CIVIL PROCEDURE CODE

Set-Offs and Counter-Claims in Civil Suits

Sahir Boppana
B.A., LL.B. (Hons)
NATIONAL ACADEMY OF LEGAL STUDIES AND RESEARCH
HYDERABAD

1
 Table of Contents
INTRODUCTION ................................................................................................................................ 3

OVERVIEW OF THE CONCEPTS .......................................................................................................... 6

SET-OFF ....................................................................................................................................... 6

Counter-Claim............................................................................................................................. 7

ANALYSIS ........................................................................................................................................ 8

Set-Off......................................................................................................................................... 8

Legal Set-Off .......................................................................................................................... 8

Equitable Set-Off .................................................................................................................... 9

Counter-Claim........................................................................................................................... 12

CONCLUSION.................................................................................................................................. 15

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 INTRODUCTION

A set-off is defined as nothing but a counterdemand made against the plaintiff by the defendant,
according to the Blacks Law Dictionary. It arises out of a transaction that may be unrelated and
independent of the plaintiffs original claim. It is also defined as a right that the debtor has to
reduce the amount of a debt claimed in the suit, by the amount that the creditor owes the debtor.1
It is the counter-balancing sum that the creditor himself owes the debtor.
The Supreme Court of India has held by quoting Thomas W. Waterman 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.2
The Supreme Court had arrived at this specifically in the case of Union of India v. Karam Chand
Thapar and Bros (Coal Sales) Ltd and Ors, as they quoted the definition of the concept put forth
by T. Waterman.
Set-off, in layman terms, means stoppage. This is primarily owed to the fact that the amount
due by the debtor to be set-off is stopped, or, is deducted from the cross-demand.
Technically, a set off can be defined as a discharge of reciprocal obligations to the extent of the
smaller obligation. For example, A files a suit against B claiming $10,000. B may take the defense
that A already owes B a sum of $4000. Thus, B is primarily requesting to set off $4000 of A's
claim and pay only the difference of $6000.
Set-off had not previously existed under the old English law despite being recognized under equity.
It was the Insolvent Debtors Relief Act, 1729 and the Debts Relief Amendment Act, 1735, that first
brought about the concept of set-off under legal statutes.
The concept of permitting the defendant the defense of set-off in a civil lawsuit claim originated
at a time when defendants were still sent to debtors prisons as consequence for owing money.
Courts began to understand that the doctrine of equity required a solution in situations where a
defendant was being sent to debtors prison, even though the plaintiff actually owed the defendant
money as well. At the time, civil procedure required the first lawsuit to be settled before another

1
Black's Law Dictionary (10th ed., 2014)
2
T. Waterman, A Treatise on the Law of Set-Off, Recoupment, and Counter Claim
3
claim could be addressed. Because of this, any claim that the defendant had against the plaintiff
was not put before the court until after the original lawsuit was disposed of.3

A Counter-claim is a claim made by the defendant in a suit against the plaintiff.4 It can be an
independent claim, separable from the plaintiffs claim, and enforceable by a cross-action in
favor of the defendant.
Prior to 1976, there had not been any provision regarding the concept of counterclaim in the Code
of Civil Procedure. In order to prevent multiplicity of proceedings, the Law Commission of India
chose to allow the defendant a right to make a counter-claim in the same suit. Counter-claims have
let the courts have a few significant benefits:
a) Saving of time for the courts, particularly in the context of pendency of cases over great periods
of time;
b) Eliminating the inconvenience of the parties caused by filing fresh litigation, on issues that
could have been resolved in the present suit itself, resulting in avoidance of multiplicity of
proceedings and
c) Allowing early disposal of cases which would have otherwise been inordinately delayed.
Considering the important reasons that prevailed with the then Government, an Amendment Act
of 1976 to CPC made a provision for counterclaims.
Being a claim made by the defendant in a suit against the plaintiff, it meant that in the written
submissions of the defendant, in addition to seeking the claim of a set-off the defendant may
actually go ahead and a make a claim of his own. This claim would be in the nature of a plain
against the plaintiff. Hence, the counter-claim is effectively a cross-suit within the same suit.
A counter-claim will only arise in such cases where it was open to the defendant to file a separate
suit in this regard in a competent court. Thus in effect the end that a counter-claim achieves is the
joining together of two separate suits between the same parties and decide the matter finally
between them.
Such a counter-claim may defeat the relief sought by the plaintiff and thus this can be viewed as
a cross-action.

