Supreme Court of India
MAFATLAL INDUSTRIES LTD. ETC. ETC.versusUNION OF INDIA ETC. ETC.
- Citation
- 1996 INSC 1514
- Decided
- 19 December 1996
- Disposal
- Disposed off
- Bench
- A M AHMADI
Holding
A claim for refund of excise or customs duty can succeed only if the claimant establishes that he has not passed on the burden of duty to another person; all refund claims must be made under the provisions of the Central Excises and Salt Act or the Customs Act, except where the levy is unconstitutional, and even then the claimant must prove non-passing on; the amended Section 11-B is constitutionally valid.
Summary
The case concerns refunds of excise and customs duties collected contrary to law. The Supreme Court examined the validity of Section 11-B of the Central Excises and Salt Act, 1944, as amended in 1991, which restricts refunds to claimants who have not passed on the burden of duty to others. The Court overruled its earlier decision in Kanhaiyalal to the extent it allowed refunds regardless of passing on. It held that all refund claims must be made under the Act, except where the levy is unconstitutional, and even then the claimant must prove non-passing on. The Court upheld the constitutional validity of the amended provisions and the doctrine of unjust enrichment. It also held that a person cannot reopen final assessments based on decisions in other cases. The Court disposed of the matters with directions for pending cases.
Issues considered
- Whether Section 11-B of the Central Excises and Salt Act is constitutionally valid.
- Whether a suit or writ petition lies for refund of excise duty collected contrary to law, or whether the remedy is only under the Act.
- Whether the doctrine of unjust enrichment applies to refund claims, i.e., whether a claimant who has passed on the burden of duty to others is entitled to refund.
- Whether a person can claim refund based on a decision in another person's case after his own assessment has become final.
- Whether the amended Section 11-B applies retrospectively to pending proceedings.
- Whether the provisions of the 1991 Amendment Act are a device to retain illegally collected taxes.
- The meaning and scope of Section 11-D and other provisions.
Legislation cited
- Central Excise Rules, 1944s. 11, s. 233-B, s. 9-B
- Central Excises and Salt Act, 1944s. 11-A, s. 11-B, s. 11-C, s. 11-D, s. 12-A, s. 12-B, s. 12-C, s. 12-D, s. 3, s. 37, s. 4, s. 5-A
- Constitution of Indias. 14, s. 19, s. 226, s. 265, s. 32, s. 38, s. 39
- Customs Act, 1962s. 27
- Indian Contract Act, 1872s. 72
- Indian Evidence Act, 1872s. 114
- Limitation Act, 1963s. 17(1)(c)
- Sale of Goods Act, 1930s. 64-A
Subjects
Excise dutyCustoms dutyRefundUnjust enrichmentPassing on burdenSection 11-BArticle 265RestitutionLimitationWrit jurisdictionConstitutional validityCentral Excises and Salt ActCustoms Act
Judgment
MAFATLAL INDUSTRIES LTD. ETC. ETC. A
v.
UNION OF INDIA ETC. ETC.
DECEMBER 19, 1996
B
(A:M. AHMADI, 0., J.S. VERMA, S.C. AGRAWAL,
B.P. JEEVAN REDDY, DR. A.S. ANAND, B.L. HANSARIA,
S.C. SEN, K.S. PARIPOORNAN AND B.N. KIRPAL, JJ.]
Excise/Customs :
c
Excise/Customs duty levied on misrepresentation/misapplication/er-
roneous interpretation of the statutory provisions under provisions declared
unconstitutional or under mistake of law-Remedies open--Maintain_ability
of suit under S. 72 of Contract Act or writ petition under Art. 226 or Art. 32
or other remedies provided in Excise Act or Customs Act-Held, where refund D
is claimed on the ground that provisions of the Central Excises Act/Customs
Act whereunder duty levied is or held to be unconstitutional, suit or writ
petition would be maintainable-However, all refund claims must be filed and
adjudicated under the Central Excises Act or the Customs Act-In such cases
suit invoking S. 72 of Contract Act would be bamd-Writ jurisdiction in such
cases to be exercised in accordance with the legislative intent manifested in E
the Act-fn all situations refund can only be allowed where manufacturer-
assessee has not passed on the burden of tax to third parties viz. con-
sumers-Presumption is of passing on the burden to the consumers-Burden
on the manufacturer to rebut the presumption by establishing to the con-
trary-Doctrine of undue enrichment applicable to such assessees but not F
applicable to State-Contract Act, 1872, S.72.
Excise duty paid under a provision declared unconstitution-
al----Petitioner failing to assail its constitutionality and the decision becoming
final-Declaration of unconstitutionality obtained by another person on
another ground-Held cannot be availed of by such petitioner to reopen the G
decision in his case.
., Excise duty paid under mistake of law-Refund-Maintainability of suit
or writ petition-Held, Once assessment or levy became final in case of a
manufacturer- assessee, he cannot later file suit or writ petition claiming H
585
586 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A refund on the ground that decision of Court or Tribunal in another person's
case led Jiim to discover the mistake of law under which he paid the duty. In .
all cases where suit or writ petition is open, it is necessary for the plain-
tiff/petitioner to file suit or writ petition within the limitation period under
S.17(1)(c) of Limitation Act and to allege and establish that he has not
B passed on the burden of tax to the consume1~Where claim has to ?e made
under the Central Excises Act or Customs Act, and no suit lies, such claim
to be preferred within the period of limitation prescribed under the said
Acts--LimitationAct, 1963, S.17(1)(c).
State can raise plea in defence, of spending away the amount of tax
C collected under unconstitutional law and/or of financial chaos in administra-
tion of the State, as a result of allowing claim of refund-Such plea by
assessee not tenable where he has not passed on the burden of duty to others.
State cannot reclaim the refunded amounts where no proceedings are
D pending-All pending matters to be governed by the law declared in the
present case notwithstanding any refunds made in such pending proceedings.
Excise Law:
Central Excises and Salt Act, 1944-Ss.Jl-B, 11-C, 12-A, 12-B, 12-C,
E 12-~Validity of-Held, valid-S.11-B not a device to retain illegally col-
lected du~Ss.11-B and 12-B have the effect of changing the very nature of
excise duty.
S.11-B-Retrospective operation-Refund-Tax levied under mistake of
F law-Limitation-Held, S.11-B applies to all pending proceedings but not to
those proceedings which have become final after appeal period expired before
the commencement of the 1991 Amendment Act-Application for refund
under S.11-B to be made within six months from date of payment of
du~Since this requirement cannot be complied with in respect of pending
decrees or orders, to ensure that such orders and decrees are not frnstrated, it
'G must be deemed that the duties were paid 'under protest' within the meaning
of second proviso to S.11- B(l)-Customs Act. 1962, S.27.
Central Excise Rules, 1944-R.233-B-<Jrounds for payment of duty
under protest-Assessee need not particularise the grounds-Letter of protest
H acknowledged by the Officer shall be proof of payment of duty under protest
MAFA1LALINDS. LTD. v. U.O.I. 587
under S.11-B of the Central Excises and Salt Act. A
Constitution of India, 1950 :
A1t. 14-Taxing statutes-Discretion of the Legislature-State allowed
to pick and choose districts, objects, persons, methods and even rates for .
taxation with reasonableness-Courts view laws relating to economic activities B
I '
with greater latitude than other matters.
Arts, 14 and 19--Reasonableness of a statutory provision-Mere pos-
sibility of abuse by those in charge of administering it-Not a ground for
holding it procedurally or substantively unreasonable-Administrative C
Law-Judicial Review.
Art. 226-rHigh Court to exercise its writ jurisdiction in consonance with
the legislative intent manifested by the statutory provisions involved-Jurisdic-
tion under Art. 226 to be exercised to effectuate the regime of law and not to
abrogate it.-Maintainability of writ petitio1t-Altemative remedy-Refund D
claim against tax/duty wrongly paid-Remedy under the relevant Act alone to
be pursued-Central Excises and Salt Act, 1944, S.11: B-Customs Act, 1962,
S.27.
Article 265-Tax levied or collected contrary to law-Refund of-Where
taxing statute provides•/or refund, validity of such provision must be examined E
with reference to other provisions of the Constitution-Where refund is
claimed on the groun4 that tax has been paid undet mistake of law, claimant-
assessee must plead andI
prove that he has not passed on the tax burden to
third persons.
_Contract Act, 1872: F
S. 72-Action for restitution under-Based on equity-Person claiming
restitution must plead and prove that he suffered loss or injury-Burden of
proof on petitioner/plaintiff since the fact whether duty passed on or not is
within his special and exclusive knowledge-If assessee passes on the tax G
burden to third persons, no suit for refund on ground of mistake of law would
be maintainabl~vidence Act, 1872 : S.lO(r-Sale of Goods Act. 1930.
S.64-A.
Civil Procedure Code, 190&-S.9-Civil Court's jurisdiction-Bar of by
implicatio1t-Suit not maintainable where a complete mechanism for redres- H
588 SUPREME COURTREPORTS[1996) SUPP.10 S.C.R.
A sal is provided by the statute concerned-Central Excises and Salt Act, 1944, '
S.11-B-Customs Act, 1962, S.27.
DOCTRINES-Doctrine of unjust enrichment-Doctrine of restitu-
tion-Discussed.
B WORDS AND PHRASES-..!'Tax''--''Levy''-''lurisdiction''--''lurisdic-
tional error''-Meaning of
The present appeals and writ petitions raised certain questions
concerning the refund of Excise & Customs duty collected contrary to law.
C These questions related to the correctness of certain earlier decisions of
Supreme Court, concept of unjust enrichment, interpretation of Article 265
of the Constitution of India and of the provisions of the Central Excises
and Salt Act 1944 and the Customs Act 1962.
The main topic of controversy viz. refund of Excise duty was
D governed by different provisions over the years; viz.(i) upto August 6, 1977,
the refund of duties was governed by Rule 11, as it stood upto that date;
(ii) between August 6, 1977 and November 16, 1980 refund of duties was
governed by Rule 11 as it obtained during the said period; (iii) from
November 16, 1980 upto September 19, 1991 (date of coming into force of
E 1991 Amendment Act) the refund of duties was governed by Section llB
as it stood during the said period; (iv) with effect from September 19, 1991
the refund of duties is governed by Section llB as amended by the 1991
Amendment Act and the allied provisions. Though different provisions
governed the subject of refund during different times, there is one feature
F uniformly common to all of them viz. they purport to be exhaustive on
subject of refund and they provided a period of limitation for making such
claims.
In these appeals and writ petitions the appellants/writ petitioners
contended that the provisions relating to refund of excise/customs duty did
G not preclude the filing of a suit or the filing of a writ petition claiming
refund where tax has been collected contrary to law by virtue of Article 265
of the Constitution and that the question of passing on the burden of duty
is totally irrelevant in the matter of refund; that the law laid down in
~~W~~~~~~~TI~~~~~~
H consistently by different Benches of the Supreme Court and that there were
MAFATLALINDS. LTD. v. U.0.1. 589
no good or compelling reasons to deviate from or to overrule the decision A
in Kanhaiya Lal; referring. to the second alternative condition imposed by
Section 424 wherein it was provided that if the manufacturer gives a bond
undertaking to refund the same to purchaser within a particular period
he would be entitled to claim the refund, it was urged that such a condition
could have been imposed in the Central Excises and Customs Act as well; B
that even if it is legitimate for Parliament to prescribe that in case the
money was P!lS!ed on it must be made over to the person from whom it
was collected, and this should be done through the medium of manufac·
turer/tax payer and not through any other medium; that a claim for refund
has to be filed within six months from the relevant date but since appel·
late/revision proceedings or for that matter proceedings in High C
Court/Supreme Court take number of years and by the time the claimant
succeeds and asks for refund his claim will be barred and it will be thrown
out on the ground that it has not been filed within six months from the
date of payment of duty; that Rule 233B which prescribes the procedure
to be followed in cases where duty is paid under protest requires the D
assessee to state the grounds for payment of duty under protest and that
it may well happen that the authority to. whom the letter of protest is
submitted may refuse to record it if he is not satisfied with the grounds of
protest; that the amended Section llB is prospective in operation and
cannot apply to pending proceedings; that Section 12A was also inserted
by the 1991 (Amendment) Act and therefore it is not expected of any E
manufacturer/assessee to maintain the records required by Section 12A
prior to its coming into force; that in respect of an application filed before
the commencement of the said Act it is not possible to comply with the
requirements of sub-section (1) in so far as it requires the filing of
documents referred to in Section 12A and this circumstance was urged as F
a ground for holding that the amended Section llB applies only to refund
applications filed after coming into force of the 1991 (Amendment) Act;
that tlie right to recover the excise duty paid is both a constitutional and
a statutory right; and that all these factors militate against giving
retrospective effect to Section llB.
G
It was also submitted that the real purpose behind Section llB and
its allied provisions was not to benefit the consumers by refusing refund
to manufacturer (on the ground of passing on the burden) but only to
enable the Government to retain the illegally collected taxes; that the
creation of the Consumer Welfare Fund is a mere pretence and not an H
590 SUPREME COURT REPORTS(1996] SUPP. lOS.C.R.
A honest exercise; that as per Section 12D even a Consumer who has really
borne the burden of tax and is in a position to establish that fact is yet not
entitled to apply for refund of the duty since the Rules do not provide for
such a situation; that there is no provision in the Act to locate the person
really entitled to refund and to make over the money to him; that in a
B competitive atmosphere and for other commercial reasons it may happen
that the manufacture is obliged to sell his goods at less than its proper
price and the manufacturer may have to forego not only his profit but also
part of excise duty and that in such a case levy and collection of full excise
duty would cease to be a duty of excise and it will become a tax on income ·
or on business; that Section llD provides for double taxation and that
C sub-section (i) of Section llD makes the manufacturer liable to pay duty
which he collects from the buyer as part of the price of goods even where
the manufacturer has already paid the duty at the time of removal of the
goods.
D On behalf of the Union of India it was contended that Kanhaiya Lal
has been wrongly decided; that no suit or writ petition lies for refund of
duty except in the case of unconstitutional levy and even in such cases the
claim is subject to proof that burden of duty has not been passed on to
·the purchaser; that in all other cases claims of refund can be· made only
E under and in accordance with the provisions of the Act/Rules governing
the subject of refund and in no other manner and in no other forum; that
in any event since Kanhaiya Lal did not deal with the effect of passing on
· _ the duty to a third party it was neither raised nor considered therein; hence
it is no authority for the proposition that the manufacturer/payer can
F recover the duty paid even if he has passed on the burden to others; that
the distinction between the constitutional values obtaining in countries like
United States of America, Canada and Australia or United Kingdom and
the values obtaining under our Constitution are different; that the
philosophy and the core values of our Constitution must be kept in mind
while understanding and applying the provisions of Art. 265 of the Con-
G stitution and Section 72 of the Contract Act that it ill· becomes the
manufacturers/assessees to espouse the cause of consumers when all the
while they had been making a killing at their expense; that no consumer
organisation had come forward to voice any grievance against the relevant
provisions; that clause (e) of the proviso to sub-section (2) of Section 118
H did provide for the buyer of the good~ to whom the burden of duty has
MAFA1LAL INDS. LTD. v. U.O.I. 591
been passed on to apply for refund of duty to him, provided that he has A
not in his turn passed on the duty to others and therefore it was not correct
to suggest that the Act did not provide for refund of duty to the person
who has actually borne the burden; that there in no vice in the relevant
provisions of the Act; that Rules can not be relied upon to impugn the
validity of an enactment, which must stand or fall on its own strength; that B
the defect in the Rules if any, could always be corrected if the experience
warrant it; that the Court may indicate the modification needed in the
Rules and that the Government is always prepared to make appropriate
changes in the Rules since it views the process as a trial and error method;
and that in case a manufacturer is obliged to sell his goods at a price lower C
than the normal price declared under S.4 it is always open to him to
approach the excise authorities for redetermination of the assessable
value.
Disposing of the matters, th.is Court
D
HELD : (Per majority· B.P. Jeevan Reddy, J. for himself and J.S.
Verma, S.C. Agrawal, Dr. A.S. Anand & B.N. Kirpal, JJ.)
1.1. Applying the proposition enunciated by a seven-Judge Bench of
this Court in Kamala Mills, it must be held that Section ll·B of the Central
Excises and Salt Act (both befo1·e and after amendment) is valid. and E
constitutional. So long as Section 11-B is constitutionally valid, it has to
be followed and given elTect to. There is no reason to doubt the con-
stitutionality of the said provision. It must also be remembered that
Central Excises and Salt Act is a special enactment creating new and
special obligations and rights, which at the same time prescribes the F
procedure for levy, assessment, collection, refund and all other incidental
and ancillary provisions. As pointed out in the Statement of Objects and
Reasons appended to the Bill which became the Act, the Act along with the
Rules was intended to "form a complete central excise code". The idea was
"to consolidate in a single enactment all the laws relating to central duties G
of excise". The Act is a self-contained enactment. It contains provisions for
collecting the taxes which are due according to law but have not been
collected and also for refunding the taxes which have been collected
contrary to law, viz., Sections 11-A and ll·B and its allied provisions. Both
provisions contain a uniform rule of limitation, viz., six months, with an
exception in each case. Sections ll·A and 11-B are complimentary to each H
592 SUPREME COURT REPORTS[l996] SUPP. 10 S.C.R.
A other. Where a statute creates a special right or a liability and also
provides the procedure for the determination of the right or liability by
the Tribunals constituted in that behalf and provides further that all
questions about the said right and liability shall be determined by the
Tribunals so constituted, the resort to civil court is not available-except to
the limited extent pointed out in Kamala Mills. Central Excise Act specifi-
B cally provides for refund, It expressly declares that no refund shall be
made except in accordance therewith. The jurisdiction of a civil court is
expressly barred · vide sub-section (5) of Section 11-B, prior to its amend-
ment in 1991, and sub-section (3) of Section 11-B, as amended in 1991. It
is relevant to notice that the Act provides for more than one appeal against
C the orders made under Section 11-B/Rule 11. Since 1981, an appeal is
provided to this Court also from the orders of the Tribunal. While
Tribunal is not a departmental organ, this court is a civil court. In this
view of the matter and the express and additional bar exclusivity contained
in Rule 11/Section 11-B, at all points of time, it must be held that any and
D every ground including the violation of tne principles of natural justice
and infraction of fundamental principles of judicial procedure can be
urged in these appeals, obviating the necessity of a suit or a writ petition
in matters relating to refund. [682-H; 683-A; C-H; 684-A-B]
1.2. Once the constitutionality of the provisions of the Act including
E the provisions relating to refund is beyond question, they constitute "law"
within the meaning of Article 265 of the Constitution. It follows that any
action taken under and in accordance with the said provisions would be
an action taken under the "authority of law'', within the meaning of Article
265. In the face of the express provision which expressly declares that no
F claim for refund of any duty shall be entertained except in accordance with
the said provisions, it is not permissible to resort to Section 72 of the
Contract Act to do precisely that which is expressly prohibited by the said
provisions. For this reason, a suit for refund would also not lie. Taking
any other view would amount to nullifying the provisions in Rule 11/Sec-
tion 11-B, which it needs no emphasis, cannot be done. It, therefore, follows
G that any and every claim for refund of excise duty can be made only under
and in accordance with Rule 11 or Section 11-B, as the case may be, in the
forums provided by the Act, No suit can be filed for refund of duty invoking
Section 72 of the Contract Act So far as the jurisdiction of the High Court
under Article 226-or for that matter, the jurisdiction of this Court under
H Article 32 • is concerned, it is obvious that the provisions of the Act cannot
MAFATLALINDS. LTD. v. U.O.I. 593
· bar and curtail these remedies. It is, however, equally obvious that while A
exercising the power under Article 226/Article 32, the Court would certainly
take note of the legiidative intent manifested in the provisions of the Act
and would exercise their jurisdiction consistent with the provisions of the
enactment. [684-C-G]
B
1.3. Where a provision of the Act whereunder the duty has been levied
is found to be unconstitutional for violation of any of the constitutional
limitations, is a situation not contemplated by the Act. The Act does not
contemplate any of its provisions being declared unconstitutional and
therefore it does not provide for its consequences. Rule 11/Section 11-B are
premised upon the supposition that the provisions of the Act are good and c
valid. But where any provision under which duty is levied is found to. be
unconstitutional, Article 265 steps in. The very collection and/or retention
of tax without the authority of law entitles the person, from whom it is
collected, to claim its refund. A corresponding obligation upon the State
to refund it can also be said to flow from it. This can be called the right to D
refund arising under and by virtue of the Constitutional provisions, viz., Article
265. But it does not follow from this that refund follows automatically.
·Article 265 cannot be read in isolation. It must be read in the light of the
cone«:pts of economic and social justice envisaged in the Preamble and the
· guiding principles of State Policy adumbrated in Articles 38 and 39. The
very concept of economic justice means and demands that unless the E
claimant (for refund) establishes that he had not passed on the burden of
the duty/tax to others, he has no just claim for refund. It would be a parody
.. of economic. justice to refund the duty to a claimant who has already
collected the said .amount from his buyers. The refund should really be
made to the persons who have actually borne its burden - that would be F
economic justice. Conferring an unwarranted and unmerited monetary
benefit upon an individual is the very anti-thesis of the concept of economic
justice and the principles underlying Articles 38 and 39. Now, the right to
refund arising as a result of declaration of unconstitutionality of a
·'
provision of the enactment can also be looked at as a statutory right of G
restitution. It can be said in such a case that the tax paid has been paid
under · a mistake of law which mistake of law was discovered by the
manufacturer/assessee on the declaration of invalidity of the provision by
the Court. Section 72 of the Contract Act may be attracted to such a case
and a claim for refund of tax on this score can be maintained with
reference to Section 72. This too, however, does not mean that the taxes · H
594 SUPREME COURTREPORTS(l996) SUPP.10 S.C.R.
A paid under an unconstitutional provision of law are automatically refun-
dable under Section 72 which contains a rule of equity and once it is a rule
of equity, it necessarily follows that equitable considerations are relevant in
applying the said rule. Thus, whether the right to refund of taxes paid under
an unconstitutional provision of law is treated as a constitutional right
B flowing from Article 265 or as a statutory right/equitable right affirmed by
Section 72 of the Contract Act, the result is the same - there is no automatic
or unconditional right to refund. [684-H; 685-A-G; 686-A-B]
State of Madhya Pradesh & Ors. v. Bhailal Bhai, [1964] 6 S.C.R. 261
overruled.
c
Bengal Immunity Co. Ltd. v. State of Bihar & Ors., [1955] 2 S.C.R.
603, held applicable.
State of Kera/a v. Aluminium Industries Ltd., (1965) 16 S.T.C. 689,
D held inapplicable.
Kamala Mills Ltd. v. State of Bombay, [1966) 1 S.C.R. 64; Dhulabhai
& Ors. v. State of Madhya Pradesh & Anr., [1968) 3 S.C.R. 662; D. Cawasji
& Co. Etc. v. State of Mysore & Anr., [1975) 2 S.C.R. 511 and R.S. Joshi v.
Ajit Mills , [1978] 1 S.C.R. 338, relied on.
E
Budh Prakash Jai Prakash v. Sales Tax Officer, Kanpur, (1952) A.L.
J. 332; Wolf & Sons v. Dadyaba Khimji & Co., (1919) I.L.R. 44 Born. 631;
Appavoo Chettiar v. South Indian Railway, A.l.R. (1929) Mad. 648; Jagdish
Prasad Pannalal v. Produce Exchange Corporation Ltd., A.I.R. (1946) Cal.
F 245; Shibha Prasad Singh v. Srish Chandra Nundi, (1949) L.R. 76 I.A. 244;
Finn & Illuri Subbayya Chetty & Sons v. State ofAndhra Pradesh, (1964] 1
S.C.R. 752; K.S. Venkataraman & Co. v. State of Madras, (1966] 2 S.C.R.
229; Raleigh Investment Co. Ltd. v. The Governor General in Counci~ (1947)
L.R. 74 I.A. 50; KS. Venkataraman Bharat Kala Bhandar Ltd. v. M.C.
•.
G Dhamangaon, (1965) 3 S.C.R. 499; Tilokchand Motichand & Ors. v. H.B.
Munshi &Anr., (1969] 2 S.C.R. 824; Kantilal Babula/ v. H.C. Patel, 21 S.T.C.
174 and R. Abdul Quader & Co. v. Sales Tax Officer, Hyderabad, [1964] 6
S.C.R. 867, referred to.
2.1. One of the important principles of law, based upon public policy,
H is the sanctity attaching to the finality of any proceeding, be it a suit or
MAFATLALINDS. LTD. v. U.O.I. 595
any other proceeding. Where a duty has been collected under a particular A
order which has become final, the refund of that duty cannot be claimed
unless the order (whether it is an order of assessment, adjudication or any
other order under which the duty is paid) is set aside according to law. So
long as that order stands, the duty cannot be recovered back nor can any
claim for its refund be entertained. But what is happening now is that the
I B .
duty which has been paid under a proceeding which has become final long
ago • may be an year back, ten years back or even twenty or more years
back • is sought to be recovered on the ground of alleged discovery of
mistake of law on the basis of a decision of a High Court or the Supreme
Court. It is necessary to point out in this behalf that for filing an appeal
or for adopting a remedy provided by the Act, the limitation generally C
prescribed is about three months (little more or less does not matter). But
according to the present practice, writs and suits are being filed after lapse
of a long number of years and the rule of limitation applicable in that
behalf issaid to be three years from the date of discovery of mistake of
The incongruity of the situation needs no emphasis. And all this D
.,ecause another manufacturer or assessee has obtained a decision
favourable to him. What has indeed been happening all these years is that
just because one or a few of the assessees succeed in having their inter·
pretation or contention accepted by a High Court or the Supreme Court,
all the manufacturers/assessees all over the country are filing refund
claims within three years of such decision, irrespective of the fact that they E
may have paid the duty, say thirty years back, under similar provisions •
and their claims are being allowed by courts. All this is said to be flowing
from Article 265 which basis, is totally unsustainable for the reason that
the Central Excises Act and the Rules made thereunder including Section
11· B/Rule 11 too constitute "law" within the meaning of Article 265 and F
that in the face of the said provisions • which are exclusive in their nature
• no claim for refund is maintainable except under and in accordance
therewith. (686-H; 687-A-F]
2.2. The second basic concept of law which is violated by permitting
· the above situation is the sanctity of the provisions of the Central Excises G
and Salt Act itself. The Act provides for levy, assessment, recovery, refund,
· appeals and all incidental/ancillary matters. Rule 11 and section 11-B, in
particular, provide for refund of taxes which have been collected contrary
to law, i.e. on account of a mis-interpretation or mis-construction of a
provision of law, rule, notification or regulation. The Act provides for both H
596 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A the situations represented by Sections 11-A and 11-B. [687-G]
2.3. The principles enunciated in Kamala Mills in the context of
Bombay Sales tax Act and Film & Illuri Subbiah Chetty apply with equal
fooce in the case of both the Central Excises and Salt Act and the Customs
B Act. Hence it is ununderstandable how an assessment/adjudication made
under the Act levying or affirming the duty can be ignored because some
years later another view of law is taken by another court in another
person's case. Nor is there any provision in the Act for re- opening the
concluded proceedings on the aforesaid basis. The provisions of the
Central Excise Act also constitute "law" within the meaning of Article 265
C and any collection or retention of tax in accordance with or pursuant to
the said provisions is collection or retention under "the authority of law"
within the meaning of the said Article. In short, no claim for refund is
permissible except under and in accordance with Rule 11 and Section 11-B.
An order or decree of a court does not become ineffective or unenforceable
D simply because at a later point of time, a different view of law is taken. If
this theory is applied universally, it will lead to unimaginable chaos. It is,
however, suggested that this result follows only in tax matters because of
Article 265, as a matter of fact, the situation today is chaotic because of
the principles supposedly emerging from Kanhaiyalal and other decisions
following it. Every decision of this Court and of the High Courts on a
E question of law in favour of the assessee is giving rise to a wave of refund
claims all over the country in respect of matters which have become final
and are closed long number of years ago. It is not shown that such a thing
is happening anywhere else in the world. Article 265 surely could not have
been meant to provide for this. Therefore, this Court is of the clear and
F considered opinion that the theory of mistake of law and the consequent
period of limitation of three years from the date of discovery of such mistake
of law cannot be invoked by an assessee taking advantage of the decision in
another assessee's case. All claims for refund ought to be, and ought to have
been filed only under and in accordance with Rule 11/Section 11-B and under
no other provision and in no other forum. An assessee must succeed or fail
G in his own proceedings and the finality of the proceedings in his own case
cannot be ignored and refund ordered in his favour just because in another
assessee's case, a similar point is decided in favour of the manufac-
turer/assessee. [688-E-H; 689-A-D]
H Kamala Mills Ltd. v. State of Bombay, (1966] 1 S.C.R. 64 & Fimi &
MAFA1LAL INDS. LtD. v. U.O.I. 597
Illuri Subbayya Chetty & Sons v. State of Andhra Pradesh, [1964] 1 S.C.R. A
752, relied on.
Sales Tax Officer, Banaras & Ors. v. Kanhaiyalal Mukundlal Saraf,
[1959] S.C.R. 1350 and State of Kera/a v. Aluminium Industries Limited,
[1965] 16 S.T.C. 689, overruled. B
3.1. The claim for refund is maintainable by virtue of the declaration
contained in Article 265 as also under Section 72 of the Contract Act subject
to one exception: where a person approaches the High Court or Supreme
Court challenging the constitutional validity of a provision but fails, he C
cannot take advantage of the declaration of unconstitutionality obtained by
another person on another ground; this is for the reason that so far as he
is concerned, the decision has become final and cannot be re-opened on the
basis of a decision on another person's case. In such cases, the plaintiff may
also invoke Section 17(1)(c) of the Limitation Act for the purpose of deter-
mining the period of limitation for filing a suit. It may also be permissible D
to adopt a similar rule of limitation in the case of writ petitions seeking
refund in such cases. But whether the right to refund or restitution, as it is
called, is treated as a constitutional right following from Article 265 or a
statutory right arising from Section 72 of the Contract Act, it is neither
automatic nor unconditional. Once it is a rule of equity, it is un- under- E
standable how can it be said that equitable considerations have no place
where a claim is made under the said provision. What those equitable
considerations should be is not a matter of law. That depends upon the
facts of each case. Indeed, in Kanhaiyalal, the Court accepts that the right
to recover the taxes - or the obligation of the State to refund such taxes -
under Section 72 of the Contract Act is subject to "questions of estoppel, F
waiver, limitation or the like", but at the same time, the decision holds that
equitable considerations cannot be imported because of the clear and un-
ambiguous language of Section 72. Certain amount of inconsistency is
involved in the aforesaid two propositions. "Estoppel, Waiver•••• or the like",
though rules of evidence, are yet based upon rules of equity and good G
conscience. So is Section 72. Equitable considerations cannot be held to be
irrelevant where a claim for refund is made under Section 72. Now, one of
the equitable considerations may be the fact that the person claiming the
refund has passed on the burden of duty to another. If so, there is no
question of reimbursing him. He cannot be recompensated for what he has
not lost, The loser, if any, is the person who has really borne the burden of H
598 SUPREME COURT REPORTS[l996] SUPP.10 S.C.R.
A duty; the manufacturer who is the claimant has certainly not borne the duty
notwithstanding the fact that it is he who has paid the duty. Where such a
claim is made, it would be wholly permissible for the court to call upon the
petitioner/plaintiff to establish that he has not passed on the burden of duty
to a third party and to deny the relief of refund if he is not able to establish
B the same. [689-F·H; 690-A-H]
3.2. It is necessary to remember that whether the burden of the duty
has been passed on to a. third party is a matter within the exclusive
knowledge of the manufacturer. He has the relevant evidence • best
evidence· in his possession. Nobody else can be reasonably called upon to
C prove that fact. Since the manufacturer is claiming the refund and also
because the fact of passing on the burden of duty is within his special and
exclusive knowledge, it is for him to allege and establish that he has not
passed on the duty to a third party. This is the requirement which flows
from the fact that Sectjon 72 is an equitable provision and that it incor-
porates a rule of equity. This requirement flows not only because Section
D 72 incorporates a rule of equity but also because both the Central Excises
duties and the Customs duties are indirect taxes which are supposed to be
and are permitted to be passed on to the buyer. That these duties are
indirect taxes, meant to be passed on, is statutorily recognised by Section
64A of_the Sale of Goods Act, 1930 (which was introduced by Indian Sale
E of Goods. (Amendment) Act, 1940 and substituted later by Act 33 of 1963.
(691-A·D]
Tilokchand Motichand & Ors. v. H.B. Munshi & Anr. (1969] 2 S.C.R.
824, affirmed.
F Sales Tax Officer, Benaras & Ors. v. Kanhaiyalal Mukundlal Saraf,
[1959] S.C.R. 1350, dissented from. ·
Union of India v. I.T.C., [1993) Suppl. 4 S.C.C. 326, referred to.
4. It would be legitimate for the court to presume, until the contrary
G is established, that a duty of excise or a customs duty has been passed on.
It is a presumption of fact which a court is entitled to draw under Section
114 of the Indian Evidence Act. It is undoubtedly a rebuttable presumption
but the burden of rebutting it lies upon the person who claims the refund
(plaintiff/petitioner) and it is for him to allege and establish that as a fact
H he has not· passed on the duty and, therefore, equity demands that his ·
MAFATLAL INDS. LTD. v. U.O.I. 599
claim for refund be allowed. This is the position de hors 1991 (amendment) A
Act. The said Amendment Act has done no more than to give statutory
recognition to the above concepts. This is the position whether the refund
is claimed by way of a suit or by way of a writ petition. The claim for refund
by a person who has passed on the burden of tax to another has nothing
to commend itself; not law, not equity and certainly not a shred of justice B
or morality. In the case of a writ petition under Article 226, it may be noted,
there is an additional factor; the power under Article 226 is a discretionary
one and will be exercised only in furtherance of interests of justice. This
factor too obliges the High Court to enquire and find out whether the
petitioner has in fact suffered any loss or prejudice or whether he has c,
passed on the burden. In the latter event, the court will be perfectly
justified in refusing to grant· relief. The power cannot be exercised to
unjustly enrich a person. [692-H; 693-A-D]
5. Kanhaiyalal is not right in saying that the defence of spending away
the amount of tax collected under an unconstitutional law is not a good D
defence to a claim for refund. It is a good defence subject to this rider;
where the petitioner- plaintiff alleges and establishes that he has not passed
on the burden of the duty to others, his claim for refund may not be refused.
In other words, if he is not able to allege and establish that he has not
passed on the burden to others his claim for refund will be rejected whether E
such a claim is made in a suit or a writ petition. It is a case of balancing
public interest vis-a-vis private interest. Where the petitioner- plaintiff has
not himself suffered any loss or prejudice (having passed on the burden of
the duty to others), there is no justice or equity in refunding the tax
(collected without the authority oflaw) to him merely because he paid it to
the State. It would be a windfall to him. As against it, by refusing refund, F
the monies would continue to be with the State and available for public
purposes. The money really belongs to a third party--neither to the
petitioner/plaintiff nor to the State· and to such third party it must go. But
"' where it cannot be so done, it is better that it is retained by the State. By
any standard of reasonableness, it is difficult to prefer the petitioner- G
plaintiff over the State. Taxes are necessary for running the State and for
various public purposes and this is the view taken in all jurisdictions.
[693-E-H; 694-A]
Sales Tax Office1; Benaras & Ors. v. Kanhaiyalal Mulamdlal Saraf,
[1959] S.C.R. 1350, dissented from. H
600 SUPREME COURT REPORTS[1996] SUPP/10 S.C.R.
A The Province of Madras v.M/s. Boddu Paidanna & Sons, (1942) F.C.R.
90; R.C. !all v. Union of India, [1962] Suppl. S.C.R. 436; Charan Lal Sahu
v. Union of India, [1990] 1 S.C.C. 613 and Mahabir Kishore & Ors. v. State
of Madhya Pradesh, [1989] 3 S.C.R. 596, relied on.
B Olieilt Paper Mills Limited v. State of Orissa, [1962] 1 S.C.R. 549 and
State of Madhya Pradesh v. Vyankatlal &Anr., [1985] 3 S.C.R. 561, affirmed.
Kewal Klishan Pwi v. State of Punjab & Ors., [1979] 3 S.C.R. 1217;
Newabganj Sugar Mills v. Union of India & Ors., [1976] 1 S.C.R. 893; Amar
Nath Om Prakash v. State of Punjab & Ors. Etc., [1985] 2 S.C.R. 72; Indian
C Aluminium Company Ltd. v. Thane Municipal Corporation, [1992] Suppl. 1
S.C.C. 480; Indian Oil Corporation v. Municipal Corporation, Jallandhar,
[1993] 1 S.C.C. 333; Entry Tax Officer v. Chandanmal Champa/al, [1994] 4
S.C.C. 460; Union of India & Ors. v. lain Spinner Ltd. & Anr., [1992] 4 SCC
389 and Union of India v. I.T.C., [1993] Suppl. 4 S.C.C. 326, referred to.
D
6.1. It is true that some of the concepts now affirmed by this Bench
e.g., effect of passing on and the relevance of our constitutional values in
the matter of judging the legitimacy of a claim for refund were not
presented to the bench which decided Kanhaiyalal but that can be no
E ground for not entertaining or accepting those concepts. [696-A]
6.2. The right to refund of tax paid under an unconstitutional
provision of law is not an absolute or an unconditional right. Similar is
the position even if Article 265 can be invoked for claiming refund of taxes
collected by misinterpretation or misapplication of a provision of law, ·
F rules, notifications or regulation. [697-B]
State of Kamataka v. Ranganath Reddy, [1978] 1 S.C.R. 641; Sanjeev
Coke Manufactwing Co. v. Bharat Coking Coal, [1983] 1 S.C.R. 1000 and
State of Tamil Nadu Etc. Etc. v. L. Abu Kavur Bai & Ors. Etc., [1984] 1
G S.C.R. 725, referred to.
7.1. As regards the submission that it would be just and proper that
the amended Section 11-B is held not to take in refund claims arising as a .
consequence of appellate or a superior court order, it is not possible to
agree. Such a holding would run against the very grain of the entire
H philosophy underlying the 1991 Amendment. The idea underlying the said
MAFATLALINDS. LTD. v. U.0.1. 601
provisions is that no refund shall be ordered unless the claimant established A
that he has not passed on the burden to others. Sub-section (3) of the
amended Section 11-B is emphatic. It leave no room for making any excep-
'- tion in the case of refund claims arising as a result of the decision in ap-
peal/reference/writ petition. There is no reason why an exception should be
made in favour of such claims which would nullify the provision to a sub-
stantial degree. So far as "lack of incentive" argument is concerned, it has no B
doubt given this Court a pause; it is certainly a substantial plea, but there
are adequate answers to it. Firstly, the rule means that only the person who
has actually suffered loss or prejudice would fight the levy and apply for
refund in case of success. Secondly, in a competitive market economy, as the
one embarked upon since 1991-92, the manufacturer's self interest lies in C
producing more and selling it at competitive prices - the urge to grow. A
favourable decision does not merely mean refund; it has a beneficial effect
for the subsequent period as well. It is incorrect to suggest that the disputes
regarding classification, valuation and claims for exemptions are fought
only for refund; it is for more substantial reasons, though the prospect of
refund is certainly an added attraction. It may, therefore, be not entirely D
right to say that the prospect of not getting the refund would dissuade the
manufacturers from agitating the questions of exigibility, classification, ap-
proval of price lists or the benefit of exemption notifications. The dis-incen-
tive, ifanywouldnot, be significant. [701-D-H; 702-A-B]
f E
7.2. The position was no different under Rule 11, or for that matter
Section 11-B, prior to its amendment in 1991. Sub- rules (3) and (4) of Rule
11 (as it obtained IJetween August 6, 1977 and November 17, 1980) read
together indicate that even a claim for refund arising as a result of an appel-
late or other order of a superior court/authority was within the purview of
the said rule though treated differently. The same position continued under F
Section 11-B, prior to its amendmentin 1991. Sub-sections (3) and (4) of this
section are in the same terms as sub-rules (3) and (4) of Rule 11; if anything,
sub-section (5) was more specific and emphatic. It made the provisions of
Section 11-B exhaustive on the question of refund and excluded the jurisdic-
tion of the civil court in respect of all refund claims. Sub-rule(3) of Rule 11 G
or sub-section (3) of Section 11-B (prior to 1991) did not say that refund
claims arising out of or as a result of the orders of a superior authority or
court are outside the purview of Rule 11/Section 11-B. They only dispensed
with the requirement of an application by the person concerned which conse-
quently meant non-application of the rule of limitation; otherwise, in all
other respects, even such refund claims had to be dealt with under Rule H
602 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A 11/Section 11-B alone. That is the plain meaning of sub-rule (3) of Rule 11
and sub-sections(3) and (4) of Section 11-B (prior to 1991 Amendment).
There is no departure from that position under the amended Section 11-B.
All claims for refund, arising in whatever situations (except where the
provisions under which the duty is levied is declared as unconstitutional),
has necessarily to be filed, considered and disposed of only under and in
B accordance with the relevant provisions relating to refund, as they obtained
from time to time. [702-B-G]
R.K. Garg v. Union of India, [1981] 4 S.C.C. 675; Keshavananda
Bharati v. State of Kerala, [1973] Suppl. S.C.R. 1; Tamil Nadu Education
C Department Ministerial and General Subordinate Service Association v. State
of Tamil Nadu & Anr., [1980] 1 S.C..l.1026; Collector of Customs, Madras
v. Nathella Sampathu Chetty & Anr., [1962] 3 S.C.R. 786; State of Rajasthan
v. Union of India, [1978] 1 S.C.R. 1 and Commissioner, Hindu Religious
Endowment, Madras v. Lakshmindra Thirtha Swamiar of Shirnr Mutt, [1954]
D S.C.R. 1005, relied on.
8.1. The second proviso to Section 11-B (as amended in 1991) express-
ly provides that "the limitation of six months shall not apply where any duty
has been paid under protest". Now, where a person proposes to contest his
liability by way of appeal or revision in the higher courts, he would naturally
E pay the duty, whenever he does, under protest. It is difficult to imagine that
a manufacturer would pay the duty without protest even when he contests
the levy of duty, its rate, classification or any other aspect. If one reads the
second proviso to sub-section (1) of Section 11-B along with the definition
of "~elevant date", there is no room for any apprehension. [703-D-E]
F
8.2. Rule 233B no doubt requires the assessee to mention the
"grounds for payment of the duty under protest" but it does not empower
the proper officer, to whom the letter of protest is given, to sit in judgment
over the grounds. The assessee need not particularise the grounds of
protest. It is open to him to say that according to him, the duty is not
G exigible according to law. All that the proper officer is empowered to do is
to acknowledge the letter of protest when delivered to him - and that
acknowledgement shall be the proof that the duty has been paid under
protest. A reading of the rule shows that the procedure prescribed therein
is evolved only with a view to keep a record of the payment of duty under
H protest. It is meant to obviate any dispute whether the payment is made
MAFATLALINDS.LTD.v. U.O.I. 603
under protest or not. Any person paying the duty under protest has to A
follow the procedure prescribed by the Rule and once he does so, it shall
be taken that he has paid the duty under protest. The period of limitation
of six months will then have no application to him. It is clarified at this
stage that when the duty is paid under the orders of Court (whether by
way of an order granting stay, suspension, injunction or otherwise) pend- B
ing an appeal/reference/writ petition, it will certainly be a payment under
protest; in such a case, it is obvioµs, it would not be necessary to lodge the
protest as provided by Rule 233-B. [704-B-F]
9. Sub-sections (1) and (2) of Section 11-B apply to all proceedings
. where the refund has not been made finally and unconditionally. Where the C
duty has been refunded under the order of the court pending disposal of
an appeal, writ or other proceedings, it would not be a case of refund
finally and unconditionally. It is, of course, obvious that where the refund
proceedings have finally terminated-in the sense that the period
prescribed for filing the appeal against such order has also expired - before
the commencement of the 1991 (Amendment) Act (September 19, 1991), D
they cannot be re-opened and/or be governed by Section 11-B (3) (as
amended by the 1991 (Amendment) Act). This, however, does not mean
that the power of the appellate authorities to condone delay in appropriate
cases is affected in any manner by this clarification. So far as _the ditliculty
or impossibility of filing the documents referred to in Section 12-A is E
concerned, it is obvious that the said requirement cannot be insisted upon
in cases where the application is filed prior to the commencement of the
act or for the period anterior to the commencement of the said Amendment
Act, though the burden of proving that the burden of duty has not been
passed on by him is -still upon the applicant. Sub-section (1) of Section F
11-B is of general application. It not merely governs the pending applica-
tions but also provides for future applications. Reasonably construed and
read together, the said provisions mean that in respect of pending applica-
tions, the requirement is only to produce such documentary and other
evidence as is sufficient to establish that the incidence of duty, refund of
which is claimed, has not been passed on by the applicant to any other G
person. The requirement of enclosing the documents referred to in Section
12-A is obligatory only where the claim of refund pertains to the period
subsequent to the commencement of the 1991 (Amendment) Act.
[705-E-H; 706-A-C]
H
604 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A Commissioner of Sales Tax, Uttar Pradesh v. Mis. Auriaya Chamber of .
Commerce, Allahabad, [1986] 3 S.C.C. 50 and Patel India Private Limited v.
Union of India & Ors., [1973] 3 S.C.R. 811, referred to.
10. Section 12-B does not create a new presumption unknown till
then; it merely gives· statutory shape to an existing situation. At the most,
B it can be said that there were two views on the subject and Section 12-B
affirms one of them. Even without Section 12-B, the true position is the
same. The obligation to prove that duty has not been passed. on to another
person is always there as a pre-condition to claim of refund. It cannot also
be said that by giving retrospective effect to Section 11-B, any vested rights
C or substantive rights are being taken away. The deprivation, if at all, is not
read. The manufacturer has already collected the duty from his purchaser
and has thus reimbursed itself. By applying for refund yet, he is trying to
reap a windfall; deprivation of that cannot be said to be real or substantial
prejudice or loss. A manufacturer had no vested legal right to refund even
D when he had passed on the burden of duty to others. No Jaw conferred such
a right in him· not Article 265, nor Section 11-B. It was only on account
of an incorrect view of Jaw taken in Kanhaiyalal and that cannot be treated
as a vested legal right. Correction of judicial error does not amount to
deprivation of vested/substantive rights, even though a person may be deprived
E of an unwarranted advantage he had under the over-rnled decision. In cases,
where the burden is not passed on, there is no prejudice; he can always get
the refund. [706·D·G]
11. Section 12-C which creates the Consumer Welfare Fund and
Section 12-D which provides for making the Rules specifying the manner
F in which the money credited to the Fund shall be utilised cannot be faulted
on any ground. Now, coming to the Rules, it is true that these Rules by
themselves do not contemplate refund of any amount credited to the Fund
to the consumers who may have borne the burden; the Rules only provide
for "grants" being made in favour of consumer organisations for being
G spent on welfare of consumers. But, this is perhaps for the reason that
clause (e) of the proviso to sub-section (2) of Section ll·B does provide
for the purchaser of goods applying for and the obtaining the refund where
he can satisfy that the burden of the duty has been borne by him alone.
Such a person can apply within six months of his purchase as provided in
H clause(e) of Explanation-B appended to Section llB. It is, therefore, not
MAFATLALINDS. LTD. v. U.0.1. 605
-..: correct to contend that the impunged provisions do not provide for refund- A
ing the tax collected contrary to law to the person really entitled thereto.
Certain practical difficulties. may arise as pointed out by the appellants-
petitioners: (i) the manufacturer would have paid the duty at the place of
"removal" or "clearance" of the said goods but the sale may have taken
place elsewhere; if the purchaser wants to apply for refund, he has to go B
to the place where the duty has been paid by the manufacturer and apply
there; (ii) purchasers may be spread all over India and it is not convenient
or practicable for all of them to go to the place of "removal" of goods and
apply for refund. True it is that there is this practical inconvenience but
it must also be remembered that such claims will be filed only by pur- C
chasers of high priced goods where the duty component is large and not
by all and sundry/small purchases. This practical inconvenience or
hardship, as it is called, cannot be a ground for holding that the provisions
introduced by the 1991 (Amendment) Act are a "device" or a "ruse" to retain
the taxes collected illegally and to invalidate them on that ground - D
assuming that such an argument is permissible in the case of a taxing
· . enactment made by Parliament. [707-H; 708-A-F]
12. Ordinarily, no manufacturer will sell his products at less then
the cost-price plus duty. He cannot survive in business if he does so. Only
in case of distress sales, such a thing is understandable but distress sales E
are not a normal feature and cannot, therefore, constitute a basis for
judging the validity or reasonableness of a provision. Similarly, no one will
ordinarily pass on less excise duty then what is exigible and payable. A
manufucture may dip into his profits but would not further dip into the
excise duty component. He will do so only in the case of a distress sale F
again. Just because duty is not separately shown in the invoice price, it
does not follow that the manufacturer is not passing on the duty. Nor does
it follow therefrom that the manufacturer is absorbing the duty himself.
The manner of preparing the invoice is not conclusive. Generally speaking,
every manufacturer will sell his goods at something above the cost-price G
plus duty. There may be a loss-making concern but the loss occurs not
because of the levy of the excise duty • which is uniformly levied on all
manufacturers of similar goods - but for other reasons. No manufacturer
can say with any reasonableness that he cannot survive in business unless
he collects the duty from both ends. The requirement complained of H
606 SUPREME COURT REPORTS(l996) SUPP.10 S.C.R.
A (prescribed by Section 11-B) is thus beyond reproach· and so are Sections
12-A and 12-B. All that Section 12-A requires is that every person who is
liable to pay duty of excise on any goods, shall, at the time of clearance of
· the goods, prominently indicate in all the relevant documents the amount
of such duty which will form part of the price at which the goods are to be
B sold, while Section 12- Braises a presumption oflaw that until the contrary
is proved, every person who has paid the duty of excise on any goods shall
be deemed to have passed on the full incidence of such duty to the buyer
of such goods. Since the presumption created by Section 12-B is a rebut·
table presumption of law-and not a conclusive presumption-there is no
C basis for impugning its validity on the ground of procedural unreasonable-
ness or otherwise. This presumption is consistent with the general pattern
of commercial life. It indeed gives effect to the very essence of an indirect
tax like the excise duty/customs duty. A manufacturer who has not passed
on the duty can always prove that fact and if it is found that duty was not
D leviable on the transaction, he will get back the duty paid. Ordinarily
speaking, no manufacturer would take the risk of not passing on the
burden of duty. It would not be an exaggeration to say that whenever a
a
manufacturer entertains doubt, he would pass on the duty rather than
not passing it on. It must be remembered that manufacturers as a class
are knowledgeable persons and more often than not have the benefit of
E
legal advice. And until about 1992, at any rate, Indian market was by and
large a sellers' market. [709-B-H; 710-A-B]
13. Any recoveries or refunds consequent upon the adjustment under
sub-rule (5) of Rule 9-B will not be governed by Section 11-A or Section
F 11-B, as the case may be. However, ifthe final order passed under sub-rule
(5) are appealed against - or questioned in a writ petition or suit, as the
case may be, assuming that such a writ or suit is entertained and is
allowed/decreed - then any refund claim arising as a consequence of the
decision in such appeal or such other proceedings, as the case may be,
G would be governed by Section 11-B. It is also made clear that if an
independent refund claim is filed after the final decision under Rule 9-B(5)
re-agitating the issues already decided under Rule 9-B - assuming that
such a refund claim lies - and is allowed, it would obviously be governed
by Section 11-B. It follows logically that the position would be the same in
H the converse situation. [712-C-E]
MAFATLAL INDS. LTD. v. U.O.I. 607
14. Section 11-B of the Central Excises and Salt Act and Section 27 A
of the Contract Act, whether before or after 1991 Amendment - as inter-
preted now - make every refund claim subject to proof of not passing-on
the burden of duty to others. Even if a suit is filed, the very same condition
· operates. Similarly, the High Court while examining its jurisdiction under
Article 226 - and this Court while acting under Article 32 - would insist B
upon the said condition being satisfied before ordering refund. Unless the
claimant for refund establishes that he has not passed on the burden of
duty to another, he would not be entitled to refund, whatever be the
proceeding and whichever be the forum. Section 11-B/Section 27 are con-
stitutionally valid and they have to be applied and followed implicitly C
wherever they are applicable. [712-H; 713-A]
15. There are no words in Section 11-D which provide for payment
of duty twice over. All that the section says is this : the amount collected
by a person/manufacturer from the buyer of goods as representing duty of
excise shall be paid over to the state; even if the tax collected by the D
manufacturer from his purchaser is more than the duty due according to
law, the whole amount collected as duty has to be paid over to the State;
if on the assessment being made it is found that the duty collected and
paid over by the manufacturer is more than the duty due according to law,
such surplus amount shall either be credited to the Fund or be paid over E
to the person who has borne the incidence of such amount in accordance
with the provisions of Section 11-B. It is obvious that if in a given cases,
the manufacturer has collected less amount as representing the duty of
excise then what is due according to law, he is not relieved of the obligation
to pay the full duty according to law. This is the general purport and
meaning of Section 11-D. There may be cases where goods are F
removed/cleared without effecting their sale. In such a case, Section 11-D
is not attracted. It is attracted only when goods are sold. The purport of
this section is in accord with Section 11-B and cannot be faulted. However,
the situation in the case of captive consumption has not been dealt with
now and that question is left open. [713-B-F]
G
Per Ahmadi, CJI (Broadly in agreement with the conclusions
recorded in the Judgment delivered by Jeevan Reddy, J. except
(i) in regard to the extent to which the jurisdiction of ordinary courts
is ousted in respect of claims for refund of taxes illegally levied and H
608 SUPREME COURTREPORTS[l996] SUPP.10 S.C.R.
A collected, and
(ii) on the issue of retrospective application of the amended
provisions of the Excise Act) :
1.1. Actions by way of suit or petitions under Article 226 of the
B Constitution cannot be completely eliminated. The claims for refund can
arise under three broad classes and the issue of ouster of jurisdiction of
civil courts can be under-stood by focussing on the parameters of these
classes which are as a follows : [721-E]
C (i) Unconstitutional levy" - where claims for refund are founded on
the ground that the provision of the Excise Act under which the tax was
levied is unconstitutional. Cases falling within this class are clearly outside
the ambit of the Excise Act. In such cases assessees can either file a suit
under Section 72 of the Contract Act, 1872 or invoke the writ jurisdiction
D of the High ~ourt under Article 226 of the Constitution. [721-F-G]
(ii) "Illegal levy" -- where claims for refund are founded on the
ground that there is misinterpretation/misapplication/erroneous inter-
pretation of the Excise Act and the Rules framed thereunder. Ordinarily, ,,
all such claims must be preferred under the provisions of the Excise Act
E and the Rules framed thereunder by strictly adhering to the stipulated
procedure. However, in cases where the authorities under the Excise Act
arrogate to themselves jurisdiction even in cases where there is clear want
of jurisdiction, the situation poses some difficulty. In cases where the
authorities under the Excise Act initiate action though lacking in inherent
p jurisdiction, the remedy by way of a suit under Section 72 of the Contract
Act or a writ under Article 226 of the Constitution, will lie. Such a
conclusion will not frustrate the exclusion of jurisdiction of civil courts by
the Excise Act because the areas where an authority acting under a statute
is said to lack inherent jurisdiction have been clearly demarcated by
G service decisions of this Court. [721-H; 722-A-E]
(iii) "Mistake of Law" - where claims for refund are initiated on the
basis of a decision rendered in favour of another assessee holding the levy
to be : (1) unconstitutional; or (2) without inherent jurisdiction. Ordinari-
ly, no assessee can be allowed to reopen proceeding that have been finally
H concluded against him on the basis of a favourable decision in the case of
MAFATLALINDS.LTD.v. U.O.I. 609
another assessee. This is becanse an order which has become final in the A
case of an assessee will continue to stand until it is specifically recalled or
set aside in his own case. In cases where the levy of a tax has been held to
be (1) unconstitutional; or (2) void for want to inherent jurisdiction, it is
open for the assessees to take advantage of the declaration of the law so
made and claim refunds on the ground that they paid the tax under a B
mistake of law. This is because such claims are outside the ambit of the
Excise Act. In such cases, the limitation period applicable will be that
specified in Section 17(1)(c) of the Limitation Act. [722-E-H; 723-A]
1.2. Since the levy of tax has been held to be unconstitutional (which
would lead to the conclusion that it should never have been levied in the C
first place) such an interpretation would be unfair to an assessee who had
the foresight to discern the unconstitutionality of the provision (albeit on
a different ground) but was unfortunate in not being able to convince the
concerned court of the unconstitutionality of the provision. Considering
the gravity of the case, it should be left open to such an assessee to use D·
such legal remedy as may be available to him to have the earlier order
reviewed or recalled on the basis of the order made in the subsequent case.
If he succeeds, well and good; if he fails, he must take the consequence, of
an adverse order against him. [723-C-E]
E
Dhuiabhai and others v. State of Madhya Pradesh and another,.[1968]
3 S.C.R. 662, relied on.
2. The decrees and orders which have become final but have not been
executed the procedure and conditions prescribed in Section llB will have
to be complied with. However, under the scheme of the amended Excise
F
Act, the application for refund which is a pre-requisite for invoking Section
11B(2), is required to be made within six months from the payment of duty.
It is obvious that this requirement cannot be complied with in respect of
pending decrees and orders. But_ it must at the same time be realised that
in such a case, the assessee was protesting against the recovery of the G
excise duty from him for which he had even initiated legal proceedings. It
' ...
would therefore be in order to assume that he had paid the duty even
though he was protesting its recovery. To ensure that such orders and
decrees are not frustrated, it must be deemed that the duties of excise in
such cases were paid "under protest"· within the meaning of the second H
610 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
A proviso to clause (1) of Section llB. This would enable the assessees in
such cases to file fresh applications under Section 11B(2), thereby comply·
ing with the scheme of the amended Excise Act. [723-H; 724·A·CJ
Per paripoornan, J. (for himself and Hansaria, J.) partly concur-
B ring with the majority judgment delivered by Jeevan Reddy, J. but on
different reasoning and giving his own views and conclusions on the
other issues):
1.1. The High Court was justified in law in holding that since the
excise duty paid by the appellant was ultimately passed on to the buyers
C of the fabric, and that the appellant has suffered no loss or injury, the
action for restitution based on Section 72 of the Contract Act, was unsus·
tainable. [732-E-F]
1.2. A person who seeks restitution, has a duty to disclose or account
D for what he has received in the transaction. An accounting is a condit.ion
precedent in an action for restitution. By way of analogy, it can be stated
that in cases where restitution is claimed under Section 72 of the Contract
Act, on the ground of payment due to mistake of law, the person claiming
restitution, should plea and prove that "he has not passed on" the liability
to another. That is the nature of "accounting" in cases falling under Section
E 72 of the Contract Act. [730-F-G]
Mulamchand v. State of Madhya Pradesh, AIR (1968) S.C. 1218, relied
on.
p Nelson v. Larhold, (1948) 1 KB 339, referred to.
Pollock & Mulla Indian Contract and Specific Relief Acts (10th Edi·
tion) page 598; Lord Goff of Chieveley and Gareth Jones: "The Law of
Restitution" (3rd Edn.) 1986, Cheshire Fifoot & Funnston's "Law of Contract"
(12th Edn.) 1991, page 649; Peter Birks (Professor of Civil Law, University
G of Edinburgh) : "Introduction to the Law of Restitution"; Endrew Bwrows :
The Law of Restitution (1993), Restatement of the Law of Restitution',
American Law Institute, 1937 Edn., P.634, referred to.
2.1. It is apparent that in Kanhaiya Lat's case there was no plea by
H the Revenue that since the assessee has passed on the tax, the claim for
MAFATLALINDS.LTD.v. U.0.1. 611
refund is unsustainable. Such a question was not posed before this Court A
for consideration. One of the main aspects to be proved in a claim for
restitution, that the person claiming restitution should have suffered a loss
or injury in order to sustain an action, was not urged and was not
considered. [737-A-B]
State of Orissa v. Sudhansu Sekhar Misra, [1968) 2 SCR 154 and B
01ie11t Paper and Industries Ltd. and Another v. State of 01issa & Othe1~·,
[1991) Supp. 1 SCC 81, relied on.
Tilokchand Motichand & Ors. v. H.B. Munshi & Anr., [1969) 2 SCR
824; D. Cawasji & Co. Etc. Etc. v. 1he State of Mysore & Am:, [1975) 2 SCR C
511; Dhanvalakshmi Rice Mills Etc. v. The Commissioner of Civil Supplies
and Another, [1976] 3 SCR 387; Shiv Shanker Dal Mills Etc. Etc. v. State of
Haryana & Ors. Etc., [1980) 1SCR1170, 1173; State of Madhya Pradesh v.
Vyankatlal &Anr., [1985) 3 SCR 561, 566, 568; M/s. Amar Nath Om Prakash
and Ors. Etc. v. State of Punjab and Ors. Etc., [1985) 2 SCR 72; llldian D
Aluminium Company Limited v. Thane Municipal Corporation, [1992)
Supp. 1 SCC 480; State of Rajasthan & Others v. Novelty Stores Etc., AIR
(1955) SC 1132 and Messrs Budh Prakash Jai Prakash v. Sales Tax Office1;
Kanpur & Ors., (1952) A.L.J. 332, referred to.
S.P.A. Case (1985) 2 C.M.L.R. 658; Woolwich Building Society v. E
Inland Revenue Commissioner (No. 2), (1992) 3 All ER 737; Air Canada
Case, 59 D.L.R. (4th series 161); Commissioner of State Revenue v. Royal
I11SUrance Australia Ltd., (1994) 69 A.LJ. 51; United States v. Jefferson
Electric Manufactwing Co., 78 Lawyer's Edition 859 and Quinn v. Leathern,
(1901) A.C. 495, referred to. F
2.2. The persons claiming refund who were only middle-men, should
not be unjustly enriched and allowed to make a "fortune" as it were, at the
expense of innumerable unidentifiable innocent consumers and that
"public interest" requires that such persons claiming refund should not be
unduly or unjustly benefited; and, public interest is better. served, if the G
State is allowed to retain the collection of tax, which could be made/spent,
for the benefit of the "public". [740-A·B]
State of Kamataka and Anr. Etc. v. Shri Ranganatha Reddy & Anr. Etc.,
[1978) 1 SCR 641; Sanjeev Coke Mfg. Co. v. Bharat Coking Coal Ltd. & Anr., H
612 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
A [1983] 1 SCR 1000; State of Tamil Nadu Etc. Etc. v. L. Abu Kavur Bai &
Ors., AIR (1984) SC 326, 343 = [1984] 1 SCR 725; Mis. Amar Nath Om
Prakash and Ors. Etc. v. State of Punjab and Ors. Etc., [1985] 2 SCR 72;
Shiv Shanker Dal Mills Etc. v. State of Haryana & Ors. Etc., [1980] 1 SCR
1173 and Walaiti Ram Mahabir Prasad v. State of Punjab & Ors., AIR (1984)
B P & H 120, relied on.
Rayalaseema Constmctions v. Dy. Commercial Tax Officer, 10 STC
345; Dy. Commercial Tax OffiCCI; Madras v. Rayalaseema Constmctions, 17
STC 505; R.C. !all v. Union of India, [1962] Snppl. 3 SCR 436 and The
Province of Madras v. Mis. Boddu Paidanna and Sons, (1942) F.C.R. 90,
C referred to.
2.3. It is open to the Court to deny the equitable remedy of refund
(restitution) in such cases. The attempt of persons who have passed on the
liability in claiming refund is only to strike at a bargain -- to make a
D fortune at the expense of innumerable unidentifiable consumers. Such
1
persons have suffered no loss. On the other hand, if the State is allowed
to retain the amount, it will be available to the community at large and
could be made use of for public purposes. On this basis as well, the denial
of refund or restitution is valid. There is nothing abhorent or against
E public policy if refund or restitution is withheld in such a situation. It
should also be stated that in cases of indirect levy of tax which was passed
on, this Court has negatived the claim for refund in a few cases. [742-C-D]
Orissa Cement Ltd. v. State of Orissa, [1991 Supp. 1 SCC 430, relied
on.
F
Shiv Shanker Dal Mills v. State of Haryana, [1980] 1SCR1170; State
of Madhya Pradesh v. Vyankatlal &Anr, [1985] 3 SCR 561; Mis. Amar Nath
Om Prakash and Ors. v. State of Punjab and Ors., [1985) 2 SCR 72; Indian
Aluminium Company Limited v. Thane Municipal Corporation, [1992]
Supp. 1 SCC 480 and State of Rajasthan & Ors. v. Novelty Stores Etc., AIR
G (1995) SC 1132, referred to.
2.4. Ordinarily, the presumption is that the taxpayer has passed on
the liability to the consumer (or third party). It is open to him to rebut
the presumption. The matter is exclusively within the knowledge of the
H taxpayer, whether the price of the goods included the 'duty' element also
MAFATIALINDS. LTD. v. U.O.I. 613
and/or also as to whether he has passed on the liability since he is in A
possession of all relevant details. Revenue will not be in a position to have
an in·depth analysis in the innumerable cases to ascertain and find out
whether the taxpayer has passed on the liability. The matter being within
the exclusive knowledge of the taxpayer, the burden of proving that the
liability has not been passed on should lie on him. [747-C-E] B
D. Cawasji & Co. v. State of Mysore, [1975) 2 SCR 511, referred to.
Peter Birks, Public Law (1992) page 580; J. Beatson : Law Quarterly
Review, Vol. 109 (1993) page 401; "Restitution of Overpaid Tax, Discretion
and Passing-on" - by J. Beatson, Law Quarterly Review, Vol. 111 (1995) page C
375 Notes; "Unjust Enrichment" - by Steve Hedley. (Cambridge Law Journal
1995 (578- 599)" Unjust Enrichment Claims: A Comparative Overview" - by
Brice Dickson Cambridge Law Jouma~ (1995) (100-126); "The Law of Taxa-
tion is not an Island - Overpaid Taxes and the Law of Restitution:" by
Graham Virgo; British Tax Review, (1993) (442-467); "Payments of Money D
under Mistake of Law; A Comparative View" - by Gareth Jones, Cambridge.
Law Jouma~ (1993) Comment (225); "Restitution, Misdirected Funds and
Change of Position" - by Ewan McKendrick, Modem Law Review, (1992) Vol.
55 (377-385); "The Law of Taxation is not an Island - Overpaid taxes and the
Law of Restitution'~ pages 462 and 463; Article by J. Beatson, (1993) 109 E
L.Q.R. 401 and Law Commission's Report in England, Law Consultation
Paper No. 120 "Restitution of Payments made Under a mistake of law" - &
Graham Virgo; article in British Tax Review, (1993) pages 458-459, referred
to.
F
3.1. It is settled law that exclusion of the jurisdiction of the civil
courts is not to be readily inferred, but that sucb exclusion must either be
explicitly expressed or clearly implied. [756"F]
3.2. It is not possible to conclude that any and every claim for refund
of illegal/unauthorised levy of tax, can be made only in accordance with the G
provisions of the Act (Rule 11, Section 118 Etc. as the case may be), and an
-''>. action by way of suit or writ petition under Article 226 will not be maintainable
under any circumstances. An action by way of suit or a petition .under Article
226 of the Constitution is maintainable to assail the levy or order which is
illegal, void or unauthorised or without jurisdiction and/or claim refund, H
614 SUPREME COURT REPORTS(l996) SUPP. 10 S.C.R.
A in cases covered by propositions No. (1), (3), (4) and (5) inDulabhai's case,
as one passed outside the Act and ultra vires. Such action will be governed
by the general law and the procedure and period of limitation provided by
the specific statute will have no application. [764-A-C]
B Dulabahi Etc. v. State of Madhya Pradesh & Anr., AIR (1969) SC 78;
Kamala Mills Ltd. v. State of Bombay, AIR (1965) SC 1942; Ram Swarup v.
Shikar Chand, AIR (1966) SC 893; Raja Kandregula Srinivasa Jagannad-
harao Panthulu Bahadur Guru v. The State of Andhra Pradesh and Others,
AIR (1971) SC 71; Collector of Central Excise, Chandigarh v. Mis. Doaba
Co-operative Sugar Mills Ltd., Jalandhar, [1988] Supp. SCC 683 andEscorts
C Ltd. v. Union of India & Ors., [1994] Supp. 3 SCC 86, relied on.
Secretary of State v. Mask & Co., AIR (1940) P.C. 105; Finn of llluri
Subbayya Chetty and Sons v. State of Andhra Pradesh, AIR (1964) SC 322
and Secretary of State v. Jatindra Nath Choudhry, AIR (1924) PC 175,
D referred to.
4.1. Where the levy is unconstitutional • outside the provisions of the
Act or not contemplated by the Act, the jurisdiction of the civil courts is
not barred. The aggrieved party can invoke. Section 72 of the Contract Act,
file a suit or a petition under Article 226 of the Constitution, and pray for
E appropriate relief inclusive of refund within the period of limitation
provided by the appropriate law. [764-E]
4.2. Where the levy is based on misconstruction or wrong or er·
roneous interpretation of the relevant provisions of the Act, Rules or
F Notifications; or by failure to follow the vital or fundamental provisions
of the Act or by acting in violation of the Fundamental principles of
judicial procedure, every error or fact or law committed by the statutory
authority or Tribunal, irrespective of its gravity, or nature of infirmity will
not be covered. It is confined to exceptional cases, ''where the provisions
of a particular Act have not been complied with or the statutory tribunal
G has not acted in conformity with fundamental principles of judicial proce·
dure". [764-F-H]
4.3. Where the levy or imposition was unconstitutional or illegal or
not exigible in law (i.e. without jurisdiction) and, so found in a proceeding
H initiated not by the particular assessee, but in a proceeding initiated by
MAFATLALINDS. LTD. v. U.O.I. 615
some other assessee, either by the High Court or the Supreme Court, and A
as soon as the assessee came to know of the judgment, (within the period
of limitation) he initiated action for refund of the tax paid by him, due to
mistake of law, the assessees who initiated proceedings and impugned the
assessments/claimed refund,/or any reason, either by way of suit or petition
under Article 226 of the Constitution, and the action was dismissed on
B
merits, they cannot maintain an action over again. If the levy or imposition
was held to be unconstitutional or illegal or not exigible in law, in a similar
case filed by some other person, the assessee who had already lost the
battle in a proceeding initiated by him or has otherwise abandoned the
claim cannot, take advantage of the subsequent declaration rendered in
another case whether the levy is held to be unconstitutional, illegal or C
not exigible in law. The claim will be unsustainable and barred by res
judicata. (765-H; 766-AJ
Tilokchand Motichand and Ors. v. H.B. Munshi, Commissioner of
Sales Tax, Bombay & Anr., AIR (1970) SC 898, relied on. D
4.4. Subject to the above, if a levy or imposition of tax is held to be
unconstitutional or illegal or not exigible in law i.e. without jurisdiction,
it. is open to the assessee to take advantage of the declaration· of the law
so made, and pray for appropriate relief inclusive of refund on the ground E
that tax was paid due to mistake of law, provided he initiates action within
the period oflimitation prescribed under the Limitation Act. Such assessee
should prove the necessary ingredients to enable him to claim the benefit
under Section 72 of the Contract Act read with Section 17 of the Limitation
Act. (766-C)
F
4.5. It should be borne in mind, that in all the three categories of
cases, the assessee should prove the fundamental factor that he has not"
"passed on" the tax to the consumer or third party and that he suffered a
loss or injury. This aspect should not be lost sight of, in whatever manner,
the proceeding is initiated •• suit, Article 226, etc. (766-E) G
5. Jurisdiction of civil courts is not barred in entirety regarding the
attack against the levy and/or claim for refund; in those cases, coming
within the three categories as above mentioned, the jurisdiction of the
ordinary courts will not be ousted. [775-F] H
"I
,...j
I
"""
616 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A Union of India v. Tarachand Gupta & Bros, AIR (1971) SC 1658; A.R.
