By TIOL News Service

NEW DELHI, MAY 28, 2014: THE issue before the Bench is - Whether the potential or possible cancellation of an existing debt, depending on the outcome of on-going litigation is too distant a contingency to make the dues unenforceable and therefore, the TRO is entitled to recover the amount due under section 226(3) of the Act. And the verdict goes in favour of the Revenue.

Facts of the case

'EHTPL' is a SPV constituted by agreement between Andhra Pradesh Industrial Infrastructure Corporation Ltd. ("APIIC"), holding 74% and Emaar Properties holding 26%, for the purpose of establishing an integrated project comprising golf course, convention centre-cum-exhibition complex, residential and commercial complexes, hotels, etc. Assessee is engaged in the business of construction/land development for industrial projects and residential townships, entered into a development agreement with ‘EHTPL’. Subsequently, the said agreement was cancelled and a new agreement was entered as per which the assessee was to receive consideration of 75% of gross revenue from sale of buildings constructed on EHTPL’s land and 25% was to remain EHTPL’s share.

Three years after the execution of the said agreement, the Government of Andhra Pradesh, on the recommendation of APIIC, prohibited the registration of documents in the integrated project being developed by Assessee and APIIC issued notice to EHTPL to terminate agreement with the assessee as it was without APIIC’s approval. APIIC also filed a civil suit against EHTPL and EMGF seeking rendition of accounts and a permanent injunction on the transfer of properties to third parties. A PIL was taken up by the High Court, in which the CBI was directed to conduct inquiry into allegations of irregularity in the development agreement.

TRO issued notice u/s 226(3) requiring the Petitioner, to pay the amount owed to EHTPL, in respect of the tax arrears on part of EHTPL. Petitioner responded that the on-going various litigation led to the integrated project coming to a standstill, that existing customers who had booked properties had stopped making payments, and that since no collections could possibly be made under the agreement, no moneys were owed from EMGF to EHTPL. The objection was rejected and the petitioner was named as assessee-in-default.

Petitioner contended that EHTPL could not be considered as having any right to recovery of sale proceeds against it since it had incurred more expenses than the amount it had collected.

TRO rejected the claim and directed petitioner to pay Rs. 30 crores by 07-02-2014 failing which it would be liable to coercive measures. Petitioner filed an affidavit u/s 226(3)(vi) disputing the existence of a liability towards EHTPL before the TRO.

Petitioner moved an application under Article 226 seeking that the notice issued be quashed. The Court directed TRO to examine whether the affidavit of EMGF under Section 226(3)(vi) was false. Another affidavit was filed stating that no money was owed to, or held on the account of EHTPL by petitioner.

TRO after calling records, asked petitioner to pay Rs. 32.82 crores towards the outstanding demand of EHTPL while rejecting petitioner’s objections on the affidavit. TRO stated that the money shown as due from EMGF to EHTPL in its books of account is crystallized, there was no contractual sanction for retaining the amounts to adjust against the future losses of EMGF, if any, nor there is any dispute between the two parties as on the date of notice u/s 226(3), the claim of more expenditure vis-a-vis the receipts on projects is contrary to the facts and it is only an afterthought to deny the liability to avoid payment of tax. The litigation relied upon by petitioner is not related to and does not alter the nature of debt to EHTPL. Thus, the affidavit was rejected and the petitioner was again declared as defaulter u/s 226(3)(x).

Assessee contended that the TRO under Section 226(3) of the Act has the power to proceed against a garnishee only when the debt is admitted. Since the project has been stalled in the litigation and no collections have been made from it, no money could be said to be owed to EHTPL. It was contended that EMGF has in the note in its accounts maintained that the liability is under serious dispute and consequently will need to be computed on a cumulative basis and not annually. Thus, it was not crystallized to EHTPL. Status quo on the project and prohibition on execution and registration of sale deeds translates to EMGF being unable to sell the properties, thus being unable to make payments to EHTPL. Thus the debt due from EMGF to EHTPL is not enforceable debt. If the agreement is found to be invalid, then all the collections of the petitioners will have to be returned to third parties. TRO ignored that the project has been halted in the litigation on the validity of the agreement.

Revenue contended that money was owed from petitioner to EHTPL on an annual basis under the agreement, and that this debt is even admitted by EMGF in its books of account. The litigation can only possibly affect the future liability of EMGF to EHTPL, and not the debts presently due and payable to EHTPL.

After hearing both the parties, the High Court held that,

++ the entries in the books of assessee, indicate that assessee admits a liability to EHTPL, each month, as part of the 25% consideration owed under the development agreement. The existence of this liability is also admitted in the note to the accounts for the year ending 31.3.2013. Thus, EMGF’s debt to EHTPL is in existence, and the fact that the project has been brought to a standstill can only negate the future liability to make payments, since no collections are being made on the project;

++ section 226(3) empowers the AO to discover falsity in the objections filed by the garnishee, in cases where it is an admitted or an indisputable debt. Power clearly does not extend to adjudicating upon the nature or existence of the liability by a proceeding akin to adjudication or judicial determination. If there is facial invalidity of or falsity in the assertion of the garnishee as to absence of its liability to the assessee, the AO is entitled to disregard the affidavit. This court notices that in the present case, contrary to Petitioner's claim that the consideration of 25% would be due on a cumulative basis, the disbursement is to be done annually as indicated in Clause 5 of the Addendum to the Development Agreement;

++ Petitioner’s attempt to retain Rs. 32 crores to adjust against prospective losses on the ground that it has spent more than it has collected thus leading to the possibility of it being unable to recover its expenses should the agreement be cancelled, is not acceptable as the submission seeks to negate an existing and indisputable debt and the TRO has found that in fact, Petititoner has collected more than it has spent;

++ the assessee EMGF merely claims that the agreement is likely to be cancelled or annulled as a consequence of the pending litigation between the parties. This submission does not find favour with this Court as the potential or possible cancellation of an existing debt, depending on the outcome of on-going litigation is too distant a contingency to make the dues unenforceable. An existing debt may cease to exist at some point in the future if one of several contingencies plays out, cannot affect the debt in praesenti.

(See 2014-TIOL-843-HC-DEL-IT)