I. Introduction – Can the State retain what it was never entitled to collect
Taxation statutes are very often a complete code in itself and a function of exactitude—charging event, rates, valuation, refund, compliance timelines, appeal, recovery etc. are predetermined and comprehensible. But in this universe nothing seems to be perfect and a document, written by some mortals cannot be an exception. Sometimes, though not very often, some questions shake the very normal reasoning and understandings of persons associated with taxing statutes and compel them to think twice the basic understanding of law. Such questions go far beyond the statutory provisions, involving a paramount constitutional debate. One of such questions arises when money is paid to the State under an erroneous perception and consideration of law. What will happen when such an error, bona fide no doubt, occurs? Will all the statutory provisions of section 54 of CGST Act, 2017 (the relevant section of Refund) be applied by the Revenue strictly and mechanically? Does such payment attain the quality of so called “tax” merely because it was deposited through a statutory mechanism? Does the Revenue have any authority and power to keep hold of that money? Does Article 265 of the Constitution have any role to intervene at that juncture?
The doctrine of “mistake of law” might answer these questions. A refund provision is not simply a statutory remedy rather it is a core constitutional principle ingrained in the prohibition against levy and collection without authority of law. In the GST regime this doctrine has great significance assumed renewed and practical significance.
II. What is a Mistake of Law
A mistake of law is a mistake about the legal effect of a known fact or situation [Black’s Law Dictionary, 7th Edition]. It is also termed as error of law. A mistake of law happens when a person having full knowledge of the facts comes to an erroneous conclusion as to their legal effect. It is a mistaken opinion or inference, arising from an imperfect or incorrect exercise of judgement, upon facts. In taxing statutes it may refer to a situation where payment is made under an erroneous understanding of legal liability. The mistake may origin from ambiguity and uncertainty in statutory interpretation, departmental persistence practice contrary to spirit of law, judicial-doubt later explained, calculation errors leading to double payment of tax or reliance upon a levy subsequently declared ultra vires.
III. Article 265 of the Constitutional and restitution
Article 265 of the Constitution provides that “No tax shall be levied or collected except by authority of law”. Article 265 is applicable not only for “levy” but also for the “collection” of taxes and any statutory function within its scope covers both the aspects carried out by the executive machinery. This constitutional provision functions not merely at the phase of imposition but equally at the phase of retention. If there is no authority of law, there can be no lawful retention.
The Hon’ble Madras High Court in S. Gopalan vs State of Madras (1958) 2 MLJ 117 held
“Law” means an act of legislature and it:-
- Should be within the legislative competence of the legislature
- Should not be prohibited by any constitutional provisions like — Article 27, 276, 286 and 301 etc.
- Should not be in violation of any fundamental right
- Should not be violative of any constitutional limitations like — Article 301 and Article 304
The use of the expression “levy or collect” mentioned in the Article is not limited only within the jurisdiction of imposition of a tax, authorised by the law, rather it is comprehensive and wide enough to include that even the collection of the tax must be sanctioned by the law. Therefore, it basically means that every stage in this entire process must comply with the requirement.
The Hon’ble Supreme Court way back in 1987 in Salonah Tea Co. Ltd. v. Superintendent of Taxes, 1988 (33) E.L.T. 249 (S.C.) held that retention of money collected without authority of law is constitutionally impermissible.
“It is a settled proposition of constitutional law flowing from Article 265 that any tax collected without authority of law is liable to be refunded and the State has no right to retain such amount, as consistently held by the Hon’ble Supreme Court in Mafatlal Industries Ltd. v. Union of India (1997) 5 SCC 536 (para 16), Auriaya Chamber of Commerce (1986) 2 SCC 458 (para 13), and HMM Ltd. (1989) 4 SCC 640 (para 12).” These judgements decisively decide that payment made under “mistake” does not convert an unlawful levy into lawful tax.
The doctrine of restitution thus surfaces as a constitutional obligation and stipulation. Restitution is an elementary concept in law designed to rectify injustices caused by certain factors, as said above. It ensures that the State should not unfairly enrich itself at the expense of honest taxpayers. Procedural technicalities cannot override the constitutional mandate and prohibition against unlawful exaction. The state cannot indulge itself into any act of extortion, particularly for a state which is based upon the principle of welfare of citizen. Unlawfulness in every form is alien to the Constitution.
