CHAPTER-6 : BANKER & CUSTOMER RELATIONSHIP

6A.1 Definition of Banking 1949. It is defined as Accepting for the purpose of lending and investment of deposits of money from public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. Thus the characteristic features of banking are to: (i) accept deposits from public (ii) pay cheques (iii) act as intermediary to invest public money in investment and credit. Section 6 of BR Act mentions the type of business a banking company can undertake and Section 8 prohibits a bank from engaging itself directly or indirectly in trading activity. Section 9 prohibits a banking company to hold immovable properties for a period exceeding seven years, except those required for own use (for details see Banking Regulation Act, Chapter III). 6A.2 Definition of Customer The term customer is not defined in any Act. A customer is a person, who has an account with the bank and whose A person, not having a bank account, but availing services from bank like The term Banking is defined in Sec. 5 (b) of Banking Regulation Act,

dealing with the bank are in nature of Banking business. purchasing a draft, remitting money, hiring a locker cannot be strictly termed as customer since such dealings are casual dealings and are not in nature of banking business. 6A.3 A customer can be a person, or any legal entity. The primary relationship between a banker and customer is that a debtor Banker and Customer Relationship and creditor (Reason: on opening the SB/CD/term/any deposit account the banker becomes a debtor). However a banker is different from an ordinary debtor on two courts viz.

i.

The banker is required to pay the customer only when payment is demanded within business hours of a working day at the branch (an ordinary debtor should search for his creditor and repay the debt.).

ii. the date of demand, by the depositor. -

For a normal debt, the period of limitation starts from the date of However, in case of bank deposits, it starts from Apart from the primary relationship, there can be other legal relationship

between a banker and customer depending upon the transaction as given hereunder. Type of Transaction 1. Acceptance of Deposits. 2. Overdraft /Loan/CC in debit balance 3. Collection of cheque on behalf of customer 4. Sale / purchase of securities /share on behalf Of customer 5. Carrying on standing instruction (like paying insurance premium etc) 6. Purchase of DD/MT/TT & Issuing Bank 7. Payee of DD & Issuing Bank 8. Safe custody of article 9. Safe deposit locker 10. Money tendered to bank pending Instruction for its disposal 6A.4 Duties and Rights of a Banker a) b) c) statement d) Duty to collect cheques / bills The primary duties of a banker can be classified into the following heads. Duty of Secrecy Duty of honour cheques Duty to submit periodical Agent and Principal Beneficiary and Trustee Bailee Bailor Lessor Lessee Trustee Beneficiary Agent and Principal Banker Customer Relationship Debtor and Creditor Creditor and Debtor Agent and Principal Agent and Principal

The primary rights enjoyed by a banker are: (i) Right of General lien (ii)

Right of Set-off (iii) Right of Appropriation (iv) Right to act as per mandate of the customer. These duties are rights are discussed in detail in the Chapters to follow. 6A.5 Termination of Banker Customer Relationship The banker customer relationship stands terminated on the (i) Death (ii) Insolvency (iii) Lunacy of the customer. On the happening of any of these events the bank must stop operation of the account and stop payment of cheques. The banker customer relationship is not affected by reason of (i) arrest of the customer (ii) imprisonment of the customer (iii) migration of customer to foreign country and such other reasons. CHAPTER 6 (B)

DUTY OF SECRECY
6B.1 Legal Obligation A Bank is legally obliged to keep the affairs of his customer secret. This obligation arises out of a contract implied in relation to a banker and customer. There is no need to have an express agreement for this purpose. Section 13 of the Banking Companies (Acquisition and Transfer of Undertaking) Act 1970 requires nationalized banks not to divulge any information relating to the affairs of constituents except in circumstances in which they, in accordance with law or practice customary among bankers, are required to do so. 6B.2 Tournier Vs. National Provincial & Union Bank of England Ltd (1924 1KB461) This is one of the leading cases which has laid down many rules on the The facts of the case are as follows: Tournier who was employee of a duty of secrecy of a bank. company had an account with he bank. The Manager of the bank during his conversion with the employer of Tournier, disclosed about the overdraft taken by Tournier & his failure to pay the weekly installments to the bank. He also informed that Tournier was in the habit of betting. After receiving such