3
http://www.wisegeek.com/what-is-a-set-off.htm
4
P.R.Iyer, Advanced Law Laxicon (2005) Vol 1 at P.1093
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Another reason for amending the code to accommodate this was the ruling of the apex court that
held that right to make a counter-claim should be made statutory in the case of Laxmidas.5 The
court, with a liberal construction, had considered the counterclaim as a plaint in a cross-suit and
decided to hear both the original suit and the counter-claim together before it gave its decision.

5
Re Laxmidas AIR 1964 SC P.11
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 OVERVIEW OF THE CONCEPTS
SET-OFF
A set-off is a subsequent claim made against another claim. A set-off is therefore a cross-claim
which has the effect of partly offsetting the original claim. This right of the defendant to claim set-
off has been recognized under Order VIII, Rule 6 of the Civil Procedure Code. It is a statutory
defence of the defendant to an action made by the plaintiff.
A set-off functions as a form of settling reciprocal debts between parties. In cases of mutual debts
between the plaintiff and the defendant, one debt is set-off against the other.6 Set-off is a defence
plea available to the plaintiff, reducing the sum of money in a plaintiffs claim in a suit for the
recovery of money.7

DOCTRINE OF SET-OFF
In a particular scenario wherein the defendant is notified that he must settle some debt against the
plaintiff, and the plaintiff in turn also finds out that he has similar debts against the defendant, then
he can claim a set-off for that specific amount.8
The doctrine of set-off can be defined as follows:
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.9
A defendant can claim set-off even after dismissal of the plaintiffs suit. It is necessary that both
the original claim and the set-off are for debts due from and to the same parties in the same right.
The claim must be made at the first hearing unless otherwise permitted by the court.
Essentially, the defense of set-off lets a party that receives a claim have a right to use a
counterclaim to reduce or defeat the claim.

6
Chambers 21st century Dictionary , p. 1283
7
Strouds Judicial Dictionary (1986) Vol. 5 , p.2387
8
B. Seshaiah v B Veerabhadrayya , AIR 1972 AP 134 (FB)
9
Jayanti Lal v Abdul Aziz , AIR 1956 Pat 199 p 200
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Counter-Claim
Rule 6A to 6G of Order VIII of the Civil Procedure Code cover the concept of counter-claim. It
is the claim made by the defendant in a suit, against the plaintiff. The claim is one that is
independent of and separate from that of the plaintiffs, enforceable by cross section.
Counter-claim is allowed to be set up in respect of action accruing to the defendant either before
or after the filing of the suit. However, it must be set up before the defendant has delivered his
defense or before expiry of time fixed for delivery of his defense.
Such a claim must not exceed the pecuniary limits of the jurisdiction of the relevant court. The
counter-claim is to be treated as a plaint and the plaintiff can file a written statement in answer to
it.
Counter-claim can also be filed after filing of written statement;
In the case of Smt. Shanti Rani Das v. Dinesh Roy it has been held that the right to file a counter
claim may be referred to the date of accrual of cause of action. If the cause of and such action had
arisen before or after filing of the suit, and the cause of action continued until the date of filing of
the suit which continued until the date of filing written statement or extended date of filing plaintiff
statement, then such counter claim is allowed to be filed even after filing the written statement.

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 ANALYSIS
Set-Off
In the case of defence of set-off, the particular suit must first and foremost involve the recovery of
money. The sum of money demanded by the claim of Set-off must be of a specified, ascertained
amount.10 It must be an amount less than or equal to the suit claim. The sum of money is required
to be legally recoverable at the date of the suit. The sum of money must be recoverable by the
defendants from the plaintiffs. The sum of the money to be recovered must not exceed the
pecuniary jurisdiction in which the court has been instituted. Both the parties must fulfil each
others criteria of claims for debt settlement.11 It is a right to adjust the claim of the plaintiff against
certain right or dues of the person entitled. 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 defense to the
plaintiffs claim. Set-off is in the nature of a cross-action which can be entertained separately.

