Set-off under section 49E cannot override insolvency proof and pari passu distribution, so departmental set-off disallowed.

Where a statutory insolvency regime for winding up governs proof and pari passu payment of unsecured debts, a revenue department cannot use the tax-refund set-off mechanism to obtain priority over other unsecured creditors. Section 49E operates where insolvency rules do not apply; it cannot be invoked to override the Companies Act scheme requiring claims to be proved and paid pari passu. The Income-tax Officer's set-off of a refund against a tax claim proved in liquidation was therefore impermissible and the departmental set-off was set aside.

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Issues: Whether section 49E of the Income-tax Act permits the Income-tax Officer to set off a refund due against a tax claim that has been proved and allowed as an unsecured debt in the winding up of a company governed by sections 228 and 229 of the Companies Act, 1913.

Analysis: The Court examined the operation of section 49E, which authorises set off of refunds against taxes payable, alongside sections 228 and 229 of the Companies Act, 1913, which require debts provable in winding up to be dealt with under insolvency rules and paid pari passu. The Court held that allowing set off under section 49E in circumstances where the department's claim has been proved in liquidation would give the department priority over other unsecured creditors and would defeat the insolvency scheme enacted in the Companies Act. The provisions were reconciled by holding that section 49E applies in situations where insolvency rules do not operate; where the statutory insolvency regime applies, section 49E cannot be used to override the Companies Act rules on proof and pari passu payment. The Court further held that applying section 49E in the present case constituted an assumption of jurisdiction inconsistent with the insolvency provisions and that the Income-tax Officer's order was therefore in error.

Conclusion: The set off effected by the Income-tax Officer under section 49E was not permissible against a tax claim proved and allowed in the company's winding up under sections 228 and 229 of the Companies Act, 1913; the departmental orders setting off the refund are set aside and the appeal is dismissed in favour of the assessee.

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