Garnishee notice under income-tax recovery law fails where a bank proves lien and set-off over fixed deposits.

A garnishee notice under section 226(3) of the Income-tax Act could not be enforced against a bank where the record showed that the bank was itself a creditor and the fixed deposits were subject to a subsisting lien and set-off. The department therefore could not treat the bank as a mere holder of money for the assessee, because no enforceable liability to pay the depositor's funds over to the department was shown. In these circumstances, the recovery action was misconceived, and the notice and order under section 226(3) were held invalid and quashed.

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Issues: Whether the notice and order issued under section 226(3) of the Income-tax Act, 1961, requiring the petitioner bank to pay the alleged tax dues of the depositor, were valid when the bank claimed lien and set-off against the fixed deposits.

Analysis: Section 226(3) permits recovery from a person who holds money for or on account of the assessee, but where the materials on record show that the petitioner was itself a creditor and that the fixed deposit receipts were subject to the bank's lien, the department could not treat the bank as a mere garnishee. The seized fixed deposit receipts were not shown to place an enforceable liability on the bank to pay over the amounts to the department, and the bank's statutory and contractual right of appropriation against the depositor's liabilities remained intact. In these circumstances, the recovery action under section 226(3) was misconceived.

Conclusion: The impugned notice and order under section 226(3) were invalid and were rightly quashed; the petition succeeded.

Ratio Decidendi: A garnishee notice under section 226(3) cannot be enforced against a bank where the bank establishes a subsisting lien and a right of set-off over the deposits, and the bank is not shown to hold money for the assessee in the manner contemplated by the provision.

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