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Issues: (i) Whether the Income-tax Officer could set off a refund payable to the company against an outstanding tax demand already proved in winding up under section 49E of the Income-tax Act, 1922; (ii) Whether the High Court could interfere under article 226 of the Constitution of India with the orders made by the income-tax authorities.
Issue (i): Whether the Income-tax Officer could set off a refund payable to the company against an outstanding tax demand already proved in winding up under section 49E of the Income-tax Act, 1922.
Analysis: The department's claim for the earlier assessment year had been admitted in the winding up and stood to be dealt with under the company law as an unsecured debt. In the winding up of an insolvent company, the rules of insolvency applied, unsecured creditors rank pari passu, and the statutory scheme of sections 228 and 229 of the Indian Companies Act, 1913 required the debt to be worked out within the liquidation process. Section 49E is a general provision enabling set-off of a refund against tax remaining payable, but it could not be construed so as to defeat the special liquidation regime governing distribution of the company's assets.
Conclusion: The set-off under section 49E was not permissible, and the assessee succeeded on this issue.
Issue (ii): Whether the High Court could interfere under article 226 of the Constitution of India with the orders made by the income-tax authorities.
Analysis: Once section 49E was construed as inapplicable in the liquidation context, the income-tax authorities acted without jurisdiction in withholding the refund by set-off against the proved debt. The orders also disclosed an error apparent on the face of the record, bringing the matter within the supervisory reach of the writ jurisdiction.
Conclusion: The High Court was justified in granting relief under article 226.
Final Conclusion: The statutory set-off could not override the liquidation provisions, and the refund had to be dealt with in accordance with the company-law regime; the dismissal of the appeal left the High Court's relief undisturbed.
Ratio Decidendi: A general statutory power of set-off in income-tax matters cannot be exercised to defeat the special rules governing proof and pari passu distribution of debts in the winding up of an insolvent company.
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