Hindustan Construction Co. Ltd vs Income Tax Officer (Companies Circle)

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 136 of 1964

Decision Date: 10 December 1964

Coram: S. M. Sikri, P. B. Gajendragadkar, M. Hidayatullah, J. C. Shah, R. S. Bachawat

In the matter titled Hindustan Construction Co. Ltd versus Income Tax Officer (Companies Circle), the Supreme Court of India delivered its judgment on 10 December 1964. The opinion was authored by Justice S. M. Sikri, who was joined by Justices P. B. Gajendragadkar, M. Hidayatullah, J. C. Shah and R. S. Bachawat. The case is reported in the 1965 volume of the All India Reporter at page 1316 and also appears in the 1965 Second Series of the Supreme Court Reports at page 414. The dispute involved the appellant, Hindustan Construction Co. Ltd, and the respondent, the Income Tax Officer of the Companies Circle in Bombay, together with another respondent. The appellant relied upon section 5 of the Income‑tax (Double Taxation Relief) (Indian States) Rules, 1939, to claim a refund of tax that had been paid to an Indian State. The Income‑tax Officer rejected the refund claim on the ground that it was filed after the prescribed time. Subsequent reviews by the Commissioner of Income‑tax and the Central Board of Revenue also declined to interfere with the officer’s decision, and the appellant did not pursue any further legal remedy against those orders. Later, when the Income‑tax Officer issued certain tax demands, the appellant submitted that the amounts for which it had previously claimed a refund under rule 5 should be set off against the new demand pursuant to section 49E of the Indian Income‑tax Act, 1922. The Income‑tax authorities again rejected this set‑off claim, prompting the appellant to approach the Bombay High Court under article 226 of the Constitution. The High Court held that the expression “found to be due” in section 49E required that, before a set‑off could be permitted, there must be an adjudication establishing a refund liability in the appellant’s favour; because no such adjudication existed, the writ petition was dismissed, although the High Court granted the appellant a certificate of fitness under article 133(1)(c).

The Supreme Court examined the issues and made several determinations. First, it held that a prior adjudication was not a prerequisite for a claim under section 49E; the Income‑tax Officer could decide whether a refund was due when an application was made, and the wording “is found” did not necessarily impose a requirement of an earlier adjudication. Second, the Court explained that the set‑off contemplated by section 49E must be “in lieu of payment,” a phrase that implies an outstanding payment and a continuing obligation on the part of the Income‑tax Officer to make the refund. Consequently, if a refund claim is barred by a final order, there can be no subsisting obligation to pay, and the set‑off cannot be allowed. The Court relied on the authority of Stubbs v. Director of Public Prosecutions, reported in the 24th volume of the Quarterly Bench Reports at page 577, to support this interpretation. Third, applying these principles to the present facts, the Court concluded that the orders of the Commissioner and the Central Board of Revenue, which had become final and were not challenged in the article 226 petition, left no existing liability on the part of the Income‑tax Officer. Therefore, the appellant’s claim for a set‑off under section 49E failed.

In this case the Court noted that the Central Board of Revenue had finally rejected the appellant’s claim under rule five of the Indian State Rules and that the decision had become final without being contested even in the petition filed under article 226 of the Constitution. Because the rejection was final, the Court held that there was no continuing duty on the part of the Income‑tax Officer to make any payment to the appellant, and consequently the appellant’s claim under section 49E of the Income‑Tax Act could not succeed. The matter was before the Civil Appellate Jurisdiction as Civil Appeal number 136 of 1964, which arose from the judgment and order dated 24 February 1961 of the Bombay High Court in Miscellaneous Application number 333 of 1960. Counsel for the appellant, namely the senior practitioner and three additional lawyers, appeared on behalf of the appellant, while counsel for the respondent, consisting of three lawyers, represented the Revenue. The judgment was delivered by Justice Sikri. The appeal concerned a certificate that the High Court of Bombay had granted against its own earlier judgment of 24 February 1961, which had dismissed the appellant’s petition under article 226 of the Constitution. The principal issue before the Court was the proper construction of section 49E of the Indian Income‑Tax Act, 1922. Before addressing that issue, the Court set out the relevant facts. At the relevant time the appellant conducted business not only within India but also in Ceylon and in the former princely states of Kolhapur and Kapurthala, among other places. The Court explained that it was not necessary to recount the details of the income earned in Ceylon and Kolhapur because the facts concerning the income earned in Kapurthala would sufficiently illustrate the dispute between the appellant and the Revenue, and it was common ground that the circumstances in Ceylon and Kolhapur were substantially similar. On 9 July 1954 the appellant sent a letter to the Income‑tax Officer, Companies Circle, Bombay, stating that for the assessment year 1949‑50 it was entitled to a refund of tax paid on income earned in Kapurthala State. The letter was accompanied by an original tax‑payment certificate showing a payment of Rs 37,828 11/‑ and requested that a refund order be issued promptly. On 27 June 1956 the Income‑tax Officer rejected the claim on the ground that the appellant’s claim was filed outside the four‑year period prescribed by rule five of the Income‑Tax (Double Taxation Relief) (Indian States) Rules, 1939, hereinafter referred to as the Indian States Rules. Consequently, on 18 December 1956 the appellant filed a revision petition under section 33A of the Act against that order before the Commissioner of Income‑Tax, Bombay. In that petition the appellant explained that the company’s assessment for the year in question had been completed by the Income‑tax Officer on the last day of the financial year 1953‑54, that is, 31 March 1954, which was the final date by which a claim for double income‑tax relief should have been lodged. The appellant argued that, because the assessment order was received only after that date, it was physically impossible to file a provisional claim within the prescribed period.