Antulay v. R.S. Nayak and another, [1988] 2 SCC 602; M/s. R.R. Shreeram
Durga Prasad and Fatehchand Nursing Das v. Settlement Commission, (IT
& WT) and Another, [1989] 1 SCC 628; N. Parthasarathy Etc. Etc. v.
Controller of Capital Issues & Am: Etc. Etc., [1991] 3 SCC 153; Associated
B Engineering Co. v. Govf!mment ofAndhra Pradesh and Anr., AIR (1992) SC
232; Shiv Kumar Chadha v. Municipal Corpn. of Delhi & Ors., [1993] 3 SCC
161; Shri M.L Sethi v.Shri R. P. Kapur,AIR (1972) SC 2379 andHari Prasad
Mulshankar Trivedi v. V.B. Raju and Ors., AIR (1973) SC 2602, referred to.
Anisminic Ltd. v. Foreign Compensation Commission, (1969) 2 AC 147
C = (1969) 1 All ER 208 (H.L.); In Re: Racal Communications Ltd., (1981)
AC 374; O'Reilly & Ors. v. Mackman & Ors., (1983) 2 AC 237; Regina v. Hull
University Visitor, (1993) AC 682 and Council for Civil Service Unions & Ors.
v. Minister for the Civil Service, (1985) 1 AC 374, referred to.
D De Smith, Woolf and Jowell - Judicial Review ofAdministrative Action,
(1995 Edn.) p. 263; Halsburry's Laws of England, (4th Edn.) P. 114 - para
67 - foot note (9); Sir William Wade: Administrative Law, (7th Edn), 1994
p. 299, De Smith on ''Judicial Review of Administrative Action" - edited by
Lord Woolf and Jowell, Q.C. (Professor of Public Law) (Fifth edition) -
E (1995), Chapter, 5; Halsbury Laws of England 4th edition (Reissue), 1989,
volume 1 (1) p. 113; H.W.R.Wade and Co. F.Forsyth in their book -Ad-
ministrative Law, Seventh Edition, (1994) "Principles of Statutory Interpreta-
tion", 6th edition, (1996) at page 475, referred to.
6.1. Section 118(2) and Section 118 (3) go together. The applications
F for refund made before the commencement of the Amendment Act, 1991,
shall be deemed to have been made under Section 118(1) of the Act as
amended and it shall be dealt with in accordance mth 'Section 118(2) of
the Act. The Section contemplates disposal of the applications pending on
the date of the Amendment Act as also fresh applications filed after the
G Amendment Act, 1991, as per the amended provisions. [777-E]
6.2. It is obvious that in cases where
(i) 'Refund' made or due as per orders passed by Courts, in a suit
or in a petition under Article 226 of the Constitution of India, which have
H become final;
MAFATLAL INDS. LTD. v. U.O.I. 611
(ii) refund orders by the statutory authority concerned which have A
become final, [777-F-H]
no application can or will be deemed to be pending on the date of the
commencement of the Amendment Act. No application praying for refund
is to be filed in such _cases, either. No further probe, regarding the requisites
for obtaining refund specified in the Amendment Act, 1991, is called for in B
such cases. The above aspects are fairly clear. Section 118(2) and (3) cannot
be made applicable to refunds already ordered by the court or the refund
ordered by the statutory authorities, which have become final. It follows
from a plain reading of Section llB, Clauses (1), (2) and (3) of the Act. The
provisions contemplate the pendency of the application on the date of the C
coming into force of the Amendment Act or the filing of an application
which is contemplated under law, to obtain a refund, after the Amendment
A~ comes into force. If the said provisions are held applicable, even to
matters concluded by the judgments or final orders of courts, it amounts to
stating that the decision of the court shall not be binding and will result in
reversing or nullifying the decision made in exercise of the judicial power. D
The legislature does not possess such power. The court's decision must
always bind parties unless the condition on which it is passed are so
fundamentally altered that the decision could not have been given in the
altered circumstances. Ii is not so herein. [777-F-H; 778-A-C]
E
Shri Prithvi Cotton Mills Ltd. & Anr. v. Broach Borough Municipality
. & Ors., [1970) 1 SCR 388; Madan Mohan Pathak v. Union of India & Ors.
Etc., [1978) 3 SCR 334 and Comorin Match Industries (P) Ltd. v. State of
Tamil Nadu, JT (1996) SSC 167, relied on.
Union of India and Others v. Jain Spinners Limited and another, F
[1992) 4 SCC 389 and Union of India and others v. ITC Ltd., [1993) Supp.
4 sec 326, distinguished,
6.3. Alternatively, it may be stated that duty paid in cases, which
finally ended in orders or decrees or judgments of courts, must be deemed G
to have been paid under protest and the procedure and limitation Etc.
stated in Section 118(2) read with Section 118(3) will not apply to such
cases. It need hardly be stated, that Section 118(1), the proviso thereto,
Section 118(2) and Section 118(3) read together will apply only to (1)
refund applications made before the Amendment of the Act and still
pending on the date of commencement of amendment Act, 1991 and (2) H
618 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A applications contemplated under law to obtain refund and filed after the
commencement of the Amendment Act, 1991. [778-E]
7. In the matter of taxation laws, the court permits a greater latitude
to the discretion of the legislature. The State is allowed to pick and choose
districts, objects, persons, methods and even rates for taxation, if it does
B so reasonably. The courts view the laws relating to economic activities with
greater latitude than other matters. [779-C]
Collector of Customs, Madras v. Nathella Sampathu Chetty and
Another, [1962] 3 SCR 786; Khyerbari Tea Company and Anr. v. State of
C Assam & Ors., AIR (1004) SC 925; R.K Garg v. Union of India & Ors., AIR
(1981) SC 2138; Gaurishanker & Ors. v. Union of India & Ors., [1994] 6
SCC 349 and Union of India & Anr. Etc. Etc. v. A.Sanvasi Rao & Ors. Etc.
Etc., AIR (1996) SC 1219, relied on.
8. It is clarified that due to paucity of details, the case or captive
D consumption has not been dealt with. It is made clear that whatever is
stated in this judgment will not apply in the cases of goods which are
captively consumed. [779-E-F]
9. Chapter II-A of the Act was inserted by way of amendment in 1991.
E The establishment, working, administration and utilisation to the Con-
sumer Welfare fund is in its stage of infancy. The scheme or set-up
envisaged by Sections 12C and 12D and its working will require an indepth
evaluation by the appropriate authorities in order to vouchsafe that the
scheme is not rendered a mere ritual or illusory, but is meaningful and
effective. However, for the present, this is not dealt with in detail. [779-G]
F
Per Sen (Partly concurring with the reasoning and conclusion ar-
rived at by Paripoornan, J. and giving his own views and conclusions on
the other issues) :
G 1.1. The scope and effect of Article 265 cannot be whittled down in
any manner in order to enable the government to retain unlawfully
gathered tax on the pretext that a refund will unduly enrich the taxpayers.
Whatever the consequence may be, the provisions of the Constitution must
be upheld as they stand. Article 265 does not permit the State to levy or
collect any tax without the authority of law. This is a protection afforded
H to the citizens by the Constitution from State oppression in financial
MAFATLALINDS. LTD. v. U.O.I. 619
matters. This protection given to the citizens must be jealously guarded by ·A
the Courts. If any tax has been gathered unlawfully by the State, it cannot
be retained by the State. If any law has been passed for retention of the
illegal levy, it must be struck down. [806-G-H; 807-A]
1.2. It cannot be said that guarantee contained in Article 265 of the B
Constitution must be restricted to direct taxes only. Article 265 must be
implemented in letter and spirit as it stands and all the tax laws and all
Government actions to realise and retain tax must be tested on the anvil
of this guarantee. The courts should jealously guard against any attempt
to whittle down or do away with any of the guarantees given under the
Constitution to the citizens. Article 265 will have to be given full effect in C
cases of direct as well as indirect taxation. If any tax has been levied and
collected without authority of law, then the State bas committed a wrong
and that wrong must be undone by the State by returning the tax unlaw-
fully collected to the person from whom it was collected. [786-E-F]
D
1.3. The Court has a duty to uphold the constitution in letter and
spirit. If the Court comes to the conclusion that a levy of tax is unlawful,
the Court will direct the government to return the tax. It is not for the
Court to enquire how the tax- payer has managed his affairs after payment
of the unlawful levy. It is but natural that the tax-payer will try to raise
funds by raising price or cutting down costs or forgoing profits to get over E
the loss caused by the unlawful exaction of tax. There is usually consider-
able time gap from payment of any illegal levy and obtaining an order of
refund. In most of the cases several years pass before refund of duty paid
can be obtained. In such a situation, it is impossible for the taxpayer
company not to do something to raise money somehow to carry on its F
business. Merely because a manufacturer has raised its price after paying
the illegal levy cannot be a ground for denying him the consiitutional
guarantee contained in Article 265. The constitutional guarantee is uncon-
ditional and unequivocal and must be enforced regardless of what the
manufacturer does after payment of tax. If the manufacturer has done
something unlawfui, steps must be taken against him. If this Court holds G
that constitutional guarantees ought to be enforced depending upon the
conduct of the manufacturer after payment of the illegal levy, then the
Court would he adding a rider to Article 265 which is not permissible. By
this forced interpretation the Court will not be upholding the Constitution,
but will be undermining it. [786-G-H; 787-A-C] H
620 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A 1.4. A manufacturer may have been compelled to raise the price.
because of the imposition of an illegal levy. But that is no reason to dilute
the mandate contained in Article 265 of the Constitution. Article 265
forbids the State from making an unlawful levy or collecting taxes unlaw-
fully. The bar is absolute. It protects the citizens from any unlawful
B exaction of tax. So long as Article 265 is there, the State cannot be
permitted to levy any tax without authority of law and if any tax has been
collected unlawfully that must be restored to the person from whom it was
collected. If the tax has been collected from any person unlawfully, it is the
taxpayer's money which is in unlawful possession of the State. The State
has a constitutional obligation to give back the money to the tax-payer. An
C act done in violation of constitutional mandate is void and no right flows
out of that void act to the State. The State is in unlawful possession of the
taxpayer's property. The State cannot retain it on any equitable ground
nor can it give it to any other person out of any supposed equitable
consideration. The constitutional mandate cannot be ignored on the
·-D pretext of any rule of equity or on the ground of what is perceived as
substantive justice. Every word of the Constitution has to be treated as ,
sacrosanct and respected and obeyed by the State and the Legislature and
enforced by the Court. (787-D-G]
1.5. The levy and collection of excise duty has been found to be niegal.
E It has been levied and collected in violation of the Central Excise Act and
also the guarantee contained in the Constitution. The levy is void. It has
denied the taxpayer the protection given by the Constitution. If illegally
collected tax is not immediately restored to the taxpayer, the guarantee
given by the Constitution will be a mockery. The constitutional guarantee
F is not hedged by any clause. A trader may trade with his goods as he likes.
The terms and conditions under which he sells his goods is a matter
between him and the purchaser. He may raise his price high enough to
include costs and taxes. If he does so with the agreement of the buyer, he
does not lose his right to get back what had been collectf:I from him
illegally or the protection of Article 265 of the Constitution. That will be
G putting a rider on the Constitution. The Court is not permitted to write
the Constitution but is duty bound to enforce it. (790-E-G]
1.6. The debate whether a taxpayer is entitled to get refund when the
levy is found illegal is concluded by Article 265 of the Constitution in our
H country. The protection afforded to the taxpayer is total and complete. It
i
MAFATLALINDS. LTD. v. U.0.1. 621
cannot be taken away under any circumstances or by any legislative action. A
The Constitution being sacrosanct and overriding, any tax collected un-
lawfully, must be returned to the taxpayer. Whether the taxpayer has
passed on the burden of the tax to the consumers or not is a matter of no
consequence. [804-C-D]
1.7. The constitutional embargo is on both the levy and collection of B
tax without authority of law. It has a been repeatedly asserted by the
Courts that every taxing law has three parts. First is charge, the second is
computation which results in a demand of tax and the third is recovery of
the tax so computed. The Constitution has enjoined that there must be a
valid levy. The word 'levy' has also been understood in a broad sense in C
various cases to include not only the imposition of the charge but also the
whole process upto raising of the demand. The Constitution guarantees
that not cnly the levy should be lawful but also collection of tax must also
be done with the authority of law. The State is not permitted to exact any
tax from a citizen without the authority of law and without following the
procedure laid down by law. This guarantee has to be strictly enforced not D
only in the matter of levy but also in the matter of collection. [804-E-G]
1.8. Article 39 of the Constitution has directed the State to formulate
its policy towards securing that the ownership and control of the material
resources of the community are so distributed as best to subserve the E
common good and that the operation of the economic system does not
result in the concentration of wealth and means of production to the com-
mon detriment. These provisions do not in any way curtail the scope and
effect of Article 265. Section 39 does not enjoin that unlawfully collected
properties should be used by the State for the common good. Nor does it
say that the operation of the economic system should be so moulded as to F
prevent concentration of wealth, by unlawful means. Article 39 cannot be a
basis for retaining whatever has been gathered unlawfully by the Govern-
ment for common good. Simply stated the Directive Principles of State
Policy do not licence the Government to rob Peter to pay Paul. [805-B-D]
G
Municipal Council, Khurai and another v. Kamal Kumar & another,
[1965) 2 SCR 653, relied on.
Commissioner of Inland Revenue v. Rossminister Ltd., (1980) AC 952,
1018; Commissioner for Motor Transport v. Antill Ranger & Co. Pvt. Ltd.,
(1966) 3 ALL. E.R; United States v. Jefferson Electric Manufacturing Com- H
622 SUPREME COURTREPORTS(1996] SUPP.10 S.C.R.
A pany, 78 L.Ed. 859; Air Canada v. British Columbia, (1989) 59 D.L.R. (4th)
161; Allied Air Conditioning Inc. v. British Columbia, 76 B.C.L.R. 2(d) 218;
Air.Canada v. British Columbia, "C.P. Air" (1989), 36 B.C.L.R. (2d) 185;
Woolwich Building Society v. Inland Revenue Commissioners, No. 2 (1992)
3 All E.R. 737, 763; Commissioner of State Revenue v. Royal Insurance
B Australia Ltd. (182) C.L.R. 51; Boyd v. United States, 116 US 616 (1886);
Olmstead v. United States, 277, US 438 (1928) & Mapp v. Ohio, 367 US 643
(1961), referred to.
2.1. when a statute like the Central Excises and Salt Act, 1944 which
is a consolidating Act is passed, the Court should not presume that the
C Legislature was unawari: of the scheme of the earlier statutes and _how the
law was understood and administered. The Legislature avowedly did not
bring about any fundamental change in the structure of these existing laws
in passing the consolidating Act. Tax was to be paid on manufacture of the
excisable goods. Thei:e were provisions for assessment and computation of
D tax. Provisions were also made for appeals, recovery of tax in cases of short
levy and refund of tax in cases of excess realisation. The duty of the Court
is not to legislate but to find out the intention of the Legislature. The
legislative intent was to consolidate and continue the laws that were
existing in one comprehensive statute and even when the new statute was
in force the Legislature did not think fit to stop refund of a wrong levy of
E tax to the manufacturer and thereby confer a right to the consumers to get
refund before the amendment made in 1991. Before that the Central Excise
Act did not recognised any right of the consumer of excisable goods to get
a refund of duty. (810-E-H]
p 2.2. Refund of tax whether under Income Tax Act, Wealth Tax Act,
Gift Tax Act, Estate Duty Act, Sales Tax Act, Customs Act or the Central
Excise Act has to be given under the Statutory provisions containe~ in the
Act Refund in a taxing statute is to be made not on the ground of compensa~
tion for loss or damage sustained by a tax-payer but on the principle of
restoration to the tax-payer of what had been collected from him without
G justification of law. When a taxing statute provides for refund, it is not to
be understood as a section providing for compensation for loss or damage.
Refund of tax means returning to the assessee what had been taken or
received from him unlawfully. (811-B-D]
H 2.3. Under the Central Excise Act, there is only one tax which is levied
MAFATLALINDS. LTD. v. U.O.I. 623
by Section 3 and the tax-payer is the person who pays the charge levied by A
Section 3. The taxable event under the charging section is manufacture.
This is the duty which a manufacturer has to pay before he can remove
the manufactured goods from his factory. Whatthe buyer of the goods pays
to the manufacturer is the price of the goods. No duty is levied by the
Central Excise Act upon the buyer. What the buyer pays to the manufac· B
turer is not under any charge imposed by any statute. What he pays is the
price of the goods. The price is a matter of contract between the buyer and
the seller. Whatever the buyer pays and the seller gets is the price of the
goods, even though the tax element is included in the price. [811-E-G]
3.1. The changing provisions have undergone minor alterations from C
time to time, but there is not the slightest doubt that the levy of excise duty
is on manufacture of goods. The taxable event is the manufacture. The duty
will have to be paid regardless of the destination of the goods. Even if the
goods are lost before clearance, duty will have to be paid. Whether the
manufacturer after removal of the goods, is able to sell the goods or not D
is a matter of no consequence. Once the taxable event has happened the
duty has to be paid. There is no escape from it. This is a strict liability
foisted on manufacture by Section 3. But nothing in excess of this strict
liability can be collected by the Excise Officers. If something is levied or
collected which is beyond the charging section, then that has to be paid
back to the tax-payer. Whatever tax has been levied or collected in violation E
of law bas to be restored to the person from whom such illegal levy has
been extracted. Otherwise the guarantee under Article 265 becomes mean-
ingless. [815-B-D]
3.2. If a man is able to pass on the burden or not is something with
F
which the Excise Act is not concerned. If as a result of high excise tariff
the price becomes too high and the goods become unsaleable, the manufac-
turer may go out of business but will not be absolved from payment of
duty. Hardships suffered by the manufacturers may be redressed by the
Government for which power has been retained in the Central Excise Act
(Section SA). But a manufacturer cannot declined to pay excise duty on G
the ground of inability to sell his products and failure to pass. on the
burden of the duty. [815-F-G]
3.3. If the Central Excise Officer-discovers that the duty of excise has
not been levied or paid or has been short levied or short paid, he has a H
624 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A right to recover the duty from the manufacturer (Section llA). The short·
levy may have been due to an oversight or mistake committed by the Excise
Officer. It may be that the goods manufactured have already been sold off
and it will not be possible for the manufacturer to recover the amount of
duty from his customers. That is a post-duty situation with which the
B Excise Act is not concerned. The Central Excise Act is only concerned
about collection of the duty levied by Section 3 on the manufacture of
goods. In the scheme of the Act, the consumer who purchases the goods
from the manufacturer and pays cum-duty price does not pay any tax
either directly or through the manufacturer. If a manufacturing company
C goes into liquidation after selling off all its products, the Excise Officer
· can in no way realise any sh'Jrt levy or under levy from the consumer. A
tax is a compulsory levy imposed by the statute which is something quite
diffe.rent from purchase-price. If a person having paid the tax increases
the price of the goods, what the purchaser pays the tax-payer is not the tax
but the price of the goods. The price usually comprises of costs, taxes and
D profits. But there is only ont: tax and one tax-payer who pays the tax. If
there is short levy or under levy of excise duty due to any reason, the excise
authority has no right to chase the consumers for the arrears of tax. In no
sense of the term the consumer can be treated as the tax-payer under the
Central Excise Act. Moreover, if the consumer is a· businessman, the
E cum-duty price will be deductible from his income under the Income Tax
Act. [815-H; 816-A·D]
3.4. Rules lOA and lOB were in force till 1980. These two rules were
substantially adopted in Sections llA and UB of the Central Excise and
Salt Act, 1944 by the Customs Central Excises and Salt Act and Central
F
Boards of Revenue (Amendment) Act, 1978. The two sections came into
force on 17.11.1980. It is well- settled that these two rules (Rules lOA and
lOB) are complementary. Rule lOA invests the Government with the power
to recover duty where any duty had not been levied or paid or had been
short-levied or erroneously refunded or any duty assessed had not been
G paid in full. In such a case, the proper officer, within six months could
serve a notice on a person chargeable with the duty requiring him to show
cause why he should not pay the amount specified in the notice. [818-E·F]
3.5. Rule lOB enabled a person to claim "refund of any duty paid by
H him". This could be done by an application for refund of such duty to the
MAFATLALINDS. LTD. v. U.O.I. 625
Assistant Collector of Central Excise before expiry of six months from the A
date of payment of duty. Where any duty was paid provisionally under Rule
9B, the period of six months was to be computed from the date ou which
the duty was adjusted after final determination of the value. If as a result
of any appellate or revisional order refund of duty is due to any person,
the proper officer had to refund the amount to such person even without B
any application. [818-G-H]
3.6. The Central Excise Act has not made the manufacturer an agent
of the State for collection of tax from the consumers. If an illegal levy has
been made on the manufacturer and any tax has been collected unlawfully
from him by the State, the State cannot refuse to return the unlawfully C
collected amount. The amount which has been unlawfully collected is the
property of the tax-payer. If the law has been broken by the State and an
unlawful levy has been made the State is not at liberty to distribute the
amount so collected on any supposed equitable principle to somebody
other than the actual tax-payer without a specific provisions of law to that D
effect. If this is allowed, the legal wrong done to the tax-payers will remain
unredressed. [820-C-D]
3.7. Like all other taxing statutes the Central Excise Act has a
charging section, provisions for computation and quantification of the
charge and also collection of the charge (Sections 11 and llA) and also E
for refund of duty (section llB). The court cannot ignore these
provisions and hold without any specific charge levied to that effect in
the Act that the ultimate consumer is a real tax-payer. The refund must
be made of excess realisation of the duty of excise to the manufacturer.
The Government has not imposed nor realised any duty from the
ultimate consumer. [821-E-F] F
3.8. The structure of the Excise Act has to be borne in mind. Duty is
levied on manufacture and collected from the manufacturer according to the
rules. The well-known distinction between levy and assessment and between
levy and collection will have to be borne in mind in this connection. [821-G] G
3.9. There is no reason why a person who has been subjected to levy
of excise duty and from whom, the duty has been collected cannot get the
refund of the duty but only a person who has neither been charged any
duty nor paid any duty under the Act can claim refund of the duty. This
Will be clearly against Article 265 of the Constitution. [822-H] H
626 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
A Baidyanath Aywved Bhawan (P) Ltd. v. Excise Commissioner, U.P. &
Ors., [1971] 2 SCR 590; R.C. Parsi v. Union of India, AIR (1962) SC 1281;
Bharat Kala Bhandar (Private) Ltd. v. Municipal Committee, Dhamangaon,
59 ITR 73 and Assistant Collector of Central Excise, Calcutta Division v.
National Tobacco Co. of India Ltd., [1972] 2 SCC 560, relied on.
B The Judicial Committee, in Govemor General in Council v. Province
of Madras, AIR (1945) PC 98, 101, referred to.
Cape Brandy Syndicate v. Commissioners of Inland Revenue, (1921) 1
K.B. 64, referred to.
c
4.1. In order to claim refund, a person has to establish that he has
paid the duty. The. duty is what is paid pursuant to the charge levied by
Section 3 and quantified in the manner laid down in the rules. Rule 3(v)
of the Central Excise Rules also says that "duty" means the duty payable
D under Section 3 of the Act. The time and manner of payment of duty will
have to be in accordance with the provisions of Rules 9 and 9A(4). There
is no other duty charged under the Central Excise Act and there is no other
way a duty can be paid under the Central Excise Act. It is the person who
has paid the duty of central excise under the charge imposed by the Act
and within the time and in the manner laid down by the Act, who can claim
E the refund of duty under Section llB. "Any person claiming refund of any
duty of excise" must be the person who has paid the aforesaid duty in the
aforesaid manner. A consumer or buyer cannot say th~t he has paid any
duty of excise.. The duty is only on the manufacturer and not on the
consumer. Under sub-section (2), the Excise Officer has to be satisfied that
F whole or any part of the duty of excise should be refunded to the person
who has paid the duty. This is the law in respect of payment of duty and
obtaining refund of duty paid in excess. The buyer or the consumer does
not pay any "duty" and, therefore, he is precluded from making any applica-
tion for refund under Section llB. A person who has not paid any duty in
law cannot claim a refund on the ground that he has borne the burden or
G duty. [827-A-E]
4.2. The Excise Officer is a creature of the statute. His powers and
functions are circumscribed by the statute. He can realise tax strictly in
accordance with the statute. He cannot realise tax beyond the charge
H imposed by Section 3 out of any extra-statutory considerations. If more tax
n
MAFATLAL INDS. LTD. v. U.O.I. 627
than permissible under the charge imposed by Section 3 has been collected, A
it must be returned to the taxpayer. There is nothing in the Act which
enables the Excise Officer to embark upon an inquiry to find out whether
after payment of the duty, the manufacturer has sold his goods and if so,
has included this amount in his price. It is not a ground on which the
Excise Officer can refuse to refund the excess amount of duty paid by the B
manufacturer in the mode and manner laid down by the Act. A taxation
statute has to be construed strictly. The Excise Officer cannot insert a
proviso to the Section and say that even if the levy is illegal and the
manufacturer is otherwise entitled to refund of duty under Section 118, he
will not be given this refund if he has included the duty element in the price C
of the goods manufacturer by him. The Excise Officer has no discretionary
power to refuse to pay refund even when he was satisfied that excess
payment of duty contrary to law has been collected or paid. Though
,'
sub-section (2) of Section 118 or earlier Rule UA used the language that
the Central Excise Officer "may make an order of refund", the word "may",
in this context, has to be construed as 'must'. The section does not give the D
Central Excise Officer any discretion once he was satisfied that excess
payment had been made. He cannot withold payment on some extraneous
reasons. [827-F-H; 828-A-B]
4.3. In fact, this principle is very important to understand the E
problem raised in this Court. The Central Excise Act provides for every
situation for levy, collection and refund of tax. If an overpayment has been
made for whatever reason, the amount has to be refunded. The Excise
Officer, who deals with an application for refund, has to find out whether
an overpayment has been made under the Act. He may, for any reason to
F
be found in the Act, decline to give refund. He cannot travel beyond the
Ai:t to find other considerations for withholding the refund. [830-A-B]
4.4. The Excise Act before its amendment in 1991, in particular Rule
108 and later Section 118, did not confer any power on the Excise Officer
to withhold refund on any ground of "unjust enrichment", after being G
satisfied that overpayment of tax has been made. Moreover, refund is to
be claimed within six months from the date of payment of tax which means
within six months from removal of the goods from the factory. A company
may take a very long time to dispose of its goods after clearance. But a
claim for refund has to be made within the short time permitted by the H
628 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A Act. These provisions are indicative of the fact that refund claim has· to be
made regardless of the sale of the goods. [830-F-G]
4.5. That passing on of the incidence of tax was not relevant con-
sideration is also borne out by sub-section (3) of Section llB as well as
sub-rule (3) of Rule lOB, e.g., if there is dispute as to classification of the
B
goods and the assessee takes resort to filing of an appeal which ends in
favour of the assessee, refund will have to be made of the excess amount of
tax realised to the assessee without his having to make any claim in that
regard. In such a situation, the Assistant Collector of Central Excise is not
empowered, before refunding the money, to make an enquiry as to whether
C the duty has been passed on to the consumers. The concept of "passing on .
of the duty" cannot be fitted in the provisions of the Excise Duty Act before ·
its amendment in 1991. As has been repeatedly asserted in a number of
cases that in a taxing statute, there is nothing to be added and there is
nothing to be taken out and the words must be interpreted as they stand.
D There is no equity about taxation. To introduce the concept of "unjust
enrichment "in the Act even before its amendment in 1991 is not permissible
by any canon of construction. Attention of this Court has not been drawn to
any provision of the Act which is concerned about the consumers of the
product after they pass out of the factory gate. The rule and the section
dealing with the refund do not contain any provision that the Excise Officer
E will be entitled to withhold refund ifit is found that the duty has been passed
on to the consumers. The powers and functions of the Excise officer are
circumscribed by the Act. He cannot take into consideration anything which
is not specifically contained in the Act. [830-H; 831-A-E]
F 4.6. Under the Central Excise Act, 1944, there is only one duty and
that has been imposed on manufacture. This duty has to be paid before
clearance. This duty has to be paid in the manner and mode laid down by
the Act. The Act does not impose any other duty. The Act is not concerned
with what happens after the goods have been cleared. If the duty has been
erroneously imposed, the refund of the duty must be made to the person
G on whom it is imposed. Refund of tax must not be confused with restitution
or compensation. There is only one taxpayer and it is the person who pays
the tax at the time of clearance of goods. there is no other tax imposed by
the Central Excise Act. How the burden of tax is borne or its economic
impact on the manufacturer are not matters within the purview of the
H Central Excise Act. No notice of these considerations can be taken in
MAFATLAL INDS. LTD. v. U.O.I. 629
deciding the application for refund by the Excise Officer. Article 265 of A
the Constitution enjoins that no duty shall be levied and collected except
in accordance with law. If it is found that a manufacturer has been asked
to pay more than what he is liable to pay under the Central Excise Act,
he is immediately entitled to get the refund of the wrongfully collected
duty. This constitutional guarantee cannot be side-tracked in any manner. B
(831-H; 832·A·C]
Commissioner of State Revenue v. Royal Insurance, (1995) 69
Australian Law Journal 51, referred to.
c
5.1. It is wrong to presume that if taxes are raised, the manufacturer
has merely to pass on the burden to the consumers by raising the price. It
should always be borne in mind that a manufacturer has to generate
•
sufficient income to pay for the prices of inputs, wages to the employees,
rents, fuel charges, overheads and many other charges, including direct D
and indirect taxes. Every type of tax, except only those which are levied on
the profits like Income Tax and Surtax on company's profits, will have to
be included in the price. The price must be high enough to fetch sufficient
income to the manufacturer to pay for all these things and stay in business.
If the manufacturer is a company, as the appellant herein is, out of the
profits, specific and general reserves will have to be created. Provisions E
have to be made for known liabilities like provident fund and gratuity for
workers etc. Debenture holders and preferential shareholders will have to
be paid. Dividends will also have to be paid to the share-holders who have
invested their money in the company. All those things will have to be paid
out of the profits made by a company after paying all the expenses F
including excise and other duties. A manufacturer has also to take into
account that all the goods produced by him may not be sold in the year of
production itself. That means a large amount of circulating capital will
remain blocked. This will also lead to higher interest charges. In fact, there
is hardly a company which does not have to carry inventories of tax-paid
finished goods year after year. Goods distributed for sale to various outlets G
may not be sold for months or even years. Such goods may ultimately have
to be sold at large discounts or even at a loss. Many products after some
time cannot be sold at all for various reasons. A substantial quantity of
tax-paid products cannot be disposed of as a matter of course and the
manufacturer has to get rid of the unsold products by organising first sale H
630 SUPREME COURT REPORTS[1996) SUPP. ln S.C.R.
A . at a discount thereafter at even lower prices. This is a problem with every
manufacturer and to assume that the excise duty can be passed on to the
consumer without any corresponding loss to the manufacturer is to ignore
reality. [832-F-H; 833-A-H]
B 5.2. The wages of labourers, their provident fund, gratuity, bonus,
the costs of raw-material, the fuel charges, the overheads; all these things
have to be paid out of the money generated by the company. This can only
be done through price obtained by the sale of goods. A suit for short sale
by a manufacturing company of recovery of money for over charging can
be defeated by saying that all these things have been passed on to the
C consumer. An electricity supply company or a coal supplier can also take
the plea, faced with an allegation of excessive charge, that in any event the
charges have been passed on to the consumers. It is not possible to split
up the price of a commodity and find out how much is attributable to
labour, how much to cost of production and how much to the overheads.
D That the buyer pays nothing but the price, has been made clear by Section
2(10) and also Section 4 of the Sale of Goods Act. Section 64A permits the
seller to add an amount equal to any new tax imposed or any tax increased
if such imposition or increment has taken place after the contract was
. entered into and if a different intention does not appeal from t.he terms of
the contract. [834-E-H; 835-A]
E
5.3. If the seller passes on his tax liability to the buyer, the amount
equivalent to the tax received by the seller is part of the entire sale
consideration. It is not collection of tax, because levy and collection of tax
is regulated by law and not by contract. Whatever may have been collected
F by a seller from his customer on account of tax, the same can only be
considered as valuable consideration for the 'price' of the goods sold. What
the buyer pays is the price of the goods and not the components of the
price. Production costs, selling costs, overheads, taxes, everything goes into
fixation of the price. Moreover, the market conditions will have to be taken
G .into account. If the price is too high for the market to bear, the goods will
not sell. In order to absorb the excise duty, the manufacturer may have to
cut various types of costs. It may have to reduce its profit, pay lesser
dividends to shareholders, he may not readily agree to any increment in
pay or payment of bonus or other benefits to the workers. It has not been
H explained how it can be readily assumed that all that the seller h11s to do
MAFATLALINDS.LTD.v. U.0.1. 631
to absorb higher duty is to include it in its price and pass it on to the A
consumers. If the labour is given just reward for the work done by him,
no surplus value will be left. It is this surplus value extracted from the
labour through the pricing mechanism that becomes the manufacturer's
profit. To prevent "unjust enrichment", the entire surplus should go back
to the labour. But in the present case, one has to take the Central Excise B
Act as it stands. One may or may not like the law. But for that reason one
cannot discard it or its language to bring out an abnormal meaning. If the
meaning of 'price' as given in the Sale of Goods Act is borne in mind and
its implications as are kept in view, then it can never be said that the seller
has charge anything but the price of the goods from his buyer. He cannot C
by a contract call upon the buyer to pay any tax which is the prerogative
of a taxing statute. Even if he quotes the price as X (Costs) + Z (Profit),
what the buyer will pay is the price of the goods and nothing else. Neither
the costs nor the taxes are passed on to the buyer. [838-E-H; 839-A-F]
British Paints India Limited v. Commissioner of Income Tax, West D
Bengal, (1978) 111 ITR 53 and Delhi Cloth and General Mills Co. Ltd. v.
The Commissioner of Sales Tax, Indore, [1971] 2 SCC 559, relied on.
BSC Footwear Limited v. Ridgway, (1972) A.C. 544, Paprika v. Board
of Trade, (1944) 1 KB 327; Love v. Nonnan Wright (Builders) Ltd., [1944] E
1 All England Law Reports 618, and Tata Iron and Steel Co. Ltd. v. State
of Bihar, [1958] SCR 1355, referred to.
6.1. There is no basis to deny the refund to a manufacturer on the
facile assumption that burden of duty has been passed on to the consumers
without any loss or detriment to the manufacturer. [842-H) F
6.2. It will be wrong to assume that the duty element can be included
in the price and that no prejudice will be caused to the manufacturer by
the levy or enhancement of the duty. To take this position is to ignore the
economic realities. [846-B]
G
6.3. There may also be a situation when a manufacturer will not be
able to certify that he has not passed on the duty even though he has borne
it. The manufacturer in a case like this will not be in a position to certify
that the burden of duty has not been included in the price of the goods but
the fact remains that in order to maintain the price of goods at the H
•
632 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A optimum level the manufacturer had to suffer loss of profit. The Central
Government has been empowered to exempt, generally or absolutely by
notification, excisable goods from the whole or any part of the duty
imposed thereon. Judicial notice must be taken that in very many cases,
having regard to the hardship suffered by the industry and representations
B made by the industry, duties have been reduced or exempted by issuing
appropriate notifications or even by legislation. [846-C-G]
Hanover Shoe Inc. v. United Shoe Machinery Corp., [1968] 392 US 481
and Amministrazione de/le Finanze dello Stato v. San Giorgio Spa, [1985]
2 CMLR 658, referred to.
c
7.1. The provisions contained in Sections 11-B, ll·D, 12- A, 12-B,
12-C, 12-D of the Central Excise Act are not in consonance with the
charging provisions of the Excise Act and the rules. The well-known -
principle of fiscal legislation is that the charge lies where it falls. It cannot
D be shifted by a contract. Acts relating to income Tax, Wealth Tax, Sales
Tax as well as ·Excise duty have charging sections. A man may contract
with somebody to pay his Income Tax, a seller may contract with somebody
else to pay his Sales Tax and a manufacturer may contract with a third
party to pay the duty of excise. These contracts are not enforceable by or
E against the Revenue. The Central Excise Act imposes a tax on manufac-
ture. This tax has to be paid before the goods are cleared in the manner
laid down by the Act and the Rules. There is no other dnty of excise payable
under the Act. The question of passing on can only arises after the duty
has been fully paid. The duty of excise is never borne by the buyer. The
F buyer may pay a sum equivalent to the duty of excise pursuant to a contract
with the manufacturer, but that is a matter of contract. [852-E-H]
7.2. The duty imposed on and collected from manufacturer, if it is
found to be in excess of the charge imposed by Section 3, has to be returned
to manufacturer and nobody else; otherwise charging provision rules for
G computation of charge and imposition and collection of duty will become
meaningless. If any amount has been realised by the Excise Officerin excess
of the charge imposed by the charging section, then such· collection is
beyond the competence of the Act and also violates Article 265 of the
Constitution. Levy may include both imposition of a tax as well as assess·
H ment. 'Collection' will be recovery of tax. If it is found that a tax-payer has
MAFATLAL INDS. LTD. v. U.0.1. 633
been levied more than the permissible limit imposed by the charging section A
read with Excise Tariff Act and the Rules, the levy is bad. The collection
pursuant to this levy is equally bad. Such levy and collection are dehors the
provisions of the Excise Act. There is no way that the Central Excise
Authority can retain the amount or use the amount. In any way it has to
refund the amount to the person from whom it has been unlawfully collected B
by the Excise Officer. No portion of the cum-duty price in law can be treated
as the duty of excise. Nothing which is not imposed by Section 3 and
collected under the provisions of the Excise Act and Rules, can be called
"duty of excise". This is the basic principle of any tax law. If by any device any
amount which is not Ieviable in law has been levied and collected from a
tax-payer, then retention of such amount will be unlawful. [853-A-F] c
7.3. If the realisation of tax is in excess of the charge imposed by the
Excise act read with Excise tariff Act and Rules, then such levy of tax is
not authorised by law. The collection of such excess unlawful levy is also
invalid. As the Judicial Committee pointed out if the levy is invalid as an D
offence against Section 92, it is equally an offence to deny the right to
recover it after it has been unlawfully exacted. Therefore, once it is estab-
lished that more than what is payable under the statute has been collected
from the tax-payer, the tax-payer automatically gets a right to get back the
whole amount. If the right is sought to be effectively taken away by E
imposing conditions, then the law imposing .these conditions must be
declared to be bad and ultra vires the Constitution. [853-H; 854-A]
7.4. Excise Officer cannot tax more than what is permitted by the
statute. If the levy is in excess of the statute, then its retention by the State
is unauthorised by law. What is being retained is not in enforcement of the F
charging section but something else. Such illegally collected tax is not the
property of the State and is not within the disposing power of the State. If
the money has to be utilised by the State, the State has to find out some
legitimacy for ha~ing possession of the money. In the instant case, there
has been no attempt to give legitimacy to the holding of the amount or G
utilisation of the amount by the Government. The. entire amount was
collected unlawfully. [854-B-D]
7.5. When. a case has been finally heard and disposed of and no
application for refund need be made, sub-section (3) of S.llB cannot H
634 SUPREME COURT REPORTS[1996} SUPP.10 S.C.R.
A apply. If there is a judgment, decree or order which has to be carried out,
the Legislature cannot take away the force and effect of that judgment,
decree or order, except by amending the law retrospectively on the basis
of which the judgment was pronounced. [854-H]
7.6. It is practically impossible for an ultimate consumer to make
B
an application for refund under Section llB. He has to know that there
is a dispute about levy of excess duty which is going on between the
manufacturer and the excise authority. He has to know the outcome of
that dispute. He has also to find out what is the amount of duty he has
C borne. This is a difficult process because the ultimate consumer may
have a cash-memo from his retail-seller. Retail-seller usually does not
have the break up of duty in the price he charges. The new law requires
a manufacturer at the time of clearance of the goods to prominently
indicate in the invoice and other documents the amount of such duty
which will form part of the price. There is no such requirement for the
D dealers down the line. It is incomprehensible how a person who buys
cake of soap will know the duty content in the price and whether the
excise duty levied was valid or not and how will he find out which is the
proper office, to whom to make an application in the prescribed form
for refund of duty and what sort of evidence will he be having in his
E possession to authenticate his claim. [855-A·B; DJ
7.7. Section UD is a curious piece of legislation. Even after the full
amount of duty has been paid and goods have been cleared, the manufac·
turer is being called upon to deposit with the Central Government any
p amount collected from the buyer representing duty of excise. In other
words, having paid the full amount of duty of excise, the manufacturer is
being called upon to deposit the duty element in the price of his goods to
be deposited to the credit of the Central Government. The only justification
for this appears to be that the entire amount will be held till finalisation
of the assessment. But the Section provides that if there is any surplus left
G after such adjustment, the surplus shall not come back to the seller but
will be credited to the Fund or paid to the person who has borne the
incidence of the duty in accordance with the provisions of Section 118 ··
which means the ultimate consumer. There cannot be a blanket statutory
direction to pay everything collected from a buyer on account of excise duty
H to be paid over to the Excise Officer. If it is in the nature of advance tax,
MAFATLAL u:ms. LTD. v. U.O.I. 635
there has to be some attempt to fix a percentage which needs to be handed A
over. Otherwise, it will be unreasonable restriction on trade. The sale price
is a part of the circulating capital. Goods are converted into money and
money is again utilised to manufacture goods. If a substantial portion of
this money is taken away without having regard to the actual or probable
necessity for the collection, it will be unreasonable restraint on the right B
of a person to carry on business. Moreover, the amount may be kept till
finalisation of assessment. The assessment may not be finalised till the
dispute has been decided finally by CEGAT or even by this Court. This
provision has to be contrasted with the advance tax collected under the
Income Tax Act. Such collection is authorised by the charging Section of
the Act Section 4(2) because otherwise, the collection would have gone C
beyond the scope of the charge. The rate on which the tax is to be collected
and the basis is clearly stated. High rates of interest is payable both by the
assessee and the Government in appropriate cases. But if an amount is
taken in advance, then the residue after adjustment of tax must go back
to the tax payer. That is not the scheme here. So, this cannot be treated as D
something in the nature of advance collection of tax where duty has not at
all been paid on the goods. [856-E-H; 857-A-E]
· 7.8. Excise duty is a duty on the mannfacture of goods. Once full
amount of duty has been collected, the excise a"uthority cannot control any
contract between the purchaser and the seller. The Excise Act imposes a E
charge on manufacturer. There is no charge of duty levied by the Excise Act
on excess collection by the manufacturer from the buyer. Any question of
excess collection by the manufacturer from the buyer is entirely out of the
purview of the charging section. If the assessee has collected on account of
excise duty from the purchaser more than what he has paid, perhaps, a
purchaser can bring an action against the seller. In the event of a contrac-" F
tual dispute between the purchaser and the seller, the relevant statutes will
be the contract Act, the Sale of goods Act and similar other statutes. But
the Central Excise Officer cannot under any circumstances, lay his hands
on anything more than what is actually levied by the Act. He cannot collect
something which is. not payable under the charging section even for the G
purpose of directing it to the Fund or to the actual consumer. The entire
Section 110 is ultra vires the charge levied by the Excise Act itself.
[857-F-H; 858-A]
7.9. Unlike the Income Tax Act, the assessee under Central Excise
Act has not been given any option to show that he is not liable to pay the H
636 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A amount which is being taken away from his proceeds. He has no oppor-
tunity of getting a hearing on this issue. The Income tax Act enables the
assessee, in such circumstances, to dispute the estimation of advance tax
made by the Income Tax Officer and file his own estimate (of course at his
own peril). H_ere he has no option but to pay without any hearing. [858-D]
B
7.10. A manufacturer cannot be called upon to pay anything except
the duty imposed by the charging provisions. Even if the final assessment
has not been made, goods may be allowed to be cleared by paying the
admitted amount of duty and furnishing the security for the disputed
amount. The security may be keeping sufficient money in the Account
C Current with the Excise Department or even by furnishing a bond or a
bank guarantee. This is provided by the Rules. There is no legal or rational
basis for a blanket provision to deposit whatever is included on account
of excise duty in the price of the goods sold. The position gets curiouser
after the deposit. After adjustment of the tax against the deposit, the
D surplus amount is not returned to the manufacturer. It has to be credited
to the Fund or paid to the pr.rson who has borne the incidence of tax, i.e.,
the ultimate consumer. In other words, the manufacturer will be robbed
of a portion of his sale price for no rhyme or reason. This may also have
the effect of nullifying the sale contract entered into by the manufacturer
E with the buyer. The buyer had agreed to pay an agreed price which may
include the duty element. The seller agreed to sell the goods to the buyer
at that price. Section 64A of the Sale of Goods Act protects the interest
of both. The only effect of Section UD is to rob the manufacturer of a
portion of his legitimate dues. These provisions are not in aid of the
F charge on manufacture levied by the Central Excise Act, but are in
excess of the charge and are confiscatory in nature and have to be
struck down. [858-E-H; 859-A-BJ
7.11. So far as sections 12A and 128 are concerned, only thing that
has to be pointed out is that these two sections do not change the character
G of the price of the goods. [859-G]
7.12. The Central Excise Act imposes a duty on manufacture of goods.
Various provisions have been made for computation and collection of that
duty. Anything collected in excess of that charge is unlawful. If any
H provision is made for retention of duties collected without any authority of
MAFATLAL INDS. LTD. v. U.0.1. 637
law, then such provision will be beyond the scope of the charge. It will A
amount to collecting and retaining something which is not at all duty
payable under Section 3. The Legislature has now authorised the Excise
Department to retain the illegal levy. These provisions are ultra vires the
charge levied by Section 3 and cannot be sustained in any way. [860-A-C]
7.13. The scope of charge in a taxing Act is of the highest importance. B
Nothing can be realised under a taxing Act beyond that. The new provisions
of the Excise Act are not in aid of the charge imposed by Section 3. These
sections are designed to enable the excise department to retain what was
collected over and above the charge. The amounts collected in excess of
what is actually payable under the charging section is not excise duty at all. C
Nothing can be collected under a taxing Act which is not authorised by the
charging section with the machinery provisions. [860-D-E]
7.14. The new provisions not only effectively bar recovery of unlawful
levies by the tax-payer but have also taken away from him a portion of the
price at which he has contracted to sell the goods to the purchasers. A D
portion of the sale price cannot be taken away and retained by the Excise
Officer or returned to the buyer in derogation of a contract of sale. The
amended provisions must be struck down as violative of Article 265 and the
gnarantee contained in Article 19(1) (g) of the Constitution oflndia. [860-F-H]
E
7.15. The Legislature has merely adopted a device and a cloak to
confiscate the property of the tax-payer by not only withholding repayment
of unlawfully gathered tax but also taking away a portion of the sale price
collected from the buyer without any lawful demand· or excuse. Every person
has a right to contract and bargain for the price. Section llD places un-
reasonable fetter to the freedom to carry on trade and commerce and violates F
the gnarantee given by Article 19(l)(g) of the Constitution. (861-A-B]
Assistant Collector of Central Excise, Calcutta Division v. National
Tobacco Co. of India Ltd., (1972) 2 SCC 560, 572 andRaja Jagam1ath Baksh
Singh v. State of U.P., AIR (1962) SC 1563, relied on.
G
Avrshire Employers Mutual Insurance Association Ltd. v. Commis-
sioner of Inland Revenue, 21 Tax Cases 331, 337, referred to.
8. An action by way of a suit or writ petition will be maintainable,
depending upon the facts and circumstances of the case. [861-C] H
638 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3255 of
1984 Etc. Etc.
From the Judgment and Order dated 6.4.84 of the Gujarat High
Court in P.A. No. 1681 of 1980.
B M. Chandrashekharan, Additional Solicitor General, F.S. Nariman,
Harish N. Salve, R.F. Nariman, D.A. Dave, P.K. Parasaran, Jayant Das,
Soli J. Sorabjee, Sr. Advs., Raju Ramachandran, P.H. Parekh, Krishan
Mahajan. E.R. Kumar, Sameer Parekh, Devan Parekh, R.N. Banerjee,
Vikram Nankani, R.N. Karanjawala, Bhaskar Raj Pradhan, (Ms. Ruby
C Ahuja) Adv. for Ms. Manik Karanjawala, Ms. Indira Sawhney (Ravinder
Narain, S. Ganesh, Amrita Mitra, S.C. Sharma, Rajan Narain, Mohit
Kapoor, Sajan Narain,) Advs. for JBD & Co., K.R. Nagaraja, Krisha~
Tyagi, Rajesh Kumar, N.K. Bajpai, V.K. Verma, M. Gaurishankar Murthy,
A. Sabba Rao, K. Swamy, Dalip Tandon, Ms. Savita Sharma, P. Narasim-
han, G. Prakash, P.R. Tiwari, A. Raghunath, Ms. Sushma Suri, S.N. Terdol,
D P. Parmeswaran, C.V.S. Rao, G.S. Chatterjee, Ms. Aruna Benerjee, B.V.
Desai, P.J. Mehta, U.A. Rana, Rajiv Tyagi, M.K. Mohan, Ms. Aparna Jha
for Gagrat & Co., Mukul Mudgal, Biraj Tiwari, Sarva Mitter for Mitter &
Mitter Co., V. Lakshmikumaran, V. Sridharan, V. Balachandran, Ashok K.
Gupta, J.K. Das, Ms. Meenakshi Arora and P. Mahale for the appearing
E parties.
The following Judgments of the Court was delivered by
JUDGMENT OF HON'BLE J.S. VERMA, S.C. AGRAWAL, B.P.
JEEVAN REDDY, A.S. ANAND AND B.N. KIRPAL, JJ.
F DELIVERED BY B.P. JEEVAN REDDY, J.
Significant questions concerning the refund of Excise and Customs
duties collected contrary to law - in all its shades - arise for consideration
in these appeals and writ petitions. They involve the correctness of certain
earlier decisions of this Court, concept of unjust enrichment, interpretation
G of Article 265 of the Constitution of India and of the provisions of the
Central Excises and Salt Act, 1944 and the Customs Act et al. As far back
as August 14, 1984, Civil Appeal No. 1794 of 1984 and the connected
special leave petitions were referred to a Bench of seven Judges by a Bench
of two learned Judges, since the referring Bench doubted the correctness
H of the five-Judge Bench decision in Sales Tax Officer, Benaras & Ors. v.
MAFATLALINDS. LTD. v. U.0.1. 639
Kanhaiyalal Mukundlal Saraf,. [1959] S.C.R. 1350. When the matter came A
up before a seven-Judge Bench, it was brought to our notice that a
seven-Judge Bench has followed the decision in Kanhaiyalal in State of
Kerala v.Aluminium Industries Limited, (1965) 16 S.T.C. 689. Accordingly,
the matters were directed to be posted before a nine-Judge Bench.
Meanwhile, several matters raising identical or connected issues got tagged B
on. Leave granted in Special Leave Petitions.
2. In the year 1991, the Parliament enacted the Central Excises and
Customs Law (Amendment) Act, 1991 (being Act 40 of 1991) substantially
amending the provisions relating to refund in both the Central Excises and
Salt Act and the Customs Act, besides introducing several new provisions C
therein. Writ petitions challenging the validity of the said amendment are
also posted before us. Apart from the validity, the meaning and purport of
the amended provisions also falls for consideration. For the sake of con-
venience, we would refer to the relevant provisions in the Central Excises·
and Salt Act inasmuch as the relevant provisions in both the enactments
are identical.
3. The Central Excises and Salt Act, 1944 (the Act) was enacted with
a view "to consolidate and amend the law relating to Central Duties of
Excise and Salt". The Statement of Objects and Reasons [vide Gazette of
India, 1943, Part-V, P. 243) stated inter alia : E
"The administration of internal commodity taxation in British India
has grown up piecemeal over many years and has been consider-
ably expanded during the last decade. Hitherto the introduction
of a new central duty of excise has required the enactment of
self-contained law and the preparation of a separate set of F
statutory rules. There are no less than 10 separate excise
Acts ....... and 11 sets of statutory rules; and there are also 5 Acts
relating to salt.. ....This agglomeration of statutes and regulations
dealing with similar matters is neither convenient fo~ the public
nor conducive to well-organized administrations... G
(2) It is accordingly proposed to consolidate in a single enactment
all the laws relating to central duties of excise and to the tax on salt
and to embody therein a Schedule, similar to that in the Indian
Tariff Act, 1934, setting forth the rates of duty leviable on each
class of goods. At the same time, the statutory rule will be similarly H
640 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A amalgamated and disembarassed of their unnecessary details. The
Act and the consolidated statutory rules, together with as many
manuals of departmental instructions as may be necessary, will then
f01m a complete Central Excise Code, which will simplify the ad-
ministration of this branch of the revenue system and aid such
further development as may be necessary ....."
B
(emphasis added)
4. Section 2 defines the several expressions occurring in the Act.
Section 3 is the charging section while Section 4 deals with valuation of
C excisable goods for the plirposes of charging of duties of excise. Section 5
provides for remission of duties on goods found deficient in quantity.
Section 5-A empowers the Central Government to grant exemption from
duty of excise in public interest. Section 9 provides for punishment for
violation of the provisions of the Act and the Rules. Section 11 provides
D for recovery of sums due to Government as arrears of land revenue. Section
11-A, which was introduced with effect from November 17, 1980, provides
for recovery of duties not levied or not paid or short levied or short paid
or erroneously refunded. Section 11-B, which too was introduced with
effect .from the same date and by the same Amendment Act (Act 25 of
1978), provides for refund of duties. Chapter-III deals with powers and
E duties of officers and land holders while Chapter-IV deals with transport
by sea. Chapter-V contains special provisions relating to salt. Chapter- VI
deals with adjudication of confiscations and penalties while Chapter VI-A
introduced by the Finance (No. 2) Act, 1980 (with effect from October 11,
1982) provides for appeals against the orders of the original and appellate
F authorities. In certain matters, a reference is provided to the concerned
High Court and in other cases, a direct appeal to this Court is provided
from the orders of the Tribunal. Chapter-VII contains supplementary
provisions. Section 37 confers upon the Central Government the power to
make rules to carry into effect the purposes of the Act and in respect of
several matters mentioned therein.
G
5. Rules have been made by the Central Government in exercise of
power conferred upon them by Section 37. The rules are very elaborate
and provide for various matters and situations, to all of which it is not
necessary to refer for the purposes of this case. Suffice it to mention that,
H broadly speaking, there are two methods of removal of excisable goods.
MAFATLALINDS.LID.v. U.O.I. 641
One is, what may be called, general method where the goods are cleared A
on payment of duty and the other is what is called the self-removal
procedure. The Rules provide for approval of classification list and price
list. In case of dispute regarding classification of excisable goods or valua-
tion (approval of the price list), there are provisions under which
provisional orders can be made which would be operative pending the B
dispute and shall be subject to final decision in the matter. The Rules also
provide for self- determination of duty in certain cases. In short, the Rules
provide for all possible situations that may arise under the Act.
6. The particular provisions in the Act and the Rules relevant to the
controversy herein may now be noticed a little more closely. Sections 11-A C
and 11-B are complimentary to each other. While Section 11-A provides
for recovery of duties not collected or short-collected by Revenue, Section
11-B provides for refund of taxes collected in excess of what is legitimately
due under the Act. Section 11-A has remained untouched by the Amend-
ment Act 40 of 1991 though it has been amended in certain minor respects D
by subsequent enactments. Omitting portions not necessary to the present
controversy, Section 11-A, as it stands today, reads as follows :
"11-A. Recovery of duties not levied or not paid or short- levied or
short-paid or erroneously refunded. - (1) When any duty of excise has not
been levied or paid or has been short- levied or short-paid or erroneously E
refunded, a Central Excise Officer may, within six months from the relevant
date, serve notice on the person chargeable with the duty which has not
been levied or paid or which has been short-levied or short-paid or to
whom the refund has erroneously been made, requiring him to show cause
why he should not pay the amount specified in the notice : p
Provided that where any duty of excise has not been levied or
paid or has been short-levied or short-paid or erroneously
refunded by reason of fraud, collusion or any wilful mis-statement
/
or suppression of facts, or contravention of any of the provisions
of this Act or of the rules made thereunder with intent to evade G
payment of duty, by such person or his agent, the provisions of this
sub-section shall have effect, as if, for the words 'six months', the
words 'five years' were substituted.
Explanation.- ............. . H
642 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A (ii) 'relevant date' means, -
(a) in the case of excisable goods on which duty of excise has
not been levied or paid or has been short-levied or short-paid...... .
(C) in any other case, the date on which the duty is to be paid
B under this Act or the rules made thereunder ;"
7. Coming to Section 11-B, before it was amended by Act 40of1991,
it read as follows (again omitting portions not necessary for the present
purposes) :
c "JJB. Claim for refund of duty.- (1) Any person claiming refund of
any duty of excise may make an application for refund of such duty
to the Assistant Collector of Central Excise before the expiry of
six months from the relevant date :
D Provided that the limitation of six months shall not apply where
any duty has been paid under protest.
(2) If on receipt of any such application, the Assistant Collector
of Central Excise is satisfied that the whole or any part of the duty . ·'
of excise paid by the applicant should be refunded to him, he may
E make an order accordingly.
(3) Whereas a result of any order passed in appeal or revision
under this Act refund of any duty of excise becomes due to any
person, the Assistant Collector of Central Excise may refund the
F amount to such person without his having to make any claim in
that behalf.
(4) Save as otherwise provided by or under this Act, no claim
for refund of any duty of excise shall be entertained.
G (5) Notwithstanding anything contained in any other law, the
provisions of this section shall also apply to a claim for refund of
any amount collected as duty of excise made on the ground that
the goods in respect of which such amount was collected were not
excisable or were entitled to exemption from duty and no court
H shall have any jurisdiction in respect of such claim.
MAFATLALINDS.LTD.v. U.O.I. 643
Explanation. - For the purpose of this section........ . A
(B) 'relevant .date' means-
(f) in any other case, the date of payment of duty."
8. Section 11-B along with Section 11-A was introduced by Customs, B
Central Excises and Salt and Central Board of Revenue (Amendment) Act,
1978 with effect from November 17, 1980, a fact mentioned hereinbefore.
Until the enactment and enforcement of Sections 11-A and 11-B, the
recovery and refund of excise duties was governed by the Rules. Rules 11
which dealt with claims for refund of duty, as in force prior to August 6,
1977 read as follows : C
"Rule l1. No refund of duties or charges erroneously paid, unless
claimed within three months. -- No duties or charges which have
been paid or have been adjusted in an account current maintained
with the Collector under Rules 9, and of which repayment wholly D
or in part is claimed in consequence of the same having been paid
through inadvertance, error or miscon>truction, shall be refunded
unless the claimant makes an application for such refund under
his signature and lodges it with the proper officer within three
months from the date of such payment or adjustment, as the case
maybe." E
9. Rule 11 was amended with effect from August 6, 1977 and it
remained in force till the coming into force of Section 11-B. Rule 11, as it
obtained during the said period, read as follows :
"Rule 11. Claim for refund of duty. -- (1) Any person claiming F
refund of any duty paid by him may make an application for refund
of such duty to the Assistant Collector of Central Excise before
the expiry of six months from the date of payment of duty.
Provided that the limitation of six months shall not apply where G
any duty has been paid under protest.
Explanation. -- Where any duty is paid provisionally under these
rules on the basis of the value or the rate of duty, the period of
six months shall be computed from the date on which the duty is
adjusted after final determination of the value or the rate of duty, H
644 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A as the case may be.
(2) If on receipt of any such application the Assistant Collector
; of Central Excise is satisfied that the whole or any part of the duty
paid by the applicant should be refunded to him, he may make an .
order accordingly.
B
(3) Where as a result of any order passed in appeal or revision
under the Act, refund of any duty becomes due to any person, the
proper officer may refund the amount to such person without his
having to make any claim in that behalf.
C (4) Save as otherwise provided by or under these rules no claim
for refund of any duty shall be entertained.
Explanation. -- For the purposes of this rule, 'refund' includes
rebate referred to in Rules 12 and 12A."
D 10. We may now set out Section 11-B, as amended by Act 40 of 1991.
(Even subsequent to 1991, there have been certain minor amendments to
the said section.) As it stands today. Section 11-B reads as follows (portions
not necessary for the purposes of the present controversy omitted) :
"llB. Claim for refund of duty. - (1) Any person claiming refund
E
of any duty of excise may make an application for refund of such
duty to the Assistant Commissioner of Central Excise before the
expiry of six months from the relevant date in such form and
manner as may be prescribed and the application shall be accom-
panied by such documentary or other evidence including the docu-
F ments referred to in section 12A as the applicant may furnish to
establish that the amount of duty of excise in relation to which
such refund is claimed was collected from, or paid by, him and the
incidence of such duty had not been passed on by him to any other
person:
G Provided that where an application for refund has been made
before the commencement of the Central Excises and Customs
Laws (Amendment) Act, 1991, such application shall be deemed
to have been made under this sub-section as amended by the said
Act and the same shall be dealt with in accordance with the
H provisions of sub-section (2) substituted by that Act :
MAFATLALINDS.LTD.v. U.O.I. 645
Provided further that the limitation of six months shall not apply A
where any duty has been paid under protest.
(2) If, on receipt of any such application, the Assistant Com-
missioner of Central Excise is satisfied that the whole or any part
of the duty of excise paid by the applicant is refundable, he may B
make an order accordingly and the amount so determined shall be
credited to the Fund :
Provided that the amount of duty of excise as determined by
the Assistant Commissioner of Central Excise under the foregoing
provisions of this sub-section shall, instead of being credited to the C
Fund, be paid to the applicant, if such amount is relatable to --
(a) rebate of duty of excise on excisable goods exported out of
India or on excisable materials used in the manufacture of goods
which are exported out of India;
D
(b) unspent advance deposits lying in balance in the applicant's
account current maintained with the Commissioner of Central
Excise;
(c) refund of credit of duty paid on excisable goods used as E
inputs in accordance with the rules made, or any notification
issued, under this Act;
(d) the duty of excise paid by the manufacturer, if he had not
passed on the incidence of such duty to any other person;
F
(e) the duty of excise borne by the buyer, if he had not passed
on the incidence of such duty to any other person;
(f) the duty of excise borne by any other such class of applicants
as the Central Government may, by notification in the Official G
Gazette, Specify :
Provided further that no notification under clause (f) of the
first proviso shall be issued unless in the opinion of the Central
Government the incidence of duty has not been passed on by the
persons concerned to any other person. H
646 SUPREME COURT REPORTS(1996) SUPP.10 S.C.R.
A (3) Notwithstanding anything to the contrary contained in any
judgment, decree, order or direction of the Appellate Tribunal or
any Court or in any other provision of this Act or the rules made
thereunder or any other law for the time being in force, no refund
shall be made except as provided in sub-section (2).
B &planation. -- For the purposes of this section, .......... .
(B) 'relevant date' means--
(t) in any other case, the date of payment of duty."
C 11. The said Amendment Act also amended Section 11-C, besides
introducing Section 11-D and an entire new chapter, Chapter II-A. Since
Section 11-C does not fall for our consideration, we need not refer to it.
Section 11-D reads as follows :
"11-D. Duties of excise collected from the buyer to be deposited with
D the Central Government. -- (1) Notwithstanding anything to the
contrary contained in any order or direction of the Appellate
Tribunal or any Court or in any other provision of this Act or the
rules made thereunder, every person who has collected any amount
from the buyer of any goods in any manner as representing duty -,
E of excise, shall forthwith pay the amount so collected to the credit
of the Central Government.
(2) The amount paid to the credit of the Central Government
under sub-section (1) shall be adjusted against the duty of excise
payable by the person on finalisation of assessment and where any
F surplus is left after such adjustment, the amount of such surplus
shall either be credited to the Fund or, as the case may be,
refunded to the person who has borne the incidence of such
amount, in accordance with the provisions of section llB and the
relevant date for making an application under that section in such
G cases shall be the date of the public notice to be issued by the
Assistant Commissioner of Central Excise."
12. Chapter II-A comprises of four section, Sections 12-A to 12-D.
They read thus :
H "12A. Price of goods to indicate the amount of duty paid thereon. -
MAFA1LALINDS.LTD. v. U.O.I. 647
Notwithstanding anything contained in this Act or any other law A
for the time being in force, every person who is liable to pay'duty
of excise on any goods shall, at the time of clearance of the goods,
prominently indicate in all the documents relating to assessment,
sales invoice, and other like documents, the amount of such duty
which will form part of the price at which such goods are to be B
sold.
12B. Presumption that incidence of duty has been passed on to the
buyer. - Every person who has paid the duty of excise on any goods
under this Act shall, unless the contrary is proved by him, be
deemed to have passed on the full incidence of such duty to the C
buyer of such goods.
12C. Consumer Welfare Fund. - (1) There shall be established by
the Central Government a Fund, to be called the Consumer
Welfare Fund.
D
(2) There shall be credited to the Fund, in such manner as may.
be prescribed, -
(a) the amount of duty of ~xcise referred to in sub-section (2)
of section llB or sub-section (2) of Section UC or sub-section (2)
of section llD; E
(b) the amount of duty of customs referred to in sub-section
(2) of 27 or sub-section (2) of section 28A, or sub- section (2) of
section 28B of the Customs Act, 1962 (52 of 1962);
(c) any income from investment of the amount credited to the F
Fund and any other monies received by Central Government the
purposes of this Fund.
12D. Utilisation of the Fund.-- (1) Any money credited to the Fund
shall be utilised by the Central Government for the welfare of the G
consumers in accordance with such rules as that Government may
make in this behalf.
(2) The Central Government shall maintain or, if it thinks fit,
specify the Authority which shall maintain, proper and separate
account and other relevant records in relation to the Fund in such H
648 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A form as may be prescribed in consultation with the Comptroller
and Auditor-General of India."
13. The refund of excise duties - which is the main topic of the
controversy herein - was thus governed by different provisions over the
years. To wit :
B
(i) upto August 6, 1977, the refund of duties was governed by Rule
11, as it stood upto that date;
(ii) between August 6, 1977 and November 16, 1980, refund of duties
C was governed by Rule 11, as it obtained during the said period;
· (iii) From November 16, 1980 upto September 19, 1991 (date of
coming into force of 1991 (Amendment) Act), the refund of duties was
governed by Sectioq. llB, as it stood during the said period;
D (iv) with effect from September 19, 1991, the refund of duties is
governed by Section llB, as amended by Act 40 of 1991 and the allied
provisions.
14. Though different proVIs1ons governed the subject of refund
during different times, there is one feature uniformly common to them all,
E viz., they purport to be exhaustive on the subject of refund and they provide
a period of limitation for making such claims. Rule 11, as it stood prior to
August 6, 1977, not only carried the title "No refund of duties or charges
erroneously paid unless claimed within three months", it provided specifi-
cally that no duties/charges "shall be refunded unless the claimant makes
p an application for such refund under his signature and lodges it to the
proper officer within three months from the date of such payment or
adjustment, as the case may be". Similarly, Rule 11, as it obtained between
August 6, 1977 and November 16, 1980, provided that claims for refund
shall be made "before the expiry of six months from the date of payment
G of duty". (Of course, this period of limitation did not apply where the duty
was paid under protest.) Sub-rule (4) of Rule 11 provided in express terms
that "save as otherwise provided by or under these rules, no claim for
refund of any duty shall be entertained''.. The situation obtaining under
Section 11-B, as it stood during the period November 16, 1980 to Septem-
ber 19, 1991, was no different. Sub-section (1) provided that a claim for
H refund shall to be filed "before the expiry of six months from the relevant
MAFATLAL INDS. LTD. v. U.O.I. 649
date" and sub-section (4) provided in specific terms that "save as otherwise A
provided by or under this Act, no claim for refund of any duty of excise
shall be entertained". Section 11-B, as amended by 1991 (Amendment) Act,
is similarly worded. Sub-section (1) now provides that a claim for refund
has to be filed "before the expiry of siX months from the relevant date" and
sub-section (3) declares in emphatic terms that "notwithstanding anything B
to the contrary contained in any judgment, decree, order or direction of
the Appellate Tribunal or any court or any other provisions of this Act or
the rules made thereunder or any other law for the time being in force, no
refund shall be made except as provided in sub-section (2)". Sub-section
(2), "it niay be mentioned, provides the circumstances in which and the
grounds on which a refund shall be made, or shall be denied, as the case C
may be. It is necessary to emphasise that the exclusivity of these provisions
relating to refund - and conversely the bar to other proceedings created by
them - is specific to the subject of refund and is apart from and in addition
to the general bar implicit in the Act or expressed in some of its other
provisions, as the case may be. Because the Act creates new rights and D
liabilities and also provides the machinery for assessment and adjudication
of those rights and liabilities, a bar to the jurisdiction to civil court arises
by necessary implication - an aspect dealt with at some length later. (Also
see Principle No. 3 enunciated in Kamala Mills Ltd. v. State of Bombay,
(1966] 1 S.C.R. 64 dealt with in Paras 30 to 33.) The point to be stressed
is that the exclusive nature of the refund provision expressly declared in E
Rule 11 and Section 11-B, at all points of time, is an express and specific
one contained in a special statute. It is not the usual finality clause found
in several statutes; it is much more.
15. The validity of the aforesaid provisions (providing a period of F
limitation for making claims of refund and declaring that no refund claim
shall be entertained except under and in accordance with the said
provisions) has never been challenged seriously. Though in certain with
petitions now before us, validity of Section 11-B (as amended in 1991) is
challenged - which challenge is dealt with hereinafter and rejected - the
main submission of Sri F.S. Nariman, leading the arguments on behalf of G
the appellants- petitioners has been that these provisions do not preclude
the filing of a suit or the filing of a writ petition claiming refund where the
tax has been collected contrary to law by virtue of Article 265 of the
Constitution and that the question of passing on the burden of duty is
totally irrelevant in the matter of refund. Once the provisions of the Act H
.
j
650 SUPREME COURT REPORTS[1996) SUPP.10 S.C.R.
A including the aforesaid provisions, viz., Rule 11 and Section 11-B, as they
stood from 'time to time, are taken as valid and effective, they constitute
"law" with the meaning of Article 265. It may be remembered that the
aforesaid provisions relating to refund have always been accompanied by
and are complimentary to the provisions relating to recovery of duties
B legitimately due under law, but not collected. The recovery provisions also
contained and do contain a corresponding period of limitation, i.e., three
months or six months, as the case may be. This period of six months can
be extended upto a maximum period of five years in cases where non-pay-
ment' of duty was on account of fraud, collusion, wilful mis-statement or
suppression of fact or contravention of the provisions of the Act and the
C Rules indulged in with intent to evade payment of duty.
