Full Judgment Text
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CASE NO.:
Appeal (civil) 3255 of 1984
PETITIONER:
MAFATALAL INDUSTRIES LTD. ETC. ETC.
RESPONDENT:
UNION OF INDIA ETC. ETC.
DATE OF JUDGMENT: 19/12/1996
BENCH:
A.M.AHMADI CJI & JAGDISH SARAN VERMA & S.C.AGRAWAL & B.P.JEEVAN REDDY &
A.S.ANAND & B.L.HANSARIA & S.C.SEN & K.S.PARIPOORNAN & B.N.KIRPAL
JUDGMENT:
JUDGMENT
Judgement Delivered By:
A.M.AHMADI CJI
B.P.JEEVAN REDDY & K.S.PARIPOORNAN, JJ.
B.L. HANSARIA & S.C. SEN, JJ.
A.M.AHMADI, CJI
I have had the benefit of studying the judgments of 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:
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 tax is necessarily required to be made
in accordance 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
in Dhulabhai and others Vs. 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 determining the extent
to which 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 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
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principles of judicial procedure.
(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 civil 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 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
constituted, and whether remedies
normally associated with actions in
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 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. 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 lies.
(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 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 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 to be inferred unless
the conditions above set down
apply."
In view of these propositions, which have been
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reiterated by this court on several occasions and thus
constitute sound law, it is clear that actions by way of
suits of petitions under Article 226 of the Constitution
cannot be completely eliminated. The claims for refund can
arise under three broad classes and 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 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 writ
jurisdiction of the High Court under Article 226 of the
Constitution.
Class II: "Illegal Levy"-- Where claims for refund are
founded on the grounded that there is
misinterpretation/misapplication/erroneous interpretation of
the Excise Act and the Rules framed thereunder.
Ordinarily, all such claims must be preferred under the
provisions of the Exercise 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 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 over situations in which they totally lack
inherent jurisdiction 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 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 several
decisions of this court.
Class 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.
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.
In Cases where the levy of a tax has been held to be
(1) unconstitutional ; or (2) void for want of inherent
jurisdiction (as explained in Class II), 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 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
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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
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 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
provision. Considering the gravity of the case, in my
opinion, it should be left open to such an assessee to use
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.
On the issue of the retrospective application of the
amended provisions of the Excise Act, I wish to emphasise
one 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 11B.
However, in respect of decrees and orders that have become
final but have not been executed, the non obstante clause,
Section 11B(3), provides as follows:
"(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)."
(Emphasis added)
It is, therefore, clear that in respect of such decrees
and orders, the procedure and conditions prescribed in
Section 11B will have to be complied 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 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 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, its must be deemed that the duties of excise in
such cases were paid "under protest" within the meaning of
the second proviso to clause (1) of Section 11B. 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.
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Subject to the above, I agree with the rest of the
conclusions reached by Reddy, J.
____________________________________________________________
B.P.JEEVAN REDDY
Article 289(1) of the Constitution of India declares
that the "property and income of a State shall be exempt
from Union taxation". The question in this batch of appeals
is whether the properties of the States situated in the
Union Territory of Delhi are exempt from property taxes
levied under the municipal enactments in force in the Union
Territory of Delhi. The Delhi High Court has taken the view
that they are. That view is challenged in these appeals
preferred by the New Delhi Municipal Corporation and the
Delhi Municipal Corporation.
Leave granted in the Special Leave Petitions.
Prior to 1911-12, a large part of the territory now
comprised in the Union Territory of Delhi was a district of
the Province of Punjab. By a proclamation dated September
17, 1912, the Governor General took the said territory under
his immediate authority and management, to be administered
as a separate Province to be known as the Province of Delhi.
[This was in connection with the decision to shift the
Capital from Calcutta to Delhi.] In the same year, the Delhi
Laws Act, 1912 {1912 Act] was enacted. It came into force on
and with effect from the Ist day of October, 1912. Schedule-
A to the Act defined the "territory" covered by the new
Province. Sections 2 and 3 of the 1912 Act provided inter
alia that the creation of the new Province of Delhi shall
not effect any change in the territorial application of any
enactment. One of the Acts so applying to the territory
comprised in the new Province of Delhi was the Punjab
Municipal Act, 1911.