information, the employer of Tournier stopped renewing his service contract. Tournier sued the bank for slander & for breach of duty of secrecy. The Court in the case decided that (i) The duty of the bank to maintain secrecy is a legal obligation (ii) This legal obligation arises out of a contract implied in relation to banker and customer (iii) Breach of this duty gives rise to actions for damage. 6B.3 Extent of Secrecy A banker must take all possible measures to ensure that the state of affairs of his customer is not made known to any third party. Ledgers should be beyond reach of public. Telephone enquiry regarding balance should be replied only after ascertaining the voice of the customer. As such, any Government official or Police Authority have no free access to ant information on the account of customer except to the extent authorized by law or by established banking practice. 6B.4 Circumstances where disclosure is authorized by Law A Court can direct a bank to furnish information relating to a bank account A Court can also direct any party to a legal proceeding to inspect the Where a bank is required to produce account books, it can produce a i) Order of Court and the bank is bound to comply with the same. books of a bank or to take a copy of the same. certified copy of the same. The production of books cannot be forced upon the banker. The certified copy should be treated as sufficient evidence. As per section 4 of Bankers Books Evidence Act, 1891, a certified copy of any entry in bankers books shall, in all legal proceedings, be received as evidence. ii) Disclosure as per Income Tax Act, 1961 Sec. 131: The Income Tax authorizes can examine a bank officer on oath & can compel him to produce books of account & other documents relating to any customer.

Sec. 133: The Income Tax Authorities may call for any information,

statement of account, or other details with reference to a particular account or all accounts. This section authorizes the Income Tax Official to make roving enquiries (i.e enquiry to give information on all accounts of a particular nature) for all types of accounts irrespective of their balance. However, the CBDT has clarified that roving enquiries can be made only respect of cash transaction of Rs.1.00Lacs and above and regarding assets declared for loans / overdrafts of Rs.50 Lac and above. It is declared by the Supreme Court in Karnatak Bank Ltd vs. Secretary to the Government of India that: (i) The Income Tax Authority has powers to call foe such general information even in the absence of any pending enquiry / proceedings (ii) The notice can be issued only with the prior approval of Director / Commissioner of Income Tax Department. Therefore, branches should comply with notice served under Section 133 (6) of I.T Act after seeking some time to furnish the information in view of the volume of transactions involved and also requesting the I.T authorities to confirm that the notice is issued with prior approval of the Director / Commissioner. iii) The Gift Tax Act, 1958 in its Sec.36, confers on the Gift Tax Authorities similar powers as given in Sec.131 of Income Tax Act, 1961. Criminal Procedure Code, 1973 Sec. 91 (I): Any officer in charge of a police station may issue a summon or written order requiring any person to produce any document or thing necessary for trial or investigation. When such a summon or written order is received under Sec. 91(I), it should be complied by providing a true copy of the document. The Regional Office should be kept informed about the receipt of such an order and its compliance. Sec. 94: A First Class Magistrate may, by warrant, authorize any police officer (above the rank of a constable) to conduct search and take possession of stolen property, articles, forged documents, counterfeit currency notes.

Production of forged cheques, counterfeit notes, stole jewellery fall

under Sec. 94. In such cases original document can be given as per the warrant. A Xerox copy of the document duly attested by Branch Manager / Police Officer, should be kept in the Branch and another copy should be sent to Regional Office. The acknowledgement of the police officer to be obtained on the reverse of the Xerox copy and in the seizure memo. In case of cheques / drafts etc involving chemical alternation colored photo should also be obtained. Sec.102: A police officer can seize money (freeze) lying in the bank account. The Supreme Court of India has decided in State of Maharastra vs. Tapas Neogy [2000ISJ (Banking) 65] the following; (i) A police officer (including CBI police officer) can direct a bank under Sec.102 to freeze operating of bank accounts (both of the accused and his relatives) (ii) He may direct this amount to be remitted to the CBI/Police authority by way of cash/Demand Draft/Fixed Deposits / Bankers Cheque and the bank is bounded to comply the same. iv) Other Acts giving similar powers Like State police (authorized by Criminal Procedure Code)some other authorities like empowered by different other Acts to call for information and documents and summon persons in possession of the information / document. Such authorities are (i) Central Bureau of investigation (ii) Customers Officer (Customer Act, Sec.107 &108) (iii) Central Excise Officer (iv) Sales Tax Officer. v) Foreign Exchange Management Act Sec. 19E & 19F: Empowers the Directors of Enforcement to summon any person give to evidence, or to produce any document which is possession / control of a person. Sec. 43: Empowers the officer of the Directorate of Enforcement and Reserve Bank to inspect books and accounts of any authorized dealer and to examine its officers on oath. vi) Companies Act, 1956

