Legal character of an overdraft facility

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.

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ShantanuNaravane

4 comments

  • In the court case (for the judgment, see – http://indiankanoon.org/doc/347202/ ), the ‘legal character’ of overdraft /credit facility is seen to have been decided mainly on the following grounds:
    QUOTE:
    The unutilized 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. Where the banker lends money on an overdraft and the customer is always in debit there is no stage at which the banker is debtor to the customer, nor at any point of time at which he holds any money of the customer or the latter’s account. We respectfully agree with the view expressed by the learned Single Judge of Madras High Court in Adam's case (supra) followed by the learned Single Judge of Karnataka High Court in Karnataka Bank's case (supra). We have therefore no authority but to set aside the order dated November 29, 2007 passed by the 3rd Respondent under Rule 35 of the Rules.
    UNQUOTE
    Comments:
    NOW, AS IS THE COMMON UNDERSTANDING, – THE FACILITY FOR OVERDRAFT, OR CASH CREDIT (AS HAS COME TO BE KNOWN IN RECENT TIMES) IS BASICALLY AN ARRANGEMENT IN TERMS OF WHICH A BUSINESS ENTERPRISE IS ALLOWED WITHDRAWALS FROM A SPECIAL CURRENT ACCOUNT, MOSTLY FOR ITS WORKING CAPITAL REQUIREMENTS, OVER AND ABOVE ITS OWN MONIES DEPOSITED AND LYING TO ITS CREDIT AT ANY GIVEN POINT IN TIME. THIS FACILITY IS ALLOWED SUBJECT TO THE SPECIFIC OVERWHELMING CONDITION THAT THE ENTERPRISE SHOULD DEPOSIT, AND NECESSARILY ROUTE, ALL ITS BUSINESS COLLECTIONS ONLY THROUGH THE SAME ACCOUNT. IN THE NATURE OF THINGS, RATHER NORMAL COURSE, THEREFORE, IT MIGHT SO, OR IS BOUND TO, HAPPEN THAT THE BANK ACCOUNT MAY AT TIMES, THOUGH NOT ALL THE TIME, SHOW A CREDIT BALANCE; NOT ALWAYS A DEBIT BALANCE.
    THESE WOULD REQUIRE TO BE KEPT IN SHARP FOCUS, FOR AN INDEPENDENT STUDY AND APPRAISALOF THE SUBJECT COURT DECISION.

    In the Post, there is a reference to and quote from “Rule 35”. There, however, is, contrary to the impression given, no such rule in the IT Rules !

    vswaminathan

  • Sir,

    My apologies, the Rules refer not to the Income Tax Rules, but the Bombay Provincial Municipal Corporation (Cess on entry of goods) Rules 1996. Thank you for your comments.

    Shantanu.

  • Addendum to – July 28, 2010 3:15 PM
    The narration in the Post provides no clue – as to whether, – either in the Sargam Foods case or in the two precedents relied on and followed therein – the authorities had at all raised the very basic question of maintainability of the writ petition. If carefully looked into, according to a view, such a question could have been validly, rather prudently, raised, had a note been made of and if due regard be had to the clinching provision of sub-section (3) (vi) of section 226 of IT Act (the corresponding Rule of the Bombay Provincial Municipal Corporation (Cess on entry of goods) Rules 1996, in material respects, is no different from but reads the same).In which event, that would have been gone into and adjudicated upon.
    For an appreciation in the proper light, the comprehensive discussion and review of the case law on the referred aspect in the oft cited Vodafone case, as also in the lately reported case @ the link – Don’t interfere with debt recovery proceedings: SC Posted: 04 Aug 2010 08:51 AM PDT – might be usefully gone through.

    vswaminathan

  • Sir/mam
    I browed 250000/_lack as overdraft loan so past from 4tour 5 month I cannot pay whatever bank told to pay 5500 per month .l had running a business it’s in loss bank advocate as sent me the legal notice .so I don’t have money to repay minimum amount still in don’t have business or job .so give some suggestion.

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