Supreme Court Dismisses Revenue Appeal Against Writ Quashing Income Tax Set-Off in Liquidation. Section 49E of Income Tax Act, 1922 Held Not to Permit Set-Off of Refund Against Tax Debt Proved in Liquidation, As It Would Defeat Pari Passu Payment Under Sections 228 and 229 of Companies Act, 1913.

Writ petition under Article 226 of the Constitution challenging the Income Tax Officer's order setting off a refund due to the respondent company against outstanding tax demand, which had been proved as an unsecured debt in liquidation.

The respondent company sought a writ, direction or order to set aside the orders of the Income Tax Officer and the Commissioner of Income Tax, restrain the Department from setting off the refund against tax dues, and direct the Department to hand over the refund to the Official Liquidator.

The Income Tax Officer, purporting to act under Section 49E of the Income Tax Act, 1922, set off a refund of Rs. 1,460/1/- due for assessment year 1955-56 against a balance of Rs. 3,549/12/- outstanding for assessment year 1948-49, despite the fact that the 1948-49 claim had been proved and admitted in liquidation proceedings as an ordinary unsecured debt. The Commissioner rejected the revision petition, leading to the writ petition.

The Commissioner of Income Tax rejected the revision petition on 21 September 1959. The Bombay High Court allowed the writ petition on 22 February 1961, holding that the tax demand, once proved in liquidation, was governed by company law and Section 49E was not available for set-off. The High Court set aside the departmental orders and directed refund under Section 48 of the Income Tax Act.

Whether the Income Tax Officer could exercise power under Section 49E of the Income Tax Act, 1922 to set off a refund due to a company in liquidation against tax remaining payable for an earlier assessment year, when that tax debt had been proved and admitted in liquidation proceedings. Whether Section 49E of the Income Tax Act, 1922 is subject to the provisions of Sections 228 and 229 of the Companies Act, 1913 regarding proof and payment of debts in liquidation. Whether the High Court was justified in exercising jurisdiction under Article 226 of the Constitution to quash the set-off orders.

The appellant contended that Section 49E of the Income Tax Act gives statutory power to the Income Tax Officer to set off the refundable amount against tax remaining payable, and this statutory power is not subject to any provision of any other law, including the Companies Act. The appellant argued that the Companies Act does not take away the power under Section 49E. The respondent contended that once the tax claim had been proved in liquidation, it became an unsecured debt payable under company law, and the Department could not use Section 49E to get priority over other unsecured creditors. The appellant also urged that the writ petition under Article 226 was misconceived because the Income Tax Officer had jurisdiction. The respondent sought to sustain the High Court's view that Section 49E must be read down to apply only when insolvency rules do not apply, and that the set-off was without jurisdiction.

Section 49E of the Income Tax Act, 1922 is a general provision applicable to all assessees and in all circumstances. Sections 228 and 229 of the Companies Act, 1913 are special provisions dealing with proof of debts and their payment in liquidation. Where there is an apparent conflict between two independent provisions of law, the special provision must prevail. A tax claim that has been proved in liquidation becomes an unsecured debt payable pari passu with other unsecured creditors. The Income Tax Department cannot, by exercising the right of set-off under Section 49E, obtain priority over other unsecured creditors, as that would defeat the very object of Sections 228 and 229 of the Companies Act. Therefore, Section 49E must be read as not applying when insolvency rules apply. The writ petition under Article 226 was maintainable because the Income Tax Officer acted without jurisdiction or, at least, there was an error apparent on the face of the orders.

If there is an apparent conflict between two independant provisions of law, the special provision must prevail. The effect of these statutory provisions is, inter alia, that an unsecured creditor must prove his debts and all unsecured debts are to be paid pari passu. Section 49E can be reconciled with ss. 228 and 229 by holding that s. 49E applies when insolvency rules do not apply. Accordingly, agreeing with the High Court, we hold that the Income Tax Officer was in error in applying s. 49E and setting off the refund due.

The respondent company was directed to be wound up by an order of the Bombay High Court dated 11 October 1950, and an Official Liquidator was appointed. For the assessment year 1948-49, the company was assessed on 8 December 1950 to tax of Rs. 8,737/15/-. On or about 15 March 1951, the Income Tax Officer lodged a claim with the Official Liquidator, which was adjudged and allowed as an ordinary claim on 2 April 1952. In August 1954, the Official Liquidator declared a dividend of 9 1/2 annas in a rupee and paid Rs. 5,188/3/- to the Income Tax Department, leaving a balance of Rs. 3,549/12/-. For assessment year 1955-56, the Department made a demand for advance tax of Rs. 2,565/6/- on 22 June 1954, which was paid. On regular assessment, only Rs. 1,126/12/- was payable, resulting in a refund of Rs. 1,460/1/- inclusive of interest. The Income Tax Officer set off this refund against the outstanding balance of Rs. 3,549/12/- for 1948-49. The respondent filed a revision petition to the Commissioner of Income Tax, which was rejected on 21 September 1959. On 25 November 1959, the respondent filed a writ petition under Article 226 of the Constitution in the Bombay High Court. The High Court allowed the petition on 22 February 1961, quashing the set-off orders and directing refund under Section 48. The Union of India appealed to the Supreme Court, which dismissed the appeal on 9 April 1965 with costs.

• Income Tax Act, 1922: Section 49E, Section 48
• Companies Act, 1913: Section 228, Section 229, Section 179, Section 180
• Constitution of India: Article 226, Article 133(1)(c)