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 section 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 article 226 of the Constitution of India
This appeal raises a short question as to the construction of section 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 ie 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 3782811  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 section 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 the last day of the financial year 1953 54 ie 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 ie 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 article 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 section 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 sections 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 section 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 article 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 article 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 8900058 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 7943019 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 article 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 section 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 section 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 section 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 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 section 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 section 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 595 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 section 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 section 49EThere 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 section 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 section 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 ie 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 vs Director of Public Prosecutions1
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 section 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 1 420 Therefore agreeing with the High Court we hold that section 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


Summary:
The appellant company made a claim under section 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 section 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 article 226 of the Constitution
The High Court held that the expression found to be due in section 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 article 1331 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 section 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 section 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 section 49E must however be in lieu of payment  which expression connotes that payment is outstanding ie 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 vs Director of Public Prosecutions  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 article 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 section 49E must therefore fail
419 G H