Wp/4044/2000 Of Vijaya Bank, Colaba Branch, Mumbai v. Joint Commissioner Of Income Tax

*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND *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 RAMW.P.No.4044 of 2000 JUDGMENT: (Per LNR,J) The petitioner is a nationalised bank. It approached thisCourt feeling aggrieved by the demand notice, dated 16.09.1999issued by the 1[st] respondent to the 2[nd] respondent requiring it to deposit certain amount. The relevant facts are as under: The 3[rd] respondent is a company, which was undertakingcertain manufacturing activity. It approached the petitioner in theyear 1994 with a request to sanction loan for purchase of plantand machinery. After verification of the documents, the petitioneradvanced a sum of Rs.3,00,00,000/- as loan. Documents wereexecuted hypothecating the purchased goods in the form ofplant and machinery, any recoverables in relation thereto and thelike. It is stated that in the year 1996, the 3[rd] respondentstopped the activity of manufacturing through the machinerypurchased with the financial assistance of the petitioner. To putit to a beneficial use, it entered into hire purchase agreement,dated 29.03.1996 with the 2[nd] respondent. The considerationwas stipulated at 72 Equivalized Monthly Installments (EMIs) ofRs.3,98,953/-. The 3[rd] respondent executed a GPA, dated23.01.1998 enabling the petitioner to receive the EMIs directlyfrom the 2[nd] respondent and to credit the same to the loanaccount. The arrangement is said to be in force. The 1[st] respondent, an assessing authority under theIncome Tax Act found that there are dues of income tax from the3[rd] respondent. On noticing that the 3[rd] respondent is entitled toreceive EMIs from the 2[nd] respondent for plant and machinery,he issued the impugned notice, which is akin to a garnisheeorder. The contention of the petitioner is that the amount payableunder the EMIs cannot be said to be the independent income ofthe 3[rd] respondent and at any rate, the it is under liquidation. According to the petitioner, the 1[st] respondent can approach theofficial liquidator for recovery of dues of tax from other sources. The 1[st] respondent filed a counter affidavit opposing thewrit petition. According to him, the arrears of income tax havepriority over other claims of third parties. It is also stated that theso-called arrangement among the writ petitioner andrespondents 2 and 3 is not binding upon them. The 1[st] respondent made an attempt to recover the arrearsof tax from the 3[rd] respondent by issuing the impugned notice tothe 2[nd] respondent obviously because an item of propertybelonging to the 3[rd] respondent is under the control and use ofthe 2[nd] respondent. Viewed in isolation, such a course cannot befound fault with. There are two important circumstances, thatneed to be noted. The first is that the machinery, which the 3[rd]respondent gave to the 2[nd] respondent on hire purchase basis,was acquired with the financial assistance of the petitioner. The3[rd] respondent, which was under obligation to pay theinstalments of loan to the petitioner, has chosen to channelizethat liability directly from the 2[nd] respondent. No exception canbe taken to such an arrangement. The 1[st] respondent made an attempt to recover the arrearsof tax from the 3[rd] respondent by issuing the impugned notice tothe 2[nd] respondent obviously because an item of propertybelonging to the 3[rd] respondent is under the control and use ofthe 2[nd] respondent. Viewed in isolation, such a course cannot befound fault with. There are two important circumstances, thatneed to be noted. The first is that the machinery, which the 3[rd]respondent gave to the 2[nd] respondent on hire purchase basis,was acquired with the financial assistance of the petitioner. The3[rd] respondent, which was under obligation to pay theinstalments of loan to the petitioner, has chosen to channelizethat liability directly from the 2[nd] respondent. No exception canbe taken to such an arrangement. The second important factor is that the 3[rd] respondent isunder liquidation. The companies Act stipulates the priorities ofthe secured and unsecured creditors vis-a-vis the assets of acompany, under liquidation. Whatever may have been thepermissibility and legality of the arrangement between thepetitioner and respondents 2 and 3, for direct payment of EMIs tothe petitioner, the same cannot be continued once the liquidationproceedings are in progress. On the strength of an interim order passed by this Court,the 2[nd] respondent has been depositing the EMIs in anationalised bank and the said amount is earning interest also. The petitioner on the one hand and the 1[st] respondent on theother hand had put forward their claims before the officialliquidator. Therefore, the writ petition is disposed of directing that- (a) the amount, that became payable up to this datefrom the 2[nd] respondent, together with interest, whichare now said to be in the Syndicate Bank, BanjaraHills Branch shall be made over to the 3[rd] respondentcompany, which is now under liquidation;are now said to be in the Syndicate Bank, BanjaraHills Branch shall be made over to the 3[rd] respondentcompany, which is now under liquidation; (b)the official liquidator shall ensure that the amount sopassed on as well as the other amount due from the2[nd] respondent becomes part of the assets of the 3[rd]respondent company, apart from other assets if any;andpassed on as well as the other amount due from the2[nd] respondent becomes part of the assets of the 3[rd]respondent company, apart from other assets if any;and the petitioner on the one hand and the 1[st]respondent on the other hand shall be entitled tosubmit their claims before the official liquidator and hein turn shall make the payments out of the availablesubmit their claims before the official liquidator and hein turn shall make the payments out of the available (c) sources to the petitioner and the 1[st] respondent inaccordance with the priorities that are provided forunder the Companies Act. This exercise shall becompleted within a period of three months.accordance with the priorities that are provided forunder the Companies Act. This exercise shall becompleted within a period of three months. The miscellaneous petition filed in this case shall alsostand disposed of. There shall be no order as to costs. ____________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J Date: 15.07.2014Note: L.R.Copy to be marked.JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM JSU W.P.No.4044 of 2000Date: 15.07.2014