IV. Refund under CGST Act vis-à-vis Mistake of Law
Under GST regime one of the recurrent disputes arises is the time line, as prescribed in Section 54. Sub-section (1) of section 54 stipulates that “Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed”. “Relevant date” has been clarify in Explanation (2), appended in Section 54. The two-year limitation is the laxman rekha both for the tax payers and the Revenue. The Revenue’s interpretation regarding the time-frame is clear, very clear. Refund, irrespective of its character, must conform to the provision Section 54. Conversely, judicial pronouncements have consistently drawn an essential distinction between refund of tax validly levied but excess paid, and refund of amounts collected without authority of law.
Section 54 presupposes that the tax was lawfully payable under the GST law. When the levy itself is unconstitutional or inapplicable, the amount paid never acquires the character of tax. In cases where the levy itself is unconstitutional or inapplicable, the amount never had the character of tax under the statute. Therefore, the limitation under Section 54 cannot override constitutional protections.
The controversy became prominent after the judgement of Hon’ble Supreme Court in the case of Union of India v. Mohit Minerals Pvt. Ltd. [ Civil Appeal No 1390 of 2022] where the Supreme Court ruled that the levy of IGST on ocean freight under reverse charge is ultra vires. Notification No. 10/2017–Integrated Tax (Rate) was declared ultra vires the IGST Act, 2017, as it imposed tax liability on the importer for a service (ocean freight) provided by a foreign shipping line to a foreign exporter (non-taxable territory). Several High Courts thereafter ordered refund of tax paid pursuant to the invalid notification, discarding the time limitation under Section 54. The logic is once the levy itself is unconstitutional, the amount collected ceased to be tax within the meaning of the statute.
The Hon’ble Supreme Court’s in State of Jharkhand v. BLA Infrastructure (P.) Ltd.[ Arising out of impugned final judgment and order dated 30-01-2025 in WPT No. 6527/2024 passed by the High Court of Jharkhand at Ranchi ] is worth mentioning here to understand the refund jurisprudence. Though the disputed issue is the refund of statutory pre-deposit under section 107 of CGST Act, 2017, the Court made a crucial clarification that refund must be governed by the nature of the payment and the provisions of Section 54 should not be applied mechanically. The court observed “We are in agreement with the submission made by the learned senior counsel that the subject refund was relatable to Section 107(6) read with Section 115 of the Jharkhand GST Act, and to that extent, the exercise undertaken by the High Court with regard to Section 54 thereof was unnecessary”.
The significance of this judgement lies in its interpretation. It emphasis that refund provisions cannot be applied indiscriminately. The nature of the payment determines the statutory framework. This reasoning has direct impact of refund procedures. If a statutory pre-deposit cannot be forced into Section 54, then a payment made without authority of law cannot be dragged into within the statutory limitation either.
Several High Courts, following the judgement of BLA Infrastructure (P.) Ltd opined that the critical factor is not whether the refund application fits within Section 54 or not, but whether the collection itself is lawful or not. If not lawful, constitutional restitution must follow.
V. Limitation
Judicial precedents have consistently recognized that in cases of mistake of law, limitation begins from the date of discovery of the mistake. In Salonah Tea and related jurisprudence, the Supreme Court acknowledged that where a levy is invalidated subsequently, the cause of action to seek refund accrues upon such declaration.
Section 17 of the Limitation Act, 1963, postpones the start of the limitation period for suits based on fraud or mistake, or for relief from the consequences of a mistake, until the plaintiff discovers the mistake or could have discovered it with reasonable diligence. Courts have reconciled the statutory limitation with constitutional justice to ensure that the State does not benefit from judicial delay or interpretational uncertainty.
VI. Conclusion – the Constitution is the supreme
Where there is no authority of law, where the statute contradicts the constitutional mandate, there can be any application of any provisions. In a structured tax regime, refund disputes should not be reduced to technicalities. The doctrine of mistake of law, coupled with the judicial pronouncements reminds us the primordial concept that taxation ultimately derives its authority from the mother law, the Constitution. Refund, sanctioned to taxpayer who has paid money under Mistake of law is not any benefit or concession by the State rather it is a constitutional necessity flowing from Article 265. Constitutional supremacy must prevail over procedural inflexibility, and restitution becomes the natural consequence of illegality.
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