Set-off against liquidation refund barred where tax dues were already proved as an unsecured claim in winding up.

Income-tax authorities could not set off a refund payable to a company in liquidation against tax dues already proved in liquidation as an ordinary unsecured claim. Once the tax demand had been admitted and certified in the winding-up process, it became subject to the company-law scheme for pari passu distribution among unsecured creditors, and the Department could not bypass that process through the Income-tax Act recovery machinery. The Court applied the principle that the Crown has no prerogative priority in liquidation except as expressly preserved, and that statutory set-off cannot secure preferential payment of an unsecured debt outside the insolvency framework. The refund was therefore payable without adjustment against the proved tax claim.

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Issues: Whether income-tax authorities could set off a refund payable to a company in liquidation against the balance of tax dues already proved in liquidation as an ordinary creditor.

Analysis: Once the company had gone into liquidation and the Department's tax claim had been adjudged and certified as an ordinary unsecured claim, the claim became subject to the statutory scheme governing liquidation. In that situation, the Department could no longer resort to the recovery machinery of the Income-tax Act to secure payment outside the winding-up process. The Court applied the principle that, in liquidation, the Crown has no prerogative priority except to the extent expressly preserved by company law, and that a statutory set-off cannot be used to obtain preferential satisfaction of an unsecured debt in derogation of the pari passu distribution among unsecured creditors. Section 49E could not operate where the tax balance had already merged into a provable claim in liquidation and was no longer a sum payable by a person outside the insolvency process.

Conclusion: The set-off was impermissible, and the petitioner was entitled to the refund without adjustment against the proved tax claim.

Ratio Decidendi: A tax claim proved in liquidation as an unsecured debt is governed by company law, and the Income-tax Department cannot use a statutory set-off to obtain preferential payment of that claim outside the liquidation scheme.

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