16. Article 265 of the Constitution is declaratory in nature. It says
that "no tax shall be levied or collected except by authority of law". This no
doubt means that taxes collected contrary to law have to be refunded. But
D where a taxing enactment contains provisions providing for and governing
the refund of taxes collected without the authority of law, the validity of
such provisions, if and when questioned, has to be examined with reference
to other provisions of the Constitution. Article 265 does not itself lay down
any criteria for testing the validity of a statute. When it speaks of "law", it
no doubt refers to a valid law but the validity of a law has to be determined
E with reference to other provisions in the Constitution.
17. We must, however, pause here and explain the various situations
in which claims for refund may arise. They may arise in more than one
situation. One is where a provision of the Act under which tax is levied is
F struck down as unconstitutional for transgressing the constitutional limita-
tions. This class of cases, we may call, for the sake of convenience, ~s cases
of "unconstitutional levy". In this class of cases, the claim for refund arises
outside the provisions of the Act, for this is not a situation contemplated
by the Act.
G 18. Second situation is where the tax is collected by the authorities
under the Act by mis-construction or wrong interpretation of the provisions
of the Act, Rules and Notifications or by an erroneous determination of
the relevant facts, i.e., an erroneous finding of fact. This class of cases may
be called, for the sake of convenience, as illegal levy. In this class of cases,
H the claim for refund arises under the provisions of the Act. In other words,
MAFATLALINDS.LTD.v. U.0.1. 651
these are situations contemplated by, and provided for by, the Act and the A
Rules.
19. The above distinction is not only accepted in all jurisdictions but
is also not disputed before us.
20. So far as the first category (unconstitutional levy) is concerned, B
there is no dispute before us that it is open to the person claiming refund
to either file a suit for recovery of the tax collected from him or to file a
. writ petition under Article 226 of the Constitution for an appropriate
direction of refund. The only controversy on this score is whether the
manufacturer/payer is entitled to such refund where he has already passed C
on the burden of the duty to others.
21. With respect to the second category of cases, there is a good
amount of controversy. While the Union of India says that such claims of
refund should be put forward and determined only under and in accord-
ance with the provisions of the Act and the Rules, the contention of the D
appellants-petitioners is that even in such cases a suit or writ is main-
tainable on the ground that the tax has been collected without the authority
of law, i.e., contrary to Article 265 of the Constitution. In other words,
while according to the Union of India, such claims of refund should be
filed within the time prescribed by the Act and the Rules and should and E
can be dealt with only under the provisions of the Act and the Rules, the
appellants-petitioners say that such claim can be made in suits and writ
petitions as well and that too without reference to the period of limitation
prescribed in Rule 11 or Section 11-B, as the case may be.
22. There is as yet a third and an equally important category. It is F
this : a manufacturer (let us call him "X") pays duty either without protest
or after registering his protest. It may also be a case where he disputes the
levy and fights it out upto first Appellate or second Appellate/Revisional
level and gives up the fight, being unsuccessful therein. It may also be a
case where he approaches the High Court too, remains unsuccessful and G
gives up the fight. He pays the duty demanded or it is recovered from him,
as the case may be. In other words, so far as "X" is concerned, the levy of
duty becomes final and his claim that the duty is not leviable is finally
rejected. But it so happens that sometime later - may be one year, five
years, ten years, twenty years or even fifty years - the Supreme Court holds,
in the case of some other manufacturer that the levy of that kind is not H
652 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
·A exigible in law. (We must reiterate - we are speaking of a case where a
provision of the Act whereunder the duty is struck down as unconstitution-
al. We are speaking of a case involving interpretation of the provisions of
the Act, Rules and Notifications.) The question is whether 'X' can claim
refund of the duty paid by him on the ground that he has discovered the
B.. mistake of law when the Supreme Court has declared the law in the case
of another manufacturer and whether he can say that he will be entitled to
file a suit or a writ petition for refund of the duty paid by him within three
years of such discovery of mistake? Instances of this nature can be multi-
plied. It may not be a decision of the Supreme Court that leads 'X' to
discover his mistake; it may be a decision of the High Court. It may also
C be a case where _'X' fights upto first appellate or second appellate stage,
gives up the fight, pays the tax and then pleads that he has discovered the
mistake of law when the High Court has declared the law. The fact is that
such claims have been entertained both in writ petitions and suits until
now, purporting to follow the law declared in Kanhaiyalal, and are being
D allowed and decreed, sometimes even with interest. The Union of India
says that this can never be. It says, a manufacturer must fight his own battle
and only if he succeeds therein, can he claim refund. He cannot take
advantage of success of another manufacturer and that no suit or writ is
maintainable by him for refund on the ground of alleged discovery of
mistake of law on the declaration of law by this Court or a High Court (or
E a Tribunal or any other authority under the Act) in the case of another
person. The Union of India denies that such a person can plead payment
of duty under a mistake of law within the meaning of Section 72 of the
Contract Act. It also denies that such a writ petition or a suit can be filed
within three years of such" discovery of mistake of law''.
F
23. The Union of India submits that Kanhaiyalal has been wrongly
decided. They submit that no suit or a writ petition lies for refund of duty
except in the case of "unconstitutional levy"· as specified hereinabove and
even here, they say, such claim is subject to the proof that burden of the
duty has not been passed on to the purchaser. In all other cases, they say,
G claims of refund can be made, and must be made, only under and in
accordance with the provisions of the Act/Rules aforesaid, governing the
subject of refund - and in no other manner and in no other forum. It is
also suggested that, in any event, since Kanhaiyalal does not deal with the
effect of passing on the duty to a third party - it was neither raised nor
H considered therein - it is no authority for the proposition that the manufac-
MAFATLALINDS. LTD. v. U.0.1. 653
turer/payer can recover the duty paid in any of the above three categories A
of cases even if he has passed on the burden to others. The petitioners-ap-
pellants, on the other hand, support the reasoning of, and the law declared
in, Kanhaiyalal and say that it has been the law over the last thirty seven
years and has been followed consistently, without a demur, by larger and
smaller Benches of this Court and that there are no good or compelling B
reasons to depart from or over-rule the said decision.
THE FACTS OF AND THE PRINCIPLES ENUNCIATED IN KAN-
HAIYALAL:
24. The respondent, Kanhaiyalal Mukundlal Saraf, was a partnership C
firm. It had entered into certain forward contracts in silver bullion at
Benaras. For the Assessment Years 1948-49, 1949-50 and 1950-51, the
forward transactions were brought to tax under assessment orders dated
May 31, 1949, October 30, 1950 and August 22, 1951 respectively. On
February 27, 1952, the Allahabad High Court held in Budh Prakash Jai D
Prakash v. Sales Tax Officer, Kanpur, (1952) A.L.J. 332, that the provisions
of the Uttar Pradesh Sales Tax Act taxing forward contracts were ultra vires
the Uttar Pradesh Legislature. The respondent applied for refund of tax
paid by it basing its claim on Budh Prakash Jai Prakash. It was declined by
the Commissioner of Sales Tax. Thereupon, the respondent filed a writ
petition in the Allahabad High Court seeking the quashing of the aforesaid E
three assessment orders and for a direction to refund the tax collected.
Meanwhile, the judgment of the Allahabad High Court in Budh Prakash
Jai Prakash was affirmed by this Court on May 3, 1954. The writ petition
filed by the respondent came up for hearing before a learned Single Judge
on November 30, 1956 and was allowed, as prayed for. In the special appeal F
filed by the department, it was contended that the said amount having been
paid under a mistake of law was not recoverable. The department, however
raised no objection to the maintainability of the writ petition. Indeed, it
exiiressly gave it up. The Division Bench applied Section 72 of the Contract
·act and affirmed the judgment of the learned Single Judge. The matter was
then brought to this court. In this court, it was sought to be contended that G
the only course open to the respondent was to follow the procedure
prescribed by the Uttar Pradesh Sales Tax Act and that since that was not
done, the assessee could not approach the civil courts. It was also con-
tended that a writ petition would not lie for refund of money. These two
contentions were not allowed to be raised by this Court (N.H. Bhagwati, H
654 SUPREME COURTREPOIFS(1996] SUPP.10 S.C.R.
A J. speaking for the Constitution Bench) in view of the categorical statement
made on behalf of the department before the special Bench of the High
Court. The Court then referred to Section 72 of the Contract Act and
observed that it does not make any distinction between a mistake of law
and a mistake of fact and that it takes in both kinds of mistakes. The Court
B referred to the legal positio11 obtaining in England, United States of
America and Australia that money paid under a mistake of law is not
recoverable but observed that so far as India is concerned, Section 72
governs the situation and since the language of the section is plain and
unambiguous, it is not permissible to rely upon the position of law obtain-
ing in England O{ other countries. The Court then referred to the decisions
C of High Courts in India on the meaning and interpretation of Section 72,
viz., the decisions of the Bombay and Madras High Courts in Wolf & Sons
v. Dadyaba Khimji & Co., (1919) I.L.R. 44 Born. 631 andAppavoo Chettiar
v. South Indian Railway, A.I.R. (1929) Mad. 648 holding that money paid
under a mistake of law is not recoverable and to the contrary decision of
D the Calcutta High Court in Jagdish Prasad Pannalal v. Produce Exchange
Corporation Ltd., A.LR. (1946) Cal. 245. The Court observed that the said
conflict has since been resolved by Privy Council in Shiba Prasad
Singh v. Srish Chandra Nundi, (1949) L.R. 76 I.A. 244, expressly
approving and affirming the view taken by the Calcutta High Court
and holding further that the expression 'mistake' in Section 72 should be
E given its due and natural meaning which means that it takes in both
mistakes of fact and law. The Privy Council observed : "It may be well
to add that their Lordships judgment does not imply that every sum paid
under mistake is recoverable, no matter what the circumstances may be.
There may in a particular case be circumstances which disentitle a plaintiff
p by estoppel or otherwise". This Court expressed its approval of the view
taken by the Privy Council and proceeded to deal with the contention
urged on behalf of the appellant (Revenue) that having regard to the fact
that the payment of tax by the respondent was voluntary and also because
the monies so received by the State have been spent away by it, the
respondent was not entitled to recover the said amounts. (The appellant-
G Revenue sought to bring its case within the observations of the Privy
Council, quoted hereinabove, which speak of the plaintiff being disentitle
to relief on grounds of "estoppel or otherwise".) Both the objections were
rejected by this Court. With respect to the objection that the payments
were voluntary and, therefore, not recoverable, this Court observed that "if
H the State of U.P. was not entitled to receive the sales tax on these
MAFA1LALINDS.LTD.v. U.0.1. 655
transactions, the provision in that behalf being ultra vires, that could not A
avail the State and amounts were paid by the respondent even though they
were not due by contract or otherwise. The respondent committed the
mistake in thinking that the monies paid were due when in fact they were
not due and that mistake, on being established, entitled it to recover the
same back from the State under s. 72 of the Indian Contract Act". The
B
Court then dealt with the argument that under Section 72, monies paid by
way of tax could not be recovered and rejected it. It held : "No distinction
can therefore be made in respect of a tax liability and any other liability on
a plain reading of the tenns of s. 72 of the Indian Contract Act, even though
such a distinction has been made to America .... To hold that tax paid by
mistake of law cannot be recovered under s. 72 will be not to interpret the c
law but to make a law by adding some such words as 'othe1Wise than by way
of taxes' after the word 'paid'. "The Court accordingly observed that both
the parties were labouring under a mistake of law since they were not
aware of the true position which they came to know only when Allahabad
High Court delivered its judgment in Budh Prakash Jai Prakash and when D
it was affirmed by this Court in appeal. The Court proceeded to observe
that "the State of mind of the respondent would be the only thing relevant
to consider in this context and once the respondent established that the
payments were made by it under a mistake. of law..... .it was entitled to
recover back the said amounts and the State of U.P. was bound to repay
or return the same to the respondent i"espective of any other consideration." E
The Court also observed that there was nothing in circumstances of that
case to support a plea of estoppel against the respondent and reiterated
its understanding of the legal position thus : "On a true interpretation of
s. 72 of the Indian Contract Act the only two circumstances there indicated
as entitling the party to recover the money back are that the monies must F
have been paid by mistake or under coercion. If mistake either of law or of
fact is established, he is entitled to recover the monies and the party receiving
the same is bound to repay or return them i"espective of any consideration
whether the monies had been paid voluntarily, subject however to questions
of estoppel, waiver, limitation or the like". With respect to the plea of
estoppel put forward by the appellant-Revenue, the Court held that there G
was no question of estoppel in that case because both the parties were
labouring under a mistake of law. The Court went further and observed :
"equitable considerations .......could sca.rcely be imported when there is a clear
and unambiguous provision of law which entitles the plaintiff to the relief
claimed by him". The Court also observed that the fact that the State of H
656 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A Uttar Pradesh had not retained the monies paid by the respondent but had
spent them away in the ordinary course of the State business would not
make any difference to the position and that the respondent was entitled
to recover back the monies paid by it under a mistake of law under the
plain terms of Section 72.
B
25. It is well to remember that (a) this was a case where the relevant
provisions of the Uttar Pradesh Sales Tax Act were held to be ultra vires
the Uttar Pradesh Legislature, i.e., beyond the legislative competence of
the State Legislature and (b) it was a case were the assessee filed a writ
petition in the High Court srceking the quashing or relevant assessment
C orders and for a consequential order of refund, basing its claim upon the
judgment of the High Court in another assessee's case. In other words,
orders in the assessee's own case had become final. He sought to reopen
them, by way of a writ petition, in view of the invalidation of the relevant
provisions of the Act by High Court and this Court in the case of another
D assessee. Yet another circumstance to be noticed is that though the Uttar
Pradesh Sales Tax Act contained a provision providing for refund, it was
neither referred to nor discussed.
26. Now, what are the propositions emerging from this decision?
They ·are: (1) Section 72 of the..Contract Act does not make any distmction
E between a mistake of law and the mistake of fact; it takes in both kinds of
mistake. (2) The Rule then obtaining in England and certain other
countries that paid under a· mistake of law are not recoverable has no
relevance to this country. Here, the matter is governed by Section 72 of
the Contract Act. (3) Where the taxes are paid under a mistake of law, the
person paying is entitled to recover the same from the State on establishing
F the mistake. This consequence flows from Section 72 of the Contract Act.
On such mistake being established, the State is bound to repay or return
the amounts irrespective of any other consideration. (4) The right to
recover or the obligation to refund mentioned in (3) above is subject,
however, to "questions of estoppel, waiver, limitation or the like". (5) There
G is no question of estoppel where both parties were labouring under a
mistake of law. (6) Equitable considerations cannot be imported when
there is a clear and unambiguous provision of law which entitles the
plaintiff to the relief claimed by him. (7) The fact that the State has spent
away the taxes for the purposes of State is no defence to a claim for refund
of taxes paid under a mistake of law, in view of the plain terms of Section
H 72.
MAFA1LALINDS. LTD. v. U.O.I. 657
;
SUBSEQUENT DECISIONS OF THIS COURT ON THE QUESTION OF A
REFUND:
27. Before we deal with the correctness of the proposition in Kan-
haiyalal, it would be appropriate to refer to the subsequent decisions of
this Court on the subject of refund of taxes collected without the authority B
of law and see how Kanhaiyalal has been followed, understood or distin-
guished, as the case may be.
28. The first decision to be referred in this behalf is the decision. of
a seven-Judge Bench in State of Kera/a v Aluminium Industries Ltd., (1965)
16 S.T.C. 689. The respondent was a dealer registered under the Kerala C
Sales Tax Act. During the year 1950-51, it paid certain amounts by way
of sales tax. Subsequently, it filed a writ petition claiming refund of
Rs. 80,048-13-6 on the ground that sales on which tax has been levied were
exempt from tax under Article 286(I)(a) of the Constitution, as it then
stood. The High Court allowed the writ petition partly directing refund of D
Rs. 54, 375-5-0. Only the State of Kerala appealed. The respondent-
assessee's case was that when it paid the tax, it did not know that the said
transactions were not exigible to tax. It claimed that it discovered its
mistake only after the payment. The claim for refund was resisted by the
State of Kerala contending inter alia that inasmuch as the tax was paid
voluntarily, it was not recoverable in law. The High Court had rejected the E
State's plea relying upon the decision of this Court in Kanhaiyalal. The
appeal was heard by a seven-Judge Bench of this Court which observed
that in the light of the decision in Kanhaiyalal, money paid under a mistake
of law is recoverable under Section 72 of the Contract Act and that there
can be no question of estoppel when the mistake of law is common to both F
the parties. The Bench further observed, "in such a case where tax is levied
by mistake of law it is ordinarily the duty of State, subject to any provision
in the law relating to sales tax (and no such provision has been brought to
our notice), to refund the tax. If refund is not made, remedy through court
is open subject to the same restrictions and also to the period of limitation G
(see Article 96 of the Limitation Act, 1908), namely, three years from the
date when the mistake becomes known to the persori who has made the
payment by mistake (see State of Madhya Pradesh v. Bhailal Bliai)". The
Court held that "it was the duty of the State to investigate the facts when
the mistake was brought to its notice and to make a refund if mistake was
proved and the claim was made within the period of limitation". It is clear H
658 SUPREME COURTREPORTS[1996] SUPP.10 S.C.R.
A from a reading of the Judgment that neither party questioned the correct-
ness of the decision in Kanha(valal and accordingly it was followed implicit-
ly. This decision, though rendered by a larger Bench, does not itself lay
down any principle.
B 29. In State of Madhya Pradesh & Ors. v. Bhailal Bhai, [1964] 6 S.C.R.
261, the tax imposed upon the tobacco imported by the respondents was
held to be unconstitutional on the ground that it was violative of Article
301 of the constitution and not saved by Article 304(a). The claim for
refund of such taxes was also upheld on the ground that it was a case of a
tax paid under a mistake within the meaning of Section 72 of the Contract
C Act. Kanhaiyalal was followed. It was also observed that though there is no
limitation prescribed for filing a writ petition under Article 226 of the
Constitution, the maximum period fixed by the Legislature as the time
within which a suit for similar relief has to be filed can be taken as the
reasonable period for approaching the High Court.
D
30. Kamala Mills Ltd. v. State of Bombay, [1966] 1 S.C.R. 64, decided
by a Special Bench of seven learned Judges, lays down several propositions
which are of crucial relevance to the issues arising herein. The appellant
was a dealer registered under the Bombay Sales Tax Act. During the year
1950-51, it was assessed to sales tax on certain sales treating them as 'inside'
E sales. However, according to the ratio of the decision of this Court in
Bengal Immunity Co. Ltd. v. State of Bihar & Ors., [1955] 2 S.C.R. 603,
delivered on September 6, 1965, the said sales were in truth 'outside sales,
not taxable under the Bombay Act. Since the time for adopting the
remedies provided by the Bombay Act had become barred meanwhile, the
F appellant filed a suit for recovery of the sales tax illegally collected from it
in respect of 'outside' sales. The respondent-State contended inter alia that
the suit was barred by virtue of Section 20 of the Bombay Act. The plea
was upheld by the trial court and the suit dismissed. On appeal, the High
Court affirmed. The matter was then brought to this Court. Three ques-
tions were raised for consideration before this Court, viz., (1) whether an
G assessment in violation of a statutory provision could claim the status of an
assessment made under the Act within the meaning of Section 20; (2)
whether the decision by the appropriate authority as to the nature of the
transaction was a decision on a collateral fact, the finding on which alone
conferred jurisdiction on the authority to levy the tax, or was it a decision
H on a question of fact which had to be determined by the authority before
MAFATIALINDS. LID. v. U.O.I. 659
itself as one of the issues before it; and (3) whether Section 20 was valid A
if construed as being a complete bar to a suit such as filed by the appellant.
31. Section 20 of the Bombay Act read as follows.
"20. Save as is provided in s. 23, no assessment made and no order
passed under this Act or the rules made thereunder by the Com- B
missioner or any person appointed under s. 3 to assist him shall
be called into question in any Civil Court, and save as it provided
in sections 21 and 22, uo appeal or application for revision shall
lie against any such assessment or order."
32. The answers given by the seven-Judge Bench are to the following
c
effect :
(a) As held by this Court in Finn & Illuri Subbayya Chetty & Sons v.
State of Andhra Pradesh, [1964]1 S.C.R. 752, the words "any assessment
made under this Act" were wide enough to cover all assessments made by D
the appropriate authorities under the Act. whether the assessments were
correct or not. The words "an assessment made" cannot mean an assess-
ment properly and correctly made. Since the appellant was calling in
question the orders of assessment made against it, its challenge in the suit
was plainly prohibited by Section 20.
E
(b) The provisions of the Bombay Act make it clear that all questions
pertaining to the liability of the dealers to pay assessment in respect of their
transactions are expressly left to be decided by the appropriate authorities
under the Act as matters falling within their jurisdiction. Whether or not
a return is correct and whether a transaction is exigible to tax, or not, are F
all matters to be determined by the authorities under the Act. It is impos-
sible to accept the argument of the appellant that the finding of the
appropriate authority that a particular transaction is taxable under the
provisions of the Act is a finding on a collateral fact and, therefore, the
resort to civil court is open. On the contrary, the whole activity of assess- G
ment beginning with the filing of the return and ending with the order of
assessment falls within the jurisdiction of the appropriate authority and no
part of it can be said to constitute a collateral activity not specifically and
expressly included in the jurisdiction of the appropriate authority as such.
Even if the appropriate authority,_ holds erroneously, while exercising its
jurisdiction and powers under the Act that a transaction which is an H
660 SUPREME COURT REPORTS(l996] SUPP.10 S.C.R.
A 'outside' sale is not an 'outside' sale and proceeds to levy sales tax on it, it
cannot be said that the decision of the appropriate authority is without
jurisdiction.
( c) Where a statute creates a special right or a liability and also
provides the procedure for the determination of the right or liability by the
B Tribunals constituted in that behalf and provides further that all questions
about the said right a liability shall be determined by the Tribunal so
constituted, it becomes pertinent to enquire whether remedies normally
associated with actions in civil courts are provided by the statute or not. In
other words, if the court comes to the conclusion that the Act does not
C provide any remedy to make a claim for recovery of illegally collected tax
and yet Section 20 prohibits such a claim being made before an ordinary
civil court, the court might hesitate to construe Section 20 as creating an
absolute bar. If for any reason, Section 20 is construed strictly as constitl).t-
ing an absolute bar, the question may arise with respect to its con-
stitutionality. Looked at from the above angle, it cannot be said that the
D Bombay Act does not provide an alternative remedy for the claim which
the appellant put forward in the suit. Section 22-B empowered the appel-
late/revisional authority under the Act to extend the period of limitation if
they are satisfied that party applying for such extension had sufficient cause
for not preferring the appeal and revision during the prescribed period.
E Section 23-A further provided for rectification of mistakes. In this view of
the matter, it cannot be said that the claim of the appellant could not have
been agitated under and in accordance with the provisions of the Bombay
Act.
(d) Section 20 was constitutionally valid on the same reasoning on
F which Section 18-A of the Madras General Sales Tax Act was held to be
valid in Finn & Illuri Subbayya Chetty & Sons.
(e) Insofar as the challenge to the constitutionality of Section 20 of
the Bombay Act is concerned, the suit cannot be said to be barred. Section
G 20 does not take in the challenge to the validity of the section itself. But
inasmuch as Section 20 is found to be constitutional, the plaintiff cannot
get any relief.
33. Sri F.S. Nariman strongly emphasised the provision in Section
22-B of the Bombay Act and the absence of a similar provision in the
H Central Excise Act/Customs Act. With respect, we are not able to ap-
MAFATLALINDS.LTD.v. U.O.I. 661
preciate this argument. Section 22-B merely empowered the appel- A
late/revisional authorities to extend the time prescribed for filing an appeal
or revision, as the case may be. Section 22-B did not provide for extension
of the time prescribed for making an application for refund under Section
13 of the Act. Even in the Central Excise and Customs Act, there are
provisions empowering the appellate authorities to extend the time B
prescribed for filing the appeal. (There is no provision for revision now.)
Of course, there is no provision for extending the time limit prescribed in
Section 11-B. But there was no such provision in the Bombay Act either.
If so, we are unable to see any distinction between the Bombay Act the
enactments concerned herein in this behalf. We must say that we are in
respectful agreement with the propositions enunciated in this decision and C
propose to apply them to the provisions concerned in these matters.
34. KS. Venkataraman & Co. v. State of Madras, [1966) 2 S.C.R. 229
is significant for the reason it differs from the decision of the Privy Council
in Raleigh Investment Co. Ltd. v. The Governor General in Counci~ (1947) D
L.R. 74 I.A. 50. The appellant was assessed to sales tax in respect of certain
works contracts executed by them during the years 1948-49 to 1952-53. On
5th April, 1954, the Madras High Court declared that the relevant
provisions of the Madras General Sales Tax Act, 1939 empowering the
State to assess indivisible building contracts were beyond the competence
of the State Legislature. On March 23, 1955, the appellant instituted a suit E
for recovery of the amount paid by it on building/works contracts. Both the
trial court and the High Court dismissed the suit relying upon the decision
of the Privy Council in Raleigh Investment Co. Ltd. and observing that the
only remedy of the appellant was to pursue the machinery provided by the
statute. This Court by a majority (Subba Rao, Wanchoo and Sikri, JJ. -
Shah and Ramaswami, JJ. dissenting) did not agree with the proposition F
in Raleigh Investment Co. Ltd. that a contention relating to the validity of
the Act can be raised before the authorities under the Act. The Court held
that an authority created by a statute cannot question the vires of the
statute or any of its provisions and that the authorities must act under the
Act and not outside it. The Court further held that if the authorities act G
under a provision which is invalid being beyond the competence of the
legislature enacting it, it cannot be said that the authorities are acting under
the Act. The question relating to the validity of the Act, the Court held,
cannot also be gone into by the High Court acting in its special advisory
jurisdiction provided by Section 64 of the Madras Act. Accordingly, it was
held that the suit for refund was maintainable and that the period of H
662 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A limitation is three years from the date on which the mistake became known
to the plaintiff. This again was a case where the provisions, under which
the disputed tax was levied, were declared unconstitutional on the ground
of lack of legislative competence.
35. In Dhulabhai & Ors. .v. State of Madhya Pradesh & Anr., (1968] 3
B S.C.R. 662, a Constitution Bench of this Court discussed at length the
question when does a suit lie for recovery of taxes imposed and collected
under a taxing enactment, to wit, the Madhya Bharat Sales Tax Act, 1950
and enunciated seven propositions. Suits were filed by the appellants for
recovery of certain taxes on the ground that the same were collected from
them against the constitutional prohibition contained in Article 301.
C Hidayatullah, CT., speaking for the Constitution Bench, summarised the
position emerging from the decisions of this Court on the subject in the
following words :
#'
"(1) Where the statute gives a finality to the orders of the special
D tribunals the Civil Courts' jurisdiction must be held to be excluded
if there is adequate remedy to do what the Civil Courts would
normally do in a suit. Such provision, however, does not exclude
those cases where the provisions of the particular Act have not
been, complied with or the statutory tribunal has not acted in
conformity with the fundamental principles of judicial procedure.
E
(2) Where there is an express bar on the jurisdiction of the court,
an examination of the scheme of the particular Act to find the
adequacy or ~he sufficiency of the remedies provided may be
relevant but is not decisive to sustain the jurisdiction of the civil
F court.
Where there is no express exclusion the examination of the
remedies and the scheme of the particular Act to find out the
intendment becomes necessary and the result of the inquiry may
be decisive. In the latter case it is necessary to see if the statute
G creates a special right or a liability and provides for the determina-
tion of the right or liability and further lays down that all questions
about the said right and liability shall be determined by the
tribunals so constituted, and whether remedies normally associated
with actions in Civil Courts are prescribed by the said statute or
H not.
MAFA1LAL INDS. LTD. v. U.O.I. 663
(3) Challenge to the provisions of the particular Act as ultra vires A
cannot be brought before Tribunal constituted under that Act.
Even the High Court cannot go into that question on the revision
or reference from the decision of the Tribunals.
(4) When a provision is already declared unconstitutional or the
constitutionality of any provision is to be challenged, a suit is open. B
A writ of certiorari may include a direction for refund if the claim
is clearly within the time prescribed by the Limitation Act but it
is not a compulsory remedy to replace a suit.
(5) Where the particular Act contains no machinery for refund of C
tax collected in excess of constitutional limits or illegally collected
a suit lies.
(6) Questions of the correctness of the assessment apart from its
constitutionality are for the decision of the authorities and a civil
suit does not lie if the orders of the authorities are declared to be D
final or there is an express prohibition in the particular Act. In
either case the scheme of the particular Act must be examined
because it is a relevant enquiry.
(7) An exclusion of the jurisdiction of the Civil Court is not readily E
to be inferred unless the conditions above set down apply."
36. In the above summary, Proposition No. 5, however, requires a
little elucidation. A reading of the judgment shows that the said proposition
is based upon the earlier decisions of this Cou•t in KS. Venkataraman
Bharat Kala Bhandar Ltd. v. M.C. Dhamangaon, [1965] 3 S.C.R. 499. KS. F
Venkataraman, as pointed out hereinabove, was a case where the suit was
filed for refund of amounts collected under provisions declared ultra vires
the State Legislature, i.e., a case of what we have called 'unconstitutional
levy. Bharat Kala Bhandar Ltd. was a case were there was no machinery
provided in the Central Provinces and Berar Municipal Act for refund of
tax assessed and recovered in violation of the constitutional limitations. It G
was held that "one of the corollaries flowing from the principle that the
• Constitution is the fundamental law of the land is that the normal remedy
of a suit will be available for obtaining redress against the violation of a
constitutional provision. The Court must, therefore, lean in favour of con-
struing a law in such a way as not to take away this right and render illusory H
664 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A the protection afforded by the Constitution". As a matter of fact, the tax
levied in this case was found to be void being violative of the provisions in
Article 276 of the Constitution and Section 142-A of the Government of
India Act, 1935. The words "in excess of the constitutional limits" must,
therefore, be understood in the. context of the ratio of the above two
decisions. So for as the words" illegally collected" in Proposition No. 5 are
B concerned, it is obvious that they go along with the preceding words, i.e.,
where a tax is collected in disregard of the constitutional limitations, it will
be a tax illegally collected and a suit lies. It would not be reasonable to
understood the words "illegally collected" dissociated from their context or
in a manner contrary to the ratio of Kamala Mills, which was expressly
C referred to and followed in thiS decision.
37. The facts of the decision in Tilokchand Motichand & Ors. v. H.B.
Munshi &Anr., [1969] 2 S.C.R. 824 are rather interesting. They tell us how
the Court viewed the attempt of a person who tried to take advantage of
D the decision in another person's case rendered several years later. The
authorities under the Bombay Sales Tax Act refunded certain amounts to
the petitioners-dealers on the condition that they should pass on the said
amounts to their customers (these amounts were earlier collected by the
dealers from their customers and paid to the State). On .the ground that
the dealers have failed to pass on the said amounts to their customers, the
E authorities forfeited the said amounts under Section 21(4) of the Bombay
Sales Tax Act, 1953. The dealers filed a writ petition in the Bombay High
Court challenging the constitutional validity of Section 21(4). A learned
Single Judge dismissed the writ petition holding that inasmuch as the
petitioners-dealers have defrauded their customers, they were not entitled
p to any relief under Article 226. The appeal preferred by the dealers was
dismissed by the Division Bench of the High Court holding that even if
there was a violation of petitioners' fundamental right, the High Court was
not bound to come to their help in view of their conduct. The dealers
accordingly paid up the said amount in instalments between August, 1959
and August, 1960. More than seven years later, i.e., on September 29, ).967,
G this Court struck down Section 12(A)(iv) of the Bombay Sales Tax Act,
1946 corresponding to Section 21(4) of the 1953 Act in Kantilal Babula!
v. H.C. Patel, 21 S.T.C. 174. On February 9, 1968, the petitioners filed a
writ petition in this Court under Article 32 of the Constitution for refund
of the aforesaid amounts on the assumption that Section 21(4) is uncon-
H stitutional in view of the decision of this Court in Kantilal Babula/. They
MAFATLALINDS. LTD. v. U.0.1. 665
submitted that though they had raised other grounds in support of their A
.... attack upon the validity of Section 21(4) in the High Court, tht:y were not
aware of the particular ground upon which the corresponding provision in
the 1946 Act was struck down by this court in Kantilal Babula/. This Court,
by majority, (Hidayatullah, CJ., Bachawat and Mitter, JJ.) dismissed the
writ petition holding that the judgment of the High Court dismissing the B
writ petition filed by the writ petitioner operates as res judicata and bars
the petition under Article 32. Hidayal ullah, C.J. made the following
relevant observations :
"The petitioner moved the High Court for the relief on the ground
that the recovery from him was unconstitutional. He set out a C
number of grounds but did not set out the ground on which
ultimately in another case recovery was struck down by this Court.
That ground was that the provisions of the Act were unconstitu-
tional. The <[tlf!Sti<Jlt is : can the petitioner in this case take advantage,
after a lapse oj d hUlhbet of years, of the decision of this Court? He D
moved the High Court but did not come up in appeal to this Court.
His contention is that the ground on which his petition was dis-
missed was different and the ground on which the statute was
struck down was not within his knowledge and therefore he did
not know of it and pursue it in this Court. To that I answer that
law will presume that he knew the exact ground of uncon- E
stitutionality. Everybody is presumed to know the law. It was his
duty to have brought the matter before this court for consideration.
In any event, having set the machinery of law in motion he cannot
abandon it to resume it after a number of years, because another
person more adventurous than he in his turn got the statute declared F
unconstitutional, and got a favourable decision. If I were to hold
otherwise, then the decision of the High Court in any case once
adjudicated upon and acquiesced in may be questioned in a fresh
litigation revived only with the argument, that the correct position
was not known to the petitioner at the time when he abandoned
his own litigation. I agree with the opinion of my brethren G
Bachawat and Mitter, JJ. that there is no question here of a mistake
of law entitling the petitioner to invoke analogy of the Article in
the Limitation Act. The grounds on which he moved the Court
might well have impressed this Court which might also have
decided the question of the unconstitutionality of the Act as was H
666 SUPREME COURT REPORTS[1996) SUPP.10 S.C.R.
A done in the subsequent litigation by another party. The present
petitioner should have taken the right ground in the High Court
and taken it in appeal to this Court after the High Court decided
against it. Not having done so and having abandoned his own
litigation years ago, I do not think that this Court should apply the
analogy of the Article in the Limitation Act and give him the relief
B now."
(Emphasis added)
38. Bachawat, J. held that a writ under Article 32 will no doubt issue
C as a matter of course where infringement of fundamental right is estab-
lished but that dc .ht mean that in giving relief under the said article,
0
this Court would -, x· ,
e all laws and procedure. The learned Judge also
emphasised the disc! tionary nature of jurisdiction.
39. Reference may also be made to the decision of K.K. Mathew, J.
D (sitting with Alagiriswami, J.) in D. Cawasji & Co. Etc. v. State of Mysore
& Anr., [1975) 2 S.C.R. 511. The appellant paid education cess levied under
the Mysore Elementary Education Act, 1941 (as amended in 1968). The
Mysore High Court struck down the relevant provisions levying the cess in
1968 on a writ petition filed by the appellant, which was affirmed by this
E Court in 1971. In the middle of the year 1968, the appellant filed a writ
petition claiming refund of the cess amount paid by him. The claim was
rejected by the High Court on the ground of delay. On the matter being
brought to this Court, this Court held following Bhailal Bhai and
Aluminium Industries that taxes paid without the authority of law can be
recovered by way of a writ petition and that by virtue of Section 17(1)(c)
F of the Limitation Act, 1963, the period of limitation does not begin to run,
in a suit for relief on the ground of mistake, until the plaintiff has dis-
covered the mistake or could, with reasonable diligence, have discovered
it. Mathew, J. did realise the implication of the said holding. The learned
Judge make these perceptive observations :
G "We are aware that the result of this view would be to enable a
person to recover the amount paid as tax even after several years
of the date of payment, if some other party would successfully
challenge the validity of the law under which the payment was
made and if only a suit or writ petition is filed for refund by the
H person within three years from the date of declaration of the
MAFATLALINDS.LTD. v. U.O.I. 667
invalidity of the law. That might both be inexpedient and unjust so A ·
far as the the State is concerned."
(Emphasis added)
The learned Judge proceeded to observe further :
B
"A tax is intended for immediate expenditure for the common good
and it would be unjust to require its repayment after it has been in
whole or in part expended, which would often be the case, if the
suit or application could be brought at any time within three years,
be it a hundred years' after the date of payment. Nor is there any
provision under which the court deny refund of tax even if the C
person who paid it has collected it from his customers and has no
subsisting liability or intention to refund it to them, or, for any
reason, it is impracticable to do so*.
40. The appeals were, however, dismissed holding that since the D
appellant has failed to claim the relief of refund in the first writ petition
filed by him, he is disentitled from doing so by way of a separate sub-
sequent writ petiton. It was observed that it is not open to the appellant to
split up his claim for refund and file writ petitons in a piece-meal fashion.
The decision is significant for pointing out the irrational and unjust conse-
quences of the holding in Bhailal Bhai and Aluminium Industries which E
implicitly followed Kanhaiyalal. The decision is also singificant for pointing
out the adverse impact of public interest inherent in holding (See Kan-
haiyalal again) that the plea that the State has expended the taxes on public
purposes is no defence to a claim for .refund.
41. We may at this juncture refer to a very significant decision in
F
R.S. Joshi v. Ajit Mills, (1978) 1 S.C.R. 338 rendered by a seven-Judge
Constitution Bench. Section 46 of the Bombay Sales Tax Act, 1959
provided that no person shall collect any sum by way of sales tax which is
not exigible according to law. Section 37 provided for penalties in case of
violation of the provisions of Section 46. Not only the person so collecting G
was liable to pay a penalty not exceeding Rupees two thousand but in
It is a matter of regret that inspite of this clear enunciation as far back as 1975,
Parliament took no steps, until 1991, to make a law providing that where the payer
passes on the burden of the tax to another, he cannot recover the same from the
State.Sri F.S. Nariman naturally stressed this inaction and n1ade it a basis for contend~
ing that any decision over-turning Kanhaiya/a/ must only have prospective effect. H
668 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A addition thereto, any sum collected by the person by way of tax in con-
travention of Section 46 was also liable to be forfeited to the State Govern-
ment. The constitutionality of the said provision was questioned on the
basis of the earlier decision of this Court in R. Abdul Quader & Co.\
v. Sales
Tax Officer, Hyderabad, (1964] 6 S.C.R. 867. The challenge was repelled.
B The following observations of Krishna Iyer, J. are apposite :
"The professed object of the law is clear. The motive of the
legislature is irrelevant to castigate an Act as a colourable device.
The interdict on public mischief and the insurance of consumer
interests against likely, albeit, unwitting or 'ex abundanti cautela'
c excesses in the working of a statute are not merely an ancillary
power but surely a necessary obligation of a social welfare state.
On.e potent prohibitory process for this consummation is to penal-
ize the trader by casting a no-fault or absolute liability to 'cough
up' to the State the total 'unust' taking snapped up and retained
by him 'by way of tax' where tax is not so due from him, apart from
D other punitive. impositions to deter and to sober the merchants
whose arts of dealing with customers may include 'many a little
makes a mickle'. If these steps in reasoning have the necessary
nexus with the power to tax under Entry 54 List II, it passes one's
comprehension how the impugned legislation can be denounced
E as exceeding legislative competence or as a 'colourable device' or
as 'supplementary, not complimentary' ...... In our view, the true
key of constitutional construction is to view the equity of the statute
and sense the social mission of the law, language permitting,
against the triune facets of justice high-lighted in the Preamble to
the Paramount Parchment, read with a spacious signification of
F
the listed entries concerned."
42. The learned Judge also observed that social justice clauses in-
tegrally connected with the taxing provisions cannot be viewed as a mere
device. The Court held that since the forfeiture of the sums collected by
G way of tax contrary to law was by way of penalty, the legislation was within
the purview of Entry 54 of List II and constitutionally valid. In our view,
the approach adopted in this case in of great relevance in the matters
before us.
H DECISIONS OF THIS COURT WHICH HAVE APPLIED THE
'll ......
MAFATLAL INDS. LID. v. U.O.I. 669
DOCTRINE OF UNJUST ENRICHMENT A
43. Shiv Shanker Dal Mills Etc. v. State of Haryana & Ors. Etc., [1980)
1 S.C.R. 1170 arose with reference to market fees collected under a
provision which was strnck down by this Court in Kewal Krishan Puri v. State
of Punjab & Ors., [1979) 3 S.C.R. 1217. The enhancement of market fee B
from two to three percent was held to be bad, whereupon the traders
demanded refund of the excess market fee collected from them. This Court
held that though refund of the fee so collected my be legally due to the
traders, the traders may be repaid amount only to the extent they have not
passed on the burden to their customers. To the extent they have passed
on, it held, they were not entitled. This principle was deduced from the C
concept of distributory justice underlying Article 38 and 39 of the Constitu-
tion of India as from the discretionary nature of the power under Article
226 of the Constitution. Following the Principle enunciated by this Court
in Newabgunj Sugar Mills v. Union of India & Ors., [1976) l S.C.R. 803, the
Court devised a scheme of refund by the market committees providing for D
refund of amounts to those from whom illegal collections had been made
by the traders.
44. Amar Nath Om Prakash v. State. of Punjab & Ors. Etc., [1985] 2 ·
S.C.R. 72 was also a case arising with reference to market fee, i.e., an
indirect tax. Section 23-A of the Punjab Agricultural Produce Markets Act E
1 enabled the market committees to "retain the fee levied and collected by
it from a licensee in excess of that leviable under Section 23, if the burden
of such fee was passed on by the licensee to the next purchaser of the
Agricultural Produce in respect whereof such fee was levied and collected".
The validity of the said provision was called in question in this case. This F
Court negatived the challenge holding that the primary purpose of the said
section was to prevent refund of licence fee to dealers. who have already
passed on the burden of such fee to purchasers and who want to. unjustly
enrich themselves by obtaining refund from the market committee. The
said provision, it was held, recognised that the consumer public who have G
borne the ultimate burden are the persons really entitled to refund and
since the market committee represents their interests, it is entitled to retain
.the amount. It was pointed out that the provision for :retention by market
committee had to be made because of the practical impossibility of tracing
the individual purchasers and consumers who have ultimately borne the
burden. It was held that it was "really a law returning to the public what it H
670 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A has taken form the public, by enabling the Cominittee to utilise the amount
for the performance of services required of it under the Act. Instead of
allowing middlemen to profiteer by illgotten gains, the legislature has
devised a procedure to undo the wrong item that has been done by the
excessive levy by allowing the Committees to retain the amount to be
B utilised hereafter for the benefit of the very persons for whose benefit the
Marketing legislation was enacted." The Court observed that Section 23-A
was akin to the provision concerned in Orient Paper Mills Limited v. State
of Olissa, (1962] 1 S.C.R. 549 which too disabled a dealer from claiming a
refund of the fee paid by him, in case he has already passed on the burden
to the next purchaser. The approach adopted by this Court in this case
C meets our respectful approval.
45. State of Madhya Pradesh v. Vyankatlal & Anr., (1985] 3 S.C.R. 561
marks a definite milestone in the application of the doctrine of unjust
emichment. In exercise of the powers conferred upon him by the Madhya
D Bharat Essential Supplies (Temporary Powers) Act, the Director of Civil
Supplies, issued a notification fixing ex-factory prices of sugar for different
sugar factories. The supply price was a little higher than the ex-factory
price. The notification required the difference between the supply price
~d the ex-factory price to be credited to the Madhya Bharat Government
Sugar Fund. Pursuant to the demands made by the State, the sugar mills
E deposited certain amounts into the said Fund under protest and then
· instituted suits for refund of the amounts so deposited. The High Court
upheld the plea of the sugar mills that the Director of Civil Supplies had
no authority in law to fix the ex-factory prices. This meant that the sugar
mills were entitled to the refund of the amounts paid by them into the
p Fund. The State appealed to this Court against the said decision. Following
the principle of Shiv Shankar Dal Mills and Amar Nath Om Prakash, this
Court held that even though there is no specific provision in Madhya
Bharat Act providing that the sugar mills are not entitled to refund in case
they have passed on the burden to the purchasers, the said principle can
safely be applied to the facts of the case before them. The Court observed:
G
"The burden of paying the amount in question was transferred by
the respondents to the purchasers and, therefore, they were not
entitled to get a refund. Only the persons on whom lay the ultimate
burden to pay the amount would be entitled to get a refund of the
H same. The amount deposited towards the Fund was to be utilised
MAFATLALINDS. LTD. v. U.O.l. 671
for the development of sugarcane. If it is not possible to identify A
the persons on whom had the burden been placed for payment
towards the Fund, the amount of the Fund can be utilised by the
Government for the purpose for which the Fund was created,
namely, development of sugarcane. There is no question of refund-
ing the amount to the respondents who had not eventually paid B
the amount towards the Fund. Doing so would virtually amount to
allow the respondents unjust enrichment."
46. We express our respectful agreement with the above approach.
47. The same approach was adopted in the case of entry tax in Indian C
Aluminium Company Ltd. v. Thane Municipal Corporation, [1992] Supp. 1
S.C.C. 480, Indian Oil Corporation v. Municipal Corporation, Jallandhar,
[1992] 1 S.C.C. 333 and in Entry Tax Officer v. Chandanmal Champa/al,
[1994] 4 s.c.c. 460.
DECISIONS OF THIS COURT DEALING DIRECTLY D
WITH THE 1991 (AMENDMENTS) ACT:
48. The first decision of this Court to consider the amended Section
11-B is in Union of India & Ors. v. Jain Spinners Ltd. & Anr., [1992] 4 S.C.C.
389. The validity of the 1991 (Amendment) Act was, however, neither E
raised nor considered by the court. The impugned orders of the High
Court, made before the coming into force of the 1991 (Amendment) Act,
directing refund of the excess duty collected to the manufacturers, this
Court held, would defeat the provisions of amended Section 11-B which
had come into force during the pendency of the, refund proceedings. The
Court held that so long as the refund proceedings are pending, the F
amended provisions get attracted and disentitle the manufacturer-payer
from claiming any refund contrary to the said provisions. In other words,
the contention of the manufacturers that the amended Section 11-B applies
only to claims of refund arising after the coming into force of the said
Amendment Act was rejected. G
49. In Union of India v. l. T.C., [1993) Suppl. 4 S.C.C. 326, it was held
by this Court (Kuldip Singh and Dr. A.S. Anand, JJ.) that the amended
Section 11-B applies to all pending cases, including those pending in appeal
before the Supreme Court. It was held that the amended provisions do
apply to such a case a well, notwithstanding the fact that the refund amount H
672 SUPREME COURT RE!'QRTS[1996] SUPP. 10 S.C.R.
A was drawn out by the manufacturer, under the orders of the Court, whether
subject to furnishing of adequate gu!II'antees or otherwise. The Court held
further that by virtue of the 1991 (Amendment) Act, the court is bound to .
take notice of the change in law governing refunds and accordingly it called
upon the manufacturer-assessee to furnish documentary or other evidence
B to establish that the amount of duty of excise in relation to which the refund
is claimed had not been passed on by him to any other person. Since the
manufacturer could not establish the said fact, the Court declined to grant
refund in terms of the amended Section ll·B. It must be noted that the
plea of unjust enrichment was not specifically raised before the High Court
and was raised only in the appeal before this Court. The objection of the
C manufacturer on this court was repelled saying that since the 1991 Amend-
ment was not there, the non-raising of the said defence cannot preclude
the Revenue from raising the said plea after the coming into force of the
Amendment Act. The Court also invoked the presumption contained in
Secti.on 12-B holding that the said presumption is attracted to pending
D proceedings as well.
DECISIONS OF FOREIGN COURTS ON THE SUBJECT:
50. A number of decisions rendered by foreign courts have been
brought to our notice, of which we may notice ·a few - only \vith a view to
E note how different constitutional courts are viewing the problem, of refund
of taxes collected contrary to law.
51. United Kingdom : Until 1992, the law in England was that taxes
paid under a mistake or law were not recoverable whereas taxes paid under
a mistake of fact or under compulsion were held recoverable. This position
F was redically altered by the decision of House of Lords in Woolwich
Building Society v. Inland Revenue Commissioners (No.2), (1992) 3 All.E.R.
737 = (1993) 1 A.C. 70.
52. The first thing to be noticed with respect to the decision in
G Woolwich Building Society is that it deals with a direct tax, viz., income tax
and not with a indirect tax. Secondly, it is a case where the Regulations
under which taxes were demanded and collected, were held to be ultra vires
and void. In other words, it was a case "in which an excessive assessment
was made on a taxpayer due to some error of fact or law''. For this reason,
it was held that the remedy of the taxpayer lay in common law and not the
H ones provided by the statute itself. The majority (Lord Goff, Lord Browne-
MAFATLAL INDS. LTD. v. U.O.I. 673
Wilkinson and Lord Slynn of Hadly), even while holding that taxes paid A
under a mistake of law are recoverable, hedged the rule with certain riders.
Lord Goff held that where a tax or duty is paid by a citizen pursuant to an
7, unlawful demand "common justice seems to require that tax to be repaid,
unless special circumstances or some principle of policy require otherwise;
prima facie, the taxpayer should be entitled to repayment as of right" (P. · B
759). This principle he deduced from the Bills of Rights (1688) which
proclaimed inter alia that taxes should not be levied without the authority
of Parliament. The learned Law Lord indicated that same rule may also
govern cases where excess tax is collected by misconstruction of law,
though he declined to express a final opinion on the question. He also did
not express any definite opinion on the question - what would be the C
position, if the plaintiff passes on the burden of tax to another. The learned
Law Lord agreed that the law can place shorter time-limits for making such
claims of restitution and referred in that connection to the position obtain-
ing in German Law where formal objection has to be lodged within one
month of the notification to enable a citizen to claim refund of amounts D
collected unlawfully. The German Law further provides that one citizen
cannot benefit from the successful formal objection of another citizen; the
rule is that the person should himself object and take proceedings within
the prescribed time-limit. The minority (Lord Keith of Kinkel and. Lord
Jauncey of Tullichettle), h(1\\cver, stuck to th1 prevailing view that taxes
paid under a mistake of law are not recover;,. E
53. Strictly speaking, this decision is of little relevance to us. Firstly,
it deals with a direct tax. In the case of a direct tax, there can be no
question of passing on the burden of the tax to others as in the case of an
indirect tax. All that the decision says, reversing the hitherto prevailing F
theory, that taxes paid under a mistake of law ought to be refunded.
-- 54. CANADA : In Air Canada et al v. The Queen in Right of British
Columbia et al, (59 D.L.R. (4th) 161), the learned Judges (including
Wilson, J. who dissented on one issue to be indicated shortly) looked at G
the claim of refund of taxes recovered contrary to law from two
standpoints, viz., Constitutional Law and Law of Restitution. They held that
the distinction between mistake of fact and mistake of law should play no
part in Law of Restitution and further that the rule that "taxes paid under
a mistake of law are not recoverable" should have no place in Constitution-
al Law. La Forest, J. put the position in the following words : H
674 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
A "In my view the distinction between mistake of fact and mistake of
law should play no part in the law of restitution. Both species of
mistake, if one can be distinguished from the other, should, in an
appropriate case, be considered as factors which can make an
enrichment at the plaintiffs expense 'unjust' or 'unjustified'. This
does not imply, however, that recovery will follow in every case
B
where a mistake has been shown to exist. If the defendant can show
that the payment was made in settlement of an honest claim, or
that he has changed his position as a result of the enrichment, then
restitution will be denied. Even were I not of the opinion that this
'rule' should be abolished, I would not be prepared to extend to
C the constitutional plane a rule so replete with technicality and
difficulty as the mistake of law rule. Constitutional adjudication
invites the formulation of broad principles suitable to the accom-
modation and resolution of broad social and political values, and
this much criticized rule seems singularly unsuited for that pur-
D pose."
55. Even so, the learned Judge held that the claim of the Airlines
should be denied on the ground that it passed on the burden to its
customers notwithstanding tl1"e fact that by doing so, the province would be
benefitted at the expense of the Airlines. The learned Judge, in fact, went
E further and held that even if the Airlines could show that they themselves
bore the burden of taxes, recovery of ultra vires taxes should be denied, at
least in the case of unconstitutional statutes except wi).ere the relationship
between the State and a particular taxpayer resulting in the collection of
taxes is unjust or oppressive in the circumstances. This rule against
p recovery, the learned Judge held, is based on concerns for the protection
of the treasury and the recognition of the reality that if the taX was
refunded, modern government would be driven to the inefficient course
of re-imposing it either on the same or a new generation of taxpayers
to finance the operations of the government. This rule, however, was
held inapplicable where the tax is extracted from a taxpayer through a
-
G misapplication of law. The following observations from his opinion are
relevant:
"While it will take some time for the courts to work out the limits
of the developing law of restitution, it is useful on this point to
H examine the American experience. Professor George C. Palmer, in
MAFATLALINDS. LTD. v. U.O.I. 675
his work, the Law of Restitution, makes the following comment A
(1986) Supplement, at p. 255) :
There is no doubt that if the tax authority retains a payment
to which it was not entitled it has been unjustly enriched. It
has not been enriched at the taxpayer's expense, however, if he B
has shifted the economic burden of the tax to others. Unless
restitution for their benefit can be worked out, it seems
preferable to leave the enrichment with the tax authority instead
of putting the judicial machinery in motion for the purpose of
shifting the same enrichment to the taxpayer.
c
In my view there is merit to this observation, and if it were
necessary I would apply it to this case as the evidence supports
that the airlines had passed on to their customers the burden of
the tax imposed upon them. The law of restitution is not intended
to provide windfalls to plaintiffs who have suffered no loss. Its D
function is to ensure that where a plaintiff has been deprived of
wealth that is either in his possession or would have accrued for
his benefit, it is restored to him. The measure of restitutionary
recovery is the gain the province made at. the airlines' expense. If
the airlines have not shown that they bore the burden of the tax, then
they have not made out their claim. What the province received is E
relevant only in so far as it was received at the airlines' expense.
This alone is sufficient to deny the airlines' claim. However,
even if the airlines could show that they bore the burden of the
tax, I would still deny recovery. It is clear that the principles of F
unjust enrichment can operate against a government to ground
restitutionary recovery, but in this kind of case, where the effect of
an unconstitutional or ultra vires statute is in issue, I am of the
opinion that special considerations operate to take this case out of
the nonnal restitutionary framework, and require a rule responding
to the specific underlying policy concerns in this area...... A related G
concem, and one prevalent through many of the authorities and much
of the academic literature is the fiscal chaos that would result if the
general rule favoured recovery, particularly where a long-standing
taxation measure is involved. That this is not an unfounded concern
can be seen by reference to one incident in the United States. A H
676 SUPREME COURT REPORTS(1996) SUPP. 10 S.C.R.
A provision has been inserted in the United States Internal Revenue
Code removing the distinction between mistakes of fact and mis-
takes of law because of the harsh and unjust results that had
occurred under the general rule. This, however, placed a severe
strain on the United States Treasury when the Supreme Court in
United States v. Butler, 297 U.S. 1, 80 L.Ed. 477 (1936), held
B unconstitutional the Agricultural Adjustment Act making almost
one billion dollars in invalid taxes (a respectable amount now but
overwhelming during the depression) repayable by the govern-
ment. Faced with this situation, Congress immediately passed an
Act which provided that no refunds for such taxes would be
c allowed unless the claimant could establish the burden of the tax."
(Emphasis added)
56. Wilson, J., however, differed with the majority on the effect of
passing on of the burden of tax by the plaintiff. The learned Judge opined
D that where taxes are recovered under an unlawful statute, they must be
returned irrespective of the fact whether the taxpayer has passed on the
burden to its customers or not. The learned Judge refused to accept the
plea of fiscal chaos, as a sufficient ground for denying the refund.
E 57. It is brought to our notice by Sri F.S. Nariman that in another
Judgment delivered on the same day by the Canadian Supreme Court in
Cal1adian Pacific Airlines Limited v. British Columbia, (1989) 59 D.L.R.
(4th) 218, the Court held that the C.P. Air could recover the social service
tax paid on purchases of equipment and parts but that the tax paid by it
on alcoholic beverages is not recoverable for the reason that the latter tax
F was imposed on passengers who consume the liquor - and not on C.P. Air.
Sri Nariman has also placed a copy of the judgment in this case before us.
It is evident from a reading of the judgment that it was not a case of tax
levied and collected under an invalid statute but a case where the tax was
collected wrongly by misinterpreting the provisions of the statute - in which
G situation, the taxes are refundable according to the decision inAir Canada.
-
In this view of the matter, it may not be necessary to refer to the opinions
of learned Judges. It is not suggested that any contrary principle is enun-
ciated in this case.
58. The law in Canada appears rather paradoxical to an Indian
H Lawyer. It says that while taxes collected under an unconstitutional statute
MAFA1LALINDS. LTD. v. U.O.I. 677
need not be refunded (even if the Burden of tax has not been passed on A
to a third party), taxes collected by mis-interpreting/mis-applying the
provisions of the statute ought to be refunded. This circumstances em-
phasises how the jurisprudence in each country has developed differently.
We, on our part, have to evolve appropriate principle to meet the emerging
situation, keeping in mind the development of law in our own country, our B
own circumstances and above all, our own constitutional philosophy. At
the same time, we express our broad agreement with the approach and
thinking of the majority Judges in Air Canada.
59. AUSTRALIA : In Commissioner of State Revenue v. Royal In-
surance Australia Ltd., (1995) 69 A.L.J. 51, the Australian High Court C
rejected the plea of the State that inasmuch as the plaintiff has passed on
the burden of illegally collected tax to others, it is not entitled to restitution,
Mason, C.J. observed :
"The argument that a plaintiff who passes on a tax or charge will
receive a windfall of will unjustly be enriched if recovery from a D
public authority is permitted rests at bottom upon the economic
view that the plaintiff should not recover if the burden of the
imposition of the tax or charge has been shifted to third parties.
In the context of the law ·of restitution, this economic view encounters
major difficulties. The first is that to deny recovery when the E
plaintiff shifts the burden of the imposition of the tax or charge to
third parties will often leave a plaintiff who suffers loss or damage
without a remedy. That consequence suggests that, if the economic
argument is to be converted into a legal proposition the proposition
must be that, the plaintifPs recovery should be limited to compen-
sation for loss or damage sustained. The third is that an inquiry F
into and a determination of the loss or damage sustained by a
plaintiff who passes on a tax or charge is a very complex under-
taking. And finally, it has long been thought that, despite Lord
Mansfield's statement in Moses v. Macferian, the basis of restitu-
tionary relief is not compensation for loss or damage sustained but G
restoration to the plaintiff of what has been taken or received from
the plaintiff without justification."
(Emphasis supplied)
60. It is obvious that the learned Chief Justice looked at the matter H
678 SUPREME COURT REPORTS[l996] SUPP. 10 S.C.R.
· A from the point of view of the law of restitution alone which fact would also
be evidenct from the following observations (at P. 63) :
"As between the plaintiff and the defendant, the plaintiff having
paid away its money by mistake in circumstances in which the
defendant has no title to retain the moneys, the plaintiff has the
B superior claim. The plaintiffs inability to distribute the proceeds
to those who recoup the plaintiff was, in my view, an immaterial
consideration."
61. Dawson, J. also took the same view. The following observations
C of the learned Judge, however, indicate the nature of the violation in this
case, which is of quite some significance :
"No question such as that which arose in Air Canada v. British
Columbia, (1989) 59 DLR (4th) 161 would arise in the present
case. In the Canadian case a majority of the Supreme Court held
D that, whilst moneys paid Uilder a mistake of law might be recovered
upon the basis of unjust enrichment, that doctrine did not extent to
moneys paid under unconstitutional legislation. No question of un-
constitutionality arises in this case. The application of the common
law would also raise the question whether the· principle of unjust
E enrichment can be invoked when moneys paid under a mistake of
fact or law constitute an expense which has been passed on to
someone else, as the respondent insurer is said to have passed on
the overpayments of stamp duty to its insured in this case. The
better view would seem to be that it is the unjust enrichment of the
payee rather than loss suffered by the payer which should govern
F entitlement to restitution but, having regard to the view which I take,
it is wmecessa1y to detennine that question in these proceedings."
(Emphasis supplied)
G 62. E.E.C. : Amministrazione Delle Finanze Delio Stato (State Finance
Administration) v. San Giorgio SPA, (1985) 2 C.M.L.R. 658 was decided by
-
the Court of Justice of the European Community.
63. Italy, which is a member of a European Economic Community
madt< a law, Section 10(1) whereof provided that a "person who has paid
H import duties, manufacturing taxes, taxes on consumption or State taxes
MAFATLALINDS. LTD. v. U.O.I. 679
which have been unduly levied, even prior to the entry into force of this A
decree, is not entitled to the repayment of the the sums paid when the
charge in question has been passed on in any way whatsoever to other
persons, except in cases of substantive error". Sub-section (2) further
provided that "the charge is presumed to have been passed. on whenever
the goods in respect of which payment was effected have been transferred B
eveI,1 after processing, transformation, erection, assembly or adaptation in
the absence of documentary proof to the contrary". The question before
the Court was whether the said provision was contrary to Article 12 of the
E.E.C. Treaty (Treaty of Rome) which prohibited imposition of any cus-
toms duties between the member States. It was held that it does. The entire
discussion in the judgment revolves around the incompatibility of both the C
provisions. We do not, therefore, see any relevance of the decision to the
question at issue before us.
64. U.SA. : In this context, we may refer to a decision of the Supreme
Court of the United States of America in United States v. Jefferson Electric D
Manufacturing Co., 78 L.Ed. 859. Section 424 of the Revenue Act, 1928
provided that "no refund shall be made of any amount paid by or collected
from any manufacturer, producer, or importer in respect of tli.e tax im-
posed by subdivision (3) of s. 600 of the Revenue Act of 1924, or sub-
division(3)of S.900 of Revenue Act of 1921, or of the Revenue Act of 1918,
unless ...... (2) It is established to the satisfaction of the Commissioner that E
such amount was in excess of the amount properly payable upon the sale
or lease of an article, subject to tax, or that such amount was not collected,
directly or indirectly, from the purchaser or lessee, or that such amount
although collected from the purchaser or lessee, was returned to him". The
said provisio? was attacked as violative of the due proce~s clause in the F
Fifth Amendment to the United States Constitution. The attack was
repelled holding that the provision being based upon equitable principles
which underlie an action in assumpsit for money had and received is not
an unreasonable provision. The Court further observed that an action in
assumpsit for money and received is of equitable character aiming at the G
abstract justice of the case and is less restricted and fettered by technical
rules and formalities than any other form of action. The Court conceded
that if the tax was illegally levied, under the system then in force, the
taxpayer had acquired a right to have it refunded without showing whether
he bore the burden of the tax or had shifted it to the purchases. Even so,
it was held that the requirements imposed by Section 424 which the H
680 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A taxpayer should satisfy before he can claim refund were ;easonable and
equitable. The following observations of the Court are apposite :
"But it cannot be conceded that in imposing this restriction the
section strikes down prior rights, or does more than to require that
it be shown or made certain that the money when refunded will
B go to the one who has borne the burden of the illegal tax, apd
therefore is entitled in justice and good conscience to such relief.
This plainly is but another way of providing that the money shall
go to the one who has been the actual sufferer and therefore is the
real party in interest.
c We do not perceive in the restriction any infringement of due
process of law. If the tax payer has borne the burden of the tax,
he readily can show it; and certainly there is nothing arbitrary in
requiring that he make such a showing. If he has shifted the burden
to the purchasers, they and not he have been the actual sufferers
D and are the real parties in interest; and in such a situation there
is nothing arbitrary in requiring, as a condition of refunding the
tax to him, that he give a bond to use the refunded money in
reimbursing them ....The present contention is particularly faulty in
that it overlooks the fact that the Statutes providing for refunds and
E for suits on claims therefor proceed on the same equitable principles
that underlie an action in assumpsit for money had and received. Of
such an action it rightly has been said : 'This is often called an
equitable action and is less restricted and fettered by technical
rules and formalities than any other form of thereon. It aims at the
abstract justice of the case, and looks solely to the inquiry, whether
F the defendant holds money, which ex aequo at bona belbngs to the
plaintiff. If was encouraged and, to a great extent, brought into
used by that great and just judge, Lord Mansfield, and from his
day to the present, has been constantly resorted to in all cases
coming within its broad principles. It approaches nearer to a bill
G in equity than any other common law action."
65. We express our broad agreement with the approach adopted by
the United State Supreme Court.
66. Sri Nariman, however, referred to the second alternate condition
H imposed by Section 424 which provided that if the manufacturer gives a
MAFA1LAL INDS. LTD. v. U.O.I. 681
bond undertaking to refund the same to purchaser within a particular A
period, he \YOuld be entitled to claim refund. Learned counsel submitted
that such a condition could have been imposed in the Central Excises and
customs Act as well. He ~ubmitted that even if it is legitimate for the
Parliament to prescribe that in case the money was passed on, it must be
made over to the person from whom it was collected, all this should be B
done through the medium of the manufacturer/taxpayer and not through
any other medium. We must say that we are not concerned with the
question of desirability of a provision which could have been made but with
the legality of the provision which has been made. It cannot be suggested
that the Parliament should necessarily have made such a provision or that
in the absence of such a provision, the provisions made are violative of C
Article 365 ·of the Constitution.
PART-II
WAS KANHAIYALAL CORRECTLY DECIDED AND IF NOT, IN
WHAT RESPECTS : D
67. The first question that has to be answered herein is whether
Kanhaiyalal has been rightly decided insofar as it says (1) that where the
taxes are paid under a mistake of law, the person paying it is entitled to
recover the same from the State on establishing a mistake and that this E
consequence flows from Section 72 of the Contract Act; (2) that it is open
to an assessee to claim refund of tax paid by him under orders which have
become final - or to re-open the orders which have become final in his own
case - on the basis of discovery of a mistake of law based upon the decision
' of a court in the case of another assessee, regardless of the time-lapse
involved and regardless of the fact that the relevant enactment does not F
provide for such refund or re-opening; (3) whether equitable considera-
tions have no place in situations where Section 72 of the Contract Act is
applicable and (4) whether the spending away of the taxes collected by the
State is not a good defence to a claim for refund of taxes collected contrary
to law.
G
68. Re. : (I) : Hereinbefore, we have referred to the provisions
relating to refund obtaining from time to time under the Central Excise
and Salt Act. Whether it is Rule 11 (as it stood from time to time) or
Section ll-B (as it obtained before 1991 or subsequent thereto), they
invariably purported to be exhaustive on the question of refund, Rule 11, H
682 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A as in force prior to August 6, 1977, stated that "no duties and charges which
have been paid or have been adjusted ........shall be refunded unless the
claimant makes an application for such refund under his signature and
lodges it to the proper officers within three months from the date of such
payment or adjustment, as the case may be". Rule 11, as in force between
August 6, 1977 and November 17, 1980 contained sub-rule (4) which
B expressly declared : "(4) Save as otherwise provided by or under this rule,
no claim of refund of any duty shall be entertained". Section 11-B, as in
force to April, 1991 contained sub-section (4) in identical words. It said :
"(4) Save as otherwise provided by or under this Act, no claim for refund
of any duty of excise shall be entertained". Sub-section (5) was more
c specific and emphatic. It said: "Notwithstanding anything contained in any
other law, the provisions of this Section shall also apply to a claim for
refund of any amount collected as duty of excise made on the ground that
the goods in respect of which such amount was collected were not excisable
or were entitled to exemption from duty and no court shall have any
jurisdiction in respect of such claim." It started with a non-obstante clause;
D
it took in every kind of refund and every claim for refund and it expressly
barred the jurisdiction of courts in respect of such claim. Sub-section (3)
of Section 11-B, as it now stands, it to the same effect - indeed, more
comprehensive and all-encompassing. It says, "(3) Notwithstanding any-
thing to the contrary contained in any judgment, decree, order or direction
E of the Appellate Tribunal or any court or in any other provision of this Act
or the rules made thereunder or in any law for the time being in force, no
refund shall be made except as provided in sub-section". The language
could not have been more specific and emphatic. The exclusivity of the
provision relating to refund is not only express and unambiguous but is in
F addition to the general bar arising from the fact that the Act creates new
rights and liabilities and also provides forums and procedures for ascer-
taining and adjudicating those rights and liabilities and all other incidental
and ancillary matters, as will be pointed out presently. This is a bar upon
a bar - an aspect emphasised in Para 14, and has to be respected so long
as it stands. The validity of these provisiorts has never been seriously
G doubted. Even though in certain writ petitions now·before us, validity of
the 1991 (Amendment) Act including the amended Section 11-B is ques-
tioned, no specific reasons have been assigned why a provision of the
nature of sub-section (3) of Section 11-B (amended) is unconstitutional.
Applying the propositions enunciated by a seven-Judge Bench of this
H Court in Kamala Mills, it must be held that Section 11-B (both before and
MAFA1LALINDS. LTD. v. U.0.1. 683
after amendment)is valid and constitutional. In Kamala Mills, this Court A
upheld the constitutional validity of Section 20 of the Bombay Sales Tax
Act (set out hereinbefore) on the ground that the Bombay Act contained
adequate provisions for refund, for appeal, revision, rectification of mis-
take and for condonation for delay in filing appeal/revision. The Court
pointed out that had the Bombay Act not provided these remedies and
B
yet barred the resort to civil court, the constitutionality of Section 20
may have been in serious doubt, but since it does provide such remedie~,
its validity was beyond challenge. To repeat - and it is necessary to do
so - so long as Section 11-B is constitutionally valid, it has to be followed
and given effect to. We can see no reason ort which the constitutionality
of the said provision - or a similar provision - can be doubted. It must c
also be remembered that Central Excises and Salt Act is a special
enactment creating new and special obligations and rights, which at the
same time prescribes the procedure for levy, assessment, collec-
tion, refund and a.JI other incidental and ancillary provisions. As
pointed out in the Statement of Objects and Reasons appended D
to the Bill which became the Act, the Act along with the Rules was
intended to "form a complete central excise code". The idea was "to
consolidate in a single enactment all the laws relating to central duties of
excise". The Act is a self-contained enactment. It contains provisions for
collecting the taxes which are due according to law but have not been
collected and also for refunding the taxes which have been collected E
contrary to law, viz., Sections 11-A and ll·B and its allied provisions. Both
provisions contain a uniform rule of limitation. viz., six months, with
an exception in each case. Sections 11-A and 11-B are complimentary to
each other. (To such a situation, Proposition No. 3 enunciated in Kamala
Mills becomes applicable, viz.,) where a statute creates a special right or a F
liability and also provides the procedure for the determination of the right
or liability by the; Tribunals constituted in that behalf and provides further
that all questions about the said right and liability shaJl be determined by
the Tribunals so constituted, the resort to civil court is not available -
except to the limited extent pointed out in Kamala Mills. Central Excise
Act specifically provides for refund. It expressly declares that no refund G
shall be made except in accordance therewith. The jurisdiction of a civil
Court is expressly barred - vide sub-section (5) of Section 11-B, prior to
its amendment in 1991, and sub-section (3) of Section 11-B, as amended
in 1991. It is relevant to notice that the Act provides for more than one
appeal against the orders made under Section 11-B/Rule 11. Since 1981, H
684 SUPREME COURT REPORTS[1996J SUPP. 10 S.C.R.
A an appeal is provided to this Court also from the order of the Tribunal.
