Hindustan Construction Co. Ltd. Vs.
Income Tax Officer Bombay & ANR  INSC 288 (10 December 1964)
10/12/1964 SIKRI, S.M.
GAJENDRAGADKAR, P.B. (CJ) HIDAYATULLAH, M.
CITATION: 1965 AIR 1316 1965 SCR (2) 414
Indian Income-tax, 1922 (11 of 1922), s.
49E-Claim of Setoff-Prior adjudication of amount of refund due whether
necessary-"found to be due", meaning of-"In lieu of
payment", meaning of-Set-off can he given only when there is subsisting
obligation to make refund.
The appellant company made a claim under s. 5
of the Income tax (Double Taxation Relief) (Indian States) Rules, 1939, for
refund of the income-tax paid by it in an Indian State.
The claim was rejected by the Income-tax
Officer as timebarred. The Commissioner of Income-tax and the Central Board of
Revenue refused to interfere and the appellant sought no further legal remedy
against their orders.
Subsequently on certain tax demands being
made by the Income-tax Officer, the appellant made representation that the
amounts in respect of which application had earlier been made under r. 5 should
be set off against the demand as provided by s. 49E of the Indian Income-tax
Act, 1922. The Income-tax authorities having rejected this claim also, the
appellant went to the High Court under Art. 226 of the Constitution. The High
Court held that the expression found to be due" in s. 49E clearly meant
that there must be, prior to the claim of set off, an adjudication where under
an amount is found due by way of refund to the person claiming set off. Since
there was no such adjudication in the appellant's favour, the writ petition was
However a certificate of fitness under Art.
133(1) (c) was granted to the appellant.
HELD : (i) It is not necessary that there
should be a prior adjudication before a claim can be allowed under s. 49E.
There is nothing to debar the Income-tax
Officer from determining the question whether a refund is due or not when an
application is made to him under s. 49E. The words "is found" do not
necessarily lead to the conclusion that there must be a prior adjudication.
[419 D-E] (ii) The set-off under s. 49E must however be "in lieu of
payment' which expression connotes that payment is outstanding i.e. there is a
subsisting obligation on the Income-tax Officer to pay. If a claim to refund is
barred by a final order, it cannot be said that there is a subsisting
obligation to make the payment. [419 F-G] Stubbs v. Director of Public
Prosecutions 24 Q.B.D. 577, relied on.
(iii) In the present case the orders of the
Commissioner and the Central Board of Revenue rejecting the appellant's claim
under r. 5 of the Indian State Rules had become final.
They were not challenged even in the petition
226. There was thus no subsisting obligation
on the part of the Income-tax Officer to make payment to the appellant, and the
claim of the appellant under s. 49E must therefore, fail. [419 G-H]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 136 of 1964.
415 Appeal from the judgment and order dated
February 24, 1961 of the Bombay High Court in Misc. Application No. 333 of
A. V. Viswanatha Sastri, T. A. Ramachandra,
J. B. Dadachanji, 0. C. Mathur and Ravinder Narain, for the appellant.
R. Ganapathy lyer, R. H. Dheber and R. S.
Sachthey, for the respondent.
The Judgment of the Court was delivered by
Sikri, J. This is an appeal on a certificate granted by the High Court of
Bombay against its judgment dated February 24, 1961, dismissing the petition
filed by the appellant under Art. 226 of the Constitution of India. This appeal
raises a short question as to the construction of S. 49E of the Indian Income Tax
Act, 1922, hereinafter referred to as the Act. Before we deal with this
question, it is necessary to set out the relevant facts.
The appellant, at the material time, carried
on business not only in India but also outside India, i.e. Ceylon, the former
States of Kolhapur and Kapurthala and other places.
It is not necessary to give the facts
relating to the income in Ceylon and Kolhapur because if the facts relating to
the income made in Kapurthala are stated, these will bring out the real
controversy between the appellant and the Revenue.