EFFECT OF SET OFF

A plea of set-off is a essentially a request that the debt to be found owed to the plaintiff shall be
treated as extinguished or reduced pro tanto by being set-off against that debt owed to the
defendant. It is important to note that, in both Rule 6 and Rule 6-A of Order VIII of the Code of
Civil Procedure, a set-off or counter-claim is not permitted to go beyond the scope and the limit
of the suit with which it is concerned. It is not permitted to bring out something totally foreign to
the suit. The defendant is considered to be in the same position as that of the plaintiff with regards
of the amount when he claims for set off.
As far as numbering of cases is concerned, however, the set off filed doesnt have a new case
number. It is tagged with the original claim and though they are separate suits, they are tried
together12.

Legal Set-Off
The suit must only be of recovery of a specified, ascertained amount money.

10
Thanjavur P Bank v. Dharmasamvardhani, AIR 1964 Mad 108
11
Civil Procedure with Limitation Act 1963, C. K Takwani , Seventh Edition , p 267 para 3
12
Dayaram vs Jokhuram , AIR 1960 MP 393
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For example - A sues B for the amount of 1 Lakh rupees. B cannot then set-off the claim for
damages for breach of contract for specific performance. The legal set-off is guided by and covered
by legal provisions under Order VIII of the Civil Procedure Code.
1. The sum of money must be ascertained.
2. The sum claimed must be legally recoverable.
3. The sum claimed must be recoverable by all the defendants against the plaintiff if there are
more than one defendants.
4. The sum claimed must necessarily be recoverable from all the plaintiffs by the defendant
if there are more than one plaintiffs.
5. In the defendant's claim for set-off, both the parties must fill in the same character as they
fill in the plaintiff's suit. They must be in the same positions in both the situations in order
to claim the amount.

A legal set-off is essentially a claim raised as a matter of right. The court is bound to adjudicate
upon the claim.
The court fee is to be paid on the set-off amount. The amount specified by the claim made by the
defendant does not have to originate from the same transaction that is involved in the suit. The
amount must not be time barred.
The right to set off is often dealt with expressly in a contract, failing which, the common law fills
the gap.
.

Equitable Set-Off
The legal provisions provided for a set-off are not necessarily exhaustive. A set-off is still possible
in certain situations even when some of the above conditions are not satisfied. For example, in a
transaction involving exchange of goods for services as well as payment, the defendants claim for
a set-off might be for an uncertain amount for damaged goods.
Jitendra Kumar Khan v. Peerless General Finance & Investment Co. Ltd: it was held that, an
equitable set-off is not the same as a legal set-off. An equitable set-off is in fact independent of not
covered by the provisions of the Code of Civil Procedure, 1908. The concept of equitable set-off

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is based on the fundamental principles of justice, equity and good conscience. It is dependent on
the courts discretion whether or not to adjudicate, as regards the claim, which is in the nature of
an equitable set-off. The discretion of the court must be exercised sparingly with application of
judicial mind and sound legal principles.13
In such a case, making the plaintiff file another suit would be unfair. A set-off in such a case is
called an Equitable Set-off, distinct from legal set-off.
It is independent of the provisions of the Code of Civil Procedure and is not explicitly covered by
provisions. In an equitable set-off, it is necessary that the mutual debts and credits or cross-
demands originate from the same transaction, or that they are both connected in the nature and
circumstances.
M/s Anand Enterprises (Bangalore) v. Syndicate Bank; during, a suit instigated by the bank on a
term loan, the defendant claimed in the written statement damages for the loss incurred because
of the delay in sanctioning the loan. It was held that, the claim of the defendant was in the nature
of an equitable set-off and not a counter-claim.14
It is important to note that such a plea is raised not as a matter of right but by way of courts
discretion. It is the discretion of the court to entertain and allow such a plea or not. No court fee is
required in such a case.
The amount may be time barred. However, in such a case, he can claim only as much amount as
is given in the plaintiff's claim resulting in claims of equal sums of money.
The concept of equitable set-off is founded on the fundamental principles of equity, justice and
good conscience. The discretion rests with the court to adjudicate upon it, to be exercised in an
equitable manner.
In the UK, the Court decided that the test Lord Denning's formulated in 1978 in The "Nanfri" was
to be favored:
"cross-claims...so closely connected with [the plaintiff's] demands that it would be manifestly
unjust to allow him to enforce payment without taking into account the cross claim".
The Court intended to emphasize that the test was based on legal principle rather than discretion.
As Hobhouse J. said in Leon Corporation v Atlantic Lines and Navigation Co Inc [1985]:

