1. N. K. AGRAWAL, J.---These are two writ petitions by the State Bank of Patiala, under Articles 226 and 227 of the Constitution. Both these petitions raise a common question as to whether the amount of tax refundable to the petitioner assessee was rightly set off by the Assessing Officer against the other demand of tax payable by the petitioner.
2. T1 facts arising from each petition may be noticed.
3. In C.W.P. No.7193 of 1997, the amount of income-tax refundable to the petitioner related to the assessm ent year 1996-97. The return of income for that assessment year was filed by the petitioner declaring a net taxable income of Rs.52,06,07,930. The return was processed under section 143(1)
(a) of the Income Tax Act, 1961 (for short the "Act"), on March 19, 1997. After making certain adjustments amounting to Rs.46,32,00,000, the total income was determined by the Assessing Officer at Rs.98,38,07,930. The tal tax including surcharge was determined at Rs.49,51,66,047. The petitioner had however, deposited an amount of Rs.64,04,91,882 by way of tax.
4. Thus, the petitioner was entitled to the refund of tax amounting to Rs.14,53,25,835 besides interest amounting to Rs.1,74,39,100. The total amount of refund worked out to Rs.16,27,64,935. The petitioner filed an appeal before the Commissioner of Income-tax (Appeals) against the adjustments made by the Assessing Officer while processing the return under section 143(1)(a) of the Act. The appeal is said to be pending. The Assessing Officer vide letter, dated March 26, 1997 (Annexure P4), informed the assessee that the amount of refund had been adjusted against the tax demands outstanding against the assessee relating to the earlier two assessment years. Out of the amount found refundable, a sum of Rs.3,50,98,375 was adjusted by the Assessing Officer towards the tax demand relating to the assessm ent year 1994-95. The balance refund amounting to Rs.
5. 12,76,66,560 was adjusted towards the tax demand arising in connection with the assessment year 1995-96.
6. For the assessm ent year 1994-95 also, return filed by the petitioner was initially processed by the Assessing Officer on January 30, 1995, under section 143(1)(a) of the Act. Certain amount of tax was found refundable to the assessee. Regular assessment was, however, subsequently made on March 26, 1997, by the Assessing Officer under section 143(3) of the Act. An additional demand of tax at Rs.6,44,12,470 was created.
7. For the assessm ent year 1995-96, after processing the return under section 143(1)(a) of the Act, a notice under section 154 was issued to the petitioner by the Assessing Officer. The income was thereafter enhanced. An additional demand of tax was created for this assessment year also.
8. The petitioner's appeals against the additional demand of tax for both the assessment years (1994-95 and 1995-96) are pending.
9. The petitioner has challenged the adjustment of the amount of tax found refundable to it against the demand of tax relating to the earlier two assessment years with the plea that the adjustment was totally unjust, unwarranted and in violation of the specific provisions of law.
10. Shri A. K. Mittal, learned counsel for the petitioner, has argued that no intimation in writing was given by the Assessing Officer to the petitioner before making the adjustment. Section 245 of the Act, in specific terms, requires that the Assessing Officer may set off the refundable amount against any sum remaining payable by the assessee under the Act after giving to the assessee an intimation in writing.
11. Intimation dated March 26, 1997 (Annexure P4) reads as under: "To M/s. State Bank of Patiala, The Mall, Patiala.
12. Dear Sirs, Sub: Adjustment of refund---Assessment year 1996-97---Intimation under section 245 of the Income-tax Act--- Regarding.
13. Return of income for the assessm ent year 1996-97 was processed under section 143(1)(a) on March 19, 1997, and a refund of Rs.16,27,64,936 has been determined to be refundable to you. The said refund is adjusted against the following demand: Sr. No. Assessm ent year Nature of demand Demand 1 1994-95 Regular 3,50,98,375 2 1995-96 Regular 12,76,66,560 This is for your information on."
14. It would be useful to read section 245 of the Act: "245. Set off 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 Assessing Officer, Deputy Commissioner (Appeals), Commissioner (Appeals) or Chief 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 sum, if any, remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section."