Sec.251: A Banker is under an obligation to disclose all information

relating to a company when approached by inspector appointed by Central Government (under Sec. 235 & 237 of the Companies Act)to investigate into the affairs of a company. vii) Reserve Bank of India Act, 1934 6B.5 Sec,45B: RBI is authorized to collect credit information from banks and Sec.45C: RBI can direct any bank to submit statements relating to credit private the same to different other banks. information as at deems fit. Circumstances where Disclosure is permitted as per Banking practice 1. Disclosure to another bank. 2. Disclosure as per express or implied consent of the customer 3. Disclosure in public interest Disclosure to another Bank It is an accepted banking practice to supply credit information / opinion on Such opinion / information should be supplied in (i) IBA prescribed customers when requested by other banks. format (ii) in general terms (iii) without affixing banks signature and (iv) describing the means of the person in coded words as circulated by IBA among banks. under: Means Rs.10000 or less Rs.10000 to Rs.25000 Rs.25000 to Rs.50000 Rs.50000 to Rs.100000 Rs.1lac to Rs.2lacs Rs.2lac to Rs.3lacs Rs.3lacs to Rs.5lacs Rs.5lacs to Rs.10lacs Code words very small means small means moderate means moderate to fair means fair means fairly goods means fairly good to good means good means The means of the customer and the corresponding code words are as

Rs.10lacs to Rs25lacs Rs.25lacs to Rs.50lacs Over 50Lacs -

very good means large means very large means

The means of a customer is calculated by adding value of his movable,

immovable assets including his capital involvement in business and deducting his liabilities and borrowings Disclosure with customers consent him. A bank has implied authority to disclose details of a borrowal account to its guarantor. However, it should not voluntarily give information. Information should be given only to the extent solicited by the guarantor and; only those, which directly relate to the advance account. 6B.6 Miscellaneous closed. In case of unauthorized disclosure, the customer may sue bank for damages. The banker is liable if it furnishes false or business or highly exaggerated information. Any third party who relied on such information and suffered loss can also sue the bank, if the information turns to be false. CHAPTER 6 (C) The obligation to maintain secrecy continues even after the account is Bankers should in no case supply information about the customer to any other person unless an express or implied authority to do so, is received from

OBLIGATION TO HONOUR CHEQUES

As per Section 31 of Negotiable Act, a bank is bound to honor his customers cheques if the following three conditions are satisfied, (i) There must be sufficient balance in the account of the customer, (ii) The balance must be properly applicable for payment of cheque, (iii) The Bank must be duly required pay the amount

However, this obligation to honor cheques stands extinguished on receipt A. GARNISHEE ORDER

of (a) Garnishee Order or (b) Income Tax Attachment order 6CA.1 Meaning A Garnishee Order is an attachment order issued by a Court at the request of a Creditor to attach his debtors fund in the hand of a banker. Garnishee means a debtor to the debtor and accordingly the banker who holds the deposit balance of the debtor is called the garnishee. Since it is an order to the garnishee, it is called a garnishee order. 6CA.2 Statute Issued under Section 60 of Code of Civil Procedure, 1908 The procedure for issuing a garnishee order is laid down in Order 21,

Rule 46 of the Code of Civil Procedure, 1908. 6CA.3 Order NISI A Garnishee Order is issued in two stages, first as an Order Nisi and then An order Nisi requires the banker to explain as to why the funds of the an Order Absolute depositor should not be attached towards satisfaction of the dues of the judgment creditor. Court. The production of pass book or deposit receipt is not necessary for making such payment. 6CA.5 Amount of the Garnishee Order A garnishee order usually does not mention the amount. On receipt of an Order Nisi the bank is bound to stop operation of the He must immediately inform the customer about the receipt of the order. After receipt of the explanation from the bank the Court may issue Order On receipt of an Order Absolute the bank should pay the amount to the depositors account. 6CA.4 Order Absolute Absolute

