Introduction

Set-off means a claim set up against another. It is an extinction of debts of which two persons are reciprocally debtors to one another by the credits of which they are reciprocally creditors to one another. It is a plea in defence, available to defendant. Simply put, when there are mutual debts between plaintiff and defendant, one debt may he settled against another. By adjustment, set-off either wipes out or reduces the plaintiff’s claim in a suit for recovery of money.

The provisions relating to set-off are provided under Order VIII Rule 6 of the Code.

Illustration-

X sues Y on a bill of exchange for Rs. 5000. Y holds a judgement against X for Rs. 10,000. The two claims being both definite, pecuniary demands may be set-off.

Doctrine Explained

In Jayanti Lal v. Abdul Aziz, the court stated that the doctrine of set-off may be defined as “the extinction of debts of which two persons are reciprocally debtors to one another by the credits of which they are reciprocally creditors to one another.”

A plea of set-off is “a plea whereby the defendant acknowledges the justice of plaintiff’s demands, but sets up another demand of his own, to counterbalance that of plaintiff’s, either in whole or in part”. Thus, it is a reciprocal acquittal of debts between two persons.

When can it be claimed?

In Nan Karay Phaw v. Nan Karay Phaw, the court held that the language of Rule 6(1) is clear and unambiguous. It requires the defendant to claim set-off at the first hearing of the suit.

Conditions

In order to claim a set-off, the following conditions must be satisfied,

The suit must be for recovery of money;
The sum of money must be ascertained;
Such sum must be legally recoverable;
It must be recoverable by the defendant or by all the defendants, if more than one;
It must be recoverable from the plaintiff or from all the plaintiff’s, if more than one;
It must not exceed the pecuniary jurisdiction of the court in which the suit is brought; and
Both the parties must fill, in the defendant’s claim to set-off, the same character as they fill in the plaintiff’s suit.

Limitation

The claim of set-off is virtually a cross-suit instituted by the defendant against the plaintiff. Set-off thus, is a plaint, for all purposes and is governed by the law of limitation. In Jitendra Nath Ray v. Jnanada Kanta Das Gupta, the Court stated that the provisions for filing of suit applies to set-off also.

Court-fee

As per Art. I, Sch. I of Court Fees Act, 1870, the court fee is payable on set-off inasmuch as in the claim raised by the defendant against the plaintiff and as such, it is a “plaint” on which court fee is payable.

Effect of set-off

When a defendant pleads set-off, he is put in the position of a plaintiff as regards the amount claimed by him. Hence, there are two suit, one by the plaintiff against the defendant and the other by the defendant against the plaintiff; and they are tried together.

Where the plaintiff does not appear and his suit is dismissed for default, or he withdraws his suit, or he fails to substantiate his claim at trial and his suit is dismissed, it does not affect the claim for set-off by the defendant and a decree may be passed in favour of the defendant if he is able to prove his claim.

Types of set-off

The law recognises two types of set-off.

Legal Set-off

Legal set off is provided in the Order VIII Rule 6(1) of the Code of Civil Procedure, 1908, and all the essential elements present in the Rule 6(1) with requisite conditions for claiming legal set off.
In case of a legal set-off, the amount must be ascertained and it can be pleaded only within the limitation period.

Equitable set-off

The concept of equitable set off comes from “equity, justice, good conscience”. This is granted on the courts’ discretion.
In cases of equitable set-off the court fees may or may not be paid.

Difference between Legal Set-off and Equitable Set-off

Legal set-off must be for an ascertained sum of money. Equitable set-off may be allowed even for an unascertained sum of money.
Legal set-off can be claimed of as aright and the court is bound to entertain and adjudicate upon it. Equitable set-off, on the other hand, cannot be claimed of as a right and the court has discretion to refuse to adjudicate upon it.
In legal set-off, it is nit necessary that the cross-demands arise out of the same transaction. Equitable set-off can be allow only when cross-demands arise out of same transaction.
In legal set-off, it us necessary that the amount claimed as set-off must be legally recoverable and must not be time-barred. A claim by way if equitable set-off may be allowed even if it is time-barred when there is a fiduciary relationship between the parties.
A legal set-off requires a court-fee, but no court fee is required in the car of an equitable set-off.