Vijaya Bank, Colaba Branch, Mumbai V. Joint Commissioner of Income Tax and others

WP/4044/2000

AI Insights

The case involves Vijaya Bank, which is the petitioner, contesting a demand notice issued by the Joint Commissioner of Income Tax (1st respondent) concerning the 3rd respondent, a company under liquidation. The 3rd respondent had previously entered into a financial arrangement with the petitioner and the 2nd respondent, involving the direct payment of EMIs for a loan used to purchase machinery. The 1st respondent issued a notice to the 2nd respondent to recover tax dues from the 3rd respondent, arguing that tax arrears have priority over other claims. The court examined the legality of the arrangement between the parties and the impact of the ongoing liquidation on the financial transactions and claims.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 796122 (HC-MUMBAI)
• Appeal Type: Others
• Pronouncement Date: 15-07-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, Companies Act
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: S RAVI; J V PRASAD; ANIL KUMAR; UNNAM RAO
• Assessee Lawyers: E AJAY REDDY
• Keywords: Garnishee Order; Hypothecation; Liquidation; Loan; EMIs
• Section: 143(3)

Judgement Text

"*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND *THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM +W.P.No.4044 of 2000 % Dated 15.07.2014 # Vijaya Bank, Colaba Branch, Mumbai ….Petitioner $ Joint Commissioner of Income Tax and others. ….Respondents ! Counsel for the petitioners : Sri E.Ajay Reddy ^ Counsel for respondents : Sri S.Ravi Sri J.V.Prasad Sri Anil Kumar Sri Unnam Muralidhar Rao < GIST: > HEAD NOTE: ? Cases referred: THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM W.P.No.4044 of 2000 JUDGMENT: (Per LNR,J) The petitioner is a nationalised bank. It approached this Court feeling aggrieved by the demand notice, dated 16.09.1999 issued by the 1st respondent to the 2nd respondent requiring it to deposit certain amount. The relevant facts are as under: The 3rd respondent is a company, which was undertaking certain manufacturing activity. It approached the petitioner in the year 1994 with a request to sanction loan for purchase of plant and machinery. After verification of the documents, the petitioner advanced a sum of Rs.3,00,00,000/- as loan. Documents were executed hypothecating the purchased goods in the form of plant and machinery, any recoverables in relation thereto and the like. It is stated that in the year 1996, the 3rd respondent stopped the activity of manufacturing through the machinery purchased with the financial assistance of the petitioner. To put it to a beneficial use, it entered into hire purchase agreement, dated 29.03.1996 with the 2nd respondent. The consideration was stipulated at 72 Equivalized Monthly Installments (EMIs) of Rs.3,98,953/-. The 3rd respondent executed a GPA, dated 23.01.1998 enabling the petitioner to receive the EMIs directly from the 2nd respondent and to credit the same to the loan account. The arrangement is said to be in force. The 1st respondent, an assessing authority under the Income Tax Act found that there are dues of income tax from the 3rd respondent. On noticing that the 3rd respondent is entitled to receive EMIs from the 2nd respondent for plant and machinery, he issued the impugned notice, which is akin to a garnishee order. The contention of the petitioner is that the amount payable under the EMIs cannot be said to be the independent income of the 3rd respondent and at any rate, the it is under liquidation. According to the petitioner, the 1st respondent can approach the official liquidator for recovery of dues of tax from other sources. The 1st respondent filed a counter affidavit opposing the writ petition. According to him, the arrears of income tax have priority over other claims of third parties. It is also stated that the so-called arrangement among the writ petitioner and respondents 2 and 3 is not binding upon them. The 1st respondent made an attempt to recover the arrears of tax from the 3rd respondent by issuing the impugned notice to the 2nd respondent obviously because an item of property belonging to the 3rd respondent is under the control and use of the 2nd respondent. Viewed in isolation, such a course cannot be found fault with. There are two important circumstances, that need to be noted. The first is that the machinery, which the 3rd respondent gave to the 2nd respondent on hire purchase basis, was acquired with the financial assistance of the petitioner. The 3rd respondent, which was under obligation to pay the instalments of loan to the petitioner, has chosen to channelize that liability directly from the 2nd respondent. No exception can be taken to such an arrangement. The second important factor is that the 3rd respondent is under liquidation. The companies Act stipulates the priorities of the secured and unsecured creditors vis-a-vis the assets of a company, under liquidation. Whatever may have been the permissibility and legality of the arrangement between the petitioner and respondents 2 and 3, for direct payment of EMIs to the petitioner, the same cannot be continued once the liquidation proceedings are in progress. On the strength of an interim order passed by this Court, the 2nd respondent has been depositing the EMIs in a nationalised bank and the said amount is earning interest also. The petitioner on the one hand and the 1st respondent on the other hand had put forward their claims before the official liquidator. Therefore, the writ petition is disposed of directing that- (a) the amount, that became payable up to this date from the 2nd respondent, together with interest, which are now said to be in the Syndicate Bank, Banjara Hills Branch shall be made over to the 3rd respondent company, which is now under liquidation; (b) the official liquidator shall ensure that the amount so passed on as well as the other amount due from the 2nd respondent becomes part of the assets of the 3rd respondent company, apart from other assets if any; and (c) the petitioner on the one hand and the 1st respondent on the other hand shall be entitled to submit their claims before the official liquidator and he in turn shall make the payments out of the available sources to the petitioner and the 1st respondent in accordance with the priorities that are provided for under the Companies Act. This exercise shall be completed within a period of three months. The miscellaneous petition filed in this case shall also stand disposed of. There shall be no order as to costs. ____________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J Date: 15.07.2014 Note: L.R.Copy to be marked. JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM W.P.No.4044 of 2000 Date: 15.07.2014 JSU "