In case no amount is mentioned, the entire balance should be attached. However, if it is issued for a specific amount, only that amount should be

attached. 6CA.6 Accounts to be attached Principle: Garnishee Order extends only to those accounts which are held in the same capacity in which the order is issued and not to accounts held otherwise. Joint Account: If the Garnishee Order is in the name of A, but the However, if the Garnishee Order is in joint names of say A, B & C, it will account is in joint names of A, B & C, the account is not attached. not only attach the joint account of A, B & C bit also accounts in their individual names. Partnership Account: In case the Garnishee Order is in the name of A and the account is in the name of a partnership firm where A is a partner, the firms account cannot be attached. However, a Garnishee Order issued in the name of a partnership firm, extends to the balance in the firms account and also to the balance available in the accounts in the individual names of the partners. Proprietorship Account: Where the Garnishee Order is in the name of individual, it would extend to any account maintained by him in the name of a firm as sole proprietor. (Reason: There is no distinction between a proprietor and has proprietor firm) Trust Account: Accounts held by a person in trust (i.e in fiduciary Advocates Name: A Garnishee order in the name of an advocate will capacity) are not attached by a Garnishee Order issued in the individual name. attach his office account (Reason: It is his personal account) but not clients account maintained by him (Reason: advocate holds this account as a trustee for his clien). 6CA.7 Accounts not Attached Deceased person: Funds belonging to deceased constituents are not attachable by a Garnishee Order.

Insolvent persons: Funds in the name of an un discharged insolvent are

not attachable by a Garnishee Order. 6CA.8 Type of Deposits Attached All deposits due and accruing due are attached. Deposits due means SB, CD, Call deposits and overdue time deposits (as Deposits accruing due are term deposits which will mature for payment in

they are due for payment) future. Accordingly, Garnishee Order attaches the term deposits, however, the amount is payable only on their maturity. Where before receipt of a Garnishee Order an amount is passed for payment, the debit entry is made and token issued but the amount is still not paid by the Cashier, the Garnishee Order attaches such amount (Reason: A payment is not conclusive unless the amount is actually parted by the bank). Similarly where a cheque received in clearing for payment and a garnishee order is received before the time within the clearing cheque can be returned unpaid, the cheque should be returned unpaid and the amount attached by the order. However, if the Garnishee Order is received after such time, it does not apply to the amount of cheque. 6CA.9 Type of Asset not attached A garnishee order attaches only debts. It does not extend to funds / goods / money held by a bank other than

as a debtor. Therefore, funds held in safe custody, safe deposit locker, funds held in trust are not attachable by a Garnishee Order. Cheques bills sent on collection are not attachable. (Reason: The The sale proceeds of shares / securities yet to be received by the bank are Notice Deposits cannot be attached. (Reason: They are neither due nor relationship of banker and customer is not that of a debtor and creditor). not attached. accruing due unless a notice demanding payments is received by the bank). Note: Presently banks do not accept such deposits.

Cash Credit Account: The undrawn portion of a cash credit account can Uncleared Balance in SB / OD account cannot be attached. The balance available at the time of the receipt of order is taken into

not be attached as it is not a debt due. 6CA10Future Credits consideration for attachment. Credits / deposits given after the receipt of the order are not attachable. To illustrate, if the Garnishee Order is received at 11A.M, the money deposited at 1P.M in the account is not attached. 6CA11Miscellaneous order. A Garnishee Order can be served at the Head Office of a bank. However, it will become effective on the branch after the reasonable time which is required to send the communication. debtor. Salary: A garnishee order cannot attach salary. Cheques marked good for payment by a banker can be paid even after 6CA12Cheques marked good for payment the receipt of garnishee order (as it constitutes the liability of the Bank). B. INCOME TAX ATTACHMENT ORDER 6CB.1 Statutory Basis Issued under Sec. 226 (3) of Indian Income Tax Act, 1961, by an Income Tax Officer. 6CB.2 Section 226 (3) Balance with foreign branches: No garnishee order can be issued for attaching balance available in foreign branches of a bank in the name of the Notice of Customer: On receipt of a Garnishee Order, the customer Right of set off: The bank is entitled to exercise its right of set off for all should be informed about it, at the earliest. debt due from the customer (but not contingent dues) before complying with the

