Bombay High Court Rules Overdraft facility can’t be attached for tax recovery

The taxman does not have claim over the bank overdraft facility of a defaulter since the lender does not owe money, but has promised a loan for business, the Bombay High Court has ruled. By taking an overdraft facility, a taxpayer becomes a debtor to the bank and hence, no authority has the right to attach overdraft facility for recovering tax dues, the court said in an order dated July 8. 

The court ruling came in a case between Navi Mumbai Municipal Corporation and Sargam Foods over outstanding municipal cess. The court said that Navi Mumbai Municipal Corporation did not have the right to attach the overdraft account of the Thane-based Sargam Foods to recover dues from the company. The overdraft facility was from the Dombivli Nagari Sahakari Bank.

To recover dues from defaulters, authorities issue notices to those who owe money to the defaulter, like in bankruptcy proceedings. While the assets of the defaulter could be sold to recover dues, contracted loans could not be treated as assets. There were precedents to such rulings.

“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 he holds any money of the customer or the latter’s account,” the Madras High court had held. A similar judgement was delivered by the Karnataka High Court in 1999 in a case between Karnataka Bank and the Commissioner of Commercial Tax.

Sargam lawyer Jitendra Jain said such notices for recovery could be sent to “any person from whom money is due or may become due to the assessee or any person who holds or subsequently holds money for or on account of the assessee.”

The division bench comprising justice RG Ketkar and justice PB Majmudar agreed with the verdict of Madras and Karnataka High Courts and set aside the order of NMMC. This does not stop the municipal corporation from recovering the money in any other manner.