HIGH COURT OF KARNATAKA 

N. Khetty, for the Petitioners : E. R. Indra Kumar, for the Respondents 

ORDER 

V. K. SINGHAL, J. : 

Validity of notices issued under section 226 (3) of the IT Act, 1961, has been assailed in all these petitions and, therefore, they are disposed of by this common order. 

2. The controversy is regarding attachment of fixed deposit receipts which have been attached on account of non-payment of income-tax dues by the assessees. Garnishee proceedings have accordingly been taken. 

3. The only point to be determined is as to whether the petitioner bank is under obligation to make the payment of fixed deposit of the assessees in default before its maturity. 

4. According to the learned counsel for the petitioner in accordance with the contract entered into, fixed deposit is payable at a later date and, therefore, it has not become due. Relevant provisions of section 226 (3)(i) & (iv) are as under : 

"226(3)(i) The AO or TRO 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 AO or TRO 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. 

(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." 

Reliance is placed on the decision given in the case of Hyderabad Co-operative Commercial Corporation Ltd. Etc. vs. Syed Mohiuddin Khadir (dead) by LRs AIR 1975 SC 2254 at para 13 as under : 

"...... To be capable of attachment, there must be in existence at the date when the attachment becomes operative something which the law recognises as a debt. So long as there is a debt in existence, it is not necessary that it should be immediately payable. Where any existing debt is payable by future instalments, the garnishee order may be made to become operative as and when each instalment becomes due. The debt must be one which the judgment debtor could himself enforce for his own benefit. A debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation [See Webb vs. Stenton 11 Q.B.D. 518]." 

Reliance is placed in the case Budda Pictures vs. ITO & Anr. (1964) 52 ITR 321 (Mad) : TC 52R.1063 where the word 'due' was interpreted by the Madras High Court and it was observed that "In common parlance the word 'due' is associated only with a liability to pay or an obligation to pay. It would be wholly inappropriate to decide an unborn future obligation or liability as something which is due. The relevant provision in the statute, with which we are dealing is intended only to collect the amount due to the Department from persons who are liable to pay to the assessee. The liability to pay may be forthwith on the date of the receipt of the notice or it may be that such liability would mature after the notice. But, in any event, the essential criteria that on the date of service of notice, the person should be under an existing obligation to pay amounts to the assessee." Reliance is also placed on the decision given by the Madras High Court in the case of K.M. Adam vs. ITO (1958) 33 ITR 26, 31 (Mad) : TC 52R.1218, thus : 

"Where there is a debitum in praesenti solvendum in futuro, that is, where by reason of an antecedent contract between the garnished and the judgment-debtor a 'debt' automatically emerges, where the maturing into a presently payable debt is not by reason of external compulsion but due to pre-existing facts which of their own motion bring a debt into existence at a predetermined point of time. The propositions that a garnishee order does not accelerate the time for payment and that it does not alter any of the terms of the contract between the garnishee and the judgment debtor relative to the accrual of a debt are too well established to need discussion." 

The observations of The Court of Appeal in N. Joachimson (A Firm Name) vs. Swiss Bank Corporation (1921) 3 KB 110 to the effect that "The contract which a banker enters into with his customer is that the banker will receive on account of the customer any moneys paid into his account, the banker having liberty to use the money in his business, and will on demand by the customer pay to the customer or to his order at the bank during business hours any amount not exceeding the credit balance; and sometimes there is the additional term that the banker will pay interest on the balance due; and further, that the banker will not terminate the relation without giving the customer reasonable notice," are also relied upon. 

In Webb vs. Stenton & Ors. Garnishers (1983) 11 QB 518 Brett, J. observed, at p. 523 thus : 

"If there is not a debt payable in praesenti, but there is a debt in existence, debitum in praesenti, but payable in futuro, it seems to me that such an order could be made with regard to that debt, although it be the only debt and there is no debt payable in praesenti, because such third person is indebted to the judgment debtor, and that would satisfy the words of the rule." 

In Stroud's Judicial Dictionary of Words & Phrases 3rd Edn., the meaning of word 'Due' is as under : 

"Due (1) A debt is "due" when it is payable (per James, V.C., Re European Life Assurance, L.R. 9EQ. 122) 

(2) "Due" may mean immediately payable (its common signification), or a debt contracted but payable in futuro" 

In Law Lexicon, Reprint 1987 Edn., the word 'Due' is defined at p. 367 as under : 

"Due - As a noun, an existing obligation; an indebtedness; a simple indebtedness without reference to the time of payment : a debt ascertained and fixed though payable in future; As an adjective, capable of being justly demanded; claimed as of right, owing and unpaid, remaining unpaid; payable; regular; formal; according to rule or form, (4MHC 385) 'Due' in an instalment bond means payable (151 C. 231, Re European Life Assurance, Co. 39 LJ Cn. 326)". 

