TMI Blog2013 (8) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... he Court may pass a garnishee order enabling a judgment creditor to obtain satisfaction of his claim only in those cases which are similar in scope as to judgments on admission under Order 12 Rule 6 of the CPC. A Court cannot issue garnishee order under Order 21 Rule 46 of the CPC against a debtor of the judgment debtor who disputes his indebtedness unless an issue in this regard is struck and tried as provided under Order 21 Rule 46C of the CPC. Unlike the CPC, Section 226(3) of the Act does not have any provision similar to Order 21 Rule 46C of the CPC which confers jurisdiction on the Assessing Officer to adjudicate the question regarding indebtedness of a third party to an assessee who disputes the same. Once the third party noticee has disputed that he owes any money or holds any money on account of the assessee, the Assessing Officer would not have any jurisdiction to proceed further against the third party. This is also abundantly clear from the language of clause (vi) of Section 226(3) of the Act. There is also no reason why either the purchaser of shares of a company or the selling shareholders have any occasion to pay any part of the consideration for sale and purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 100 shares of the assessee company each entered into a share purchase agreement dated 25.9.2005 for sale of their shares in the assessee company to M/s Fortis Health Care Ltd. (hereinafter referred to as the purchaser ). In all 18,00,300 shares of the assessee company which aggregated 90.01% of the issued and paid up share capital of the assessee company were agreed to be sold by the petitioners and three other entities (hereinafter collectively referred to as the sellers ). The consideration for the sale of 18,00,300 shares of the assessee company was agreed at Rs. 585,00,97,485/- @ Rs. 3249.51 per share. As agreed under the share purchase agreement, the purchaser was required to deposit the entire consideration with the escrow agent and the sellers agreed to deposit certain documents including share transfer deeds and instructions with the escrow agents in order to consummate the transaction for sale and purchase of an aggregate of 18,00,300 equity shares of the assessee company. The shares held by petitioner No.3 were pledged with certain lenders and the escrow agent was required to release part of the consideration to the lenders in order that the petitioner No.3 could redeem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e would be released to the petitioners. 5. Pursuant to the share purchase agreement dated 25.09.2005, the sellers and the purchaser and respondent no. 2 entered into an Escrow Agreement dated 27.09.2005 which, inter alia, recorded the obligations of respondent no.2 as the escrow agent. 6. The Assessing Officer issued a notice under Section 226(3) of the Act to respondent no. 2 bank in respect to the amount held by respondent no. 2 as an escrow agent in terms of the Escrow Agreement dated 27.09.2005. The said notice was objected to and it was clarified by respondent no. 2 that it was not holding any money on account of the assessee company. The Assessing Officer sent another similar notice dated 15.02.2007 without considering the objections of the respondent no. 2 bank. 7. The Assessing Officer sent a notice dated 16.07.2008 directing the respondent no. 2/bank to remit a sum of Rs. 64,99,02,514/- which was lying in fixed deposits to the Assessing Officer by 17.07.2008. 8. The notice dated 16.07.2008 was challenged by petitioner no. 1 and 2 by filing a writ petition, being writ petition no. 5080/2008 in this Court. This Court passed an interim order dated 17.07.2008 staying t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi with EHIRCL, Chandigarh and/or the conversation of the merged entity into a Part IX company under the Companies Act, 1956 has to be paid by the ESCROW Account. The said demand has been raised due to the withdrawal of exemption of the Escort Heart Institute and Research Center, Delhi as it got merged with the Chandigarh Society which was a non-charitable society. Therefore, it can be concluded without doubt that the said amount of money has been kept in the ESCROW Account for meeting Income Tax demands only. So the notice u/s 226(3) sent by the ACIT dated 10.10.2006 is very much in accordance with ESCROW Agreement and Income Tax Act. 12. Pursuant to the impugned order, the Assessing Officer sent a notice dated 04.02.2013 under Section 226(3) of the Act calling upon respondent no. 2 to forthwith pay the amount held by respondent no.2 by way of fixed deposits pursuant to the Escrow Agreement. Thereafter, respondent no. 2 paid a sum of Rs. 95,85,30,934/- to the Assessing Officer in compliance of the notice dated 04.02.2013. 13. The controversy in the present writ petition essentially revolves around the question whether respondent no. 2 held any money on account of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very 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) xxxx xxxx xxxx xxxx xxxx (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atta High Court in the case of Shaw Wallace and Co. Ltd. v. Union of India: (2003) 262 ITR 528 (Cal.) also expressed a similar view and held as under: In the facts and circumstances of the case whether the decree had been put to execution by VCVL or not is immaterial. If the decree is offered, the Tax Recovery Officer is free to proceed upon it under section 226(3) of the Act. But by reason of clause (vi) thereof the judgment debtor/garnishee has a right to object. As soon as objected, to the Tax Recovery Officer cannot proceed to recover until discovery of falsity of the objection. If the executability of the decree is challenged, the Tax Recovery Officer cannot assume jurisdiction to decide a dispute between the garnishee and the assessee. He cannot usurp the jurisdiction of the executing court. The jurisdiction of the Tax Recovery Officer is confined within the dispute between the assessee and the income tax authority. He cannot assume jurisdiction in respect of any dispute between the assessee and the garnishee nor can he embark upon an exercise to determine any such dispute unless it appears to be false on the face of it. As soon there appears to be a dispute prima facie, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his is also abundantly clear from the language of clause (vi) of Section 226(3) of the Act. 20. The Supreme Court has in the case of Surinder Nath Kapoor v. Union of India: AIR 1988 SC 1777, observed as under: 15. The object of serving a notice under clause (3)(vi) of section 226 is to give the garnishee an opportunity to admit or deny his liability for the amount mentioned in the notice. Under clause (i) of section 226(3), if the garnishee objects to the notice by a statement on oath that the sum demanded or any part thereof is not due