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PETITIONER: HINDUSTAN CONSTRUCTION CO.  LTD.

       Vs.

RESPONDENT: INCOME TAX OFFICER (COMPANIES CIRCLE) BOMBAY& ANR.

DATE OF JUDGMENT: 10/12/1964

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. GAJENDRAGADKAR, P.B. (CJ) HIDAYATULLAH, M. SHAH, J.C. BACHAWAT, R.S.

CITATION:  1965 AIR 1316            1965 SCR  (2) 414

ACT: Indian  Income-tax, 1922 (11 of 1922), s. 49E-Claim of  Set- off-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.

HEADNOTE: 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  time- barred.   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  whereunder  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   dismissed. 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

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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  under  Art. 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]

JUDGMENT: 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 1960. 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  IncomeTax 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 similar. 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  date. 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  Com- missioner  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

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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  prescribed. 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 IncomeTax 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 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

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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 whereunder 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

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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  obli- gation  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. Appeal dismissed.

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