In its submission, the company argued that it could not physically lodge a claim for double income‑tax relief before the assessment order was received, and therefore the limitation period prescribed in Section 50 had already expired. The Commissioner subsequently made enquiries on this point. In a letter dated 30 June 1958, the appellant responded that it had not filed any provisional claim for double income‑tax relief within the prescribed time, and it reiterated that it was not “physically practicable” for the assessee to make such a claim within the limitation period. The Commissioner, however, dismissed the petition. He observed that the assessment in Kapurthala State had been made on 20 March 1950, which was well before the Bombay Income‑Tax Officer completed the assessment. He held that nothing had prevented the petitioner from filing a provisional claim before the limitation expired and that, at the very least, a claim could have been made to the Income‑Tax Officer at the time of assessment. The Commissioner expressed that he could not condone the delay because Section 50 contained no provision for condonation of a late claim.

The appellant then approached the Central Board of Revenue, which, in a letter dated 31 December 1958, declined to interfere in the matter. The appellant made no attempt to approach the High Court under Article 226 to set aside the orders of the Commissioner of Income‑Tax or those of the Central Board of Revenue. Subsequently, on 28 August 1959, the Income‑Tax Officer issued three notices of demand under Section 29 of the Act concerning the assessment years 1949‑50, 1950‑51 and 1951‑52. In a letter dated 4 September 1959, the appellant requested that the Income‑Tax Officer set off the refunds to which it was entitled under the Income‑Tax (Double Taxation Relief) (Ceylon) Rules, 1942, read with Sections 49A and 48 of the Income‑Tax Act, for the assessment years 1942‑43, 1943‑44 and 1944‑45 (relating to Ceylon) and the assessment years 1947‑48 and 1949‑50 (relating to Kolhapur and Kapurthala), against the demands raised in the notices. The appellant argued that, although the applications for those refunds had been filed beyond the statutory time limit, it still possessed a right under Section 49E to have the refunds set off against the tax demands made by the Income‑Tax Officer. The appellant again approached the Central Board of Revenue, urging it to adopt the same approach, but the Board, in a letter dated 24 June 1960, again declined to intervene. Finally, on 7 October 1960, the appellant filed a petition under Article 226 of the Constitution, setting out the relevant facts and submissions and praying that the High Court issue a writ directing the respondents to set off the refunds due under the double‑taxation relief rules against the tax payable for the assessment year 1955‑56.

In the petition, the appellant requested that the High Court issue a mandamus or any writ, direction or order under Article 226 of the Constitution, directing the respondents to set off the refunds that were due to the appellant under the double‑taxation relief rules against the tax liability for the assessment year 1955‑56. During the pendency of the petition, the appellant had already paid tax for the assessment years 1949‑50 and 1950‑51. The demand of Rs 89,000.58 for the assessment year 1951‑52 had been kept in abeyance, and when the assessment for 1955‑56 was concluded, the Income‑Tax Officers agreed to keep in abeyance an amount of Rs 79,430.19 out of the total demand for that year until the Central Board of Revenue decided the matter. The second prayer sought a writ of prohibition or any other direction or order under Article 226, commanding the respondents, their officers, servants and agents not to demand or recover the tax for the assessment year 1955‑56 from the appellant unless the refunds due under the double‑taxation relief rules were first set off against that tax liability.

