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I-T - Sec 226 does not empower Revenue to seize money or properties of assessee or judgment debtors, which belong to others and were obtained by fraud: HC

By TIOL News Service

NEW DELHI, NOV 14, 2016: THE issue is - Where Section 226 empowers the Revenue to seize the money or properties of the assessee or judgment debtors, which belongs to others and was obtained by fraud. NO is the verdict.

Facts of the case

The Assessee-partnership firm, a flagship concern of the SGI Group, was accepting deposit from the public and offering return on the deposits. The group had claimed that they had the expertise in stock and commodity market and the deposits collected were used by the group for trading in equity and commodity market, speculative business, FDR and investment in real estate. The deposits were collected from the investors through agents and those Investors /agents were allowed to refer and introduced any other person to be an investor/agent in the firm under their downline as they would receive referral commission on the investment of the said new referred person. One of the investors of the Assessee filed a suit for recovery against the Assessee contending that he had been defrauded by the Assessee and a money decree of Rs 1.60 crore was passed by the Court. The Court also directed the banker of the Assessee for not to release any payment from the bank account to any party without taking leave of the Court.

In the meantime a search and seizure operation u/s 132 of the Act was carried out by the Investigation Wing of Income Tax Department at various residential and office premise of the Assessee and a number of incriminating documents including the cash of Rs 34,69,00,000/- was seized. The block assessment of the Assessee pursuant to search operation and in terms of the post search enquiry had been completed and the demand had been raised on them for a total sum of Rs.345,97,46,125/-. Accordingly, the bank accounts of the Assessee was attached u/s 226 of the Act. Now, the department in instant application prayed for a direction to release the sum to it as the amount belonging to the Assessee deposited by it in the bank account had been freezed for meeting the tax liability arising against it.

On application, the High Court held that,

++ section 293 of the Income Tax Act perhaps has no applicability in the present proceedings. It bars the filing of the suit in a civil court to set aside or modify any proceedings taken and / or made under the Income Tax Act. The Decree Holder has not filed any suit in any civil court against the Revenue authorities challenging any proceedings taken this Act. The Decree Holder rather had filed a civil suit for recovery of his own money of Rs.1,60,00,000/- with pendetelite and further interest based on two post dated cheques issued by the Judgment Debtors. The suit was filed by the decree holder on the premise that the Judgment Debtors had cheated the Decree Holder and had committed fraud upon him;

++ the department of course can seize the money/properties which belongs to the assessee/the judgment debtors but of none other. Now in this case the decree holder has alleged his money being Rs 1,60,00,000/- was received by the judgment debtors by cheating him and the said money belong to the decree holder and need to be returned by the judgment debtors. It is argued the such money of decree holder is held by the judgment debtors in trust and the decree holder has a proprietary interest in the amount so seized to the extent of his decree. If the money was transferred in pursuance of a contract induced by fraud or mistake, as proved by the decree holder and so noted in judgment, the judgment debtor on receiving the notice of rescission ought to have held the money in trust for the benefit of the decree holder;

++ under Section 226 Rule 4 the AO may apply to the Court in whose custody there is money belonging to the assessee for payment to it of the entire amount of such money or if it is more than the tax amount, an amount sufficient to discharge the tax. The section rather clarifies the money which belong to the assessee shall only be available for payment as tax to the Income Tax Department, but what if money found in possession of the assessee does not belong to him or he is holding such money in trust/constructive or otherwise. To my mind such money can't be adjusted against tax liability of the assessee. The plea of revenue that the decree holder ought to have applied u/s 132(11) is also not sustainable. Section 132(11) stands omitted by the Finance Act of 2002 w.e.f. 01.06.2002 and hence decree holder could not have availed of such provision in any case. The plea of the Income Tax Department that it being a secured creditor, would not be of any benefit to the Revenue in view of the fact the money seized to the extent of decree does not belong to assessee being obtained by fraud. The assessee though was in possession of it but at best can said to have held it only in constructive trust.

(See 2017-TIOL-2399-HC-DEL-IT)