We may mention that it is common ground that
the facts relating to Ceylon income and Kolhapur income are substantially
On July 9, 1954, the appellant wrote a letter
to the Income Tax Officer, Companies Circle, Bombay, stating that for the
assessment year 1949-50, it was entitled to refund on the income taxed in
Kapurthala State. It attached an original certificate for tax showing payment
of Rs. 37,828/11/-, and requested that a refund order be passed at an early
On June 27, 1956, the Income Tax Officer
rejected the claim on the ground that the claim filed by the appellant was not
within the time limit of four years laid down in r. 5 of Income-Tax (Double
Taxation Relief) (Indian States) Rules 1939-hereinafter called the Indian
States Rules. On December 18, 1956, the appellant filed a revision, under s. 33A
of the Act, against the said order, before the Commissioner of Income-Tax,
Bombay. The appellant stated in the petition that "unfortunately the
Company's assessment for the year in question was completed by the Income-Tax
Officer on 416 the last day of the financial year 1953-54, i.e., 31-3-1954
being the last date on which their claim for double income tax relief should
have been lodged. In absence of the assessment order being received by the
Company it was not physically practicable for the assessee to lodge its claim
for double income-tax relief and as such the time prescribed under Section 50
had already expired when the assessment order was received by the
company." The Commissioner made some enquiries. The appellant, in its
letter dated June 30, 1958, replied that no provisional claim for double income
tax relief was made by the appellant within the time prescribed. The appellant
reiterated its own plea that it was not "physically practicable" for
the assessee to lodge its claim for double-tax relief within the time
The Commissioner, however, rejected the
petition. He observed that "the assessment in the Kapurthala State was
made on 20-3-1950, i.e., much before the assessment was completed by the Bombay
Income-tax Officer. Nothing prevented the petitioner, therefore, from filing a
provisional claim before the period of limitation was over.
At least, it should have made such a claim
before the Income Tax Officer at the time of assessment. I regret I cannot
condone the delay in filing the claim as there is no provision under Section 50
for such condonation." The appellant then approached the Central Board of
Revenue. The Central Board of Revenue, by its letter dated December 31, 1958,
declined to interfere in the matter. The appellant did not take any steps to
apply to the High Court under Art.
226 for quashing the above orders of the
Commissioner of Income-Tax or the Central Board of Revenue.
On August 28, 1959, the Income-Tax Officer
issued three notices of demand under s. 29 of the Act in respect of the
Assessment years 1949-50, 1950-51 and 1951-52. The appellant then wrote a
letter dated September 4, 1959, requesting the Income Tax Officer to set off
the refunds to which the appellant was entitled pursuant to the Provisions of
Income-Tax (Double Taxation Relief) (Ceylon) Rules, 1942, and read with the
provisions of ss. 49A and 48 of the Income-Tax Act, in respect of the
assessment years 1942-43, 1943-44 and 1944-45, relating to Ceylon, and the
assessment year 1947-48 and 1949-50 relating to Kolhapur and Kapurthala,
against the said demands. In this letter the appellant gave arguments in
support of its request. In short, the argument was that although the
applications claiming those refunds were submitted beyond the prescribed time
limit, nevertheless the appellant had a right still, pursuant to the provisions
of s. 49E, to call upon the Income-Tax Officer to 417 set off the refunds found
to be due to the appellant against the tax demands raised by the Income-Tax
Officer on the appellant. The appellant also approached the Central Board of
Revenue,. urging similar points. The Central Board of Revenue, however, by its
letter dated June 24, 1960, declined to interfere in the matter.
The appellant then on October 7, 1960, filed
a petition under Art. 226 of the Constitution. After giving the relevant facts
and submissions, the appellant prayed that the High Court be pleased to issue a
writ in the nature of Mandamits or a writ, direction or order under Art. 226 of
the Constitution, directing the respondents to set off the refunds due to the
petitioner under the aforesaid double taxation relief rules against the tax
payable by it for the assessment year 1955-56. It appears that in the meantime
the petitioner had paid tax for the assessment years 1949-50 and 1950-51, and
the demand for Rs. 89,000.58 for the assessment year 1951-52 was kept in
abeyance, and later when the assessment for 1955-56 was completed, the
Income-Tax Officers had agreed to keep in abeyance Rs. 79,430.19 out of the
total demand relating to the assessment year 1955-56, till the decision of the
Central Board of Revenue. The second prayer was that the High Court be pleased
to issue writs in the nature of Prohibition or other direction or order under
Art. 226 of the Constitution prohibiting the respondents, their officers,
servants and agents from demanding or recovering from the petitioner the tax
payable by it for the assessment year 195556 without first setting off against
that tax the refunds due to the petitioner under the aforesaid double tax
relief rules. It will be noticed that no prayer was made for quashing the order
of the Commissioner, dated August 23, 1958, and the order of the Central Board
of Revenue dated December 31, 1958. It was indeed contended by Mr. S. P. Mehta,
the learned counsel for the appellant before the High Court that the appellant
was not challenging the orders of the Income-Tax Officer rejecting his
application for refund, but was only challenging the orders made by them
rejecting its application for grant of set off.