15. The petitioner's challenge to the action relating to the set-off is primarily based on the intimation having been sent after adjustment and not before the adjustment. Shri Mittal has argued that no intimation in writing was sent by the Assessing Officer before making the adjustment of the refundable amount of tax. Refund of tax for the assessment year 1996-97 became due to the petitioner on March 19, 1997, when the return for that assessment year was processed by the Assessing Officer under section 143(1)(a) of the Act.. The demand for the additional tax for the assessm ent year 1994-95 was created by the Assessing Officer in pursuance of the assessment order, dated March 26, 1997. Thus, additional liability of tax for the assessment year 1994-95 was .Created subsequent to the date on which refund for the assessment year 1996-97 became due to the petitioner. It is alleged by the petitioner that the Assessing Officer created the additional demand of tax for the assessm ent year 1994-95 on March 26, 1997, with a mala fide intention. It adversely affected the right of the petitioner to receive the amount of refund with interest.
16. Additional liability for the assessm ent year 1994-95 was illegally and arbitrarily created.
17. On the question of intimation of the proposed action, the Bombay High Court has, in A.N. Shaikh v.
18. Suresh B. Jain (1987) 165 ITR 86, held that the Assessing Officer has to give a previous intimation of the proposed action for adjustment and not a simultaneous intimation.
19. The Madhya Pradesh High Court has also, in Shiv Narain Shivhare v. Asst. CIT (1996) 222 ITR 620 taken a similar view.
20. In Vijay Kumar Bhati v. CIT (1994) 205 ITR 110 (Delhi), similar view has been taken by the Delhi High Court.
21. Shri R.P. Sawhney, learned senior counsel for the respondents, has contended that intimation regarding set-off was duly sent by the Assessing Officer to the petitioner by letter, dated March 26, 1997. No prejudice was caused to the petitioner as the demand of tax standing against the petitioner for the earlier years was adjusted in accordance with law. Demand of tax for the earlier years had not been stayed either by the Assessing Officer or the appellate authority. The demand was payable by the petitioner. It was necessary to safeguard the interests of the Revenue and the Assessing Officer rightly adjusted the amount of refund towards the additional demand of tax outstanding against the petitioner. After adjusting the refund amount of Rs.12,76,66,560 towards the tax demand created for the assessm ent year 1995-96, the balance refund amount of Rs.3,50,98,375 was adjusted towards the tax demand of Rs.6,44,12,470 relating to the assessment year 1994-95. A demand for Rs.2,93,14,095 for the assessment year 1994-95 was still due against the petitioner.
22. Mere pendency of appeal would not mean the stay of the demand. The refund amount was rightly adjusted against the demand of tax for the other assessment years. Shri Sawhney has also argued that, in the absence of any specific provision in section 243 regarding the issue of notice before making adjustment, no such requirement can be assumed. Since section 245 simply requires that the Assessing Officer shall give an intimation in writing to the assessee, it would not mean that a prior show-cause notice should be issued before set-off. Shri Sawhney has placed reliance on two decisions of the Supreme Court:
(i) A.K. Kraipak v. Union of India, AIR 1970 SC 150; and
(ii) Union of India v. J.N. Sinha, AIR 1971 SC 40.
23. Shri Sawhney has contended that, as laid down by the Supreme Court, the rules of natural justice may operate only in the areas not covered by any law. They do not supplant the law but supplement it If a statutory provision could be read consistently with the principles of natural justice, the Courts should do so.
24. On a plain reading of section 245 of the Act, it would appear that this provision enables the Assessing Officer or other tax or appellate authorities to set-off, after intimation to the claimant, the amount to be refunded or any part thereof, against any sum remaining payable under the Act by the person to whom the refund is due. In the Indian Income-tax Act, 1922 (for short "the 1922 Act"), similar provision regarding set-off existed in section 49E. Requirement regarding intimation to the assessee did not, however, find place in section 49E of the 1922 Act. Section 245 reproduces section 49E of the 1922 Act with the addition of the requirement that the Assessing Officer shall give intimation to the assessee before making the adjustment under this section. Thus, an additional requirement regarding intimation was engrafted in section 245 which corresponds to section 49E of the 1922 Act.
25. The following conditions must exist or be fulfilled in order to setoff a refund under section 245 of the Act:
(i) A refund is found due to a person under any provision of the Income-tax Act:
(ii) The amount of refund is set-off against another sum which is payable by that person under the Income-tax Act; and
(iii) The refundable amount is set-off after intimation, in writing of such proposed action to that person.
