Retrospective tax extension and garnishee recovery limits barred taxation of pre-notification offshore income and invalid attachment

Income accrued in the accounting year before the operative date of the notification extending the Income-tax Act to the continental shelf and exclusive economic zone was held not taxable in the later assessment year, absent an express deeming provision making the extension retrospective. The court also noted that section 226(3) garnishee recovery applies only where the noticee owes money to the assessee or holds it on the assessee's account; sums payable by ONGC to a third party under a separate contract did not satisfy that . The recovery notice was therefore invalid, and the attached amount had to be released.

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Issues: (i) Whether income accruing in the previous year before the operative date of the notification extending the Income-tax Act to the continental shelf and exclusive economic zone could be taxed for the later assessment year. (ii) Whether a notice under section 226(3) could validly attach sums payable by ONGC to a third party when no money was due to the assessee from ONGC.

Issue (i): Whether income accruing in the previous year before the operative date of the notification extending the Income-tax Act to the continental shelf and exclusive economic zone could be taxed for the later assessment year.

Analysis: The notification extending the Income-tax Act to the continental shelf took effect from 1 April 1983. The income in question had accrued during the previous accounting year 1 April 1982 to 31 March 1983, when the Act was not applicable to the area beyond the territorial waters. The scheme of taxation requires an express provision where income of an earlier period is sought to be brought within a later extended taxing regime. The cited precedents were applied to hold that, in the absence of such an express deeming provision, income earned before the Act became applicable to that area could not be taxed merely because the assessment year fell after the extension.

Conclusion: The income accrued in the accounting year 1982-83 from work beyond 12 nautical miles was not liable to tax under the Income-tax Act, 1961.

Issue (ii): Whether a notice under section 226(3) could validly attach sums payable by ONGC to a third party when no money was due to the assessee from ONGC.

Analysis: Section 226(3) permits recovery only from a person who owes money to the assessee or holds money for or on account of the assessee. The amounts in ONGC's hands were payable under its contract with Hyundai Heavy Industries, while the assessee's claim lay only against Hyundai under a separate subcontract. The attached sum was therefore not money due to the assessee or held on its account. The notice was also unsustainable because the underlying tax demand itself failed in relation to offshore income earned before the Act became applicable.

Conclusion: The notice under section 226(3) was invalid and bad in law.

Final Conclusion: The writ petitions succeeded and the authorities were required to release the attached amount with interest, making the recovery action unsustainable.

Ratio Decidendi: A taxing provision extended to a new orial area does not operate retrospectively to fasten tax on income accrued there before the extension, unless the statute or notification expressly so provides, and garnishee recovery is permissible only where the noticee owes money to the assessee or holds it on the assessee's account.

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