The petition did not contain a prayer to set aside the order of the Commissioner dated 23 August 1958 nor the order of the Central Board of Revenue dated 31 December 1958. Counsel for the appellant argued before the High Court that the appeal was not against the Income‑Tax Officer’s refusal to grant a refund, but solely against the orders rejecting the appellant’s request for a set‑off. Counsel further contended that compliance with rule 5 of the Indian States Rules, 1939 was physically impossible, and therefore rule 5 should not apply, allowing the refund to be made notwithstanding that rule. The court, however, declined to examine whether rule 5 had been correctly applied by the tax authorities, noting that the orders of 23 August 1958 and 31 December 1958 could not be challenged in the present proceedings and must be treated as validly passed. The court expressly refrained from opining on whether the tax authorities’ view that rule 5 was applicable was correct. The discussion then turned to the construction of section 49E, which provides: “49E. Power to set off amount of refunds against tax remaining payable. Where under any provision of this Act a refund is found to be due to any person, the Income‑Tax Officer, 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 thereof, 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…

The High Court held that the Act gave no assistance to the appellant because, according to that Court, a prior adjudication in favour of the appellant was required before a set‑off could be permitted. The High Court explained that the expression “found to be due” plainly indicated that, before a claim for set‑off could be entertained, there must already have been an adjudication which determined that an amount was due by way of refund to the person seeking the set‑off. Counsel for the appellant, Mr Sastri, argued that a prior adjudication was not a necessary condition for a set‑off claim. He submitted that the Income‑Tax Officer was empowered to decide whether a refund was due at the time an application for refund was made to him, and that, on the facts, the appellant was clearly entitled to a refund under rule 3 of the Indian States Rules, 1939. According to Mr Sastri, the Income‑Tax Officer’s only task was to calculate the amount of relief due and then to set it off against any tax, interest or penalty remaining payable. The learned counsel for the respondent, Mr Ganapathi Iyer, advanced the opposite view. He maintained that, since the orders of the Commissioner and the Central Board of Revenue had become final, the Income‑Tax Officer was under no obligation to make any payment of refund, and that such an obligation was a condition precedent to the operation of section 49E. He emphasized that the phrase “in lieu of payment of the refund” clearly required the Officer to be bound to make a payment. He further contended that the refund in question arose under the Rules and not under the Act, and therefore section 49E could not be invoked. The Court noted that this contention could be readily rebutted because section 59(5) provides that the rules made under that section have the same effect as if they were enacted by the Act. Consequently, the Indian State Rules, 1939, become part of the Act, and a refund due under those Rules is also a refund due under the Act for the purposes of section 49E. The Court then considered whether a prior adjudication was indispensable before a set‑off could be allowed under section 49E, and whether any other condition needed to be satisfied. The Court expressed the opinion that a prior adjudication was not required; there is nothing to prevent the Income‑Tax Officer from determining, upon receipt of an application, whether a refund is due. The words “is found” do not necessarily imply the existence of an earlier adjudication. Nevertheless, the Court cautioned that this reasoning alone does not sustain the appellant’s claim; the appellant must still demonstrate that a refund is actually due to it.

The Court observed that the phrase “found to be due” in section 49E could, in theory, be interpreted to include a situation where a refund claim has been barred by rule 5 of the Indian State Rules. However, the Court held that this interpretation is not correct. The correct meaning, according to the Court, is clarified by the words “in lieu of payment.” The Court explained that the expression “in lieu of payment” conveys that the payment is still outstanding and that a continuing obligation exists on the Income‑Tax Officer to make the payment. Consequently, if a refund claim is finally barred by a conclusive order, there can be no continuing obligation for the officer to pay, because the order eliminates any liability to make such a payment. The Court referred to the construction of the expression “in lieu of” in the case of Stubbs v. Director of Public Prosecutions (1). In that case, it was held that where a liability is to be discharged “A in lieu of B,” there must first be a binding obligation on B to perform the payment before A can be held liable. Applying this principle, the Court stated that a subsisting obligation to pay the refund must exist before a taxpayer may invoke a set‑off under section 49E. In the present matter, the Court noted that, in view of the orders issued by the Commissioner and by the Central Board of Revenue, no such continuing obligation to pay existed. Accordingly, the appellant’s claim could not succeed. The Court agreed with the High Court’s decision, holding that section 49E of the Act provided no assistance to the appellant and that the High Court had correctly dismissed the petition. As a result, the appeal was dismissed, and the Court declined to award any order as to costs.