Karnataka HC quashes I-T attachment order against electronics giant Xiaomi

The Karnataka High Court has quashed the provisional attachment order passed by the Income Tax Department in connection with Rs 3,700 crore fixed deposits held by Xiaomi Technology India Private limited.

Partly allowing the petition, Justice S R Krishna Kumar has said that the petitioner Xiaomi is not entitled to make payments from the subject fixed deposit accounts in the form of royalty or in any other form to any companies/entities located outside India. The company is, however, at liberty to take overdrafts from the subject fixed deposits accounts and make payments from such overdrafts to such companies/entities located outside India.

The provisional attachment order was passed by the Deputy Commissioner of Income Tax, Bengaluru, on August 11, 2022, under Section 281B of the Income Tax Act pursuant to the approval granted by Principal Commissioner of Income Tax. The attachment order pertains to Rs 3,700 crore fixed deposits, Rs 2,600 crore with HSBC Bank and Rs 1,100 crore with the City Bank.

The petitioner Xiaomi challenged the order claiming that the impugned order is manifestly arbitrary and reflects pre-meditated conclusion and it does not record any opinion as to the necessity for attaching the property.

The court noted that there is no finding recorded by the Income Tax department that the petitioner company was a 'fly by night operator' from whom it was not possible to recover the likely demand. "The impugned order also does not state that the petitioner was either a habitual defaulter or that he was not doing any business at all or that the petitioner did not have sufficient funds to satisfy the demand," the court said.

Justice Krishna Kumar observed that the Income Tax department has not assigned any reasons except that the officer who approved the attachment was of the opinion that it was necessary to attach the fixed deposits for the purpose of protecting the interest of the revenue.

"It is trite law that grant of approval should not be a mechanical act and should reflect independent application of mind and this important safeguard of taking prior approval of the Commissioner under Section 281B of Income Tax Act is not a mere empty formality and cannot be taken lightly. The approval granted by the Principal Commissioner of Income Tax also reflects complete non-application of mind and is a non-speaking and unreasoned approval which is contrary to law and consequently, the impugned order based on the said approval deserves to be quashed," the court said.