In the year 1915, another Act called "The Delhi Laws
Act, 1915" [1915 Act] was enacted. Under this enactment,
certain areas formerly comprised in the United Provinces of
Agra and Oudh were included in and added to the Province of
Delhi with effect from Ist April, 1915. Section 2 of the
1915 Act also contained a saving clause similar to Section 2
of the 1912 Act.
In the Constitution of India, 1950, as originally
enacted, the First Schedule contained four categories of
States, viz., Part ‘A’, Part ‘B’, Part ‘C’ and Part ‘D’.
Part ‘D’ comprised only of Andaman and Nicobar Islands. The
Chief Commissioner’s Province of Delhi was one of the Part
‘C’ States. By virtue of the Part ‘C’ States [Laws] Act,
1950, the laws in force in the erstwhile Chief
Commissioner’s Province of Delhi were continued in the Part
‘C’ State of Delhi. This Act came into force on the 16th day
of April, 1950.
In the year 1951, the Parliament enacted the Government
of Part ‘C’ States Act, 1951. This Act contemplated that
there shall be a legislature for each of the Part ‘C’ States
specified therein which included Delhi. Section 21 stated
that the legislature of a Part ‘C’ State shall have the
power to make laws with respect to any of the matters
enumerated in List-II and List-III of the Seventh Schedule
to the Constitution. In the case of Delhi legislature,
however, it was provided that it shall not have power to
make laws with respect to matters specified therein
including "the constitution and powers of municipal
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corporations and other local authorities, of improvement
trusts and of water supply, drainage, electricity, transport
and other public utility authorities in Delhi or in New
Delhi". Section 22 provided that any law made by the
legislature of a Part‘C’ State shall, to the extent of
repugnancy with any law made by Parliament, whether enacted
earlier or later, be void. It is necessary to notice the two
distinctive features of the legislatures of Part ‘C’ States;
not only were they created under an Act made by Parliament,
the laws made by them even with respect to any of the
matters enumerated in List-II were subject to any law made
by the Parliament. In case of repugnancy, the law made by
legislature was to be of no effect. So far as Delhi is
concerned, the Parliament placed certain additional fetters
referred to in Section 26.
It is stated that in the year 1952, a legislature was
created for Delhi which functioned upto November 1, 1956
when the Government of Part ‘C’ States Act, 1951 was
repealed by Section 130 of the States’ Reorganisation Act,
1956. While repealing the Government of Part ‘C’ States Act,
1951, the States’ Reorganisation Act, 1956 did not provide
for the creation or continuance of legislatures for the Part
‘C’ States. The legislature constituted for Delhi thus came
to an end.
By Constitution Seventh [Amendment] Act, 1956, some of
the Part ‘C’ States ceased to exist, having been merged in
one or the other State while some others continued -
designated as Union territories. The categorisation of the
States into Parts A,B,C and D was done away with. In its
place, the First Schedule came to provide only two
categories, viz., "(i) the States" and "(ii) the Union
territories". The Seventh [Amendment] Act specified six
Union territories, viz., Delhi, Himachal Pradesh,
Manipur,Tripura, Andaman and Nicobar Islands and Laccadiv
Minicoy and Amindivi Islands. Delhi thus became a Union
territory. With the inclusion of Goa and other former
Portugese territories in the Union, the number of Union
territories grew to eight by 1962. In that year, the
Constitution Fourteenth [Amendment} Act, 1962 was enacted.
Pondicherry was added as a Union territory as S1.No.9. More
important, the said Amendment Act introduced Article 239-A.
The new Article provided that "Parliament may by law create
for any of the Union territories of Himachal Pradesh,
Manipur, Tripura, Goa, Daman and Diu and Pondicherry, a
body, whether elected or partly nominated, and partly
elected to function as a legislature for the Union
territory, or a council of ministers, or both with such
constitutional powers and functions in each case, as may be
specified in the law" [Emphasis added]. It is significant to
note that the said article did not provide for creation of a
legislature or a council of ministers, as the case may be,
for the Union Territory of Delhi.
Pursuant to Article 239-A, Parliament enacted the
Government of Union Territories Act, 1963 [1963 Act].