While Tribunal is not a departmental organ, this court is a civil court. In
this view of the matter and the express and additional bar and exclusivity
contained in Rule 11/Section 11-B, at all points of time, it must be held
that any and every ground including the violation of the principles of
natural justice and infraction of fundamental principles of judicial proce-
B
dure can be urged in these appeals, obviating the necessity of a suit or a
writ petition in matters relating to refund. Once the constitutionality of the
provisions of the Act including the provisions relating to refund is beyond
question, they constitute "law" within the meaning of Article 265 of the
Constitution. It follows that any action taken under and in accordance with
c the said provisions would be an action taken taken under the "authority of
law", within the meaning of Article 265. In the face of the express provision
which expressly declares that no claim for refund of any duty shall be
entertained except in accordance with the said provisions, it is not permis-
sible to resort to Section 72 of the Contract Act to do precisely that which
D is expressly prohibited by the said provisions. In other words, it is not
permissible to claim refund by invoking Section 72 as a separate and
independent remedy when such a course is expressly barred by the
provisions in the Act, viz., Rule 11 and Section 11-B. For this reason, a suit
. for refund would also not lie. Taking any other view woul~ amount to
nullifying the provisions in Rule 11/Section 11-B, which, it needs no em-
E phasis, cannot be done. It, there/ore, fallows that any and every claim for
refund of excise duty can be made only under and in accordance with Rule
JI or Section 11-B, as the case may be, in the forums provided by the Act.
No suit can be filed for refund of duty invoking Section 72 of the Contract
Act. So far as the jurisdiction of the High Court under Article 226 - or for
F that matter, the jurisdiction for this Court under Article 32 · is concerned,
it is obvious that the provisions of the Act cannot bar and curtail these
remedies. It is, however, equally obvious that while exercising the power
under Article 226/Article 32, the Court would certainly take'note of the
legislative intent manifested in the provisions of the Act and would exercise
their jurisdiction consistent with the provisions of the enactment.
G
69. There is, however, one exception to the above proposition, i.e.,
where a provision of the Act whereunder the duty has been levied is found
to be unconstitutional for violation any of the constitutional limitations.
This is a situation not contemplated by the Act. The Act does not con-
H template any of its provisions being declared unconstitutional and there-
MAFAlLALINDS. LTD. v. U.O.I. 685
fore it does not provide for its consequences. Rule 11/Section 11-B are A
premised upon the supposition that the provisions of the Act are good and
valid. But where any provision under which duty is levied is found to be
unconstitutional, Article 265 steps in. In other words, the person who paid
the tax is entitled to claim refund and such a claim cannot be governed by
the provisions in Rule 11/Section 11-B. The very collection and/or retention B
of tax without the authority of law entitles the person, from whom it is
collected, to claim its refund. A corresponding obligation upon the State
to refund it can also be said to flow from it. This can be called the right to
refund 01ising under and by virtue of the Constitutional provisions, viz., Article
265. But, it does not follow from this that refund follows automatically.
Article 265 cannot be read in isolation. It must be read in the light of the C
concepts of economic and social justice envisaged in the Preamble and the
guiding principles of State Policy adumbrated in Articles 38 and 39 - an
aspect dealt with at some length at a later stage. The very concept of
economic justice means and demands that unless the claimant (for
refund) establishes that he has not passed on the burden of the duty/tax D
to others, he has no just claim for refund. It would be a parody of
economic Justice to refund the duty to a claimant who has already
collected the said amount from his buyers. The refund should really be
made to the persons who have actually borne its burden - that would be
economic justice. Conferring an unwarranted and unmerited monetary E
benefit upon an individual is the very anti-thesis of the concept of
economic justice and the principles underlying Articles 38 and 39. Now,
the right to refund arising as a result of declaration of uncon-
stitutionality of a provision of the enactment can also be looked at as a
statl!tory right of restitution. It can be said in such a case that the tax
paid has been paid under a mistake of law which mistake of law was F
discovered by the manufacturer/assessee on the declaration of.invalidity
of the provisions by the court. Section 72 of the Contract Act may be
attracted to such a case and a claim for refund of tax on this score can
be maintained with reference to Section 72. This too, however, does not
mean that the taxes paid under an unconstitutional provision of law G
are automatically refundable under Section 72. Section 78 contains a
rule of equity and once it is a rule of equity, it necessarily follows that
equitable considerations are relevant in applying the said rule - an
aspect which we shall deal with a little later. Thus, whether the right to
refund of taxes paid under an unconstitutional provision of law is H
686 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A treated as a constitutional right following from Article 265 or as a statutory
right/equitable right affirmed by Section 72 of the Contract Act, the result
is the same - there is no automatic or unconditional right to refund.
70. Re. : (II) : We may now consider a situation where a manufacturer
B · pays a duty unquestioningly - or he questions the levy but fails before the
original authority and keeps quite. It may also be a case where he files an ·
appeal, the appeal goes against him and he keeps quiet. It may also be a
case where he files a second appeaVrevision, fails and then keeps quiet*.
The orders in any of the situations have become final against him. Then
what happens is that after an year, five years, ten years, twenty years or
C even much later, a decision rendered by a High Court or the Supreme
Court in the case of another person holding that duty was not payable or
was payable at a lesser rate in such a case. (We must reiterate and
emphasise that while dealing with this situation we are keeping out the
situation where the provision under which the duty is levied is declared
D unconstitutional by a court; that is a separate category and the discussion
in this paragraph does not include that situation. In other words, we are
dealing with a case where the duty was paid on account of mis- construc-
tion, mis-application or wrong interpretation of a provision of law, rule,
notification or regulation, as the case may \Je.) Is it open to the manufac-
turer to say that the decision of a High Court or the Supreme Court, as
E the case may be, in the case of another person has made him aware of the
mistake of law and, therefore, he is entitled to refund of the duty paid by
him? Can he invoke Section 72 of the Contract Act in such a case and
claim refund and whether in such a case, it can be held that reading Section
72 of the Contract Act along with Section 17(1)(c) of the Limitation Act,
p 1963, the period of limitation for making such a claim for refund, whether
by way of a suit or by way of a writ petition, is three years from the date
of discovery of such mistake of law? Kanhaiyalal is understood as saying
that such a course is permissible. Later decisions commencing from Bhailal
Bhai have held that the period of limitation in such cases is three years
from the date of discovery of the mistake of law. With the greatest respect
G to the learned Judges who said so, we find ourselves unable to agree with
the said proposition. Acceptance of the said proposition would do violence
to several well-accepted concepts of law. One of the important principles
of law, based upon public policy, is the sanctity attaching to the finality of
Situation would be the same where he fights upto High Court and failing therein, he
H keeps quiet.
MAFA1LAL INDS. LTD. v. U.0.1. 687
any proceeding, be it a suit or any other proceeding. Where a duty has A
been collected under a particular order which has become final, the refund
of that duty cannot be claimed unless the order (whether it is an order of
• assessment, adjudication or any other order under which the duty is paid)
is set aside according to law. So long at that order stands, the duty cannot
be recovered back nor can any claim for its refund be entertained. But
B
what is happening now is that the duty which has been paid under a
proceeding which has become final long ago - may be an year back, ten
years back or even twenty or more years back - is sought to be recovered
on the ground of alleged discovery of mistake of law on the basis of a
decision of a High Court or the Supreme Court. It is necessary to point
out in this behalf that for filing an appeal or for adopting a remedy C
provided by the Act, the limitation generally prescribed is about three
months (little more or less does not matter). But according to the present
practice, writs and suits are being filed after lapse of a long number of
years and the rule of limitation applicable in that behalf is said to be
three years from the date of discovery of mistake of law. The incongruity D
of the situation needs no emphasis. And all this because another
manufacturer or assessee has obtained a decision favourable to him.
What has indeed been happening all these years is that just because one
or a few of the assessees succeed in having their interpretation or
contention accepted by a High Court or the Supreme Court, all the
manufacturers/assessees all over the country are filing refund claims E
within three years of such decision, irrespective of the fact that they may
have paid the duty, say thirty years back, under similar provisions - and
their claims are being allowed by courts. All this is said to be flowing
from Article 265 which basis, as we have explained hereinbefore, is
totally unsustainable for the reason that the Central Excises Act and the F
Rules made thereunder including Section 11-B/Rule 11 too constitute
"law" within the meaning of Article 265 and that in the face of said
provisions - which are exclusive in their nature - no claim for refund is
maintainable except under and in accordance therewith. The second
basic concept of law which is violated by permitting the above situation
is the sanctity of the provisions of the Central Excises and Salt Act itself. G
The Act provides for levy assessment, recovery, refund, appeals and all
incidental/ancillary matters. Rule 11 and Section 11-B, in particular, pro-
. vide for refund of taxes which have been collected contrary to law, i.e.,
on account of a mis-interpretation or mis-construction of a provision of
law, rule, notification or regulation. The Act provides for both the situ~- H
688 SUPREME COURT REPORTS[l996) SUPP.10 S.C.R.
A tions represented by Sections 11-A and 11-B. As held by a seven-Judge
Bench in Kamala Mills, following the principles enunciated in Finn & llluri
Subbaiya Chetty, the words "any assessment made under this Act" are wide
enough to cover all assessments made by the appropriate authorities under
the Act whether the assessments are correct or not and that the words "an
assessment made" cannot mean an assessment properly and correctly
B made. It was also pointed out in the said decision that the provisions of
the Bombay Sales Tax Act clearly indicate that all questions pertaining to
the liability of the dealer to pay assessment in respect of their transactions
are expressly left to be decided by the appropriate authorities under the
Act as matters falling within their jurisdiction. Whether or not a return is
c correct and whether a transaction is exigible to tax or not are all matters
to be determined by the authorities under the Act. The argument that the
finding of the authority that a particular transaction is taxable under the
Act is a finding on a collateral fact and, therefore, resort to civil court is
open, was expressly rejected and it was affirmed that the whole activity of
assessment beginning with the filing of the return and ending with the
D
order of assessment falls within the jurisdiction of the authorities under
the Act and no part of it can be said to· constitute a collateral activity not
specifically or expressly included in the jurisdiction of the authorities under
the Act. It was clarified that even if the authority under the Act holds
erroneously, while exercising its jurisdiction and powers under the Act that
E a transaction is taxable, it cannot be said that the decision of the authority
is without jurisdiction. We respectfully agree with the above propositions
and hold that the said principles apply with equal force in the case of both
the Central Excises and Salt Act and the Customs Act. Once this is so, it
is ununderstandable how an assessment/adjudication made under the Act
F levying or affirming the duty can be ignored because some years later
another view of law is taken by another court in another person's case. Nor
is there any provision in the Act for re-opening the concluded proceedings
on the aforesaid basis. We must reiterate that the. provisions of Central
Excise Act also constitute "law" within the context of Bombay Sales tax Act
and the meaning of Article 265 and any collection or retention of tax in
G accordance or pursuant to the said provisions is collection or retention
under "the authority of law" within the meaning of the said article. In short,
no claim for refund is permissible except under and in accordance with
Rule 11 and Section 11-B. An order or decree of a court does not become
ineffective or unenforceable simply because at a later point of time, a
H different view of law is taken. If this theory is applied universally, it will
MAFATLALINDS.LTD.v. U.O.I. 689
lead to unimaginable chaos. It is, however, suggested that this result follows A
only in tax matters because of Article 265. The explanation offered is
untenable, as demonstrated hereinbefore. As a matter of facts, the situation
today is chaotic because of the principles supposedly emerging from Kan-
haiyalal and other decisions following it. Every decision of this Court and
of the High Courts on a question of law in favour of the assessee is giving B
rise to a wave of refund claims all over the country in respect of matters.
which have becomes final and are closed long number of years ago. We ·
are not shown that such a thing is happening anywhere else in the world.
Article 265 surely could not have been meant to provide for this. We are,
therefore, of the clear and considered opinion that the theory of mistake of
law and the consequent pe1iod of limitation of three years from the date of C
discovery of such mistake of law cannot be invoked by an assessee taking
advantage of the decision in another assessee's case. All claims for refund
ought to be, and ought to have been, filed only under and in accordance with
Rule 11/Section 11-B and under no other provision and in no other forum.
Ar;i assessee must succeed or fail in his own proceedings and the finality D
of the proceedings in his own case cannot be ignored and refund. ordered
in his favour just because in another assessee's case a similar point is
decided in favour of the manufacturer/assessee. (see the pertinent obser-
vations of Hidayatullah, CJ. in Tilokchand Motichand extracted in Para 37).
The decisions of this Court saying to the contrary must be held to have
been decided wrongly and are accordingly overruled herewith. E
71. Re. : (III) : For the purpose of this discussion, we take the
situation arising from the declaration of invalidity of a provision of the Act
under which duty his been paid or collected, as the bases, inasmuch as that
is the only situation surviving in view of our holding on (I) and (II). In such F
cases the claim for refund is maintainable by virtue of the declaration
contained in Article 265 as also under Section 72 of the Contract Act as
explained hereinbefore subject, to one exception : where a person ap-
proaches the High Court or Supreme Court challenging the constitutional
validity of a provision but fails, he cannot take advantage of the declaration
of unconstitutionality obtained by another person on another ground; this G
is for the reason that so far as he is concerned, the decision has become
final and cannot be re-opened on the basis of the decision on another
person's case; this is the ratio of the opinion of Hidayatullah, CJ. in
Tilokchand Motichand and we respectfully agree with it. In such cases, the
H
690 SUPREME COURT REPORTS(1996] SUPP.10 S,C.R.
A plaintiff may also invoke Section 17(1)(c) of the Limitation Act for the
purpose of determining the period of limitation for filing a suit. It may also
be permissible to adopt a similar rule of limitation in the case of writ
petitions seeking refund in such cases. But whether the right to refund or
restitution, as it is called, is treated as a constitutional right flowing from
Article 265 or a statutory right arising from Section 72 of the Contract Act,
B
it is neither automatic nor unconditional. The position arising under Article
265 is dealt with later in Paras 75 to 77. Here we shall deal with the position
under Section 72. Section 72 is a rule of equity. This is not disputed by Sri
F.S. Nariman or any of the other counsel appearing for the appellants-
petitioners. Once it is a rule of equity, it is un-understandable how can it
c be said that equitable considerations have no place where a claim is made
under the said provision. What those equitable considerations should be is
not a matter of law. That depends upon the facts of each case. But to say
·that equitable considerations have no place where a claim is founded upon
Section 72 is, in our respectful opinion, a contradiction in terms. Indeed,
D in Kanhaiyalal, the Court accepts that the right to recover the taxes - or
the obligation of the State to refund such taxes - under Section 72 of the
Contract Act is subject to "questions of estoppel, waiver, limitation or the
like", but at the same time, the decision holds that equitable considerations
canno.t be imported because of the clear and unambiguous language of
Section 72. With great respect, we think that a certain amount of inconsis-
E
tency is involved in the aforesaid two propositions. "Estoppel, waiver.... or
the like", though rules of evidence, are yet based upon rules of equity and
good conscience. So is Section 72. We are, therefore, of the opinion that
equitabie considerations cannot be held to be irrelevant where a claim for
-
refund is made under Section 72. Now, one of the equitable considerations
F may be the fact that the person claiming the refund has passed on the
burden of duty to another. In other words, the person claiming the refund
has not really suffered any prejudice or loss. If so, there is no question of
reimbursing him. He cannot be recompensated for what he has not lost.
The loser, if any, is the person who has really borne the burden of duty;
G the manufacturer who is the claimant has certainly not borne the duty
notwithstanding the fact that it is he who has paid the duty. Where such a
claim is made, it would be wholly permissible for the court to call upon the ·
petitioner/plaintiff to establish that he has not passed on the burden of duty
to a third party and to deny the relief of refund if he is not able to establish
H the same, as has been done by this Court in l.T.C. In this connection, it
MAFA1LALINDS. LTD. v. U.0.1. 691
is necessary to remember that whether the burden of the duty has been A
passed on to a third party is a matter within the exclusive knowledge of the
manufacturer. He has the relevant evidence - best evidence - in his posses-
sion. Nobody else can be reasonably called upon to prove that fact. Since
the manufacturer is claiming the refund and also because the fact of
passing on the burden of duty is within his special and exclusive knowledge, B
it is for him to allege and establish that he has not passed on the duty to
a third party. This is the requirement which flows from the fact that Section
72 is an equitable provision and that it incorporates a rule of equity. This
requirement flows not only because Section 72 incorporates a rules of
equity but also because both the Central Excises duties and the Customs
duties are indirect taxes which are supposed to be and are permitted to C
be passed on to the buyer. That these duties are indirect taxes, meant to
be passed on, is statutorily recognised by Section 64A of the Sale of Goods
Act, 1930 (which was introduced by Indian Sales of Goods (Amendment)
Act, 1940 and substituted later by Act 33 of 1963). As originally intro-
duced, Section 64-A read : D
"64A. In the event of any duty of customs or excise on any goods
being imposed, increased, decreased or remitted after the
making of any contract for the sale of such goods without
stipulation as to the payment of duty where duty was not
chargeable at the time of the making of the contract, or for E
the sale of such goods duty-paid where duty was chargeable
at that time -
(a) if such imposition or increase so takes effect that the duty
or increased duty, as the case may be, or any part thereof, is
paid, the seller may add so much to the contract price as will
F
be equivalent to the amount paid in respect of such duty or
increase of duty, and he shall be entitled to be paid and to sue
for and recover such addition; and
(b) if such decrease or remission so takes effect that the G
decreased duty only or no duty, as the case may be, is paid, the
buyer may deduct so much from the contract price as will be
equivalent to the decrease of duty or remitted duty, and he shall
not be liable to pay, or be sued for or in respect of, such
deduction." H
692 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A 72. As substituted in 1963, and as it stands today, Section 66-A reads
thus:
"64-A. In contracts of sale, amount of increased or .decreased taxes ·..
to be added or deducted. - (1) Unless different intention appears
from that terms of the 'contract in the event of any tax of the nature
B described in sub-section (2) being imposed, increased, decreased
or remitted in respect of any goods after the making of any contract
for the sale or purchase of such goods without stipulation as to the
payment of tax where tax was not chargeable at the time of the
making of the contract, or for the sale or purchase of such goods
c tax paid where tax was chargeable at that time, --
(a) if such imposition or increase so takes effect that the decreased
tax or increased tax, as the case may be, or any part of such tax is
paid or is payable, the seller may add so much to the contract price
as will be equivalent to the amount paid or payable in respect of
D such tax or increase of tax, and he shall be entitled to be paid and
sue for and recover such addition, and
(b) if such decrease or remission so takes effect that the decreased
tax only, or no tax, as the case may be, is paid or is payable, the
buyer may deduct so much from the contract price as will be
E equivalent to the decrease of tax or remitted tax, and he shall not
be liable to pay, on be sued for, or in respect of, such deduction.
(2) The provisions of sub-section (1) apply to the following taxes,
namely:
F (a) any duty of customs or excise on goods ;
(b) any tax on the sale or purchase of goods."
73. Sub-section (2), it may be noted, expressly makes the said
provisions applicable to duty of customs and duties of excise on goods. This
G fact was also recognised by the Federal Court in The Province of Madras
v. Mis. Boddu Paidanna & Sons, (1942) F.C.R. 90 and by this Court in R.C.
fall v. Union of India, [1962] suppl. S.C.R. 436. In such a situation, it would
be legitimate for the court to presume, until the contrary is established,
that a duty of excise or a customs duty has been passed on. It is a
H presumption of fact which a court is entitled to draw under Section 114 of
MAFATIALINDS. LTD. v. U.0.1. 693
the Indian Evidence Act. It is undoubtedly a rebuttable presumption but A
the burden of rebutting it lies upon the person who claims the refund
(plaintiff/pWtioner) and it is for him to allege and establish that as a
fact he has not passed on the duty and, therefore, equity demands that
his claim for refund be allowed. This is the position de hors 1991
(Amendment) Act and as we shall point out later, the said Amendment _ B
Act has done no more than to give statutory recognition to the above
concepts. This is the position whether the refund is claimed by way of
a suit or by way of a writ petition. It needs to be stated and stated in
clear terms that the claims for refund by a person who has passed on
the burden of tax to another has nothing to commend itself; not law; not
equity and certainly not a shred of justice or morality. In the case of a C
writ petition under Article 226, it may be noted, there is an additional
factor : the power under Article 226 is a discretionary one and will be
exercised only on furtherance of interests of justice. This factor too
obliges the Hig]! Court to inquire and find out whether the petitioner
has in fact suffered any loss or prejudice or whether he has passed on D
the burden. In the latter event, the court will be perfectly justified in
refusing to gr ant relief. The power cannot be exercised to unjustly
enrich a person.
74. Re. : (W) : We are also of the respectful opinion that that
Kanhaiyalal is not right in saying that the defence of spending away the E
amount of tax collected under an unconstitutional law is not a good
defence to a claim for refund. We think it is subject to this rider : where
the petitioner- plaintiff alleges and establishes that he has not passed
on the burden of the duty to others, his claim for refund may not be
refused. In other words, if he is not able to allege and establish that he F
has not passed on the burden to others, his claim for refund will be
rejected whether such a claim is made in a suit or writ petition. It is a
case of balancing public interest vis-a-vis private interest. Whether the
petitioner-plaintiff has not himself suffered any loss or prejudice (having
passed on the burden of the duty to others), there is no justice or equity G
in refunding the tax (collected without the authority of law) to him
merely because he paid it to the State. It would be a windfall to him.
As against it, by refusing refund, the monies would continue to be with
the State and available for public purposes. The money really belongs
to a third party - neither to the petitioner/plaintiff nor to the State - and
to such third party it must go. llut where it cannot be so done, it is H
694 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R. ..
A better that it is retained by the State. By any standard of reasonableness,
it is difficult to prefer the petitioner-plaintiff over the State. Taxes are
necessary for running the State and for various public purposes and this is
the view taken in all jurisdictions. It has also been emphasised by this Court
inD. Cawasji wherein Mathew, J. not only pointed out the irrational and
B unjust consequences flowing from the holding in Bhailal Bhai and
Aluminium lndustdes but also pointed out the adverse impact on public
interest resulting from the holding that expending the taxes collected by
the State is not a valid defence. (see Paras 39 and 40). This would not be
a case of unjust enrichment of the State, as suggested by the petitioners-
appellants. The very idea of "unjust enrichment" is inappropriate in the case
C of the State, which is in position of parens patrea, as held in Charan Lal
Sahu v. Union of India, [1990] 1 S.C.C. 613 at 649. And even if such a
concept is tenable, even then, it should be noticed that the State is not
being enriched at the expense of the petitioner- plaintiff but at someone
else's expense who is not the petitioner-plaintiff. As rightly explained by
D Saikia, J. in.Mahabir Ki.shore & Ors. v. State of Madhya Pradesh, [1989] 3
S.C.R. 596, "the principle of unjust enrichment requires - first that the
defendant has been 'enriched' by the receipt of a 'benefit'; secondly, that
this enrichment is 'at the expense of the plaintiff; and thirdly, that the
retention of the enrichment be just. This justifies restitution." We agree
with the holding in Air Canada (quoting Professor George C. Palmer) that
E in such a case, "it seems preferable to leave the enrichment with the tax
authority instead of putting judicial machinery in motion for the purpose
of shifting the same enrichment to the taxpayer". The Canadian Supreme
Court has further emphasised - and, in our opinion, rightly - the "fiscal
chaos that would result if the general rule favoured recovery, particularly
F where the long standing taxation measure is involved". In this connection,
the majority decision refers to what happened in United States. In United
States v. Butler, (1936) 80 L.Ed. 477, the Agricultural Adjustment Act was
held unconstitutional, the result of which was refund of almost one
billion dollars collected under the said statute. In such a situation, it is
pointed out, the Congress passed an Act which provided that no refunds
G shall be allowed unless the claimant establishes that he himself bore the
burden of tax. Similar provision was also made in another enactment,
viz., Section 424 of the Revenue Act, 1928, the validity of which has been
upheld by the United Stated Supreme Court in Jefferson (supra).
H 75. In this connection, Sri K. Parasaran has rightly emphasised the
MAFATLAL INDS. LTD. v. U.O.I. 695
distinction between the constitutional values obtaining in countries like A
United States of America, Canada and Australia - or for that matter,
United Kingdom - and the values obtaining under our Constitution*.
Unlike the economically neutral - if not pro-capitalist - Constitutions
governing those countties, the Indian Constitution has set before itself the
goal of "Justice, Social, Economic and Political" - a total re-structuring of
our society - the goal being what is set out in Part-IV of the Constitution
B
and, in particular, in Articles 38 and 39. Indeed, the aforesaid words in the
preamble constitute the motto of our Constitution. If we can call it one.
Article 38 enjoins upon the State to "strive to .promote the welfare of the
people by securing and protecting as effectively as it may a social order in
which justice, social, economic and political shall inform all the institutions c
of the national life". Article 39 lays down the principles of policy to be
followed by the State. It says that the State shall, in particular direct its
policy towards securing "(b) that the ownership and control of the material
resources of the community are so distributed as best to subserve the
common goods; and (c) that the operation of the economic system does
D
not result in the concentration of wealth and means of production to the
common detriment". Refunding the duty paid by a manufacturer/assessee
in situations where he himself has not suffered any loss or prejudice (i.e.,
where he has passed on the burden to others) is no economic justice; it is
the very negation of economic Justice. By doing so, the State would be
conferring an unearned and unjustifiable windfall upon the manufacturing E
community thereby contributing to concentration of wealth in a small class
of persons which may not be consistent with the common good. The
preamble and the aforesaid articles do demand that where a duty cannot
be refunded to the real persons who have bore the burden, for one or the
other reason, it is but appropriate that the said amounts are retained by F
the State for being used for public good (See Amar Nath Om Prakash).
Indeed, even in an economically neutral Constitution, like that of United
States of America, such a course has been adopted by the State and upheld
by the Courts. It would be rather curious - nay, ridiculous - if such a course
were held to be bad under our Constitution which speaks of economic and
distributive justice, opposes concentration of wealth in a few hands and G
when the Forty - Second (Amendment) Act describes our Republic as a
Socialist Republic.
This discussion, we n1ay reiterate, it also relevant on the nature of the constitutional
right to refund or restitution as it is called - flowing from Article 265 referred to in
Paras 71 to 73. H
696 SUPREME COURT REPORTS[l996) SUPP. 10 S.C.R.
A 76. It is true that some of the concepts now affirmed by us, e.g., effect
of passing on and the relevance of our Constitutional values in the matter
of judging the legitimacy of a claim for refund were not presented to the
Bench which decided Kanhaiyalal but that can be no ground for not
entertaining or accepting those concepts. As obseived by Thomas Jeffer-
B son, as far back as 1816, "laws and institutions must go hand-in-hand with
the progress of the human mind ..... as new discoveries are made, new truths
are discovered and manners and opinions change with the change of
circumstances, institutions must advance also and keep pace with the
time ...... ". The very same thought was expressed by Krishna Iyer, J. in State
of Kamataka v. Ranganath Reddey, [1978) 1 S.C.R. 641 with particular
C reference to our Constitutional philosophy and values :
"Constitutional problems cannot be studied in a socio- economic
vacuum, since socio-cultural changes are the source of the new
values, and sloughing off old legal thought is part of the process
of the new equity-loaded legality...... .It is right that the rule of law
D
enshrined in our Constitution must and does reckon with the
roaring current of change which shifts our social values and shrivels
of feudal roots, invades our lives and fashions our destiny."
The learned Judge quoted Granville Austin, saying :
E
"The Judiciary was to be the arm of the social revolution, upholding
the quality that indians had longed for in colonial days .....The
courts were also idealised because, as guardians of the Constitu-
tion, they would be the expression of the new law created by
Indians for Indians."
F
77. That "the material resources of the community" are not confined
to public resources but include all resources, natural and man-made public
and private owned" is repeatedly affirmed by this Court. (See Ranganatl1
Reddy, Sanjeev Coke Manufacturing Co. v. Bharat Coking Coal, (1983] 1
G S.C.R. 1000 and State of Tamil Nadu Etc. Etc. v. L. Abu Kavur Bai & Ors.
Etc., [1984] 1 S.C.R. 725. We are of the considered opinion that Sri
Parasaran is right in saying that the philosophy and the core values of our
Constitution must be kept in mind while understanding and applying the
provisions of Article 265 of the Constitution of India and Section 72 of the
H Contract Act (containing as it does an equitable principle) - for that
MAFATLALINDS. LTD. v. U.0.1. 6CJ7
matter, in construing any other provision of the Constitution and the laws. A
Accordingly, we hold that even looked at from the constitutional angle, the
right to refund of tax paid under an unconstitutional provision of law is not
an absolute or an unconditional right. Similar is the position even if Article
265 can be invoked - we have held, it cannot be - for claiming refund of
taxes collected by misinterpretation or misapplication of a provision of law, B
rules notifications or regulation.
PART-III
VALIDITY AND MEANING OF THE PROVISIONS INTRO-
DUCED BY THE 1991 (AMENDMENT) ACT: c
78. While examining the validity and reasonableness of the provisions
introduced by the. 1991 (Amendment) Act, it is necessary to bear in mind
certain principles relevant in that behalf. In R.K Garg v. Union of India,
[1981) 4 S.C.C. 675, this Court held that : D
"laws relating to economic activities should be viewed with
grater latitude than laws touching civil rights such as freedom
of speech, religion etc. It has been said by no less a person
than Holmes, J., that the legislature should be allowed some
play in the joints, because it has to deal with complex problems E
which do not admit of solution through any doctrinaire or
straight jacket formula and this is particularly true in case of
legislation dealing with economic matters, where, having
regard to the nature of the problems required to be dealt with,
greater play in the joints has to be allowed to the legislature. F
The Court should feel more inclined to give judicial defence
to legislative judgment in the field of economic regulation than
in other areas where fundamental human rights are in-
volved ....... The Court must always remember that "legislation
is directed to practical problems, that the economic
mechanism is highly sensitive and complex that many problems G
are singular and contingent, that laws are not abstract proposi-
tions and do not relate to abstract units and are not to be
measure4 by abstract symmetry' that exact wisdom and nice
adaptation of remedy are not always possible and that 'judg-
ment is largely a prophecy based on meagre and uninterpreted H
698 SUPREME COURT REPORTS[1996) SUPP.10 S.C.R.
A experience'. Every legislation particularly in economic matters is ,.
essentially empiric and it is based on experimentation or what one
may call trial and error method and therefore it cannot provide
for all possible situations or anticipate all possible abuses. There
may be crudities and inequities in complicated experimental
economic legislation but on that account alone it cannot be struck
B
down as invalid. The Courts cannot, as pointed out by the United
States Supreme Court in Secy. of Agriculture v. Central Roig. Refin-
ing Co., (1950) 94 L.ed. 381, be converted into tribunals for relief
from such crudities and inequities. There may even be pos-
sibilities of abuse, but that too cannot of itself be a ground for
c invalidating the legislation, because it is not possible for any
legislature to anticipate as if by some divine prescience, distor-
tions and abuses of its legislation which may be made by those
subject to its provisions and to provide against such distortions
and abuses. Indeed, howsoever great may be the care bestowed
D on its framing, it is difficult to conceive of a legislation which
is not capable of being abused by perverted human ingenuity.
The Court must therefore adjudge the constitutionality of such
legislation by the generality of its provisions and not by its
crudities or inequities or possibilities. of abuse of any of its
E provisions. If any crudities, inequities or possibilities of abuse
come to light the legislature can always step in and enact
suitable amendatory legislation. That is the essence of pragmatic
approach which must guide and inspire the legislature in dealing
with complex economic issues."
F 79. To the same effect are the observations by Khanna, J. in
Keshavananda Bharati v. State of Kera/a, [1973] Suppl. S.C.R. 1 at Page 755.
The learned Judge said, "in exercising the power of judicial review the
courts cannot be oblivious of the practical needs of the government. The
door has to be left open for trial and error. Constitutional law like other
G mortal contrivances has to take some chances. Opportunity must be al-
lowed for vindicating reasonable belief by experience". To the same effect
are the observations in Tamil Nadu Education Department Ministerial and
General Subordinate Service Association v. State of Tamil & Anr., (1980] 1
S.C.R. 1026 (Krishna Iyer, J.). It is equally well-settled that mere possibility
H of abuse of a provision by those in-charge of administering it cannot be a
ground for holding the provision procedurally or substantively un-
MAFATLALINDS.LTD. v. U.O.I. ·•:
'· ,
reasonable. In Collector of Customs, Madras v. Nathella Sampathu Chetty A
& Anr., [1962] 3 S.C.R. 786, this Court observed : "The possibility of abuse
of a statute otherwise valid does not impart to it any element of invalidity".
It was said in State of Rajasthan v. Union of India, [1978) 1 S.C.R. 1 at 77,
"it must be remembered that merely because power may sometimes be
abused, it is no ground for denying the existence of power. The wisdom of B
man has not yet been able to conceive of a government with power
sufficient to answer all its legitimate needs and at the same time incapable
of mischief'. (Also see Commissioner, Hindu Religious Endowment, Madras
v. Lakshmindra Thirtha Swamiar of Shirur Mutt, [1954) S.C.R. 1005 at 1030.
80. Section 11-B, as amended in 1991, has been set out in Para 10 C
hereinabove. Sub-section (1) of Section 11-B says that every claim for
refund shall be inade before the Assistant Commissioner of Central Excise
within six months of the relevant date. The application shall have to be in
the prescribed form and manner and shall be accompanied by documentary
and other evidence including those referred to in Section 12-A to establish D
that the duty claimed by way of refund has not been passed on by him to
any other person. The proviso to sub-section (1) expressly states that
pending applications for refund made before the commencement of the
1991 (Amendment) Act shall be deemed to have been made under sub-
section (1) of Section 11-B as amended in 1991 and that the same shall be E
dealt with in accordance with sub-section (2). Sub- section (2) provides
that only in situations specified in clauses (a) to (f) therein will the refund
be granted to the applicant; in all other cases, the amount will be credited
to the Fund established under Section 12-C. Sub-section (3) declares that
notwithstanding anything to the contrary contained in (a) any judgment, F
decree, order, or direction of the Appellate Tribunal or any Court or (b)
any other provision of this Act or the rules made thereunder or (c) any
other law for the time being in force, not refund shall be made except as
provided in sub-section (2). Sub-section (1) of Section fl-D too opens with
a non-obstante clause. It provides for making over of excise duty, realised
by a person from his buyer, to the Central Government forthwith. Sub-sec- G
tion (2) says that duty so paid shall be adjusted against the duty payable
by him O!l finalisation of assessment. The sub-section further says that if
on such adjustment, any surplus duty is left, it shall be dealt with in
~ accordance with Section 11-B. Section 12-A req•Jires every person liable to
pay duty to indicate prominently in sales invoices, documents of assessment H
700 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A and other similar documents, the amount of duty forming part of the price
at which the goods are sold Section 12-B creates a rebuttable presumption
of law that everyperson paying the duty shall be deemed to have passed on
the full incidence of duty to the buyer of such goods. Section 12-C provides
for the establishment of the Consumer Welfare Fund (Fund) while Section
B 12-D provides for rules being made to specify the manner in which the
monies in the Fund shall be utilised. Rules have indeed been made under
Section 12-D, which provide for grants being made to Consumer's Welfare
Organisations for being spent on welfare of consumers.
81. 'The challenge to the validity of the provisions introduced by the
C 1991 (Amendment) Act has been presented under various heads which we
now proceed to deal with separately.
MEANING AND SCOPE OF SUB-SECTION (3) OF SECTION 11-B :
D 82. A good amount of debate took place before us on the question
whether sub-section (3) makes Section 11-B exhaustive of all kinds of
refund claims including those which are refundable as a consequence of
appellate/revisional order and/or as as consequence of orders made by the
High Court/Supreme Court. Sri Nariman pointed out that in Rule 11 (as
E it was in force during the period August 6, 1977 to November 17, 1980),
sub-rule (3) expressly provided that "where as a result of any order passed
in appeal or revision under the Act, refund of any duty becomes due to
any person, the proper officer may refund the amount to such person
without his having to make any claim in that behalf' and that sub-section
(3) of Section 11-B, before its amendment in 1991, was also in identical
F terms. But, Sri Nariman says, sub-section (J) of Section 11-B has now been
dropped; there is no corresponding provision in Section 11-B as it now
stands, which means, says the counsel, that even a refund claim arising as
a result of an appellate order or an order of a court has also got to be
made under and in accordance with sub-sections (1) and (2) of Section
G 11-B and will be disposed of in terms of sub-section (2) of the said section,
as amended in 1991. This consequence, learned counsel says, is unjust,
unreasonable and arbitrary. There is no reason why a period wh~ becomes
entitled to refund of duty as a result of appellate or court order should ·
also be made to apply and satisfy all the requirements of sub-sections (1)
H and (2) of Section 11-B (amended) when he is entitled to such refund as
MAFATLAL INDS. LTD. v. U.0.1. 701
a matter of right. Sri Nariman submits that if a manufacturer/assessee, who A
succeeds in vindicating his claim after a long fight - may be, upto this Court
- and applies for refund is asked to satisfy that he has not passed on the
burden of tax to another, he would rather keep quite than fighting the levy.
There would be no incentive for him to file the appeal/appeals or approach
the higher courts which also involves substantial expense. If after all this B
fight and expense, he is to be denied the refund on the ground that he has
passed on the burden of duty to third parties, why should he fight and
spend money for fighting the litigation, says the counsel. Sri Sorabjee and
Sri Salve too emphasised this aspect and said that this situation would lead
to many an undesirable consequence. The assessing/approving officer C
(original authority) would become the monarch; whatever he says would
be the law since there would be nobody interested in challenging his order.
Illegal levies would become the order of the day. Such a situation, the
learned counsel point out, is neither in the interest of law nor in the interest
of consumer or the larger public interest. It is accordingly submitted that D
it would be just and proper that the amended Section 11-B is held not to
take in refund claims arising as a consequence of appellate or a superior
court order. We do not think it is possible to agree. Such a holding would
run against the very gain of the entire philosophy underlying the 1991
Amendment. The idea underlying in the said provisions· is that no refund E
shall be ordered unless the claimant establishes that he has not passed on
the burden to others. Sub-section (3) of the amended Section 11-B is
emphatic. It leaves no room for making any exception in the case of refund
claims arising as a result of the decision in appeal/reference/writ petition.
There is no reason why an exception should be made in favour of such F
claims which would nullify the provision to a substantial degree. So far as
"lack of incentive" argument is concerned, it has no doubt given us a pause;
it is certainly a substantial plea, but there are adequate answers to it.
Firstly, the rule means that only the person who has actually suffered loss
or prejudice would fight the levy and apply for refund in case of success.
Secondly, in a competitive market economy, as the one we have embarkeq G
upon since 1991-92, the manufacturer's self interest lies in producing more
and selling it at competitive prices - the urge to grow. A favourable decision
does not merely mean refund; it has a beneficial effect for the subsequent
period as well. It is incorrect to suggest that the disputes regarding clas-
sification, valuation and claims for exemptions are fought only for refund; H
702 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A it is for more substantial reasons, though the prospect of refund is certainly
an added attraction. It may, therefore, be not entirely right to say that the
prospect of not getting the refund would dissuade the manufacturers from ·
agitating the questions of exigibility, classification, approval of price lists or
the benefit of exemption notifications. The dis-incentive, if any, would not
B be significant. In this context, it would be relevant to point out that the
position was no different under Rule 11, or for that matter Section 11-B,
prior to its amendment in 1991. Sub-rules (3) and (4) of Rule 11 (as it
obtained between August 6, 1977 and November 17, 1980) read together
indicate that even a claim for refund arising as a result of an appellate or
C other order of a superior court/authority was within the purview of the said
rule though treated differently. The same position continued under Section
11-B, prior to its amendment in 1991. Sub-sections (3) and (4) of this
section are in the same terms as sub-rules (3) and (4) of Rule 11; if
anything, sub-section (5) was more specific and emphatic. It made the
D provisions of Section 11-B exhaustive on the question of refund and ex-
cluded the jurisdiction of the civil court in respect of all refund claims.
Sub-rule (3) of Rule 11 or sub-section (3) of Section 11-B (prior to 1991)
did not say that refund Claims arising out of or as a result of the orders of
a superior authority or court are outside the purview or Rule 11/Section
E 11-B. They only' dispensed with the requirement of an application by the
person concerned which consequentially meant non-application of the rule
of limitation; otherwise, in all other respects, even such refund claims had
to be dealt with under Rule 11/Section 11-B alone. That is the plain
meaning of sub-rule (3) of Rule 11 and sub-sections (3) and (4) of Section
11-B (prior to 1991 Amendment). There is no departure from that position
F under the amended Section 11-B. All claims for refund, arising in whatever
situations (except where the provision under which the duty is levied is
declared as unconstitutional), has necessarily to be filed, considered and
disposed of only under and in accordance with the relevant provisions
relating to refund, as they obtained from time to time. We see no un-
G reasonableness in saying so.
83. It is then pointed out by the learned counsel for the petitioners-
appellants that if the above interpretation is placed upon amended Section
11-B, a curious consequence will follow. It is submitted that a claim for ·
H refund has to be filed within six months from the relevant date according
MAFATLALINDS. LID. v. U.0.1. 703
to Section 11-B and the expression "relevant date" has been defined in A
clause (B) of the Explanation appended to sub-section (1) of Section 11-B
to mean the date of payment of duty in case other than these falling under
clauses (a), (b), (c), (d) and (e) of the said Explanation. It is submitted
that clauses (a) to (e) deal with certain specific situations whereas the one
applicable in most cases is the date of payment. It is submitted that the B
appellate/revision proceedings, or for that matter proceedings in High
Court/Supreme Court, take a number of years and by the time the claimant
succeeds and asks for refund, his claim will be barred; it will be thrown
out on the ground that it has not been filed within six months from the date
of payment of duty. We think that the entire edifice of this argument is C
erected upon an incomplete reading of Section 11-B. The second proviso
to Section 11-B (as amended in 1991) expressly provides that "the limitation
of six months shall not apply where any duty has been paid under protest".
Now, where a person proposes to contest his liability by way of appeal,
revision or in the higher courts, he would naturally pay the duty, whenever
he does, under protest. It is difficult to imagine that a manufacturer would D
pay the duty without protest even when he contests the levy of duty, its
rate, classification or any other aspect. If one reads the second proviso to
sub-section (1) of Section 11-B along with the definition of "relevant date",
there is no room for any apprehension of the kind expressed by the learned
counsel. E
84. It was then submitted that Rule 2338 which prescribes the
procedure to be followed in cases where duty is paid under protest requires
the assessee to state the grounds for payment of duty under protest and
that it may well happen that the authority to whom the letter of protest is F
submitted may refuse to record it, if he is not satisfied with the ground of
protest. In our opinion, the said apprehension is not well-founded. Sub-
rules (1), (2) and (3) of Rule 233-B read as follows :
"RULE 233B. Procedure to be followed in cases where duty is paid
under protest. - (1) Where an assessee desires to pay duty under G
protest he shall deliver to the proper officer a letter to this effect
and give grounds for payment of the duty under protest.
(2) On receipt of the said letter, the proper officer shall give an
acknowledgement to it. H
704 SUPREME COURT REPORTS[l996] SUPP.10 S.C.R.
A (3) The acknowledgement so given shall, subject to the provisions
of the sub-rule (4), be the proof that the assessee has paid the duty
under protest from the day on which the letter of protest was
delivered to the proper officer."
85, The rule no doubt requires the assessee to mention the "grounds
B for payment of the duty under protest" but it does not empower the proper
officer, to whom the latter of protest is given, to sit in judgment over the
grounds. The assessee need not particularise the grounds of protests. It is
open to him to say that according to him, the duty is not exigible according
to law. All that the proper officer is empowered to do is to acknowledge
C the letter of protest when delivered to him - and that acknowledgement
shall be the proof that the duty has been paid under protest. A reading of
the rule shows that the procedure prescribed therein is evolved only with
a view to keep a record of t'ie payment of duty under protest. It is meant
to obviate any dispute whether the payment is made under protest or not.
D Any person paying the duty under protest has to follow the procedure
prescribed by the Rule and once he does so, it shall be taken that he paid
the duty under protest. The period of limitation of six months will then
have no application to him.
86. We may clarify at this stage that when the duty is paid under the
E orders of Court (whether by way of an order granting stay, suspension,
injunction or otherwise) pending an appeaVreference/writ petition, it will
)
certainly be a payment under protest; in such a case, it is obvious, it would
not be necessary to lodge the protest as provided by Rule 233-B.
F WHETHER SECTION 11-B IS RETROSPECTWE?
87. It is submitted by the learned counsel for the petitioners- appel-
lants that the amended Section 11-B is prospective in operation and cannot
apply to pending proceedings. In support of this contention, it is submitted
that according to sub-section (1), the application for refund has to be
G accompanied by "documentary or other .evidence including the documents
referred to in Section 12-A" to prove that the incidence of duty has not
been passed on by the applicant to any other person. It is submitted that
Section 12-A was also inserted by the very same 1991 (Amendment) Act
and, therefore, it is not expected of any manufacturer/assessee to maintain
H the records required by Section 12-A, prior to its coming into force. It is
MAFA1LALINDS. LID.°v. U.0.1. 705
submitted that in respect of an application filed before the commencement A
of the said Act, it is not possible to comply with the requirement of
sub-section (1) insofar as it requires the filing of documents referred to in
Section 12-A. This circumstance is pointed out as a ground for holding that
the amended Section 11-B applies on to refund applications filed after
coming into force of the 1991 (Amendment) Act. It is further submitted B
that the right to recover excess duty paid is both a constitutional and a
a
statutory right. It is also substantive right, it is submitted, as held in
Commissioner of Sales Tax, Uttar Pradesh v. Mis. Auriaya Chamber of
Commerce, Allahabad, [1986] 3 S.C.C. 50 and Patel India Private Limited
v. Union of India & Ors., [1973] 3 S.C.R. 811. All these factors, it is
submitted, militate against giving retrospective effect to Section 11-B. It is C
difficult to agree with the propositions in the light of the specific and clear
language of the first proviso to the sub- Section (1). The first proviso
expressly declares that "where an application for refund has been made
before the commencement of the Central Excises and Customs (Amend-
ment) Act, 1991, such application shall be deemed to have been made D
under this sub- section as amended by the said Act and the same shall be
dealt with in accordance with the provisions of sub-section (2) substituted
by that Act". In the face of this proviso, it is idle to contend that sub-sec-
tions (1) and (2) of Section 11-B do not apply to pending proceedings.
They apply to all proceedings where the refund has not been made finally E
and unconditionally. Where the duty has been refunded under the orders
of the court pending disposal of an appeal, writ or other proceedings, it
would not be a case of refund finally and unconditionally, as explained in
Jain Spinners and I. T.C. It is, of course, obvious that where the refund
proceedings have finally terminated - in the sense that the period F
prescribed for filing the appeal against such order has also expired - before
the commencement of the 1991 (Amendment) Act (September 19, 1991),
they cannot be re-opened and/or be governed by Section ll-B(3) (as
amended by the 1991 (Amendment) Act). This, however, does not mean
that the power of the appellate authorities to condone delay in appropriate
cases is affected ir:. any manner by this clarification made by us. So far as G
the difficulty or impossibility of filing the documents referred to in Section
12-A is concerned, it is obvious that the said requirement cannot be
insisted upon in cases where the application is filed prior to the commen-
cement of the Act or for the period anterior to the commencement of the
said Amendment Act, though the burden of proving that the burden of H
706 SUPREME COURT REPORTS(1996) SUPP.10 S.C.R.
A duty has not been passed on by him is still upon the applicant. Sub-section
(1) of Section 11-B of general application. It not merely governs the
pending applications but also provides for future applications. Reasonably
construed and read together, the said provisions mean that in respect of
pending applications, the requirement is only to produce such documentary
B and other evidence as is sufficient to establish that the incidence of duty,
refund of which is claimed, has not been passed on by the applicant to any
other person. The requirement of enclosing the documents referred to in
Section 12-A is obligatory only where the claim or refund pertains to the
period subsequent to the commencement of the 1991 (Amendment) Act.
C 88. There is yet another circumstance : Section 12-B does not create
a new presumption unknown till then; it merely gives statutory shape to an
existing situation, as explained hereinbefore. At the most, it can be said
that there were two views on the subject and Section 12-B affirms one of
them. Even without Section 12-B, the true position is the same, as held by
D us in the earlier part of this judgment. The obligation to prove that duty
has not been passed on to another person is always there as a pre-condition
to claim of refund. It cannot also be said that by giving retrospective effect
to Section 11-B, any vested rights or substantive rights are being taken
away. The deprivation, if at all, is not real. TJ:ie manufacturer has already
collected the duty from his purchaser and has thus reimbursed itself. By
E applying for refund yet, he is trying to reap a windfall; deprivation of that
cannot be said to be real or substantial prejudice or loss. A manufacturer
had no vested legal right to refund even when he had passed on the burden
of duty to others. No law conferred such a right in him - not Article 265,
nor Section 11-B. It was only on account of an incorrect view of law taken
p in Kanhaiyalal - and that cannot be treated as a vested legal right. Correc-
tion of judicial error does not amount to deprivation of vested/substantive
rights, even though a person may be deprived of an unwarranted advantage
he had under the over-ruled decision. In cases, where the burden is not
passed on, there is no prejudice; he can always get the refund.
G IS SECTION 11-B A MERE DEVICE TO RETAIN
ILLEGALLY COLLECTED TAXES?
89. A major attack is mounted by the learned counsel for petitioners-
appellants on Section 11-B and its allied provisions on the ground that
H real purpose behind them was not to benefit the consumers by refus-
MAFATLAL INDS. LTD. v. U.O.L 707
ing refund to manufacturers (on the ground of passing on the burden) but A
only to enable the government to retain the illegally collected taxes. It is
suggested that the creation of the Consumer Welfare Fund is a mere
pretence and not an honest exercise. By reading the Rules framed under
Section 12- D, it is pointed out, even a consumer, who has really borne the
burden of tax and is in a position to establish that fact, is yet not entitled .
to apply for refund of the duty since the Rules do not provide for such a B
situation. The Rules contemplate only grants being made to Consumer
Welfare Societies. Even in the matter of making grants, it is submitted, the
Rules are so framed as to make it highly difficult for any consumer
organisation to get the grant. There is no provision in the Act, Sri Nariman
submitted, to locate the person really entitled to refund and to make over C
the money to him. "We expect a sensitive Government not to bluff but to
hand back the amounts to those entitled thereto'', intoned Sri Nariman. It
is a colourable device - declaimed Sri Sorabjee - "a dirty trick" and "a
shabby thing". The reply of Sri Parasaran to this criticism runs thus : it
ill-becomes the manufacturers/assessees to espouse the cause of con-
sumers, when all the while they had been making a killing at their expense. D
No consumers' organisation had come forward to voice any grievance
against the said Provisions. Clause (e) of the proviso to sub- section (2) of
Section 11-B does provides for the buyer of the goods, .to whom the burden
of duty has been passed on, to apply for refund of duty to him, provided
that he has not in his turn passed on the duty to others. It is, therefore, not
correct to suggest that the Act does not provide for refund of duty to the E
person who has actually borne the burden. There is no vice in the relevant
provisions of the Act. Rules cannot be relied upon to impugn the validity
of an enactment, which must stand or fall on its own strength. The defect
in the Rules, assuming that there is any, can always be corrected if the
experience warrants it. The Court too may indicate the modifications p
needed in the Rules. The Government is always prepared to make the
appropriate changes in the Rules since it views the process as a "trial and
error" method - says Sri Parasaran.
90. We agree with Sri Parasaran that so far as the provisions of the
Act go, they are unexceptionable. Section 12-C which creates the Con- G
sumer Welfare Fund and Section 12-D which provides for making the
Rules specifying the manner in which the money credited to th~ Fund shall
be utilised cannot be faulted on any ground. Now, coming to the Rules, it
is true that these Rules by themselves do not contemplate refund of any
amount credited to the ·Fund to the consumers who may have borne the H
708 SUPREME COURT REPORTS[l996] SUPP. 10 S.C.R.
A burden; the Rules only provides for "grants" being made in favour of
consumer organisations for being spent on welfare of consumers. But, this
is perhaps for the reason that clause ( e) of the proviso to sub-section (2)
of Section 11-B does provide for the purchaser of goods applying for and
obtaining the refund where he can satisfy that the burden of the duty has
B been borne by him alone. Such a person can apply within six months of his
purchase as provided in clause (e) of Explanation-B appended to Section
11-B. It is, therefore, not c;orrect to contend that the impugned provisions
do not provide for refunding the tax collected contrary to law to the person
really entitled thereto. Certain practical difficulties may arise as pointed
C out by the appellants-petitioners : (i) the manufacturer would have paid
the duty at the place of "removal" or "clearance" of the said goods but the
sale may have taken place elsewhere; if the purchaser wants to apply for
refund, he has to go to the place where the duty has been paid by the
manufacturer and apply there; (ii) purchasers may be spread all over India
and it is not convenient or practicable for all of them to go to the place of
D "removal" of goods and apply for refund. True it is that there is this
practical inconvenience but it must also be remembered that such claims
will be filed only by purchasers of high priced goods where the duty
component is large and not by all and sundry/small purchasers. This
practical inconvenience or hardship, as it is called, cannot be a ground for
E holding that the provisions introduced by the 1991 (Amendment) Act are
a "device" or a "ruse" to retain the taxes collected illegally and to invalidate
them on that ground - assuming that such an argument is permissible in
the case of a taxing enactment inade by Parliament. (See R.K Garg and
other decisions cited in Paras 78 and 79). '
F DO SECTIONS 11-B AND 12-B HAVE THE EFFECT OF
CHANGING THE VERY NATURE OF EXCISE DU1Y?
91. It is next contended that in a competitive atmosphere or for other
r
commercial reasons, it may happen that the manufacturer is obliged to sell
G his goods at less than its proper price. The suggestion is that the manufac-
turer may have to forego not only his profit but also part of excise duty
and that in such a case levy and collection of full excise duty would cease
to be a duty of excise; it will become a tax on income or on weightiness.
We are unable to appreciate this argument. Ordinarily, no manufacturer
H will sell his products at less than the cost-price plus duty. He cannot survive
MAPATI.AL INDS. LTD. v. U.O.I. 709
in business if he does so. Only in case of distress sales, such a thing A
understandable but distress sales are not a normal feature and cannot,
therefore, constitute a basis for judging the validity or reasonableness of a
provision. Similarly, no one will ordinarily pass on less excise duty than
what is exigible and payable. A manufacturer may dip into his profits but
would not further dip into the excise duty component. He will do so only B
in the case of a distress sale again. Just because duty is not separately
shown in the invoice price, it does not follow that the manufacturer is not
passing on the duty. Nor does it follow therefrom that the manufacturer is
absorbing the duty himself. The manner of preparing the invoice is not
conclusive. Generally speaking, every manufacturer will sell his goods at C
something above the cost-price plus duty. There may be a loss-making
concern but the loss occurs not because of the levy of the excise duty -
which is uniformly levied on all manufacturers of similar goods - but for
other reasons. No manufacturer can say with any reasonableness that he
cannot survive in business unless he collects the duty from both ends. The D
requirement complained of (prescribed by Section 11-B) is thus beyond
reproach - and so are Sections 12-A and 12-B. All that Section 12-A
requires is that every person who is liable to pay duty of excise on any
goods, shall, at the time of clearance of the goods, prominently indicate in
all the relevant documents the amount of such duty· which will from part
of the price at which the goods are to be sold, while Section 12-B raises a E
presumption of law that until the contrary is proved, every person who has
paid the duty of excise on any goods shall be deemed to have passed on
the full incidence of such duty to the buyer of such goods. Since the
presumption created by Section 12-B is a rebuttable presumption of law -
and not a conclusive presumption - there is no basis for impugning its F
validity on the groun\i of procedural unreasonableness or otherwise. This
presumption is consistent with the general pattern of commercial life. It
indeed gives effect to the very essence of an indirect tax like the excise
duty/customs duty. A manufacturer who has not passed on the duty can
always prove that fact and if it is found that duty was not leviable on the G
transaction, he will get back the paid. Ordinarily speaking, no manufacturer
would take the risk of not passing on the burden of duty. It would not be
an exaggeration to say that whenever a manufacturer entertains a doubt,
he would pass on the duty rather than not passing it on. It must be
remembered that manufacturers as a class are knowledgeable persons and H
710 SUPREME COURTREPORTS(1996) SUPP.10 S.C.R.
A more often than not have the benefit of legal advice. And until about 1992,
at any rate, Indian market was by and large a sellers' market.
92. For a proper appreciation of the learned counsel's contention, it
would be appropriate to examine the scheme of the Act and the Rules
..
concerning the valuation of excisable goods and their clearance/removal.
B Section 4 deals with valuation of excisable goods. The assessable value
under Section 4 determined on the basis of the normal price referred to in
Section 4(1)(a) - and in certain cases under Section 4(1)(b). In either case,
the excise duty and certain specified amounts are deductible. More impor-
tant, in the documents submitted by the manufacturer for determination of
C the assessable value, he has to clearly state the excise duty payable as well
as other charges and discounts which he claims to be deductible. Ordinarily
speaking, a manufacturer has to file a classification list first (Rule 173-B)
for approval by the Proper Officer. On the basis of the approved classifica-
tion list and the rate of duty approved therein, he files a price list for
D approval as contemplated by Rule 173-C. Prior to April 1, 1994, the price
list has to be declared in the form prescribed for the purpose which form
required the manufacturer to disclose clearly and separately the excise duty
and other deductions claimed by him. The Form requires the manufacturer
to declare t)lat the facts stated therein are true. After the price list is
E approved,"removal" begins. Under the Self Removal Procedure (S.R.P.),
the procedure in vogue until recently - speaking broadly - was that at the
time to removal of goods, gate pass in Form G.P. I had to be issued which
required the manufacturer to mention several particulars of the goods
removed including the rate of duty and the total duty paid. Form G.P. I
too had to be verified by. the manufacturer declaring that the facts stated
F therein are true. From the price list and the gate pass, therefore, it was
easy to ascertain the duty component of the price. It may also be mentioned
that G.P. I required the name and address of the consignee as well as the
manner of transport to be mentioned therein. (More often than not the
sale of excisable goods is simultaneous with the removal/clearance.) In
G addition to the above, the manufacturer was required to file monthly
returns (RT-12) as provided by Rule 173-G. The monthly returns had to
be filed every month, within seven days of the succeeding month in respect
of all clearances during that month. The RT-12 also provides for several
particulars including the rate of duty and duty payable. These documents
H clearly and cogently disclose the excise duty that has been paid. Since April
MAFATLAL INDS. LTD. v. U.O.I. 711
•
- 1, 1994, however, there is said to have occurred a change in the procedure. A
Under the new Rules, a proforma has been provided under which a
declaration is to be filed" indicating inter alia the tariff-chapter heading
applicable and the effective rate of duty assessable on the goods. This Form
has to be filled in and filed by the manufacturer with a declaration that the
particulars stated therein are true. In the place of gate pass, provision is B
now made for a special form of invoice which gives full particulars of the
price, assessable value, rate of duty and duty actually paid. From the
invoice and the proforma now prescribed, it is equally easy to ascertain the
duty component, i.e., the effective duty paid and passed on to the pur-
chaser.
c
93. We may also mention t~at, in case of S.R.P., the Rules require
that every assessee shall keep a current account with the Collector/Com-
missioner. He has to make periodical credits in the current account by cash
payment into the treasury so as to keep the balance sufficient to cover the
duty due on the goods intended to be removed at any time. On each
D
consignment removed by him, he has to pay the duty determined by him
by debiting the same to the current account before removal of the goods.
As stated already, in the case of S.~.P. also, the manufacturer has to file
the monthly returns in Form RT-12 which have to be assessed by the
Proper Officer as required by Rule 173-1. The Proper Officer adjusts the E
duty paid by the manufacturer against the duty assessed by him. if as a
result of such adjustment, it is found, during the course of assessment of
RT-12 Forms, that duty has not been levied or paid or has been short-
levied or short-paid, the authority is entitled to make a demand for the
same according to law. F
94. Indeed, it is suggested on behalf of the Union of India that if, in
any case, a manufacturer is obliged to sell his goods at a price lower than
the normal price declared under Section 4 (for the purposes of determining G
the assessable value), it is always open to him to approach the excise
authorities for re- determination of the assessable value. In other words,
he can ask for reduction in the excise duty component on the ground that
he is obliged to sell his goods at a lower price on account of various
commercial compulsions. H
712 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
0
A 95. Rule 9-B provides for provisional assessment in situations
specified in clauses (a), (b) and (c) of sub-rule (1). The goods provisionally
assessed under sub-rule (1) may be cleared for home consumption or
export in the same manner as the goods which are finally assessed. Sub-rule ·
(5) provides that "when the duty leviable on the goods is assessed finally
B in accordance with the provisions of these Rules, the duty provisionally
assessed shall be adjusted against the duty finally assessed, and if the duty
provisionally assessed falls short of or is in excess of the duty finally
assessed, the assessee shall pay the deficiency or be entitled to a refund,
as the case may be". Any recoveries or refunds consequent upon the
adjustment under sub-rule (5) of Rule 9-B will not be governed by Section
C 11-A or Section 11-B, as the case may be. However, if the final orders
passed under sub-rule (5) are appealed against - or questioned in a writ
petition or suit, as the case may be, assuming that .such a writ or suit is
entertained and is allowed/decreed - then any refund claim arising as a
consequence of the decision in such appeal or such other proceedings, as
D the case may be, would be governed by Section 11-B. It is also made clear
that if an independent refund claim is filed after the final decision under
Rule 9-B(5) re- agitating the issues already decided under Rule 9-B -
assuming that such a refund claim lies - and is allowed, it would obviously
be governed by Section 11-B. It follows logically that position would be the
E same in the converse situation.
NATURE AND CHARACTER OF REFUND CLAIMS UNDER THE
CENTRAL EXCISES AND SALT ACT AND THE CUSTOMS ACT:
96. It would be evident from the above discussion that the claims for
F refund under the said two enactments constitute an independent regimen.
Every decision favourable to an assessee/manufacturer, whether on the
question of classification, valuation or any other issue, does not automat-
ically entail refund. Section 11-B of the Central Excises and Salt Act and
Section 27 of the Contract Act, whether before or after 1991 Amendment
G - as interpreted by us herein - make every refund claim subject to proof of
not passing-on the burden of duty to others. Even if a suit is filed, the very
same condition operates. Similarly, the High Court while examining its
jurisdiction under Article 226 - and this Court while acting under Article
32 - would insist upon the said condition being satisfied before ordering
H refund. Unless the claimant for refund establishes that he has not passed
MAFATLALINDS.LTD.v. U.O.I. 713
on the burden of duty to another, he would not be entitled to refund, A
whatever be the proceeding and whichever be the forum. Section 11-B/Sec-
tion 27 are constitutionally valid, as explained by us hereinbefore. They
have to be applied and followed implicitly wherever they are applicable.
MEANING AND PURPORT OF SECTION 11-D :
B
97. It was contended by the learned counsel for the appellants-
petitioners that Section 11-D provides for double taxation. It was con-
tended that sub-section (1) of Section 11-D makes the manufacturer liable
to pay duty which he collects from the buyer as part of the price of goods
even where the manufacturer has already paid the duty at the time of C
removal. We do not think that there is any foundation for the said under-
standing or apprehension. There are no words in the section which
provided for payment of duty twice over. All that the section says is this :
the amount collected by a person/manufacturer from the buyer of goods
as representing duty of excise shall be paid over to the State; even if the D
tax collected by the manufacturer from his purchaser is more than the duty
due according to law, the whole amount collected as duty has to be paid
over to the State; if on the assessment being made it is found that the duty
collected and paid over by the manufacturer is more than the duty due
according to law, such surplus amount shall either be credited to the Fund E
or be paid over to the person who has borne the incidence of such amount
in accordance with the provisions of Section 11-B. It is obvious that if in a
given case, the manufacturer has collected less amount as representing the
duty of excise than what is due according to law, he is not relieved of the
obligation to pay the full duty according to law. This is the general purport
and meaning of Section 11-D. There may be cases where goods are F
removed/cleared without effecting their sale. In such a case, Secti,x;;_ 11-D
is not attracted. It is attracted only when goods are sold. The purport of
this section is in accord with Section 11-B and cannot be faulted.
98. A clarification : The situation in the case of captive consumption G
has not been dealt with by us in this opinion. We leave that question open.
PART - IV
99. The discussion in the judgment yields the following propositions.
We may forewarn that these propositions are set out merely for the sake H
714 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A of convenient reference and are not supposed to be exhaustive. In case of
any doubt or ambiguity in these propositions, reference must be had to the
discussion and propositions in the body of the judgment.
(i) Where a refund of tax duty is claimed on the ground that it has
B been collected from the petitioner/plaintiff - whether before the commen-
cement of the Central Excises and Customs Laws (Amendment) Act, 1991
or thereafter - by mis-interpreting or mis- applying the provisions of the
Central Excises and Salt Act, 1944 read with Central Excise Tariff Act,
1985 or Customs Act, 1962 read with Customs Tariff Act or by mis-inter-
preting or mis-applying any of the rules, regulations or notifications issued
C under the said enactments, such a claim has necessarily to be preferred
under and in accordance with the provisions of the respective enactment
before the authorities specified thereunder and within the period of limita-
tion prescribed therein. No suit is maintainable in that behalf. While the
jurisdiction of the High Courts under Article 226 - and of this Court under
D Article 32 - cannot be circumscribed by the provisions of the said enact-
ments, they will certainly have due regard to the legislative intent evidenced
by the provisions of the said Acts and would exercise their jurisdiction
consistent with the provisions of the Act. The writ petition will be con-
sidered and disposed of in the light of and in accordance with the
provisions of Section 11-B. This is for the reason that the power under
E Article 226 has to be exercised to effectuate the rule of law and not for
abrogating it.
The said enactments including Section 11-B of Central Excises and
Salt Act and Section 27 of the Customs Act do constitute "law'' within the
F meaning of Article 265 of the Constitution of India and hence, any tax
collected, retained or not refunded in accordance with the said provisions
must be held to be collected, retained or not refunded, as the case may be,
under the authority of law. Both the enactments are self-contained enact-
ments providing for levy, assessment, recovery and refund of duties im-
G posed thereunder. Section 11-B of the Central Excises and Salt Act and
Section 27 of the Customs Act, both before and after the 1991 (Amend-
ment) Act are constitutionally valid and have to be followed and give effect
to. Section 72 of the Contract Act has no application to such a claim of
refund and cannot form a basis for maintaining a suit or a writ petition.
H All refund claims except those mentioned under Proposition (ii) below
MAFATLALINDS. LTD. v. U.0.1. 715
have to be and must be filed and adjudicated under the provisions of the A
Central Excises and Salt Act or the Customs Act, as the case may be. It is
n~cessary ·to emphasise in this behalf that Act provides a complete
mechacisffi for correcting any errors whether of fact or law and that not
only an appeal is provided to a Tribunal - which is not a departmental
organ ~ but to this Court, which is a civil court. B
(ii) Where, however, a refund is claimed on the ground that the
provision of the Act under which it was levied is or has been held to be
unconstitutional, such a claim, being a claim outside the purview of the
enactment, can be made either by way or a sui~ or by way of a writ petition.
This principle is, however, subject to an exception : where a person c
approaches the High Court or Supreme Court challenging the constitution-
al validity of a provision but fails, he cannot take advantage of the decla-
ration of unconstitutionality obtained by another person on another
ground; this is for the reason that so far as he is concerned, the decision
has become final and cannot be re-opened on the basis of a decision on D
another person's case; this is the ratio of the opiniqn of Hidayatullah, CJ.
in Tilokchand Motichand and we respectfully agree with it.
Such a claim is maintainable both by virtue of the declaration con-
tained in Article 265 of the Constitution of India and also by virtue of E
Section 72 of the Contract Act. In such cases, period of limitation would
naturally be calculated taking into account the principle underlying clause
(c) of sub-section (1) of Section 17 of the limitation Act, 1963.. A refund
claim in such a situation cannot be governed by the provisions of the
Central Excises and Salt Act or the Customs Act, as the case may be, since
F
the enactments do not contemplate any of their provisions being struck
down and a refund claim arising on that account. It other words, a claim
of this nature is not contemplated by the said enactments and is outside
their purview.
(iii) A claim for refund, whether made under the provisions of the G
Act as contemplated in Proposition (i) above or in a suit or writ petition
in the situations contemplated by Proposition (ii) above, can succeed only
if the petitioner/plaintiff alleges and establishes that he has not passed on
the burden of duty to another person/other persons. His refund claim shall
be allowed/decreed only when he establishes that he has not passed on the H
716 SUPREME COURT REPORTS(l996] SUPP. 10 S.C.R.
A burden of the duty or to the extent he has not so passed on, as the case
may be. Whether the claim for restitution is treated as a constitutional
imperative or as a statutory requirement, it is neither an absolute right nor
an unconditional obligation but is subject to the above requirement, as
explained in the body of the judgment. Where the burden of the duty has
B been passed on, the claimant cannot say that he has suffered any real loss
or prejudice. The real loss or prejudice is suffered in such a case by the
person who has ultimately borne the burden and it is only that person who
can legitimately claim its refund. But where such person does not come
forward or where it is not possible to refund the amount to him for one or
C the other reason, it is just and appropriate that that amount is retained by
the State, i.e., by the people. There is no immorality or impropriety
involved in such a proposition.
The doctrine of unjust enrichment is a just and salutory doctrine. No
person can seek to collect the duty from both ends. In other words, he
D cannot collect the duty from his purchaser at one end and also collect the
same duty from the State on the ground that it has been collected from
him contrary to law. The power of the Court is not meant to be exercised
for unjustly enriching a person. The doctrine of unjust enrichment is,
however, inapplicable to· the State. State represents the people of the
E country. No one can speak of the people being unjustly enriched.
(iv) It is not open to any person to make a refund claim on the basis
of a decision of a Court or Tribunal rendered in the case of another person.
He cannot also claim that the decision of the Court!fribunal in another
person's case has led him to discover the mistake of law under which he
F has paid the tax nor can he claim that he is entitled to prefer a writ petition
or to institute a suit within three years of such alleged discovery of mistake
of law. A person, whether a manufacturer or importer, must fight his own
battle and must succeed or fail in such proceedings. Once the assessment
or levy has become final in his case, he cannot seek to reopen it nor can
G he claim refund without re-opening such assessment/order on the ground
of a decision in another person's case. Any proposition to the contrary not
only results in substantial prejudice to public interest but is offensive to
several well established principles of law. It also leads to grave public
mischief. Section 72 of the Contract Act, or for that matter Section 17(1)(c)
H of the Limitation Act, 1963, has no application to such a claim for refund.
MAFATLAL INDS. LTD. v. U.0.1. 717
(v) Article 265 of the Constitution has to be construed in the light of A
the goal and the ideals set out in the Preamble to the Constitution and in
· Articles 38 and 39 thereof. The concept of economic justice demands that
in the case of indirect taxes like Central Excises duties and Customs duties,
the tax collected without the authority of law shall not be refunded to the
petitioner- plaintiff unless he alleges and establishes that he has not passed B
on the burden of duty to a third party and that he has himself borne the
burden of the said duty.