In Law Lexicon, at p. 956 the word 'payable' is defined as under : 

"Payable : The word 'payable' is a descriptive word, meaning 'capable of being paid; suitable to be paid; admitting or demanding payment; justly due; legally enforceable." 

Where a bank issued a paper which recited that a certain person had deposited in the bank a certain sum payable to the order of another, the word payable should be construed as an express promise to pay on demand." 

In Bouvier's Law Dictionary, a concised Encyclopaedia, Third Edn. at p. 946, the meaning of the word "due" is as under : 

"The word 'due' unlike 'arrears', has more than one signification, and expresses two district ideas. At times it signifies a simple indebtedness without reference to the time of payment; at others it shows that the day of payment has passed." 

In Jowitts Dictionary of English Law, 2nd Edn. 1977, the word "Due" is defined as under : 

"Due (Old Fr. Deu; Fr. Du; Lat, debitum) anything owing; that which one contracts to pay or perform to another that which law or justice requires to be paid or done. 

"As applied to a sum of money 'due' means either that it is owing or that it is payable : in other words, it may mean that the debt is payable at once or at a future time. It is a question of construction which of these two meanings the word 'due' bears in a given case." 

5. It is stated that since the amount is not payable immediately by the bank to its customers in respect of the fixed deposit receipts obtained by them and is payable at a future date, the IT Department at the most could attach them and that the order may continue till its maturity and on maturity the amount could be remitted to the IT Department. 

6. On behalf of the respondents, Mr. Indra Kumar, relied on the decision given in the case of I. Devarajan & Ors. vs. Tamil Nadu Farmers Service Co-operative Federation & Ors. (1981) 51 Comp. Cas. 682 wherein it was observed that so far as the law relating to banking is concerned when a customer pays in on deposit, the money paid in cannot be considered as a fund held by the banker in trust for the customer. It is merely a loan to the banker and the customer is entitled to no more than the payment of an equivalent sum at the time which the agreement between the two parties specifies. Following the Halsbury's Law of England, 4th Edn. Vol. 3, p. 89, it was observed that "Even if a deposit is payable at a future date or after the lapse of a specified time it is liable to attachment and when the account is attached the whole amount is impounded irrespective of the sum recovered by the judgment unless the order otherwise directs. What is attached is the money in the deposit account. It being a debt due is of no significance as far as the law relating to attachment is concerned. Debts can always be attached". 

7. It is submitted that the deposit with the bank represents the money held by the bank and liable for attachment under garnishee proceedings. Reliance is placed on the decision in ITO & Anr. vs. Mysore Spun Silk Mills Ltd. (In liquidation) (1963) 50 ITR 672 (Mys). It is submitted that the effect of service of garnishee notice by the ITO under section 46 (5A) of IT Act, 1922, corresponding to section 226 (3) of the IT Act, 1961, is that the ITO serving the notice gets an enforceable claim against the debtor. Reliance is also placed on the decision in Rekstin vs. Severo Sibirsko Gosudarstvemmpe Akcionernoe Obschestvo Komseverputj and the Bank for Russian Trade, Ltd. (King's Bench Division) (1933) 1 KB 47 at p. 66 for the proposition that the service of any garnishee order is a sufficient demand by operation of law and revokes any direction given by the debtor in respect of the fund. The observations of Lord Hanworth M.B., in the case of Rogers vs. Whiteley (1989) 23 QBD 236 were taken into consideration wherein it was observed that "the effect of an order attaching 'all debts' owing or accruing due by him to the judgment debtor is to make the garnishee custodier for the Court of the whole funds attached; and he cannot, except at his own peril, part with any of those funds without the sanction of the Court." 

8. Both the learned counsel for the parties relied on the decision given in ITO & Anr. vs. Budha Pictures (1967) 65 ITR 620 (SC). In that case it was observed by the apex Court that there should be subsisting relationship between the garnishee and the assessee. The person to whom notice has been issued has only to object with the sum demanded or part thereof is not due to the assessee or that he does not hold any money on account of the assessee. He has not to say that he is not likely to owe or to hold money. The expression 'may become due' or 'may subsequently hold money' was incorporated to that subsisting relationship between the person served with a notice and the assessee, e.g., assessee's employer, or banker or debtor, or a person paying annuity to him; they do not suggest a bank with which he has never dealt, a person he has never lent money to or dealt with, or all persons who may possibly in future employ an assessee out of job or work. 

