Income‑tax‑‑‑

‑‑‑‑Recovery of tax‑‑‑Garnishee proceedings‑‑‑Condition precedent‑‑ Subsisting relationship of debtor and creditor‑‑‑Fixed deposit in Bank‑‑ Banker becomes a debtor the moment the fixed deposit receipt is obtained‑‑ Fixed deposit can be withdrawn before date of maturity‑‑‑Fixed deposit can be attached in garnishee proceedings‑‑‑Indian Income Tax Act, 1961, S.226(3).

Section 226(3) of the Income Tax Act, 1961, contemplates that the Income‑tax Officer 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) arrived person who holds money for an assessee; (4) or may subsequently hold money on account of an assessee, to pay to the Assessing Officer or Tax Recovery Officer either forthwith or 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 a sine qua non for the exercise of the power under the section. In the case of a fixed deposit in a bank the banker becomes a debtor of the assessee in default the moment the 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: According to the instructions which are issued by the Reserve Bank from time to time if a depositor wants to encase the fixed deposit receipt before its maturity, the bank is bound torefund the amount. with lesser interest as is permissible looking to the time involved. The Department steps into the shoes of the assessee and. can claim payment even before its maturity. Attachment of the amount in the fixed deposit could be made by the income‑tax authorities under the proviso to section 226(3).

Adam (K.M.) v. ITO (1958) 33 ITR 26 (Mad.); Buddha Pictures v. Fourth ITO (1964) 52 ITR 321 (Mad.); Devarajan (I) v. Tamil Nadu Farmers Service Cooperative Federation (1981) 51 Comp. Cas. 682 (Mad.); European Life Assurance Society: In re (1869) LR 9 Eq. 122; Hyderabad Cooperative Commercial Corporation Ltd. v. Syed Mohiuddin Khadir AIR 1975 SC 2254; ITO v. Budha Pictures (1967) 65 ITR 620 (SC); ITO v. Mysore Spun Silk Mills Ltd. (In Liquidation) (1963) 50 ITR 672 (Mys.); 33 Comp. Cas. 1159 (Mys.); Joachimson (N.) v. Swiss Bank Corporation (1921) 3 KB 110 (CA); Rekstin v. Severo Sibirsko Gosudarstvenunpe Akcionernoe Obschestvo Komserverputj and Bank of Russain Trade Ltd. (1933) 1 KB 47; Rogers v. Whiteley (1889) 23 QBD 236 (CA) and Webb v. Stenton (1883) 11 QBD 518 (CA) ref.

N. Khetty for Petitioners.

E.R. Indra Kumar for Respondents.

JUDGMENT

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

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. Granishee proceedings have accordingly been taken.

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.

According to 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. The relevant provisions of section 226(3)(i) and (iv) are as under:‑‑

"226(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.

(iv) Save as otherwise provided in this subsection, every person to whom a notice is issued under this subsection 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 Cooperative Commercial Corporation Ltd. v. Syed Mohiuddin Khadir AIR 1975 SC 2254, at para: 13 page 2257 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 v. Stenton 11 QBD 518)."

Reliance is placed on the case reported in Buddha Pictures v. Fourth ITO (1964) 52 ITR 321 (Mad.), where the word "due" was interpreted by the Madras High Court and it was observed at (page 326): "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 describe 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 as 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 criterion is 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 v. ITO (1958) 33 ITR 26, at page 31, thus:‑‑

Where there is a debitum in praesenti solvendum in futuro, that is, where by reason of an antecendent contract between the grarnishee 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 for 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 v. Swiss Bank Corporation (1921) 3 KB 110, to the effect that (page 112): "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 v. Stenton (1883) 11 QBD 518 (CA), Brett, J. observed at page 522 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 and Phrases, third edition, the meaning of the 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. 9 Eq. 122) and (2) 'Due' may mean immediately payable (its common signification) or a debt contracted but payable in future."