Mr. Viswanatha Sastri, the learned counsel
for the appellant first urged that as compliance with r. 5 of the Indian States
Rules, 1939 was physically impossible, r. 5 did not apply, and consequently the
refund due to the appellant notwithstanding r. 5. But we cannot go into the
question whether r. 5 was rightly or wrongly applied by the Income Tax
authorities. The 418 orders dated August 23, 1958 and December 31, 1958, cannot
be attacked in these proceedings. Therefore, we must proceed on the basis that
those orders were validly passed.
We-express no opinion whether the view of the
Income-Tax authorities that r. 5 was applicable in the circumstances of the
case was correct or not.
This takes us to the construction of s. 49E.
Section 49E reads thus :
"49E. Power to set off amount of refunds
against tax remaining payable. Where under any of the provisions of this Act, a
refund is found to be due to any person, the Income-tax Officer, Appellant
Assistant Commissioner or Commissioner, as the case may be may, in lieu of
payment of the refund, set off the amount to be refunded, or any part of that
amount against the tax, interest or penalty if any, remaining payable by the
person to whom the refund is due." The High Court held that s. 49E of the
Act did not give :any assistance to the appellant because, according to it,
there ,must be prior adjudication in favour of the appellant. The High Court
observed that "the expression found to be due" clearly means that
there must, prior to the date set off is claimed, be an adjudication where under
an amount is found due by way of refund to the person claiming set off."
Mr. Sastri contends that it is not necessary that there should be a prior
adjudication to enable a person to claim set off. He says that the Income-Tax Officer
can decide the question whether refund is due or not when an application for
refund is made to him. On the facts, he says that it is clear that the
appellant is entitled to refund under r. 3 of Indian States Rules, 1939, and
the Income-Tax Officer has only to calculate the relief due and then set it
off. The learned counsel for the respondent, Mr. Ganapath lyer, on the other
hand, contends that the orders of the Commissioner and the Central Board of
Revenue having become final, there was no obligation on the Income-Tax Officer
to make any payment of refund, and he says that it is a condition precedent to
the applicability of s. 49E that the Income Tax Officer must be under an
obligation to make a payment.
He points out that the expression "in
lieu of payment of the refund' clearly indicates that the Income-Tax Officer
must be under an obligation to make a payment of refund. He further contends
419 that the refund is not due under the Act but under the said Rules, and
therefore, s. 49E does not apply.
There is no difficulty in refuting the
contention of the learned counsel for the Revenue that the refund, if due, was
due under the provisions of the Act. Section 59(5) provides that the rules made
under this section shall have effect as if enacted under this Act. This
provision thus makes the Indian State Rules, 1939, part of the Act, and
consequently if a refund is due under the Rules, it would be refund due under
the Act within the meaning, of s. 49E.
The question then arises as to whether there
should be a prior adjudication existing before a set off can be allowed under
49E, and whether there is any other condition which is necessary to be
fulfilled before the section becomes applicable. We are of the opinion that it
is not necessary that there should be a prior adjudication before a claim can
be allowed under s. 49E.There is nothing to debar the Income-Tax Officer from
determining the question whether a refund is due or not when an application is
made to him under S. 49E. The words "is found" do not necessarily
lead to the conclusion that there must be a prior adjudication.
But this is not enough to sustain the claim
of the, appellant. It must till show that a refund is due to it.
The words "found to be due" in s.
49E may possibly cover a case where the claim to refund has been held barred
under r. 5 of the Indian State Rules but that this is not the correct meaning
is made clear by the expression "in lieu of payment". This
expression, according to us, connotes that payment is outstanding, i.e. that
there is subsisting obligation on the Income-Tax Officer to pay. If a claim to
refund is barred by a final order, it cannot be said that there. is a
subsisting obligation to make a payment. The expression "in lieu of"
was construed in Stubbs v. Director of Public Prosecutions(1). It was held
there that where a liability has to be discharged by, A in lieu of B, there
must he a binding obligation on B to do it before A can be charged with it. In
our opinion, there must be a subsisting obligation to make the payment of
refund before a person is entitled to claim a set off under s. 49E. In this
case in view of the orders of the Commissioner and the Central Board of Revenue
mentioned above there was no subsisting obligation to pay, and therefore, the
claim of the appellant must (1) 24 Q. B. D. 577 420 Therefore, agreeing with
the High Court, we hold that S. 49E of the Act is of no assistance to the
appellant and that the petition was rightly dismissed by the High Court. The
appeal accordingly fails and is dismissed, but in the circumstances of the case
there will be no order as to costs.