9. I have considered over the matter. It is not in dispute that the assessee in default has deposited the money and obtained fixed deposit receipt from the petitioners' bank which was done with a view to earn interest and the date of maturity of that fixed deposit receipt is at a later date. Fixed deposits are normally payable after the expiry of the period specified in the receipts itself. The banker becomes a debtor of the assessee in default the moment fixed deposit receipt is obtained. Normally the payment of the fixed deposit receipt is made on the due dates. But on forgoing interest or paying lesser rate of interest the bankers generally permit customers to withdraw the amount of the fixed deposits before the maturity date. The fixed deposit receipt is not a negotiable instrument, but could be assigned with the concurrence of the bank in favour of other persons. Attachment of the amount in the fixed deposit could be made by the IT authorities under the proviso to section 226 (3) of the IT Act. 

10. Power under section 226 has been given to the ITO to recover in the modes provided the amount which is outstanding. Power under section 226 could be exercised by one 3‚ or more of the methods provided in the section and the certificate of the TRO has been issued under section 222. Sec.226 (3) contemplates that the ITO may require any person at any time or from time to time (1) from whom money is due, (2) or may become due to the assessee, (3) any person who holds money for an assessee, (4) or may subsequently hold money on account of an assessee, to pay to the AO or TRO 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). There should be an obligation on the person on whom notice is served to pay money to the assessee i.e., the subsisting relationship of a debtor and creditor is sine qua non for the exercise of the power under the section. Relationship of the petitioner-bank and the assessee is that of a debtor and creditor and, therefore, the ITO has jurisdiction to attach the amount of fixed deposit receipts irrespective of the fact that the amount is payable at a later period, as on the date of service of notice the relationship of the bank and the assessee as that of debtor and creditor cannot be denied. 

11. Sec. 226 (3)(iv) of the Act provides that every person to whom a notice is issued is bound to comply with such notice and with reference to the banking company it is provided that it is not necessary for any deposit receipt to be produced before payment is made notwithstanding any rule, practice or requirement to the contrary. 

11.1. In view of the judgment of the apex Court in Budda Pictures (supra) there has to be subsisting relationship between the garnishee and the assessee. The words 'money is due or becomes due' or any person who holds or may subsequently hold money were interpreted for that subsisting relationship. The relationship of banker and the assessee in default is not in dispute. The bank is holding money for the assessee. The dispute is only that according to the petitioner the amount has not become due. In the case of a tenant and landlord that subsisting relationship exists because of the tenancy agreement and the amounts become due every month. In such a situation the power under section 226 (3) of the Act cannot be exercised to demand the rent for the period for which it has not become due. In order to find out as to whether the amount has become due, it has to be seen whether there is a subsisting claim existing on that date. If the deposit receipt matures even at a subsequent date and the assessee wants to get the fixed deposit encashed earlier than the date of maturity, it is considered permissible. Though the contract is entered by the assessee while obtaining the deposit receipt for receiving the money at a later date yet for the sake of reputation of the bank or for the facility of the assessee or otherwise, payment is made before maturity of the deposit receipt. The Department steps in the shoes of the assessee and can claim payment even before its maturity. Even the production of such receipt, deposit receipt is not required in terms of s.226 (3)(iv).

12. In these circumstances, the respondent has the jurisdiction to attach the fixed deposit and the bank is under obligation to make the payment of the amount even before the maturity of the fixed deposit receipt. It may be observed that according to the instructions which are issued by the Reserve Bank from time to time if a depositor wants to encash the fixed deposit receipt before its maturity, the bank is bound to refund the amount with lesser interest as is permissible looking to the time involved. The position of contracts entered into by an assessee with other companies or partners, where there is no such express or implicit contract for payment before the maturity date, the position stands on a different footing since according to the banking norms, the fixed deposit can be encashed before its maturity date. 

13. Copy of the notice under section 226 (3) is required to be served on assessee. Sufficient safeguard has been provided to adjudicate the objections which the garnishee may raise and even Departmental instructions have been issued which have to be complied with. In these circumstances, the notice issued under section 226 cannot be considered bad in law. While upholding the validity of the action of respondents it may be observed that if the appeal is pending and the assessee has applied for stay, the TRO/assessing authority should give minimum time of 10 days to the assessee so that the appellate authority may decide the stay application and only unstayed amount is required to be deposited. 

In the case of the petitioners since the matter is pending before the Tribunal and in W.P. No. 9742-49/99 DD 27th July, 1999 directions have been given to dispose of stay application of the assessee afresh, recovery action would be taken in accordance with the order of the Tribunal. The fixed deposit receipts however shall remain attached. 

Petition stands disposed of with the above observations.

Copyright© Vakilno1.com 2000-2006. All rights reserved