Obviously, this Act applied only to those Union territories
as were referred to in Article 239-A. It did not apply to
Delhi. This Act provided for creation of Legislative
Assemblies for the Union territories mentioned in Article
239-A and the extent of their legislative power. Section
3(1) declared that "there shall be a Legislative Assembly
for each Union territory" whereas Section 18(1) provided
that "subject to the provisions of this Act, the Legislative
Assembly of a Union territory may make laws for the whole or
any part of the Union territory with respect to any of the
matters enumerated in the State List or the Concurrent List
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in the Seventh Schedule to the Constitution insofar as any
such matter is applicable in relation to Union territories."
Sub-section (2) of Section 18 read with Section 21, however,
conferred over-riding power upon the Parliament to make any
law with respect to any matter for a Union territory or any
part thereof. In case of inconsistency between a law made by
Parliament and a law made by the legislature of any of these
Union territories, the latter was to be void to the extent
of repugnancy, notwithstanding whether the Parliamentary law
was earlier or subsequent in point if time. Section 19 of
the Act exempted the property of the Union from all taxes
imposed by or under any law made by the Legislative Assembly
of a Union territory except insofar as is permitted by a law
made by Parliament.
By the Constitution Sixty Ninth [Amendment] Act, 1991,
Article 239-AA was introduced in Part-VIII of the
Constitution . This Article re-named the Union Territory of
Delhi as the "National Capital Territory of Delhi" and
provided that there shall be a Legislative Assembly for such
National Capital Territory. The Legislative Assembly so
created was empowered by clause (3) of the said Article "to
make laws for the whole or any part of the National Capital
Territory with respect to any of the matters enumerated in
the State List or in the Concurrent List, insofar as any
such matter is applicable to Union territories, except,
matters with respect to Entries 1,2 and 18 of the State List
and Entries 64,65 and 66 of that List insofar as they relate
to the said Entries 1, 2 and 18". Clause (3) further
provided that the power conferred upon the Legislative
Assembly of Delhi by the said article shall not derogate
from the powers of the Parliament "to make laws with respect
to any matter for a Union territory or any part thereof". It
further provided that in the case of repugnancy, the law
made by Parliament shall prevail, whether the Parliamentary
law is earlier or later to the law made by the Delhi
Legislative Assembly. The Parliament is also empowered to
amend, vary or repeal any law made by the Legislative
Assembly. Article 239-AA came into force with effect from
February 1, 1991. Pursuant to the article, the Parliament
enacted the Government of National Capital Territory of
Delhi Act, 1991. It not only provided for constitution of a
Legislative Assembly but also its powers as contemplated by
Article 239-AA. This Act too came into force on February 1,
1991. The subordinate status of the Delhi Legislature is too
obvious to merit any emphasis.
So far as the MUNICIPAL LAWS GOVERNING THE TERRITORY OF
DELHI is concerned, the following is the position: by Delhi
Laws Act, 1912, referred to supra, the Punjab Municipal Act
continued to govern the territory comprised in the Chief
Commissioner’s Province of Delhi. The Act is stated to have
been extended to Part ‘C’ State of Delhi under a
notification issued under Part ‘C’ State [Laws] Act, 1950.
In the impugned judgment, the High Court has stated the
following facts:
"The various Punjab enactments
which were then in force in the
territory of Delhi continued to be
in force by virtue of the Delhi
Laws Act of 1912 and later by the
Part C States Laws Act of 1950 and
the Union Territories Laws Act of
1950. The application and the later
extension of this law to the Union
Territory of Delhi was, therefore,
not by the authority of the State
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Legislature but that of the Central
Legislature, that is, the Central
Legislature under the Government of
India Act followed by the Central
legislature under the Constitution
of India, that is, the Parliament
of India...... The Delhi Laws Act
1912, the Union Territories [Laws]
Act, 1950 as indeed the Part C
States [Laws] Act, 1950 were all
central statutes and when a
provincial Act or an Act which may
be treated as a provincial Act or
State Act was extended to a
territory by a particular
legislature, it would be deemed to
be the enactment of such a
legislature and this principle is
clearly recognised by the Supreme
Court in the case of Mithan Lal v.
