In the simplest terms, A frozen bank account means that the account holder is temporarily prevented from accessing the funds in their account. It wonât be possible to move money in or out of the account. Neither can the debit card be used to make account-based purchases. For a number of reasons, financial institutions or regulatory bodies such as the Reserve Bank of India ( RBI ), Security and Exchange Board of India ( SEBI ), Income Tax authorities and Courts may freeze an account with or without forewarning depending on the situation.
In this article, weâll delve into the primary reasons behind freezing of accounts as well as the steps you can take to unfreeze them.
Why is your Account Frozen?
If you defaulted on your taxes that you owe to the government or if there is enough evidence to believe that you have committed tax evasion, your account can be frozen by the regulating authority.
Recently, the Delhi High Court observed that the order freezing bank accounts not to remain in force for more than sixty days from date of order under sub-section (8-A) to Section 132 of the Income Tax Act, 1961.
If thereâs an ongoing legal dispute with your account in concern,whether business or personal, the Court may direct the bank to freeze an account during the course of the legal proceedings. This is to ensure that funds are available to satisfy the potential judgement.
If you are a business/ individual and you have unpaid loans or credit card dues, the lender can take it to the Court, obtain a judgement against you and then get your account frozen. The freeze is usually lifted when the due amount is paid in full.
Banks usually mark âlienâ on accounts when sufficient funds are not available to debit EMI on time, so that future defaulting can be avoided by keeping sufficient funds.
In the case of a business, If a company fails to submit its financial statements, The registrar of company (ROC) has the authority to strike the companyâs name off. Consequently, accounts may be frozen so as to prevent misuse of funds.
To unfreeze the account as well as to bring back the company, the Directors should approach National Company Law Tribunal ( NCLT ) and submit a petition to restore the company. Once the company is restored, they may submit the NCLT order acknowledging the same before the bank, and the bank shall then unfreeze the account.
Under the Prevention of Money Laundering Act 2002 ( PMLA ), Banks are required to monitor transactions and report any suspicious activity. This is applicable to both business and personal accounts.
If your Bank suspects illegal activities such as money laundering and fraud due to unusual transactions, the account can be frozen without prior notice until the investigation is over. Examples of actions that may trigger suspicions include unreported financial activities abroad, sudden transfer of a large sum of money and receiving cash deposits from multiple sources seemingly out of nowhere. This is why it is necessary to notify your bank beforehand about the atypical but legal transaction that may take place in your account.
For example, in the case of winning a lottery, one should notify the bank before receiving the lump sum.
The Income Tax Department employs advanced techniques to detect disparities between disclosed income in Income Tax Returns ( ITR ) and actual financial transactions.
Read More: Beware Income Tax Payers! These 10 High Value Transactions may Trigger IT Notices
The âKnow Your Customerâ check is a necessary step in account opening that has to be repeated on a periodic basis to confirm the clientâs identity. Simply put, it’s a method employed by banks to make sure that their customer is who they claim to be. If the reason behind your account getting frozen is incomplete KYC information, you may contact the bank and verify your identity to lift the freezing easily.
If Goods and Services Tax ( GST ) returns are not filed within the prescribed time, it may lead to freezing of your account.
Section 83 of the Goods and Service Tax Act, 2017 provides that if the Commissioner is of the opinion that it is necessary to attach any property including bank account belonging to the taxable person to protect the Governmentâs revenue interests then he shall proceed to do so. The attachment shall, however, cease to have effect after one year from the date of order. The account should be de-freezed when relevant documents are submitted.
The Delhi High Court recently directed the GST Authority to de-freeze Bank accounts and unblock Electronic Credit Ledger of the petitioner as relevant documents were furnished.
Letâs say you died. Can transactions still be made through your account? The simple answer is no, not unless it is done fraudulently. In order to prevent fraudulent activities, your nominee/legal heir should notify the bank so that the account is frozen. The amount in your account can be transferred to the nominee/legal heirâs account after providing relevant documents and if they wish to close the account, they can do so.
Impacts of Frozen Account
While consequences of a frozen account can be critical for an individual/ a business adversely most of the time, it can also be good given the situation.
Without access to funds, a person/business can be completely paralysed. Financial restriction can adversely impact almost all aspects of oneâs existence. From basic necessities to large liabilities, everything will be negatively affected, some of which will carry long-term consequences.
As your account is now frozen, you can neither withdraw money nor make scheduled payments on time. If your account is âoverdrawnâ and consequently if your account is in the negative, then this will result in overdraft fees which can be another blow to your financial situation
If the account was frozen due to suspicious activities and to your misfortune the said suspicions are proven true by the appropriate authorities, then your account will be closed and you will be prosecuted further.
In case of unauthorised fraudulent activity, that is if the transactions were made unbeknown to the account holder, the freezing protects them from further harm.
Frozen accounts halt criminal activities such as money laundering and funding of terrorism, by depriving their access to necessary funds.
Also in the digital era finance related cyber crimes using mule accounts are alarmingly becoming rampant. For example, In 2023 alone Puducherry had 1903 cases of cyber frauds, in which 752 notices were sent and only 140 responded back, meaning 612 accounts were fake accounts by fraudsters.
 To combat this the Puducherry Police department has issued a standard operating procedure ( SOP ) for â debit freeze of suspected bank accountsâ detailing the steps that will be taken upon suspicion and identification of such crimes. This is a welcome move by the department that can be adopted by other Indian states as well so that cyber crimes can be bridled.
What can you do if your Account is Frozen?
The primary step towards unfreezing your account is to contact your bank and inquire about the reasons for such an action. Usually If the action was taken over reasons that can be solved through a call, the account will be frozen easily. If not, further actions may be required from your side to unfreeze the account, like furnishing relevant documents.
In non payment of loans, credit dues and matters of such nature if you are able to resolve the issue by paying the amount in full, the account will be unfreezed.
If your account was frozen over unfair reasons, you can seek legal assistance and proceed with your actions accordingly.
For example, if your account was frozen in the case of investigation of a third party, you can take the issue to court with reasonable contention.
The Supreme Court recently ruled that the bank account of the company cannot be frozen for an investigation against a third party.
Conclusion
The Freezing of Bank Accounts, whether business or personal, is a measure taken to ensure compliance with legal and regulatory requirements. Understanding reasons that lead to such an action will help account holders take proactive steps so that they can avoid the financial and operational disruptions that come along with a frozen account. Maintaining transparency, following and keeping up with the necessary requirements and regular communications with financial institutions are key to safeguard oneself against such measures.
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