(vi) Section 72 of the Contract Act is based upon and incorporates
a rule of equity. In such a situation, equitable considerations cannot be
ruled out while applying the said provision. C
(vii) While examining the claims for refund, the financial chaos which
would result in the administration of the State by allowing such claims is
not an irrelevant consideration. Where the petitioner-plaintiff has suffered
no real loss or prejudice, having passed on the burden of tax or duty to D
another person, it would be unjust to allow or decree his claim since it is
bound to prejudicially affect the public exchequer. In case of large claims,
it may well result in financial chaos in the administration of the affairs of
the State.
E
(viii) The decision of this Court in Income Tax Officer Benaras v.
Kanhaiyalal Mukundlal Saraf, [1959] S.C.R. 1350 must be held to have been
wrongly decided insofar as it lays down or is understood to have laid down
propositions contrary to the propositions enunciated in (i) to (vii) above.
It must equally be held that the subsequent decisions of this Court follow- F
ing and applying the said propositions in Kanhaiyalal have also been
wrongly decided to the above extent. This declaration - or the law laid
down in Propositions (i) to (vii) above - shall not however entitle the State
to recover to taxes/duties already refunded and in respect whereof no
proceedings are pending before any authority/Tribunal or Court as on this
date. All pending matters shall, however, be governed by the law declared G
herein notwithstanding that the tax or duty has been refunded pending
those proceedings, whether under the orders of an authority, Tribunal or
Court or otherwise.
(ix) The amendments made .and the provisions inserted ·by the H
718. SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A Central Excises and Customs Law (Amendment) Act, 1991 in the Central
Excises and Salt Act and Customs Act are constitutionally valid and are
unexceptionable.
' (x) By virtue of sub-section (3) to Section 11-B of the Central Excises
B and Salt Act, as amended by the aforesaid Amendment Act, and by virtue
of the provisions contained in sub-section (3) of Section 27 of the Customs
Act, 1962, as amended by the said Amendment Act, all claims for refund
(excepting those which arise as a result of declaration of unconstitutionality
of a provision whereunder the levy was created) have to be preferred and
C adjudicated only under the provisions of the respective enactment. No suit
for refund of duty is maintainable in that behalf. So far as the jurisdiction
of the High Courts under Article 226 of the Constitution - or of this Court
under Article 32 - is concerned, it remains unaffected by the provisions of
the Act. Even so, the Court would, while exercising the jurisdiction under
the said articles, have due regard to the legislative intent manifested by the
D provisions of the Act. The writ petition would naturally be considered and
disposed of in the light of and in accordance with the provisions of Section
11-B. This is for the reason that the power under Article 226 has to be
exercised. to effectuate the regime of law and not for abrogating it. Even .
while acting in exercise of the said constitutional power, the High Court
E cannot ignore the law nor can it over-ride it. The power under Article 226
is conceived to serve the ends of law and not to transgress them.
(xi) Section 11-B applies to all pending proceedings notwithstanding
F the fact that the duty may have been refunded to the petitioner/plaintiff
pe'lding the proceedings or under the orders of the
Court/Tribunal/Authority or otherwise. It must be held that Union of India
v. Jain Spinners, [1992) 4 S.C.C. 389 and Union of India v. I. T.C., [1993)
Suppl. 4 S.C.C. 326 have been correctly decided. It is, of course, obvious
that where the refund proceedings have finally terminated - in the sense
G that the appeal period has also expired - before the commencement of the
1991 (Amendment) Act (September 19, 1991), they cannot be re-opened
and/or governed by Section ll-B(3) (as amended by the 1991 (Amend-
ment) Act). This, however, does not mean that the power of the appellate
authorities to condone delay in appropriate cases is affected in any manner
H by this clarification made by us.
MAFATLAL INDS. LTD. v. U.O.I. [AHMADI, CJ.] 719
(xii) Section 11-B does provide for the purchase making the claim A
for refund provided he is able to establish that he has not passed on the
burden to another person. It, therefore, cannot be said that Section 11-B
is a device to retain the illegally collected taxes by the State. This is equally
true of Section 27 of the Customs Act, 1962.
B
100. We take note of the fact that writ petitions/writ appeals/suits
claiming refund of excise duties/customs duties may be pending as on today.
They are liable to fail on the ground of maintainability by virtue of the law .
declared herein. Since the law is being declared and clarified by us now,
we make the following directions :' in cases where writ petitions, writ C
appeals (by whatever appellation they are called) or suits (at whatever
stage they may be, as on today) are pending as on today, and provided they
have not already taken proceedings for refund under the Act, it shall be
open to the petitioners/appellants/plaintiffs to file applications for refund
under Section 11-B within sixty days from today. If the applications are so
filed by them, they shall not be rejected on the ground of limitation and D
shall be dealt with according to law. We make it clear that this direction
applies only to petitioners/appellants/plaintiffs in pending writ peti-
tions/writ appeals/suits (pending as on today), as explained hereinabove,
and not to any others. The applications so filed under Section 11-B shall be
disposed of under Section 11-B, as interpreted herein, and in accordance E
with law. It is obvious that if any of such petitioners/appellants/plaintiffs
already taken proceedings for refund under the Act and having failed
therein - either partly or wholly - have resorted to writ petition or suit, they
shall not be entitled to the benefit of this direction.
F
101. The individual cases may now be listed before a Division Bench
for being disposed of in this light of the judgment.
There shall be no order as to costs.
AHMADI, CJ. I have had the benefit of studying the judgments of G
my learned brothers Reddy, Sen and Paripoornan, JJ. Pursuant to the
discussions that I have had with them and with all my other learned
brothers on this bench, I find myself to be broadly in agreement with the
conclusions recorded by Reddy, J. subject to the two aspects on which I
have recorded my views hereunder : H
720 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A The first of these is the issue regarding the extent to which the
jurisdiction of ordinary courts is ousted in respect of claims for refund of
taxes illegally levied and collected. In my view, it would be incorrect to
hold, as Reddy, J. has done, that every claim for refund of illegal or
unauthorised levy of tax is necessarily required to be made in accordance
B with the provisions of the Central Excise Act, 1944 (hereinafter called "the
Excise Act"). The leading authority governing this issue is the decision of
this Court inDhulabhai and Others v. State of Madhya Pradesh and Another,
[1968] 3 S.C.R. 662. In this case, after analysing the leading decisions in
the field, this Court laid down the following propositions with a view to
C determining the extent to 'Nhich the jurisdiction of civil courts can be
ousted:
"(1) Where the statute gives a finality to the orders of the special
tribunals the Civil Courts' jurisdiction must be held to be excluded
if there is adequatt- remedy to do what the Civil Courts would
D normally do in a suit. Such provision, however, does not exclude
those cases where the provisions of the particular Act have not
been complied with or the statutory tribunal has not acted in
conformity" with the fundamental principles of judicial procedure.
(2) Where there is express bar of the jurisdiction of the Court, an
E examination of the scheme of the particular Act to find the ade-
quacy or the sufficiency of the remedies provided may be relevant
but is not decisive to sustain the jurisdiction of the civil court.
Where there is no express exclusion the examination of the
F remedies and the scheme of the particular act to find out the
intendment becomes necessary to see if the statute creates a special
right or a liability and provides for the determination of the right
or liability and further lays down that all questions about the said
right and liability shall be determined by the tribunals so con-
stituted, and whether remedies normally associated with actions in
G Civil Courts are prescribed by the said statute or not.
(3) Challenge to the provisions of the particular Act as ultra vires
cannot be brought before Tribunals constituted under that Act.
Even the High Court cannot go into that question on a revision or
H reference from the decision of the Tribunals.
MAFA1LAL INDS. LID. v. U.0.I. [AHMADI, CJ.] 721
( 4) When a provision is already declared unconstitutional or the A
constitutionality of any provision is to be challenged, a suit is open.
A writ of certiorari may include· a direction for refund if the claim
is clearly within the time prescribed by the Limitation Act but it
is not a compulsory to replace a suit.
(5) Where the particular Act contains no machinery for refund of B
tax collected in excess of constitutional limits or illegally collected
a suit lies.
( 6) Questions of the correctness of the assessment apart from its
constitutionality are for the decision of the authorities and a civil C
suit does not lie if the orders of the authorities are declared to be
final or there is an express prohibition in the particular Act. In
either case the scheme of the particular Act must be examined
because it is a relevant enquiry.
(7) An exclusion of the jurisdiction of the Civil Court is not readily D
to be inferred unless the conditions above set down apply."
In view of these propositions, which have been reiterated by this
Court on several occasions and thus constitute sound law, it is clear that
actions by way of suits or petitions under Article 226 of the Constitution E
cannot be completely eliminated. The claims for refund can arise under
three broad classes and the issue of ouster of jurisdiction of civil courts
can be understood by focussing on the parameters of these classes which
are as follows :
Class I : "Unconstitutional levy" - where claims for refund are F
founded on the ground that the provision of the Excise Act under which
the tax was levied is unconstitutional.
Cases falling within this class are clearly outside the ambit of the
Excise Act. In such cases assessees can either file a suit under Section 72
of the Contract Act, 1872 (hereinafter called "Contract Act") or invoke the
G
writ jurisdiction of the High Court under Article 226 of the Constitution.
Class II : "Illegal levy" - where claims for refund are founded on the
ground that there is misinterpretation/misapplication/erroneous interpreta-
tion of the Excise Act and the Rules framed thereunder. H
722 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A Ordinarily, all such claims must be preferred under the provisions of
the Excise Act and the Rules framed thereunder by strictly adhering to the
stipulated procedure. However, in cases where the authorities under the
Excise Act arrogate to themselves jurisdiction even in cases where there is
clear want of jurisdiction, the situation poses some difficulty. Reddy, J. has
B held that in all cases, except where unconstitutionality is alleged, the
remedy is to be pursued within the framework of the Excise Act. This is a
dangerous proposition for it will not cater to situations where the
authorities under the Excise Act assume authority in cases where there is
an inherent lack of jurisdiction. This is because, if one were to follow
Reddy, J.'s reasoning, the authorities under the Act will have the final say
C over situations in which they totally lack inherent jurisdiction. In such a
situation, there is nothing to prevent the authorities from exercising juris-
diction in cases which are ultra vires the Excise Act but intra vires the
Constitution. To that extent, I would hold that in cases where the
authorities under the Excise Act initiate action though lacking in inherent
D jurisdiction, the remedy by way of a suit under Section 72 of the Contract
Act or a writ under Article 226 of the Constitution, will lie. Such a
conclusion will not frustrate the exclusion of jurisdiction of civil courts by
· the Excise Act because the areas where as authority acting under a statute
is said to lack inherent jurisdiction have been clearly demarcated by several
E decisions of this Court.
Class Ill : "Mistake of Law'' - where claims for refund are initiated
on the basis of a decision rendered in favour of another assessee holding
the levy to be : (1) unconstitutional; or (2) without inherent jurisdiction.
F Ordinarily, no assessee can be allowed to reopen proceedings that
have been ·finally concluded against him on the basis of a favourable
· decision in the case of another assessee. This is because an order which
has become final in the case of an assessee will continue to stand until it
is specifically recalled or set aside in his own case.
G
In cases where the levy of a tax has been held to be (1) unconstitu-
tional; or (2) void for want of inherent jurisdiction (as explained in Class
II), it is open. for the assesses to take advantage of the declaration of the
law so made and claim refunds on the ground that they paid the tax Under
H a mistake of law. This is because such claims are outside the ambit of the
MAFATLALINDS. LTD. v. U.O.L [AHMADI, CJ.] 7'23
Excise Act. In such cases, the limitation period applicable will be that A
specified in Section 17(1)(c) of the Limitation Act.
Reddy, J. has moulded an exception to the above stated principle.
He has held that where a person approaches the High Court or the
Supreme Court challenging the constitutional validity of a provision but
fails, he cannot take advantage of the declaration of unconstitutionality · B
obtained by another person on another ground; this is for the reason that
so far as he is concerned, the decision has become final and cannot be
ignored or put aside as if it did not exist on the basis of the decision in
another person's case. However, in my opinion, since the levy of tax has
been held to be unconstitutional (which would lead to the conclusion that C
it should never have been levied in the first place) such an interpretation
would be unfair to an assessee who had the foresight to discern the
unconstitutionality of the provision (albeit on a different ground) but was
unfortunate in not being able to convince the concerned court of the
unconstitutionality of the provisions. Considering the gravity of the case, in D
my opinion, it should be left open to such an assessee to use legal remedy
as may be available to him to have the earlier order reviewed or recalled
on the basis of the order made in the subsequent case. If he succeeds, well
and good; if he fails, he must take the consequence of an adverse order
against him. ·
E
On the issue of the retrospective application of the amended
provisions of the Excise Act, I wish to emphasise on practical difficulty that
may arise. Reddy, J. has held that in respect of proceedings that have been
finally culminated, there is no question of reopening proceedings, and
retrospectively applying the amended Section llB. However, in respect of
decrees and orders that have become final but have not been executed, the F
non obstante clause, Section 11B(3), provides as follows :
"(3) Notwithstanding anything to the contrary contained in any judg-
ment, decree, order or direction of the Appellate Tribunal or any
court or in any other provision of this Act or the rules made G
thereunder or any other law for the time being in force, no refund
shall be made except as provided in sub-section (2)."
(Emphasis added)
It is, therefore, clear that in respect of such decrees and orders, the H
724 SUPREME COURT REPORTS[1996) SUPP.10 S.C.R.
A procedure and conditions prescribed in Section llB will have to be com-
plied with. However, under the scheme of the amended Excise Act, the
application for refund which is a pre- requisite for invoking Section 11B(2),
is required to be made within six months from the payment of duty. It is
obvious that this requirement cannot be complied with in respect pending
B decrees and orders. But it must at the same time be reallsed that in such
a case, the assessee was protesting the recovery of the excise duty from him
for which he had even initiated legal proceedings. It would therefore be in
order to assume that he had paid the duty even though he was protesting
its recovery. To ensure that such orders and decrees are not frustrated, it
must be deemed that the duties of excise in such cases were paid "under
C protest" within the meaning of the second proviso to clause (1) of Section
llB. This would enable the assessees in such cases to file fresh applications
under Section 11B(2), thereby complying with the scheme of the amended
Excise Act.
Subject to the above, I agree with the rest of the conclusions reached
D by Reddy, J.
PARIPOORNAN, J. Common questions of law arise for considera-
tion in this batch of cases. Initially the matter came up before a two
Member Bench. The said Bench felt that the decision of the Constitution
E Bench comprising of 5 Judges in Sales Tax Officer, Benaras & Others v.
Kanhaiya Lal Mukundlal Saraf, AIR (1959) SC 135 = [1959) SCR 1350
requires reconsideration and referred the matter to a larger bench of 7
Judges. When the matter came up before a Bench of 7 Judges, it was
noticed that Kanhaiya Lat's case (supra) was expressly approved by a
F bench of 7 Judges in the decision reported in State of Kera/a v. Aluminium
Industries Ltd., (1965) 16 STC 689, and so, by order dated 28.7.1993, the
said Bench directed that the matter may be placed before the learned Chief
Justice for constituting a still larger Bench. That is how this batch cf cases
came up before a Bench of 9 Judges. We heard, Sri F.S. Nariman, Sri Soli
Sorabjee and Sri Harish Salve, Senior Advocates, who appeared for the
G different assessees (claimants) and Sri K. Parasaran and Sri M.
Chandrashekhar, Senior Advocate who appeared for the Union of India.
2. Stated briefly, the controversy centres round the tenability or
otherwise of the claim for refund of the amounts paid be way of excise duty
H under the Central Excises and Salt Act, 1944, now titled as Central Excise
MAFATLALINDS. LTD. v. U.0.1. [PARIPOORNAN,J.) 725
Act, 1944 (hereinafter referred to as 'the Excise Act') on the ground that A
;; it was so done under "mistake of law". It will be convenient to deal with
the controversy by adverting to the minimal facts in the main appeal argued
before us - Civil Appeal No. 3255 of 1984 - Mafatlal lndustlies Ltd.,
Ahmedabad v. Union of India. The appellant is a textile mill situate at
Ahmedabad. The appellant and a few other mills manufacture "blended B
yarn". The said blended yearn was captively consumed by the various mills
for manufacture of fabric, popularly known as "art silk" fabric. For the
period prior to March 16/17, 1972, the mills paid excise duty on blended
yarn manufactured for captive consumption under Tariff Item 18 or 18A
of the First Schedule to the Excise Act. In Special Application No. 1058/72
filed by M/s. Calico Mills, who manufactured fabrics and was captively
c
consuming blended yarn, produced by it for manufacturing fabric kn.own
as "art silk fabric", a Division Bench of the Gujarat High Court by judgment
dated 15.1.1976, held that the levy of the excise duty on blended yarn prior
to March 16/17, 1972, under tariff Item 18 or 18A was clearly ultra vires.
D
The High Court directed refund of the excise duty levied for 3 years prior
to institution of the petition, which was instituted on 6.5.1972. The appel-
!ant and other mill-owners stated that as a result of the declaration of the
law as aforesaid by the Court, they were not liable to pay excise duty on
blended ya~n up to March 16/17, 1972 and that they had paid the excise
duty on the same upto that date under mistake of law. They requested for E
refund of the excise duty so paid till March 16/17, 1972, stating that such
duty was illegally recovered from them. The Revenue did not refund the
excise duty as claimed. So, the appellant and others filed suits within three
years of the aforesaid judgment (15.1.1976) for refund of excise duty
illegally recovered from them, with interest. The trial court decreed the F
suits. In the appeals filed by the Union of India against the aforesaid
decrees passed by the trial court, the High Court of Gujarat allowed the
appeals and set aside the decrees passed by the trial courts, by judgment
dated 6.4.1984. It was held that in order to successfully sustain the. claim
~- of restitution based on Section 72 of the Contract Act, the person claiming G
restitution should prove "loss or injury" to him, and in the cases before
them, the excise duty paid on blended yarn was ultimately passed on to the
.. buyer of the fabric, and so the claim for restitution will not lie. In other
words, in cases where an assessee has "passed on" the duty paid by or
realised from him, he has suffered no loss or injury, and the action for H
726 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A restitution is unsustainable. The aforesaid statement of the law is seriously
disputed by the appellants in Civil Appeal No. 3255/84 and others.
3. In the ultimate analysis, the main question that falls for considera-
tion in this batch of cases is, whether in an action claiming refund of excise
duty (tax) paid under mistake of law, is it essential for the person claiming
B such refund, to establish "loss or injury'' to him? In other words, in cases
where the person from whom the excise duty (tax) is collected, has "passed
on" the liability or deemed to have passed on the liability, is it open to him
to claim refund of the duty paid by him, placing reliance on Section 72 of
the Indian Contract Act? The further question as to whether an action by
C way of civil suit or a writ petition under Article 226 of the Constitution will
lie in the light of various amendments to the Act, claiming "refund" or
·"restitution", also arises for consideration.
4. I Pfrused the draft judgment prepared by my learned brother
D Jeeven Reddy, J., wherein on the main question, he has held that if the
person claiming the refund has passed on the burden of duty to another
and has not really suffered any loss or prejudice, there is no question of
reimbursing him and he cannot successfully sustain an action for restitu-
tion, based on Section 72 of the Indian Contract Act. With great respect,
I fully concur with the aforesaid conclusion of my learned brother. But, in
E view of the importance of the question raised, I would like to record my
own reasons for the aforesaid conclusion. I shall separately deal with the
maintainability of the action either by way of suit or petition under Article
226 of the Constitution - the extent to which there is ouster of jurisdiction
of Courts.
F
5. -In this batch of cases, the claims by different assessees for refund
of excise duty paid by them under mistake of law arise over a period of
years, and the claims were made in different proceeding - before the
departmental authorities, by way of civil suits and writ petitions under
Article 226 of the Constitution, which are in appeal before us.
G
Broadly, the basis for the various refund claims can be classified into
3 groups or categories :
(I) The levy is unconstitutional - outside the provisions of the Act or
H not contemplated by the Act.
MAFATLALINDS. L1D. v. U.O.I. [PARIPOORNAN,J.) 727
(II) The levy is based on misconstruction or wrong or erroneous A
interpretation of the relevant provisions of the Act, Rules or Notifications;
or by failure to follow the vital or fundariie'll'tal provisions of the Act or by
acting in violation of the fundamental principles of judicial procedure.
(III) Mistake of law - the levy or imposition was unconstitutional or
illegal or not exigible in law (without jurisdiction) and, so found in a B
proceeding initiated not by the particular assessee, but in a proceeding
initiated by some other assessee either by the High Court or the Supreme
. Court, and as soon as the assessee came to know of the judgment (within
the period of limitation), he initiated action for refund of the tax paid by
him, due to mistake of law. C
For the periods during which the refund were claimed, there were different
statutory provisions which governed the subject. They are -
(a) Period up to 7.8.1977 - Rule 11 of the Central Excise Rules,
before amendment; D
(b) Period from 7.8.1977 to 16.11.80 - Rule 11 of the Central
Excise Rules, as amended;
(c) Period from 16.11.1980to19.9.1991- Section llA and Section
llB of the then Central Excises & Salt Act; E
(d) Period after 19.9.1991 - Section llA read along with Section
llB of the Act, as amended by Act 40 of 1991.
The circumstances and grounds on the basis of which the refund can be
claimed, the period within which it should be so done, the forum before F
which the claim should be preferred and whether the decision thereon is
subject to the jurisdiction of ordinary courts, vary from period to period.
We shall advert to such provision and their impact on various aspects
regarding the claim for refund a little later.
G
Rule 11 of the Central Excise Rules which dealt with claims for
refund of duty as it was in force prior to 7.8.1977, is to the following
.. effect:
"Rule 11. No refund of duties or charges erroneously paid, unless
claimed within three months. - No duties or charges which have H
72Ji, SUPREME COURT REPOR TS(l996] SUPP. 10 S.C.R.
A been paid or have been adjusted in an account current maintained
with the Collector under Rule 9, and of which repayment wholly
or in part is claimed in consequence of the same having been paid
through inadvertance, error or misconstruction, shall be refunded
unless the claimant makes an application for such refund under
his signature and lodges it with the proper officer within three
B
months from the date of such payment or adjustment, as the case
maybe."
It should be noted that Rule 11 before amendment did not provide for any
ouster of jurisdiction of courts. We shall deal with Rule 11-A as amended
C and Sections llA and B of the Excise Act a little later. The Revenue states
that in view of these later provisions, there is ouster of jurisdiction of
courts, relating to claims for refund.
6. The claims by different assessee for refund arose and are/were
D preferred during different periods. After Rule 11 was amended and Sec-
tions llA and B were inserted in the Act, the statute contained provisions
making them exclusive for claiming refund. Be that as it may, it is only
relevant to state at this juncture that in all cases, irrespective of the relevant
statutory provisions in the Excise Act and/or the Rules, the claims for
refund were made in different proceedings mainly based on section 72 of
E the India Contract Act. So the main issue, in all the cases, that arises for
consideration is, whatever be the nature of the attack regarding the levy,
or the basis put forward for claiming refund, or the period for which refund
is claimed or the character of the proceedings in which it was so done, or
the different nature or chancter of the statutory provisions either providing
p or not providing as to how and in what manner the claim should be made,
- whether the claim for refund is tenable in any of the proceedings, for any
period, based on Section 72 of the Contract Act, if the assessee has "passed
c
on" the liability to the consumer or third party?
7. The levy under the Excise Act is an indirect tax (duty). A duty of "..
G excise is levied on the manufacture or production of goods. Ordinarily, it
is levied on the manufacturer or producer of goods. (Since the levy is in
relation to or in connection with the manufacture or production of goods,
it may be levied even at a point later than manufacture or production of
the goods.) The duty levied will form part of the total cost of the manufac-
H turer or producer. The levy being a component of the price for which the
MAFATLALINDS. LTD. v. U.0.1. [PARIPOORNAN,J.) 729
goods are sold, is ordinarily passed on to the customer. It is a matter of A
common knowledge that every prudent businessman will adjust his affairs
in his best interests and pass on the duty levied or leviable on the com-
modity to the consumer. That is the presumption in law.
8. The claim for refund. in these cases is based upon the plea that
excise duty was paid when it was not exigible. It was so done under mistake B
of law. Refund is claimed basing the action under Section 72 of the
Contract Act, which is to the following effect :
"Liability for person to whom 72. A person to whom money has
money is paid or thing been paid, or anything delivered, C
delivered, by mistake or under by mistake or under coercion,
coercion. must repay or return it.
Illustrations
(a) A and B jointly owe 100 rupees to C. A alone pays the amount D
to C, and B, not knowing this fact, pays 100 rupees over again to
C. C is bound to repay the amount to B.
(b) A railway company refuses to deliver up certain goods to the
consignee, except upon the payment of an illegal charge for car- E
riage. The consignee pays the sum charged in order to obtain the
goods. He is entitled to recover so much of the charge as was
illegally excessive."
Chapter V of the Indian Contract Act is styled thus : "Of Certain Relations
Resembling Those Created By Contract". The Chapter contains five sec- F
tions - Section 68 to 72. The rights and liabilities dealt with in those
Sections accrue from relations resembling those created by contract. It is
not a real contract, but one implied in law or a quasi-contract.
Law is fairly settled that "Money paid under a mistake or on a
consideration which has wholly failed or under duress falls under the G
general head of money "had and received." An action for money "had and
received." An action for money "had and received" is an action "founded
on simple contract" which has been called quasi contract or restitution".
Pollock & Mulla Indian Contract And Specific Relief Acts (10th Edition)
page 598. H
730 SUPREME COURTREPORTS[l996] SUPP.10 S.C.R.
A 9. The Law of Restitution is founded upon the principle of "unjust
enrichment". As stated by the learned authors, Lord Goff of Chieveley and
Gareth Jones "The Law of Restitution" (3rd Edu.) 1986. "It presupposes
three things : first, that the defendant has been enriched by the receipt of
a benefit; secondly, that he has been so enriched at the plaintiff's expense;
B and thirdly, that it would be unjust to allow him to retain the benefit. These
three subordinate principles are closely interrelated." (page 16).
Cheshire Fifoot & Furmston's "Law of Contract" (12th Edn.) 1991,
page 649.)
C 10. The second aspect aforesaid, namely, that the defendant has been
enriched "at the plaintiffs' expense", has been considered by Peter Birks
(Professor of Civil Law, University of Edinburgh) "introduction to the Law
of Restitution". rather elaborately. The principles discernible from the
above discussion has bee succinctly stated by Endrew Burrows : The Law
of Restitution (1993), at page 16, thus :
D
"It is the major theme of Birks' work that this phrase ambiguously
conceals two different ideas in the law of restitution. The first, and
most natural meaning, is that the defendant's gain represents a loss
to the plaintiff: in Birks' tenninology a 'subtraction from' the plaintiff.
E The second, and less obvious meaning, is that the defendant's gain
has been acquired by committing a wrong against the plaintiff."
(Emphasis supplied)
The person claiming restitution should have suffered a "loss of injury". In
F my opinion, in cases where the assessee or the person claiming refund has
passed on the incidence of tax to a third person, how can it be said that
he has suffered a loss of injury? How is it possible to say that he has got
ownership or title to the amount claimed, which he has already recouped
from a third party? So, the very basis requirement for a claim of restitution
G under Section 72 of the Contract Act is that the person claiming restitution
should plead and prove a loss or injury to him; in other words, he has not
passed on the liability. If it is not so done, the action for restitution or
refunds, should fail.
11. In this connection, the decision of a three-member Bench of this
H Court in Mulamchand v. State of Madhya Pradesh, AIR (1968) S.C. 1218,
MAFATLALINDS. LTD. v. U.O.I. [PARIPOORNAN,J.] 731
affords some guidance. The appell<\flt in that case, purchased a right to A
pluck, collect and remove the forest produce from the proprietors. The
right was acquired before the propriety rights vested in the State of
Madhya Pradesh by Act No. 1 of 1951 - called the Abolition Act. Acting
under the Act, in April, 1951 the Deputy Commissioner auctioned the
forest produce of villages covered by the purchases of the appellant.
Amongst others, the appellant had deposited a sum of Rs. 10,000 towards B
the right to collect lac from' the forest. It turned out that the provisions of
Article 299 of the Constitut\ion were not complied with and the contract
entered into by appellant. therein with the State of Madhya Pradesh was
void. The ·appellant Paimed ri:fun.d on the basis that there was no valid
contract. The trial court as wellas the appellant court held that the appellant C
having worked out the eontract by collecting the lac from the jungles in
pursuance of the agreement, was not· entitled to refund of the amount of
deposit. In t~e appeal filed by the appellant, this Court held that if the
money is deposited and the goods are supplied or services rendered in terms
of the contract, the provision of Section 70 of the Contract, Act may be
applicable and, can be invoked by the aggrieved party to the void contract. D
This Court further held at pages 1222-23, thus :
"The juristic basis of the obligation in such a case is not found(\d
upon any contract or tort but upon a third category of law, namely,
quasi-contract or restitution. In Fibrosa v. Fairbairn, (1943) AC 32
LOrd Wright has stated the legal position as- follows : E
"........ any civilised system of law is bound to provide remedies for
cases of what has been called unjust enrichment or1unjust benefit,
that is, to prevent a man from retaining the money of, or some
benefit cl,erived from, another which it is against conscience that F
he should keep. Such remedies ill English Law are generically
different from remedies in contract or in tort, and are now recog-
nised to.fall within a third category of the common law which has
been called quasi- contract or restitution."
(7) In Nelson v. Larhol~ (1948) 1 KB 339 Lord Denning has observed G
as follows.
"It is no longer appropriate to draw a distinction between law
and equity, Principles have now to be stated in the light of their
combined effect. Nor is it necessary to canvass the niceties of the H ·
732 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A old fonns of action. Remedies now depend on the substance of the
right, not on whether they can be fitted into a particular framework.
The right here is not pecUliar to equity or contract or tort, but falls
naturally within the important category of cases where the court
orders restitution of the justice of the case so requires."
B (Emphasis· supplied)
· This Court furthe~ stated the law thus :
: ".... It is well established that a~ person who seeks restitution has a
duty to account to the defendant for what he has received in the
c transaction from which his right to restitution arises. In other words,
an accounting by the plaintiff is a condition of restitution from the
defendant (See 'Restatement of the Law of Restitution', American
Law Institute, 1937 Edn., p. 634)."
(Emphasis supplied)
D
The observations extracted above indisputably point out that a person who
seeks restitution, has a duty to disclose or account for what he has received
in the transaction. An accounting is a condition precedent in an action for
restitution. By way of analogy, it can be stated that in cases where restitution
E is claimed under Section 72 of the Contract Act, on the ground of payment
due to mistake of law, the person claiming reslftution, should plead and prove
that "he has not passed on" the liability to another. That is the nature of
"accounting" in cases falling under Section 72 of the Contract Act. In my
opinion, Qie High Court was justified in law in holding that since the excise
duty paid by the appellant was ultimately passed on to the buyers of the fabric,
F and that the appellant has suffered no loss or injury, the action for restitution
based on Section 72 of the Contract Act, was unsustainable. (This is the legal
position even under general law, without reference to section 1JB of Central
Excises & Salt Act as amended by Act 40/1991).
G 12. Mr. F.S. Nariman, Senior Counsel for the appellants, contended
that in an action for restitution under Section 72 of the Contract Act, the
question as to whether the incidence of duty or tax has been passed on, is
an irrelevant factor. There is no such requirement in the statute. The (
sheet-anchor of the appellant's case is founded on the decision of the
Constitution Bench in Kanhaiya Lat's case (supra), which was followed by
H a Bench of 7 Judges in Aluminium Industries' case (1965) 16 STC 689. It
MAFA1LALINDS. LTD. v. U.0.1.[PARIPOORNAN,J.] 733
was argued. that the decision in Kanhaiya Lat's case was followed sub- A
sequently in Tilokchand Motichand & Ors. v. H.B. Munshi & Anr., [1969) 2
SCR824; D. Cawasji & Co., Etc. Etc. v. The State of Mysore & Anr., [1975)
2 SCR 511; Dhanyalakshmi Rice Mills Etc. v. The Commissioner of Civil
Supplies and Another, [1976) 3 SCR 387 Etc. The plea was that the law laid
down in Kanhaiya Lat's case has stood the test of time for nearly four
decades and there is no requirement either in Section 72 of the Indian . B
Contract Act or in any of the above decisions, holding that in order to claim
refund or restitution based on Section 72 of the Contract Act, the liability
(duty) should not have been passed on. Our attention was also invited to
the decision of House of Lords in Woolwich Building Society v. Inland
Revenue Commissioners (No. 2), (1992) 3 All ER 737, of the Canadian
Court in Air Canada case, (59 D.L.R. (4th series) 161), (in particular C
dissenting judgment of Wilson, J.), of the decision of the Australian Court
in Commissioner of State Revenue v. Royal Insurance Australia Ltd., (1994)
69 A.L.J. 51, of the European Economic Committee in San Giorgio S.PA.
case (1985) 2 C.M.L.R. 658, and the decision of the United State Supreme
Court in United States v. Jefferson Electric Manufacturing Co., 78 Lawyers' D
Edition 859, It was argued that the preponderance of judicial opinion in
other jurisdictions also is in favour of the view, that "passing on" of the
liability, is an irrelevant factors for consideration in an action for restitu-
. tion, and at any rate, it cannot form the basis of a valid defence in an action
for "restitution". Mr. Parasaran, Senior Counsel for the Union of India
contended that the question of "passing on" of the liability never arose for E
consideration in Kanhaiya Lat's case nor was it decided. The said decision
cannot be an authority for the proposition that a person claiming refund
of tax on the ground of mistake of law is not obliged to allege and prove
that it has not been passed on; on the other hand, it is mandatory for a
claimant in such cases to allege and prove that he suffered a loss or
detriment. Then and then alone, that Court can grant the equitable relief F
of restitution. Counsel also contended that the principle in Kanhaiya Lat's
case (supra) has not been uniformally followed by this Court subsequently.
Counsel also distinguished the various foreigu decisions that were brought
to our notice and highlighted the fact that those decisions were ren\iered
on their own facts. Counsel further contended that in cases of indirec.t levy
of tax (ess or fee) whi.ch was passed on, this Court has negatived the claim G
for refund in a few cases. Our attention was invited to the following
decisions:
Shiv Shanker Dal Mills Etc. Etc. v. State of Haryana & Ors. Etc., [1980]
1 SCR 1170 (1173); State of Madhya Pradesh v. Vyankatlal & Anr., [1985) H
734 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A 3 SCR 561, 566-568; M/s. Amar Nath Om Parkash and Ors. Etc. v. State of
Punjab and Ors. Etc., (1985] 2 SCR 72 (at pp. 96-100); Indian Aluminium
Company Limited v. Thane Municipal Corporation, (1992] Supp. 1 SCC 480
(488-489) and State of Rajasthan & Others v. Novelty Stores Etc., AIR (1995)
SC 1132.
B 13. The main case relied on, Kanhaiya Lal's case (supra) requires a
little detailed examination. The respondent, Kanhaiya Lal was a furn. For
the assessment years 1948-49, 1949-50 and 1950-51, its forward transactions
were brought to tax by the Assessing Authority - the Sales Tax Officer, as
per Assessment orders dated 31.5.1949, 30.10.1950 and 22.8.1951. On
C 27.2.1952, the Allahabad High Court in Messrs Budh Prakash Jai Prakash
v. Sales Tax Officer, Kanpur & Ors., (1952) A.L.J. 332 held that the
provisions of the Uttar Pradesh Sales Tax Act, taxing forward contracts
were ultra vires the U.P. Legislature. The said judgment was affirmed by
this Court or 3.5.1954. The attempts of the assessee to obtain refund of tax
basing its claim on Budh Prakash Jai Prakash case before the statutory
D authorities were futile. Ther\:after, the· assessee-firm filed a writ petition in
the High Court, praying to quash the assessment orders, and for direction
for refund of tax illegally collected. By judgment dated 30.11.1956, a
learned single Judge of the High Court, allowed the writ petition. In the
appeal, the Revenue contended that since the tax was paid under mistake
E of law, it was not recoverable. Even so, relying on Section 72 of the
Contract Act, the Division Bench affirmed the decision of the single Judge.
The Revenue took up the matter in appeal before this Court. The pleas of
the appellant-Revenue, that the assessee should have followed the proce-
dure prescribed by the U.P. Sales Tax Act and, that the writ petition filed
for refund of money would not lie, were not allowed to be urged by this
F Court. Mainly, two questions arose before this Court for consideration -
(i) Whether the term "Mistake" occuring in section 72 of the
Contract Act took within its fold "mistake of Law" as well as
"mistake of fact"? ·
G
(ii) Whether the tax paid under mistake of law can be recovered
under Section 72 of the Indian Contract Act?
This Court held that word "mistake" occuring in Section 72 of the Contract
Act has been used without any qualification or limitation and, so, it takes
H within its fold "mistake of law" as well as "mistake of fact". On the second
MAFA1LALINDS.LTD.v. U.0.1.[PARIPOORNAN,J.] 735
question, this Court held that once it is established that the payment, even A
though it be a tax, has been made by the party under a mistake of law, the
party is entitled to recover the same and a party who received the tax is
bound to repay or return it. This Court held that there can be no distinction
in a tax liability and any other liability on a plain reading of Section 72 and
the plea that tax paid by mistake of law cannot be recovered under Section B
72, will not be a proper interpretation of the relevant provisions, but to
make a law, adding such words as "otherwise than by way of taxes" after
the word "paid". The scope of Section 72 was considered only within a
limited sphere. It should be noticed that no question was raised before this
Court that in order to claim refund (restitution) of sales tax paid, - (an
indirect levy) - under Section 72, the claimant should necessarily prove that C
he has sustained "a loss. or injury''. In other words, the tax collected by him
has not been passed on to a third party. Dealing with the plea that the
position in law obtaining in England, America and Australia that money
paid under mistake of law could not be recovered, and that similar con-
siderations should weigh in interpreting Section 72, the Court held that the D
true meaning and intent .of Section 72 should be interpreted on its own
terms, divorced from all considerations, as to what was the state of previous
law or the law in England or elsewhere. This Court made further observa-
tions to the following. effect :
"If it is once established that the payment, even though it be of a E
tax, has been made by the party labouring under a mistake ff law
the party is entitled to recover the same and the party receiving
the same is bound to repay or return it. No distinction can,
therefore, be made in respect of a tax liability and any other liability
on a plain reading of the terms of s. 72 of the Indian Contract Act, F
even though such a distinction has been made in America vide the
passage from Willoughby on the Constitution of the United States,
Vol. 1, p. 12.op cit. To hold that tax paid by mistake of law cannot
be recovered under s. 72 will be not to interpret the law but.to
make a law by adding soI)le such words as "otherwise than by way
of taxes" after the word "paid"." G
(p. 1363)
"Voluntary payment of such tax liability was not by itself enough
to preclude the respondent from recovering the said amounts, once H
736 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
A it was established that the payments were made under a mistake
of law. On a true interpretation of s. 72 of the Indian Contract Act
the only two circumstances there indicated as entitling the party
to recover the money back are that the monies must have been
paid by mistake or under coercion. If mistake either of law or of
fact is established, he is entitled to recover the monies and the
B party receiving the same is bound to repay or return them irrespec-
tive of any consideration whether the monies had been voluntarily,
subject however to questions of estoppe~ waiver, limitation or the
like. If, once that circumstance is established the party is entitled
·to the relief claimed." ·
c
(p. 1364)
"No question of estoppel can ever arise where both the parties, as
in the present case, are labouring under the mistake of law and
one party is not more to blame than the other." "'
D
(p. 1365)
"The other circumstances would be such as would entitle a court
of equity to refuse the relief claimed by the plaintiff because on
E the facts and circumstances of the case it would be inequitable for
the court to award the relief to the plaintiff. These are, however,
equitable considerations and could scarcely be imported when there
is a clear and unambiguous provision of law which entitles the
plaintiff to the relief claimed by him. n
F (p. 1366)
"Merely because the State of U.P. had not retained the monies
paid by respondent but had spent them away in the ordinary course
of the business of the State would not make any difference to the
position and under the plain terms of s. 72 of the Indian Contract
G Act the respondent would be entitled to recover back the monies
p!lid by it to the State of U.P. under mistake of Law."
(p. 1367)
H (Emphasis supplied)
MAFATLALINDS. LID. v. U.0.1. [PARIPOORNAN, J.) 737
14. It is apparent that in Kanhaiya Lal's case there was no plea by A
the Revenue that since the assessee has passed cin the tax, the claim for
refund is unsustainable. Such a question was not posed before this Court
for consideration. One of tlie main aspe,cts to be. proved in a claim for
restitution, that the person claiming restitution should have suffered a loss
or injury in order to sustain an action, was not urged and was not con- B
sidered. In such a situation the following observations of Lord Halsbury in .
Quinn v. Leathern, (1901) AC. 495 at p. 506, quoted with approval by a
Constitution Bench of this Court in State of Orissa v. Sudhansu Sekhar
Misra, [1968] 2 SCR 154 at page 162 and again in Orient Paper and
Industries Ltd. and Another v. State of Orissa & Others, [1991] Supp. 1 SCC
81, at page 96, should govern the matter. C
"...... there are two observations of a general character which I wish
to make, and one is to repeat what I have very often said before,
that every judgment must be read as applicable to the particular
facts proved, or assumed to be proved, since the generality of the D
expressions which may be found there are not intended to b,6
expositions of the whole law, but governed and qualified by the
particular facts of the case in which such expressions are to be
I
found. The other is that a case is only an authority }or what it actually
decides. I entirely deny that it can be quoted for a proposition that
may seem to follow logically from it. Such a mode. of reasoning E
assumes that law is necessarily a logical code, whereas every lawyer
must acknowledge that the law is not always logical at all".
(Emphasis supplied)
-
The above observations should be borne in mind in understanding the F
scope of the decision in Kanhaiya Lat's case, and the cases following the
said case. The said decisions cannot be understood as laying down the law
that even ll;l cases the liability has been "passed on", the assessee can
maintain ;m action for restitution. · "
It also appe~ that there is some int;:'1i:isistency in the Kanhaiya .(.,izl's G
case. The basis in an action for restitution under Section 72 of the Contract
Act, rests upon the equitable doctrine of unjust enrichment. ·The Court
observed on page 1364 that the recovery of the money paid under mistake
of law or fact can be recovered "subject however to questions of estoppe~
waiver, limitation or the like". Even so, at page 1366, the Court has observed H
738 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A "equitable considerations could scarcely be imported when there is a clear
·and unambiguous provision of law which entitles the plaintiff to the relief
claims by him." The very basis of the claim, though statutorily incorporated
in Section 72 of the Contract Act, is equitable in nature and if so, how can
it be said that equitable considerations should not be applied in adjudicat-
B ing the claim for restitution (refund)? If an assessee has passed on the tax
to the consumer or a thii:d party and sustained no loss or injury, grant of
refund to him will result in a windfall to him. Such a person will be unjustly
emiched. This will result in the assessee or the claimant obtaining a benefit,
which is neither legally nor equitably due to him. In other words, such a
person is enabled to obtain an unjust benefit" at the cost of innumerable -
C persons to whom the liability (tax) has been passed on and to whom really
the refund or restitution is due. The above factors certainly disentitle such
a person from claiming restitution. If the decision in Kanhaiya Lal's case
(supra) and the cases following the said decision, enables such a person to
claim refund (restitution), with great respect to the learned Judges, who
D rendered the above decisions, I express my dissent thereto.
15. Shri Nariman and Shri Sorabjee also contended that if the relief
of refund is withheld or denied on the ground that the assessee has passed
on the tax (liability) to the consumer or third party, It will result in a
position where the State is enabled to retain and appropriate the unlawful
E collection to itself. The plea was that Article 265 of the Constitution of
India contains a mandate to the effect that "no tax shall be levied or
collected except by authority of law". It was argtied that this is a basic
feature of the Constitution and cannot be ignored. If no tax can be
collected except by authority of law, the same logic would prevail for
F retention of amounts collected without the authority of law. Reference was
made in this connection to the decision of the Madras High Court in
Rayalaseema Constrnctions v. Dy. Commercial Tax Officer, 10 STC 345
(355-356) and affirmed by this Court in Dy. Commercial Tax Officer,
Madras v. Rayalaseema Constrnctions, (17 STC 505). The plea urged was
that, if the assessee, is denied the refund, the State Government could-
G retain the amount illegally collected, and it would amount to violation of
the constitutional mandate enshrined in Article 265 of the Constitution. An
equitable principle will not hold good against a constitutional mandate. On
the other hand, Counsel for the Union of India, Sri K. Parasaran, brought
to our notice the following portion of the Preamble an~ Article 39 (b) and
·H (c) of the Constitution to contend that -Article 265 of the Constitution
MAFATLALINDS. LTD. v. U.0.I. [PARIPOORNAN,J.] 739
cannot be construed in a vacuo ~r isolation, but should be construed in the A
light of the basic principles contained in other parts of the Constitution -
viz. - the Preamble and the Directive Principles of State Policy :
"Preamble
WE, THE PEOPLE OF INDIA, having solemnly resolved to con- B
stitute India into a SOVEREIGN SOCIALIST SECULAR
DEMOCRATIC REPUBLIC and to secure to all its citizen:
JUSTICE, social, economic and political;
xxxx xxxx xxxx" c
Article 39 (b)-(c) :
"(b) that the ownership and control of the material resources of the
community are so distributed as best to subserve the common good; D
(c) that the operation of the economic system does not result in
the concentration of wealth and means of production to the com-
mon detriment;"
(Emphasis supplied) E
Mr. Parasaran also urged that it should be borne in mind that excise duty
is an indirect levy or tax which could be passed on. Innumerable persons
bear the brunt. And it is passed on, ordinarily by prudent businessmen.
The decisions in R.C. Jail v. Union of India, [1962] Suppl. 3 SCR 436 and
The Province of Madras v. M/s. Boddu Paidanna and Sons, (1942) F.C.R. F
90, were referred to. Reference also was made to Section 64A of Sale of
Goods Act, 1930 which was substituted later by Act 33 of 1963 to show
that the levy could be passed on and so recognised by statute, and in the
above background, there is a presumption that excise duty has been passed
on. The scope of Article 39(b) of the Constitution, as laid down by this
Court in State of Kamataka and Anr. Etc. v. Shri Ranganqtha R~ddy & Anr. G
Etc., (1978] 1 SCR 641 (689); Sanjeev Coke Mfg. Co. v. Bharat Coking Coal
Ltd. & Anr. (1983] 1 SCR 1000 (1023-24 and 1026); State of Tamil Nadu
Etc. Etc. v. L. Abu Kavur Bai & Ors., AIR (1984) SC 326 (343) = [1984] 1
SCR 725 (759, 761) was highlighted. Reliance was placed on M/s. Amar
Nath Om Prakash and Ors. Etc. v. State of Punjab and Ors. Etc., [1985) 2 H
740 SUPREME COURTREPORTS(1996] SUPP.10 S.C.R.
A SCR 72, at pp. 96, 97, 99, 100; Shiv Shanker Dal Mills Etc. Etc. v. State of ·
Haryana & Ors. Etc., [1980] 1SCR1170 (1173) and Walaiti Ram Mahabir
Prasad v. State of Punjab & Ors., AIR (1984) P&H 120, at p. 124, to stress ·
the point that the persons claiming refund who were only middle-men,
should not be unjustly emiched and allowed to make a "fortune" as it were,
B at the expense of innumerable unidentifiable innocent consumers and that
"public interest" requires that such persons claiming refund should not be
unduly or unjustly benefited; and, public interest is better served, if the
State is allowed to retain the collection of tax, which could be made/spent,
for the benefit of the "public".
C· 16. On an evaluation of the rival pleas urged in the matter, lam of
the view that the plea of Counsel for Union of India should prevail.
Following the decision in the Province of Madras case (supra) and
other cases, a Constitution Bench of this Court in R.C. fall v.Union of India
D (supra) at·page 451 stated the nature and character of excise duty, thus :
"Excise duty is primarily a duty on the production of manufactured
of goods produced m; manufactured within the country. It in an
indirect duty which the manufacturer or producer passes on to the
ultimate consumer, that is, its ultimate incidence will always be on
E the consumer".
(Emphasis supplied)
Section 64A of the Sale of Goods Act after its amendment by Act 33 of
F 1963, in providing that in contract of sale amount of increased or decreased
taxes, may be added or deducted by the seller or by the buyer, in case of
increase or decrease or remitted, after the making .of the contract for the
sale or purchase of such goods, without stipulation as to the payment of
tax where a tax was not chargeable at the time of making the contract,
G expressely states that the provisions shall apply to any duty of customs or
excise and any tax on the sale or purchase of goods. The scope of Article
39(b) of the Constitution which has as its basis the concept of "distributive
justice", as explained in three cases referred to in the previous paragraph;
Shri Ranganatha Reddy [1978] 1 SCR 641; Sanjeev Coke v. Bharat, (1983] 1 t
H SCR 1000 and L. Abu, AIR (1984) SC 326 go to show that the words
"material resources" occuring in Article 39 clause (b) will take in, natural
. M(\FATLALINDS.LTD,v. U.OJ.(PARIPOORNAN,J.) 741
or physical resources and also movable or immovable property and it would A
inciude all private and public sources of meeting material needs, and not
merely confined to public possessions. So also, the three cases, shiv Shanker
Dal Mill's case [1980) 1 SCRl170, Amar Nath Om Prakash's case, [1985)
2 SCR 72 and Walaiti Reim Mahabir Prasad, AIR 1984 (P&H) 120, em-
phasise the principle that the persons who have passed on. the bnrden of . B
the levy • middlemen - should not be allowed to profiteer by illgotten gains
. and unjustly enriched; An analysis of the above decisions in detail will point ..
out that if Article 265 of Constitution is literally interpreted and in isola• ,
tion, and refund ordered, ·in casei where excise duty ruiS been passed on, .
it will result in a mockery, totally ignoring the other salient features of the C
Constitution and the groi.ind realities. As the Preamble states, the Constitu-
tion was enacted by the people, to secure to all the citizen, justice, political,
social and economic. It is fairly settled by the decisions of this Court,· that
the directive principles contained in Part IV. of the Constitution are fun-
damental in the gove~e 'of this country and all organs of ilie State
including the judiciary are bound to enforce those directives. In interpreting D
the various provisions of the Constitution, the courts have to be realistic
and should be alive to the needs of the times. The courts have a respon-
sibility to ensure proper and meaningful interpretation of the directive
principle and to .adjust or hamionise th1:: objectives enshrined in the
Preamble - justice, political, social and economic and the directive prin· E
ciples contained in PartIV, with the individual rights. In the process, it:is
permissible t~ restrict, abridge, curtail and in extreme cases, abrogate other )
rights in the Constitution, if found necessary and expedient, in particular .
situations. In the light of the above, l hold that Article 265 should be read
al~ng with the Preambie and Article 39(b) and (c) of the Constitution, and F
so construed in cases where the assessee has passed on the liability to the
consumer or third party, he is not entitled to the claim of restitution or
refund. The fact that the levy is invalid need not automatieally result in a
direction for refund of all collections made in pursuance thereto. The
observation of a three-Member Bench of this Court in Orissa Cement Ltd.
v. State of Orissa, [1991) Supp. 1SCC430 (498 para 69), is apposite in this G
context.
'We are inclined to accept the view urged on behalf of the State
that a finding regarding the invalidity of a levy need not automat-
H
742 SUPREME COURTREPORTS[l996] SUPP.10 S.C.R.
A · ically result in a direction for a refund of all collections thereof
made earlier. The declaration regarding the invalidity of a
provision and the determination of the relief that should be granted
in consequence thereof are two different things and, in the latter
sphere, the court has, and must be held to have, a certain amount
of discretion. It is a well settled proposition that it is open to the
B court to grant, mould or restrict the relief in a manner most
appropriate to the situation before it in such a way as to advance
the interests of justice." ·
io
,.17. It is open the Court to deny the equitable remedy of refund
C (restitution) in such cases. The attempt of persons who have passed on the
liability in claiming refund is only to strike at a barg~ - to make a fortune
at the expense of innumerable unidentifiable consumers. Such persons have .
suffered no loss. On the other hand, if the State is allowed to retain the
amount, it will be available to the community at large and could be made
use of for public purposes. On this basis as well, the denial of refund or
D restitution is valid. There is nothing abhorent or against public policy if
refund or restitution is withheld in such a situation. It should also be stated
that in cases of indirect levy of tax which was passed on, this Court has
negatived the claim for refund in a few cases, mentioned in paragraph 12
(supra); - Shiv Shanker Dal Mills v. State of Haryana, [1980) 1 SCR 1170
(1173); State of Madhya Pradesh v. Vyankatlal & Anr., [1985) 3 SCR 561
E (566, 568); M/s. Amar Nath Om Prakash and Ors. v. State of Punjab and
Ors., [1985) 2 SCR 72 (96-100); Indian Aluminium Company Limited' v.
Thane Municipal Corporation, [1992) 1 Supp. 1SCC480 (488-489) and State
of Rajasthan & Ors~ v. Novelty Stores etc., AIR (1995) SC 1132.
18. It now remains to consider the foreign decisions brought to our
F notice. The various decisions of foreign courts and their scope have been
very exhaustively censidered by Jeevan Reddy, J. in his judgment under the
heading "Decisions of foreign courts on the subject". I am in broad agree-
ment with my learned brother Jeevan Reddy, J., in the analysis of the various
decisions aforesaid. It is unnecessary to cover that ground over again.
G
19. In this context, it will not be out of place to note that
academicians have bestowed great thought ·and in various articles dealt
with the matter in sufficient detail, particularly with reference to the foreign
decisions brought to our notice. To mention a few, they are -
H (1) "When Money is paid in Pursuance of a void authority...." - A
MAFATLAL INDS. LTD. v. U.O.l. [PARIPOORNAN, J.] 743
duty to replay? by Peter Birks : (Public Law (1992) page 580) A
(2) "Restitution of taxes, levies and other imposts : Defining the
extent of the Woolwich Principle" - by J. Beatson Law
Quarterly Review Vol. 109 (1993) Page 401. 'B
(3) "Restitution of Overpaid Tax, Discretion and Passing-on" - by
J. Beatson. (Law Quarterly Review Vol. 111 (1995) page 375
Notes.
c
(4) "Unjust Enrichment" - by Steve Hedley, (Cambridge La~
Journal 1995 (578-599) -
(5) "Unjust Enrichment Claims : A Comparative Overview" - by D
Brice Dickson (Cambridge Law Journal (1995) (100-126)
(6) "The Law of Taxation is not an
Island - Overpaid Taxes and
the Law of Restitution" - by Graham Virgo; (British Tax E
Review (1993) (442-467) ·
(7) "Payments of Money under Mistake of Law : A Comparative
View" - by Gareth Jones [Cambridge Law Journal (1993)
Comment (225)] F
(8) "Restitution, Misdirected Funds and Change of Position" - by
Ewen McKendrick, [Modern Law Review (1992) Vol. 55
(377-385)]. G
In some of the arti'cles, the defences to a claim for restitution of overpaid
taxes, has been dealt with the detail. One of them is the article by Graham
Virgo's appearing in British Tax Review (1993) (pp. 442-467) titled "The
Law of Taxation is not an Island - Overpaid Taxes and the Law of H
Restitution". pages 462 and 463 under the sub-heading "Passing on", the
learned author has made the following comment :
"(vii)_Passing on 48
-· 48
Since restitution at common _law is based upon the principle of
reversing an unjust enrichment, it is important to determine
This defence differs from that of change of position because with the latter the issue
relates to the conduct of the payee. With the defence of passing on the issue relates to
the conduct of the pay.
744 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A whether the defendant was actually enriched at the· plaintiffs
expense. This raises a difficult problem where the Revenue was
initially enriched at taxpayer's expense, by virtue of the receipt of
overpaid tax, but the taxpayer did not ultimately suffer a loss because
the burden of the payment. was passed on to somebody else. This
B colild arise if the taxpayer pays excessive VAT and passes the amount
overpaid ori to customers 49. As a matter of principle it, could be
argued that, in such a .case, the taxpayer should not be allowed to
fecovery the amount overpaid frqm the Revenue, because recovery
. i.voutd mean tha~ the taxpayer was unjustly enriched at the expense
of thi>se wlio ulti/inately bore the burden of the tax :SO. A possible
c solution to 'this is to allow those who effectively paid the tax to
recover from the tax payer, who u;, turn sho,uld recovet from the
Revenue, However, typically in cases of passing on there are many .
people who effectively bear the burden of the tax arid to encourage
actions by them would be impractical and unrealistic, Thus, in such
D cases the best approach is to allow the.Revenue a defence ofpassing
on and enable it to retain the tax and use it for the public benefit.
However, it remains uncertain to what extent a defence· of
passing on exists in English law 51. Such a defence is recognised
E by European Community law. In Am~inistrazione del/e Finanze
del/o Stato v. SpA San Giorgio it was held that Community law.
does not prevent Member States from "disallowing repayment of
charges which have been unduly levied to do so would entail unjust
enrichment of the recipients," for example where the unduly levied
charges have been inrorporated in the price of goods and passed
F
49 This specifically dealt with by P.A.. 1989, s. 24(5) discussed infra, which denies the
repayment of VAT if it would unjustly enrich the recipient of the payment.
50 In Meses v. Macferlan, (1760) 2 Burr. 1005 at p. 1020 Lord Mansfield said that the payee
"may defend himself by everything which shews that the plaintiff, ex aequo et bono, is
G not entitled to the whole of his demand, or to any part of it." This principle suggest
that a defence of passing on should exist, for simple reasons of justice.
51 51. In Woolwich, supra, Lord Goff deferred the issue of the existence of a passing on
defence, suggesting (at p. 178) that the availability to such a defence may depend on
the nature of the tax. It is submitted that the only real relevance of the nature of the
tax relates to the case of determiningwhether the burden of the tax really was passed
H on.
t
J
MAFATI.AL INDS. LTD. v. U.0.1. [PARIPOORNAN, J.] 745
on to purchasers, Although this decision is confined to charges A
levied contrary to the rules or Community law, the very fact that
Community law accepts the validity of a defence of passing on and
accepts that the rationale of it is to avoid the unjust enrichment of
the initial taxpayer, is a good reason for the defence to be adopted·
generally in English law. It would be odd if there were a divergence B
of approach between English and Community law on this matter.
However, it must be noted that Community law "does not
prevent" Member States from adopting a defence of passing on.
The San Giorgio case is not authority for the proposition that
Member States must adopt such a defence. There has been some C
disquiet expressed as to the need for such a defence in theory and
how it would work in practice. The defence was rejected in Mason
v. New South Wales. The operation of the defence is fraught with
difficulties because it is not easy to.show that the charge was passed
on in the price of.goods. For the price of goods is affected by many D
factors, conditional upon the state of the market. Advocate
General Mancini in the San Giorgio case said that the "passing on
of charges is not generally relevant because of the innumerable
variables which affect price formation in a free market an:d because
/ · of the consequent impossibility of definitively relating any part of · E
the price exclusively to ·a certain cost." Thus, may be the price of
goods was increased in an attempt to recoup the tax paid to the
Revenue from the purchasers of goods, but this in turn may have
had an impact on sales volume resulting in an overall loss. The
burden of the enrichment cannot really be said to have been passed F
on when the initial" taxpayer suffers a net loss.
It is submitted that in principle a defence of passing on should
exist, with'u burden of proving this being on the Revenue : in
unlawfully demanded the taxes and so it should show that repay-
ment would unjustly enrich the taxpayer. It is unlikely that such a G
defence would operate successfully in practice in many cases
because of the difficulty of proving that the tax was actually passed
on."
(Emphasis supplied) H
746 SUPREME COURT REPORTS[l996] SUPP.10 S.C.R.
'A Similarly, in the Article by J. Beatson (1993) 109 L.Q.R. 401 (427-428), the ..
learned author has stated regarding passing on, thus :
""Passing on." The Law Commission raised the question of whether
· a payer who was "passed on" to others, for instance by price
B increases, the higher cost he has borne because of the overpayment
should be precluded from recovering. This defence is permitted
by European Community Law so long as it does not have the effect
of making the right to recover impossible in practice or excessively
difficult to exercise. However, it has been criticised, technically
c because, inter alia, price increases should mean that less will be
sold, and also because of difficulties of proof. These difficulties
were noted by Lord Goff, and arguments for a similar limit were
not accepted by the High Court of Australia in Mason v. South
Wales. However, the underlying rationale of a "passing on" defence
might be achieved by providing, as in the statutes on recovery of
D
Value Added Tax and car tax, that recovery should not be allowed
if the payee can show that the payer would be unjustly enriched if
he recovered the payment. This would be consistent with the basic
equitable features that have influenced the development of the
action for money had and received. It is also possible that such a
E limit would achieve the same policy ends as the "reasonable and
just" limit in provisions such as section 33 of the Taxes Manage·
ment Act 1970 and, if so, it might provide a useful method of
achieving a measure of rationalisation." (pp. 427-428)
F 20. Mention may also be made about the Law Commission's Report
in England, Law Consultation Paper No. 120 "Restitution of Payments
made under a mistake of law'' • wherein, after discussing the entire case
law of England and other jurisdiction, an observation is made thus :
G "3.85. In principle there would appear to be no reason why such a
defence should not apply to cases where the authority can prove
on the balance of probabilities that the payer would be unjustly
enriched because the charge has been passed on. The views of
consultees on the general issue of a "passing on" defence are
H invited."
MAFA1LALINDS. LTD. v. U.0.1. [PARIPOORNAN,J.) 747
1 In Kanhaiya Lal's case [1959] SCR 1350 at page 1367, this Court was A
not inclined to accept the defence in mitigation that the State has not
retained the amount, but has spent them away in the ordinary course of
governmental activities, This plea in defence based on the theory of
"Change of Position" has been dealt with by Graham Virgo in his article in
British Tax Review (1993) at pages 458-459. See also the views expressed B
in this· behalf by a two-Member Bench of this Court in D. Cawasji & Co.
v. State of Mysore, [1975) 2 SCR 511.
21. I am of the view that the above academic opinion has got much
force. However, it is subject to one aspect, stated hereunder. As held by C
me earlier, ordinarily, the presumption is that the taxpayer has passed on
the liability to the consumer (or third party). It is open to him to rebut the
presumption. The matter is exclusively within the knowledge of the tax-
payer, whether the price of the goods included the 'duty' element also
and/or also as to whether he has passed on the liability since he is in
possession of all relevant details. Revenue will not be in a position to have D
an indepth analysis in the innumerable cases to ascertain and find out
whether the taxpayer has passed on the liability. The matter being within
the exclusive knowledge of the taxpayer, the burden of proving that the
liability has not been passed on should lie on him. It is hel<;l accordingly.
E
22. The next important question that falls to be considered is, as to
what extent the jurisdiction of the ordinary courts is ousted regarding
claims for refund of tax illegally levied or collected?
According to the Revenue, the Act is a special enactment creating F
new rights and liabilities and has also made exhaustive provisions, to
ventilate the grievances against all illegal and improper assessments by way
of appeals, revisions etc. and also to obtain refunds in appropriate cases
by following certain procedures and fulfilling some conditions. A hierarchy
of tribunals is provided to afford relief to the assessees. Elaborate alternate
remedies provided by the Act, taken along with the specific bar of the G
jurisdiction of courts provided in Rule 11 (as amended) and Section ll(B)
of the Act, and in particular specifying the conditions and procedure for
entertaining claims for refund, period of limitation within which the claim
should be preferred, etc. will oust/bar the jurisdiction of ordinary courts in
that regard. (Attention was also drawn to Sections llC, llD and also to H
748 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A Sections 12A to D of the Act, to stress the scheme of the Act). On the '
other hand, counsel for the assessees-claimants urged that the provisions
in the Act dealing with refund of tax "unconstitutionally" or "illegally" or
"unauthorisedly" collected are not exhaustive. Even so, in cases where the
levy is unconstitutional or illegal or without jurisdiction, the jurisdiction of
B the Civil Courts is not barred to annul the levy and/or order refund.
23. As stated by me e.arlier in paragraph 5 of this judgment, the
claims for refund can be classified broadly into 3 groups. They are -
(I) the levy is unconstitutional - outside the provisions of the Act
C or not contemplated by the Act.
(II) the levy is based on misconstruction or wrong or erroneous
interpretation of the relevant provisions of the Act, Rules or
Notifications; or by failure to follow the vital or fundamental
provisions of the Act or by acting in violation of the Fun-
D damental Principles of judicial procedure.
(III) mistake of law - the levy or imposition was unconstitutional
or illegal or not exigible in law (without jurisdiction) and, so
found in a proceeding initiated not by the particular assessee,
E but in a proceeding initiated by some other assessee either
by the High Court or the Supreme Court, and as soon as the
assessee came to know of the judgment, (within the period
of limitation) he initiated action for refund of the tax paid by
him, due to mistake of law.
F 24. The relevant provisions of law that existed during different
periods dealing with the claim for refund are different in content and
scope. They are as follows :
G
(a) Period up to 7.8.1977 - Rule 11
before amendment;
J the Central Excise Rules,
(b) Period from 7.8.1977 to 16.11.80 - Rule 11 of the Central
Excise Rules; as amended;
(c) Period from 16.11.1980to19.9.1991- Section UA and Section
H llB of the Central Excises & Salt Act; and
•
MAFATLALINDS. LTD: v. U.O.l. [PARIPOORNAN,J.] 749
(d) Period after 19.9.1991- Section llA read along with Section A
llB of the Act, as amended by Act 40 of 1991.
Rule 11 of the Central Excise Rules which was in force prior to 7.8.1977,
has been quoted in paragraph 5 of this judgment. It contains no specific
provision relating to ouster of jurisdiction of the courts.
B
25. Rule 11 of the Central Excise Rules as amended, Section llA
al'ld Section llB before Amendment Act 40 of 1991 and Section llB, as
amended by Act 40 of 1991, will be more important to consider the
question of ouster of jurisdiction of courts. Sections llC, llD as also
Sections 12A to D of the Act, will throw light on the scheme of the Act as C
amended. They are as follows (insofar as they are relevant in the instant
cases) :-
Rule 11 as amended
"Rule 11. Claim for refund of duty. - D
(1) Any person claiming refund of any duty paid by him may
make an application for refund of such duty to the Assistant
Collector of Central· Excise before the expiry of six months from
the date of payment of duty. E
Provided that the limitation of six months shall not apply where
any duty has been paid under protest.
Explanation.- Where any duty is paid provisionally under these
rules on the basis of the value or the rate of duty, the period of F
six months shall be computed from the date on which the duty is
adjusted after fmal determination of the value or the rate of duty,
as the case may be.
(2) If on receipt of any such application the Assistant Collector G
of Central Excise is satisfied that the whole or any part of the duty
paid by the. applicant should'be refunded to him, he may make an
order accordingly.
(3) Whether as a rl!sult of any order passed in appeal or
revision under the Act, refund of any duty becomes due to any H
•
750 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A person, the proper officer may refund the amount to such person
without his having to make any claim in that behalf.
Save as otherwise provided by or under these rules no claim for
refund of any duty shall be .entertained.
B Explanation. - For the purposes of this rule, 'refund' includes
rebate referred to in Rules 12 and 12A."
Section 11-A
c "JJA. Recovery of duties not levied or not paid or short-levied or
short-paid or erroneously refunded. - (1) when any duty of excise
has not been levied or paid or has been short-levied or short paid
or erroneously, refunded, a Central Excise Officer may, within six
months from the relevant date, serve notice on the person charge-
able with the duty which has not been levied or paid or which has /
D
been short-levied or short-paid or to whom the refund has er-
roneously been made, requiring him to show cause why he should
not pay the amount specified in the notice :
Provided that where any duty of excise has not been levied or
E paid or has been short-levied or short-paid or erroneously
refunded by reason of fraud, collusion or any wilful mis-statement
or suppression of facts, or contravention of any of the provisions
of this Act or of the rules made thereunder with intent to evade
payment of duty, by such per&on or his agent, the provisions of this
F sub-section shall have effect, as if, for the words 'six months', the
words 'five years' were substituted.
Explanation. - .......... ..
(ii) 'relevant date' means, -
G
(a) in the case of excisable goods on which duty of excise has not
been levied or paid or has been short-levied or short-paid......... ..
(C) in any other case, the date on which the duty is to be paid
H under this Act or the rules made thereunder;"
MAFA1LALINDS. LTD. v. U.0.l[PARIPOORNAN,J.] 751
SECTION 11-B BEFORE AMENDMENT BY ACT 4011991 A
"llB. Claim for refund of duty. - (1) Any person claiming refund
of any duty of excise may make an application for refund of such
duty to the Assistant Collector of Central Excise before the expiry
of six months from the relevant date :
B
Provided that the limitation of six months shall not apply where
any duty has been paid under protest.
(2) If on receipt of any such application, the Assistant Collector
of Central Excise is satisfied that the whole or any part of the duty C
· of excise paid by the applicant should be refunded to him, he may
make an order accordingly.
(3) Where as a result of any order passed in appeal or revision
under this Act refund of any duty of excise becomes due to any D
person, the Assistant Collector of Central Excise may refund the
amount to such person without his having to make any claim in
that behalf.
(4) Save as othenvise provided by or under this Act, no claim for
refund of any duty of excise shall be entertained. E
(5) Notwithstanding anything contained in any other law, the
provisions of this section shall also apply to a claim for refund of
any amount collected as duty of excise made on the ground that the
goods in respect of which such amount was collected were not F
excisable or were entitled to exemption from duty and no court shall
have any jurisdiction in respect of su.ch claim.
Explanation. - For the purpose of this section......... .
(B) 'relevant date' means. -
G
(1) in any othet case, the date of payment of duty."
SECTIONS JJB, IJD AND 12A TO D, AS AMENDED BY ACT
4011991 H
752 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A "JJB. Claim for refund of duty. - (1) Any person claiming refund
of any duty or excise may make as application for refund of such
duty (o the Assisant Commissioner of Central Excise before the
expiry of six months from· the relevant date in such form and
manner as may be prescribed and the application shall be accom-
B panied by such documentary or other evidence including the docu-
ments referred to in Section 12A as the applicant may furnish to
establish that the amount of duty of excise in relation to which
such refund is claimed was collected from, or paid by, him and the
incidence of such duty had not been passed on by him to any other
C person:
Provided that where an application for refund has been made
before the commencement of the Central Excises and Customs
Laws (Amendment) Act, 1991, such application shall be deemed
to have been made under this sub-section as amended by the said
D Act and the same shall be dealt with in accordance with the
provisions of sub-section (2) substituted by that Act :
Provided further that the limitation of six months shall not apply
where any duty has been paid under protest.
E (2) If, on receipt of any such application, the Assistant Com-
missioner of Central Excise is satisfied th~ the whole or any part
of the duty of excise paid by the applicant is refundable, he may
make an order accordingly and the amount so determined shall be
credited to the Fund :
F
Provided that the amount of duty of excise as determined by
the Assistant Commissioner of Central Excise under the foregoing
provisions of this sub-section shall, instead of befog credited to the
Fund, be paid to the applicant, if such amount is relatable to -
G (a) rebate of duty of excise on excisable goods exported out of
India or on excisable material used in the manufacture of goods
which are exported out of India;
(b) unspent advance deposits lying in balance in the applicant's
H account current maintained with the Commissioner of Central
MAFATLALINDS. LTD. v. U.0.1. [PARIPOORNAN,J~ 753.