13
Jitendra Kumar Khan v. Peerless General Finance and Investment Company Ltd., 2013 (6) AWC 6359.
14
M/s Anand Enterprises (Bangalore) v. Syndicate Bank AIR 1990 Kant 175

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This defence does not vary according to the length of the Lord Chancellor's foot15. The defence
has to be granted or refused by an application of legal principle".16
The legal principle involves the application of a test which has two elements:
1. The necessity of a "close connection" between the two claims, the claim and the
counterclaim
2. The condition of it being unjust to enforce the claim without considering the counterclaim.
The formal element and the functional elements cannot be separated from each other. Both
are necessary.
An equitable set-off is not to be allowed where protracted enquiry is required to determine the
amount due, as has been stated in Jitendra Kumar Khan v. Peerless General Finance and
Investment Company Ltd.17
A claim made by equitable set-off may be allowed despite it being time-barred, when there is a
fiduciary relationship between the parties. In the case of, Mackinnon Mackenzie & Co. (P) Ltd.
v. Anil Kumar Sen & Anr, it was held that an equitable set-off is not necessarily barred by the
provisions of the Limitation Act, 1963. It was said that the very provisions of Order VIII, Rule 6
do not do away with the principles of equitable set-off.18 Section 3 of the Limitation Act, 1963
does not pertain to an equitable set-off.
When it comes to payment of court fee, there is no difference between a legal set-off and an
equitable set-off, as both require applicability of Schedule I, Article 1 of the Court Fees Act,
1870.
Although, equitable set-off is not explicitly referred to in the Code of Civil Procedure, 1908,
Order XX, Rule 19(3) the covers the drawing of a decree in case of set-off or counter-claim,
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.
Dobson & Barlow v. Bengal Spinning & Weaving Co., and,

15
Referring to the varying discretion of the court
16
Leon Corporation v Atlantic Lines and Navigation Co Inc [1985]
17
Jitendra Kumar Khan v. Peerless General Finance and Investment Company Ltd., 2013 (6) AWC 6359.
18
Mackinnon Mackenzie & Co. (P) Ltd. v. Anil Kumar Sen & Anr AIR 1975 Cal 150
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Girdharilal Chaturbhuj v. Surajmal Chauthmal Agarwal, 19it was held that an equitable set-off
requiring an extended enquiry as to determine the sum due is not to be allowed.
In cases where the defendant is unable to attend in person, unable to substantiate his claim, his suit
is dismissed as a result.20 This, however, does not affect the set-off claimed by the defendant. If
the defendant is able prove that the plaintiff does owe him money, the suit could be claimed against
him.21
In a situation wherein the plaintiff fails to appear and his suit is dismissed or he withdraws, it does
not have bearing on the defendants claim for a set-off. A decree may even be passed in his favor if
he is able to prove his claim.
Essentially, the Set-Off is a ground of defense for the defendant to the plaintiffs action,
comparable to that of a shield.

Counter-Claim
Counter-claim is covered under Rules from 6-A to 6-G of Order VIII of the Civil Procedure Code.
It is a relatively new provision, for which the Rules 6-A to 6-G have been inserted in the Civil
Procedure Code, 1908 by C.P.C. Amendment Act, 1976. There is no classification within Counter-
Claims as there is in Set-Offs. Counter-claim is substantially a cross-action. A Counter-claim can
be made for both an ascertained sum and for an unascertained sum. It is not required to arise out
of the same transaction. In a counter-claim, the defendant demands for a large amount. The claim
for excess amount is really a counter-claim.
The amount claimed must be recoverable at the date of the written statement.
Counter-claim functions as a weapon of offence, just like a sword, allowing the defendant to
enforce the claim against the plaintiff effectually as an independent action.
A counter-claim is a claim made by the defendant in excess of the right claimed by the plaintiff.

