Bank Cash Credit / Overdraft account which has not been utilized or availed can not be attached by Income Tax Authorities u/s 226
In a recent judgment, the Hon’ble High Court has held that bank Cash Credit / Overdraft account, which has not been utilized or availed of can not be attached by income tax authorities u/s 226 as relationship of ‘debtor and creditor’ does not exits.
ABCAUS Case Law Citation:
4345 (2024) (12) abcaus.in HC
In the instant case, the assessee/Petitioner had filed a Writ Petition praying for quashing order of attachment of cash credit account as illegal, arbitrary and beyond jurisdiction as so mentioned in Section 226(3) of the Income Tax Act 1961.
The petitioner was dealing in the work of Iron and Steel. The petitioner had a bank account in the nature of “Overdraft / Cash Credit” with two banks with a huge debit balance.
In the case of the assessee, an assessment order under Section 143(3) of the Act was passed along-with a notice of demand under Section 156 of the Act. The petitioner assailed this demand before the Hon’ble High Court and was granted interim stay with regard to the issue of the income.
When the employees of the petitioner approached banks qua the routine transactions undertaken for the business activities of the petitioner, they were informed that there was a communication addressed by Assessing Officer (AO), whereby, the bank(s) had been asked to seize the account of the petitioner with immediate effect.
When the petitioner enquired about the letter/communication/any further details, the bank refused to supply the same and informed the petitioner that they would be initiating the process of seizing the account of the petitioner with immediate effect. The petitioner, however, somehow, managed to get the communication issued by the authorities under Section 226(3) of the Act.
Before the Hon’ble High Court, the Income Tax Department contended that it was well within its right to attach the overdraft / cash credit accounts having “credit balance” which may be treated as a saving account and the account of “credit balance” can also be attached. It was averred that the petitioner itself had not placed any material on record which may show that the attached account had a ‘debit balance or credit balance’.
The question to be answered by the Hon’ble High Court was whether the accounts which are in the nature of Cash Credit Accounts can be attached and that there was any money due to the petitioner from the bank which can be recovered in terms of sub section (3) of Section 226 of the Act?
The Hon’ble High Court observed that sub Section (3) of Section 226 of the Act enables the Assessing Officer or the Tax Recovery Officer by notice in writing to require any person from whom money is due or may become due to the assessee or any person who owes or may subsequently owe money for on account of assessee to pay the Assessing Officer or Tax Recovery Officer. Proceedings under sub Section (3) of Section 226 of the Act are in the nature of what is commonly called garnishee proceedings. Attachment of debts is a process by means of which judgment creditor is enabled to reach the money due to a judgment debtor which is in the hands of a third person. These are garnishee proceedings. To be capable of attachment, there must be in existence at the time when the attachment becomes operative, sometime which the law recognizes ‘debt’. So long as there is debt in existence, it is not necessary that it should be immediately payable. Where any existing debt is payable by future
installments, the garnishee order may be made to become operative as and when installment becomes due. The debt must be one which the judgment debtor could himself enforce for his own benefit. The debt is a sum of money which is now payable or will become payable in future by reason of present obligation.
The Hon’ble High Court observed that the Madras High Court while dealing with a provisions under Income Tax Act, 1922 has dealt with a question whether the bank account a holds the amount, specified as that up to which the customer may draw is either ‘ a debtor ‘ of the customer or holds that money on behalf of or on account of the customer. It was held that when a Bank lends money on overdraft and the customer is always in debit there is no stage at which the Bank is a debtor to its customer, nor and point of time at which it holds any money of his on his account. S. 46(5-A) of the Act cannot on any construction be intended as a credit-freeze, with this feature superadded, that if there was any thawing, the resultant credit released became immediately payable to the department.
The Hon’ble High Court further observed that similar issue came up for consideration before the Division Bench of the Bombay High Court which relying on the judgment of the Madras High Court and Karnataka High Court which held that the account in question being a Cash Credit Account, which in other words is a overdraft facility, the unutilized overdraft account does not render the banker the debtor in any sense and the banker is, therefore, not a person from whom money is due to the customer. It was further observed that where the banker lends money on an overdraft and the customer is always in debit there is no stage at which the banker is debtor to the customer, nor at any point of time at which he holds any money of the customer or the latter’s account.
The Hon’ble High Court also observed that identical question as involved in the instant case came up for consideration before Calcutta High Court. The sheet anchor of the argument was that the authority while invoking the provisions contained under Section 226(3) of the Act, cannot pass an order of attachment of Cash Credit account, which has not been utilized or availed of as yet. it was held that unless there exists a relationship of ‘debtor and creditor’ the order of attachment by an authority under the provisions contained under Section 226(3) of the said Act cannot be passed. It was further held that the Cash Credit limit is a facility provided by the bank to its customers to use and utilize the money; and if such facility availed of, it would attract the interest to be charged for the same so utilized.
Similarly, the Gujarat High Court held that unless there exists a relationship of ‘debtor and creditor’ the order of attachment by an authority under the provisions contained under Section 226(3) of the said Act cannot be passed. It was further held that the Cash Credit limit is a facility provided by the bank to its customers to use and utilize the money; and if such facility availed of, it would attract the interest to be charged for the same so utilized. The aforesaid view of the Gujarat High Court had been followed by the division Bench of the Punjab and Haryana High Court.
In view of the above judgments, the Hon’ble High Court in the instant case opined that mere providing a facility of an overdraft, it cannot be said that the bank is a debtor to its customers or holds the money for account of its customers, nor any point of time at which it holds any money of his on his account. The Cash Credit limit is a facility provided by the bank to its customers to use and utilize the money and if such facility availed of, it would attract the interest to be charged for the same so utilized and, therefore, the amount cannot be attached in terms of sub Section (3) of Section 226 of the Act.
It was held that action on the part of authorities in passing the order of attachment of Cash Credit Account was not at all sustainable and was clearly beyond the powers conferred under Section 226(3) of the Act and, accordingly quashed and set aside.
Download Full Judgment Click Here >>
- ESI Corporation Coimbatore invites tenders for Empanelment of CA Firm for FY 2025-26
- Fixing date of personal hearing prior to date of filing reply – GST order quashed
- MCA designates 3 Special Courts for speedy trial of offences u/s 435(2)(b) of Companies Act
- Exemption u/s 54EC allowed for delayed investment in REC Bonds
- There is no provision in GST Act for reserving judgement and delivering it later