--- Excise; A
( c) refund of credit of duty paid on excisable goods used as inputs
in accordance with the rules made, or any notification issued,
under this Act;
(d) duty of excise paid by the manufacturer, if he had not paSsed B
on the incidence of such duty to any other person;
(e) the duty of excise borne by the buyer, if he had not passed on
the incidence of such duty to any other person;
(f) the duty of excise borne by any other such class of applicants
c
as the Central Government may, by notification in the Official
Gazette, specify :
Provided further that no notification under clause (f) of the
first proviso shall be issued unless in the opinion of the Central D
Government the incidence of duty has not been passed on by the
persons concerne.d to any other person.
(3) Notwithstanding.anything to the contrary contained in any judg-
ment, decree, order or direction of the Appellate Tribunal or any
Court or in any other provision of this A ct or the mies made
E
thereunder or any other law for the time being in force, no refund
shall be made except as provided in sub-section (2 ).
Explanation. - For .the purposes 'of this section, ......
F
(B) 'relevant date' means -
· (f) in any other case, the date of payment of duty."
(Emphasis supplied)
G
--
Section llC deals with the power of Central Government to dispense with
recovery of excise duty in certain specified cases, which is not necessary
for our discussion. Section 110 and Sections 12A to D highlight the new
scheme of the Act, relating to refund and they are as follows :
"110, Duties of excise collected from the buyer to be deposited with H
SUPREME COURT REPORTS[l996) SUPP.10 S.C.R.
A the Central Government.
(1) Notwithstanding anything to the contrary contained in any
order cir direction of the Appellate Tribunal or any court or in any
other provisions of this Act or the rules made thereunder every
person who has collected any amount from the buyer of any goods
B in any manner as representing duty of excise, shall forthwith pay
the amount so collected to the credit of the Central Government.
(2) The amount paid to the credit of the Central Government
under sub-section (1) shall be adjusted against duty of excise
payable by the person on the finalisation of assessment and where
c any surplus is left after such adjustment, the amount of such surplus
shall either be credited to the Fund or, as the case may be,
refunded to the person who has borne the incidence of such
amount, in accordance with the provisions of section llB and the
relevant date for making an application under that section in such
D cases shall be the date of the public notice to be issued by the
Assistant Commissioner of Central Excise."
"12A Price of goods to indicate the amount of duty paid thereon
Notwithstanding anything contained in this Act or any other
E law for the time being in force, every person who is liat:Ie to pay
duty of excise on any goods shall, at the time of clearance of the
goods, prominently indicate in all the documents relating to assess-
ment, sale invoice and other like documents, the amount of such
duty which will form part of the price ·at which such goods are to
F be sold;
12B. Presumption that incidence of duty has been passed on to the
buyer
Every person who has paid the duty of excise on any goods
G under this Act shall, unless the contrary is proved by him, be
deemed to have passed on the full incidence of such duty to the
buyer of such goods.
12C. Consumer welfare fund
H (1) There shall be established by the Central Government a
MAFATLALINDS.LTD. v. U.O.L [PARIPOORNAN,J.) 755
fund, to be called the Consumer Welfare Fund. A
(2) There shall be credited to the Fund, in such manner as may
be prescribed, -
(a) the amount of duty of excise referred to in sub-section (2) of
section llB or sub-section (2) of section llC or sub-section B
(2) of section llD;
(b) the amount of duty of customs referred to in sub-section (2)
of section 27 or sub-section (2) of section 28A, or sub-section
(2) of section 28B of the Customs Act, 1962 (52 of 1962);
c
(c) any income from investment of the amount credited to the
Fund and any other monies received by the Central Govern-
ment for the purposes of this Fund.
12D. Utilisation of the Fund D
(1) Any money credited to the Fund shall be utilised by the
Central Government for the welfare of the consumers in accord-
ance with such rules as that Government may make in this behalf.
(2) The Central Government shall maintain or, if it thinks fit, E
specify the authority which shall maintain, proper and separate
account and other relevant records in relation to the Fund in such
form as may be prescribed in consultation with the Comptroller
and Auditor-General of India."
It is evident that Rule 11, before amendment, provided a time limit to apply
F
for re~d. Rule 11(4) as amended, Section llB clauses (4) and (5) before
amendment and Section llB clause (3) after amendment, specifically oust
the jurisdiction of the ordinary courts. Detailed provisions are also
provided to ventilate the grievances and making such provisions exclusive.
Other ancillary or incidental provisions are specified in Sections llD and G
12A to D - Section llD provides that every person, who collects excise
duty from the buyer, should deposit the same with the Central Government.
It will be· adjusted against the duty of excise payable by the person con-
cerned on fmalisation of the assessment. Section llD requires clarification.
Excise duty is, ordinarily paid or payable at the time of clearance of the H
756 SUPREME COURT REPORTS[lcf96] SUPP. 10 S.C.R.
A goods. The sale of the goods may be later. So, if excise duty due is aheady
paid by the manufacturer, and later collected by him when the goods are
sold, such collection, need not be paid to the Govemment. Only if the duty
has not been paid already or if any excess is collected over the duty already
paid, then only an occasion arises for payment of the duty collected or
B excess collected - and this is the purport of Section llD. The said section
(Section llD) should be understood in the above practical and business
sense. Section 12A provides that the price of the goods sold should indicate
the amount of duty, which will form part of the price. Section 12B states
that the person, who has paid the duty of excise on any goods under the
Act, shall be deemed to have passed on the incidence of such duty to the
C buyer of such goods. It is a rebuttable presumption. Section 12C creates
the "Consumer Welfare Fund''. The amount of duty referred to in Sections
11B(2), 11C(2) and 11D(2) shall be credited in the said Fund. Section: 12D
provides that the Fund shall be utilised for the welfare of the consumers.
D 26. The question that falls to be considered is as to how far or to
what extent the jurisdiction of the ordinary courts is barred, in view of the
alternate remedies provided by the Act by wa~ of appeals, revisions, claims
for refund and· the period of limitation provided therefor, etc. and specifi-
cally excluding the jucisdiction of the civil courts for claiming refund? In
E discussing this aspect, one has to bear in mind the content of Article
265 also. It will apply when: the stz.tute is unconstitutional or invalid and
also where the collection is unauthorised/illegal, i.e., without "authority of
law".
F 27. It is settled law that exclusion of the jurisdiction of the civil courts
is not to be readily inferred, but that such exclusion must either be explicitly
expressed or clearly implied. There are a few decisions of Judicial Com-
mittee of the Privy Council and innumerable decisions of this Court which
have dealt with the matter in detail. I propose to deal, only with the
landmark decisions on the subject. In Secretary of State v. Mask & Co., AIR
G (1940) P.C. 105, the Judicial Committee laid down the law thus :
".... .It is settled law that the exclusion of the jurisdiction of the Civil
Courts is not to be readily inferred, but that such exclusion must
either be explicitly expressed or clearly implied. It is also well
H settled that even if jurisdiction is so excluded, the Civil Eourts have
MAFATLALINDS. LID. v. U.0.1. [PARIPOORNAN,J.) 757
.- jurisdiction to examine into cases where the provisions of the Act A
have not been complied with, or the statutory tribunal has not acted
in confonnity with the fundamental principles of judicial proce-
dure."
(Emphasis supplied) B
The scope of the above observation has been explained by a Constitution
Bench of this Court, in Finn of /lluri Subbayya Chetty and Sons v. State of
Andhra Pradesh, AIR (1964) SC 322. The minimal facts in this case will be
relevant to understand_ the scope of the decision. The case arose under the
Madras General Sales Tax Act, 1939. Section 18A of the Act provided that C
no suit or other proceeding shall except expressly provided in the Act, be
instituted in any court to set aside or modify any assessment made under
the Act. The Act also contained provisions by way of appeals, revisions and
further revision to the High Court. The levy under the Act was only on
"purchase" of 'ground-nuts', but the Sales Tax authorities brought to tax the D
"sales" turnover and collected tax. The assessee contended that levy of tax
on the sales turnover as distinguished from the purchase turnover is illegal,
and filed a suit for .recovery of the amount so collected. It should be noticed
that the assessee himself voluntarily made a return and paid the tax. In
such circumstances, the question arose, whether the suit so filed is main-
tainable in view of the adequate alternate remedies provided by the Act E
and the ouster of jurisdiction of the courts expressly contained in Section
18A of the Act? On the facts of the case, it was held that the suit was
barred. In considering the question of exclusion of jurisdiction of the civil
courts to entertain civil actions by virtue of specific provisions contained
in the special statute, reference was made to .the decision of the Judicial F
Committee in Secretary of State v. Mask & Co., (supra). After referring to
the observations of the Judicial Committee quoted hereinabove, this Court
in Finn of Illuri Subbayya Chetty and Sons v. State of Andhra Pradesh, AIR
\, (1964) SC 322 at pages 325 and 326 explained the said observations thus :
"........ .It is necessary to add that these observations, though made G
in somewhat wide terms, do not justify the assumption that if a
decision has been made by a taxing authority under provisions of
the relevant taxing statute, its validity can be challenged by a suit
on the ground that it is inco"ect on the merits and as such, it can
be claimed that the provisions of the )iaid statute have not been H
' _,
758 SUPREME COURT REPORTS[l996] SUPP.10 S.C.R.
'·
A complied with. Non-compliance with the provisions of the statute
to which reference is made by the Privy Council must, we think,
be non-compliance with such fundamental provisions of the statute
as would make the entire proceedings before the appropriate authority
illegal and without jurisdiction. Similarly, if an appropriate authority
has acted in violation of the fundamental principles of judicial
B procedure, that may also tend to make the proceedings illegal and
void and this infirmity may affect the validity of the order passed
by the authority in question. It is cases of this character where the
defect or the infirmity in the order goes to the root of the order and
makes it in law invalid and void that these observations may
c perhaps be invoked in support of the plea that civil court can
exercise its jurisdiction notwithstanding a provision to the contrary
contained in the relevant statute. In what cases such a plea would
succeed it is unnecessary for us to decide in the present appeal
because we have no doubt that the contention of the appellant that
.on the merits, the decision of the assessing authority was wrong,
D
cannot be Ehe subject-matter of the suit because S. 18-A clearly bars
such a claim in the civil courts."
(Emphasis supplied)
~
E In this case, the relevant Act contained detailed and specific provisions by
way of appeal, revision etc. to ventilate the grievances of the assessee. In
addition thereto, there was specific provision ousting the jurisdiction of the
courts. Even so, the court did not hold that the principles laid down in
Mask & Co. case are inapplicable. The principles in Mask & Co. case were
F affirmed and explained.
28. The decision of the Privy Council in Mask & Co. case (supra),
and either decisions of the Privy.Council and of this Court, were surVeyed
in detail by a Constitution Bench of this Court in Dulabhai Etc. v. State of r
Madhya Pradesh &Anr., AIR (1969) SC 78. In that case, the assessees filed
G a suit for refund of the tax on the ground that it was illegally collected from
them being against the constitutional prohibition contained in Article 301 ,,.,
of the Constitution of India and not saved in Article 304(a) of the Con- ~
stitution. Section 17 of the relevant Act was pleaded in defence as a bar to
the maintainability of the suit. Section 17 provided that no assessment made
H · and no order passed under the Act or the Rules by any of the statutory
MAFATLALINDS.LTD.v. U.O.I.[PARIPOORNAN,J.) 759
authorities, shall be called in question in any case. The court held that A
notwithstanding, the alternate remedies by way of appeal, revision, rec-
tification and reference to the High Court, the tax therein was levied
without a complete charging section and this affected the jurisdiction of the
tax auth01ities, and so, the suit was maintainable, and decreed the suit.
After referring to the relevant decisions and in particular, Secretary of State B
v. Mask & Co., AIR (1940) P.C. 105; Finn of Illuri Subbayya Chetty and
Sons v. State of Andhra Pradesh, AIR (1964) SC. 322, this Court held in
paragraph 28 of the judgment, thus :
"The Constitution Bench, however went on to examine the rulings
of the Judicial Committee in Mask and Co.'s and Raleign Invest- C
ment Co.'s cases, 67 Ind App 222 = AIR (1940) PC 105 and 74
Ind App ~O = AIR (1947) PC 78. Dealing with the former case,
this Court pointed out that non-compliance with the provisions of
the statute meant non-compliance with such fundamental
provisions of the statute as would make the entire proceedings
before the appropriate authority illegal and without jurisdiction. D
(Emphasis supplied)
Referring to the facts of Finn of flluri Subbayya Chetty and Sons v. State of E
Andhra Pradesh, AIR {1964) SC 322, it was further observed :
"The case of Firm of Illuri Subbayya, [1961] 1 SCR 752 = AIR
(1964) SC 322 may be said to be decided on special facts with
additional reference to the addition of Section 18-A excluding the
jurisdiction of civil court and the special remedies provided in p
Sections 12-A to 12-D by which the matter could be taken to the
highest civil court in the State."
(Emphasis supplied)
This Court also considered the facts and the actual decision of the Special G
Bench of of 7-Judges in Kamala Mills Ltd. v. State of Bombay, AIR {1965)
SC 1942 in detail, with reference to Section 20 of the Bombay Sales Tax
Act, 1946, and observed thus :
"The Special Bench refrained from either accepting the dictum of
Mask Co. 's case, 67 Ind App 222 == AIR (1940) PC 105 or rejecting H
760 SUPREME COURT REPORTS(l996] SUPP. 10 S.C.R.
A it, to the effect that even if jurisdiction is excluded by a provision
making the decision of the authorities final, the civil courts have
jurisdiction to examine into cases where the provisions of the
particular Act are not complied with."
It is evident from the above, that the principle laid down in Mask &
B . Co. case, though explained, was not questioned, or departed from, either,
in Illuri Subbayya Chetty's case or Kamala Mills case. In a subsequent
decision - Ram Swarup v. Shikar Chand, AIR (1966) SC 893, a Constitution·
Bench of this Court again considered the scope of the decisions in Mask
& Co.'s case (supra) and Kamala Mills's case (supra). Ram Swarup's case
arose ilnder the U.P. (Temporary) Control of Rent and Eviction Act.
C Section 3(4) of the Act provided that the order passed by the designated
authority shall be final and Section 16 thereof further provided that the
order passed by the State Government or the District Magistrate, shall not
be called in question in any court. In other words, the jurisdiction of civil
courts was excluded in relation to the matters covered by orders included
D within the provisions of Sections 3(4) and 16 of the said Act. The Constitu-
tion Bench approached the matter thus :
"One of the points which is often treated as relevant in dealing
with the question about the exclusion of civil Courts' jurisdiction, ·
is whether the special statute which, it is urged, excludes such
E jurisdiction, hai used clear and unambiguous words indicating that ·
intention~ Another test which is applied is : does the said statute
provide for an adequate and satisfactory alternative remedy to a party
that may be aggrieved by the relevant order under its material ·
provisions? Applying these two tests, it does appear that the words
F used in S. 3(4) and S. 16 are clear. Section 16 in terms provides
that the ord~r made under this Act to which the said section applies
shall not be called in question in any Court. This is an express
provision excluding the ci"il Courts' jurisdiction. Section 3(4) does
not expressly exclude the jurisdiction of the civil Courts, but, in the
context, the inference that the civil Courts jurisdiction is intended
G to be excluded, appears to be inescapable. Therefore, we are
satisfied that Mr. Goyal is right in contending that the jurisdiction
of the civil Courts is excluded in relation to matters covered by the
orders included within the provisions of S. 3(4) and S. 16.
H (Emphasis supplied)
MAFATLALINDS. LTD. v. U.0.1. [PARIPOORNAN,J.] 761
Even so, this Court proceeded to state in paragraph13 at page 896, to the A
following effect :
. "This conclusion, however, does not necessarily mean that the plea
against the validity of the order passed by the District Magistrate,
or the Commissioner, or the State Government, can never be raised
in a Civil Court. In our opinion, the bar created by the relevant B
provisions of the Act excluding the jurisdiction of the civil Courts
cannot operate in cases where the plea raised before the civil Court
goes to the rooi of the matter and would, if upheld, lead to the
conclusion that 'the impugned order is a nullity." ·
. _;;... .
c
(Emphasis supplied)
This Court referred to the decisions of the Judicial Committee, in Secretary
of State v. Jatindra Nath Chaudhry, AIR {1924) PC 175 and the decision in
.
1
Mask & Co., and also quoted the observations in the latter case which have
been quoted hereinbefore (para 27 - supra) and concluded thus : D
"In M/s. Kamala Mills Ltd. v. The State of Bombay, C.A. No. 481
of 1963, dated 23.4.1965 : AIR (1965) SC 1942, while dealing with
a similar poin~ this Court has considered the effect of the two
decisions of the Privy Council, one in the case of Mask and Co., 67 E
Ind App 222. AIR (1940) PC 105 (supra), and the other in Raleigh
Investment Co. v. Governor-General in Council, 74 Ind App 50 at
...
pp. 62-63 : AI'R. (1947) PC 78 at pp. 80-81. The Conclusion reached
by this Court in Mis. Kamala Mill's case C.A. No. 481 of 1963 dated
23.4.1965: AIR (1965) SC 1942. (supra) also support the view which
we are taking in the present appeal." F
(Emphasis supplied)
It is evident that in Ram Swarup's case, this Court expressed the view that
the decision in Kamala Mills' case is in accord with Mask & Co. 's case, and
the bar of jurisdiction of civil courts cannot operate in cases where the plea G
raised before the civil court goes to the root of the matter and would, if
upheld, lead to the conclusion that the impugned order is a nullity - in other
words, where the order or proceeding is attacked as one passed without
jurisdiction. Again, the principle laid down in Mask & Co.'s case was only
reiterated and observations were made that the decision in Kamala Mills' H
762 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A case was in accord with the decision in Mask & Co.'s case. It is important
to notice that Gajendragadkar, C.J., spoke for the Bench in all the three
decisions : llluri Subbayya Chetty AIR (1964) SC 322; Kamala Mill AIR
(1965) SC 942 and Ram Swamp AIR (1966) SC 893.
In considering Mask & Co. AIR (1940) PC 105 and Kamala 'Mills
B AIR (1965) SC 1942 the Constitution Bench in Ram Swamp's case AIR
(1966) SC 893 held that if the proceeding assailed is totally invalid and a
nullity or without jurisdiction, the jurisdiction of the civil courts is not
barred. Again, the principle laid down in Mask & Co (supra) was only
affirmed.
c On an analysis of the various decisions, this Court laid down the law
in paragraph 32 at page 89, thus (Dulabhai's case) :
"Neither of the two cases of Firm of Illuri Subbayya, [1964] 1 SCR
752 = AIR (1964) SC 322 or Kamala Mills [1966] 1 SCR 64 - AIR .'
D (1965) SC 1942) can be said to .rnn counter to the series of cases
earlier noticed. The result of this inquiry into the diverse views
expressed in this Court may be stated as follows :
(1) Whether the statute gives a finality to the orders of the
special tribunals the civil court's jurisdiction must be held to be
E
excluded if there is adequate remedy to do what the civil courts
would normally do in a suit. Such provision, however, does not
exclude those cases where the provisions of the particular Act have
not been complied with or the statutory tribunal has not acted in
conjormity with the fundamental principles of judicial procedure.
F
(2) Where there is an express bar of the jurisdiction of the
court, an examination of the scheme of the particular Act to find
the adequacy or the sufficiency of the remedies provided may be
relevant but is not decisive to sustain the jurisdiction of the dvil
court.
G
Where there is no express exclusion the examination of the
remedies and the scheme of the particular Act to find out the
intendment becomes necessary and the result of the inquiry may
be decisive. In the latter case it is necessary to see if the statute
H creates a special right or a liability and provides for the determina-
MAFATLALINDS. LTD.v. U.O.L [PARIPOORNAN,J.] 763
tion of the right or liability and further lays down that all questions A
about the said right and liability shall be determined by the
tribunals so constituted, and whether remedies normally associated
with actions in civil courts are prescribed by the said statute or
not.
B
(3) Challenge to the provisions of the particular Act as ultra
vires cannot be brought before Tribunals constituted under that
Act. Even the fligh Court cannot go into that question on a revision
or reference from the decision of the Tribunals.
(4) When a provision is already declared unconstitutional or the
c
constitutionality of any provision is to be challenged, a suit is open.
A writ of certiorari may include a direction for refund if the claim
is clearly within the time prescribed by the Limitation Act but it is
not a compulsory remedy to replace a suit.
D
(5) where the particular Act contains no machinery for refund
of tax collected in excess of constitutional limits or illegally collected
a suit lies.
(6) Questions ofthe cori:ectness of the assessment apart from E
its constitutionality are for. the decision of the authorities and a
civil suit does not lie if the orders of the authorities are declared
to be final or there is rui express prohibition in the particular Act.
In either case the scheme of the particular Act must be examined
because it is a relevant enquiry. F
(7) An exclusion of the jurisdiction of the civil court is not
readily to be inferred unless the conditions above 'set down apply."
(Emphasis supplied) G
Dulabhai's case (supra) has been consistently followed by this Court later
- see : Sree Raja Kandregula Srinivasa Jagannadharao Panthulu Bahadur
Gum v. The State of Andhra Pradesh mid Others, AIR (1971) SC 71 and
other cases. H
764 SUPREME COURTREPORTS[1996] SUPP. 10 S.C.R.
A 29. Applying the law laid down in the decisions aforesaid, it is not
possible to conclude that any and every claim for refund of illegal/un-
authorised levy of tax, can be made only in accordance with the provisions
of the Act (Rule 11, Section llB etc. as the case may be), and an action
by way of suit or writ petition under Article 226 will not be maintainable
B under any circumstances. An action by way of suit or a petition under
Article 226 of the Constitution is maintainable to assail the levy or order
which is illegal, void or unauthorised or without jurisdiction and/or claim
refund, in cases covered by propositions No. (1), (3), (4) and (5) in
Dulabhai's case, as explained hereinabove, as one passed outside the Act
and ultra vires. Such action will be governed by the general law and the
C procedure and period of limitation provided by the specific statute wi)J.
_have no application. Collector of Central Excise, Chandigarh v. Mis. Doaba
Co-operative Sugar Mills Ltd., Jalandhar, [1988] Supp. SCC 683; Escorts Ltd.
v. Union of India & Ors., [1994] Supp. 3 SCC 86. Rule 11 before and after
amendment, or S. llB, cannot affect S.72 of the Contract Act or the
D provisions of Limitation Act in such situations. My answer to the claims
for refund broadly falling under the three groups or categories
enumerated in paragraph 5 of this Judgment is as follows :
Category (I) where the levy is unconstitutional - outside the provisions
of the Act or not 'contemplated by the Act:-
E
In such cases, the jurisdiction of the civil courts is not barred. The ag-
grieved party can invoke Section 72 of the Contract Act, file a suit or a
petition under Article 226 of the Constitution, and pray for appropriate
relief inclusive of refund within the period of limitation provided by the
appropriate law. [Dulabhai's case (supra) - para 32 - Clauses (3) and (4)).
F
Category (II) where the levy is based on misconstruction or wrong
or erroneous interpretation of the relevant provisions of the Act.
Rules or Notifications; or by failure to follow the vital or fundamen-
tal provisions of the Act or by acting in violation of the Fundamen-
tal Principles of judicial procedure:-
G
Under this category every error of fact or law committed by the statutory
authority or Tribunal, irrespective of its gravity, or nature of infirmity will
not be covered. It is confined to exceptional cases, "where the provisions
of a particular Act have not been complied with or the statutory tribunal
H has not acted in conformity with fundamental principles of judicial proce-
MAFA1LALINDS. LTD. v. U.0.1. [PARIPOORNAN,J.] . 765
dure", as stated in Mask & Co.'s (supra) and in Dulabhai's case (supra). A
The scope of the above dicta, should be understood in the background of/in
accord with the observations of the earlier Constitution Bench of this Court
in Finn of llluri Subbayya Chetty and Sons v. State of Andhra Pradesh, AIR
(19(/4) SC. 322 at page 326, to the following effect :
"...Non-compliance with the provisions of the statute, to which B
reference is made by the Privy Council must, we think, be non-
compliance with such fundamental provisions of the statute as
would make the entire proceedings before the appropriate authority
illegal and without jurisdiction. Similarly, if an appropriate authority
has acted in violation of the fundamental principles of judicial
procedure, that may also tend to make the proceedings illegal and
c
void and this infirmity may affect the validity of the order passed
by the authority in question. It is cases of this character where the
defect or the infirmity in the order goes to the root of the order and
makes it in law invalid and void........ "
D
[Dulabhai's case (supra) --para 32 Clause (1)]
(Emphasis supplied)
Here also, the appropriate action should be laid within the period of
limitation provided by the appropriate law and also can invoke Section 72 E
of the Contract Act, as the case may be.
Category (III) - Mistake of law '- the levy or imposition was
unconstitutional or illegal or not exigible in law (i.e. without juris-
diction) and, so found in a proceeding initiated not by the par-
ticular assessee, but in a proceeding initiated by some other F
assessee, either by the High Court or the Supreme Court and as
soon as the assessee came to know of the judgment, (within the
period of limitation) he initiated action for refund of the tax paid
by him, due to mistake of law:
In this category, assessees who initiated proceedings and impugned the G
assessments/claimed refund.for any reason, either by way of suit or petition
under Article 226 of the Constitution, and the action was dismissed on
merits, they cannot maintain an action over again. He who fights and runs
away, cannot have another day. If the levy or imposition was held to be
unconstitutional or illegal or not exigible in law, in a similar case filed by H
766 SUPREME COURT REPORTS(1996) SUPP.10 S.C.R.
A some other person, the assessee who had already lost the battle in a
proceeding initiated by him or has otherwise abandoned the claim cannot,
take advantage of the subsequent declaration rendered in another case
where the levy is held to be unconstitutional, illegal or not exigible in law.
The claim will be unsustainable and barred by res judicata; Mis. Tilokchand
B Motichand and Ors. v. H.B. Munshi, Commissioner of Sales Tax, Bombay
and Another, AIR (1970) SC 898. (This will be confined to the period for
which action was laid and lost).
Subject to the above, if a levy or imposition of tax is held to be
unconstitutional or illegal or not exigible in law i.e. without jurisdiction, it
C is open to the assessee to take advantage of the declaration of the law so
made, and pray for appropriate relief inclusive of refund on the ground
that tax was paid due to mistake of law, provided he initiated action within
the period of limitation prescribed under the Limitation Act. Such assessee
should prove the necessary ingredients to enable him to claim the benefit
under Section 72 of the Contract Act read with Section 17 of the Limitation
D Act. Dulabhai's case (supra) - para 32 - clauses (4) and (5).
30. It should be borne in mind, that in all the three categories of
cases, the ·assessee should prove the fundamental factor that he has not ·
"passed on" the tax to the consumer or third party and that he suffered a
E loss or injury. This aspect should not be lost sight of, in whatever manner,
the proceeding is initiated - suit, Article 226, etc.
, 31. As observed earlier, prpposition No. (1) or clause No. (1) enun-
. ciated in Dulabhai's case (supra) should be understood in the background.
· ·of or in accord with the observations of the earlier Constitution Bench in ·
F Illuri Subbayya Chetty's case - AIR (1964) SC 322 (at pp. 325-326)) as
quoted in para 27 (supra) - (see para 29 of this judgment).
Opinions may differ as to when it can be said that in the "public law''_
domain, the entire proceeding before the appropriate authority is illegal
G .and without jurisdiction or the defect or infinnity in the order goes to the
root of the matter and ma:kes it in law invalid or -void (Referred to in Illuri
Subbayya Chetty's case and approved in Dulabhai case). The matter may
have to be considered in the light of the provisions of the particular statute
in question and the fact situation obtaining, in each case. It is difficult to
visualise all situations hypothetically and provide an answer. Be that as it
H may, the question that frequently arises for consideration, is, in what
MAFATLALINDS.LTD. v. U.0.1. [PARIPOORNAN,J.] 767
situation/cases the non-compliance or error or mistake, committed by the A
statutory authority or Tribunal, makes the decision rendered ultra-vires or
a imllity or one without jurisdiction? If the decision is without jurisdiction,
notwithstanding the provisions for obtaining. reliefs contained in the Act
and the "ouster clauses", the jurisdiction of the ordinary court is not
excluded. So, the matter assumes significance. Since the landmark decision
B
inAnisminic Ltd. v. Foreign Compensation Commission, (1969) 2 AC 147
= (1969) 1 All ER 208 (H.L.), the legal world seems to have accepted that
any "jurisdictional error" as understood in the liberal or modem approach,
laid down therein, makes a decision ultra vires or a nullity or without
jurisdiction and the "ouster clauses", are construed restrictively, and such
provisions whatever their stringent language be, have been held not to c
prevent challenge on the ground that the decision is ultra vires and being
a complete nullity, it is not a decision within the meaning of the Act. The
concept of jurisdiction has acquired "new dimensions". The original or pure
theory of jurisdiction means, "the authority to decide", and it is deter-
minable at the commencement, and not at the conclusion of the inquiry. The
D
said approach has been given a go bye in Anisminic case, as we shall see
from the discus.sion hereinafter (See De Smith, Woolf and Jowell - Judicial
Review of Administrative Action (1995 edn.) P. 268; Halsbuny's Laws of
England (4th edn.) p. U4 - para 67 - foot note (9). As Sir William Wade
observes in his book, Administrative Law (7th edn.), 1994, at p. 299, "The
tribunal must not only have jurisdiction at the outset, but musl retain it E
· unimpaired until it has discharged its task". The decision inAnisminic case
has been cited with approval in a number of cases by this Court : Citation
of few such cases; Union of India v. Tarachand Gupta & Bros., AIR (1971)
SC 1558 (at 1565), A.R. Antulay v. R.S. Nayak and Another, (1988] 2 SCC
602 (650), Mis. R.B. Shreeram Durga Prasad and Fatehchand Nursing Das F
v. Settlement Commission. (IT & WT) and Another, (1989] 1 SCC 628, 634;
N. Panhasarathy Etc. Etc. v., Controller of Capital Issues & Anr. Etc .. Etc.,
(1991] 3 SCC 153 at 195; _Associated Engineering Co. v. Government of
Andhra Pradesh and Anr,. AIR (1992) SC 232; Shiv Kumar Chadha v.
Municipa!Corporation of Delhi and Others, (1993) 3SCC161173. Deliver-
ing the judgment of a two-Member Bench in Shri M.L. Sethi v. Shri R.P. G
Kapur, AIR (1972) SC 2379 Methew, J. in paragraphs 10 and 11 of the
judgment explained the legal position after Anisminic case to the following
effect :
"The word "jurisdiction" is a verbal cast of many colours. J urisdic- H
'
768 SUPREME COURT REPORTS[1996J SUPP.10 S.C.R.
A tion originally seems to have had the meaning which Lord Baid
ascribed to it in Anisminic Ltd. v. Foreign Compensation Commis-
sion, (1969} 2 AC 147, namely, the entitlement "to enter upon the
enquiry in question". If there was an entitlement to enter upon an
inquiry into the question, then any subsequent error could only
be regarded as an error within the jurisdiction. The best known
B formulation of this theory is that made by Lord Denman in R. v.
Bolton, [1841] 1 QB 66. He said that the question of jurisdiction
is determinable at the commencement, not at the conclusion of the
enquiry. InAnisminic Ltd., (1969) 2 AC 147 Lord Reid said:
"Put there are many cases where, although the tribunal had juris-
c diction to enter ·on the enquiry, it has done or failed to do
something in the course of the enquiry which is of such a nature
that its decision is a nullity. It may have given its decision in bad
faith. It may have made a decision which it had no power to make.
It may have failed in the course of the enquiry to comply with the
D requirements of natural justice. It may in perfect good faith have
misconstrued the provisions giving it power to act so that it failed
to deal with the question remitted to it and decided Some question
which was not remitted to it. It may have refused to take into
account something which it was required to take into account. Or
it may have based its decision on some matter which, under
E provisions setting it up, it had no right to take into account. I do
not intend this list to be exhaustive."
In the same case, Lord Pearce Said :
F "Lack of jurisdiction may arise in various ways. There may be an
absence. of those formalities or things which are conditions prece-
dent to the tribunal having any jurisdiction to embark on an .
enquiry. Or the tribunal may at the end make an order that it has
no jurisdiction to make. Or in the intervening stage while engaged
on a proper enquiry, the tribunal may depart from the rules of
G' natural justice; or it may ask itself the wrong questions; or it may
take into account matters which it was not directed to take into
.1 '
account. Thereby it would step outside its jurisdiction. It would
turn its inquiry into something not directed by Parliament and fail
·to make the inquiry which the Parliament did direct. Any of these
H things would cause its purported decision to be a nullity."
\
MAFA1LALINDS. LTD. v. U.O.I. [PARIPOORNAN,J.) 769
11. The dicta or the majority of the House of Lords, in the above A
case would show the extent to which .'lack' and 'excess' of jurisdic-
tion have been assimilated or, in other words, the extent to which
we have moved away from the traditional concept of "jurisdiction".
The effect of the dicta in that case is to reduce the difference between
jurisdictional error and mor of law within jurisdiction almost to
B
vanishing point. The practical effect of the decision is that any error
of law can be reckoned as jurisdicponal. That comes perilously close
to saying that there is jurisdiction if the decision is right in law but
none if it is wrong. Almost any misconstruction of a Statute can
be represented as "basing their decision on a matter with which
they have no right to deal", "imposing an unwarranted condition" c
or addressing themselves to a wrong question". The majority
opinion in the case leaves a court or Tribunal with virtually. no
margin of legal error. Whether there is excess of jurisdiction or
merely error within jurisdiction can be determined only by con-
struing the empowering statute, which will give little guidance. It
D
is really a question of how much latitude the Court is prepared to
allow.............."
In. a subsequent Constitution Bench decision, Hari Prasad Mu_lshankar
Trivedi v. V.B. Raju and Others, AIR (1973) SC 2602, delivering the
judgment of the Bench, Mathew, J., in para 27 at page 2608 of the E
judgment, stated thus :
"········'·· Though the dividing line between lack of jurisdiction or
power and erroneous exercise of it has become thin with the ·
decision of the House of Lords in the Anisminic Case. (1967) 3 F
W.L.R. 382, we do not think that the distinction between the two
has been completely wiped out. We are aware of the difficulty in
formulating an exhaustive rule to tell when there is lack of power
and when there is an erroneous exercise of it. The difficulty has
arisen because the word "jurisdiction" is an expression which is
used in a variety of senses and takes its colour from its context, G
(see Per Diplock, J. at p. 394 in the Anisminic Case). Whereas the
'pure' theory of jurisdiction would reduce jurisdietional control to
a vanishing point, the adoption of a narrower meaning might result
in a more useful legal concept even though the formal structure of
law may lose something of its logical symmetry. ''At bottom the H
770 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A problem of defining the concept of jurisdiction for purpose of judicial
review has been one of public policy rather than one of logic". (SA.
De Smith, "Judicial Review of Administrative Action". 2nd Edn.,
p. 98.)" (1968 edition)
(emphasis supplied)
B
The observation of the learned author, (S.A. De Smith) was continued in
its third edition {1973) at page 98 and in its fourth edition (1980) at page
112 of the book. The observation aforesaid was based on the then prevailing
academic opinion only as is seen from the foot notes. It should be stated
C that the said observation is omitted from the latest edition of. the book De
Smith, Woolf and Jowell - Judicial Review of Administrative Action - 5th
edition (1995) as is evident from page 229; probably due to later develop-
ments in the law and the academic opinion that has emerged due to the
change in the perspective.
D 32. After 1980, the decision in Anisminic case came up for further con-
sideration before the House of Lords, Privy Council and other courts. The
three leading decisions of the House of Lords wherein Anisminic principle,
was followed and explained, are the following : In re Racal Communica-
tions Ltd., (1981) AC 374; O'Reilly & Ors. v. Mackman & Ors., (1983) 2 AC
E 237, Regina v. Hull University Visitor, (1993] AC 682. It should be noted that
In re Racal's case, the Anisminic principle was held to be inapplicable in
the case of (superior) court where the decision of the court is made final and
conclusive by the statute. (The superior court referred to in this decision is
the High Court) (1981) AC 374 (383, 384, 386, 391). In the meanwhile, the
House of Lords in Council for Civil Service Union & Ors. v. Minister For
F the Civil Service, (1985) 1 AC 374 enunciated three broad grounds for
judicial review, ·as "legality'', "procedural propriety'' and "rationality" and
this decision had its impact in the development of the law in post-Anisminic
period. In the light of the above four important decisions of the House of
Lords, other decisions of the court of appeal, Privy Council, etc. and the
G later academic opinion in the matter the entire case law on the subject has
been reviewed in leading text books. In the latest edition of De Smith on
"Judicial review of Administrative Action" - edited by Lord Woolf and
Jowell, Q.C. [(Professor of Public Law) (Fifth edition) - (1995)], Chapter
5, titled as "Jurisdiction, Vires, Law and Fact" (pp. 223-294), there is
exhaustive analysis about the concept, "jurisdiction", and its ramifications.
H The authors have discussed the pure theory of jurisdiction, the innovative
MAFATIALINDS. LTD. v. U.O.I. [PARIPOORNAN,J.J 771
decision in "Anisminic" case, (1969) 2 AC 147, the development of the law A
in the post Anisminic period, the scope of the "finality" clauses (exclusion
of jurisdiction of courts) in the statutes, and have laid down a few proposi-
. tions at pages 250-256 which could be advanc~d on the subject. The authors
have concluded the discussion thus at page 256 :
''After Anisminic virtually every error of law is a jurisdictional error, B
and the only place left for non-jurisdictional error is where the
components of the decision made by the inferior body included
matters of fact and policy as well as law, or where the error was
evidential (concerning for example the burden of proof or admis-
sion of evidence). Perhaps the most precise indication of jurisdic- C
tional error is that advanced by Lord Diplock in Racal
Communications, when he suggested that a tribunal is entitled to
make an error when the matter "involves, as many do inter-related
questions of law, fact and degree". Thus it was for the county court
judge in Peariman to decide whether the installation of central
heating in a dwelling amounted to a "structural alteration extension D
or addition". This was a "typical question of mixed law, fact and
degree which only a scholiast would think it appropriate to dissect
into two separate questions, one for decision by the superior court,
viz. the meaning of these words, a question which must entail
considerations of degree, and the other for decision by a county E
court, viz. the application of words to the particular installation, a
question which also entails considerations of degree."
It is, however, doubtful whether any test of jurisdictional error
will prove satisfactory. The distinction between jurisdictional and
non-jurisdictional error is ultimately based upon foundations of sand. F
Much of the superstrncture has already crnmbled. What remains is
likely quickly to fall away as the courts rightly insist that all ad-
ministrative action should be, simply, lawful, whether or not jurisdic-
tionally lawful.".
G
(Emphasis supplied)
33. The jurisdictional control exercised by superior courts over sub-
ordinate courts, tribunals or other statutory bodies and the scope and
content of such power has been pithly stated in Halsbury Laws of England
= 4th edition (Reissue), 1989, volume 1(1), P. 113 to the following effect : H
772 SUPREME COURT REPORTS[l996] SUPP. 10 S.C.R.
A "The inferior court or tribunal lacks jurisdiction if it has no power
to enter upon an inquiry into a matter at all; and it exceeds
jurisdiction if it nevertheless enters upon such an inquiry or, having
jurisdiction in the first place, it proceeds to arrogate an authority
withheld from it by perpetrating a major eJTor of substance, form
or procedure, or by making an order or taking action outside its
B
limited area of competence. Not every error committed by an
inferior Court or tribunal or other body, however, goes to jurisdic-
tion. Jur_isdiction to decide a matter imports a limited power to
decide that matter incoJTectly."
c "A tribunal lacks jurisdiction if (I) it is improperly constituted.
or (2) the proceedings have been improperly instituted, or (3)
authority to decide has been delegated to it unlawfully, or (4) it is
without competence to deal.with a matter by reason of the parties,
the area in which the issue arose, the nature of the subject matter, ;'
the value of that subject matter, or the non-existence ofany other
D prerequisite of a valid adjudication. Excess of jurisdiction is not
materially distinguishable from lack of jurisdiction and the expres-
sions may be used interchangeably."
"Where the jurisdiction of a tribunal is dependent on ·the
E existence of a particular state of affairs, that state of affairs may
be described as preliminary to, or collateral to the merits of, the
issue, or as jurisdictional". (p. 114)
"There is a presumption in construing statutes which confer
jurisdiction or discretionary pmyers on a body, that if that body
F makes an error of law while purporting to act within that jurisdic-
tion or in exercising those powers, its decision or action will exceed
the jurisdiction conferred and will be quashed. The error must be
one on which the decision or action depends. An error of law going
to jurisdiction may be committed by a body which fails to follow
the proper procedure required by law, which takes legally ir-
G relevant considerations into account, or which fails to take relevant
considerations into account, or which asks itself and answers the
wrong question. (pp. 119-120)
The presumption that error of law goes to jurisdiction of a
H particular statute, so that the relevant body will not exceed its
MAFATLAL INDS. LID. v. U.O.I. [PARIPOORNAN, J.] 773
jurisdiction by going wrong in law. Previously, the courts were more A
likely to"find that errors of law were within jurisdiction; but with
the modern approach e"ors of law will be held to fall within a body's
jurisdiction only in exceptional cases. The courts will generally
assume that their expertise in determining the principles of law
applicable in any case has not been excluded by Parliament"
B
(p.120)
"Errors of law include misinterpretation of a statute or any
other legal document or a rule of common law; asking oneself and
answering the wrong question, taking irrelevant considerations into
account or ffliling to take relevant considerations into account C
when purporting to apply the law to the facts; admitting inadmis-
sible evidence or rejecting admissible and relevant evidence; exer-
cising a discretion on the basis of incorrect legal principles; giving
reasons which disclose faulty legal reasoning or which are inade-
quate to fulfil an express duty to give reasons, and misdirecting D
oneself as to the burden of proof''. (pp. 121-122)
(Emphasis supplied)
_ 34. H.W.R. Wade and C.F. Forsyth in their book - Administrative
Law, Seventh Edition, (1994) - discuss the subject regarding the jurisdiction E
of superior courts over subordinate courts and tribunals under the head
"Jurisdiction over Fact and Law'' in Chapter 9, pages 284 to 320. The
decisions before Anisminic and those in the post Anisminic period have
been discussed in detail. At pages 319-320, the authors give the Summary
of Rules thus :
F
"Jurisdiction over fact and law : Summary
At the end of a chapter which is top-heavy with obsolescent matelial
it may be useful to summarise the position as shortly as possible.
The overall picture is of an expanding system struggling to free itself G
from the trammels of classical doctrines laid down in the past. It
is not safe to say that the classical doctrines are wholly obsolete
and that the broad and simple principles of review, which clearly
now commend themselves to the judiciary, will entirely supplant
them. A summary can therefore only state the long-established
rules together with the simpler and broadl}r rnles which have now H
774 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A superseded them, much for the be1iefit of the law. Together they are
as follows :
Errors of fact
Old rule The court would quash only if the erroneous fact was
B jurisdictional.
New rule The court will quash if an erroneous and decisive fact
was
(a) jurisdictional
(b) found on the basis of no evidence; or
c ( c) wrong, misunderstood or ignored.
Errors of law
Old rule The court would quash only if the error was
(a) jurisdictional; or
D (b) on the face of the record.
New rule The court will quash for any decisive error, because all
errors of Jaw are now jurisdictional."
(emphasis supplied)
E
35. The scope of the exclusionary clauses contained in the statutes
· has been considered in great detail with reference to the decisions of the
superior courts in England and also the decisions of the Supreme Court of
India by Justice G.P. Singh (former Chief Justice, M.P. High Court) in
p "Principles of Statutory Interpretation", 6th edition (1996) at page 475. The
law is stated thus :
"A review of the relevant authorities on the point leads to the
following conclusions :
"(1) An Exclusionary Clause using the formula 'an order of the
G
tribunal under this Act shall not be called in question in any Court'
is ineffective to prevent the calling in question of an order of the
tribunal if the order is really not an order under the Act but a
nullity.
H (2) Cases of nullity may arise when there is lack of jurisdiction
MAFATLALINOS. LTD. v. U.O.I.(PARIPOORNAN,J.] 775
at the stage of commencement of enquiry e.g., when (a) authority A
is assumed under an ultra vires statute; (b) the tribunal is not
properly constituted, or is disqualified to act; (c) the subject-matter
or the parties are such over which the tribunal has no authority to·
inquire; and ( d) there is want of essential preliminaries prescribed
by the law for commencement of the inquiry.
B
(3) Cases of nullity may also arise during the course or at the
conclusion of the inquiry. These cases are also cases of want of
jurisdiction if the word 'jurisdiction' is understood in a wide sense.
Some examples of these cases are (a) when the tribunal has
wrongly determined a jurisdictional question of fact or law; (b) C
when it has failed to follow the fundamental principles of judicial
procedure, e.g. has passed the order without giving an opportunity
_of hearing to the party affected; ( c) when it has violated the
fundamental provisions of the Act, e.g., when it fails to take into
account matters which it is required to take into account or when
it takes into account extraneous and irrelevant matters; ( d) when D
it has acted in bad faith; and ( e) when it grants a relief or makes
an order which it has no authority to grant or make; "as also (f)
when by misapplication of the law it has asked itself the wrong
. question."
E
With great respect to the learned author, I would adopt the above state-
ment of law, as my own.
I would conclude this aspect by holding that the jurisdiction of civil
courts is not barred in entirety regarding the attack against the levy and/or
claim for refund; in those cases, coming within the three categories men~ F
tioned in paras 5 and 29 of this judgment, the jurisdiction of the ordinary
courts will not be ousted, in the circumstances and subject to the conditions
stated therein and in para 30 (supra).
36. Two decisions of this Court rendered after Section llB of the
Act was amended in 1991, deserve mention. They are ·· Union of India and G
others v. Jain Spinners Limited and Another, [1992] 4 SCC 389; Union of
.
..
, India and others v. ITC Ltd., [1993] Supp. (4) SCC 326. hi Jain spinners
case, the application for refund itself was filed before the concerned statutory
Authority (Assistant Collector, Central Excise). While the said application
was pending, Section llB of the Act came into force. There was an earlier H
776 SUPREME COURTREPORTS[1996] SUPP.10 S.C.R.
A interim order passed by the High Court directing the deposit of the duty
levied with a liberty to the Reve'nue to withdraw it, subject to the condition
that the amount will be refunded if the assessee succeeded ultimately. The
Assistant Collector applying the amendments effected in 1991, declined to
order refund, holding that the assessee had passed on the incidence of duty
B to others. It was upheld by this Court notwithstanding the interim orders
and other proceedings of the High Court. Basically, the application for
refund was filed before the concerned statutory authority, who negatived
the claim by giving effect to. the provisions of the Amendment Act. There
was no attack in the above case that the levy or collection as one un-
authorised or unconstitutional or without jurisdiction or illegal. In Union
C of India v. ITC Ltd., the Jain Spinners case (supra) was followed. The main
aspect that arose for consideration in the latter case was whether the
assessee had passed on the incidence of duty to the consumers or other
persons. In spite of. the repeated orders of this Court, the assessee failed
to establish that the burden of excess 'excise duty was borne by it and was
D not passed on to any other person. The assessee had filed five applications
for refund. Three of them were allowed by the statutory authorities in the
appeals. Only two refund applications were rejected which were assailed
in the High Court. The High Court allowed the said applications, directing
the Revenue to refund the amounts due as per the two refund applications.
In Appeal, this Court stressed the fact that the assessee was not able to
E substantiate that the burden of excess excise duty was borne by it and was not
passed on to any other person. Incidentally, this court also referred to the
amended provisions of the Act (llB, 12B etc.) and held that the amended
provisions would apply when the matter regarding refund was still pending
for adjudication in this Court. In this case also the levy or collection was
F not assailed as unconstitutional or illegal or without jurisdiction and, in
consequence refund was called for. The above two cases did n'ot deal with
the maintainability of action in the ordinary courts where the levy or
collection is assailed on the ground that it is unconstitutional, illegal or
without jurisdiction.
G
37. The changes brought about by the Central Excise and Customs
Laws (Amendment) Act, 1991 (w.e.f. 20.9.1991) regarding refund and the
scope of Section llB read with Section 12B was the subject of great ·
controversy before us. The Amendment Act 1991 is also attacked as
unconstitutional, illegal, invalid and unreasonable and as a "device" to deny
H refund legitimately due. The relevant statutory provisions have been ex-
MAFATLALINDS. LTD. v. U.O.L [PARIPOORNAN,J.] 777
tracted earlier in this judgment. Briefly stated the position is this. Clause A
(3) of Section llB provides that notwithstanding any judgment, decree or
order of the appellate tribunal or any court etc. no refund shall be made
except as provided in sub-section (2). In other words, the procedure to
obtain refund is made exclusive as per Section 11B(3) of the Act. The
application, therefori<, shall be made under Section llB(l) and dealt with
by the concerned authority under Section 11B(2) of the Act. These B
provisions mandate amongst other things that the person claiming refund
should substantiate that the incidence of duty has not been passed on by
him to any other person. The application should also be filed within the
time prescribed in the said sub-section. Section 11B(2) and Section 11B(3)
go together. Under Section 11B(2), in certain specified cases, the duty paid
will be refunded to the applicant. One such case is, the duty of excise paid
c
by the manufacturer, if he had not passed on the incidence of such duty to
any other person and substantiates the same. In cases not falling within the
proviso to Section 11B(2) of the Act the duty collected will be credited to
the Consumer Welfare Fund and the said Fund will be utilised as per
Section 120 of the Act. D
38. As stated, Section 11B(2) and Section 11B(3) go together. The
applications for refund made before the commencement of the Amend-
ment Act, 1991, shall be deemed to have been made .under Section llB(l)
of the Act as amended and it shall be dealt with in accordance with Section
11B(2) of the Act. The Section contemplates disposal of the applications E
pending on the date of the Amendment Act as also fresh applications filed
after the Amendment Act, 1991, as per the amended provisions. Counsel
for the assessees urged that the provisions relating to refund and, in
particular, Section 11B(2) and (3) as amended in 1991 cannot apply to :
1. 'Refund' made ~r due as per orders passed by Court, in a F
• I
suit or in a petition under Article 226 of the Constitution of
India, which have become final.
2. refunds ordered by the statutory authority concerned which
have become final. G
It is obvious that in such cases no application can or will be deemed to be
pending on the date of the commencement of the Amendment Act. No
application praying for refund is to be filed in such cases, either. No further
probe, regarding the requisites for obtaining refund specified in the
Amendment Act, 1991, is called for in such cases. The above aspects are H
778 SUPREME COURTREPORTS[1996] SUPP.10 S.C.R.
A fairly clear. Section 11B(2) and (3) cannot be made applicable to refunds
already ordered by the court or the refund ordered by the statutory
authorities, which have become final. It follows from a plain reading of --
Section llB, Clauses (1), (2) and (3) of the Act. The provisions con-
template the pendency of the application on the date of the coming into
force of the Amendment Act or the filing of an application which is
B contemplated under law, to obtain a refund, after the Amendment Act
comes into force. I am of the opinion, that if the said provisions are held
applicable, even to matters concluded by the judgments or final orders of
cowts, it amounts to stating that the decision of the court shall not be
binding and will result in reversing or nullifying the decision made in
C exercise of the judicial power. The legislature does not possess such power.
The court's decision must always bind parties unless the condition on which
it is passed are so fundamentally altered that the decision could not have
been given in the altered circumstances. It is not so herein. Shri Prithvi
Cotton Mills Ltd. & Anr. v. Broach Borough Municipality & Ors., [1970] 1
SCR 388 and Madan Mohan Pathak v. Union of India & Ors. Etc., [1978]
D 3 SCR 334. See also Comorin Match Industries (P) Ltd. v. State of Tamil
Nadu, JT (1996) 5 SC 167. Alternatively, it may be stated that duty paid in
cases, which finally ended in orders or decrees or judgments of courts, must
be deemed to have been paid under protest and the procedure and -
limitation etc. stated in Section 11B(2) read with Section 11B(3) will not
E apply to such c~es. It need hardly be stated, that Section llB(l), the
proviso thereto, Section 11B(2) and Section 11B(3) read together will apply
only to (1) refund applications made before the Amendment of the Act
and still pending on the date of commencement of Amendment Act, 1991
and (2) applications contemplated under law to obtain refund and filed
after the commencement of the Amendment Act, 1991. (Cases dealt with
F in paras 5 and 29 of this judgment will not be covered by the above to the
extent stated therein). .
39. Excise duty is an indirect levy. It is intended or presumed to be
passed on. This is so under the ordinary law. Section 12B of the Act only
G provides a statutory rebuttable presumption in that regard. If it turns out '. '
that the levy is not exigible, it is refundable to the person who had borne
the liability. Ordinarily, in the case of indirect taxes, such persons will be
innumerable and cannot be easily identified or located. If the duty, which
is not exigible, is refunded to the person who had not borne the liability,
it will result in an unjuSt benefit to him. So the Act has provided in Section
H 11B(2), that in such cases where the duty is refundable, it will be credited
MAFATLALINDS. LTD. v. U.O.L [PARIPOORNAN,J.] 779
to the Consumer Welfare Fund (Section 12C). However, the proviso to A
Section 11B(2) provides that the duty of excise will be refunded in few
specified cases, subject to certain conditions -- one of them is the manufac-
turer -- in cases, where he has not passed on the incidence to any other
person (Clause (d)]. Those provisions will apply only for refunds to be
made under the Act. In the totality of the factual situation, it cannot be
said that the provisions ushered in by Amendment Act, 1991 -- and the B
scheme formulated in Sections llB and 12A to D -- are, a "device" or
invalid or arbitrary or unreasonable (except to the extent stated in para 38
supra) or in any way constitutionally infirm. (Of course, the cases dealt with
in paras 5 and 29 are excluded to the extent stated therein). Brother Jeevan
Reddy, J. has dealt with this matter rather elaborately and there is no need
to elaborate the matter any further. In the matter of taxation laws, the court
c
permits a great latitude to the discretion of the legislature. The State is
allowed to pick and choose districts, objects, persons, methods and even
rates for taxation, if it does so reasonably. The courts view the laws relating
to economic activities with greater latitude than other matters. (See Collec-
tor of Customs, Madras v. Nathella Sampathu Chetty and Another, (1962] 3 D
SCR 786; Khyerbari Tea Company and Anr. v. State of Assam & Ors., AIR
(1984) SC 925; R.K Garg v. Union of India & Ors., AIR {1981) SC 2138;
Gaurishanker & Ors. v. Union of India & Ors., (1994] 6 SCC 349 and Union
_, of India & Anr. Etc. Etc. v. A. Sanyasi Rao & Ors. Etc. Etc., AIR (1996) SC
1219, etc.]
E
40. Before closing I should specifically deal with two important
aspects. In this judgment I have dealt with cases where duty is paid on
items which are consumed as such. Due to paucity of details, the case of
captive consumption has not been dealt with. It is made clear that whatever
is stated in this judgment will not apply in the cases of goods which are F
captively consumed.
Chapter 11-A of the Act was inserted by way of amendment in 1991.
The establishment, working, administration and utilisation to the Consumer
Welfare Fund is in~its stage of infancy. The scheme or set-up envisaged by
Sections 12C and 12D and its working will require an in-depth evaluation G
by the appropriate authorities in order to vouchsafe that the scheme is not
rendered a mere ritu~I or illusory, but is meaningful and effective for the
present, I do not want to deal with that aspect in detail.
41. For the sake of convenience, I shall summarise my conclusions as H
780 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
A here-under : (in case of doubt, the body of the judgment should be looked
into).
(A) If the excise duty paid by the assessee was ultimately passed
on to the buyers or any other person, and that the assessee
has suffered no loss or injury, the action for restitution based
B on Section 72 of the Contract Act, is unsustainable. (This is
the legal position even under general law, without reference to
Section 1JB of Central Excises & Salt Act as amended by Act
40/1991.)
c (B) The decision in Kanhaiya Lal's case and the cases following
the same, cannot be understood as laying down the law that
even in cases the liability has been "passed on", the assessee
can maintain an action for restitution.
If the decision in Kanhaiya Lal's case (supra) and the cases
D following the said decision, enables such a person to claim
refund (restitution), with great respect of the learned Judges,
who rendered the above decisionsj I express my dissent there-
to. In this context, the observations in para 29 - clause III
shall also be Borne in mind.
E (C) Article 265 should be read along with the Preamble and
Article 39(b) and (c) of the Constitution, and so construed
in cases where the assessee has passed on the liability to the
consumer or third party, he is not entitled to restitution or
refund. The fact that the levy is invalid need not automatically
F result in a direction for refund of all collections made in
pursuance thereto.
(D) The presumption is that the taxpayer has passed on the
liability to the consumer (or third party). It is open to him to
rebut the presumption. The matter is exclusively within the
G knowledge of the taxpayer, whether the price of the goods
included the 'duty' element also and/or also as to whether he
has passed on the liability since he is in possession of all
relevant details. Revenue will not be in a position to have an
indepth analysis in the innumerable cases to ascertain and
H find out whether the taxpayer has passed on the liability. The
MAFATLAL INDS. LTD. v. U.0.1. [PARIPOORNAN, J.] 781
matter being within the exclusive knowledge to the taxpayer, A
the burden of proving that the li~bility has not been passed
on should lie on him.
(E) It is not possible to conclude that any and every claim for
refund of illegal/unauthorised levy of tax, can be made only
in accordance with the provisions of the Act (Rule 11, Section B
llB etc., as the case may be), and an action by way of suit or
writ petition undef Article 226 will not be maintainable under
any circumstances. An action by way of suit or a petition under ·
Article 226 of the Constitution is maintainable to assail the
levy or order which is illegal, void or unauthorised or without c
jurisdiction and/or claim refund, in cases covered by proposi-
tions No. (1), (3), (4) and (5) inDulabhai's case, as one passed
outside the Act, and ultra vires. Such action will be governed
by the general law and the procedure and period of limitation
provided by the specific statute will have 110 application.
D
(F) The attack against the illegal or unauthorised levy as also the
relief of refund may fall ordinarily within the three categories
specified in paragraph 29 of the judgment. An action by way
·of suit or writ petition under Article 226 of the Constitution
of India will lie in the cases, and subject to t):ie conditions E
stated in paragraphs 29 and 30 of the judgment.
(G) The jurisdictibn of tjvil courts is not bar.red in entirety regard-
ing the attack against the levy and/or claim for refund; in
those cases, coming within the three categories mentioned in
paras 5 and 29 of this judgment, the jurisdiction of the F
ordinary courts will not be ousted, in the circumstances and
subject to the conditions stated therein and in para 30 (supra).
(H) Section 11B(2) and (3) cannot be made applicable to
refunds already ordered by the court or the refund ordered
by the statutory authorities, which have become final. It G
follows from a plain reading of Section llB, Clauses (1),
(2) and (3) of the Act. The provisions contemplate the
pendency of the application on the date of the coining into
force of the Amendment Act or the filing of an application
which is contemplated under law, to obtain a refund, after H
782 SUPREME COURT REPORTS[1996] SUPP.10 S.C.R.
A the Amendment Act comes into force. If the said provisions
are held applicable, even to matters concluded by the judg-
ments or final orders of courts, it amounts to stating that the
decision of the court shall not be binding and will result
in reversing or nullifying the decision made in exercise of
the judicial power. The legislature does not possess such
B
power. Alternatively, it may be stated that duty paid in
cases, which finally ended in orders or decrees or judg"
ments of courts, must be deemed to have been paid under
protest and the procedure and limitation etc. stated in
Section 11B(2) read with Section 11B(3) will not apply to
c such cases.
(I) It need hardly be stated, that Section llB(l), the proviso
thereto, Section 11B(2) and Section 11B(3) read together will
apply, only to (1) refund applications made under the statute
D and filed before the Amendment of the Act and still pending
on the date of commencement of Amendment Act, 1991 and
(2) applications contemplated under law to obtain refund and
filed after the ".ommencement of the Amendment Act, 1991.
(cases dealt with in paras 5 and 29 of this judgment will not
be covered by the above to the extent stated therein).
E
(J) The proviso to Section 11B(2), provides, that the duty of
excise will be refunded in few specified cases, subject to
certain conditions - one of them is the manufacturer - in
F cases, where he has not passed on the incidence to any
other person [Clause (d)]. Those provisions will apply only
for refunds to be made under the Act. In the totality of the
factual situation, it cannot be said, that the provisions
ushered in by Amendment Act, 1991 - and the scheme
formulated in Sections llB and 12A to B -- (in the light of
G the clarifications made in the body of the judgment, and
more particularly in paras 25 and 40 above) are, a "device"
or invalid or arbitrary or unreasonable (except to the extent
stated in para 38 supra) or in any way constitutionally
infirm. (Of course, the cases dealt with in paras 5 and 29
H are excluded to the extent stated therein).
MAFATLALINDS. LTD. v. U.0.1. [HANSARIA,J.SEN,J.] 783
42. The principles laid down in this judgment should be applied to A
the fact situation obtaining in individual cases and should be disposed of
accordingly.
The matters may be placed before My Lord the Chief Justice for
appropriate orders in this behalf.
B
HANSARIA, J. The conclusions arrived at by learned brother
Paripoornan, J. and the reasons given in support thereof, have my respect-
ful concurrence. I have nothing useful to add. The time at my disposal does
not really permit me to do so, as the draft of this judgment reached my
hands on the night of 15th instant; indeed, the first draft judgment of the c
case got me in the evening of 13th of this month.
SEN, J. Leave granted in the Special Leave Petitions.
In C.A. No. 3255 of 1984 and a number of other cases which have
been heard together, questions have been raised, firstly, as to whether a D
refund of Central Excise Duty wrongly realised from a tax-payer can be
withheld on the ground of what is described as 'unjust enrichment', without
any specific provision of Jaw to that effect; secondly, whether the position
was altered after the Central Excise Act, 1944 was amended by the Central
Excises and Customs Law (Amendment) Act, 1991 which came into effect E
on September 20, 1991? By virtue of this amendment Section llB along
with a few other sections of the Central Excise Act, 1944 stood amended.
I shall deal with both these questions separately. But before entering into
that controversy, it is important to bear in mind the provisions of Article
265 of the Constitution and its amplitude. It has also to be seen what is the
scope, meaning and purport and also the import of what is described as F
'unjust enrichment'. A challenge has also been made to the validity of the ·
amendments made to the Central Excise Act. That will also have to be
examined.
ARTICLE 265
G
J
Article 265 of the Constitution lays down that "no tax shall be levied
or collected except by authority of law." The mandate of the Constitution
is lucid and clear and must be taken to mean what it says. 'No tax' takes
in every type of tax. It has been contended on behalf of the Union of India
that Article 265 merely lays down that no direct tax shall be levied or H
I
784 SUPREME COURT REPORTS(1996) SUPP. 10 S.C.R.
A collected except by authority of law. The first question is that if that was
the intention of the Constitution makers, then why did they not say so in
so many words? 'Taxation' has been defined in Article 366 (28) to include
the imposition of any tax or impost, whether general or local or special,
and 'tax' shall be construed accordingly. Therefore, the word 'tax' will
B include any tax general, local or special. That means every kind of tax direct
or indirect will come within the ambit of Article 265.
It has also to be noted that Article 265 is included in Part XII of the
Constitution which deals with Finance, Property, Contracts and Suits.
Chapter I of Part XII deals with Finance. Under this heading, both direct
C and indirect t~ have been dealt within a number of Articles. Article 268
deals with stamp duties and duties of excise on medicinal and toilet
preparations. Article 269 deals with duties in respect of succession to
property other ¢1,lan agricultural land, estate duty in respect of property
other than agricultural land, terminal taxes on goods or passengers, taxes
D on railway fares and freights, taxes other than stamp duties on transactions
in stock-exchanges and futures markets and taxes on the sale or purchase
of newspapers and on advertisements published therein. Article 270 deals
with taxes on income other than agricultural income. Article 272 deals with
Union duties of excise, other than duties of excise on medicinal and toilet
preparations. Article 276 deals with taxes for the benefit of a State or a
E municipality, district board, local board or other local authority in respect
of professions, trades, callings or employments. Article 277 deals with
taxes, duties, cesses or fees which were being lawfully levied by the Govern-
ment of any State or by any municipality or other local authority or body
for the purposes of the State, municipality, district or other local area.
p Article 287 deals with tax on the consumption or sale of electricity. All
these Articles go to show that Part XII, Chapter I, deals with not only
direct taxes like taxes on income or duties in respect of succession to
property, but also deals with indirect taxes like stamp duty, duties of excise
on medicinal and toilet preparations, other duties of excise, terminal taxes
on goods, taxes on railway freights, taxes on transactions in stock- exchan-
G ges and futures markets and taxes on sale or purchase of newspaper. In
the context of all these Articles in Chapter I of Part XII dealing with direct
and indirect taxes, it is difficult to hold that the mandate at the beginning
of the Chapter that "no tax shall be levied or collected except by authority
of law'',. was meant to be confined to direct taxes only and not to other
H types of taxes which were specifically enumerated in a number of other
MAFA1LAL INDS. LTD. v. U.O.I. [SEN, J.] 785
Articles in Chapter I of Part XII of the Constitution. A
Moreover, this argument, if accepted, will have dangerous implica-
tions. It will mean that the Constitution has impliedly empowered the
Government to levy and collect indirect taxes without any authority of law.
Bearing in mind that the bulk of the taxes imposed by the Union and
practically the entire amount of taxes collected by the States is by indirect B
levies, the constitutional protection against unlawful taxes will become
meaningless and devoid of any substance.
Mr. Parasaran, appearing on behalf of Union of India has argued
that Article 265 has to be read along with the Directive principles. The
State has been enjoined to direct its policy towards securing that the
c
ownership and control of the material resources of the community are so
distributed as best to subserve the common good. I do not see how this
provision or any other provision of Article 39 can in any way whittle down
the scope of Article 265 of the Constitution. If the provisions of Article 39
are to be construed as a licence given to the State to retain whatever has D
been collected however unlawfully, then why should any distinction be
made between direct taxes and indirect taxes? If the argument is taken to
its logical conclusion, it will mean that the State will be at liberty to retain
whatever it has gathered unlawfully by- direct as well as indirect taxation
and use the same for the purpose of common good according to its E
perception. The victims of unlawful activities of the State will have no
remedy against the State. This reasoning, if accepted, will have the effect
of turning the State into a Leviathan in which the individuals have only such
rights as may be permissively given by the State. The various constitutional
guarantees given to protect the individuals from the oppression by State
will become futile and without any meaning and substance. Neither Article F
38 nor Article 39, in any way, empower the State to levy or retain taxes
without any authority of law.
The importance and effectiveness of the Directive Principles of the
State Policy have been laid down in Article 31C in the following words :
G
"3JC. Saving of laws giving effect to certain directive principles. -
Notwithstanding anything contained in article 13, no law giving
. effect of the policy of the State towards securing all or any of the
principles laid down in part IV shall be deemed to be void on the
ground that it is inconsistent with, or takes away or abridges any H
786 SUPREME COURTREPORTS[1996] SUPP.10 S.C.R.
A of the rights conferred by article 14 or article 19; and no law
containing a declaration that it is for giving. effect to such policy
shall be called in question in any court on the ground that it does
not give effect to such policy:
Provided that where such law is made by the Legislature of a
B State, the provisions of this article shall not apply thereto unless
such law, having been reserved for the consideration of the Presi-
dent, has received his assent."
The disputes raised in this case do not relate to enforcement of the
C guarantees contained in Article 14 or Article 19 of the Constitution in any
manner. The faws of Central Excise have been enforced since 1944 or even
earlier. It is a tax on manufacture of goods. The object of the tax is to raise
revenue for the Government. But this can only be done in accordance with
law. No man can be subjected to an unlawful exaction made by the State
by whatever process in disregard of the guarantee given by Article 265 of
D the Constitution.
I
In my judgment, apart from its boldness, there is no merit in this
contention that guarantee contained in Article 265 of the Constitution must
. be restricted to direct taxes only. In my judgment, Article 265 must be
E implemented in letter and spirit as it stands and all the tax laws and all
Government actions to realise and retain tax must be tested on the anvil
of this guarantee. The courts should jealously guard against any attempt to
whittle down or do away with any of the guarantees given under the
Constitution to the citizens. In my judgment, Article 265 will have to be
given full effect in cases of direct as well as indirect taxation. If any tax has
F been levied and collected without authority of law, then the State has
committed a wrong and that wrong must be undone by the State by
returning the tax unlawfully collected to the person from whom it was
collected.
The Court has a duty to uphold the Constitution in letter and spirit.
G If the Court comes to the conclusion that a levy of tax is unlawful, the Court
will direct the Government to return the tax. It is not for the Court to
enquire how the tax-payer has managed his affairs after payment of the ·
unlawful levy. It is but natural that the tax-payer will try to raise funds by
raising price or cutting down costs or forgoing profits to get over the loss
H caused by the unlawful exaction of tax. There is usually considerable time
MAFATLAL INDS. LID. v. U.O.I. [SEN, J.] 787
gap from payment of any illegal levy and obtaining an order of refund. In A
most of the cases several years pass before refund of duty paid can be
obtained. In such a situation, it is impossible for the taxpayer company not
to do something to raise money somehow to carry on its business. Merely
because a manufacturer has raised its price after paying the illegal levy
cannot be a ground for denying him the constitutional guarantee contained
B
in Article 265. The constitutional guarantee is unconditional and unequivo-
cal and must be enforced regardless of what the manufacturer does after
payment of tax. If the manufacturer has done something unlawful, steps
must be taken against him. If this Court holds that constitutional guarantees
ought to be enforced depending upon the conduct of the manufacturer
after payment of the illeg<1l levy, then the Court would be adding a rider c
to Article 265 which is not permissible. By this forced interpretation the
Court will not be upholding the Constitution, but will be undermining it.
A point has been made that the manufacturer has passed on the
burden of the illegal levy to his customers by raising his price of the goods.
But that is no reason why the guarantee given by the Constitution should
D
not be enforced. The manufacturer may have been compelled to raise the
price because of the imposition of an illegal levy. But that is no reason to
dilute the mandate contained in Article 265 of the Constitution. Article 265
forbids the State from making an unlawful levy or collecting taxes unlaw-
fully. The bar is absolute. It protects the citizens from any unlawful exaction E
of tax. So long as Article 265 is there, the State cannot be permitted to levy
any tax without authority of law and if any tax has been collected unlawfully
that must be restored to the person from whom it was collected. If the tax
has been collected from any person unlawfully, it is the taxpayer's money
which is in unlawful possession of the State. The State has a constitutional
obligation to give back the money to the tax- payer. An act done in violation F
of constitutional mandate is void and no right flows out of that void act to
the State. The State is in unlawful possession of the taxpayer's property.
The State cannot retain it on any equitable ground nor can it give it to any
other person out of any supposed equitable consideration. The constitu-
tional mandate cannot be ignored on the pretext of any rule of equity or
on the ground of what is perceived as substantive justice. Every word of G
the Constitution has to be treated as sacrosanct and respected and obeyed
by the State and the Legislature and enforced by the Court.
