Facts

The appellant is a textile mill manufacturing “blended yarn”. Blended yarn was captively consumed. 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 a petition, Gujarat High Court held that the levy of the excise duty on blended yarn prior to March 16/17, 1972, under tariff Item 18 or 18A was ultra vires. 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 appellant 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 and they had paid the excise duty on the same up to that date under mistake of law. They requested for 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. The appellant and others filed suits. The trial court decreed the 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 restitution should prove “loss or injury” tohim, 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 restitution is unsustainable. Matter  was carried to Supreme Court and was ultimately referred to 9 judge Bench of     the Apex Court.

Issue

Whether in  an  action claiming refund of  excise  duty (tax) paid under mistake  of law, is it essential for the person claiming 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?

View

The nine-Judge verdict of the Supreme has decided by a majority of 8:1 as to what rights and remedies are available to a citizen against the State in the matter   of refund of unlawfully recovered taxes and imposts. The court relied on the decisions of the courts which have applied the doctrine of unjust enrichment. Reliance was based on State of Madhya Pradesh v. Vyankatlal & Anr.[1985 (3)

S.C.R. 561] and Shiv Shanker Dal Mills etc. v. State of Haryana & Ors. Etc.  [1979 (3) S.C.R. 1217] wherein court held that though refund of fee so collected may be legally due to the traders, the traders may be repaid amounts only to the extent that they have not passed on the burden to their customers. To the extent they have passed on, it held, they were not entitled.

Held

Nine-Member Bench Judgement: Where burden of duty is not passed on to third party, refund is admissible but no civil suit  for  refund is  maintainable. No automatic refund to be granted under section 11B of Central Excise Act & Section 27 of Customs Act unless it is proved that duty has not been passed on      to third party. (CA. No. 3255 of 1984 dt. 19-12-1996)

Editorial: The term ‘unjust enrichment’ is not used anywhere in the CGST Act. However, principle is inbuilt under section 54(4) of CGST Act. Thus, a refund under section 54 would have to pass this test. However, only if it can be shown  that amount paid is not tax (GST), the said conditions may not apply for seeking refund.

“A man’s true wealth hereafter is the good he has done to his fellowmen.”

– Mahatma Gandhi