http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7  

CASE NO.: Appeal (civil)  2509 of 1997

PETITIONER: Union of India

RESPONDENT: Karam Chand Thapar & Brs. (Coal Sales) Ltd. & Ors.

DATE OF JUDGMENT: 10/03/2004

BENCH: R.C. LAHOTI & ASHOK BHAN.

JUDGMENT: J U D G M E N T

R.C. Lahoti, J.

       Just bare essential facts, as ascertainable on retrieval from a  jumble of facts, are set out hereinafter, as those would suffice, in our  opinion, to appreciate the crux of controversy arising for decision in  this appeal.  The controversy and the consequent litigation have  spread over nearly four decades.  In between, the parties have  changed their identities by succession, amalgamation or supersession.   The Coal Board, a statutory body has been dissolved and taken over  by Union of India.  What was M/s.Bhulanbaree Coal Co. Ltd. has taken  shape as Oriental Coal Co. Ltd., and then the respondent No.1  hereinafter.  We would refer to the present parties only and that  reference would include their respective predecessor legal entities.   The Oriental Coal Co. Ltd. shall be referred to as ’Coal Company’ for  short.

       The Coal Company owns and possesses certain coal mines in the  State of Bihar.  The Coal Board was constituted under the provisions of  the Coal Mines (Conservation and Development) Act, 1974, hereinafter  ’the Act’ for short.  However, the said Coal Board was dissolved with  effect from April 1, 1975 and all rights, privileges, liabilities and  obligations of the Board have come to vest in the Central Government.

       There are cross-demands between the parties.  It is not  necessary to set out the details and particulars of the demands.  It  would suffice for our purpose to notice that the Coal Company is liable  to pay royalty on account of sand extracted by it for the purpose of  carrying out stowing operations in the coalfields.  We would not enter  into yet another controversy which we will briefly set out hereinafter at  an appropriate place as to whether it is the Central Government as  successor of the Coal Board or the State of Bihar which is entitled to  recover the royalty.  For the purpose of the present appeal we proceed  on an assumption that the amount of royalty on the sand extracted by  the Coal Company is due and payable by it to the Central Government.   The fact remains that such obligation to pay the amount of royalty is  contractual inasmuch as there is a contract i.e. a mining lease entered  into by the Coal Company whereby it has earned the privilege of  extracting sand from Damodar River-bed and an obligation to pay  royalty on account of sand extracted, calculated at the rate appointed  by the mining contract.  So far as the quantified amount of royalty on  sand is concerned the Coal Company is a debtor and the Union of India  is creditor.

       The Coal Mines (Conservation & Development) Act, 1974 came  into force on and from April 1, 1975.  Clause (j) of Section 3 defines  "stowing" to mean as the operation of filling, with sand or any other  material, or with both, spaces left underground in a coal mine by the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7  

extraction of coal.  Sub-section (2) of Section 4 specifically empowers  the Central Government to make order in writing addressed to the  owner, agent or manager of a coal mine, requiring him to take such  measures as it may think necessary for the purpose of conservation of  coal or for development of coal mines including in any coal mine,  stowing for safety.  Sub-section (2) of Section 5 specifically obliges the  owner of a coal mine to:- (i) execute such stowing and other  operations as may be necessary to be taken in furtherance of the  objects of this Act in so far as such objects relate to the conservation  of coal or development of the coal mine or the utilization of coal  obtained from the coal mine; (ii) acquire such stowing and other  materials as may be necessary for ensuring the conservation of coal,  and safety in, the coal mine;  (iii) undertake such other activity as the  Central Government may, for the furtherance of the objects of this Act,  direct; and so on.

       Out of the net proceeds of excise and customs duties on coal,  the Central Government is obliged to disburse a certain amount inter  alia for the purpose of grant of stowing materials and other assistance  for stowing operations and execution of stowing and other operations  for the safety of coal mines or conservation of coal.  The amount  released by the Central Government under Section 9 of the Act to the  owner of every coal mine, is required to be credited into the Coal Mine  Conservation and Development Account under Section 10 of the Act.   The money standing to the credit of the Account shall be applied by  the owner of the coal mine only for the purposes specified in sub- section (2) of Section 10 of the Act including, inter alia, the acquisition  of stowing and other materials needed for stowing operations in coal  mines and the execution of stowing and other operations in  furtherance of the objects of the Act amongst others.  Under Section  18 the Central Government is empowered to make rules.

