1. Issue: The issue is whether an Income Tax Recovery Officer can attach the cash credit or overdraft account of a taxpayer for outstanding demands.
2. Before we discuss further, let us look into the relevant section that grants powers to either the Tax Recovery Officer or the Assessing Officer. Whenever a demand has been raised against the taxpayer as a result of an intimation order under Section 143(1) or a scrutiny assessment order under Section 143(3) of the Income Tax Act, the department allows a time frame of 30 days from the receipt of the demand notice under section 156 of the I.T Act, to pay the demand. If the taxpayer does not agree with the demand, they can file an appeal before the First Appellate Authority, which is the JCIT (Appeals) or CIT (Appeals), after paying 20% of the net demand. Only then, the recovery of the demand will be stayed by the authorities. Section 226(3) states that…
(3) (i) The Assessing Officer or Tax Recovery Officer may, at any time or from time to time, by notice in writing require any person from whom money is due or may become due to the assessee or any person who holds or may subsequently hold money for or on account of the assessee to pay to the Assessing Officer or Tax Recovery Officer either forthwith upon the money becoming due or being held or at or within the time specified in the notice (not being before the money becomes due or is held) so much of the money as is sufficient to pay the amount due by the assessee in respect of arrears or the whole of the money when it is equal to or less than that amount.
(ii) A notice under this sub-section may be issued to any person who holds or may subsequently hold any money for or on account of the assessee jointly with any other person and for the purposes of this sub-section, the shares of the joint holders in such account shall be presumed, until the contrary is proved, to be equal.
(iii) A copy of the notice shall be forwarded to the assessee at his last address known to the Assessing Officer or Tax Recovery Officer, and in the case of a joint account to all the joint holders at their last addresses known to the Assessing Officer or Tax Recovery Officer.
(iv) Save as otherwise provided in this sub-section, every person to whom a notice is issued under this sub-section shall be bound to comply with such notice, and, in particular, where any such notice is issued to a post office, banking company or an insurer, it shall not be necessary for any pass book, deposit receipt, policy or any other document to be produced for the purpose of any entry, endorsement or the like being made before payment is made, notwithstanding any rule, practice or requirement to the contrary.
(v) Any claim respecting any property in relation to which a notice under this sub-section has been issued arising after the date of the notice shall be void as against any demand contained in the notice.
(vi) Where a person to whom a notice under this sub-section is sent objects to it by a statement on oath that the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for or on account of the assessee, then nothing contained in this sub-section shall be deemed to require such person to pay any such sum or part thereof, as the case may be, but if it is discovered that such statement was false in any material particular, such person shall be personally liable to the Assessing Officer or Tax Recovery Officer to the extent of his own liability to the assessee on the date of the notice, or to the extent of the assessee’s liability for any sum due under this Act, whichever is less.
(vii) The Assessing Officer or Tax Recovery Officer may, at any time or from time to time, amend or revoke any notice issued under this sub-section or extend the time for making any payment in pursuance of such notice.
(viii) The Assessing Officer or Tax Recovery Officer shall grant a receipt for any amount paid in compliance with a notice issued under this sub-section, and the person so paying shall be fully discharged from his liability to the assessee to the extent of the amount so paid.
(ix) Any person discharging any liability to the assessee after receipt of a notice under this sub-section shall be personally liable to the Assessing Officer or Tax Recovery Officer to the extent of his own liability to the assessee so discharged or to the extent of the assessee’s liability for any sum due under this Act, whichever is less.
(x) If the person to whom a notice under this sub-section is sent fails to make payment in pursuance thereof to the Assessing Officer or Tax Recovery Officer, he shall be deemed to be an assessee in default in respect of the amount specified in the notice and further proceedings may be taken against him for the realisation of the amount as if it were an arrear of tax due from him, in the manner provided in sections 222 to 225 and the notice shall have the same effect as an attachment of a debt by the Tax Recovery Officer in exercise of his powers under section 222.
2.1 As a summary the above statutory provision indicates the following:-
> Notice: The officer can issue a written notice requiring any person holding money for the assessee to pay the owed amount directly to the officer.
> Joint Accounts: Notices can be sent to those holding joint accounts, assuming equal shares unless proven otherwise.
> Marking copy to the taxpayer/Joint holders: A copy of the notice must be sent to the assessee and, in the case of joint accounts, to all holders at their known addresses.
> Compliance: Recipients of the notice must comply, and specific entities (like banks) do not need to produce documentation before making payments.
