Court rules that excess payment made towards one firm's excise dues can be adjusted against another firm's liability, emphasizing recovery of principal dues over party identity.
In a significant judgment delivered on August 1, 2026, the Karnataka High Court (Division Bench, Dharwad) dismissed the State of Karnataka's writ appeal and upheld the decision of the Single Judge allowing adjustment of excess excise duty payment under the Karasamadhana-IV Scheme. The case arose from a dispute between the State and Manoji, a respondent who had made excess payment towards the liability of one firm and sought adjustment of that amount against dues of another firm under the Scheme.
The Karasamadhana-IV Scheme, introduced by the Karnataka Government in June 2016, aimed at expeditious recovery of excise arrears by focusing on the recovery of principal amounts due from defaulters and granting waiver of interest and penal interest upon timely payment of principal dues. The Scheme was extended up to October 31, 2017, to facilitate settlement of outstanding arrears related to toddy and arrack rentals.
Manoji, a partner in M/s. Nagalingaswami Trading Company (NTC), had paid the entire principal amount due under the Scheme for NTC within the stipulated time. The payment exceeded the principal liability by Rs.43,23,475. Subsequently, Manoji requested the State authorities to adjust this excess amount towards the dues of another firm, M/s. Torgal Group (TG), which also had outstanding excise liabilities. The State rejected the request on the grounds that the two firms were distinct and independent entities and that the Scheme did not provide for such inter-firm adjustments.
Challenging this rejection, Manoji filed a writ petition which was allowed by the Single Judge, directing the State to treat the excess payment towards NTC's liability as payment towards TG's dues and to remove the lien on the respondent's properties. The State filed a writ appeal against this order.
The Division Bench, comprising Justices Mrs. Lalitha Kanneganti and K.S. Hemalekha, after considering the submissions and the Scheme's objectives, dismissed the State's appeal. The Court observed that the central purpose of the Scheme was the recovery of principal arrears, and once the principal amount was paid, the identity of the firm or person making the payment was immaterial. The Court emphasized that refusal to adjust the excess payment towards another firm's liability would amount to unjust enrichment of the State.
The judgment highlighted the Scheme's preamble which showed the government's intent to recover principal arrears expeditiously by granting relief from interest and penal interest. Since the respondent had already paid the entire principal amount due for NTC and had made an excess payment, the State was obliged to adjust the excess amount against TG's liability, especially as recovery proceedings had been initiated against both parties.
The Court further stated that the State's concern over loss of revenue was unsustainable because the amount was already in the State's possession. Denying adjustment benefits solely on the basis of the distinct identity of the firms contradicted the Scheme's objective. The judgment thus reinforced the principle that financial relief under such schemes should be construed liberally to enable effective recovery and avoid undue hardship.
This ruling clarifies the treatment of excess payments under excise settlement schemes and reinforces the principle against unjust enrichment of government authorities. It is a landmark decision ensuring that excise dues recovery mechanisms prioritize substantive recovery over formalistic distinctions.
Bottom Line:
Adjustment of excess payment made under the Karasamadhana-IV Scheme - Excess payment made by a respondent towards the liability of one firm can be adjusted towards the liability of another firm under the scheme, as the scheme prioritizes recovery of principal dues and grants waiver of interest and penal interest.
Statutory provision(s): Karnataka Excise Act, 1965; Karasamadhana-IV Scheme (Notification dated 08.06.2016 and extensions)
State of Karnataka v. Manoji, (Karnataka)(DB)(Dharwad) : Law Finder Doc Id # 2973031