       In exercise of the power, conferred by the Coal Mines  (Conservation and Safety) Act, 1952 on the Central Government, the  Central Government has framed the Coal Mines (Conservations and  Safety) Rules 1954.  Rule 49 provides as under:         "49. Purposes for which assistance may be granted \026  (1)     The Board may grant assistance from the Fund to  any owner, agent or manager of coal mine \026

(a)     for stowing or other protective measures  which are required to be undertaken by an  order issued under sub-section (3) of Section  13 or sub-rule (2) of Rule 35 or sub-rule (3)  of Rule 40;

(b)     for any measures which in the opinion of the  Board are essential for the effective  prevention of the spread of fire to or the  inundation by water of any coal mine from  an area adjacent to it;

(c)     for stowing for conservation of coal or  washing coal which is required to be  undertaken by an order under Rule 36 or 37;

(d)     for the following measures voluntarily  undertaken by the owner agent, or manager  of the coal mine : \026  

(i)     stowing operations in the interests of  safety or conservation of coal,

(ii)    any process of washing or cleaning  coal which reduces its ash content and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7  

also improves its qualities or,

(iii)   any other measures for safety in coal  mines or for conservation of coal;

(e)     for any other measures undertaken by the  owner, agent or manager of a coal mine  under the order of the Board to ensure  conservation of coal.

(2)     The Board may grant assistance to owner of any  steel work, blast furnace or coke plant for blending  of coal undertaken under the orders of the Board.

(3)     The Board may grant assistance to the owner,  agent, or manager of a coal mine which is specially  handicapped by adverse factors rendering its  working uneconomic, but which, in the opinion of  the Central Government, should be maintained in  production for the purpose of ensuring the  conservation of coal.  In such cases assistance shall  be granted by the Board \026  

(i)     with due regard to the circumstances of each  case;

(ii)    only in respect of such adverse factors as  may, from time to time, be specified by the  Central Government as entitling a coal mine  to receive assistance, and published by the  Board in the Official Gazette for general  information; and

(iii)   in accordance with such procedure as may be  determined, and not exceeding such rates as  may be fixed, by the central Government,  from time to time :

          Provided that the existence or otherwise of  adverse factors in any coal mine, the extent to which  such adverse factors render the working of the coal mine  uneconomic, and the amount of assistance, if any, to be  granted to the coal mine, shall be determined by the  central Government."

          Coal Board Manual is a compilation of the rules and instructions  issued by the Coal Board/Central Government from time to time.   Some of them are statutory and some are executive.  However, it is  not disputed that whatever is contained in the Coal Board Manual is  binding on the Coal Board/Central Government and the coal  companies.  Vide para 34 of the Manual it is provided that the stowing  assistance granted by the Central Government to the Coal Company  includes amongst other items, the actual amount of royalty paid for  stowing material excavated and transported.  Other charges included  in the amount of stowing assistance are wages of labour employed in  and associated with stowing charges, certain charges related to sand  pumps and so on, as stated in the Rules.  Thus, it appears that while  the Coal Company has to pay royalty on the amount of sand extracted  by it for the purpose of carrying out stowing operations, the amount of  royalty actually paid is reimbursed by the Central Government to the  Coal Company as one of the constituents of the stowing assistance.

So far as the current amount of royalty is concerned there  cannot possibly be any dispute as to adjustment or set off inasmuch as

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7  

the amount of royalty on the quantum of sand extracted by the Coal  Company for carrying out stowing operations, shall be actually paid by  the Coal Company to the Central Government or anyone else entitled  and it is only on such actual payment that the Coal Company would be  entitled to be reimbursed for the amount as a constituent of the  stowing assistance.  So long as the Coal Company does not actually  pay the amount or royalty, the question of its being reimbursed would  not arise.  If the amount of royalty is payable by the Coal Company to  the Central Government by way of any arrangement arrived at with  the State Government or otherwise the adjustment or reimbursement  would pose no problem; for the Coal Company has first to pay the  amount of royalty and then seek reimbursement of the amount of  royalty included by way of an ingredient in the amount of stowing  assistance released by the Central Government to it.

The controversy, however, arose because there were certain  arrears of the amount of royalty payable by the Coal Company to the  Central Government and the Central Government sought to enforce  recovery of the amount of royalty due and payable on account of sand  already extracted and utilized in its stowing operations by the Coal  Company by making an adjustment from out of the amount payable by  the Central Government to the Coal Company as stowing assistance  consisting of wages and transportation charges etc. incurred by the  Coal Company for carrying out the stowing operations.  The Central  Government sent a few communications to the Coal Company whereby  the Central Government made it clear that the payment of stowing  assistance was being withheld and the amount appropriated by the  Central Government towards satisfying its demand outstanding against  the Coal Company on account of royalty due and payable by the Coal  Company to the Central Government on the sand extracted from the  river-bed and utilized by it in stowing.