26. In the present case, the first two conditions stand fulfilled, but the third condition is missing. No intimation, in writing was given by the Assessing Officer prior to the proposed action of set-off.
27. When the third condition in terms requires that an intimation in writing has to be given about the proposed action, that must be strictly followed. This course was not adopted by the Assessing Officer. A perusal of the intimation, dated March 26, 1997, (reproduced earlier), would show that the Assessing Officer sent the intimation to the assessee after making adjustment or it was a simultaneous action. Thus, adjustment was made in violation of the third condition contained in section 245 of the Act. As has been noticed earlier, there was no provision regarding intimation to the assessee in section 49E of the 1922 Act. It would, thus, mean that there was a purpose in adding a specific condition regarding intimation in section 245 of the Act. Obviously, the object was to inform the assessee about the proposed action of set-off so as to enable him to put forward his objection, if he so desired. There cannot be any other object behind a prior intimation regarding the proposed action. If the legislative intent was simply to give an intimation about the set-off to the assessee, there would not be a requirement of giving intimation before making the adjustment. It would defeat the purpose of the provision if it is said that an intimation simpliciter, while making adjustment of the refundable amount towards the tax demand of other years, was sufficient.
28. The facts in C.W.P. No.10273 of 1997 may now be noticed. In this case, even the first condition under section 245 was not fulfilled.
29. The petitioner filed on December 30, 1993, the annual return of interest-tax for the assessment year 1993-94 declaring net taxable interest at Rs.2,77,96,97,855, on which Interest-tax amounting to Rs.8,33,90,936 was payable under the interest-tax Act, 1974. Advance interest-tax amounting to Rs.9,50,00,000 was already paid. Thus, excess interest-tax amounting to Rs.1,16,09,064 had been paid by the petitioner. The Assessing Officer vide order, dated December 16, 1995, under section 8(2) of the Interest-tax Act assessed interest income at Rs.4,17,22,24,690 as against the net taxable interest income declared by the petitioner at Rs.2,77,96,97,855. The petitioner filed appeal, which was allowed on January 15, 1997.
30. For the next assessm ent year (1994-95), the petitiOner declared net taxable interest income at Rs.2,89,34,31,220. Interest-tax payable on the declared interest income worked out to Rs.8,68,02,937.
31. The petitioner had deposited a stun of Rs.9,45,00,000 by way of advance interest-tax. The petitioner was, thus, entitled to the refund of Rs.76,97,063. The Assessing Officer, however, assessed the taxable interest income at Rs.4,53,09,96,740 vide order, dated December 15, 1996, under section 8(2) of the Interest-tax Act. The petitioner went in appeal against this assessment also which was allowed on January 15, 1997.
32. The petitioner's case is that pursuant to the appellate orders in respect of the assessment years 1993-94 and 1994-95, the Deputy Commissioner of Income-tax passed orders on April 30, 1997, giving effect to the appellate orders. The petitioner was found entitled to the refund of Rs.2,09,16,511 for the assessm ent year 1993-94 and Rs.1,40,08,682 for the assessment year 1994-95.. The petitioner was, however, informed by the Deputy Commissioner of Income-tax vide letter, dated May 6, 1997 (Annexure P-9), that out of the total refundable amount of Rs.3,49,25,193, a suni of Rs.2,93,14,095 was adjusted against the demand of income-tax for the assessment year 1994-95 and the balance amount of Rs.56,11,098 was being refunded.
33. It is apparent that refund arose under the provisions of the Interest-tax Act and not under the Income-tax Act. Thus, the first condition under section 245 of the Act was not fulfilled. Refundable amount of interest-tax - could be set-off against any sum payable by the petitioner under the Interest-tax Act. But, this is not the case here.
34. Shri R.P. Sawhney, learned senior counsel for the respondents, has argued that section 21 of the Interest-tax Act seeks to incorporate. Certain provisions, including section 245 of the Income-tax Act into the Interest-tax Act.
