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),
•Approval of the director of investigation or commissioner under income tax act
•Notice should be generated through ITD system. Hence, the notice should not be
•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
•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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