Defining Contours Of Freezing Orders Under Section 226(3) Of The Income Tax Act

Aditya Singh Chauhan, Law Student, National Law University, Jodhpur

Introduction

With heavy tax defaults pilling-up in the recent years, tax authorities have resorted to issuing freezing orders under certain special provisions to freeze bank accounts and directly recover the money. The Assessing Officer (“AO”) or Tax Recovery Officer (“RO”) can make use of section 226(3) of the Income Tax Act, 1961 (“Act”) for this purpose. The aforesaid provision pertains to “Garnishee proceedings”, and allows the tax authorities to attach or collect money directly from the account of the tax payer’s debtor.[1] The Supreme Court of India, while defining the scope of this section, observed “[it] would be applicable only when a money is due to the assesse from any person. Was the amount due to the assesse when the notice dated […] was issued is the question.[2] However, indiscriminate use of this section can severely impact the reputation and business of the assesse.[3]It has been said that “[t]his is a provision which has to be used sparingly but is now used at the first instance by the assessing officer even in cases where a stay application is pending with various appellate authorities.”[4] This article will explain the process of Garnishee Proceedings under the Act, discuss case laws in relation to freezing orders issued after serving notice under section 226(3) of the Act, and conclude with the instances where freezing orders are illegal or invalid.

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