to the assessee, then the garnishee will not be required to pay any such sum or part thereof, as the case may be. 21. In the present case, respondent no. 2 bank has furnished an affidavit unequivocally affirming that no part of the amount held by respondent no. 2 in escrow is owed to or belongs to or is held by respondent no. 2 on account of the assessee company. In view of the affidavit dated 07.12.2012 furnished by the respondent no. 2 bank, the Assessing Officer had no jurisdiction to proceed further and call upon the respondent no. 2 bank to makeover the funds held by respondent no. 2 as an escrow agent pursuant to the Escrow Agreement d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own cost in mutual consultation with the Purchaser and the Company. In the event EL is desirous of settling the Income Tax claim/demand it shall do so only with the prior written consent of the Purchaser and the Company, which consent shall not be unreasonably withheld. For the purposes of this Article 2.9, Income Tax claim/demand shall mean any Income Tax and/or Capital Gain Tax claim/demand including interest and penalty thereon, if any, made on the Company on account of or in connection with the merger of Escorts Heart Institute and Research Centre Delhi with Escorts Heart Institute and Research Centre, Chandigarh and/or the conversion of the merged entity into a Part IX Company under the Companies Act, 1956, including all legal expenses incurred by EL for defending the Income Tax claim/demand. Provided that EL shall have right to substitute the Securities with cash or such other securities as may be acceptable to the Purchaser by depositing an amount with the Escrow Agent, equivalent to the value of total Securities including interest accrued thereon up to the date of such substitution by EL. In the event EL substitutes the Securities with either cash or such other securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y undertakes to pay its 1/3 share to the Purchaser within two Business Days of the Company notifying EL, the Purchaser and the Escrow Agent. In the event there is a delay in payment to Purchaser by EL of its aforesaid 1/3 share, interest @ 15% per annum on the aforesaid 1/3 share or part thereof which shall remain payable by EL to the Purchaser shall commence with effect from the expiry of two Business Days until payment to the Purchaser. In the event the said amount is paid directly by EL to the Purchaser, the Escrow Agent under instructions of EL, shall release to EL and/or AAA and/or Apple as the case may be, the amount (if in cash) or securities as the case may be together with all interest accrued thereon held by the Escrow Agent. (c) In the event the Income Tax claim/demand is less than Rs.64,99,02,514 (Rupees Sixty Four Crores Ninety Nine Lakhs Two Thousand Five Hundred Fourteen Only) together with all interest accrued thereon, the Income Tax claim/demand shall be paid to the Purchaser by EL in the first instance under intimation to the Escrow Agent by EL, within two Business Days of the Company notifying EL, the Purchaser and the Escrow Agent, failing which by the Escrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of a tenor of five years and one day each and would be encashable/renewable from time to time by Escrow Agent without any further approval, consent or notice from AAA, Apple, EL and/or Purchaser, as the case may be, unless Escrow Agent is in receipt of any joint instructions to the contrary from EL and Purchaser. (c) Parties further agree that Heldback Amount No.2 in the form of Fixed Deposits shall be retained by the Escrow Agent as custodian towards settlement of the Income Tax claim/demand of the Company. Provided that EL shall have right to substitute the Fixed Deposits with cash or such other securities (Fixed Deposits along with cash and such other substituted securities shall hereinafter be referred to as the "Securities") as may be acceptable to the Purchaser and the Escrow Agent, by depositing such Securities with the Escrow Agent, equivalent to the value of total Fixed Deposits/substituted Securities including interest accrued thereon up to the date of such substitution by EL. In the event EL substitutes the Fixed Deposits with cash or other securities, the Fixed Deposits or any balance held in respect of Heldback Amount No.2 shall be released by the Escrow Agent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Five Hundred Fourteen Only) together with all interest accrued thereon, the Income Tax claim/demand crystallised in part shall be paid to the Purchaser upon receipt of a opinion in writing by the Escrow Agent from the Purchaser, obtained by the Purchaser from one amongst the following accounting firms, namely Price Waterhouse, Ernst Young, Delloitte, Touche Tohmatsu and KPMG certifying/stating that the demand pertains to Income Tax claim/demand. The balance amount after disbursement of the Income Tax claim/demand to the Purchaser as specified in this paragraph shall be released by the Escrow Agent to EL and/or AAA and/or Apple as the case may be only upon receipt of joint instructions from EL and the Purchaser that there is no other Income Tax claim/demand pending and/or to be discharged. 25. A plain reading of the Share Purchase Agreement dated 25.09.2005 and the Escrow Agreement dated 27.09.2005 would indicate that the conclusion drawn by the Assessing Officer that respondent no. 2 held any money on account of the assessee company is patently erroneous. Neither the Share Purchase Agreement nor the Escrow Agreement provides for any contingency which would enable the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd of the deficient amount to the purchaser. It is clear from the language of the Share Purchase Agreement that under no circumstances would the money held in escrow be released either to the assessee company or to the Income-tax Department. This clearly indicates that no amount was held by respondent no. 2 on account of the assessee company. 27. There is also no reason why either the purchaser of shares of a company or the selling shareholders have any occasion to pay any part of the consideration for sale and purchase of shares of a company to the company. A company is an independent entity completely distinct from its shareholders. A transaction relating to sale and purchase of shares is a transaction inter-se the selling shareholders and purchasers and a company cannot stake claim to any part of the consideration as shares of a company are not the assets of the company but those of its shareholders. The assessee company is neither a party to the Share Purchase Agreement or the Escrow Agreement nor can claim any sum from the parties to the Escrow Agreement. No money is due to the assessee company by respondent no.2 or is held by or may subsequently be held by Respondent no. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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