The Coal Company filed a civil writ petition in the High Court of  Calcutta.  A learned Single Judge held that it was not open for the  Central Government to make an adjustment of cross demands and  satisfy its contractual demand by making an adjustment out of the  amount due and payable on account of its statutory obligation.  The  learned Single Judge directed the communications to the contrary  made by the Central Government to be quashed.  The Union of India  preferred an intra-court appeal which has been dismissed by the  Division Bench.  The Division Bench has not only upheld the view  taken by the learned Single Judge but it has also proceeded further to  opine that under the law it was the State Government which was  entitled to recover the amount of royalty on sand, and therefore, there  was no question of Central Government raising a demand on account  of royalty and withholding the release of stowing assistance pursuant  to its statutory obligation.

The question which arises for decision is: whether the Central  Government can withhold the release of stowing assistance, which is  its statutory obligation to do, for the purpose of satisfying its demand  of money arising under the contractual obligation (i.e. in mining lease)  incurred by the Coal Company qua it?

Though Shri N.N. Goswami, the learned Senior Counsel for  Union of India, has urged that the Coal Company had entered into a  contract by correspondence with the Central Government, supported  by company resolutions, whereby the Coal Company had agreed for  such satisfaction of cross demands but we are not satisfied if such a  plea can be successfully urged by the Union of India from the  documents and materials available on record.  We cannot hold that the  Coal Company had agreed to its demand of stowing assistance being  set-off against the demand by the Central Government on account of  royalty.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7  

No statutory provision has been brought to our notice at the Bar  to sustain the claim of the Central Government for such adjustment  and satisfaction of cross-demands.  We are called upon to decide if  such an adjustment is permissible in equity.  Shri Goswami, the  learned Senior Counsel, has vehemently urged that the right of the  creditor to withhold money due and payable by it to its debtor for the  purpose of satisfying by appropriation the demand which the creditor  legitimately has outstanding against the debtor, ought to be  recognized and upheld as a principle of equity emanating from what is  just, fair and convenient.  The learned Senior Counsel submitted that it  would be unfair and iniquitous if the Central Government was  compelled to part with the money already available in its hands and  left free or compelled to enforce its right of recovery wherein it may  fail and consequently left high and dry.                            On general principles supported by rationality and reasonability,  it appears to be a sound proposition that a person who is obliged to  pay a sum of money to another person and also has in his hands an  amount of money which that another person is entitled to claim from  him then instead of physically entering into two transactions by  exchanging money twice that person may utilize the money available  in his hands to satisfy the claim due and legally recoverable from such  other person to him.  However, this equitable principle is not one of  universal application and has its own limitations.

               "Set-off" is defined in Black’s Law Dictionary (7th Edn., 1999)  inter alia as a debtor’s right to reduce the amount of a debtor by any  sum the creditor owes the debtor; the counterbalancing sum owed by  the creditor.  The dictionary quotes Thomas W. Waterman from ’A  Treatise on the Law of Set-Off, Recoupment, and Counter Claim’ as  stating, "Set-off signifies the subtraction or taking away of one  demand from another opposite or cross demand, so as to distinguish  the smaller demand and reduce the greater by the amount of the less;  or, if the opposite demands are equal, to extinguish both.  It was also,  formerly, sometimes called stoppage, because the amount to be set- off was stopped or deducted from the cross-demand."

       The writ petition filed by the respondent-Coal Company sought  for quashing of the communication made by the appellant-Union of  India informing it of its action to withhold the amount of stowing  assistance against its claim for arrears of royalty.  In effect, the Coal  Company was seeking a relief for release of stowing allowance by  compelling the Central Government to discharge its such statutory  obligation.  A debtor making an adjustment or set-off, may have done  so in its own volition, nevertheless, the validity of such action shall be  called in question and decided by a Court of law wherein the creditor  would seek enforcement of his claim while the debtor would raise in  defence the plea of adjustment or set-off.  Though there is no specific  provision of law or settled rule of procedure governing decision of such  dispute arising for adjudication in exercise of writ jurisdiction, yet  being a money-claim, there is nothing wrong in borrowing the  principles underlying  Order 8 Rule 6 of the Code of Civil Procedure  and applying the same as governing the discretion of the writ Court.

               Sub-rule (1) of Rule 6 of Order 8 of the CPC provides as under :                 "6. Particulars of set-off to be  given in written statement. \026 (1) Where  in a suit for the recovery of money the  defendant claims to set-off against the  plaintiff’s demand any ascertained sum of  money legally recoverable by him from the  plaintiff, not exceeding the pecuniary limits  of the jurisdiction of the Court, and both  parties fill the same character as they fill in  the plaintiff’s suit, the defendant may, at the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7  

first hearing of the suit, but not afterwards  unless permitted by the Court, present a  written statement containing the particulars  of the debt sought to be set-off."

