Court Blocks Tax Recovery from Petitioner's Funds, Citing Lack of Evidence

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Case Name:

Zahra Ahmed Vs Director of (Investigation) Income Tax (High Court of Allahabad)

Misc Bench No. 1229 of 2016

Date: 17th January 2017

Key Takeaways:

1. The tax department can't recover money from accounts or investments that don't belong to the person who owes taxes.

2. Clear evidence is needed to show that money held by one person actually belongs to the tax defaulter.

3. The court emphasized the importance of verifying ownership before issuing recovery notices.

Issue: 

Can the Income Tax Department recover money from accounts and investments held in the petitioner's name to satisfy the tax liability of her son?

Facts: 

Alright, here's the scoop:

- Zahra Ahmed (our petitioner) had some fixed deposits in State Bank of India, Lucknow, and shares in Cipla Ltd., Mumbai.

- The Income Tax folks were trying to recover money from Rizwan Syed Ahmed (Zahra's son).

- They sent notices to the bank and Cipla Ltd. under Section 226(3) of the Income Tax Act, 1961, thinking the money belonged to Rizwan.

- Zahra said, "Hey, that's my money! Rizwan only gets it if he's the sole survivor."

- The bank confirmed that the accounts were in Zahra's name, with Rizwan as a joint holder under "Former or Survivorship" mode.

Arguments:

Zahra's side:

- The money and investments are hers, not Rizwan's.

- The tax department can't take her money to pay off Rizwan's debts.

Tax Department's side:

- They thought the money belonged to Rizwan.

- They were trying to recover taxes owed by Rizwan.

Key Legal Precedents:

The judgment doesn't mention specific case laws, but it heavily relies on Section 226(3) of the Income Tax Act, 1961. This section deals with the recovery of tax by the Income Tax Department from third parties who hold money on behalf of the tax defaulter.

Judgement:

The court sided with Zahra. Here's what they said:

1. There's no evidence that Zahra was holding money for Rizwan.

2. The tax department can't recover money from Zahra's accounts without proof that it belongs to Rizwan.

3. The court dismissed the objection about territorial jurisdiction, saying part of the cause of action arose in Lucknow.

4. The court set aside the notices issued by the Income Tax Department.

FAQs:

1. Q: What does this mean for joint account holders?

  A: It shows that the tax department can't automatically assume joint accounts belong to the tax defaulter. They need clear evidence.

2. Q: Can the tax department still try to recover money from Rizwan?

  A: Yes, but they'll need to find assets that actually belong to Rizwan, not his mother.

3. Q: What's the significance of the "Former or Survivorship" mode?

  A: It means Zahra has primary control over the account, and Rizwan only gets the money if he's the sole survivor.

4. Q: Could this case impact how the tax department handles recovery notices in the future?

  A: Absolutely! It might make them more cautious and thorough in verifying ownership before issuing notices.

5. Q: What should taxpayers learn from this case?

  A: It's important to keep clear records of your assets and their ownership. If you're wrongly targeted for tax recovery, you can challenge it in court.

1. Heard Sri Pradeep Agrawal, learned counsel for appellant as well as Sri Siddharth Dhaon, learned counsel for respondents-1 and 2 and Sri Anurag Srivastava, learned counsel for respondent-3.

2. Petitioner has some fixed deposit receipts in State Bank of India, Main Branch, Lucknow and also possess some shares and fixed deposits in a private company, namely, Cipla Ltd. having its registered office at Mumbai.

3. Income Tax Authorities, however, sought to recover some amount from one Rizwan Syed Ahmed and for recovery of said amount, impugned notice has been issued to Branch Manager, State Bank of India, Main Branch, Lucknow and Principal Officer, Cipla Ltd., Mumbai under Section 226(3) of Income Tax Act, 1961 (hereinafter referred to as the “Act, 1961”) requiring them to discharge liability of tax payer- Rizwan Syed Ahmed against money in accounts, FDRs, deposited in the name of Rizwan Syed Ahmed.

4. Petitioner claimed that fixed deposits in State Bank of India, Main Branch, Lucknow and other investment in Cipla Ltd. are by her and not Rizwan Syed Ahmed. He is son and only entitled to claim said money if he is sole survivor otherwise no money deposited or invested in the aforesaid institutions belongs to Rizwan Syed Ahmed which is sought to be recovered. Aforesaid money in fact belong to petitioner and unless it can be shown that petitioner is holding some money on behalf of Rizwan Syed Ahmed, recovery against Rizwan Syed Ahmed cannot be attempted to be satisfied from money belongs to petitioner.