In Law Lexicon, reprint 1987 edition, the word "due" is defined at page 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 (15 IC 231; Re: European Life Assurance Co. 39 LJ Ch. 326. "

In Law Lexicon at page 956, the word "payable" is defined as under.

"Payable‑‑‑ The words '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 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 Concise Encyclopaedia, third edition, at page 946, the meaning of the word "due" is as under''‑‑

"The word 'due' unlike arrears, has more than one signification and expresses two distinct 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 Jowitt's Dictionary of English Law, second edition, 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 means that the debt is payable at once or at a future time. It is question of construction which of these two meanings the word 'due' bears in a given case.

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 Income‑tax 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 Income‑tax Department.

On behalf of the respondents, Mr. Indra Kumar relied on the decision given in the case of I. Devarajan v. Tamil Nadu Farmers Service Cooperative Federation (1981) 51 Comp. Cas. 682 (Mad.), wherein it was observed that so far as the law relating to banking is concerned, when a customer pays in money 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 repayment of equivalent sum at the time which the agreement between the two parties specifies. Following Halsbury's Laws of England, Fourth Edition, Volume 3, para.89, it was observed that (page 699):‑‑

"Even if a deposit is payable at a future date or after the lapse of a specified tithe 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."

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 v. Maysor Spun Silk Mills Ltd. (In Liquidation) (1963) 50 ITR 67 (Mys.). It is submitted that the effect of service of garnishee notice by the Income‑tax Officer under section 46(5A) of the Indian Income‑tax Act, 1922, corresponding to section 226(3) of the Income Tax Act, 1961, is that the Income‑tax Officer serving the notice gets an enforceable claim against the debtor. Reliance is also placed on the decision in Rekstin v. Severo Sibirsko Gosudarstvemmpe Akcionernoe Obschestvo Komserverputj and Bank of Rusian Trade Ltd. (1933) 1 KB 47, at page 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.R. in the case of Rogers v. Whiteley (1889) 23 QBD 236 (CA), 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".

Both learned counsel for the parties relied on the decision given in ITO v. Buddha Pictures (1967) 65 ITR 620 (SC). In that case it was observed by the apex Court that there should be subsisting a relationship between the garnishee and the assessee. The person to whom the notice has been issued has only to object that 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. the 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.

I have considered over the matter. It is not in dispute that the assessee in default has deposited the money and obtained a fixed deposit receipt from the petitioner's bank which was done with a view to earn interest and the date of maturity of those 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 the 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 Income‑tax authorities under the proviso to section 226(3) of the Income‑tax Act.

Power under section 226'has been given to the Income‑tax Officer to recover in the modes provided the amount which is outstanding. Power under section 226 could be exercised by one or more of the methods provided in the section and the certificate of the Tax Recovery Officer has been issued under section 222. Section 226(3) contemplated that the Income‑tax Officer may require any person at any time or from time to time (1) from whom money is due; (2) or my 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 Assessing Officer or Tax Recovery Officer either forthwith or 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 a sine qua non for the exercise of the power under the section. The relationship of the petitioner‑bank and the assessee is that of a debtor and creditor and therefore, the Income‑tax Officer has jurisdiction to attach the amount of fixed deposit receipt 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.

Section 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.

In view of the judgment of the apex Court in Buddha Pictures' case (1967) 65 ITR 620, there has to be a subsisting relationship between the granishee and the assessee. The words "money is due or may become due or any person who holds or may subsequently hold money" were interpreted for that subsisting relationship. The relationship of a 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 into by the assessee while obtaining the deposit receipt for receiving the money at a lacer date yet for the sake of the 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 into 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 section 226(3)(iv).

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.

Copy of the notice under section 226(3) is required to be served on the 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 the respondents it may be observed that if the appeal is pending and the assessee has applied for stay, the Tax Recovery Officer/Assessing Authority should give a minimum time of ten 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 Income‑tax Appellate Tribunal and in Writ Petitions Nos.9742‑49 of 1999, dated July 29, 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.

The petition stands disposed of with the above observations.

M.B.A./567/FC

Order accordingly.