Petitioner’s Debt Dispute: Court Orders Revenue to Reassess Account Freeze

Get the full picture - access the original judgement of the court order here

Case Name:

Blueblood Ventures Limited Vs. Deputy Commissioner of Income Tax (High Court of Delhi)

W.P.(C) 5460/2021

Date: 24th May 2021

Key Takeaways:

• The court emphasized the need for the revenue department to hear the petitioner’s side and pass a “speaking order.”
• The decision highlights the importance of due process and fair hearing in tax disputes.
• The court’s use of videoconferencing for hearings reflects adaptability to pandemic conditions.

Issue

Did Blueblood Ventures Limited owe any amount to Shridham Distributors Private Limited as of April 1, 2019, justifying the garnishee notice and account freeze by the revenue department?

Facts

• Blueblood Ventures Limited claimed it settled its debt to Shridham Distributors Private Limited by transferring Zero Coupon Optionally Convertible Debentures worth Rs. 21,37,00,000 on March 28, 2019.
• Despite this, the revenue department issued a garnishee notice on February 7, 2020, demanding payment of the alleged debt.
• The department further froze the petitioner’s bank account on March 13, 2020.
• The petitioner repeatedly communicated that no debt was owed as of April 1, 2019, but the freeze remained.

Arguments

• Petitioner: Argued that the debt was settled before the garnishee notice was issued, and thus, the account freeze was unjustified.
• Respondent (Revenue): Issued the garnishee notice and account freeze based on their assessment that the petitioner owed money to SDPL.

Key Legal Precedents

The judgment did not explicitly cite past case laws but focused on the application of Section 226(3) of the Income Tax Act, 1961, which deals with the recovery of tax dues.

Judgement

The court directed the revenue department to treat the writ petition as a representation and pass a speaking order after hearing the petitioner’s authorized representative. The court ordered the use of videoconferencing for the hearing and set a four-week deadline for the revenue department to complete this process.

FAQs

Q1: What is a garnishee notice?

A1: It’s a legal order for a third party to seize or withhold a debtor’s property or money to satisfy a debt.

Q2: Why was the petitioner’s bank account frozen?

A2: The revenue department believed the petitioner owed money to SDPL and issued a freeze to secure the alleged debt.

Q3: What does “speaking order” mean?

A3: It’s a detailed order that explains the reasoning behind a decision, ensuring transparency and accountability.

Q4: How does this case affect future tax disputes?

A4: It underscores the necessity for tax authorities to provide a fair hearing and detailed reasoning before taking enforcement actions like account freezes.

1. Issue notice.

1.1. Mr. Sanjay Kumar, who appears on advance notice, on behalf of the respondent/revenue, accepts service.

2. Mr. Kumar says that, he does not wish to file a counter-affidavit in the matter, in view of the directions that we propose to pass.

2.1. Accordingly, with the consent of the parties, the writ petition is taken up for hearing and final disposal, at this stage itself.

3. Briefly, the backdrop in which the petitioner has approached this court by way of the instant writ petition is, as follows:

3.1. It is the petitioner’s case that it owed monies to an entity, going by the name, Shridham Distributors Private Limited [in short 'SDPL']. According to the petitioner, the debt owed to SDPL was defrayed, by transferring Zero Coupon Optionally Convertible Debentures [in short ‘ZOCD’] of another entity, namely Devoted Construction Limited, amounting to Rs.21,37,00,000/-. This transaction, the petitioner avers, was completed on 28.03.2019.

3.2. According to the petitioner, as on 01.04.2019, it owed nothing to SDPL. It is, therefore, the petitioner's case that, on 01.04.2019, a letter was addressed by the petitioner to SDPL to obtain balance confirmation.

3.3. The respondent/revenue, however, issued a garnishee notice, dated 07.02.2020, under Section 226(3) of the Income Tax Act, 1961 [in short 'the Act']. Via this notice, the respondent/revenue called upon the petitioner, to remit the amount owed by it to SDPL.

3.4. The petitioner claims that, in response to the garnishee notice dated 07.02.2020, a communication dated 19.02.2020 was addressed to the respondent/revenue. It is the petitioner's case that, in the said communication, it, inter alia, indicated that as on 01.04.2019 nothing was owed by it to SDPL.

3.5. The respondent/revenue, however, did not stop with the issuance of the garnishee notice dated 07.02.2020. The respondent/revenue, thereafter, issued a notice dated 13.03.2020 under Section 226(3) of the Act to the petitioner's banker [i.e. South Indian Bank Ltd.], directing the said bank to freeze the petitioner's current account bearing number 358073000002442.

3.6. It appears, thereafter, the petitioner, vide communication dated 10.06.2020, addressed to the respondent/revenue, reiterated the stand, which was taken by it, as noticed above, on 19.02.2020.

3.7. The aforesaid communication was followed, by the petitioner, by a letter dated 22.07.2020 to the respondent/revenue. With this letter, in compliance with Section 226(3)(vi) of the Act, the petitioner submitted a statement on oath, wherein it reiterated its earlier stand, which is, that, as on 01.04.2019, the petitioner’s account with SDPL stood settled.

3.8. Since there was no movement in the matter, on 26.11.2020, the petitioner once again approached the respondent/revenue for lifting the freeze order qua its aforementioned bank account.

4. In these circumstances, the petitioner has approached this court.

5. According to us, the respondent/revenue needs to hear the petitioner and thereafter, pass a speaking order, given the stand taken by the petitioner that, as on 01.04.2019, its account with SDPL stood settled. The respondent/revenue needs to reach a finding, as to whether or not the petitioner owes any amount to SDPL.

5.1. Needless to add, if the petitioner does not owe any amount to SDPL, the impugned notices will have to be recalled. Continuance of the order directing a freeze on the petitioner’s bank account, without reaching a finding, is obviously detrimental to the petitioner’s interest.

5.2. Therefore, the writ petition is disposed of with the direction to the respondent/revenue, to treat the instant writ petition as a representation, and pass a speaking order, albeit, as per law.

5.3. Before passing the said order, the respondent/revenue will hear the authorised representative of the petitioner. For this purpose, in view of the fact that the pandemic is on, the respondent/revenue will take recourse to the video-conferencing [VC] mechanism. The respondent/revenue will fix a date and time for according the hearing, and in this behalf, will give prior notice of at least three days, to the petitioner. The respondent/revenue will also send a VC link to the authorised representative of the petitioner, to enable hearing in the matter.

5.4. Since the impugned notices were issued more than a year ago, the respondent/ revenue will complete the aforesaid exercise within the next four weeks.

6. The writ petition is disposed of in the aforesaid terms.