The Court cannot, by torturing the language of Article 265 Ol by any
other means, construe it so as to give it a meaning which it does not H
788 SUPREME COURT REPORTS(l996] SUPP. 10 S.C.R.
A naturally bear. It was observed in the case of Commissioner of Inland
Revenue v. Rossminster Ltd., (1980) AC 952 at 1018 that in construing a
statutory provision, the rule of construction must be "however much a court
may deprecate an Act, it must apply it. It cannot by torturing its language
or any other means construe it so as to give a meaning which the Parliament
B did not clearly intend it to bear". The same rule of construction will apply
for construing a constitutional provision. The Court may dislike Article 265
and its natural consequence. But because of that the Court cannot torture
its language to bring out a meaning which the words do not naturally bear.
Once it is established that a levy or collection of tax is void, no legal or
equitable right is acquired by the State in the unlawfully collected money.
C The right to get refund accrues to the person who pays it the moment an
illegal levy or collection is made. Once the levy or collection is declared
illegal, the illegally collected amount has to be immediately paid back to
the person from whom it was collected. The refund order is made to
enforce the right of the tax-payer which accrued when the tax was illegally
D levied and collected from him. This is an absolute obligation under the
Constitution. No statute can provide otherwise. If a collection of tax is .
found to be illegal being in contravention of the provisions of Central
Excise Act, then it not only violates the Act but also the Constitution. If
the Central Excise Act is amended or any s.eparate act is passed to provide
for denial of refund to the taxpayer, in any manner, then such amendment
E or Act is as offensive to the Constitution as the illegal levies themselves
were. If the tax has been illegally exacted from a person, then he has been
denied the protection given to him by the Constitution. The denial of the
right to recover the unlawfully collected tax is denial of the protection given
to citizen by Article 265.
F
A similar question was examined by the Judicial Committee of the
Privy Council in an appeal from Australia in Commissioner for Motor
Transport v. Antill Ranger & Co. Pvt. Ltd., (1966) 3 AIL E.R. There, certain
charges had been levied by the State of New South Wales under an Act in
connection with inter-State transactions. These charges where held to be
G violative of Section 92 of the Commonwealth of Australian Constitution.
Subject to imposition of uniform duties of customs, Section 92 guarantees
freedom of trade, commerce and intercourse among the States by internal
carriage or ocean navigation. The levy under the Principal Act having been
declared unlawful, an Act called the state Transport Co-ordination (Bar-
H ring of Claims and Remedies) Act, 1954 was passed barring and extinguish-
MAFATLALINDS. LTD. v. U.0.1. (SEN, J.) 789
ing the right of recovery of any sums collected or recovered under the A
Principal Act. It was made clear that the provisions of the Barring Act
·would apply to proceedings pending at the commencement of the Act as
well as proceedings brought after the commencement of the Act. The
validity of the Barring Act was challenged. It was pointed out by the
Jmikial Committee that if the Act was valid, it would be a complete answer
B
to the claim of the taxpayers. But the validity of the relevant provisions of
the Barring Act could be no greater or no less if they had been contained
in the Principal Act itself. It was held that neither prospectively nor
retrospectively can a State law make lawful that which the Constitution says
is unlawful. If the statute laid down that the charges in respect of inter-
State trade should be imposed and that, if they were illegally imposed and c
collected, they should nevertheless, be retained, such an enactment would
be illegal. The statutory immunity accorded to illegal acts is as offensive to
the Constitution as the illegal acts themselves.
The Judicial Committee posed the following question" ..... Then the D
question is whether the statutory immunity accorded to illegal acts is not
as offensive to the Constitution as the illegal acts themselves, and, applied
to the present circumstances, that question is whether, if the imposition of
charges in respect of inter-state trade is invalid as an offence against s.92, it
they
·is not equally an offence to deny the right to recover them after have been
unlawfully exacted." E
The Judicial Committee answered the question by saying that :
"It appears to their Lordships that to this question there can be
only one answer. It cannot be too strongly emphasise or too often p
repeated that, in the words of the High Court, the immunity given
by s.92 to trade, commerce and intercourse cannot be transient or
illusory. Yet, how fugitive would that protection be if effect where
given to the argument of the appellants in this case."
The Judicial Committee clearly recognised Section 92 of the G
Australian Constitution as a measure of protection to the respondents who
were the taxpayers. The judicial Committee emphasised, this protection
could not be allowed to be transient or illusory. We should also not allow
the protection to the tax- payers by Article 265 of our Constitution to be
transient and illusory. H
790 SUPREME COURT REPORTS[1996J SUPP. 10 S.C.R.
A The Judicial Committee went on to give an illustration which is also
useful for the purpose of this case. A trader desiring to engage in inter-
state trade and confronted with the provisions of an unlawful Act may
conform to its requirements and submit to the pecuniary exactions in order
that he may be able to carry on his business. He can test the legality of the
B exactions in a court of law and if he was right and these sums were
unlawfully exacted, he is entitled to the protection afforded by Section 92
of the Constitution. What is his situation if then he finds himself by a later
provision of the same Act or by a subsequent Act once more subjected to
the same exactions? The burden of his trade remains just what it was; the
freedom of his trade has been in the same degree impaired. In letter and
C spirit, Section 92 is in the same measure defeated.
An argument was advanced before the Judicial Committee that the
Barring Act did not impo~e any burden on trade but only barred the right
of property viz., the right to sue for money................... which accrued after
D the trading operations were over. the Judicial Committee rejected this
argument by observing that "........ an enactment whose only object is to
validate an exaction which the section renders unlawful would in their
Lordships' opinion be a mockery of the spirit of the Constitution".
In the case before us, a very similar situation has arisen. The levy and
E collection of excise duty has been found to be illegal. It has been levied
and collected in violation of the Central Excise Act and also the guarantee
contained in the Constitution. The levy is void. It has denied the taxpayer
the protection given by the Constitution. If illegally collected tax is not
immediately restored to the taxpayer, the guarantee given by the Constitu-
F tion will be a mockery. The constitutional guarantee is not hedged by any
clause. A trader may trade with his goods as he likes. The terms and
conditions under which he sells his goods is a matter between him and the
purchaser. He may raise his price high enough to include costs and taxes.
If he does so with the agreement of the buyer, he does not lose his right
to get back what had been collected from him illegally or the protection of
G Article 265 of the Constitution. That will be putting a rider on the Con-
stitution. The Court is n.ot permitted to write the Constitution but is duty
bound to enforce it.
The view of the Judicial Committee was that but for Section 92 of
H the Australian Constitution, the Barring Act might have been held to be
!
.MAFA1LALINDS.L1D.v. U.O.I.(SEN,J.) 791
valid. In the instant case also, the amended provisions of Section llB of A
the Central Excise Act might have been held to be valid but for Article 265
of the Indian Constitution. The right to get refund arose the moment an
illegal levy was imposed. As was pointed out in that case, the taxpayer had
no option but to pay this levy; otherwise he could not have carried on his
trade at all. The goods would not be cleared without payment of the illegal
B
demand made by the excise authority. This does not debar him from
..., pointing out that the collection of tax was illegal and claiming return of the
illegal levy.
The American Constitution does not contain anything similar to
Article 265 of our Constitution. The U.S. Supreme Court, therefore, had c
no difficulty in upholding the validity of Section 424 of Revenue Act of
t 1928 in the case of United States v. Jefferson Electric Manufacturing Com-
pany, .78 L.Ed. 859. Section 424 provided :
"Sec. 424 Refund of automobile accessories tax.
D
(a) No refund shall be made of any amount paid by or collecteg
from any manufacturer, producer, or importer in respect of the
tax imposed by subdivision (3) of S.600 of the Revenue Act of ·
1924........... unless either -
(1) pursuant to a judgment of a court in an action duly begun E
' prior to April 30, 1928 ; or
(2) It is established to the satisfaction of the Commissioner that
such amount was in excess of the amount properly payable upon
the sale or lease of an article subject to tax, or that such amount
was not collected, directly or indirectly, from the purchaser or F
lessee, or that such amount, although collected from the purchaser
or lessee, was returned to him: ......"
The Act came into force on 29th May, 1928. The section was chal-
... lenged on the ground that it was violative of the Fifth Amendment of the
G
American Constitution in that a taxpayer was being deprived of his proper-
,,. ty without due process of law and his private property was being taken
away for public use without just compensation. It was held :
"The contention is made that sub-division (a) (2), when construed
and applied as we hold it should be infringes the due process clause H
...1
'
792 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R..
A of the Fifth Amendment to the Constitution in that it strikes down
rights accrued theretofore and still subsisting, but not sued on prior
to April 30, 1928. This contention is pertinent, because the cases
now being considered were begun after April 30, 1928, and in each
the tax in question was paid before S.424 was enacted, which was
May 29, 1928.
B
If the tax was e"oneous and illegal, as is alleged, it must be
conceded tha~ under the system then in force, there accmed to the
taxpayer when he paid the tax a right to have it refunded without any
showing as to whether he bore the burden of the tax or shifted it to
c the purchasers. And it must be conceded also that S.424 applies to
rights accrued theretofore and still subsisting, but not sued on
prior to April 30, 1928, and subjects them to the restriction that
the taxpayer (a) mlist show that he alone has borne the burden of
the tax, or (b), if he has shifted the burden to the purchasers, must
give a bond promptly to use the refunded sum in reimbursing them.
D But it cannot be conceded that in imposing this restriction the
section strikes down prior rights, or does more than to require that
it be shown or made certain that the money when refunded will
go to the one who has borne the burden of the illegal tax, and
therefore is entitled in justice and good conscience to such relief.
E This plainly is but another way of providing that the money shall
go to the one who has been the actual sufferer and therefore is
the real party in interest.
We do not perceive in the restriction any infringement of due
process of law......."
F
What the U.S. Supreme Court held in that case was that the new
enactment did not infringe the due process of law and, therefore, could not
be struck down. The U.S. Supreme Court did not 'have to consider the
impugned section in the light of a provision similar to Article 265 of the
G Indian Constitution. But there were two important observations which have
to be borne in mind :
.(1) If the tax was erroneous and illegal, a right accrued to the
taxpayer when he paid the tax to have it refunded without
showing as to whether he bore the burden of tax or shifted it
H to the purchaser.
MAFATLAL INDS. LTD. v. U.0.1. [SEN, J.) 793
(2) Section 424 applied to rights accrued theretofore and still A
__:: subsisting but not sued on prior to April 30, 1928.
A question similar to the one dealt with by the American Supreme
Court also came up before the Supreme Court of Canada, in the case of
Air Canada v. British Columbia, (1989) 59 D.L.R. 4th 161. The principles
laid down in Air Canada case cannot be understood unless one bears in
B
~ mind the peculiar facts of the case which has been recorded in detail in
the judgment of La Forest, J.
The dispute was confined to the taxes paid by Air Canada in the 23
month period between August 1, 1974 and July 1, 1976. The tax was levied c
under the Gasoline Tax Act, 1948. The Act as it stood on August 1, 1974
provided that every purchaser shall pay a tax equal to 10 cents per gallon
on all gasoline purchased except gasoline purchased for use in an aircraft,
which was taxed at a lower rate. Section 2 defined "Purchaser" as under :
"Purchaser" means any person who within the Province purchases D
gasoline when sold for the first time after its manufacture in or
importation into the Province."
An identical provision in a cognate statute was struck down by the
Privy Council which led to retroactive amendment of the Gasoline Tax Act E
by inserting Section 25 which was as under :
"25(1) In this section "purchaser" means any person who, within
the Province, after August 1, 1974 and before July 8, 1976 pur-
chased or received delivery of gasoline for his own use or con-
sumption or for the use or consumption by other persons at his F
expense, or on behalf of, or as an agent for a principal who was
acquiring the gasoline for use or consu1Dption by the principal or
by other persons at his expense.
"" (2) Every purchaser shall pay to Her Majesty for the purpose
of raising revenue for Provincial purposes a tax of 15c a gallon on
G
all gasoline purchased by him after August 1, 1974 and before
February 28, 1975, but
(a) where gasoline was purchased for use in an aircraft the
.. tax shall be 8c a gallon, and H
794 SUPREME COURTREPORTS[1996] SUPP.10 S.C.R.
A (b) where gasoline in the form of liquefied petroleum gas or
natural gas was purchased to propel a motor vehicle the tax
shall be lOc a gallon.
{3) Every purchaser shall pay to Her Majesty for the purpose
of raising revenue for Provincial purposes a tax of 17c a gallon on
B all gasoline purchased by him after February 27, 1975 and before
July 8, 1976, but
(a) where gasoline was purchased for use in an aircraft the
tax shall be Sc a gallon, and
c (b) where gasoline in the form of liquefied petroleum gas or
natural gas was purchased to propel a motor vehicle the tax
shall be 12c a gallon.
(4) x x x x x x x
D
(5) Where after August 1, 1974 and before July 8, 1976, money
was collected or purported to have been collected as taxes, penal-
ties or interest under this Act, the money shall by this section be
conclusively deemed to have been confiscated by the government
without compensation."
E
These amendment were statutorily given retroactive character by
Section 62 (5) of the Finance Statutes Amendment Act, 1981. By this
change of definition of purchaser what was an indirect tax earlier was
converted . into a direct tax. The tax was on gasoline purchased by a
F purchaser for his own use or consumption or for consumption of other
persons at his expense or on behalf of or as an agent for the principal for
use or consumption by the principal or by other persons at his expense.
Although, it was provided by sub-section (5) that the amount which was
collected before the amendment of the Act between August 1, 1974 and
July 1, 1976 as tax shall be conclusively deemed to have been confiscated
G by the Government without compensation, according to La Forest, J., the
Section really does not mean what it says. A fund of money illegally
collected was lying with the Province. Having imposed the tax retroactively,
the Province merely was enabled to retain the amount in its hands by
adjusting it against the tax which has subsequently become payable by the
H amended provision. The tax retained and the tax payable were· identical
MAFATLALINDS. LTD. v. U.0.1. [SEN,J.] 795
amounts. This in sum and substance, was the judgment of La Forest, J. The A
rest of the observations of La Forest, J. in Air Canada case appears to be
obiter.
After referring to the amended Section, La Forest, J. said :
"11tat the tax is a direct tax I have no doubt. Since at least bank of B
Toronto v. Lambe, (1887), 12 App. Cas. 575, the generally accepted
test of what constitutes a direct tax has been that of John Stuart
Mill: A direct tax is one which is demanded from the very person
who it is intended or desired should pay it". That person is clearly
identified in the definition in the 1976 Act as the ultimate consumer C
of the gasoline; there is no passing on of the tax to others, whatever
may be the opportunities of recouping the amount of the tax by
other means (a. very different thing)."
Referring to the new Section 25 brought into existence by the 1981
Act, La Forest, J. identified the real issue of the case in the following D
words:
"None of the judges in the courts below casts any doubt on the
legislative power of the province to impose a retroactive tax in the
manner provided in s. 25(1) to (4). What they really disagreed
E
about was the effect of s.25(5) on those provisions. In common
with these judges. I am unable to see any constitutional impediment
to the province's enacting s.25(1) to (4). On the reasoning regard-
ing the 1976 Act, these provisions seem to be a proper exercise of
its power to impose direct taxation in the province, the sole
difference being that the 1981 provisions are given retroactive F
effect, a result that is not constitutionally barred. The real question,
then, is whether when s.25(1) to (4) are conjoined to s.25(5), they
become so coloured by the latter provision as to make all of s.25
ultra vires."
G
That question was answered by La Forest, J. in the following words:
"That, of course, raises the issue whether s.25(5) is itself ultra vires.
There are, in my view, some serious difficulties in establishing its
invalidity. It may be, if the provision stood alone, that it could be
successfully maintained that it violates the principle in the Amax H
796 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
A decision. I need not consider that situation because it does not
stand alone. It is the fifth of five subsections, the first four of which
impose a valid direct tax, and it must obviously be read in that
context. It must also be read in light of the well-known principle
that it must be assumed that the legislature intended to stay within .
the confines of its constitutional competence. While, as Esson, J.A.
B notes, the expression "confiscated" is distasteful, one should not
permit it to mislead us regarding the purpose of s.25(5). The
function of the courts is not to give the legislature lessons in tact.
Their function, rather is to attempt to discover what the legislature,
however, clumsily was attempting to achieve by the language it
c used, a task that should, as already noted, be informed by the
presumption that the legislature intended to stay within its con-
stitutional powers.
In the context in which it appears, s.25(5) seems to be nothing
more nor less than machinery for collecting the taxes properly
D imposed in the first four subsections of s.25. It must be remem-
bered that the amounts illegally collected under the ultra vires
provision before 1974 would be equal to the taxes levied under s.
25(1) to (4). A~stratively, the taxes levied under the invalid
scheme were collected in the same manner and in the same
E amounts and from the same taxpayers as would have occurred if
the scheme had originally been framed along the lines of s.25(1)
to (4). What the legislature attempted to do by s.25(5), therefore,
was to provide collection machinery whereby the moneys owing by
the taxpayers under the latter provision could simply be taken out
of the equal amounts it had collected from those taxpayers under
F
the invalid tax. It was in that sense that the moneys were deemed
to have been confiscated by the government."
Having reached this conclusion, La Forest, J. distinguished this case
with the principles laid down in Amax case in the following manner :
G
"In that case, the Legislature sought, by giving itself immunity, to
avoid repaying an unlawful tax. This was simply an indirect way of
giving effect to the invalid statute............... The situation is entirely
different here. The legislature did directly what it was empowered
H to do impose a direct tax under sub-sections (1) to (4). I see no
MAFATLALINDS. LTD. v. U.0.1. [SEN,J.] 797
reason why it could not then take that tax out of moneys it had A
improperly collected from the taxpayers under the ultra vires
statutes, just as it could have set it off against any other obligatioh
of the government to the taxpayers. The good fortune of the
legislature, in the unusual facts of this case, in having collected
amounts that matched precisely those owing by each taxpayer
B
under s.25(1) to (4) affords no reason to brand as unconstitutional
a tax that it can validly impose and collect."
This is the ratio of the decision of La Forest, J. An unconstitutional
levy brought about by an indirect tax was cured retroactively by a direct
levy. What was collected wrongfully under an indirect levy was retained by c
adjusting the unlawful collection against what turned out to be a valid
collection under the new law. Section 25(5) was clumsily worded in that it
had used the word "confiscated". Properly understood, according to La
Forest, J., it did not really confiscate the amount already paid but adjusted
that amount against the subsequent lawful demands made under the
retroactively amended provisions. D
Thereafter, La Forest, J. went on to discuss the points raised on
"mistake of law". La Forest, J. came to the conclusion after review of the
case law that "in my view, the distinction between mistake of fact and
mistake of law should play no part in the law of restitution. " But he was E
of the view that recovery of taxes imposed by a legislation subsequently
declared ultra vires could not be allowed "even if the airlines could show
that they bore the burden of the tax........................"
The view on ultra vires taxes as expressed by La Forest, J. is an
extreme proposition which may be acceptable in accordance with the F
Constitution laws of Canada, but it cannot be held valid under our system.
Wilson, J. who dissented in part held:
"It is, in my view, impossible to divorce s.25(1) to (4) from
s.25(5) of the Gasoline Tax Act, R.S.B.C. 1979, c.152. The only G
possible basis for the confiscation under s.25(5) is the imposition
of the retroactive tax under s.25(1) to ( 4). Certainly the payments
made under the ultra vires legislation could riot support such a
confiscation since the moneys were not as a constitutional matter
properly exigible under that legislation....." H
798 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R. ·
A Averting to "Mistake of Law'' Wilson, J. observed:
11
Whatever the nature of the mistake, the key question, my
•••••••
colleague suggests, should be whether the respondent has been
unjustly enriched at the appellants' expense or whether there is
some specific reason which makes restitution inappropriate in the
B circumstances. My colleague concludes that there was unjust en-
richment in this case but he finds two reasons why restitution is
inappropriate. The first is that the appellants in all likelihood
passed on the burden of the ultra vires tax. to their customers; the
unjust enrichment of the respondent was therefore not shown to
c be at the expense of the appellants. The second is that the general
rule of recovery shoul('as a matter of policy, be reversed where .
the person unjustly enriched is a governmental body......"
Wilson, J. went on to observe :
D "It is, however, my view that payments made under unconstitutional
legislation are not 'voluntary' in a sense which should prejudice
the taxpayer. The taxpayer, assuming the validity of the statute as
I believe it is entitled to do, considers itself obligated to pay.
Citizens are expected to be law abiding. They are expected to pay
their taxes. Pay first and object later is the general rule. The
E
payments are made pursuanc to a perceived obligation to pay which
results from the combined presumption of constitutional validity
of duly enacted legislation and the holding out of such validity by
the legislature. In such circumstances I consider it quite unrealistic
to expect the taxpayer to make its payments 'under protest'. Any
F taxpayer paying taxes exigible under a statute which it has no
reason to believe or suspect is other than valid should be viewed
as having paid pursuant.to the statutory obligation to do so."
Adverting to the argument that any refund to the taxpayer who has
G passed on the burden of tax to the ultimate consumer will result in an
unmerited "windfall" to him, Wilson, J. observed :
"My colleague advances another reason why the appellants should
be denied recovery in this case. he says, in effect, that the appel-
lants would be receiving a "windfall" if they received their money
H back because in all likelihood they have already recouped the
MAFATLAL INDS. LTD. v. U.O.I. [SEN, J.] 799
payments made on account of the ultra vires tax from their cus- A
tomers. In tenns of my colleague's analysis, the appellants are unable
to show that the unjust enrichment of the province was at their
expense. In my view there is no requirement that they be able to do
so. u-'here the payments were made pursuant to an unconstitutional
statute there is no legi.timate basis on which they can be retained. As B
Dickson, J. stated in Amax, supra, at p.10:
"To allow moneys collected under compulsion, pursuant to
an ultra vires statute, to be retained would be tantamount to
allowing the provincial Legislature to do indirectly what it
could not do directly, and by covert means to impose illegal C
burdens.
Indeed, even on my colleague's unjust enrichment analysis Dick-
son, J. found in Nepean, supra, that there were no equitable D
reasons of principle or policy to preclude recovery from Ontario
Hydro."
I shall deal with Sections UB, UD and 12A to 12D of Central Excise
Act as amended by the Act 40, 1991 later in this judgment in greater detail.
But it may be noted that now these provisions have made it practically
E
impossible for a taxpayer to get back what had been collected unlawfully
from him, whatever the wording of the statute may be. La Forest, J.
interpreted sub-section (5) of Section 25 of the Gasoline Tax Act and
construed that although the word "confiscation" was used, the provision was
not confiscatory but was really a provision for setting off of the new claims F
arising out of the retroactive statute against the moneys which were lying
in the hands of the Province even though unlawfully collected. In the
present case, although the term\confiscation" has not been used in Sections
llB, UD and 12A to 12D these provisions, in effect, have confiscated
without any compensation all ill.egally gathered taxes which came within
G
their ambit.
Air Canada case came up for further consideration in the case of
Allied Air Conditioning Inc. v. British Columbia, 76 B.C.L.R. 2( d) 218. Here
the question was whether a taxpayer could recover the moneys which were
collected as tax, but were not properly payable. The plaintiff had paid H
800 SUPREME COURTREPORTS[1996] SUPP.10 S.C.R.
A Social Service Tax to the Province of British Columbia totalling to $
500,000. In the judgment of Oliver, J, it was stated that the required
elements at the heart of the law of restitution was (1) an enrichment of the
defendant, (2) a corresponding deprivation of the plaintiff and· (3) an
absence of any juristic reason for the enrichment.
B Oliver, J. stated that the distinction between recovery of money paid
under mistake of fact and money paid under mistake of law had now been
swept away by the decision in Air Canada Case. On the day on which the
judgment in he case of Air Canada was pronounced, a second judgment
was delivered in the case of Air Canada v. British Columbia ("C.P. Air")
C 1989, 36 B.C.L.R. (2d) 185. There the dispute related to social Service
Tax, wrongly paid on (a) aircraft parts and equipment and (b) alcoholic
beverages sold to passengers on the flight. The Supreme Court held that
C.P.A. could recover the Social Service Tax paid on purchasers of equip-
ment and parts, but the tax paid on alcoholic beverages soldto passengers
D was imposed on the passengers who consumed the liquor and therefore,
the C.P.A. was not entitled to recover the same. Oliver, J. observed that "it
can be agreed that both taxes were passed on to customers by Air Canada
in the price of airline tickets." La Forest, J. in the C.P.A. case held that
Social Service Tax paid by the airlines was not properly payable on either
aircraft parts or on alcoholic beverages. Having found that the tax was
E inapplicable, La Forest, J. concluded "there seems no reason to refuse Air
Canada the recovery it seeks. There is nothing to indicate it ever aban-
doned this claim." The claim for recovery of the tax paid on alcoholic
beverages was rejected on the ground that "the tax was imposed on the
passengers, not Air Canada. Air Canada was simply an agent to collect it
F under the Act, and, in fact, obtained a fee for doing so. I am unable to see
how it could identify the passengers who consumed the liquor, so its
repayment to Air Canada would simply amount to windfall to the airline."
The contention of the plaintiffs in Allied Air Conditioning Inc. Case
·before Oliver, J. was that the observations of La Forest, J. that "a passing-
G on defence is available to the taxing authority whenever the taxpayer can
be shown to have passed on the tax burden, regardless of whether it was
passed on "specifically and directly" or generally in the price charged to
customers" was obiter. The true reasoning of the Supreme Court with
respect to the passing-on defence can be gleaned from its decision in C.P.
H Air in which it allowed a passing-on defence where the tax was "directly
MAFATLALINDS. LTD. v. U.0.1. [SEN,J.] 801
and specifically" passed on to customers but not where the tax was merely A
included generally in the price of airline tickets.
In the end, after noting that the comment of La Forest, J. at page
179 that "this alone is sufficient to deny the airlines' claim, Oliver, J. stated
that rest of the decision of the La Forest, J. was obiter. Oliver, J., however,
disposed of the case before him by observing : B
"In the present case the invoices given by the plaintiffs to their
customers for lump sum contracts did not set out any amounts
charged for materials, labour or taxes; simply the lump sum itself
was sho~. The evidence discloses that many factors, including the
competitive environment and the plaintiffs profit margin goals,
c
influence the amount of the lump sum.
In my opinion, it cannot be said in such a case that the tax is
passed directly and specifically to customers so that they become
the true taxpayers. While it is difficult to make specific com- D
parisons, the situation in the present case more closely resembles
the tax paid on aircraft parts and equipment in C.P. Air than the
tax paid on alcoholic drinks in that case.
I find that in all the circumstances no passing- on defence is
available and that the plaintiffs are entitled to restitution of the E
amounts they are claiming as wrongly paid taxes, subject to any
applicable limitation period.''
In the case of Woolwich building Society v. Inland Revenue Commis-
sioners (No. 2), (1992) 3 All E.R. 737 at 763. Lord Goff cited with approval
the dissenting view expressed by the Wilson, J. in Air Canada Case (supra) F
after quoting from the judgment and noting the fact that :
"She also rejected the proposed defence of 'passing on' (at 160-
170). Accordingly in her opinion the taxpayer should be entitled
to succeed.
G
I cannot deny that I find the reasoning of Wilson, J. most
attractive. Moreover, I agree with her that, if there is t:i be a right
to recovery in respect of taxes exacted unlawfully by the Revenue,
it is irrelevant to consider whether th~ old rule barring recovery
of money paid. under mistake of law should be abolished, for that H
802 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
rule can have no application where the remedy arises not from
error o.n the part of the taxpayer, but from the unlawful nature of
the demand by the Revenue. Furthermore, like Wilson, J, I very
respectfully doubt the advisability of imposing special limits on
recovery in the case of 'unconstitutional or ultra vires levies'."
.B In the concluding part of the judgment, Lord Goff recognised the
difficulties involved in the doctrine of 'passing on'. Lord Goff pointed
out that the question need not be finally decided in that case. It was
observed;
c "It will be a matter for consideration whether the fact that the
plaintiff has passed on the tax or levy so that the burden has fallen
on another should provide a defence to his claim. Although this is
contemplated by the Court of justice of the European Communities
in the San Giorgio case, it is evident from Air Canada v. British
Columbia that the point is not without its difficulties; and the
D availability of such a defence may depend on the nature of the tax
or other levy....."
In the case of Commissioner of State Revenue v. Royal Insurance
Australia Ltd. 182 C.L.R. 51, the question before the Australian High Court
E was whether a taxpayer is entitled to recover overpayment of stamp duty.
It was held that there was no obligation to refund the overpayment because
sub-section (1) of Section 111 of the Stamps Act conferred discretionary
power on the Commissioner to refund the money but did not create any
duty to do so. Therefore, the finding that there was an overpayment did
not give rise to any enforceable obligation to make refund. One of the
F points that came up for consideration was disruption of public finance as
a consequence of restitution. Mason, C.J. did not uphold this contention.
He observed that :
"That proposition was accepted by La Forest, J. in Air Canada v.
British Columbia but it was repudiated by Wilson, J. in her dis-
G senting judgment for reasons which, to my mind, are compelling...."
Mason, C.J. went on to observe that the argument that the plaintiff
will. receive a windfall or will unjustly enrich if recovery from public
authority is permitted, cannot be accepted straightaway. He further ob-
H served:
MAFATLALINDS. LTD. v. U.0.1. [SEN,J.] 803
11
...... In the context of the law of restitution, this economic view A
encounters major difficulties. The first is that to deny recovery
when the plaintiff shifts the burden of the imposition of the tax or
charge to third parties will often leave a plaintiff who suffers loss
or damage without a remedy. That consequence suggests that, if
the economic argument is to be converted into a legal proposition,
B
the proposition must be that the plaintiffs recovery should be
limited to compensation for loss or damage sustained. The third
is that an inquiry into and a determination of the loss or damage
sustained by a plaintiff who passes on a tax or charge is a very
complex undertaking. And, finally, it has long been thought that,
despite Lord Mansfield's statement in Moses v. Macferlan, the basis c
of restitutionary relief is not compensation for loss or damage
sustained but restoration to the plaintiff of what has been taken or
received from the plaintiff without justification.
After a review of the large number of cases cited, Mason, C.J.
D
concluded:
"The United States and European decisions demonstrate that any
acceptance of the defence of passing on is fraught with both
practical and theoretical difficulties. Indeed, the difficulties are so
great that, in my view, the defence should not succeed unless it is E
established that the defendant's enrichment is not at the expense
of the plaintiff but at the expense of scme other person or persons."
Brennan, J. who agreed with Mason, C.J. that the appeal should be
dismissed, held that :
F
"The fact that Royal had passed on to its policy holders the burden
of the payments made to the Commissioner does not mean that
Royal did not pay its own money to the Commissioner. The passing
on of the burden of the payments made does not affect the situation
that, as between the Com~issioner and Royal, the former was G
enriched at the expense of the latter."
In the concurrent judgment Of Dawson, J., there are certain obser-
vations to which I shall refer later on in this judgment.
All these cases go to show the complexity of the problem of doctrine H
804 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A of "passing on". The U.S. view appears to be that but for the law passed in
1924, illegally collected tax had to be refunded even if it was passed on to
the consumers. The majority view of the Canadian Supreme Court was to
the contrary. However, the dissenting judgment of Wilson, J. was found
preferable by Mason, C.J. in Australia as well as by Lord Goff who spoke
B for the House of Lords in England. But the English decision as well as the
Australian decisions were founded on common law and Bill of Rights.
In none of these countries any constitutional provision akin to Article
265 fell for consideration. The debate whether a taxpayer is entitled to get
refund when the levy is found illegal is concluded by Article 265 of the
C Constitution in our country. The protection afforded to the taxpayer is total
and complete. It cannot be taken away under any circumstances or by any
legislative action. The Constitution being sacrosanct and overriding, in my
view, any tax collected unlawfully, must be returned to the taxpayer.
Whether the taxpayer has passed on the burden of the tax to the consumers
D or not is a matter of no consequence.
The constitutional embargo is on both the levy and collection of tax
without authority of law. It has been repeatedly asserted by the Courts that
every taxing law has three parts. First is charge, the second is computation
which results in a demand of tax and the third is recovery of the tax so
E computed. The Constitution has enjoined that there must be a valid levy.
The word 'levy' has also been understood in a broad sense in various cases
to include not only the imposition of the charge but also the whole process
upto raising of the demand. The Constitution guarantees that not only the
levy should be lawful but also collection of tax must also be done with the
F authority of law. The State is not permitted to exact any tax from a citizen
without the authority of law and without following the procedure laid down
by law. This guarantee has to be strictly enforced not only in the matter of
levy but also in the matter of collection. It was pointed out by this Court
in the case of ¥unicipal Council, Khurai and Another v. Kamal Kumar &
Anr. Others, [1965] 2 SCR 653 that Article 265 of the Constitution clearly
G implies that the procedure to impose a liability upon the taxpayer has to
be strictly complied with. Where it is not complied with, the liability to pay
a tax cannot be said to be according to law. In that case, a validly passed
municipal law was sought to be enforced, but the objections of the rate-
payer were not dealt with by the Municipal Council as a whole but by a
H sub-committee. The Court held that this was erroneous. The phrase 'levy
MAFATLAL INDS. LTD. v. U.O.I. [SEN, J.] 805
and collection' indicates that all the steps in making a man liable to pay a A
tax and exaction of tax from him must be in accordance with law. There
must be a valid statute which will be properly followed. All steps must be
taken according to statutory provisions. Recovery of tax must also be
according to law. No one can be subjected to levy or tax or deprived of
his money by the State without authority of law.
B
Article 39 of the Constitution has directed the State to formulate its
policy towards securing that the ownership and control of the material
resources of the comm.unity are so distributed as best to subserve the
common good and that the operation of the economic system does not
result in the concentration of wealth and means of production to the c
common detriment. These provisions do not in any way curtail the scope
and effect of Article 265. Section 39 does not enjoin that unlawfully
collected properties should be used by the State for the common good. Nor
does it say that the operation of the economic system should be so moulded
as to prevent concentration of wealth, by unlawful means. Article 39 cannot
be a basis for retaining whatever has been gathered unlawfully by the D
Government for common good. Simply stated the Directive Principles of
State Policy do not license the Government to rob Peter to pay Paul,
It has been repeatedly asserted by the Supreme Court of the United
States that it is the duty of the Courts to be watchful for the constitutional E
rights of the citizens and against any stealthy encroachments thereon. (See
Boyd v. United States, 116 US 616 (1886). Actually, that should be the main
function of the Court. Otherwise, independence of the judiciary will be-
come meaningless.
"Independen~ tribunals of justice ........ will be naturally led to resist F
every encroachment upon· rights expressly stipulated for in the
Constitution by the declaration of rights."
Madison, I Annals of Cong. 439 (1789).
Repeatedly, in various contexts, it has been emphasised that constitu- G
tional rights of citizens should not be watered down however desirable the
end result of a particular case may be. The Constitution is to last for ever.
If for one particular case, out of its perceieved notion of expediency, the
Court cuts down the scope and effect of a constitutional provision, the
Court will be failing in its bounden duty to uphold the Constitution. The H
806 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A Court should not be guided by any policy of expedition but only by the
dictates of what has been laid by the Constitution and what the American
Courts refer to as "Imperative of Judicial Integrity." It is the imperative of
judicial integrity that Article 265 is upheld as it is. If it is allowed to be
destroyed in this case, there is no reason why other Articles of the Con-
B . stitution should not slowly and steadily be whittled away to take away all
the other guarantees given to the citizens by the Constitution. This case,
then, would be a dangerous precedent for demolition of the Constitution,
article by article.
Apart from that, the Government cannot be allowed to say that it has
C broken the law but it will retain the fruits thereof. As was observed by Mr.
Justice Brandeis in Olmstead v. United States, 277. US 438 (1928) :
"Our Government is the potent, the omnipresent teacher. For good
or for ill, it teaches the whole people by its example...... .If the
Government becomes a lawbreaker, it breeds contempt for law; it
D invites every man to become a law unto himself; it invites anarchy."
In the case of Mapp v. Ohio, 367 US 643 (1961), Mr. Justice Claks
delivering the opinion of the Court in a case where the State tried to use in
evidence he materials gathered as a result of unlawful search, on the ground
E that it was very desirable to do so in the facts of that case observed :
"Our decision, founded on reason and truth, gives to the individual
no more than that which the Constitution guarantees him, to the
police officer no less than that to which honest law enforcement
is entitled, and, to the courts, that judicial integrity so necessary
F in true administration of justice."
In may view, the scope and effect of Article 265 cannot be whittled
down in any manner in order to enable the Government to retain unlawfully
gathered tax on the pretext that a refund will unduly enrich the taxpayers.
G Whatever the consequence may be, the provisions of the Constitution must
be upheld as they stand.
In my judgment, Article 265 does not permit the State to levy or
collect any tax without the authority of law. This is a protection afforded
to the citizens by the Constitution from State oppression in financial
H matters. This protection given to the citizens must be jealously guarded by
MAFATLALINDS. LTD. v. U.O.I. [SEN,J.] 807
the Courts. If any tax has been gathered unlawfully by the State, It cannot A
be retained by the State. If any law has been passed for retention of the
illegal levy, it must be struck down in the same manner as the Judicial
Committee struck down the Barring Act in the case of Commissioner for
Motor Transport v. Antill Ranger & Co. Pty, Ltd., (supra).
WHO IS THE TAX-PAYER UNDER THE CENTRAL EXCISE ACT? B
The taxable event for payment of central excise is manufacture of·
excisable goods. The Central Excise Act has a long history and the courts
have never been in doubt that the excise duty under the various Excise Acts
was payable by the manufacturer and if there was any excess payment, the c
refund of the excess amount of tax must be made to the manufacturer who
had actually paid the duty'. In this connection, it has to be borne in mind
that the Central Excise and Salt Act. 1944 is a consolidating Act. In the
statement of objects and reasons it is stated :
"The administration of internal commodity taxation in British India D
has grown up piecemeal over many years and has been consider-
ably expanded during the last decade. Hitherto, the introduction
of a new central duty of excise has required the enactment of a
_)
self-contained law and the preparation of a separate set of
statutory rules. There are now no less than 10 separate excise Acts E
(the excise on kerosene being covered by a part of the Indian
Finance Act, 1922) and 11 sets of statutory rules; and there are
also 5 Acts relating to salt, the duty on which is by a wide margin
the oldest of our taxes on indigenous commodities. The taxes being
closely akin to one another, the methods of collection follow the
name general pattern and many of the provisions of the various F
Acts are identical or closely similar; and this is the case also with
many of the statutory rules. The anglomeration of statute and
regulations dealing with similar matters is neither convenient for
the public nor conducive to well-organised administration.
G
3. The intention of the Bill is to reproduce provisions already
existing in the Acts which it is proposed to appeal but in the
process certain small amendments have been made, either in
mode~ing the language <;>r for dovetailing the provisions and H
808 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A otherwise adapting them to present circumstances. These amend-
ments are the minimum consistent with each blending and adap-
tation."
Section 39 of the Act, when it was passed in 1944, stood as under :
B "39. The enactments specified in the Third Schedule are hereby
repealed to the extent mentioned in the fourth column thereof. But
all rules made, notifications published, licences, passes or permits
granted, powers conferred and other things done under any such
enactment and now in force shall, so far as they are not inconsistent
c with this Act, be deemed to have been respectively made, publish-
ed, granted, conferred or done under this Act."
The Third Schedule contained as many as 17 Acts which were entirely
repealed. The Acts were inter alia, The Motor Spirit (Duties) Act, 1970.
The Silver (Excise Duty) Act. 1930. The Sugar (Excise Duty) Act, 1934,
D the Matches (Excise Duty) Act, 1934. The Iron and Steel Duties Act, 1934.
The Tyres (Excise Duty) Act, 1941, The Tobacco (Excise Duty) Act, 1943
and the Vegetable Product (Excise Duty) Act, 1943 and Mechanical
Lighters (Excise Duty) Order, 1934.
E In all these Acts the Central Government were empowered to make
rule for assessment and collection of duty, issue of notice requiring pay-
ment, the manner in which the duties shall be payable and the recovery of
duty not paid. The rules also provided for appeals in case the tax-payer
was aggrieved by any order.
F Elaborate provisions were made for payment of excise duty on
various products, the manner in which the duty was to be paid, imposition
of penalty in case of evasion of duty and also the remedies to a tax-payer
including refund of any excess amount of duty paid. If an assessee suc-
ceeded in appeal, the appellate authority was competent to give suitable
G direction to grant relief to the assessee. For example, under the Sugar
(Excise Duty) Order, 1934 duty was imposed on certain varieties of sugar.
Provisions was made for filing of monthly returns (Rule 5). The Collector
was empowered to make assessment and also summary assessment (Rule
6). Provisions for refunds and remissions of duty were made (Rule 9). Any
H dispute could be determined by a suitably empowered officer (Rule 11)
1
MAFAlLAL INDS. LTD. v. U.0.1. [SEN, J.) 809
and appeal also lay to such authority as the Local Government might direct A
(Rule 12). Any order of the Collector or such authority could be revised
by the Local Government or such higher authority as the Local Govern-
ment might direct. A time limit for filing of appeals was provided in
Rule 13. Rule 16 entitled the Collector to recover duty which had been
short levied through inadvertence, erro"i: or misconstruction of ~he law B
by the Collector, or through misstatement as to quai:it~y.on the part of
the owner of a factory, or even when erroneously refunds had been
made. Rule 17 provided, "No duty which has been paid and of which
repayment wholly or in part is claimed in consequence of the same
having been paid through inadvertence, error or misconstruction shall C
be returned unless such claim is made within three months from the date
of such payment". Likewise, in the Mechanical Lighters (Excise Duty) Order,
1934 a duty of excise was imposed on manufacture of mechanical lighters.
Such manufacturer was required to take a. licence from the Collector
(Rule 4). The manufacture could only take place in terms of the licence.
Every holder of licence had to keep a correct daily account (Rule 7).
D
Within five days after the close of such month, every holder of a licence
had to submit to the Collector a monthly return showing the number of
mechanical lighters removed from the manufactory during that month
(Rule 8). On receipt of the return, the Collector would make an assess-
ment. The Collector was empowered to make a summary assessment E
(Rule 9). Provisions for refunds and remissions were contained in Chapter
IV. Chapter V dealt with miscellaneous provisions including provision for
preferring an appeal, firstly to the Local Government or to such higher
authority as the Local Government might direct. Appeal could also be
made to the Central Board of Revenue and any order could be revised F
by the Governor General in Council (Rule 22). Rule 23 imposed a time
limit of three months for preferring an appeal. Rule 26 dealt with short
. levy through inadvertence, error or misconstruction on the part of the
Collector, or through mis-statement as to the quantity on the part of the
owner of the manufactory. Recovery could also be made when erroneous G
refunds had been made. Such claims of refund had to. 'be, made within
three months from the date of such payment. Some provisions were made
' in the other Orders or statutes by directly providing for payment of tax,
appeals and refunds or by incorporating provisions of other Acts like Sea
Customs Act. What is important to remember is that it was never in doubt H
810 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A that it was the manufacturer who was liable to pay tax and also entitled to
get refund of any tax paid to the State through "inadvertence, error or
misconstruction."
This scheme was continued in the consolidating Act of 1944. As was
B stated in the object clause of the Act the Act sought to consolidate the
existing legislations and did not seek to bring about any fundamental
changes in the legislation. In fact even under the Central Excise and Salt
Act, 1944 after the levy of duty if the tax-payer felt aggrieved he could go
up on appeal and claim that the levy was.excessive or unlawful and if he
succeeded, he got refund of the excess amount paid. This is how the Act
C was understood and interpreted.
Now it is being argued that if excess amount of duty has been realised
the tax-payer should not get back the excess payment because it is morally
wrong. The burden of tax has been passed on to the consumers who are
I
the real tax-payers.
D
This argument cannot be upheld for three reasons :
(1) When a statute of this nature, which is a consolidating Act,
is passed, the Court should not presume that the Legislature
was unaware of the scheme of the earlier statutes and how
E the law was understood and administered. The Legislature
avowedly did not bring about any fundamental change in the
structure of these existing laws in passing the consolidation
Act. Tax was to be paid on manufacture of the excisable
goods. There were provisions for assessment and computation
F of tax. Provisions were also made for appeals, recovery of tax
in cases of short levy and refund of tax in cases of excess
realisation. The duty of the Court is not to legislate but to
find out the intention of the Legislature. The legislative intent
was to consolidate and continue the laws that were existing
in one comprehensive statute and even when the new statute
G was in force the Legislature did not think fit to stop refund
of a wrong levy of tax to the manufacturer and thereby confer
a right to the consumers to get refund before the amendment
made in 1991.
H Before that the Central Excise Act did not recognise any right of the
MAFATLALINDS. LTD. v. U.0.1. [SEN,J.] 811
consumer of excisable goods to get a refund of duty. A
(2) Refund of tax whether under Income Tax Act, Wealth Tax
Act, gift Tax Act, Estate Duty Act, Sales Tax Act, Customs
Act or the Central Excise Act has to be given under the
statutory provisions contained in the Act. Refund in a taxing
statute is to be made not on the ground of compensation for B
loss or damage sustained by a tax-payer but on the p1inciple of
restoration to the (ax-payer of what had been collected from
him withou_t justification of law. This was highlighted by
Mason, CJ. in theAustralian Case (supra). It is not without
significance that in all the tax laws, the word 'refund' has been c
preferred to 'restitution' or 'compensation'. The dictionary
meaning of 'refund' is "to give or pay back money etc.",
Webster Comprehensive Dictionary, International Edition
1984. When a taxing statute provides for refund, it is not to
be understood as a section providing for compensation for
loss or damage. Refund of tax means returning to the assessee D
what had been taken or received from him unlawfully.
(3) Under the Central Excise Act, there is only one tax which is
levied by Section 3 and tbe tax-payer is the person who pays
the charge levied by Section 3. The taxable event under the E
charging section is manufacture. This is the duty which a
manufacturer has to pay before he can remove the manufac-
tured goods from his factory. What the buyer of the goods
pays to the manufacturer is the price of the goods. No duty
is levied by the Central Excise Act upon the buyer. What the
buyer pays to the manufacturer is not under any charge F
imposed by any statute. What he pays is the price of the
goods. The price is a matter of contract between the buyer
and the seller. Whatever the buyer pays and the seller gets is
the price of the goods, even though the tax element is included
in the price. I shall refer to the decided cases later in the G
judgment.
Section 3, which is the charging Section, reads :
"3. Duties specified in the Schedule to the Central Excise Tmiff Act,
1985 to be levied. H
812 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
A (1) There shall be levied and collected in such manner as may
be prescribed duties of excise on all excisable goods which are
produced or manufactured in India as and at the rates, set forth
in the Schedule to the Central Excise Tariff Act, 1985.
PROVIDED that the duties of excise which shall be levied and
B collected on any excisable goods which are produced or manufac-
tured, -
(i) in a free trade zone and brought to any other place in India;
or
c (ii) by a hundred per cent export-oriented undertaking and al-
lowed to be sold in India,
shall be an amount equal to the aggregate of the duties of customs
which would be leviable under section 12 of the Customs Act, 1962
(52 of 1962), on like goods produced or manufactured outside
D
India if imported into India, and where the said duties of customs
are chargeable by reference' to their value, the value of such
excisable goods shall, notwithstanding anything contained in any
other provision of this Act, be determined in accordance with the
provisions of the Customs Act, 1962 and the Customs Tariff Act,
E 1975 (51 of 1975).
·-
Explanation I : Where in respect of any such like goods, any
duty of customs leviable under the said section 12 is leviable at
different rates, then, such duty shall, for the purposes of this
proviso, be deemed to be leviable under the said section 12 at the
F highest of those rates.
Explanation 2 : In this proviso, -
(i) "free trade zone" means the Kandla Free Trade Zone and the
Santa Cruz Electronics Export Processing Zone and includes
G
any other free trade zone which the Central Government may,
by notification in the Official Gazette, specify in this behalf;
(ii) "hundred per cent export-oriented undertaking" means an
1
undertaking which has been approved as a hundred per cent
H export-oriented undertaking by the Board appointed in this
MAFATLAL INDS. LTD. v. U.O.I. [SEN, J.) 813
behalf by the Central Government in exercise of the powers A
conferred by section 14 of the Industries (Development and
Regulation) Act, 1951 (65of1951), and the rules made under
that Act.
(1A) The provisions of sub-section (1) shall apply in respect of
all excisable goods other than salt which are produced or manufac- B
tured in India by, or on behalf of, Government, as they apply in
respect of goods which are not produced or manufactured by
Government.
(2) The Central Government may, by notification in the official C
gazette, fix, for the purpose of levying the said duties, tariff values
of any articles enumerated, either specifically or under general
headings, in the Schedule to the Central Excise Tariff Act, 1985
(5 of 1986) as chargeable with duty ad valorem and may alter any
tariff values for the time being in force.
D
(3) Different tariff values may be fixed --
(a) for different classes or descriptions of the same excisable
goods; or .
(b) for excisable goods of the same class or description -- E
(i) produced or manufactured by different classes of
producers or manufacturers; or
(ii) sold to different classes of buyers :
F
PROVIDED that in fixing different tariff values in respect of
excisable goods falling under sub-clause (i) or sub- clause (ii),
regard shall be had to the sale prices charged by the different
classes of producers or manufacturers or, as the case may be, the
normal practice of the wholesale trade in such goods."
G
Actually there has been a very little change in the charging section
since 1944, except that since 1985 excise duty has to be paid at the rates
set forth in the "Schedule to the Central Excise Tariff Act, 1985". Before
this amendment with effect from 28.2.1986, the levy was at the rates set
forth in the First Schedule of the Central Excise Act. Since 1944 the taxable H
814 SUPREME COURTREPORTS[1996] SUPP.10 S.C.R.
A event continues to be production and manufacture or excisable goods. The
moment any excisable goods are produced or manufactured, levy of
excise duty is attracted. The time and manner of payment of duty have
been fixed by Rule 9 of the Central Excise Rules :
"RULE 9. time and manner of payment of duty. - {1) No
B excisable goods shall be removed from any place where they are
produced, cured or manufactured or any premises appurtenant
thereto, which may be specified by the Collector in this behalf,
whether for consumption, export or manufacture of any other
commodity in or outside such place, until the excise duty leviable
c thereon has been paid at such place and in such manner as is
prescribed in these Rules or as the Collector may require and
except on presentation of an application in the proper form and
on obtaining the permission of the proper officer on the form:
Provided that such goods may be deposited without payment
D of duty in a store-room or other place of storage approved by
the Collector under Rule 27 or Rule 47 or in a warehouse
appointed or registered under Rule 140 or may be exported
under bond as provided in Rule 13:
E Provided further that such goods may be removed without
payment or on part payment of duty leviable thereon if the
Central Government, by notification in the Official Gazette,
.allow the goods to be so removed under Rule 49:"
Rule 9A inter alia lays down that the rate of duty and tariff valuation
F shall be the rate and valuation in force in the case of goods removed from
a factory or a warehouse on the date of the actual removal of such goods
from such factory or warehouse. Even if any excisable goods are lost after
manufacture, the duty will have to be paid. Clause (iii) of sub rule (4) of
Rule 9A provides :
G
"Rule 9A(4). The rate and valuation, if any, applicable to cases of
losses of goods shall -
(i) ............................................................................................................. .
H (ii) ............................................................................................................ .
MAFATLALINDS. LTD. v. U.O.L [SEN,J.] 815
(iii) where the loss occurs in storage, whether in a factory or in a A
warehouse, be the rate and valuation, if any, in force on the
date on which such loss is discovered by the proper officer
or made known to him."
These provisions have undergone minor alterations from time to time B
but there is not the slightest doubt that the levy of excise duty is on
manufacture of goods. The taxable event is the manufacture. The duty will
have to be paid regardless of the destination of the goods. Even if the goods
are lost before clearance, duty will have to be paid, whether the manufac-
turer after removal of the goods, is able to sell the goods or not is a matter
of no consequence. Once the taxable event has happened the duty has to C
be paid. There is no escape from it. This is a strict liability foisted on
manufacture by Section 3. But nothing in excess of this strict liability can be
collected by the Excise Officers. If something is levied or collected which is
beyond the charging section, then that has to be paid back to the tax-payer.
Whatever tax has been levied or collected in violation of law has to be D,
restored to the person from whom such illegal levy has been extracted.
Otherwise the guarantee under Article 265 becomes meaningless.
The argument that the real tax-payer is the person who buys. the
goods from the manufacturer or the ultimate consumer because duty is
included in the price, forms a component of the price and is thereby passed E
on to the consumer, does not bear scrutiny. Excise duty is payable because
of the charge levied by Section 3. Whether the manufacturer is able to sell
his goods or not, excise duty will have to be paid. If a man is able to pass
on the burden or not is something with which the Excise Act is not
concerned. If as a result of high excise tariff the price becomes too high F
and the goods become unsaleable, the manufacturer may go out of business
but will not be absolved from payment of duty. Hardships suffered by the
manufactures may be redressed by the Government for which power has
been retained in the Central Excise Act (Section 5A). But a manufacturer
cannot decline to pay excise duty on the ground of inability to sell his
products and failure to pass on the burden of the duty. G
If the Central Excise Officer discovers that the duty of excise has not
been levied or paid or has been short levied or short paid, he has a right
to recover the duty from the manufacturer (Section llA). The short levy
may have been due to an oversight or mistake committed by the Excise H
816 SUPREMECOURTREPORTS(1996] SUPP. lOS.C.R.
A Officer. It may be that the goods manufactured have already been sold off
and it will not be possible for the manufacturer to recover the amount of
duty from his customers. That is a post-duty situation with which the
Excise Act is not concerned. The Central Excise Act is only concerned
about collection of the duty levied by Section 3 on the manufacture of
B goods. In the scheme of the Act, the consumer who purchases the goods
from the manufacturer and pays cum-duty price does not pay any tax either
directly or through the manufacturer. If a manufacturing company goes
into liquidation after selling off all its products, the Excise Officer can in
no way realise any short levy or under levy from the consumer. A tax is a
compulsory levy imposed by the statute which is something quite different
C from purchase-price. If a person having paid the tax increases the price of
the goods, what the purchaser pays the tax-payer is not the tax but the price
of the goods. The price usually comprises of costs, taxes and profits. But
there is only one tax and one tax-payer who pays the tax. If there is short
levy or under levy of excise duty due to any reason, the ·excise authority has
D no right to chase the consumers for tlie arrears of tax. In no sense of the
term the consumer can be treated as the tax-payer under the Central Excise
Act. Moreover, if the consumer is a businessman, the cum-duty price will
be deductible from his income under the Income Tax Act.
The charge of duty under the Central Excise act is imposed by
E Section 3. It has to be computed in the manner laid down in the rules and
paid also in the way rule provides. The charge of tax is to be recovered
from every person "who produces, cures or manufactures any excisable
goods" (Rule 7). It may also be recovered from person who stores such
goods in a warehouse. It further provides that the duty shall be payable "at
p such time and place and to such person as may be designated". Rule 7
really supplements the· charging section and specifies the person who has
to pay excise duty and to whom, where and within which time the duty is
to be paid. Rule 9, which has been set out earlier in the judgment, places
a bar on removal of goods from the place of manufacture "until the excise
duty leviable thereon has been paid at such place and in such manner as
G is prescribed in these rules or as the Collector may require". Under the
scheme of the Excise Act and the rules, these are the only provisions by
which excise duty is made payable. The charge is declared in Section 3.
The liability to pay duty is cast on any person who produces, cures or
manufactures any excisable goods or stores such goods in a warehouse
H (Rule 7). Time and manner of payment of duty is laid down by Rule 9.
MAFATLALINDS. LTD. v. U.O.I. [SEN,J.] 817
Date for determination of duty and tariff valuation is provided by Rule 9A A
and Rule 9B provides for provisional assessment to duty. It is provided that
when the duty leviable on the goods is assessed finally, the duty provisional-
ly assessed has to be adjusted against the duty finally assessed and if the
duty provisionally assessed falls short of, or is in excess of, the duty finally
assessed, the assessee has to pay the deficiency or be entitled to refund, as
B
the case may be. Provisions were also made for recovery of duties not
levied or not paid, or short-levied or not paid in full or erroneously
refunded (Rule 10). Rule lOA provided residuary powers for recovery of
duties for which any specific provision had not been made in the Act or
the Rules. Rule lOB dealt with claim for refund of duties.
c
Rules lOA and lOB were as under :
"JOA. Residuary Powers for Recove1y of Sums Due to Govemment.
- (1) Where these rules do not make any specific provision for the
collection of any duty, or of any deficiency in duty if the duty has
for any reason been short levied, or of any other sum of any kind D
payable to the Central Government under the Act or these rules,
the proper officer may serve a notice on the person from whom
such duty, deficiency in duty or sum is recoverable requiring him
to show cause to the Assistant Collector of Central Excise why he
should not pay the amount specified in the notice.
E
(2) The Assistant Collector of Central Excise, after considering
the representation, if any, made by the person on whom notice is
served under sub-rule (1), shall determine the amount of duty,
deficiency in duty or sum due from such person (not being in excess
of the amount specified in the notice) and thereupon such person
F
shall pay the amount so determined within ten days from the date
on which he is required to pay such amount or within such
extended period as the Asst. Collector of Centrai Excise may, in
any particular case, allow.
JOB. Claim for refund of duty. - Any person claiming refund of G
- any duty paid by him may, make an application, for refund of such
duty to the Assistant Collector of Central Excise before the expiry
of six months from the date of payment of duty :
Provided that the limitation of six months shall not apply where
any duty has been paid under protest. · H
818 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
A Explanation. - Where any duty is paid provisionally under these
rules on the basis of the value or the rate of duty, the period of
six months shall be computed from the date on which the duty is
adjusted after final determination of the value or the rate of duty,
as the case may be.
B (2) If on receipt of any such application the Assistant Collector of
Central Excise is satisfied that the whole or any part of the duty
paid by applicant should be refunded to him, he may make an
order accordingly.
(3) Where, as a result of any order, passed in appeal or revision,
c under the Act, refund of any duty becomes due to any person, the
proper officer may refund the amount to such person without his
having to make any claim in that behalf.
(4) Save as otherwise provided by or under these rules, no claim
for refund of any duty shall be entertained.
D
Explanation : For the purposes of these rule 'refund' includes
rebate referred to in rules 12 and 12A."
Rules WA and lOB were in force till 1980. These two rules were
substantially adopted in Section llA and llB of the Central Excises and
E Salt Act, 1944 by the Customs Central Excises and Salt Act and Central
Boards of Revenue (Amendment) Act, 1978. The two sections came into ·
force on 17.11.1980. It is well-settled that these two rules (Rules lOA and
lOB) are complementary. Rule lOA invests the Government with the power
to recover duty where any duty had no,t been levied or paid or had been
short-levied or erroneously refunded or any duty assessed had not been
F paid in full. In such a case, the proper officer within six months could serve
a notice on a person chargeable with the duty requiring him to show cause .
why he should not pay the amount specified in the notice.
Likewise, Rule lOB enabled a person to claim "refund of any duty paid
G by him". This could be done by an application for refund of such duty to the
Assistant Collector of Central Excise before expiry of six months from the date
of payment of duty. Where any duty was paid provisionally under Rue 9B, the
period of six months was to be computed from the date on which the duty
was adjusted after final determination of the value. If as a result of any
appellate or revisional order refund of duty is due to any person, the proper
H officer had to refund the amount to such person even without any application.
MAFATLALINDS. LTD. v. U.O.L [SEN,J.] 819
There is nothing in the Act which enables or enjoins the manufac- A
turer to pass on the duty of excise to the purchaser nor is any duty cast on
the purchaser to pay the excise duty. It is the manufacturer who has to pay
the duty imposed by Section 3 by virtue of the provisions of Rule 7 and in·
the manner laid down in Rules 9A and 9B. He is the person against whom
proceedings for recovery could be taken in case of non-levy or short-levy B
or erroneous refund of duty. Only a person who was under a legal obliga-
tion to pay duty under Section 3 read with Rule 7 and has actually paid
duty in the manner laid down in Rule 9 (or any other rule), can claim
refund of duty.
'Duty' has been defined by Rule 2(v) to mean "the duty payable under
c
Section 3 of the Act". All these provisions go to show that there is only one
duty payable under the Central Excise Act. It has to be paid by the
manufacturer or producer of the excisable goods. In fact stringent
provisions have been made to ensure that there is no evasion of duty by
the manufacturer. Under Rule 43 the manufacturer is required to give D
notice before commencement of production. He has also to give a notice
before stopping or resuming production of such goods. He has also to give
particulars of the raw-materials used for production and if there is any
change in the nature of the raw-material that has also to be conveyed to
the Collector of Excise. Under Rule 49 duty has to be paid by a manufac- E
turer only when the goods are removed from the factory premises or an
approved place of storage. But a manufacturer has to pay on demand the
duty leviable on any goods which cannot be accounted for or which are not
shown to have been lost or destroyed by natural causes or by an un-
avoidable accident during handling or storage of such goods.
F
The procedure of clearance is contained in Rule 52. The manufac-
turer has to make an application in triplicate to proper officer in proper
form at least twelve hours before the removal of the goods. The officer has
to assess amount of duty on the goods on production of evidence that the
sum has been paid into the treasury or the approved Bank as has been G
provided in the Rules. This rule has also importance for our purpose. Duty
of Central Excise is to be paid into the treasury or the Bank specified in
Rule 52. Any payment made by any person by way of price has not been
treated as payment of duty by the Central Excise Act. Rule 53 enjoins every
manufacturer to niake stock account of his goods. Monthly return has to H
820 SUPREME COURT REPORTS(l996] SUPP.10 S.C.R.
A be filed showing the quantity of goods manufactured, the quantity removed
on payment of duty, the quantity removed for export without payment of
duty and such other particulars as may be prescribed. Materials used for
manufacturing of the goods have also to be accounted for under the
provisions of Rule 55. It is not really necessary to examine the scope of
B procedure for the duty-paid materials or under MODVAT scheme. All
these elaborate rules and procedures have been made for payment and
collection of duty by and from the manufacturer.
The Central Excise Act has not made the manufacturer an agent of
the State for collection of tax from the consumers. If an illegal levy has
C been made on the manufacturer and any tax has been collected unlawfully
from him by the State, the State cannot refuse to return the unlawfully
collected amount. The amount whi~h has been unlawfully collected is the
property of the tax- payer. If the law has been broken by the State and an
unlawful levy has been made the State is not at liberty to distribute the
D amount so collected on any supposed equitable principle to' somebody
other than the actual tax-payer without a specific provision of law to that
effect. If this is allowed, the legal wrong done to the tax-payers will remain
unredressed. In the case of Baidyanath AyU1ved Bhawan (P) Ltd. v. Excise
Commissioner, U.P. & Ors., [1971] 2 SCR 590, a Bench of Three Judges of
E this Court reiterated that the Court should not concern itself with the
policy behind the provisions of the statute or even with its impact. The
observations of Rowlatt, J. in Cape Brandy Syndicate v. Commissioner of
Inland Revenue, (1921) 1 K.B. 64, was cited in the judgment that "in a taxing
Act one has to look at what is clearly said. There is no room for any
intendment. There is no equity about a tax. There is no presumption as to
F a tax. Nothing is to be read in, nothing is to be implied. One can only look
fairly at the language used."
In the case of R.C. Parsi v. Union of India, AIR (1962) SC 1281 after
quoting with approval the observations of Lord Simonds in The Judicial
G Committee, in governor General in Council v. Province of Madras, AIR
(1945) PC 98 at p. 101, Subba Rao, J. observed as under :
"...... the said tax can be levied at a convenient stage so long as the
character of the' impost, that is it is a duty on the manufacture or
H production, is not lost. The method of collection does not affect
MAFATLALINDS. LTD. v. U.O.I. [SEN,J.) 821
the essence of the duty, ·but only relates to the machinery of A
collection for administrative convenience. Whether in a particular
case the tax ceases to be in essence an excise duty, and the rational
connection between the duty and the person on whom it is imposed
ceased to exist, is to be decided on fair construction of the
provisions of a particular Act." B
In Bharat Kala Bhandar (Private) Ltd. v. Municipal Committee,
Dhamangaon, 59 ITR 73, the subject matter of dispute was a municipal
levy. The appellant claimed repayment of an excess amount of tax
recovered by the Municipality. Although the facts and the subject mater
of the decision was municipal levy which is quite different from the facts c
of this case, there is an important observation made by a Constitution
Bench of Five Judges :
"The Constitution is the fundamental law of the land and it is wholly
unnecessary to provide in any law made by the legislature that
D
anything done in disregard of the Constitution is prohibited. Such
a prohibition is to be read in every. enactment."
Here we are dealing with a taxing legislation. Like all other taxing
statutes the Cential Excise Act has a charging section, provisions for
computation and quantification of the charge and also collection of the E
charge (Sections 11 and llA) and also for refund of duty (Section llB).
The Court cannot ignore these provisions and hold without any specific
charge levied to that effect in the Act that the ultimate consumer is the
real tax- payer. The refund must be made of excess realisation of the duty
of excise to the manufacturer. The Government has not imposed nor F
realised any duty from the ultimate consumer.
The structure of the Excise Act has to be borne in mind. Duty is
levied on manufacture and collected from the manufacturer according to
the rules. The well-known distinction between levy and assessment and
between levy and collection will have to be borne in mind in this Connec- G
tion. In the case of Assistant Collector of Central Excise, Calcutta Division
V. National Tobacco co. of India Ltd., [1972] 2 sec 560, it was held by this
Court that :
r'
"The term "levy'' appears to us to be wider in its import than the H
822 SUPREME COURT REPORTS[l996] SUPP.10 S.C.R.
A term "assessment". It may include both "imposition" of a tax as well
as_ assessment. The term "imposition" is generally used for the levy
of a tax or duty by legislative provisions indicating the subject-mat-
ter of the tax and the rates at which it has to be taxed. The term
"assessment", on the other hand, is generally used in this country
B for the actual procedure adopted in fixing the liability to pay a tax
on account of particular goods property or whatever may be the
object of the tax in a particular case and determining its amount.
The Division Bench appeared to equate "levy'' with an "assessment"
as well as with the collection of a tax when it held that "when the
c payment of tax is enforced, there is a levy". We think that, although
the connotation of the term "levy" seems wider than that of "as-
sessment", which it includes, yet, it does not seem to us to extend
to "collection". Article 265 of the Constitution does not seem to us
to extend to "collection". Article 265 of the Constitution makes a
distinction between "levy" and "collection". We also find that in
D
N.B. Sanjana, Assistant Collector of Central Excise, Bombay and
Others v. The Elphinstone Spinning and Weaving Mills Co. Ltd., this
Court made a distinction between "levy" and "collection" as used
in the Act and the rules before u~. It said there with reference to
Rule 10:
E
"We are not inclined to accept the contention of Dr. Syed Moham-
mad that the expression 'levy' in Rule 10 means actual collection
of some amount. The charging provision Section 3(1) specifically
says: There shall be levied and collected in such a manner as may
F be prescribed the duty of excise...... It is to be noted that sub-sec-
tion (i), uses both the expressions - 'levied and collected' and that
clearly shows that the expression 'levy' has not been used in the
Act or the Rules as meaning actual collection."
G
I fail to see how a person who has been subjected to levy of excise
duty and from whom the duty has been collected cannot get the refund of
the duty but only a person who has neither been charged any duty nor paid
any duty under the Act can claim refund of the duty. This will be clearly
H against Article 265 of the Constitution.
MAFATLAL INDS. LTD. v. U.O.I. [SEN, J.] 823
REFUND A
Sections llA and 118 before its amendment in 1991 stood as
under:
"llA. Recovery of duties not levied or not paid or short-levied or B
short-paid or erroneously refunded. - (1) when any duty of excise
has not been levied or paid or has been short- levied or short-paid
or erroneously refunded, a Central Excise Officer may, within six
months from the relevant date, serve notice on the person charge-
able with the duty which has not been levied or paid or which has
been short-levied or short-paid or to whom the refund has er- C
roneously been made, requiring him to show cause why he should
not pay the amount specified in the notice :
Provided that where any duty of excise has not been levied or
paid or has been short-levied or short-paid or erroneously D
refunded by reason of fraud, collusion or any wilful misstatement
or suppression of facts, or contravention of any of the provisions
of this Act or of the rules made thereunder with intent to evade
-
payment of duty, by such person or his agent, the provisions of this
sub-section shall have effect, as if for the words "Central Excise
Officer," the words "Collector of Central Excise, " and for the E
words "six months", the words "five years" were substituted.
Explanation, - Where the service of the notice is stayed by an
order of a court, the period of such stay shall be excluded in
computing the afore~aid period of six months or five years, as the F
case may be.
(2) The Assistant Collector of Central Excise or, as the case
may be, the Collector of Central Excise shall, after considering the
representation, if any, made by the person on whom notice is G
served under sub-section (1), determine the amount of duty of
excise due from such person (not being in excess of the amount
specified in the notice) and thereupon such person shall pay the
amount so determined.
(3) For the purposes of this section, H
824 SUPREME COURT REPORTS(1996J SUPP. 10 S.C.R.
·;
A (i) "refund" includes rebate of duty of excise on excisable goods
.
exported out of India or on excisable materials used in the
'
manufacture of goods which are exported out of India;
i
(ii) "relevant date" means :
B (a) in the case of excisable goods on which duty of excise has not
been levied or paid or has been short levied or short-paid -
(A) Where under the rules made under this Act a monthly
return, showing particulars of the duty paid on the excisable
goods removed during the month to which the said return
c relates, is to be filed by a manufacturer or producer or a
licensee of a warehouse, as the case may be, the date on
which such return is so filed;
(B) where no monthly return as aforesaid is filed, the last
D date on which such return is to be filed under the said rules;
(c) in any other case, the date on which the duty is to be paid
under this Act or the rules made thereunder :
E
(b) in a case where duty of excise is provisionally assessed under
this Act or the rules made thereunder, the date of adjustment of
duty after the final assessment thereof;
-
~.
(c) in the case of excisable goods on which duty of excise has been
erroneously refunded, the date of such refund."
F· JJB. Claim for refund of duty. - (1) Any person claiming refund of
any duty of excise may make an application for refund of such duty
to the Assistant Collector of Central Excise before the expiry of
six months from the relevant date:
Provided that the limitation of six months shall not apply where
G
any duty has been paid under protest.
(2) If on receipt of any such application, the Assistant Collector
of Central Excise is satisfied that the whole or any p_art of the duty
of excise paid by the applicant should be refunded to him, he may
H make an order accordingly.
MAFA1LAL INDS. LTD. v. U.O.I. [SEN, J.] 825
(3) Where as a result of any order passed in appeal or revision A
under this Act refund of any duty of excise becomes due to any
person, the Assistant Collector of Central Excise may refund the
amount to such person without his having to make any claim in
that behalf.
(4) Save as otherwise provided by or under this Act, no claim B
for refund of any duty of excise shall be entertained.
(5) Notwithstanding anything contained in any other law, the
provisions of this section shall also apply to a claim for refund of
any amount· <'.Ollected as duty of excise made on the ground that
the goods in respect of which such amount was collected were not
c
excisable or were entitled to exemption from duty and no court
shall have any jurisdiction in respect of such claim.
