Cash Credit Account Cannot Be Attached U/S 226(3) of Income Tax Act: Himachal Pradesh High Court
The Himachal Pradesh High Court held that a Cash Credit account is not capable of being attached under Section 226(3) of the Income Tax Act, 1961.
The Court said that by merely providing a facility of an overdraft, it cannot be said that the bank is a debtor to its customers or holds the money for the account of its customers, nor any point of time at which it holds any money of his on his account
The Court was hearing a Petition seeking to quash and set aside the communications issued by Respondent No. 1 on the ground that they are illegal, arbitrary, and beyond the jurisdiction of Section 226(3) of the Income Tax Act, 1961.
The bench of Justice Tarlok Singh Chauhan observed, “…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.”
Senior Advocate Shrawan Dogra appeared for the Appellant and Advocate Neeraj Sharma appeared for the Respondent.
Brief Facts-
The Petitioner was involved in iron and steel manufacturing, maintaining "Over Cash Credit" (OCC) and "Cash Credit" (CC) accounts with HDFC Bank and YES Bank, both with significant debit balances. The Petitioner received a notice under Section 143(2) of the Income Tax Act, which was followed by a show cause notice proposing an addition of ₹237.53 crores. Subsequently, an assessment order was passed demanding ₹17.07 Cr. The Petitioner challenged it in Court and obtained an interim stay. However, the petitioner's bank accounts were seized following communications from the tax department. Hence, the present Petition.
The Court observed, “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.”
The Court mentioned the decision in Karnataka Bank Limited vs. Commissioner of Commercial Taxes, (1999) where according to the Court it was observed, “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.”
The Court further mentioned the decision in Kaneria Granitio Ltd. vs. Assistant Commissioner IT, (2016) where according to the Court it was held, “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.”
Accordingly, the Court said 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.
Finally, the Court allowed the Petition.
Cause Title: M/s Kundlas Loh Udyog v. Union of India (Neutral Citation: 2024:HHC:9355)
Appearance:
Appellant: Senior Advocate Shrawan Dogra, Advocates Manik Sethi, Tejasvi Dogra and Harsh Kalta
Respondent: Advocates Neeraj Sharma and Ishaan Kashyap