> Void Claims: Any claims on property mentioned in the notice arising after the notice date are considered void against the demand in the notice.
> Objections: If a person believes they do not owe the amount, they can object by swearing a statement. However, if this statement is later found to be false, they may be held liable.
> Amendments: The officer can amend, revoke, or extend the notice at any time.
> Receipt: Payments made in compliance will be acknowledged with a receipt, discharging the payer’s liability to the assessee for that amount.
> Subsequent Liability: Individuals who fulfill obligations to the assessee after receiving a notice may still be liable to the officer, up to the amount owed by the assessee.
3. The taxpayer may have a savings account, current account, cash credit account, and fixed deposits with their bankers. When a Recovery Officer issues a notice under Section 226(3) of the Income Tax Act, also known as garnishee proceedings, to the banker for the recovery of outstanding demands, the first step is for the banker to freeze the account from operation. Subsequently, following the direction of the Tax Recovery Officer, the balance available in the taxpayer’s accounts will be appropriated to the extent of the outstanding demand specified in the notice.. If the available amount does not meet the outstanding liability, the banker will pay only what is available in the taxpayer’s account.
3.1 As far as the savings bank account is concerned, there are no restrictions preventing the Tax Recovery Officer from realizing the amount towards the outstanding demand. In the case of fixed deposits, there was uncertainty regarding whether the FD can be realized for outstanding demand before its maturity. However, one judgment from the Karnataka High Court in the case of Vysya Bank Ltd Vs Joint Commissioner of Income tax[1] favoured the department, stating that even before the FD’s maturity, the proceeds of the FD can be adjusted towards tax arrears if the officer requests payment against the dues.
3.2 Regarding current accounts and cash credit accounts, there are case laws indicating that the Tax Recovery Officer cannot realize the balance available in these accounts. It is pertinent to point out that various High Courts have held that unless there exists a relationship of ‘debtor and creditor,’ an authority cannot issue an order of attachment under the provisions of Section 226(3) of the Act. It was further held that the cash credit limit is a facility provided by the bank to its customers, and utilizing this facility attracts interest charges. Lastly, a meaningful reading of Section 226(3) of the Act does not suggest that accounts like cash credit or overdraft can be attached, as the bank does not become a debtor in these cases. Garnishee proceedings are based on the fundamental principle of directing a third party, who owes money to a debtor, to pay that money to the creditor. However, since a cash credit or overdraft account is a loan facility provided by the bank to the taxpayer, a debtor-creditor relationship does not exist in these instances.
3.3 More recently, the Himachal Pradesh High Court, in the case of M/s Kundlas Loh Udyog vs. Union of India and others[2], ruled that the Recovery Officer cannot attach a taxpayer’s overdraft account with banks by exercising power under Section 226(3) of the Income Tax Act. The Court observed that cash credit limits are a facility provided by banks for customers to use funds, and utilizing this facility incurs interest; thus, the amount cannot be attached under Section 226(3) of the Act. For sake of clarity, the relevant portion of the judgment is given below:-
“22. In this view of the matter, this Court does not find that the action on the part of respondent No.1 in passing the order of attachment of Cash Credit Account would at all be sustainable, in view of the ratio laid down in the above noted judgments; even the meaningful reading of the language employed in Section 226(3) of the Act does not suggest that the account like the Cash Credit or the overdraft is capable of being attached as the bank does not become a debtor. This Court, therefore, finds that the impugned orders of attachment passed by the authorities are clearly beyond the powers conferred under Section 226(3) of the Act and, therefore, are liable to be quashed and set aside”
3.4 As Attaching a cash credit or overdraft account would affect the business of the taxpayer, the department issued an administrative instruction (vide F.No.275/29/2020-IT(B) dated 19.01.2021) stating that necessary approval from higher authorities should be obtained by the concerned Recovery Officer or Assessing Officer before issuing a notice under Section 226(3) of the Income Tax Act.
4. Conclusions: The issue is whether an Income Tax Recovery Officer can attach the cash credit or overdraft account of a taxpayer for outstanding demands. Based on the court decisions, it can be inferred that the Recovery Officer cannot attach a cash credit account or overdraft account for outstanding income tax liabilities.
[1] Vysya Bank Ltd Vs Joint Commissioner of Income tax & Anr dated 02.081999 in (2000) 158 CTR (KAR) 60
[2] M/s Kundlas Loh Udyog vs Union of India and others in CMPMO No. 418 of 2024 dated 30.09.2024
[i] Author’s Note : This article is intended to create tax awareness and for academic purposes only.
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