What the rule deals with is legal set-off.  The claim sought to be  set-off must be for an ascertained sum of money and legally  recoverable by the claimant.  What is more significant is that both the  parties must fill the same character in respect of the two claims sought  to be set-off or adjusted.  Apart from the rule enacted in Rule 6  abovesaid there exists a right to set-off, called equitable,  independently  of the provisions of the Code.  Such mutual debts and  credits or cross-demands, to be available for extinction by way of  equitable set-off, must have arisen out of the same transaction or  ought to be so connected in their nature and circumstances as to make  it inequitable for the Court to allow the claim before it and leave the  defendant high and dry for the present unless he files a cross-suit of  his own.  When a plea in the nature of equitable set-off is raised it is  not done as of right and the discretion lies with the Court to entertain  and allow such plea or not to do so.

               In Bhupendra Narain Singha Bahadur Vs. Bahadur Singh  and Ors. \026 AIR 1952 SC 201, this Court ruled that a plea in the nature  of equitable set-off is not available when the cross-demands do not  arise out of the same transaction.  A wrong-doer who has wrongfully  withheld monies belonging to another cannot invoke any principle of  equity in his favour and seek to deduct therefrom the amounts which  may have fallen due to him.  There would be nothing improper or  unjust in telling the wrong-doer to undo his wrong and not to take  advantage of it.                          In the present case, what the Coal Company has sought to  enforce is a statutory obligation of the appellant-Union of India.  The  Coal Mines (Conservation and Development) Act, 1974 has a public  purpose and a beneficial object to achieve.  The stowing assistance is  released to the Coal Company in the interest of securing safety at the  coal mines and the development thereof.   In  the absence of stowing,  there may be accidents, casualties and difficulties of operation.  Non- payment of stowing allowance may discourage the coal mines from  carrying out the stowing operations which would be detrimental to the  interest of the workers.  It would not be sound exercise of discretion  on the part of the Court to permit set-off or recognize an adjustment  made out-of-Court which would have the effect of withholding the  release of stowing  assistance and appropriating the amount thereof  for the recovery of dues not arising out of the same transaction.

               Shri Jaideep Gupta, the learned senior counsel for the Coal  Company, has rightly relied on the decision of Calcutta High Court in  Coal Products Pvt. Ltd. and Anr. Vs. Income-Tax Officer, "M"  Ward, Companies District II, Calcutta, and Ors. \026 (1972) 85 ITR  347, wherein a garnishee order was quashed.  It was held that the  money which is payable by the Coal Board to a Coal Company as and  by way of stowing assistance was not available to be paid by the Coal  Board to Income-tax Department for recovery of income-tax dues as  that would result in breach of statutory obligation of the Board with  regard to the utilization of its fund as laid down in Section 12 of the  Act as also in breach of statutory obligation of the Coal Company  attaching to the grant of assistance from the Coal Board.  Rule 49  referred to hereinabove came up for the consideration of this Court in  Industrial Supplies Pvt. Ltd. and Anr.  Vs.  Union of India and  Ors. \026 (1980) 4 SCC 341, in some other context.  Vide para 32, this  Court observed that if the subsidy receivable from the Coal Board  (succeeded by the Central Government) was by way of assistance, the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7  

grant being conditional, the recipient thereof would be bound to apply  the same for the purposes for which it was granted viz. for the  purpose of stowing or other safety operations and conservation of coal  mines.  In our opinion, in the facts and circumstances of the present  case it would not make any difference whether the amount withheld by  the Central Government is on account of assistance or reimbursement;  in either case the Could would not hold in favour of adjustment being  made by the Central Government by setting off the outstanding credit  referable to stowing assistance as against the outstanding demand of  arrears of royalty.                     In our opinion, the High Court has not erred in allowing the writ  petition filed by the respondent-Coal Company.

               So far as the finding recorded in its appellate judgment by the  Division Bench that the Central Government is not entitled to recover  the royalty and it is the State of Bihar which only is entitled to demand  and recover the royalty from the respondent-Coal Company is  concerned, we set-aside that finding but without recording any opinion  of ours on that aspect for the short reason that such issue is not  required to be adjudicated upon in the present case in view of the  finding arrived at hereinabove.  We hasten to add that requisite  pleadings and necessary material are also not available on record to  arrive at a definite finding in that regard.

                Before parting we make it clear that the appellant or the State  of Bihar, as the case may be, is free to recover arrears of royalty by  adopting such other method as may be available under the law.

               The appeal is dismissed. No order as to the costs.