Explanation : For the purpose of this section :
D
(a) "refund" includes rebate of duty of excise on excisable rebate
of duty India or on excisable materials used in the manufacture of
goods which ar exported out of India;
(b) "relevant date" means. -
E
(a) in the case of goods exported out of India where a refund of
excise duty paid is available in respect of the goods themselves or,
as the case may be, the excisable materials used in the manufacture
of such goods, -
(i) if the goods are exported by sea or air, the date on which the
F
ship or the aircraft in which such goods are loaded, leaves India,
or
(ii) if the goods are exported by land, the date on which such goods
pass the frontier, or G
(iii) if the goods are exported by post, the date of despatch of
goods by the Post Office concerned to a place outside India;
(b) in the case of goods returned for being remade, refined,
reconditioned, or subjected to any other similar process, in any H
826 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A factory, the date of entry into the factory for the purposes
aforesaid:
(c) in the case of goods to which banderols are required to be
affixed if removed for home consumption but not so required when
exported outside India, if returned to a factory after having been
B removed from such factory for export out of India, the date of
entry into the factory;
( d) In a case where a manufacturer is required to pay a sum, for
a certain period, on the basis of the rate fixed by the Central
c Government by notification in the Official Gazette in full discharge
of his liability of the duty leviable on his production of certain
goods, if after the manufacturer has made the payment on the basis
of such rate for any period but before the expiry of that period
such rate is reduced, the date of such reduction;
'Q. (e) in a case where duty of excise is paid provisionally under this
Act or the Rules made thereunder, the date of adjustment of duty
after the final assessment thereof;
.(t) In any other case, the date of payment of duty.
E Section llB before its amendment in 1991 provided by sub-section
(1) "Any person claiming refund of any of duty of excise may make an
application for refund of such duty to the Assistant Collector of Central
Excise before the expiry of six months from the relevant date". By sub-sec-
tion (2), the Assistant Collector was required to examine the application
p and if he was satisfied that "the whole or any part of the duty of excise
paid by the applicant should be refunded to him, he may make an order
accordingly''. Sub-section (3) dealt With the consequence of an order
passed in appeal or revision under the Act. It provided that if as a result
of any appellate or revisional order, any duty of excise becomes due to any
person, the Assistant Collector of Central Excise may refund the amount.
G Sub~section (4) provided that no claim for refund for any duty of excise
shall be entertained except as provided by or under this Act. Sub-section
(5) laid down that the provisions of this Section Will also apply to a claim
for refund of any amount collected as duty of excise made on the ground
that the goods in respect of which such amount was collected were not
H excisable or were entitled to exemption from duty.
MAFATLALINDS.LTD. v. U.O.I. (SEN,J.] 827
In order to claim refund, a person has to establish that he has paid A
the duty. The duty is what is paid pursuant to the charge levied by Section
3 and quantified in the manner laid down in the rules. Rule 3{v) of the
Central Excise Rules also says that "duty" means the duty payable under
Section 3 of the Act. The time and manner of payment of duty will have
to be in accordance with the provisions of Rules 9 and 9A (4). There is no
B
other duty charged under the Central excise Act and there is no other way
a duty can be paid under the Central Excise Act. It is the person who has
paid the duty of central excise under the charge imposed by the Act and
within the time and in the manner laid down by the Act, who can claim
the refund of duty under Section llB. "Any person claiming refund of any
duty of excise" must be the person who has paid the aforesaid duty in the c
aforesaid manner. A consumer or buyer cannot say that he has paid any
duty of excise. The duty is only on the manufacturer and not on the
consumer. Under sub-section (2), the Excise Officer has to be satisfied that
whole or any part of. the duty of excise should be refunded to the person
who has paid the duty.
D
This is the law in respect of payment of duty as obtaining refund of
duty paid in excess. The buyer or the consumer does not pay any "duty"
and, therefore, he is precludeq from making any application for refund
under Section llB. A person who has not paid any duty in law cannot claim
a refund on the ground that he has borne the burden of duty. E
The Excise offict<r is a creature of the statute. H:s powers and
functions are circumscribed by the statute. He can realise tax strictly in
accordance with the statute. He cannot realise tax beyond the charge
imposed by Section 3 out of any extra-statutory considerations. If more tax F
than permissible under the charge imposed by Section 3 has been collected,
it must be returned to the taxpayer. There is nothing in the Act which
enables the Excise Officer to embark upon an inquiry to find out whether
after payment of the duty, the manufacturer has sold his goods and if so,
has included this amount in his price. It is not a ground on which the Excise
officer can refuse to refund the excess amount of duty paid by the manufac- G
turer in the mode and manner laid down by the Act. A taxation statute has
to be construed strictly. The Excise Officer cannot insert a proviso to the
Section and say that even if the levy is illegal and the manufacturer is
otherwise entitled to refund of duty under Section llB, he will not be given
this refund if he has included the duty element in the price of the goods H
828 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A manufactured by him.
The Excise Officer has no discretionary power to refuse to pay
refund. even when he was satisfied that excess payment of duty contrary to
law has been collected or paid. Though sub-section (2) of Section llB or
B earlier Rule llA used the language that the .Central Excise Officer "may
make an order of refund". The word 'may', in this context, has to be
construed as 'must'. The section does not give the Central Excise Officer
any discretion once he was satisfied that excess payment had been made.
He cannot withhold payment on some extraneous reasons. This point was
dealt with at length in the Australian case of Commissio11er of State
C Reve11ue v. Royal ll!surance, {1995) 69 Australian Law Journal 51 by
Dawson, J. There, Section 111{1) of the Stamps Act, provided :
"Where the comptroller fit!ds in any case that duty has been
over-paid, whether before or after the commencement of the
Stamps Act, 1978 he may refund to the company, person or firm
D
of persons which or who paid the duty the amount of duty found
to be overpaid."
This section was later on amended to provide that the Comptroller
"must refund the amount of the overpaid duty" upon an application made
E within three years of overpayment. There was no dispute that a huge
amount of Stamp duty had been overpaid by Royal in respect of premiums
for workers compensation insurance. The overpayments had been passed
on. The comptroller made a decision not to refund the overpaid duty.
Royal initiated an action for the recovery of the amount. It was unsuccess-
F ful before the Trial Judge who reached the conclusion that the use of the
word 'may' in Section 111{1) gave the Comptroller a discretion whether or
not to refund the overpaid tax. The Full Court on appeal came to a
contrary conclusion. It held that after being satisfied that over payment had
been made, it was not open to the comptroller to refuse to refund the duty.
One of the points argued was the Act was amended later to use the word
G 'shall' in place of 'may'. Dawson, J. observed that this was of no conse-
quence. On behalf of the Comptroller it was argued that a number of
considerations might justify her withholding of refund of overpaid stamp
duty and submitted that the possibility of these situations arising explains
why the Legislature had used the word 'may'. Chief among these considera-
H tions was the impossibility of ensuring that where the duty had been passed
•
MAFATLALINDS. LID. v. U.O.I. [SEN, J.) 829
on to some other person, any refund should be similarly passed on. It was A
argued that unlikelihood of Royal's passing on of any refund would result
in a windfall to it because the burden of the duty had in fact been borne
by its customers.
Dawson, J. repelled this contention by saying ;
B
"But that it is a situation for which the legislature might have
provided had it wished to do so and its failure to do so does not
indicate an intention to give to the Comptroller a discretion to
retain payments of stamp duty which were not made pursuant to
any legal obligation. c
The absence of any qualification of this kind in s.111(1) suggests
to my mind an obligation to refund the overpaid duty rather than
a discretion to withhold repayment in situations which the legisla- D
ture might have specified but did not.
It must be borne in mind that the occasion for the exercise of
the authority conferred by s.111(1) is the finding of an overpayment
of stamp duty; that is to say, a finding that the comprtroller
received moneys to which she had no entitlement. The sub-section
E
must be read either as requiring her to refund the overpayment or
as conferring a discretion upon her to keep the moneys not-
withstanding that she had no entitlement to receive them. The
principle that a statute will not be read as authorising expropriation
without compensation unless an intention to do so is clearly ex- F
pressed has been described as a firmly established rule of law'."
Dawson, J. also expressed the view that the. Comptroller did not have
a discretion which had tci be exercised in accordance with law of restitution.
He pointed out that the occasion for the exercise of the authority was
identified. The only question which arose was whether the authority must G
be exercised when the necessary finding of overpayment had been made
or whether its exercise was discretionary. Dawson, J. observed that "if the
common law, rather than the sub-section, were to govern the Comptroller's
obligation to make a refund, then no doubt a refund would now be
required." H
830 SUPREME COURT REPORTS(1996) SUPP.10 S.C.R.
A In fact, this principle is very important to understand the problem
raised in this Court. The Central Excise Act provided for every situation
for levy, collection and refund of tax. If an overpayment has been made for
whatever reason, the amount ~as to be refunded. The Excise Officer, who
deals with an. application for refund, has to find out whether an overpay-
B ment has been made under the Act. He may, for any reason to be found
in the Act, decline to give refund. He cannot travel beyond the Act to find
other considerations for withholding the refund. As Dawson, J. pointed out
if that was the intention of the Legislature, the Legislature would have
expressly provided for it. Dawson, J. observed :
c "However, as I have said, I do not regard s.111(1) as conferring a
discretion. Once the Comptroller found that duty had been over-
paid, she was under an obligation to refund it."
Since Dawson, J. concluded that Section 111(1) did not confer any
discretion to the Comptroller to withhold payment of an unlawful levy, he
D did not express any final opinion on the question of unjust enrichment and
passing on of the overpayment of stamp duty to the insurer in that case.
However, Dawson, J. observed:
"The better view would seem to be that it is the unjust enrichment
E of the payee rather than loss suffered by the payer which should
govern entitlement to restitution, but, having regard to the view
which I take, it is unnecessary to determine that question in these
proceedings."
I am also of the view that the Excise Act before its amendment in
F 1991, in particular Rule lOB and later Section llB, did not confer any
power on the Excise Officer to withhold refund on any ground of "unjust
enrichment", after being satisfied that overpayment of tax has been made.
Moreover, refund is to be claimed within six months from the date
G of payment of tax which means within six months from removal of the goods
from the factory. A company may take a very long time to dispose of its
goods after clearance. But a claim for refund has to be made within the
short time permitted by the Act. These provisions are indicative of the fact
that refund claim has to be made regardless of the sale of the goods.
H That passing on of the incidence of tax was not relevant consideration
MAFATLALINDS. LTD. v. U.0.1. [SEN,J.] 831
is also borne out by sub-section (3) of Section llB as well as sub-rule (3) A
of Rule lOB, e.g., if there is dispute as to classification of the goods and
the assessee takes resort to filing of an appeal which ends in favour of the
assessee, refund will have to be made of the excess amount of tax realised
to the assessee without his having to make any claim in that regard. In such
a situation, the Assistant Collector of Central Excise is not empowered, . B
before refunding the money, to make an enquiry as to whether the duty
has been passed on to the consumers.
The concept of "passing on the duty " cannot be fitted in the
provisions of the Excise Duty Act before its amendment in 1991. As has
been repeatedly asserted in a number of cases that in a taxing statute, there c
is nothing to be added and there is nothing to be taken out and the words
must be interpreted as they stand. There is no equity about taxation. To
introduce the concept of "unjust enrichment" in the Act even before its
amendment in 1991 is not permissible by any canon of construction. Our
attention has not been drawn to any provision of the Act which is con-
D
cerned about the consumer of the product after they pass out of the factory
gate. The rule and the Section dealing with the refund do not contain any
provision that the Excise officer will be entitled to withhold refund if it is
found that the duty has been passed on to the consumers. As I have stated
earlier powers and functions of the Excise Officer are circums~ribed by the
Act. He cannot take into consideration anything which is not specifically E
contained in the Act.
The contention of Mr. Parasaran on behalf of the Union of India has
been that the incidence of tax is on the ultimate consumer. As I have
pointed out earlier, the Central Excise Act is not at all concerned with the F
ultimate consumer. Even if it is not possible for a manufacturer to sell the
goods, the duty will have to be paid. If it is found after sale of the goods
that there is any short levy or underlevy, the duty will still have to be paid
by the manufacturer. If there is a penalty imposeable because of short levy
or underlevy or any interest is payable, it is the manufacturer who has to
bear it. If the goods are lost after production, the manufacturer will have G
to pay duty on the lost goods.
The sum up, under the Central ExcL<;e Act, 1944, there is only one
duty and that has been imposed on manufacture. This duty has to be paid
before clearance. This duty has to be paid in the manner and mode laid H
832 SUPREME COURTREPORTS(1996j SUPP.10 S.C.R.
A down by the Act. The Act does not impose any other duty. The Act is not
concerned with what happens after the goods have been cleared. If the duty
has been erroneously imposed, the refund of the duty must be made to the
person on whom it is imposed. Refund of tax must not be confused with
restitution or compensation. In my judgment, there is only one taxpayer
B and it is the person who pays the tax at the time of clearance of goods.
There is no other tax imposed by the Central Excise Act. How the burden
of tax is borne or its economic impact on the manufacturer are not matters
within the purview of the Central Excise Act. No notice of these considera-
tions can be taken in deciding the application for refund by the Excise
Officer. Article 265 of the Constitution enjoins that no duty shall be levied
C and collected except in accordance with law. If it is found that a manufac-
turer has been asked to pay more than what he is liable to pay under the
Central Excise Act, he is immediately entitled to get the refund of the
wrongfully collected duty. This constitutional guarantee cannot be side-
tracked in any manner.
D PRICE
Every manufacturer tries to maximise his profits. When he sells
goods, he fixes a price at which he can make the maximum profits. Higher
prices do not necessarily fetch higher profits. the manufacture has to sell
E his products and if the prices are to high, the products will not sell. He has
to fix a price keeping in view the costs incurred by him (this will include
costs of production as well as selling costs and also the overheads) and also
the taxes he has to pay. He will also have to take into consideration the
market forces, the effective demand for his products and also the nature
and price of the competing products in the market. He will only fix such a
F price which "the traffic can bear'. It is wrong to presume that if taxes are
raised, the manufacturer has merely to pass on the burden to the con-
sumers by raising the price.
It should always be borne in mind that a manufacturer has to
G generate sufficient income to pay for the prices of inputs, wages to the
employees, rents, fuel charges, overheads and many other charges, includ-
ing direct and indirect taxes.
Every type of tax, except only those which are levied on the profits
like Income Tax and Surtax on company's profits, will have to be included
H in the price. The price must be high enough to fetch~sufficient income to
MAFATLALINDS. LTD. v. U.O.I. [SEN,J.] 833
the manufacturer to pay for all these things and stay in business. If the A
manufacturer is a company, as the appellant herein is, out of the profits,
specific and general reserves will have to be created. Provisions have to be
made for known liabilities like provident fund and gratuity for workers, etc.
Debenture holders and preferential share- holders will have to be paid.
Dividends will also have to be paid to the share-holders who have invested
B
their money in the company. All these things will have to be paid out of
the profits made by a company after paying all the expenses including
excise and other duties. A manufacturer has also to take into account that
all the goods produced by him may not be sold in the year of production
itself. That means a large amount of circulating capital will remain blocked.
This will also lead to higher interest charges. In fact, there is hardly a c
company which does not have to carry inventories of tax-paid finished good
year after year. Goods distributed for sale to various outlets may not be
sold for months or even years. Such goods may ultimately have to be sold
at large discounts or even at a loss. Many products after some time cannot
be sold at all for various reasons. In the case of BSC Footwear Limited v.
D
Ridgway, (1972) A.C. 544, the House of Lords dealt with a case of a
well-known shoe manufacturing company. It was found that the unsold
stock of shoes of the company at the end of the trading year was generally
about a third of the quantity actually sold in that year. Substantial part of .
the stock-in-hand at the end of the year would be sold either at reduced
prices in January sales and thereafter at even lower prices in later sales. E
The question in that case was how to value the unsold stock at the end of
the trading year. That question does not arise in this case, but it is
illustrative of the difficulty of selling goods produced by a manufacturer.
Can it be said in such cases when a substantial portion of the goods are
being sold at an undervalue and thus causing large erosion of profits, that F
the incidence of duty has been merrily passed on to the consumers? The
goods could not be sold except by reducing the price drastically. It is
difficult to say that in such a case incidence of tax is being borne by the
')
consumers and the loss by the producer. BSC Footwear's Case illustrates
the predicament of an average manufacturer. A substantial quantity of
tax-paid products cannot be disposed of as a matter of course and the G
manufacturer has to get rid of the unsold products by organising first sale
at a discount thereafter at even lower prices.
This is a problem with every manufacturer and to assume that the
excise duty can be passed on to the consumer without any corresponding H
834 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A loss to the manufacturer is to ignore reality.
In the case of B1itish Paints India Limited v. Commissioner of Income
Tax, West Bengal, (1978) 111 ITR 53, the problem was once again of
valuation of unsold stock of a paint manufacturer. It was recognised that
B paints had a very short "shelf life". In other words, unsold cans of paints
lying on the shelves of the various outlets of the manufacturer could not
retain its quality and utility for indefinite length of time and became unfit
for market. In that case, the question was whether the Company was
entitled to depart from the usual practice of valuing the unsold stock at the
end of the year on cost or market price, whichever was lower, basis. The
C Court said Yes. The Court held that the Company was entitled to value its
unsold stock of the goods "in process" on the basis of the cost of raw
materials and finished products on the basis of its costs. It was recognised
that the company might have to sell a portion of its products ultimately at
a vastly reduced price.
D
I have not understood the concept of passing on of tax liability. If
this argument is taken to its logical conclusion, then it means that the
manufacturing company does not incur any expenditure at all. The taxes
as. well as the costs of production are recovered through price. Will that
mean that a company does not have any cost of production? The wages of
E labourers, their provident fund, gratuity, bonus, the costs of raw-material,
the fuel charges, the overheads; all these things have to be paid out of the
money generated by the company. This can only be done through price
obtained by the sale of goods. A suit for short sale by a manufacturing
company or recovery of money for over charging can be defeated by saying
F that all these things have been passed on to the consumer. An electricity
supply company or a coal supplier can also take the plea, faced with an
allegation of excessive charge, that in any event the charges have been
passed on to the consumers. As I have emphasised earlier that it is not
L -
possible to split up the price of a commodity and find out how much is
attributable to labour, how much to cost of production and how much to
G the overheads.
That the buyer pays nothing but the price, has been made clear by
Section 2(10) and also Section 4 of the Sale of Goods Act. Section 64A
permits the seller to add an amount equal to any new tax imposed or any
H tax increased if such imposition or increment has taken place after the
MAFATLALINDS. LTD. v. U.0.1. [SEN, J.] 835
contract was entered into and' if a different intention does not appear from A
the terms of the contract.
Incidentally, it should be noted that Lord Goddard, J. took into
consideration Section 27 of Finance (No. 2) Act, 1940 which appears to be
similar to Section 64A of our Sale of Goods Act, 1930. Section 64A
provides: B
"64A. In contracts of sale, amount of increased or decreased taxes
to be added or deduced. - Unless different intention appears from
the terms of the contract in the event of any tax of the nature
described in sub-section (2) being imposed, increased, decreased
or remitted in respect of any goods after the making of any contract
c
for the sale or purchase of such goods without stipulation as to the
payment of tax where tax was not chargeable at the time of the
making of the contract, or for the sale or purchase of such goods
tax paid where tax was chargeable at that time,-
D
(a) if such imposition or increase so takes effect that the
decreased tax or increased tax, as the case may be, or any
part of such tax is paid or is payable, the seller may add so
much to the contract price as will be equivalent to the amount
paid or payable in respect of such tax or increase of tax, and
he shall be entitled to be paid and to sue for and recover such
E
addition; and
(b) if such decrease or remission so takes effect that the
decreased tax only, or no tax, as the case may be, is paid or
is payable, the buyer may deduct so much from the contract p
price as will be equivalent to the decrease of tax or remitted
tax, and he shall not be liable to pay, or be sued for, or in
- ; respect of, such deduction.
(2) The provisions of sub-section (1) apply to the following
taxes, namely; G
(a) any duty of customs or excise on goods;
(b) any tax on the sale or purchase of goods."
The English Law in this regard is the same. H
836 SUPREME COURT REPORTS(1996) SUPP. 10 S.C.R.
A Lord goddard's judgment goes to show that even if the duty element
was separately shown in the invoice what the buyer pays is the price of the
product and nothing else. The seller similarly gets only the price. Lord
Goddard, J. also noted the fact in that case that the burden of the tax had
been passed on. This according to Lord Goddard J., did not make any
difference.
B
In the case of Pap1ika v. Board of Trade, (1944) 1 KB 327, ·a person
was called upon to pay penalty which was three times the price at which
the articles were expected to be sold. The Divisional Court rejected the
argument that the tax element in the price should be excluded because it
C was no price at all. It was an amount which would ultimately go to the
Government. The Court recognised the fact that the price could be af-
fected by the tax element but "it does not cease to be the price which buyer
has to pay even if the price is e>..pressed to be as X plus purchase tax."
This case was cited with approval by Lord Goddard, J. (as His
D Lordship then was) in the case of Love v. Nomian Wright (Builders) Ltd.,
(1944) 1 All England Law Reports 618, the question before the Court of
Appeal was whether the seller of goods under a contract made after the
purchase tax had been imposed by law could call upon the purchaser to
pay the tax exigible in respect of the sale in addition to the agreed price
E at which the goods were to be supplied. Goddard, J., pointed out that a
seller quoted a price X plus purchase tax, the buyer must pay the tax as
part of the purchase price. Conversely, if a seller agreed to supply goods
for a certain sum, then he could not call on the buyer to pay anything extra
for tax additionally, unless he was authorised by any statute to do so.
F In George Oakes (Private) Ltd. v. State of Madras and Others, this
Court was called upon to consider whether a dealer can pass on his tax
liability as such to his customer. In that decision while rejecting the
contention that the tax liability as such can be transferred to the buyers,
this Court referred to the observations of Lawrence. J. in Paprika Ltd. and
G Another v. Board of Trade, (supra) and Goddard, L.J., in Love v. Norman
Wright (Builders) Ltd. (supra).
In the former case, Lawrence, J. observed :
"Whenever a sale attracts purchase tax, that tax presumably affects
H the price which the seller who is liable to pay the tax demands it
MAFATLALINDS.LID.v. U.O.L [SEN,J.) '/)37
does not cease to be the price which the buyer has to pay even if A
the price is expressed as X plus purchase tax."
In love's Case, Goddard, L.J. observed:
"Where an article is taxed, whether by purchase tax, customs duty
or excise duty, the tax becomes part of the price which ordinarily B
the buyer will have to pay. The price of an omice of tobacco is
what it is because of the rate of tax but on a sale there is only one
consideration, though made up of cost plus profit plus tax. So, if a
seller offers goods for sale, it is for. him to quote a price which
includes the tax if he desires to pass it on to the buyer. If the buyer C
agrees to the price, it is not for him to consider how it is made up
or whether the seller has included tax or not.
In that decision, reference was also made to the decision of this
Court in Tata Iro11 and Steel Co. Ltd. v. State of Bihar, (1958] SCR 1355.
Therein Das, CJ. who delivered the majority judgment of the court said: D
"The circUIIlstance that the 1947 Act, after the amendment, per-
mitted the seller who was a registered dealer to collect the sales .
tax as a tax from the purchaser does not do away with the primary
liability of the seller to pay the sales tax. This is further made clear
E
by the fact that the registered dealer need not, if he so pleases or
chooses, collect the tax from the purchaser and sometimes by
reason of competition with other registered dealers he may find it
profitable to sell his goods and to retain his old customers even at
the sacrifice of the sales tax. This also makes it clear that the sales F
tax need not be passed on to the purchasers and this fact does not
alter the real nature of the tax which, by the express provisions of
the law, is cast upon the seller. The buyer is under no liability to
pay sales tax in addition to the agreed sale price unless the contract
specifically provides otherwise. See Love v. Norma11 Wright G
(Builders), Ltd.."
From all these observations, it is clear that when the seller
passes on his tax liability to the buyer, the amount recovered by
the dealer is really part of the entire consideration paid by the
buyer and the distinction between the two amounts - tax and price H
838 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A - loses all significance."
These decisions were re-affirmed by this Court in the case of Delhi
Cloth and General Mills Co. Ltd. v. Commissioner of Sales Tax, Indore,
(1971) 28 STC 331.
B In the case of Delhi Cloth and General Mils Co. Ltd. v. The Commis-
sioner of Sales Tax, Indore, (1971) 2 SCC 559, Hegde, J., speaking for the
Court, once again emphasised :
"Unless the price of an article is controlled, it is always open to
the buyer and the seller to agree upon the price to be payable.
c While doing so it is open to the dealer to include in the price the
tax payable by him to the Government. If he does so, he cannot be
said to be collecting the tax payable by him from his buyers. The levy
and collection of tax is regulated by law 'and not by contract. So long
as there is no law empowering the dealer to collect tax from his
D buyer or seller, there is no legal basis for saying that the dealer is
entitled to collect the tax payable by him from his buyer or seller.
Whatever collection that may be made by the dealer from his
customers the same can only be considered as valuable considera-
tion for the goods sold." ·
E I have been at great pains to emphasise that if the seller passes on
his tax liability to the buyer, the amount equivalent to the tax received by
the Seller is part of the entire sale consideration. It is not collection of tax,
because levy and collection of tax is regulated by law and not by contract.
Whatever may have been collected by a seller from his customer on
F account of tax, the same can only be considered as valuable consideration
for the 'price' of the goods sold.
What the buyer pays is the price of the goods and not the com-
ponents of the price. Production costs, selling costs, overheads, taxes,
17'""
everything goes into fixation of the price. Moreover, the market conditions
G will have to be taken into account. If the price is too high for the market
to bear, the goods will not sell. In order to absorb the excise duty the
manufacturer may have to cut various types of costs. It may have to reduce
its profit, pay lesser dividends to shareholders, he may not readily agree to
any increment in pay or payment of bonus or other benefits to the workers.
H It has not been explained how it can be readily assumed that all that the
MAFATLALINDS. LTD. v. U.O.I. (SEN,J.] 839
seller has to do to absorb higher duty is to include it in its price and pass A
it on to the consumers?
If preamble to the Constitution and social justice is borne in mind,
then it may as well be argued, as Karl Marx did, that every article of
manufacture is congealed labour. If the labour is given just reward for the
work done by him, no surplus value will be left. It is this surplus value B
extracted from the labour through the pricing mechanism that becomes the
manufacturer's profit. To prevent "unjust enrichment", the entire surplus
should go back to the labour.
But, here we are not concerned with social and economic theories, C
but only with the prosaic realm of law as it stands. Harold Laski in his
well-known book "Introduction to. Politics" pointed out the difference
between role of law and role of politics by saying that the lawyers will have
to take the law as it stands. It is not for them to ask why those laws should
be our laws? What ends do these laws serve? Why should these ends be
our ends? Whereas a student of politics may ask all these questions. Laski D
said, "We have to add, so to say, a teleology to law."
In this case also we are not entitled to add any teleology to law. We
have to take the Central Excise Act as it stands. We may- or may not like
the law. But for that reason we cannot discard it or its language to bring E
out an abnormal meaning. If the meaning of 'price' as given in the Sale of
Goods Act is borne in mind and its implications as explained in judgments
referred to hereinabove are kept in view, then it can never be said that the
seller has charged anything but the price of the goods from his buyer. He
cannot by a contract call upon the buyer to pay any tax which is the
prerogative of a taxing statute. Even if he quotes the price as x (Costs) + F
Y (Taxes) + Z (Profit), what the buyer will pay is the price of the goods
and nothing else, neither the costs nor the taxes are passed on to the buyer.
UNJUST ENRICHMENT
The facile assumption that when excise duty is imposed or raised,, it G
can be passed on to the consumer by merely raising the price with no
corresponding loss or detriment to the manufacturer has not been made
on the basis of any market study. In fact, before the new amendments were
effected no in-depth study was at all done by the legislawre. The basic
premise of this line of reasoning is fallacious. The Finance Minister in his H
840 SUPREME COURT REPORTS[l996] SUPP.10 S.C.R.
A budget speech for the year 1994-95 (206 ITR Page 19) stated :
"Over the years, our indirect tax structure has grown into a complex
maze of high and multiple rates, with numerous exemptions, and
different rates being applicable for the same product for different
uses and users, This has resulted in unnecessary complexity leading
B to administrative abuse, mounting litigation and uncertain
economic impact. All this has effectively eroded the tax base and '
buoyancy of the system and created serious economic distor-
tions .......... "
C To illustrate the enormity of excise burden which has to be borne by
the manufacturers, it may be mentioned that in the Central excise Tariff
Act, 1985, duty on oils used for skin-care was 105 per cent and duty on
residual oil which was not specifically mentioned under the heading 3305.90
was 105 per cent. The duty on paints and varnishes under the heading 32.09
was as high as 60 per cent. Under the heading 33.07 pre-shave, shaving or
D after-shave preparations had to bear duty of 105 per cent. The example of ·
high excise duty can be multiplied. It cannot be blindly assumed that levy
of excise duty does not cause any financial hardship or loss to the manufac-
turers because they can merrily pass it on to the consumers. In fact, in very
many cases, the Central Government had to issue exemption notifications
E on the representation made by industries exemption goods wholly or
partially from excise duty having regard to the plight to which the industries
had been reduced under the impact of taxation. The economic reality that
rise in duty causes financial hardship to the manufacturer and that the
manufacturer cannot get rid of that hardship by simply passing on the duty
has been recognised by the Central Government itself by giving relief to
F the manufacturers by various exemption notifications. Even in cases where
exemption notifications could not be issued retrospectively, an Act was
passed to help the manufacturers.
The Central Duties of Excise (Retrospective Exemption) Act. 1986 was
H:
G passed on 8th September, 1986 to give retrospective effect to certain
notifications to enable the excise authorities to refund duties of excise
which had already been collected in certain cases. It was stated by Section
2 of the Act that the Act shall be deemed to have and to have always had,
effect on and from the 1st day of March, 1986. It went on to provide :
•
H "(2) The duties of excise which have been collected, but which
MAFATLALINDS. LTD. v. U.0.1. [SEN,J.] 841
would not have been so collected if the said notification had been A
in force at all material times, shall be refunded :
(3) The duties of excise which have become payable, but which
would not have been so payable if the said notification had been
in force at all material times, shall not be required to be paid.
B
(4) Any person claiming refund of any duty of excise under
sub-section (2) may make an application for refund of such duty
to the Assistant Co,llector of Central Excise before the expiry of
six months from the. _commencement of this Act."
It had the effect of refunding the duties of excise which had already
c
been collected and declaring the duties of excise which had become
payable (but would not have been payable if the notifications had been in
force) shall not be required to be paid. This Act was passed in recognition
of the fact that high excise duty causes hardship to the manufacturers. They
must be given relief even with retrospective effect. D
This Act is important for the purpose of this case because it goes to
show the legislative intent. The Legislature never intended before 1991. that
refund of excise duty will not be given to the manufacturers but to the
, buyers of the goods. The Central Excise Act is totally silent on this aspect E
of the matter and we shall not add a rider to the Central Excise Act to
deny any refund due to the manufacturer.
It has also to be borne in mind that the rates of duty in India is much
higher than in U.S.A., Australia or Canada. Its economic impact is much
greater. In fact in the case of United States v. Jefferson Electric Manufactur- F
ing Company, (supra), the dispute related to levy of excise duty at the rate
of 5 per cent. In Air Canada' Case, the disputed duty was 5 cents per gallon.
It is needless to speculate how the Courts would have reacted if they had
to face the high tax regime that exists in India ..
G
Mason, CJ. in the case of Commissioner of State Revenue v. Royal
Insurance Australia Ltd., (supra), noted how the theory that the burden
imposed by higher excise duty can be passed on to the consumers without
any economic loss to the manufacturer has been rejected in various Courts
in the United States, Canada and also Australia. Mason, CJ. observed that ·
this economic theory had major difficulties. The first was that to deny H
842 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
A recovery when the plaintiff shifted the burden of the imposition of the tax
or charge to third parties will often leave a plaintiff who suffered loss or
damage without a remedy. Another reason given by Mason, CJ. was that
an inquiry into and a determination of the loss or damage sustained by a
plaintiff who had passed on a tax or charge was a very complex undertak-
ing.
B
Mason, C.J. also pointed out that the basis of restitutionary relief was
not compensation for loss or damage sustained but restoration of the
plaintiff of what has been taken or received from the plaintiff without justifica-
tion. Mason, C.J in his judgment illustrated the proposition with a number
of cases to show that the doctrine of "Passing on" was fraught with many
C difficulties. An American case was cited where the Supreme Court of U.S.
had rejected the doctrine ·of "passing on" under anti- trust .laws where
plaintiff had passed on overpayments to their customers (Hanover Shoe
Inc. v. United Shoe Machinery Corp., (1%8) 392 US 481. Commenting on
this, Mason, C.J. obsetVed that though the context is different, the reasons
D given for the rejection were relevant for the present case. They include the
difficulty of determining the economic impact upon the plaintiffs business
of passing on the overpayment, the practical problems which availability of
the defence would generate involving "massive evidence and complicateCI
theories". Further the defence would probably apply all the way down the
cltain of distribution to the ultimate consumer who would have little
E interest to sue. The U.S. Supreme Court also noted that economic theories
rely upon the assumptions which do not operate in the real world, thereby
making the proof of passing on extremely difficult. This view was also
expressed in the opinion of Advocate General in Amministrazione delle
Finanze dello Stato v. San Giorgio SPA, (1985) 2 CMLR 658.
F Mason, C.J. Concluded that:
"The United Sta~es and European decisions demonstrate that any
acceptance of the defence of passing on is fraught with both
·practical and theoretical difficulties. Indeed, the difficulties are so
great that, in my view, the defence should not succeed unless it is
G
established that the defendant's enrichment is not at the expense
of the plaintiff but at the expense of some other person or persons."
In view of all these, I see no basis to deny the refund to a manufac-
turer on the facile assumption that burden of duty has been passed on to
H the consumers without any loss or detriment to the manufacturer. The
MAFATLALINDS.LTD.v. U.O.I.[SEN,J.] 843
absurdity of this doctrine of "passing on" can well be demonstrated by the A
following exampfos.
Supposing, a manufacturer of pulp sells his product to a rayon
manufacturer which uses the pulp to manufacture rayon it can be said that
the burden of duty has been passed on to the rayon manufacturer. The
rayon manufacturer, in his turn, includes the cum-duty price in his costs
B
and includes it in his price when he sells his yarn to a cloth manufacturer.
The cloth manufacturer in his turn will include the duty-paid price of rayon
in his costs and will sell his products to a garment manufacturer at
duty-paid price. The garment maker will sell the garments to the actual
users. Can the last consumer establish that he has borne the incidence of c
an illegal excise duty imposed on pulp and claim refund of the unlawful
duty on pulp. Can he at all be made aware of such an unlawful levy on
pulp? Or will it be that the rayon manufacturer will get the refund as a
consumer of pulp even though he has included the duty paid price in his
costs of raw material for production of rayon and has thereby passed on D
the burden to his customers. These illustrations can be multiplied ad
infinitum. If a scrap dealer buys duty paid scrap and sells to a car-parts
manufacturer who in his turn treats such price as his cost and includes it
in his price (duty included) and sells the parts to a car manufacturer, who
in his turn sells cars to the actual users, who will get back any illegal levy
of excise duty on scraps? E
This problem has other dimensions. Excise Act cannot be viewed in
isolation. If there is an illegal levy of paper and a lawyer buys paper at
cum-duty price, he gets deduction of the entire sum in computation of
income under the Income Tax. Can he claim refund of excise duty as being F
the ultimate consumer? As I said earlier, these are not isolated examples.
But things that are happening in everyday life. Duty paid price charged by
a manufacturer is his income for Income Tax purposes, turn over for sales .
tax and turn over tax. It has a variety of other fiscal dimensions. How can
it ever be assumed that an illegal levy of tax will be a source of joy for the
taxpayer? He will happily pass on the burden and merrily enjoy the refund. G
The argument by reference to the Directive principles that unlawfully
collected tax must be retained by the government for the common good of
the people and also to involve the weaker sections of the people may have
a populist appeal, but is without any basis having regard to the provisions H
•
844 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R.
A of the Central Excise Act as well as Excise Tariff Act.
The Central Excise Act levies a tax on manufacture of goods. Very
often goods are manufactured by small scale industries or individuals for
the benefit of large industries. If a small scale paper pulp manufacturer
who struggles to exist, cannot get back an illegal levy of excise duty because
B the consumer, a large scale viscose fibre manufacturer, has ultimately borne
the burden of the duty and the illegally collected duty is paid back to that
large company, the weaker section far from being benefitted, will be
thoroughly robbed. In fact, if we look at the Central Excise Tariff Act, it
will be seen that the vast majority of the products are not for household
C use or for common man." The list of excisable commodities starts with
Animal Products, which may include products of the kind unfit or un-
suitable for human consumption; Guts, bladders or stomachs of animals or
animal blood; or animal fat, other than pig fat (Chapter 2). Obviously these
have industrial uses, but a common man will not buy them. Likewise, lac,
D Gums, Resins (Chapter 13), Bituminous and Asphalt, chemical compound
(Chapter 27), Chemical Compounds - Organic and Inorganic (Chapter 28),
Explosives, Pyrotechnic Products; Pyrophoric Alloys and other Combus-
tible Preparations (Chapter 36) will only be used by large industries. A
large number of chemical products are taxed 1;1nder the heading Miscel-
laneous Chemical Products, like Graphite, Activated Carbon, Rubber Ac-
E celerators, compound plasticisers, organic composite solvents (Chap~er
38), charged fire extinguishing grenade are not used by the common rrian.
In fact, the Schedule to the Central Excise Tariff Act has as many as
96 chapters and appears to contain more entries relating to goods which
F are used by trade and industry than common man in every day life like
Base Metals, Iron and steel. Aluminium Metal (Chapter 72), Nuclear
Reactors, Boilers, machineries, mechanical appliances; parts thereof,
electric motors and generators, rotary converters, transformers, static con-
verters, electro-magnets, etc. (Chapter 85). The Schedule also include
G Railway or tramway Locomotives, Rolling-Stock and parts thereof; Railway
or Tramway Track Fixtures and Fittings and parts thereof; Mechanical
Traffic Signalling Equipment of all kinds (Chapter 86). This Entry is
followed by Vehicles other than Railway or tramway etc. (Chapter 87). This
Entry includes motor cars, motor vehicles, tanks and other armoured
fighting vehicles and also parts and accessories of the motor cars and motor
H vehicles principally designed for transport of persons, motor vehicles for
MAFATLALINDS.LID. v. U.O.I. [SEN,J.] 845
the transport of goods. Even here it should be noted that, having regard A
to the price of the motor cars and motor vehicles, it is not the weaker
section of the population who uses these vehicles. In the name of benefit-
ting the weaker section, unlawfully and illegally levied duty of excise on
parts and accessories and various inputs manufactured by small manufac-
turers for use of the large manufacturers will not be returned to them but
B
handed over to the large manufacturer or rich consumers who has the
resource and ability to claim it.
There are of course household goods or goods of everyday necessity
like edible oil, toothpaste, tooth brush, soap, some textile articles and
possibly some items falling under paper and paper board are used by c
common man in everyday life. But taking an overall view of the tariff items
in the Schedule to the Central Excise Tariff Act, it can hardly be said that
excise duty by and large is on goods to be used by the common man.
Moreover, there are many industries reserved for small scale sector. This
has been done to protect small scale industries from competition from the
.- big manufacturers. If for example, a manufacturer of wrist watch strap
D
(reserved for small sector) is unable to get back any illegally imposed duty
of excise because the watch straps have been sold to large watch manufac-
turing company and that large company is given the refund, the weaker
section will not benefit in any way.
E
Even for the consumer goods, it is not in the realm of belief that an
ordinary buyer will be able to chase the Excise Officer and claim refund
of duty illegally imposed on the manufacturer. For example, a person
buying tooth brush from the local grocery shop, will not retain the cash
memo for years and years and even if he does so, he will not know that
there is a .dispute about the levy of excise duty pending. Furthermore, a F
man who purchases tooth brush in Madras will not be able to claim refund
of duty from the proper Excise Officer who has jurisdiction over the
company at Bombay. We shall bear all these considerations in mind before
trying to interpret the law in a way which will benefit the weaker sections
of the people and give them a sense of participation in the development of G·
the country.
Moreover, only the manufacturer has to separately show the duty
element in his invoice. The wholesaler, the distributor or the retailer has
no such obligation. Ordinary customers buy their goods at the retail outlet,
where even if a cash-memo if given, the duty element will not be shown H
846 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A separately. How will the common man know that he has paid any duty and
if so of what amount? ·
In my view, the entire argument based on "unjust enrichment" is
founded on a false premise. It will be wrong to assume that the duty
element can be included in the price and that no prejudice will be caused
B to the manufacturer by the levy or enhancement of the duty. To take this
position is to ignore the economic realities.
There may also be situation when a manufacturer will not be able to
certify that he has not passed on the duty even though he has borne it.
C Supposing a manufacturer is charging Rs. 100 per unit of good. The price
of Rs. 100 is calculated on the basis of Rs. 80 as costs, Rs. 10 as profits
and Rs.10 as excise duty. The excise duty element is enhanced unlawfully
by Rs. 5. In such a case. the manufacturer may either raise the price of the
goods by Rs. 5 or he may decide to reduce his profit to Rs. 5 and sell the
goods at the same price. In the second case when the manufacturer redJces
D the profit element to Rs. s·and sells the goods at Rs. 100, caµ it be said.
that he has passed on the burden of excise duty to his customers. The price
. is inclusive of the duty element. In a sense, the burden of duty borne by
the manufacturer has been passed on. But then again, the manufacturer
has suffered diminution of profit. Can it be said in such a case that if the ·
E manufacturer manages to get an order of refund of duty, it will be unethical
for him to get the amount because this will be "unlawful enrichment"? The
manufacturer in a case like this will not b.e in a position to certify that the
burden of duty has not been included in the price of the goods but the fact
remains that in order· to maintain the price of goods at the optimum level
the manufacturer had to suffer loss of profit. The Central government has
F been empowered to exempt, generally or absolutely by notification, ex-
cisable goods from the whole or any part of the duty imposed thereon.
Judicial notice must be taken that in very many cases, having regard to the
hardship suffered by the industry and representations made by the industry,
duties have been reduced or exempted by issuing appropriate notifications
or even by legislation.
G
SCOPE OF SECTION llB, llD, 12A, 12B, 12C AND
12D OF THE CENTRAL EXCISE ACT, 1944
Sections llB and llD in Chapter II and Sections 12A, 12B, 12C and ·
H 12D in Chapter II-A are now to be considered :
MAFATI..ALINDS. LID. v. U.0.1. (SEN,J.) 847
"1 JB. Claim for refund of duty. A
(1) Any person claiming refund of any duty of excise may make
an application for refund of such duty to the Assistant Commis-
sioner of Central Excise before the expiry of six months from the
relevant date in such form and manner as may be prescribed and
B
the application shall be accompanied by such documentary or
other evidence (including the documents referred to in section
12A) as the applicant may furnish to establish that the amount of
duty of excise in relation to which such refund is claimed was
collected from, or paid by, him and the incidence of such duty had
not been passed on by him to any other person : c
PROVIDED that where an application for refund has been
made before the commencement of the Central Excises and Cus-
toms Laws (Amendment) Act, 1991, such application shall be
deemed to have been made under this sub-section as amended by D
the said Act and the same shall be dealt with in accordance with
the provisions of sub-section (2) substituted by that Act;
PROVIDED FURTHER that the limitation of six months shall
not apply where any duty has been paid under protest.
E
(2) If, on receipt of any sue~ .application, the Assistant Com-
missioner of Central Excise is satisfied that the whole or any part
of the duty of excise paid by the applicant is refundable, he may
make an order accordingly and the amount so determined shall be
credited to the Fund : F
PROVIDED that the amount of duty of excise as determined
by the Assistant Commissioner of Central Excise under the forego-
ing provisions of this sub-section shall, instead of being credited to
the Fund, be paid to the applicant, if such amount is relatable to - G
(a) rebate of duty of excise on excisable goods exported out of
India or on excisable materials used in the manufacture of
goods which are exported out of India;
(b) unspent advance deposits lying in balance in the applicant's H
848 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A account current maintained with the Commissioner of Central
Excise;
(c) refund of credits of duty paid on excisable goods used as
inputs in accordance with the rules made, or any notification
issued, under this Act;
B
(d) the duty of excise paid by the manufacturer, if he had not
passed on the incidence of such duty to any other person;
(e) the duty of excise borne by the buyer, if he had not passed
on th\! incidence of such duty to any other person;
c
(f) the duty of excise borne by any other such class of applicants
as the Central Government may, by notification in the Official
Gazette, specify :
PROVIDED FURTHER that no notification under clause (f)
D
of the first proviso shall be issued unless in the opinion of the
Central Government the ~ncidence of duty has not been passed on
by the persons concerned to any other person.
(3) Notwithstanding anything to the contrary contained in any
E judgment, decree, order or direction of the Appellate Tribunal or
any court or in any other provision of this Act or the rules made
thereunder or any other law for the time being in force, no refund
shall be made except as provided in sub-section (2).
(4) Every Notification under clause (f) of the first proviso to
F sub-section (2) shall be laid before each House of Parliament, if
it is sitting, as soon as may be after the issue of the notification,
and, if it is not sitting, within seven days of its re-assembly, and
the Central Government shall seek the approval of Parliament to
the notification by a resolution moved within a period of fifteen
G days beginning with the day on which notification is so laid before
the House of the People and if Parliament makes any modification
in the notification or directs that the notification should ceases to
have effect, the notification shall thereafter have effect only in such
modified form or be of no effect, as the case may be, but without
H prejudice to the validity of anything previously done thereunder.
MAFATIALINDS. LTD. v. U.0.I. [SEN, J.) 849
(5) For the removal of doubts, it is hereby declared that any A
notification issued under clause (f) of the first proviso to sub-sec-
tion (2), including any such notification approved or modified
under sub-section (4), may be rescinded by the Central Govern-
ment at any time by notification in the Official Gazette.
Explanation : For the purposes of this section, - B
(A) "refund" includes rebate of duty of excise on excisable goods
exported out of India or on excisable materials used in the
manufacture of goods which are exported out of India;
(b) "relevant date" means, -
c
(a) in the case of goods exported out of India where a refund of
excise duty paid is available in respect of the goods themselves or,
as the case may be, the excisable material used in the manufacture
of such goods, - D
(i) if the goods are exported by sea or air, the date on
-
which the ship or the aircraft in which such goods are
loaded, leaves indja, or
(ii) if the goods are exported by land, the date on which E
such goods pass the frontier, or
(iii} if the goods are exported by post, the date of despatch of
goods by Post Office concerned to a place outside India;
(b) in the case of goods returned for being remade, refined, F
reconditioned, or subjected to any other similar process, in
any factory, the date of entry into the factory for the purpose
aforesaid;
(c) in the case of goods to which banderols are required to be
G
affixed if removed for home consumption but not so required
when exported outside India, if returned to a factory after
having been removed from such factory for export out of
India, the date of entry into the factory;
. (d) in a case where a manufacturer is required to pay a sum, for H
850 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A a certain period, on the basis of the rate fixed by the Central
Government by notification in the Official Gazette in full
discharge of his liability for the duty leviable on his production
of certain goods, if after the manufacturer has made the
payment on the basis of such rate for any period but before
the expiry of that period such rate is reduced, the date of
B such reduction;
(e) in the case of a person, other than the manufacturer, the date
of purchase of the goods by such person;
c (ea) in the case of goods which are exempt from payment of duty
by a spedal order issued under sub-section (2) of section 5A,
the date of issue of such order;
(f) in any other case, the date of payment of duty.
D
llD. Duties of excise collected from the buyer to be deposited
with the Central Government.
(1) Notwithstanding anything to the contrary contained in any
E order or direction of the Appellate Tribunal or any court or in any
other provision·of this Act or the rules made thereunder, every
person who has collected any amount from the buyer of any goods
in any manner as representing duty of excise, shall forthwith pay
the amount so collected to the credit of the Central Government.
F (2) The amount paid to the credit of the Central Government
under sub-section (1) shall be adjusted against the duty of excise
payable by the person on finalisation of assessment and where any
surplus is left after such adjustment, the amount of such surplus
shall either be credited to the Fund or, as the case may be,
G refunded to the person who has borne the incidence of such
amount, in accordance with the provisions of section llB and the
relevant date for making an application under that section in such
cases shall be the date of the public notice to be issued by Assistant
Commissioner of Central Excise.
•
H ............;.........................................................................
I
MAFATLAL INDS. LTD. v. U.O.I. [SEN, J.) 851
12A. Price of goods to indicate the amount of duty paid thereon. A
Notwithstanding anything contained in this Act or any other
law for the time being in force, every person who is liable to pay
duty of excise on any goods shall, at the time of clearance of the
goods, prominently indicate in all the documents relating to assess-
ment, sale invoice and other like documents, the amount of such B
duty which will form part of the price at which such goods are to
be sold.
12B. Presumption that 1i1cidence of duty has bee11 passed 011 to the
buyer.
c
Every person who has paid the duty of excise on any goods
under this Act shal~ unless the contrary is proved by him, be
deemed to have passed on the full incidence of such duty to the
buyer of such goods.
D
12C Consumer welfare fund.
(1) There shall be established by the Central Government a
fund, to be called the Consumer Welfare Fund.
(2) There shall be credited to the Fund, in such manner as may E
be prescribed, -
(a) the amount of duty of excise referred to in sub- section (2)
of section llB or sub-section (2) of section UC or sub-section
(2) of section 110;
F
(b) the amount of duty of customs referred to in sub- section (2)
of section 27 or sub-section (2) of section 28A, or sub-section
(2) of section 28B of the Customs Act, 1962 (52 of 1962);
(c) any income from investment of the amount credited to the
Fund and any other monies received by the Central Govern- G
ment for the purposes of this Fund.
120, Utilisation of the fund.
(1) Any money credited to the Fund shall be utilised by the
Central Government for the welfare of the consumers in accord- H
852 SUPREME COURT REPORTS(1996) SUPP. 10 S.C.R.
A ance with such rules as that Government may make in this behalf.
(2) The Central Government shall maintain or, if it thinks fit,
specify the authority which shall maintain, proper and separate
account and other relevant records in relation to the Fund in such
B form as may be prescribed in consultation with the Comptroller
and Auditor-General of India.
Section llB(l) contemplates that for claiming refund of any ~uty of
excise a person has to apply with documentary evidence to establish, (1)
C the amount of duty of excise was collected from him or paid by him and
(2) the incidence of such duty has not been passed on by him to any other
person. Sub-section (2) of Section llB provides that if the Excise officer
is satisfied that the whole or any part of the duty of excise paid by the
applicant is refundable, he may make an order accordingly. The refundable
D amount, however, will be credited to a Fund. The proviso lays down certain
circumstances under which the duty may be paid to applicant. Clause (d)
of the proviso says that the duty of excise paid by the manufacturer, if he
had not passed on the incidence of such duty to any other person, will be
refunded to him. These provisions are not in consonance with the charging
E provisions of the Excise Act and the Rules. The well-known principle of
fiscal legislation is that the charge lies where it falls. It cannot be shifted
by a contract. Acts relating to Income Tax, Wealth Tax, Sales Tax as well
as Excise Duty have charging sections. A man may contract with somebody
to pay his Income Tax, a seller may contract with somebody else to pay his
Sales Tax and a manufacturer may contract with a third party to pay the
F duty of excise. These contracts are not enforceable by or against the
Revenue. The Central Excise Act imposes a tax on manufacture. This tax
has to be paid before the goods are cleared in the manner laid down by
the Act and the Rules. There is no other duty of excise payable under the
Act. I have referred to various decisions wherein it has been pointed out
G that the contract between the manufacturer and a buyer is of no conse-
quence in the matter of payment and collection of excise duty. The ques-
tion of passing on can only arise after the duty has been fully paid. The
duty of excise is never borne by the buyer as stated in clause ( e) of the
proviso. The buyer may pay a sum equivalent to the duty of excise pursuant
H · to a contract with the manufacturer, but that is a matter of contract.
)
MAFATLAL INDS. L'fO. v. U.O.I. [SEN, J.] 853
The duty impose on and collected from manufacturer, if it is found A.
to be in excess of the charge imposed by Section 3, has to be returned to
manufacturer and nobody else, otherwise charging provision, rules for
computation of charge and imposition and collection of duty will become
meaningless. If any amount has been realised by the Excise Officer in
excess of the charge imposed by the charging section, then such collection B
is beyond the competence of the Act and also violates Article 265 of the
Constitution. It was pointed out in the case of Assista11t Collector of Ce11tral
Excise, Calcutta Divisio11 v. Natio11al Tobacco Co. of l11dia Ltd., [1972] 2
SCC 560, 572, that Article 265 of the Constitution makes a distinction
between levy and collection. Levy may include both imposition of a tax as
well as assessment. 'Collection' will be recovery of tax. If it is found that a
c
tax-payer has been levied more than the permissible limit imposed by the
charging section read with Excise Tariff Act and the Rules, the levy is bad.
The Collection pursuant to this levy is eq_ually bad. Such levy and collection
are dehors the provisions of the Excise Act. There is no way that the
Central Excise Authority can retain the amount or use the amount. In any D
way it has to refund the amount to the person from whom it has been
unlawfully collected by the Excise Officer. The Central Excise Act, as
Hegde, J. pointed out in the case of Delhi Cloth a11d Ge11eral Mills (supra),
dµty is imposed by a statute whereas the cum-duty price is paid by the
/ purchaser under a contract with the manufacturer. No portion of the E
• cum-duty price in law can be treated as the duty of excise. Nothing which
· is not imposed by Section 3 and collected under the provisions of the
Excise Act and Rules, can be called "duty of excise". In my view this is the
basic principle of any tax law. If by any device any amount which is not
leviable in law has been levied and collected from a tax- payer, then F
retention of such amount will be unlawful.
Any provision appearing or trying to bar recovery of illegally col-
lected tax is violative of Article 265 of the Constitution and must be struck
down as the Barring Act was struck down by the Privy Council in the case
of Commissio11er for Motor Transport v. Antill Ra11ger & Co. Pty. Ltd. G
(supra). If the realisation of tax in excess of the chanre imposed by the
Excise Act read with Excise Tariff Act and Rules, then such levy of tax is
not authorised by law. The Collection of such excess unlawful levy is also
invalid. As the judicial Committee pointed out if the levy is invalid as an
offence against Section 92, it is equally an offence to deny the right to H
854 SUPREME COURT REPORTS[1996) SUPP. 10 S.C.R. '
A recover it after it has been unlawfully exacted. Therefore, in my view, once
it is established that more than what is payable under the statute has been .
collected from the tax-payer, the tax-payer automatically gets a right to get
back the whole amount. If the right is sought to be effectively taken away.
by imposing conditions, then the law imposing these conditions must be
B declared to be bad and ultra vires the Constitution.
There is another aspect of this matter. Excise Officer cannot tax
more than what is permitted by the statute. If the levy is in excess of the
statute, then its retention by the State is unauthorised by law. What is being
retained is not in enforcement of the charging section but something else.
C Such illegally collected tax is not the property of the State and is not within
the disposing power of the State. If the money has to be utilised by the
State, the State has to find out some legitimacy for having possession of
the money. In the Canadian case of Air Canada v. British Columbia (supra)
retroactive amendment of the Gasoline Tax Act was passed with a new
D definition of 'purchaser.' to make a levy valid and retain the illegally ..-
collected amount by setting off against the claim raised by the amended
Act. That is the only way in which La Forest, J. could justify, what was
otherwise a confiscatory provision. In this case, there has been no attempt
to give legitimacy to the hol&ig of the amount or utilisation of the amount ·
by the Government. The entire amount was collected unlawfully. The
E original sin has not been cured as in Canada by a retroactive charge.
I shall now examine the other provisions of the newly added sections.
Sub-section (1) of Section llB requires an application for refund to be
made. Sub-section (2) requires the Assistant Commissioner to pass an
F order of refund provided the conditions set out therein are fulfilled.
Sub-section (3) merely lays down that no refund shall be made except as
provided in sub-section (2). There is a non obstante clause that this will
operate notwithstanding anything to the contrary contained in any judg-
ment, decree, order etc. It is obvious that new provisions will apply in cases
where applications for refund were made before the new provisions came
G into force and also subsequently. Sub-section (3) has no retrospective
effect. When a case has been finally heard and disposed of and no applica-
tion for refund need be made, sub-section (3) cannot apply. If there is a
judgment, decree or order which has to be carried out, the Legislature
cannot take away the force and effect of that judgment, decree or order,
H except by amending the law retrospectively on the basis of which the
I
MAFATLAL INDS. LTD. v. U.0.I. (SEN, J.] 855
judgment was pronounced. A
I have indicated earlier in the judgment and shall not repeat that it
is practically impossible for an ultimate consumer to make an application
for refund under Section UB. He has to know that there is a dispute about
levy of excess duty which is going on between the manufacturer and the
excise authority. He has to know the outcome of that dispute. He has also
B
to find out what is the amount of duty he has borne. This is a difficult
process because the ultimate consumer may have a cash-memo from his
retail-seller. Retail-seller usually does not give the break up of duty in the
price he charges. The new law requires a manufacturer at the time of
clearance of the goods to prominently indicate in the invoice and other c
documents the amount of such duty which will from part of the price. There
is no such requirement for the dealers down the line. It is incomprehensibe
how a person who buys a cake of soap will know the duty content in the
price and whether the excise duty levied was valid or not and how will he
find out which is the proper officer, to whom to make an application in the D
prescribed form for refund of duty and what sort of evidence will he be
having in his possession to authenticate his claim? It is rightly contended
by Mr. Nariman that all these provisions are only an eye-wash to retain the
illegally exacted excess levy by the Government which as a matter of fact
what is actually being done.
E
Now I shall deal with Section 110. Excise duty is levied by the
charging section 3. It has to be paid according to the Excise Tariff Act,
1985 and the rules. Before clearance of the goods, the assessee is required
by Rule 173B to file what is known as price/classification List in which full
particulars of the goods manufactured and intended to be removed from F
his factory has to be given. The Chapter heading and sub-heading number
under which the goods are to be assessed under Tariff Act has also to be
indicated. The assessee has also to sfate the rate of duty leviable on each
such goods. On the basis of the declaration made by the assessee, the
Excise Officer has to make his calculation of duty. For the purpose of
proper valuation of the goods assessable ad valorem, pro-forma price list G
for commodities has to be filed. The value of the goods have to be
calculated by making deductions from the wholesale price in accordance
with Section 4(4) of the Excise Act. There may be dispute as to the
valuation or rate of duty for which an adjudication proceedings may have
to be taken. But without the approval, of the Excise Officer, no goods can H
856 SUPREME COURT REPORTS(1996] SUPP.10 S.C.R.
A be removed from the factory. The assessee has also to maintain an Account
Current. This is laid down by Section l 73G :
RULE 173G. Procedure to be followed by the assessee. - (1) Every
assessee shall keep an account-current with the Commissioner
separately for each excisable goods ....... , in such forms and manner
B · as the Commissioner may require, of the duties payable on the
excisable goods and in particular such account.. .......shall be main-
tained in triplicate by using indelible pencil and double-sided
carbon, and the assessee shall periodically make credit in such
account-current, by cash payment into the treasury so as to keep
c the balance, in such account- current, sufficient to cover the duty
due on the goods intended to be removed at any time; and every
such assessee shall pay the duty determined by him for each
consignment by debit to such account-current before removal of
the goods :"
D This rule requires advance payment of tax. Money has to be
deposited in the treasury well in advance before removal of the goods.
Section llD is a curious piece of legislation. Even after the full
amount of duty has been paid and goods have been cleared, the manufac-
E turer is being called upon to deposit with the Central Government any
amount collected from the buyer representing duty of excise. In other
words, having paid the full amount of Cluty of excise, the manufacturer is
being called upon deposit the duty element in the price of his goods to be
deposited to the credit. of the Central Government. The only justification
p for this appears to be that the entire amount will be held till finalisation of
the assessment. But the Section provides that if there is any surplus left
after such adjustment, the surplus shall not come back to the seller but will
be credited to the Fund or paid to the person who has borne the incidence
of the duty in accordance with the provisions of section llB which means
G the ultimate consumer.
An attempt has been made to salvage this Section by construing that
this Section will apply only if duty has not been paid on the goods or if any
excess collection has been made over and above the duty already paid. It
is very difficult to agree to such a construction. There cannot be a blanket
H statutory direction to pay everything collected from a buyer on account of
I
_:{
.
MAFA'f!.-AL INDS.LTD. v. U.O.I. [SEN, J.] 857
excise duty to be paid over to the Excise Officer. If it is in the nature of A
advance tax, there has to be some attempt to fix a percentage which needs
to be handed over. Otherwise, it will be unreasonable restriction on trade.
The sale price is a part of the circulating capital. Goods are converted into
money and money is again utilised to manufacture goods. If a substantial
portion of this money is taken away without having regard to the actual or
probable necessity for the collection, it will be unreasonable restraint on B
the right of a person to carry on business. Moreover, the amount may be
kept till finalisation of assessment. The assessment may not be finalised till
the dispute has been decided finally by CEGAT or even by this Court. Will
the money be blocked up till then? Supposing the assessee succeeds, why
will he not get back the money with interest?
c
This provision has to be contrasted with the advanced tax collected
under the Income Tax Act. Such collection is authorised by the charging
Section of the Act Section 4(2) because otherwise, the collection would
have gone beyond the scope of the charge. The rate on which the tax is to
be collected and the basis is clearly stated, High Court rates of interest is D
payable both by the assessee and the Government in appropriate cases. But
if an amount is taken in advance, then the residue after adjustment of tax
must go back to the taxpayer.
That is not the scheme here. So, this cannot be treated something in
the nature of advan,ce collection of tax where duty has not at all been paid E
on the goods.
The second point that this has been done to safeguard against any
excess collection from the consumer is equally unreasonable. The excise
duty is a duty on the manufacture of the goods. Once full amount of duty F
has been collected, the excise authority cannot control any contract be-
tween the purchaser and the seller. The Excise Act imposes a charge on
manufacturer. There is no charge of duty levied by the Excise Act on
exccess collection by the manufacturer from the buyer. Any question of
exccess cilllection by the manufacturer from the buyer is entirely out of the
purview of the charging section. If the assessee has collected on account
G
of excise duty from the purchaser more than what he has paid, perhaps, a
purchaser can bring an action against the seller. In the event of a contrac-
., tual dispute between the purchaser and the seller, the relevant statutes will
be the Contract Act, the Sale of Goods Act and similar other statutes. But
the Central Excise Officer cannot under any circumstances, lay his hands H
858 SUPREME COURT REPORTS[l996) SUPP.10 S.C.R.
A on anything more than what is actually levied by the Act. He cannot collect
something which is not payable under the charging section even for the
purpose of directing it to the Fund or to the actual consumer. The entire
Section llD is ultra vires the charge levied by the Excise Act itself.
Moreover, the entire sale price (duty included), will' form part of the
B sales turn over of the assessee on which sales tax will have to be paid under
the State Acts. Turn over tax will have to be paid by big assessees. The
purchaser may also have to pay purchase tax on the purchase price. In such
cases, how will the State Revenue authorities determine the quantum of
turn over of sales or purchase for levy of sales tax or purchase tax? The
C sales proceeds will be income of the assessee for the purpose of levy of
income tax.
Unlike the Income Tax, Act, the assessee has not been given any
option to show that he is not liable to pay the amount which is being taken
away from his proceeds. He has no opportunity of getting a hearing on this
D issue. The Income Tax Act enables the assessee, in such circumstances, to
dispute the estimation of advance tax made by the the Income Tax Officer
and file 'his own estimate (or course at his own peril). Here he has no
option but to pay without any hearing.
E I repeat that a manufacturer cannot be called upon to pay anything
except the duty imposed by the charging provisions. Even if the final
assessment has not been made, goods may be allowed to be cleared by
paying the admitted amount of duty and furnishing the security for the
disputed amount. The security may be keeping sufficient money in the
Account CUrrent with the Excise Department or even by furnishing a bond
F or a bank guarantee. This is provided by the Rules.
There is no legal or rational basis for a blanket provision to deposit
whatever is included on account of excise duty in the price of the goods
sold.
G The position gets curiouser after the deposit. After adjustment of the
tax against the deposit, the surplus amount is not returned to the manufac-
turer. It has to be credited to the Fund or paid to the person who has borne
the incidence of tax i.e., the ultimate consumer. In other words, the ,
manufacturer will be robbed of a portion of his sale price for no rhyme or
,.
H reason. This may also have the effect of nullifying the sale contract entered
MAFA1LALINDS. LTD. v. U.0.1. (SEN, J.] 859
into by the manufacturer with the buyer. The buyer had agreed to pay an A
agreed price which may include the duty element. The seller agreed to sell
the goods to the buyer at that price. Section 64A of the Sale of Goods Act
protects the interests of both. How can a portion of that price be taken
away and credited to a Fund or paid to the ultimate consumer? What will
happen to the contract? Thi;: only effect of Section llD is to rob the
B
manufacturer of a portion of his legitimate dues. These provisions are not
in aid of the charge on manufacture levied by the Central Excise Act, but
are in excess of the charge and are confiscatory in nature and have to be
struck down.
It appears to me that by these newly amended provisions, the Legis- C
lature has merely created a device or a cloak to confiscate the property of
the tax-payer. In such a situation, a Bench of Five Judges of this Court in
Raja Jagannath Baksh Singh v. State of Uttar Pradesh, AIR {1962) SC 1563,
said that the law has to be struck down as passed in colourable exercise of
the power of taxation. It was observed by Gajendragadkar, J., speaking for D
the Bench:
"... the conclusion that a taxing statute is colourable would not and
cannot normally be raised merely on the finding that the tax .
imposed by it is unreasonably high or heavy, because the
reasonableness of the extent of the levy is always a matter within E
the competence of the Legislature. Such a conclusion can be
reached where in. passing the Act, the Legislature has merely
adopted a device. and a cloak to confiscate the property of the
citizen taxed. If, however, such a conclusion is reached on the
consideration of all relevant facts, that is separate and independent F
ground for striking down the Act."
So far as Sections 12A and 12B are concerned, only thing that, has
to be pointed out is that these two sections do not change the character of
the price of the goods. Both these elements were taken into consideration G
by Lord Goddard, J. in the case of Love v. Nonnan Wright (Builders) Ltd.
(supra). It was stated that even if the burden of duty was passed on and
the price was expressed as Pound X plus duty, even then what the buyer
paid was price of the goods and not the duty and the seller obtained the
price and nothing else. This principle was reaffirmed time and again, as we
have noted earlier in the judgment, in a number of cases by this Court. H
860 SUPREME COURT REPORTS(1996] SUPP. 10 S.C.R.
A Apart from what has been stated hereinabove, I find that the entire
group of these sections is dehors the charging section of the CentratExcise
Act. The Central Excise Act imposes a duty on manufacture of goods.
Various provisions have been made for computation and collection of that
duty. Anything collected in excess of that charge is unlawful. If any
B provision is made for retention of duties collected without any authority of
law, then such provision will be beyond the scope of the charge. It will
amount to collecting and retaining something which is not at all duty
payable under Section 3.
The Legislature has now authorised the Excise Department to retain
C the illegal levy. In my judgment, these provisions are ultra vires the charge
levied by Section 3 and cannot be sustained in any way. In the language of
Lord Mac Millan in Avrshire Employers Mutual !11Surance Association Ltd.
v. Commissioners of Inland Revenue, 27 Tax Cases 331, 337, the legislature
has missed fire.
D
The scope of charge in a taxing Act is of the highest importance.
Nothing can be realised under a taxing Act beyond that. The new
provisions of the Excise Act are not in aid of the charge imposed by Section
3. These sections are designed to '<nable the Excise Department to retain
what was collected over and above the charge. The amounts collected in
E excess of what is actually payable under the charging section is not excise
duty at all. Nothing can be collected under a taxing Act which is not
authorised by the charging section read with the machinery provisions.
The new provisions not only effectively bar recovery of unlawful
F levies by the tax-payer but have also taken away from him a portion of the
price at which he has contracted to sell the goods to the purchasers. How
can a portion of the sale price be taken away and retained by the Excise
Officer or returned to the buyer in derogation of a contract of sale passes
comprehension.
G I have already noted earlier in the judgment the impossibility of
finding out on whom the incidence of charge falls and also the various
unworkable problems created by these ill-conceived amendments. In my
view, the amended provisions must be struck down as violative of Article
265 and the guarantee contained in Article 19(1)(g) of the Constitution of
H India.
MAFA1LAL INDS. LTD. v. U.O.I. [SEN, J.] 861
I am further of the view, the Legislature has merely adopted a device A
and a cloak to confiscate the property of the tax-payer by not only with-
holding repayment of unlawfully gathered tax but also taking away a
portion of the sale price collected from the buyer without any lawful
demand or excuse. Every person has a right to contract and bargain for
the price. Section llD places unreasonable fetter to the freedom to carry
on trade and commerce and violates the guarantee given by Article B
19(1)(g) of the Constitution.
Various other points were raised in these cases. I am not dealing with
them separately, but I express my respectful concurrence with the views
of my learned Brother Paripoornan, J. that an action by way of a suit or
writ petition will be maintainable, depending upon the facts and cir-
c
cumstances of the case. I am en~irely in agreement with the view expressed
by him and the reasoning thereof on points E, F and G of the concluding
part of his judgment.
In conclusion, I hold that the Government is permitted to levy and D
retain only that much of excise duty which can be lawfully levied and
collected under the Central Excise Act read with the Central Excise Tariff
Act, 1985 and the Central Excise Rules and various notifications issued
from time to time. Anything collected beyond this is unla:-vful and cannot
be· retained by the Government under any pretext. The illegal levy and
collection of duty violate not only the Central Excise Act and the Rules E
but also offends Article 265 of the Constitution of India.
I am of the view that the provisions of Section llB is a device for
denying the claim for refund of duty to a tax-payer and must be struck
down as violative of Article 265 of the Constitution. It in effect tries ·to
perpetuate an illegal levy without altering the basis of the law under which F
the levy ·was made in any way. It is also a colourable piece of legisiation
and must be struck down.
Section llD imposes unreasonable restriction on the right to carry
trade and violates Article 19(1)(g). Excise authority cannot deny the
G
manufacturer the freedom to commerce and trade and take away a portion
of the contract price even without raising any demand or giving any
hearing. The Excise Officer cannot under any circumstance give the
balance to the ultimate consumer or credit the amount to the Fund. Section
llD is arbitrary and is a colourable piece of legislation and is hereby struck
down. H
862 SUPREME COURT REPORTS[1996] SUPP. 10 S.C.R.
A Section 12C and 12D are parts of a device to withhold refunds of
unlawfully gathered tax. These provisions are also violative of Article 265
of the Constitution.
I express my respectful agreement with the views expressed by my
learned Brother Paripoornan, J. that an action by way of a suit or writ
B petition will be maintainable, depending upon the facts and circumstances
of the case. I am entirely in agreement with the views expressed by him
and the reasoning on points 'E', 'F' and 'G' of the concluding part of his
judgment. I also agree with my learned brother Paripoornan, J.'s holding
on points 'H' and 'I' subject to my views that in view of Article 265 of the
C Constitution, the Excise Department is not entitled to withhold refund of
any unlawfully collected duty of excise under any circumstances. Any
provision to that effect will be ultra vires Article 265 of the Constitution.
Such illegally collected duties must be returned to the person from whom
it has been collected.
D In my judgment, the.appeal should be allowed and the writ petitions
should succeed.
There will be no order as to costs.
G.N. Matters disposed of.
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