Recovery of tax – Section 226(3)(vi) – Garnishee objecting to liability and payment and filing affidavit in this regard – No further proceedings for recovery can be made against garnishee – TRO cannot discover on his own that statement on oath by garnishee was false – Provision applies only to an admitted liability and not to disputed liability:

The petitioner company was engaged in the business of financial services. One assessee RCFSL, which had become defaulter of income-tax dues for Rs. 3.2 crore claimed that an amount of Rs. 1.55 crore was due to it from the petitioner. On the basis of the claim of the assessee, the TRO issued garnishee notice u/s. 226(3) of the Income-tax Act, 1961 requiring the petitioner to pay the said amount to the TRO towards the tax dues of the assessee. Since there was no response, the TRO attached 4,24,910 shares of the petitioner in Jhunjhunwala Vanaspati Ltd., and also the bank balance of Rs. 28,988.78 in ICICI bank and also got the shares and the amount transferred to the TRO. Being aware of the said action of the TRO the petitioner appeared before the TRO and raised objections and also claimed that the garnishee notice was not served on the petitioner and accordingly the garnishee proceedings are invalid. The petitioner also produced the books of account as required by the TRO and explained that there is no outstanding payable to the assessee. The petitioner also filed an affidavit denying the liability as required u/s. 226(3)(vi) of the Act. However, the TRO did not accept the petitioner’s claim.

On a writ petition challenging the garnishee action taken by the TRO, the Allahabad High Court held as under:

“i) Under Clause (vi) of section 226(3) of the Act, a limited enquiry can be conducted by the TRO to find about the genuineness of the affidavit. He is required to give notice to the person giving the affidavit that he is going to hold an enquiry for the purpose of determining whether the statement made on oath on behalf of the garnishee is correct or false. The ITO cannot discover on his own that the statement on oath made on behalf of the garnishee was false in any material particular and cannot subjectively reach a conclusion that in his opinion the affidavit filed by the garnishee was false in any material particular.

ii) Further, this provision is intended to apply only to an admitted liability where a person admits by word or by conduct that any money is due to the assessee or is held by him for or on account of assessee. The authorities under the garb of the inquiry cannot adjudicate upon a bona fide dispute between the garnishee and the assessee.

iii) Section 226(3) is not a charging section nor does it give any power to the TRO to adjudicate a dispute. Bona fide disputes, if any, between the garnishee and the assessee cannot be adjudicated by the authorities u/s. 226(3). The Legislature could not have meant to entrust the authority with the jurisdiction to decide questions relating to the quantum of such liability between the garnishee and the assessee, which matter is within the purview of the civil courts.

iv) The assessee asserted that it had advanced certain sums of money to the petitioner and, therefore, the petitioner was its debtor but the petitioner had denied this assertion. No steps had been taken by the assessee for recovery of that amount before any forum or any appropriate court of law.

vi) Pursuant to the affidavit filed by the petitioner before the TRO denying its liability to pay any amount and further denying that any sum is or was payable to the assessee, no steps had been taken by the TRO to cross check with the assessee or inquire into the genuineness of the affidavit filed by the petitioner. Since the petitioner had appeared and participated in the proceedings, the order of the TRO treating the petitioner as an assessee in default could not continue any longer.

vii) In view of the categorical denial by the petitioner to pay any amount, the attachment made by the TRO could not continue any further, especially as till date no inquiry had been made by the Revenue into the genuineness of the affidavits filed by the petitioner.

viii) Income Tax Department was restrained from alienating the shares, which were transferred to the demat account of the TRO. The order of the TRO treating the petitioner as a assessee in default could not be sustained and was quashed. Within two weeks the TRO to transfer the shares to the petitioner and also the amount of Rs. 28,988.78/- with interest”