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

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


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.

Garnishee proceedings

 When any assesse defaults in the payment of tax, RO may draw-up a certificate specifying the amount due (in accordance with the Second Schedule of the Act). Pursuant to section 222, sub-section (1)(a), the RO can recover such an amount by attachment and sale of the assesses movable and immovable properties. If the certificate under section 222 has not been made, AO can recover the payment that is due by the other modes of recovery provided under section 226 of the Act. The Act provides the provisions for “Garnishee proceedings” under sub-section (3) of section 226, i.e., where “money belonging to a judgment debtor, in the hands or possession of a third party known as the ‘Garnishee’ (usually a bank), is attached or seized by a judgment creditor, the ‘Garnisher’ or ‘Garnishor’, in satisfaction of a judgment sum or debt.”[5]In the present context, the Act provides that the AO or RO can attach/collect the due payment directly from the third-party who owes money to the assesse. Section 226, sub-section (3)(x) of the Act provides for the situation where the Garnishee fails to comply with the notice as well.

The AO/RO can also apply to court, or obtain a general or special order from any Commissioner provided under sub-section (5) of section 226 of the Act. In case of the latter, the AO/RO may recover any arrears of tax due from an assesse by distrait and sale of his movable property in the manner laid down in the Third Schedule.In case of unpaid tax demands, the notices are issued to the banks for attachment of the bank accounts and payment of the money directly to the Department. The AO/RO directly sends the notice to the bank of the person whose assets are targeted. The bank has to comply with the directions it receives, and accordingly freeze the bank account, as the language of section 226, sub-section (3) (iv) requires mandatory compliance from any person to which it is served.

The AO may order provisional attachment under section 281B of the Act if it forms an opinion it is necessary for protection of revenue. This section (and sections 222-225 and 226)[6] is applied in accordance with the Second Schedule to the Act as rule 3 of Sch. II of the Act, provides for cancellation of the attachment if sufficient security is furnished by the defaulter.

Freezing orders

Pending application or appeal

It is pertinent to note that in case of any pending application or appeal, Section 226 of the act cannot be used for freezing the bank account as the Calcutta High Court in Ghosh Exports Pvt. Ltd. v. Principal Commissioner of Income Tax-2, Kolkata,[7] has held that section 226 cannot be used to order freezing assesses bank account while an application under section 220(6) is pending. Further, the High Court of Calcutta Indian Chamber of Commerce v. Income Tax Officer, Exemption-I,[8] has held that section 226 cannot be used to freeze assesse’s bank account while an appeal under section 246 or 246A is pending.

Notice requirement

As per Section 226 (3) (iii) notice shall be issued to the assesse before freezing the bank account it is a mandatory required under the Act as the Punjab and Haryana HC in the case of Mohan Singh v. Commissioner of Income-Tax,[9] also observed that while raising a demand for recovery, the concerned assesse has to be issued a notice and it is only after hearing him, an appropriate order can be passed. Similarly, in Suntec Business Solutions Pvt. Ltd. v. Union of India,[10] the Karnataka High Court held that a copy of the notice issued to the garnishee must be forwarded to the assesse. This requirement under section 226(3)(iii) of the Act is mandatory. It allows the assesse to point out any anomalies to the RO, arrange its affairs to deal with the contingency of frozen bank accounts, and also avail any of the statutory remedies available under the Act.


In Farrukhabad Gramin Bank v. Additional Commissioner of Income-Tax,[11] the Allahabad High Court held that the Income-tax authorities has to act in accordance with the laws, and not in an arbitrary manner. The Court held that non-issuance of notice under section 226(3) of the Act before recovery from the bank accounts warrants quashing of the notice of demand. In Ballabh Das Agarwal v. Income Tax Officer, Ward-56(3), Kolkata,[12] the Calcutta High Court held that as no document was produced to support compliance with clause (iii) of section 226 of the Act, the Court found balancing of convenience is in favour of passing an interim order restraining the income-tax authority from giving effect to the order of attachment of petitioner’s bank account.