19
Girdharilal Chaturbhuj v. Surajmal Chauthmal Agarwal AIR 1940 Nag 177
20
Dobson & Barlow v. Bengal Spinning & Weaving Co (1897) 21 Bom 126
21
Jamnadas V Behari , AIR 1941 Nag 258
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Effect of Counter-Claim
Counter-Claim has the effect of a cross-suit, for which the concerned court can pronounce a final
judgment on both the original claim and the counter-claim. The counter-claim itself would be
treated as a plaint. Counter-claim of the defendant is treated as a plaint22 and the rules governing
the plaints do apply. Plaintiff would respond to the counter-claim by filing his reply, which is
treated as a written statement. The rules applicable for the written statement shall apply to such
replies.23
In order to answer to the counter-claim, the plaintiff has the right to file a written statement.24
The court ultimately decides the counter-claim on merits, regardless of whether or not the
plaintiffs suit is stayed, dismissed, discontinued or withdrawn.25
The defendants right to a decree regarding a counter-claim claimed in the written statement is in
way affected by the suit of the plaintiff.26
In a scenario where the plaintiff does not file a reply to the counter-claim, the court may pronounce
judgment against the plaintiff with regard to such counter-claim or make such order in respect of
counter-claim.27
Counter-claim is substantially a cross-action that does not necessarily arise out of same transaction
as the original claim.
In a counter-claim, it is not mandatory that the amount be recoverable on the date of the suit filed
by the plaintiff, but it may be recoverable on the date of the written statement as well. Keeping
this in mind, it is permitted that the defendant may amend the written statement with the leave of
the court.

Since a counter claim is in its nature a cross suit, a defendant that intends to make a counter claim
must present all the relevant material facts on which he relies to support his claim, with the same
diligence as he would as a plaintiff in an independent suit.
In essence, set-off is a form of defense while counter claim is substantially a cross suit. It was also
held by Kerala High Court that,

22
Rule 6A(4), Order VIII of Civil Procedure Code
23
Rule 6G, Order VIII of Civil Procedure Code
24
Rule 6A, Order VIII of Civil Procedure Code
25
Rule 6D, Order VIII of Civil Procedure Code
26
Rule 6F, Order VIII of Civil Procedure Code
27
Rule 6E, Order VIII of Civil Procedure Code
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It is really a weapon of offence and enables a defendant to enforce a claim against the plaintiff
as effectively as in an independent action. It need not be an action of the same nature as the
original action or even analogous thereto, though the counter claim has to be one entertainable
by the Court in India.28

While a Set-Off is said to be like a shield, a Counter-Claim is said to be like a sword. It is

substantially a Cross-Action, made for an ascertained or even an unascertained amount.
The amount claimed by the way of counter-claim must be relatively large, higher than the amount
demanded in the plaintiffs suit. It is the claim for the excess amount that is the counter-claim.
Rules relating to counter-claim would apply to the excess amount claimed by the defendant than
the suit amount claimed by plaintiff.29
The effect of a counter-claim is to place the plaintiff in the position of a defendant who must defend
himself and put in a reply or accept the judgment in relation to the counter claim. As a counter-
claim is an independent suit permitted to be heard together with a plaintiffs suit to allow the Court
to pronounce one judgment, it would appear that where there are several co-plaintiffs, a counter
claim would be allowable either against all of them or some of them only.
The present position has been summed up by Mulla thus:
Though the Code does not provide for counter-claims, there is nothing to prevent a Court from
treating the counter-claim as a plaint in a cross-suit and hearing the two suits together, provided
the requisite Court-fee on the counter-claim has been paid. High Courts which exercise original
jurisdictions have made rules which provide for counter-claims (e.g. Bombay High Court Original
Side Rules, 1957, Rules 137 et seq.). We are of the opinion that in order to avoid multiplicity of
proceedings and to dispel doubts that counter claims cannot be entertained, an express provision
should be inserted in the Code for this purpose.30

28
Pathrose Sameul & Anr v. Karumban Parameshwaran, AIR 1988 Ker 163.
29
Anand Enterprises Vs. Syndicate Bank, AIR 1990 Kant P.175.