5. Section 226(3) of Act, 1961 reads as under:- “226(3)(i) The Assessing Officer or Tax Recovery Officer may, at any time or from time to time, by notice in writing require any person from whom money is due or may become due to the assessee or any person who holds or may subsequently hold money for or on account of the assessee to pay to the Assessing Officer or Tax Recovery Officer either forthwith upon the money becoming due or being held or at or within the time specified in the notice (not being before the money becomes due or is held) so much of the money as is sufficient to pay the amount due by the assessee in respect of arrears or the whole of the money when it is equal to or less than that amount. (ii) A notice under this sub-section may be issued to any person who holds or may subsequently hold any money for or on account of the assessee jointly with any other person and for the purposes of this sub-section, the shares of the joint holders in such account shall be presumed, until the contrary is proved, to be equal. (iii) A copy of the notice shall be forwarded to the assessee at his last address known to the Assessing Officer or Tax Recovery Officer, and in the case of a joint account to all the joint holders at their last addresses known to the Assessing Officer or Tax Recovery Officer. (iv) Save as otherwise provided in this sub-section, every person to whom a notice is issued under this sub-section shall be bound to comply with such notice, and, in particular, where any such notice is issued to a post office, banking company or an insurer, it shall not be necessary for any pass book, deposit receipt, policy or any other document to be produced for the purpose of any entry, endorsement or the like being made before payment is made, notwithstanding any rule, practice or requirement to the contrary. (v) Any claim respecting any property in relation to which a notice under this sub-section has been issued arising after the date of the notice shall be void as against any demand contained in the notice. (vi) Where a person to whom a notice under this sub-section is sent objects to it by a statement on oath that the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for or on account of the assessee, then nothing contained in this sub-section shall be deemed to require such person to pay any such sum or part thereof, as the case may be, but if it is discovered that such statement was false in any material particular, such person shall be personally liable to the Assessing Officer or Tax Recovery Officer to the extent of his own liability to the assessee on the date of the notice, or to the extent of the assessee's liability for any sum due under this Act, whichever is less. (vii) The Assessing Officer or Tax Recovery Officer may, at any time or from time to time, amend or revoke any notice issued under this sub-section or extend the time for making any payment in pursuance of such notice. (viii) The Assessing Officer or Tax Recovery Officer shall grant a receipt for any amount paid in compliance with a notice issued under this sub-section, and the person so paying shall be fully discharged from his liability to the assessee to the extent of the amount so paid. (ix) Any person discharging any liability to the assessee after receipt of a notice under this sub-section shall be personally liable to the Assessing Officer or Tax Recovery Officer to the extent of his own liability to the assessee so discharged or to the extent of the assessee's liability for any sum due under this Act, whichever is less. (x) If the person to whom a notice under this sub-section is sent fails to make payment in pursuance thereof to the Assessing Officer or Tax Recovery Officer, he shall be deemed to be an assessee in default in respect of the amount specified in the notice and further proceedings may be taken against him for the realisation of the amount as if it were an arrear of tax due from him, in the manner provided in sections 222 to 225 and the notice shall have the same effect as an attachment of a debt by the Tax Recovery Officer in exercise of his powers under section 222.”

6. Sri Siddharth Dhaon, learned counsel for respondents-1 and 2 has been required by Court repeatedly as to how Income Tax Authorities have come to know that aforesaid money belongs to Rizwan Syed Ahmed when bank authorities and private company have clearly shown that said money belongs to petitioner, i.e., Smt. Zahra Ahmad and not to Rizwan Syed Ahmed. Letter sent by bank dated 23.09.2015 is on record and extract thereof reads as under:-

“In this context we have to advise that the following bank accounts, fixed deposits are in the name & style of Smt. Zahra Ahmed and Shri Rizwan Ahmed and not Rizwan Ahmed and Zahra Ahmed as mentioned in our earlier letter. Further, the mode of operation in these following accounts are in “Former or Survivorship” i.e. No amount is payable to Shri Rizwan Ahmed presently.......”

7. In absence of any material to show that aforesaid money is held by petitioner on behalf of depositor-Assessee against whom recovery is to made or that petitioner held some money on behalf of Assessee under Section 226(3) of Act, 1961, no recovery can be made from money belong to petitioner.

8. At this stage, an objection with regard to jurisdiction for filing the petition is raised stating that notices sent to Cipla Ltd. was issued to aforesaid company at Mumbai and thus this Court lacks territorial jurisdiction. We find that investment has been made in aforesaid company at Mumbai as well as in State Bank of India, Main Branch, Lucknow from Lucknow and therefore, we find no force in submission with regard to territorial jurisdiction inasmuch it cannot be disputed that a part of cause of action has also arisen at Lucknow. Objection to this extent is rejected.

9. In view of above discussion, writ petition is allowed. Impugned notices are hereby set aside.