Court Rules Cash Credit Accounts Cannot be Attached for Tax Recovery

The court ruled in favor of the petitioner, setting aside the notice of attachment issued under Section 226(3) of the Income Tax Act. It held that accounts like cash credit or term loan accounts cannot be attached for tax recovery purposes. The court emphasized the need for money to be due or becoming due to the assessee for recovery actions. Referring to precedents, including decisions from various High Courts, the court concluded that the attachment of bank accounts, especially cash credit accounts, for unpaid taxes was not sustainable under the relevant provision.

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Issues:
1. Validity of notice issued under Section 226(3) of the Income Tax Act, 1961 for recovery of unpaid tax.
2. Interpretation of Section 226(3) regarding recovery of tax from bank accounts.
3. Applicability of garnishee order in tax recovery cases.
4. Consistency of High Court judgments on attachment of bank accounts for tax recovery.

Issue 1: Validity of notice under Section 226(3):
The petitioner sought to quash a notice under Section 226(3) issued by the respondent to a bank for recovery of unpaid tax. The petitioner argued that the accounts mentioned in the notice were either cash credit or term loan accounts, and thus, there was no money due to the petitioner from the bank for recovery. The Assessing Officer initiated recovery procedures despite the appeal pending before the Appellate Commissioner.

Issue 2: Interpretation of Section 226(3):
Section 226(3) empowers the Assessing Officer to recover tax by requiring any person from whom money is due to the assessee to pay the amount due. The court analyzed the provision and highlighted that the power to recover is based on the existence of money due or becoming due to the assessee. The notice operates as a garnishee order, compelling the debtor of the assessee to pay the arrears directly to the Assessing Officer.

Issue 3: Applicability of garnishee order:
The court referenced a case where a similar situation arose, emphasizing that banks providing overdraft facilities do not hold money as a debtor of the customer but rather facilitate borrowing. This interpretation was consistent with previous judgments, including those from the Madras and Bombay High Courts, which held that accounts like cash credit or overdraft cannot be attached for tax recovery purposes.

Issue 4: Consistency of High Court judgments:
The court noted the consistent view of various High Courts in setting aside attachment orders on cash credit accounts for tax recovery. Citing precedents, including a Division Bench of the Bombay High Court, the court concluded that the attachment of bank accounts for unpaid taxes, especially cash credit accounts, was not sustainable under Section 226(3) of the Income Tax Act.

In conclusion, the court set aside the impugned notice of attachment dated 15.09.2014, ruling in favor of the petitioner and disposing of the petition accordingly.

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