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How banks can deal with the notice from Tax authorities in India

Owing to increase in money laundering and tax evasion practices, banks are often served with the notices under section 133(6) and section 226(3) of the income tax act, 1961, by the tax authorities. 

The hon'ble supreme court of India, in August 2013, pronounced it's judgement in Kathiroor Service co-operative bank limited and others V. Commissioner of Income tax (CIB) dated 27-08-13, Where  question regarding  power of  tax authorities under section 133(6) was affirmed by the hon'ble court. Section 133(6) empowers the income tax authorities, including assessing officer requiring any person including bank to furnish information which in the opinion of the authorities will be useful for or relevant to any enquiry or proceedings under income tax act.

This power to call for the information is of the widest amplitude, covering all situations, including a situation where no proceedings are pending, or where no enquiry has commenced before the issuance of the notice by the authorities. However, the exercise of this power to call for information when no proceedings are pending can happen only with the prior permission of the director or commissioner under Income tax act.

Moreover, there are certain conditions that tax authorities have to abide before directing banks for obtaining information, Otherwise this conditions can become exception for the bank to avoid notices under section 133(6),

Conditions include:

•Approval of the director of investigation or commissioner under income tax act is mandatory. 

•Notice should be generated through ITD system. Hence, the notice should not be hand written. 

•As per section 133(6), reply to the notice by the banks under verification can be only done through online mode.

•Verification under "operation clean money" is to be made through online verification portal about SOP (standard operating procedure) as on 21/02/2017.

Bank when served with a notice under section 133(6) has to mandatory provide the information sought by the authorities under Income tax act. In case any bank under verification does not provide for or reply to the notice in allotted time given by the assessing officer regarding cash deposit in bank accounts. The case may be escalated as "not acceptable" and further actions can be taken as the procedure in SOP of CBDT (Instruction no 3/ 2017) 

Similarly, under section 226 (3), the income tax authorities have the power to direct banks to remit money which is due or may become due to the banks depositor or borrower. When such notice served to the banks in respect of an account, the banks may take the following measures or recourse:-

•In case of a deposit account, including fixed deposit, standing in the name of the depositor having credit balance, the bank is obligated to remit the amount as is sufficient to meet the demand stipulated in the said notice. On remission of the sum, a receipt for the sum paid shall be issued and the bank shall be fully discharged from it's liability to the extent of payment. 

•In case there is no money in the said deposit account,  the bank may submit a written objection stating that the sum demanded in the notice is not due to the depositor or the bank does not hold any money for or on account of the depositor. If banks takes such objection in the circumstances mention above, nothing in this section 226(3) can compel the bank to pay such sum mentioned in the notice. 

•In case of notice is served in respect of loan account having debit balance, banks may write back to the income tax authorities that no money is due to the borrower or the bank does not hold any money to the account for or to the account of the borrower.

•In case tax authorities demand unutilized portion of the loan, the demand may be declined as the unutilized portion is not the amount belonging to the borrower in the hands of the bank. 

In this regard, the hon'ble Chennai high court, In K.M Adam V. The Income tax officer (1958) IMLJ34, has held that in case of amount held in the current account or deposit account, the bank is a debtor of the customer.  However, when a bank lends money on overdraft and the customer is always in debt, there is no stage at which the bank is a debtor to its customer, nor any point of time at which it holds any money at his or her account. 

Relying on this decision, which was subsequently affirmed by a single judge of the Karnataka High court, the Bombay High court in Sangram foods V. State of Maharashtra 2010, ALLMR 202, held that a cash credit facility offered by bank cannot be attached. Echoing the view of the Chennai High Court, the bench observed, that the unutilized overdraft account does not render the banker a debtor in any sense and the banker is therefore, not a person from whom money is due to the customer, nor is the banker in such cases, a person from whom money may become due.

Thus, the uniform position adopted by the high courts is that a cash credit or an overdraft facility cannot be attached in tax recovery proceedings,  since the bank is not the debtor of the customer with respect to the unutilized amount of the cash credit /overdraft facility.

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