The Income Tax department on Wednesday moved  to harden its hold over Kingfisher Airlines’ finances, rejecting a plea to unfreeze its bank accounts as well as a tax dues re-payment plan.

In a pincer movement, the department rejected a KFA plea to release accounts that it had frozen last week over non-payment of dues. Additionally, it moved a caveat in the Bombay High Court against the airline’s petition to restart access to its accounts. The tax department has asked the court not to pass any orders on the status of the accounts without first hearing the case. It has also rejected a repayment plan by the airline, saying it was inadequate'.

The cash-starved carrier had on Tuesday requested the IT department to allow it to operate its accounts after they were rendered inoperable since Friday.

The tax department’s decision to reject the airline’s plea could spell more trouble ahead for both the carrier and fliers. Already, Kingfisher Airlines has had to cancel scores of flights in the past six days, including 20 on Wednesday, leading to much anguish among stranded passengers, not to mention significant revenue loss for the company.

The airline has directly blamed the seizure of its accounts for the situation it finds itself in. It has claimed that it is unable to pay operating expenses because of the crimp in its banking channel and has therefore been forced to cancel flights.

Kingfisher Airlines had also submitted a plan to the tax department to pay outstanding dues stemming from taxes deducted at source from employees. Last year, it was reported that the airline had been deducting tax from employees’ payrolls but had failed to pass on those tax deductions to the government.

The IT Department has now found the tax repayment plan “inadequate”, sources told NDTV Profit.

A Kingfisher Airlines spokesperson told NDTV that there is status quo on the frozen accounts, and that a clearer picture would emerge by Wednesday evening.

Sanjay Agarwal, CEO of Kingfisher Airlines, was also summoned by the civil aviation regulator, the DGCA, to explain the cancellations and to submit a revised flight schedule. On Wednesday , Kingfisher Airlines told the DGCA it would be able to operate only 175 flights a day, using 28 of its 64 planes.

The debt-ridden carrier – with outstanding dies of over Rs 7,000 crore – is also waiting to hear from a consortium of 18 banks that it owes money to on a debt restructuring proposal prepared by SBI Caps, the merchant banking division of the State Bank of India (SBI). State-owned SBI is also the single largest lender to Kingfisher Airlines, with an exposure of over Rs1,400 crore, and has already listed the carrier as a non-performing asset (NPA).

On Wednesday, the embattled airline was thrown a lifeline by SBI – reports said that the bank had agreed  to extend a Rs1,200 crore relief package to help the stumbling carrier tide the crisis over. Of that, Rs 700 crore will be in working loans while the rest will go towards bank guarantees and loan repayment extension.

Equity markets, however, were far less charitable.

As news of the relief package trickled out, shares of the country’s largest bank by assets plunged 7.91 per cent on the Bombay Stock Exchange.

Another public sector bank, Punjab National Bank, also saw its stocks fall 4.62 per cent for the same reason.

Later in the day, however, a State Bank of India official said the media reports were "baseless and untrue".

"We have not given any fresh loans to Kingfisher," said Deputy Manging Director R. Venkatachalam, who is responsible for managing the Kingfisher loan account.

The bank is not considering giving any fresh loans to Kingfisher as of now, he said.

Unlike state-owned Air India, whose debt-restructuring plan has been passed by the Group of Ministers, Kingfisher Airlines will also not get any help from the government. Earlier this week, Civil Aviation Ajit Singh ruled out any government intervention in the restructuring plan being considered by lenders, and said it would not exert any pressure on banks to lend to the struggling airline.

However, Singh has expressed hope that banks would continue to keep the carrier flying, saying “It would be good if banks want to loan to Kingfisher,” he said on Wednesday. Earlier in the day, Singh said the airline should not shut down and should instead mobilize resources to keep flying. Corporate Affairs Minister Veerappa Moily also said that he would work closely with the finance ministry to help the airline.

 (WIth inputs from Reuters)