Doctrine of Equitable Set-Off: Critical Analysis

Doctrine of Equitable Set-OffIntroduction: Set-Off- Meaning and Characteristics:

According to the Black’s Law Dictionary (Seventh Edition, 1999), a set-off is nothing but a debtor’s right to reduce the amount of a debt by any sum the creditor owes the debtor. In the case of, Union of India v. Karam Chand Thapar and Bros (Coal Sales) Ltd and Ors, referring to the concept of set-off and quoting from ‘A Treatise on the Law of Set-Off, Recoupment, and Counter Claim’, by Thomas W. Waterman, the Hon’ble Supreme Court of India held that, set-off signifies the subtraction or taking away of one demand from another opposite or cross-demand, so as to distinguish the smaller demand and reduce the greater by the amount of the less; or, if the opposite demands are equal, to extinguish both. Set-off, broadly speaking, means ‘stoppage’, much because the amount due to be set-off is stopped, or, is deducted from the cross-demand.

According to Order VIII, Rule 6 of the Code of Civil Procedure, 1908, set-off means the deduction of one demand from another cross-demand. It is the demand that the defendant makes as against the plaintiff for the purpose of liquidating the whole or part of his claim.1 Order VIII, Rule 6 of the Civil Procedure Code, 1908 which deals with the doctrine of legal set-off is in fact restricted to only an “ascertained sum”. The conditions that must exist for the applicability of a legal-set-off are the following:

Suit must be for the recovery of money;

The claim demanded to be set-off must be an ascertained sum of money2;
The ascertained sum of money must be legally recoverable from the plaintiff3;
The ascertained sum of money legally recoverable from the plaintiff must not surpass the pecuniary jurisdiction of the court in which along with the written statement, the defendant has filed the set-off;
When the defendant pleads set-off, he is put in the position of a plaintiff as regards the amount claimed by him. A defendant can claim set-off even if the plaintiff’s suit is dismissed;
It is essential that both, the claim and the set-off must be for debts due from and to the same parties in the same right;
The claim must be made at the first hearing unless it is permitted by the court to do even afterwards.
In nutshell, set-off means reciprocal acquittal of debts between two persons. As per Order VIII, Rule 6, where in a suit for recovery of money by the plaintiff, the defendant finds that he also has a claim of some ascertainable amount against the plaintiff, then the defendant can claim set-off in respect of the said amount as against the money claim of the plaintiff. A plea of set-off is a request that the debt to be found due to the plaintiff shall be treated as extinguished or reduced pro tanto by being set-off against the debt to the defendant.4 It is pertinent to note that, in both Rule 6 and Rule 6-A of Order VIII of the Code of Civil Procedure, 1908, a set-off or counter-claim cannot travel beyond the scope and the limit of the suit with which it is concerned; and it cannot bring out something, which is completely foreign to the suit.5

A claim of set-off is based on an independent cause of action which the defendant has, as against the plaintiff, and the cause of action of the plaintiff and the defendant should have arisen in the same transaction or different transaction. It is pertinent to mention here, that, both claims (that of the plaintiff as well as that of the defendant) are decided vide the same judgment and the decree is drawn-up after adjusting the set-off claim, in favour of the person whose amount is greater.

Where the defendant relinquishes (that is, forgoes) a part of his claim in the set-off then in a subsequent suit for relinquished claim, the bar of Order II, Rule 2 shall apply.6

A claim of set-off is put to an examination which is akin to an independent suit and therefore, the rules of examination of a plaint, bar of limitation, res judicata and Order II, Rule 2 are applicable pro tanto.

According to Section 3(2) (b) (i) of the Limitation Act, 1963, for the purpose of the Limitation Act, 1963, any claim by way of a set-off is to be treated as a separate suit and it shall be deemed to have been instituted on the same date as the suit in which the set-off is pleaded.7 Generally speaking, the rules relating to a written statement to be filed by a defendant, apply to, a written statement in answer to a claim of set-off.8

Doctrine of Equitable Set-Off:

There have been cases where by the defendants were allowed to set-off even an unascertained sum of money by the Courts of Equity in England, on the premise that, if the plaintiffs’ claim and the defendants’ claim arise out of the same transaction, then, it would be inequitable to drive the defendants to a separate suit. This legal ideology later came to be known as the doctrine of equitable set-off.

Right to equitable set-off is recognised only if the claim arises out of the same transaction which is the foundation of the plaintiff’s claim and the claim has not become time-barred.9 Plea in the nature of equitable set-off is not available when the cross demands do not arise out of the same transactions.10 When a plea in the nature of equitable set-off is raised, then it is not done as a matter of right and the discretion lies with the court to entertain and allow such plea or not.11

In the case of Clark v. Ratnavaloo Chetti12, it was held that, so far as equitable set-off is concerned, the right of set-off exists not only in cases of mutual debits and credits, but also where cross-demands arise out of the same transaction.13 Further, in the case of, Raja Bhupendra Narain Singha Bahadur v. Maharaj Bahadur Singh & Ors14, it was held that, a plea in the nature of equitable set-off is not available when cross-demands do not arise out of the same transaction and are not connected as regards their nature and circumstances. In the case of, M/s. Lakshmichand and Balchand v. State of Andhra Pradesh15, the Hon’ble Supreme Court of India took occasion to rule that, when a claim is founded on the doctrine of equitable set-off, all cross-demands are to arise out of the same transaction, or, the demands are to be so connected in the nature and circumstances that they can be looked upon as a part of one transaction.