35. Section 21 of the Interest-tax Act reads as under: "(21)Application of provisions of Income-tax Act.---The provisions of the following sections and Schedules of the Income-tax Act, and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to time, shall apply with necessary modifications as if the said provisions and the rules referred to interest-tax instead of to income-tax: 2(44), 119, 129, 131, 132, 132A, 132B, 133 to 136 (both inclusive ), 138, 140, 145, 156, 160, 161, 162, 163, 166, 167, 170, 173, 175, 176, 178, 179, 220 to 227 (both inclusive), 228A, 229, 232, 237 to 245 (both inclusive), 254 to 202 (both inclusive), 265, 266, 268, 269, 281, 281B, 282, 284, 287, 288, 288A, 288B, 289 to 293 (both inclusive), the Second Schedule and the Third Schedule: Provided that references in the said provisions and the rules to the 'assessee' shall be construed as references to an assessee as defined in this Act."
36. It would appear that the provisions regarding set-off as contained in section 245 of the Act were, by virtue of the deeming provisions of section 21 of the Interest-tax Act, made applicable to the set- off under the Interest-tax Act. It is provided that section 245 shall be applicable to the Interest-tax Act with necessary modifications as if it referred to the interest-tax instead of income-tax. It would mean that the provisions as contained in section 245 would apply mutatis mutandis to the interest-tax also as if such provisions formed part of the Interest-tax Act. If that be so, reference to the Income-tax Act in section 245 would stand substituted by reference to the Interest-tax Act. In that event. Refund found due under the provisions of the Interest-tax Act may be set-off only against any sum remaining payable under the said Act. It has already been seen that under the express provisions of section 245 of the Act, refund should be found due under the Act and such refund could be set-off against any amount found payable by the same person under the Act. If both the refundable tax and the payable tax had to arise under the same Act, similar conditions must stand fulfilled in respect of the set-off under the Interest-tax Act as are required to be fulfilled under the Income-tax Act. Once the provisions of section 245 of the Act are, by virtue of section 21 of the Interest-tax Act, treated to be the provisions in the Interest-tax Act also, both the refund due to a person as well as the tax demand payable by that person should arise under the Interest-tax Act.
37. A similar question was considered by the Madhya Pradesh High Court in Princess Usha Trust v. CIT (1989) 176 ITR 227. It was held that the amount refundable to an assessee under another Act cannot be set-off against the amount of tax payable by the assessee.
38. Since there is an express and explicit provision in section 245 of the Act, it cannot be read so as to conclude that the amount of interest-tax found refundable to the petitioner could be set-off against the amount of income-tax outstanding against the petitioner. The Assessing Officer was, thus, in error in applying section 245 of the Act and setting of the refund due. In this case also, prior intimation of the proposed action was not given by the Assessing. Officer to the petitioner.
39. Intimation, dated May 5/6, 1997 (Annexure P-9), reads as under: "To M/s. State Bank of Patiala, The Mall, Patiala.
40. Dear Sir, Sub: Adjustment of refund under section 245 of the Income Tax Act, 1961---State Bank of Patiala--- Assessm ent years 1993-94 and 1994-95---Regarding---Read with section 21 of the Interest-tax Act, 1974.
41. In this case appeal effect to the Commissioner of Income-tax (Appeals) order for the assessment years 1993-94 and 1994-95 (interest-tax), a refund of Rs.3,49,25,193 (Rs.2,09,96,511 assessment year 1993-94 + Rs. 1,40,08,682 assessm ent year 1994-95) is determined to be refundable to you. Out of this refund a sum of Rs.2,93,14,095 is adjusted against arrear demand (income-tax) for the assessm ent year 1994-95. Balance refund of Rs.56,11,098 is issued to you.
2. This is for your information please."
42. The above intimation makes it clear that the Commissioner of Income-tax informed the petitioner about the adjustment of the refundable amount towards the tax demand. This is not a prior intimation about the proposed action. This is a simultaneous intimation at the time of making the adjustment. Thus, it does not fulfil the third condition of section 245 of the Act.
43. In the result, both the writ petitions are allowed. The action of the Assessing Officer in setting off the amount found refundable to the petitioner against the amount of tax payable by it is held to be unsustainable in law. Communication, dated March 26, 1997 (Annexure P-4), in C.W.P. No.7193 of A997 and communication, dated May 5/6, 1997 (Annexure P-9), in C.W.P. No.10273 of 1997 are, therefore, quashed. The respondents are directed to pay to the petitioner the amount found refundable alongwith interest. Costs are assessed at Rs.10,000 (rupees ten thousand) in each petition payable by respondents to the petitioner.