Facts of the Case

The Petitioner, GECAS Services India Pvt. Ltd., a wholly owned subsidiary of the GE Group, was engaged in providing marketing support, liaisoning, and administrative services in connection with aircraft leasing in India.

For Assessment Year 2014–15, the Petitioner filed its return declaring income, which was subjected to scrutiny assessment under Section 143(3) of the Income Tax Act, 1961. The Assessing Officer made additions to the returned income, thereby raising a tax demand of Rs. 94,51,390.

The Petitioner filed an appeal before the Commissioner of Income Tax (Appeals) against the assessment order. However, no stay application against recovery of demand was filed.

Subsequently, the Department invoked garnishee proceedings under Section 226(3)(i) and issued notice to HSBC Bank for attachment of the Petitioner’s bank account for recovery of the outstanding tax demand. The entire amount was recovered before the Petitioner received a copy of such notice. Aggrieved by the said action, the Petitioner approached the Delhi High Court challenging the legality of recovery proceedings. 

Issues Involved

  1. Whether the Income Tax Department is mandatorily required to issue prior notice to the assessee under Section 226(3)(iii) before issuing garnishee notice to the bank under Section 226(3)(i)?
  2. Whether recovery of 100% disputed tax demand is permissible when appeal is pending before CIT(A) without disposal of stay application?
  3. Whether CBDT Instruction No. 1914 and Office Memorandum dated 29.02.2016 restricting recovery to 15% apply automatically in absence of stay application?

Petitioner’s Arguments

  • The Department acted illegally by attaching the bank account without prior or simultaneous notice to the assessee under Section 226(3)(iii).
  • The action violated principles of natural justice.
  • CBDT Instruction No. 1914 and OM dated 29.02.2016 mandated that during pendency of appeal, recovery should ordinarily be restricted to 15% of disputed demand.
  • The Department unlawfully recovered the entire demand amount without granting opportunity to seek stay.
  • The delayed dispatch of notice demonstrated arbitrary exercise of power. 

Respondent’s Arguments (Revenue Department)

  • Demand notice under Section 156 had already been served and the statutory 30-day period for payment had expired.
  • Since no stay application was filed, the assessee became an “assessee in default” under Section 220(4).
  • Section 226(3)(iii) only requires forwarding a copy of notice to the assessee and does not mandate prior service before issuing garnishee notice.
  • CBDT stay instructions apply only when a formal stay application is filed by the assessee.
  • The Department acted strictly within statutory authority for recovery of tax dues.

Court Findings / Court Order

The Delhi High Court dismissed the writ petition and upheld the Department’s action.

The Court held that:

  • Service of demand notice under Section 156 is sufficient to put the assessee on notice regarding tax liability.
  • Failure to pay within 30 days results in the assessee becoming an assessee in default under Section 220(4).
  • There is no statutory requirement under Section 226(3)(iii) that notice must be served prior to or simultaneously with garnishee proceedings under Section 226(3)(i).
  • The statutory requirement is merely forwarding a copy of the garnishee notice to the assessee.
  • CBDT Instructions regarding 15% deposit are applicable only where a stay application is filed.

Accordingly, the recovery proceedings were held valid. 

Important Clarification by the Court

The Court clarified that:

Section 226(3)(iii) does not create a mandatory requirement of prior notice to the assessee before attachment of bank accounts.

The expression “forwarded to the assessee” cannot be interpreted as requiring advance service.

Further, filing of appeal alone does not operate as stay against tax recovery. A specific stay application must be filed.

 Sections Involved

  • Section 143(3) – Scrutiny Assessment
  • Section 156 – Notice of Demand
  • Section 220(4) – Assessee in Default
  • Section 221(1) – Penalty for Default
  • Section 226(3)(i) – Garnishee Proceedings
  • Section 226(3)(iii) – Copy of Notice to Assessee
  • CBDT Instruction No. 1914 dated 02.12.1993
  • CBDT Office Memorandum dated 29.02.2016

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:3435-DB/SMD11072017CW31272017.pdf

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