When such actions of haste and arbitrariness results in gross violations of the law and perpetrates injustice, the courts must intervene in exercise of its duties, and grant the appropriate relief.[13] For example, the independent identity of a company, including any of its subsidiaries, must not be compromised for income-tax demands. Similarly, the Delhi High Court in AAA Portfolios Pvt. Ltd. v. Deputy Commissioner of Income Tax,[14] held that shareholders cannot be brought under the purview of 226(3) of the Act as Garnishees. In the aforesaid matter, the Court held AO’s finding that the money held in escrow will be available to the assesse for meeting income-tax demands to be erroneous.


The Income Tax authorities have the power to freeze bank accounts by releasing notice and directing branches of the Indian banks to comply with the said notices. While the reason for freezing assets is usually founded on the allegation of routing of money through various entities, i.e., prevent diversion of money through shell companies, all “[s]tatutory authorities have to exercise their powers strictly according to the Act under which they function.”[15] The scope of section 226 (3) of the Act is very wide by the use of the words “any person” in sub-clause (i). The possibility of misuse is further widened by sub-clause (iv), making such compliance mandatory.

The Income-tax authorities have issued freezing orders for companies meeting their income-tax demands without check. The aforesaid section is also used to freeze foreign bank accounts of companies that are residents in India in some instances. In Khaja Mustafa Kamal v. Union of India,[16] the Bombay High Court took into consideration that the source of livelihood of the petitioner was negatively affected by freezing its bank accounts. The Court observed that coercive measures can bring businesses to standstill. While the aforesaid matter concerned freezing order under the provisions of the Customs Act, 1962, it makes it clear beyond doubt that “what is prohibited directly cannot be achieved indirectly or in an oblique manner.”[17]

Such discretion should be restricted by court rulings and amendments to the Act. Any freezing orders must not be issued in an arbitrary manner, and the provisions of the Act must be strictly followed. For example, the requirement of forwarding the notice to assesse before recovery under section 226(3) of the Act has been ignored in many instances. Further, the courts and tribunals should take initiative to prevent any injustice caused by freezing orders while considering balance of convenience and other factors. In the cases where such freezing orders are issued in an arbitrary manner, the High Courts can be approached under article 226 of Indian the Constitution to de-freeze the bank accounts.

[1]     ITO v. Budha Pictures, (1967) 65 ITR 620 ¶ 4.

[2]     Administrator, Unit Trust of India v. B.M. Malani, (2007) 10 SCC 101 ¶ 13.

[3]     Taxmen use rare law to collect dues directly from bank accounts of evaders (Apr. 04, 2019) The Economic Times available at

[4]     Id.

[5]     Anyanechi&Akinlagun, Understanding Garnishee Proceedings In Nigeria (Sept. 12, 2016) Mondaq, available at

[6]     Relay Shipping Agency Ltd. v. Tax Recovery Officer, 2003 SCC OnLine Bom 1267 ¶ 5.

[7]     Ghosh Exports Pvt. Ltd. v. Principal Commissioner of Income Tax-2, Kolkata,2016 SCC OnLine Cal 3271 ¶ 5; See also Khandelwal Laboratories Pvt. Ltd. v. Deputy Commissioner of Income-Tax, 2016 SCC OnLine Bom 15954 ¶ 8; St. Joan’s Educational Trust v. Deputy Director of Income Tax (Exemption)-I, Kolkata, 2014 SCC OnLine Cal 17801.

[8]     Indian Chamber of Commerce v. Income Tax Officer, Exemption-I,2012 SCC OnLine Cal 7283.

[9]     Mohan Singh v. Commissioner of Income-Tax,1993 SCC OnLine P&H 1584 ¶ 5.

[10]    Suntec Business Solutions Pvt. Ltd. v. Union of India,2014 SCC OnLine Ker 28379 ¶ 16.

[11]    FarrukhabadGramin Bank v. Additional Commissioner of Income-Tax,2005 SCC OnLine All 1875 ¶ 35.

[12]    Ballabh Das Agarwal v. Income Tax Officer, Ward-56(3), Kolkata,2011 SCC OnLine Cal 2851.

[13]    Dunlop India Ltd., (1985) 154 ITR 172.

[14]    AAA Portfolios Pvt. Ltd. v. Deputy Commissioner of Income Tax,2013 SCC OnLine Del 2798 ¶ 27.

[15]    Balaji EnterprisesUnion of India, 2017 SCC OnLine Del 1097114.

[16]    Khaja Mustafa Kamal v. Union of India,2016 SCC OnLine Bom 4832 ¶ 19.

[17]    Id.

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