30
Law Commission of India, Code of Civil Procedure,1908 (Law Com Report No.27, 1964) para 64
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 CONCLUSION
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 plaintiffs claim. Set-offs are in the nature of a
cross-action, which can be entertained separately. Alternatively, the concept of equitable set-off is
not defined in any procedural law. This concept of equitable set-off is derived from the broad
principles of justice, equity and good conscience. Equitable right to set-off exists only when both
the claims, plaintiffs and the defendants, arise out of the same transaction.
For example, in the case of, M/s Anand Enterprises (Bangalore) v. Syndicate Bank31, the damages
for the loss due to delay in sanctioning the loan were claimed by the defendant in a suit by the
bank regarding the loan. It was held that, the claim of the defendant was in the nature of an
equitable set-off and not a counter-claim as it pertained to the same transaction.
Therefore, 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 against the plaintiff, without having to comply with rigours of
Order VIII, Rule 6 of the Code of Civil Procedure, 1908 and Section 3 of the Limitation Act, 1963.
However, grant or non-grant of equitable set-off depends on the discretion of the court.

The Government had acted after a period of 12 years on the ruling of the apex court, which has
shown to prove effective in achieving the objectives such as avoidance of multiplicity of
proceedings and to advance the course of justice, giving justice to both the parties to the suit,
though the counter-claims can be set up in respect of a claim for which the defendant could have
filed a separate suit.32 The court, instead, opined to hear the matters as cross-action, treating the
counter-claim as plaint, but within the same suit.
In conclusion, it may be stated that the Amendment CPC of 1976 conferred benefits on the courts
as well as the parties. The courts are enabled to avoid delay and to prevent multiplicity of suits.
The court are allowed to decide the claims of the plaintiff and defendants on the basis of equality,
with efficiency. The pecuniary jurisdiction of the courts and their power to try the case when the
suit of the plaintiff was filed is protected, letting the course of justice remain unaffected.

31
AIR 1990 Kant 175
32
Re Laxmidas AIR 1964 SC P.11
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Time-barred counter-claims are not entertained in order to ensure that barred claims under
Limitation Act shall not be allowed. Therefore, the counter-claims are confined to real and legally
enforceable rights.
The right of the defendant to secure his rights in a counter-claim is kept intact and is not affected
by the dismissal, withdrawal or otherwise of plaintiffs suit. Ultimately, counter-claims are treated
as independent and separate claims. Counter-claim should satisfy the rules relating to filing of
plaint. Plaintiff failing to file a reply to the counter-claims will be fatal as the courts decide the
counter-claims on merits.33
The intention of counter-claim is to turn the table onto the plaintiff bringing more issues in the
case, demanding redress of defendant. As discussed in the paper, it has to be treated as a plaint and
is governed by the rules applicable to it. If the counter-claim is treated as a suit, it may be disposed
of by a common judgment. In case one of the judgments is not appealed against, the principle of
res judicata has to be applied.
There has been constructive criticism pointing out the necessity of express statutory provisions in
the Civil Procedure Code to dispel the existing doubt that counter-claims cannot be entertained, as
is the current situation in countries like Bangladesh.34
Through this paper, with a conceptual understanding with regard to this area of procedural law, it
was discussed and observed how set-offs and counter-claims can be said to be fine examples of
the manner in which the Code of Civil Procedure provides for justice dispensation in a speedy and
effective manner.

33
Rule 6A, Order VIII of CPC

34
Counter-claim: defendants right to present a defense in civil suit necessitates express provisions in the Code of
Civil Procedure, LAWJOURNALBD, http://www.lawjournalbd.com/2016/09/counter-claim-defendants-right-to-
present-a-defense-in-civil-suit-necessitates-express-provisions-in-the-code-of-civil-procedure/ (last visited Oct 10,
2017).
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