Facts of the Case

The petitioner, Blueblood Ventures Limited, had an outstanding financial obligation toward Shridham Distributors Private Limited (SDPL). The petitioner contended that this liability was fully discharged on 28.03.2019 through the transfer of Zero Coupon Optionally Convertible Debentures (ZOCDs) of Devoted Construction Limited amounting to ₹21.37 crores.

According to the petitioner, as of 01.04.2019, no amount remained payable to SDPL, and a confirmation was sought accordingly.

Despite this, the respondent (Income Tax Department) issued a garnishee notice dated 07.02.2020 under Section 226(3), directing the petitioner to remit alleged dues payable to SDPL. Subsequently, another notice dated 13.03.2020 was issued to the petitioner’s banker, South Indian Bank Ltd., resulting in the freezing of the petitioner’s bank account.

The petitioner repeatedly communicated to the respondent asserting that no liability existed, including submission of a sworn statement under Section 226(3)(vi). However, no relief was granted, prompting the petitioner to approach the High Court.

Issues Involved

  1. Whether the respondent was justified in issuing garnishee notices under Section 226(3) without determining the existence of debt.
  2. Whether freezing the petitioner’s bank account without adjudicating liability violates principles of natural justice.
  3. Whether the petitioner’s assertion of discharge of liability required a reasoned determination by the tax authority.

Petitioner’s Arguments

  • The liability toward SDPL had already been fully discharged via transfer of debentures.
  • As of 01.04.2019, no debt was outstanding, making garnishee proceedings invalid.
  • The respondent failed to consider representations and sworn statements submitted under statutory provisions.
  • Freezing of the bank account without adjudication was arbitrary, unjust, and detrimental to business operations.

Respondent’s Arguments

  • The respondent relied on statutory powers under Section 226(3) of the Income Tax Act to recover dues.
  • It proceeded on the basis that amounts were payable by the petitioner to SDPL.
  • However, the respondent did not file a counter-affidavit and agreed to disposal based on directions of the Court.

Court’s Findings / Order

  • The respondent must determine whether any amount is actually owed by the petitioner to SDPL before enforcing recovery measures.
  • Garnishee proceedings cannot be sustained without a clear finding on liability.
  • Freezing of the petitioner’s bank account without such determination is prejudicial and unsustainable.
  • The writ petition was disposed of with directions to the respondent to:
    • Treat the writ petition as a representation.
    • Provide an opportunity of hearing to the petitioner (via video conferencing).
    • Pass a reasoned speaking order in accordance with law.
    • Complete the exercise within four weeks.
  • If no liability is found, the impugned notices must be recalled.

Important Clarifications

  • Garnishee proceedings under Section 226(3) require prior determination of debt.
  • Authorities must adhere to principles of natural justice, including hearing and reasoned orders.
  • Freezing of bank accounts without adjudication is considered arbitrary and legally unsustainable.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:1681-DB/RAS24052021CW54602021_133028.pdf

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