In the case of, Jitendra Kumar Khan v. Peerless General Finance & Investment Co. Ltd, (2013) 8 SCC 769, it was held that, an equitable set-off is different from a legal set-off, for an equitable set-off is independent of the provisions of the Code of Civil Procedure, 1908. The concept of equitable set-off is based on the fundamental principles of justice, equity and good conscience; the discretion is with the court to adjudicate or not to adjudicate, as regards the claim, which is in the nature of an equitable set-off; the court has to exercise the discretion sparingly with application of judicial mind and sound legal principles.

Requirements of Equitable Set-Off:

In case of an equitable set-off, the original suit has to be a money-suit just like in case of a legal set-off; but, however, unlike the legal set-off, the amount claimed in case of an equitable set-off can be for ascertained or even an unascertained sum of money.
In case of an equitable set-off, the set-off claimed should arise in the same transaction in which the cause of action for the main suit arises.
A claim by way of an equitable set-off can be allowed even if it is time-barred when there is a fiduciary relationship between the parties. In the case of, Mackinnon Mackenzie & Co. (P) Ltd. v. Anil Kumar Sen & Anr16, it was held that the provisions of the Limitation Act, 1963 do not necessarily bar an equitable set-off and provisions of Order VIII, Rule 6 do not do away with the principles of equitable set-off.
Section 3 of the Limitation Act, 1963 does not at all relates to an equitable set-off.
For payment of court-fee there is no distinction between a legal set-off and an equitable set-off. Both attract applicability of Schedule I, Article 1 of the Court Fees Act, 1870.17
Equitable set-off is not specifically referred to in the Code of Civil Procedure, 1908, however, Order XX, Rule 19(3) which deals with the case of drawing of a decree when set-off or counter-claim is allowed mentions that, “provisions of this rule shall apply whether the set-off is admissible under Rule 6 of Order VIII or otherwise”. The word “otherwise” therefore can be construed to imply equitable set-off.
It was held in: Dobson & Barlow v. Bengal Spinning & Weaving Co.18; and, Girdharilal Chaturbhuj v.Surajmal Chauthmal Agarwal19, it was held that, an equitable set-off is not to be allowed where protracted (or usual) enquiry is needed for determination of the sum due.


The essence of set-off is that the defendant should have a cause of action against the plaintiff apart from the suit and not merely as a defence to the plaintiff’s claim. Set-off is in the nature of a cross-action which can be entertained separately.20 On the other hand, the concept of equitable set-off is not defined in any procedural law or otherwise. This concept of equitable set-off comes from the broad principles of justice, equity and good conscience. Equitable right to set-off exists only when both the claims, that is, of the plaintiff as well as the defendant, arise out of the same transaction. For example, in the case of, M/s Anand Enterprises (Bangalore) v. Syndicate Bank21, in a suit by the bank on a term loan, damages for the loss on account of delay in giving/sanctioni ng the loan was claimed by the defendant in the written statement. It was held that, the claim of the defendant was in the nature of an equitable set-off and not a counter-claim.

Thus, when the claim of the defendant is in the nature of mutual debits and credits as against the plaintiff, arising from the same transaction, between the same parties then, equitable set-off can be claimed by the defendant as against the plaintiff, without complying with rigours of Order VIII, Rule 6 of the Code of Civil Procedure, 1908 and Section 3 of the Limitation Act, 1963. Grant or non-grant of equitable set-off is the discretion of the court.

1*Authored by: Shivam Goel (Associate, S.G. & Co); LL.M. (WBNUJS); Author of: Corporate Manslaughter & Corporate Homicide: Scope for a New Legislation in India, Penguin-Partridg e, Bloomington, 2015; and Concept of Rights in Islam, Lambert Publications, Germany, 2014. See: Sudipto Sarkar & V.R. Manohar, Code of Civil Procedure, 1908, Volume 1, Tenth Edition (2005), Wadhwa & Company Nagpur, p.1045
2 See: Thanjavur P Bank v. Dharmasamvardhan i, AIR 1964 Mad 108
3 Note: A sum the recovery of which is barred under Section 11 of the Code of Civil Procedure, 1908, or Order II, Rule 2, or by the law of limitation at the time of plaintiff’s suit is not a sum legally recoverable; but it has been held in some cases that this rule as to limitation does not apply in the case of an equitable set-off.
4 See: Andhra Paper Mills v. Anand, AIR 1951 Mad 783, 786
5 See: Aninda Saha v. Amal Saha, AIR 2001 NOC 101: 2001 AIHC 2956 (Cal)
6 See: Aakarsh Kamra, Code of Civil Procedure, Chapter 5: Pleadings in General, Lexis Nexis Publication (2015), p. 115
7 See: Section 3 of the Limitation Act, 1963
8 See: Vinayak D. Kakde, Civil Trials: Practice and Procedure, Chapter VIII: Written Statement, Set-Off and Counter-Claim (Order VIII), Universal Law Publishing (2015), p. 30
9 See: Maharashtra State Farming Corporation Ltd. v. Belapur Sugar and Allied Industries Ltd., 2004 (3) Mh LJ 414 (Bom)
10 See: Nathmal v. Kashiram, AIR 1975 Raj 217
11 See: Union of India v. Karam Chand Thapar & Bros (Coal Sales) Ltd, (2004) 3 SCC 504
12 2 M.H.C.R. 296 (1865)
13 See: Chishlom v. Gopal Chander, ILR 16 Cal 711 (1889)
14 AIR 1952 SC 782
15 (1987) 1 SCC 19
16 AIR 1975 Cal 150
17 See: Cofex Exports Ltd. v. Canara Bank, AIR 1997 Del 355 (at 365)
18 (1897) 21 Bom 126
19 AIR 1940 Nag 177
20 See: Pramada Prasad v. Sagarmal, AIR 1954 Pat 439 (at p. 441)
21 AIR 1990 Kant 175

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