This section authorities the ITO to require, by notice in writing, any

person from whom money is due or may become due, to the assessee, or any person who holds or may subsequently hold money for or on account of assessee to pay the Income Tax Officer an amount equal to the amount of arrears of tax It is not only debts due and payable (as is the case with a garnishee order), but also any money held on account of assessee is attached by an Income Tax Attachment Order. Accordingly, it can attach: (i) Saving Bank and Current Account (ii) Term Deposit (however amount is payable on maturity) (iii) Proceeds of Collection item not credited to account (note that it attached by a garnishee order). In case of term deposits, the notice attaches the deposits but the payment of the same to I.T authorities will be made on maturity of the deposit. 6CB.3 Joint Account Even though the order is received in a single name, it attaches balance (prorota) in any joint account maintained by such person. Unless it is proved otherwise, the share of the joint account holders is considered to be equal [Section 226 (3) iii] Procedure before attaching joint account Account in joint names can be attached only where is a mention in the order that a copy of the same is sent to the order joint account holders. In case no such remarks is made, the income Tax Department should be advised: you have not sent the notice to both/all depositors as provided in Sec. 226 (3) (iii) of the Act. We are therefore, unable to comply with your demand without references to the other joint depositors. The joint account holders should be asked to establish their claim, if any, to the entire balance to the exclusion of the person name in the order. In case they fail to produce Court order /stay order, within a reasonable time, the bank should act on the presumption made by the Act and pay proportionate amount to Income Tax Authority. 6CB.4 Account in the name of a Deceased or Insolvent person

An IT attachment order attaches the funds held on account of a deceased

or insolvent depositor. (Garnishee Order does not attach the same). 6CB.5 Attachment of joint account towards the dues payable by a deceased depositor Where the attachment order related to the arrears of tax dues on the estate of the deceased depositor, the balance in the joint account in his name need not be attached. 6CB.6 Accounts in other Capacities If the order is in individual name, it does not attach accounts in the name of partnership firms (where he is a partner) or in name of a trust (where he is a trustee). 6CB.7 Money held subsequent to receipt of order As per Sec. 226 (3) of Income Tax Act, the order also attaches money held or that may be subsequently held. However, Court decisions have struck down the view that the money to be held subsequent by the bank will be recovered. Any payment made into the account after that receipt of the notice cannot be attached and hence is not payable to Income Tax Department. 6CB.8 Right of set off order. 6CB.9 Penalty Where a bank fails to attach the amount it would be deemed to be an assessee in default. 6CB.10Action to be taken on receipt of the order On receipt of the order, the customer must be given notice. Permission from Regional / Central Office is to be obtained before The account holder must be informed about the payment to I.T.O The Bank is entitled to first exercise its right of set off before acting on the

remitting the funds to I.T.O Note: Like Income Tax Attachment Order, attachment orders can also be issued under Wealth Tax Act. The Recovery of Debts due to Banks & Financial

Institutions Act, 1993 Employees Provident & Miscellaneous Provisions Act, 1952 (under Section 8F) and also Sales Tax Acts of different States.

C. COMPARISON BETWEEN GARNISHEE ORDER AND ATTACHMENT ORDER OF REVENUE AUTHORITIES

Garnishee Order 1. Issued by Court authority 2. Amount not mentioned 3. Type of deposits attached I.T/W.T/S.T/Attachments Orders Issued by I.T /W.T/S.T dept Amount mentioned Same. Future credits not attached. SB, CD, Call Deposit & Term deposit held at the time of receipt of order 4. Proceeds of Cheques / Bills on collection Attached are not attached as the banker customer relationship is that of agent and principle and not debtor creditor 5. Issued in single name Attached pro-rata 6. Issued in joint names Same Balance in joint account not attached Balance in joint account and also in individual accounts attached 7. Account of deceased /insolvent cannot Accounts of deceased / insolvent be attached are attachable. D. ATTACHMENT ORDERS UNDER OTHER STATUES

Like Income Tax Attachment orders, certain other statues also provide for

issue of attachment orders and banks have to act almost in the similar manner and pay the amount to the respective authority. 6CD.1 Employee State Insurance Act 1948 As per Sec. 45G of the Employee State Insurance Act, the Director General of the Employee State Insurance Corporation or any other officer authorized by the corporation (i.e Recovery Officer) can issued a notice in writing to any person from whom money is due or may become due to principal employer to pay the amount of the dues by such employer to the corporation. Therefore the

bank may received notice under this section and should act almost in similar manner as in the case of an Income Tax attachment order. 6CD.2 Employee Provident Fund and [Miscellaneous Provisions] Act 1952 As per Sec. 8 F of the Employee Provident Fund and [Miscellaneous Provisions] Act 1952, the Central Provident Commissioner or any other officer authorized by him may at any time by notice in writing require any person from whom money is due or will become due to the employer to pay the required amount. The bank may receive notice under this section and should act almost in similar manner as in the case of an Income Tax attachment order. 6CD.3 Recovery of Debts due to Banks and Financial Institutions Act 1993 Under Sec. 28 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the Recovery officer can issue direction to any bank to pay the amount due or becoming due to the borrower and the bank is bound to honour such directive.