Earlier this month, a division bench of the Bombay High Court considered an important question regarding the legal character of an overdraft facility offered to a customer. The issue before the Court in Sargam Foods v. State of Maharashtra, was whether the cash credit facility offered by a bank can be attached in recovery proceedings against one of its customers.
The relevant provision was Rule 35 of the Bombay Provincial Municipal Corporation (Cess on entry of goods) Rules, 1996, which reads-
35. Special mode of recovery
(1) Notwithstanding anything contained in any law for the time being in force or contract to the contrary, the Commissioner at any time or, from time to time, by notice in writing, a copy of which shall be forwarded to the dealer or person liable to pay cess at his last address known to the Commissioner, require
(a) any person from whom any amount of money is due, or may become due, to a dealer or person from whom any amount has become due under these rules and has remained unpaid; or (b) any person who holds or may subsequently hold money for or on account of such dealer or person, to pay to the Commissioner, either forthwith upon the money becoming due or being held or at or within the time specified in the notice (but not before the money becomes due or is held as aforesaid), so much of the money as is sufficient to pay the amount due by such dealer or person in respect of the arrears of cess, penalty, interest, sum forfeited, fine or the whole of the money when it is equal to or less than that amount.
Explanation For the purpose of this rule, the amount of money due to a dealer or person from, or money held for or on account of a dealer or person by any person, shall be calculated after deducting therefrom such claims, if any, lawfully subsisting, as may have fallen due for payment by such dealer or person to such person. [emphasis supplied]
Thus, the question before the Court was whether the cash credit facility provided to a customer could be considered as being covered by the amounts against which the income tax officer may initiate recovery proceedings. A very similar provision had been considered by a single judge of the Chennai High Court, in K.M. Adam v. The Income-Tax Officer, which was seized of facts involving an overdraft facility. The Court held that such a provision (for attachment of amounts in recovery proceedings) only apply to amounts held by a person who is a debtor vis-a-vis the assessee. In the case of amounts 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 debit 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 of his on his account” (¶ 8).
Relying on this decision, which was subsequently affirmed by a single judge of the Karnataka High Court, the division bench held that a cash credit facility cannot be attached. Echoing the view of the Chennai High Court, the bench observed, “The unutilised overdraft account does not render the banker the 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 case, a person from whom money may become due” (¶ 8).
Thus, the uniform position adopted by the High Courts (it is submitted, rightly) 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 unutilised amount of the cash credit/overdraft facility. Another brief discussion of the judgment is available here.