funds under Section 226(3) of the Income Tax Act, 1961. The parties were left to bear their own costs.

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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.

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