The State of Delhi and another,
1959 S.C.R.445...It is thus clear
that on the extension of the Act to
the Union Territory of Delhi by the
various Central Legislative
enactments referred to above, it
became a Central Act or an Act of
Parliament as if made by virtue of
power of Parliament to legislate
for the Union territory of Delhi by
virtue of clause (4) of Article 246
of the Constitution of India."
The correctness of the above factual statement has not
been disputed by anyone before us. Indeed, the contention of
Sri P.P. Rao, who led the argument on behalf of the
respondents-State governments was to the same effect. He
contended that inasmuch as the Punjab Municipal Act has been
extended to Part ‘C’ State of Delhi Under the Part ‘C’ State
[Laws] Act, 1950 with effect from April 16, 1950, it is a
post-constitutional enactment made by Parliament and hence
the taxes levied thereunder constitute Union taxation. He
placed strong reliance upon the decision in Mithan Lal v.
The State of Delhi & Anr. [1959 S.C.R.445] and also certain
observations in T.M. Kanniyan v. Income Tax Officer,
Pondicherry & Anr. [1968 (2) S.C.R.103] in that behalf. It
is obvious that this was also the case of the State
governments before the Delhi High Court. We, therefore,
proceed on the basis that the Punjab Municipal Act was
extended to Part ‘C’ State of Delhi under and by virtue of
the Part ‘C’ State of Delhi under and by virtue of the Part
‘C’ States [Laws] Act, 1950 which came into of the force on
April 16, 1950.
By virtue of the Constitution Seventh [Amendment] Act,
1956, the Part ‘C’ State of Delhi was designated as a Union
Territory. The Punjab Municipal Act continued to govern the
Union Territory of Delhi. In the year 1957, the Parliament
enacted the Delhi Municipality Act, 1957. The First Schedule
to the Act specified the boundaries of New Delhi within
which area the Punjab Municipal Act continued to be in
force. The remaining area was designated as the Delhi
Municipal Corporation area and the Delhi Municipal
Corporation Act, 1957 was made applicable to it. In the year
1994, the Parliament enacted the new Delhi Municipal
Corporation Act, 1994 repealing Punjab Municipal Act, 1911.
This Act has been brought into force with effect from May
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25, 1994. It is, however, confined in its application to the
area comprised in the New Delhi Municipal Corporation. Delhi
and New Delhi are thus governed by different municipal
enactments. The Delhi Municipal Corporation Act and New
Delhi Municipal Corporation Act are, without a doubt, post-
constitutional laws enacted by Parliament.
PART - II
Article 1(1) of the Constitution of India declares that
India, i.e., Bharat, shall be a Union of States. As amended
by the Constitution Seventh [Amendment] Act, clauses (2) and
(3) Article 1 read:
"(2) The States and the territories
thereof shall be as specified in
the First Schedule.
(3) The territory of India shall
comprise--
(a) the territories of State;
(b) the Union territories specified
in the First Schedule; and
(c) such other territories as may
be acquired."
Clause (30) in Article 366 defines the "Union
territory" in the following words:
"‘Union territory’ means any Union
Territory specified in the First
Schedule and includes any other
territory comprised with the
territory of India but not
specified in that Schedule."
The expression "State" is not defined in the
Constitution. It is defined in the General Clauses act, 1397
which is made applicable to the interpretation of the
Constitution by Article 367. As on the date of the
commencement of the Constitution, clause (58) in Section 3
of the General Clauses Act defined "State" in the following
words"
"(58). ‘State’ shall mean a Part A
State, a Part B State or a Part C
State."
The said definition was amended by the adaptation of
Laws Order No.1 of 1956 issued by the President in exercise
of the power conferred upon him by Article 372-A of the
Constitution introduced by the Constitution Seventh
[Amendment] Act. The amended definition reads thus:
"(58) ‘States’--
(a) as respects any period before
the commencement of the
Constitution (Seventh Amendment)
Act, 1958, shall mean a Part A
State, a Part B State or a Part C
State; and
(b) as respects any period after
such commencement, shall mean a
State specified in the First
Schedule to the Constitution and
shall include a Union territory."
The definitions in the General Clauses Act, it is
necessary to remember, have to be read and applied subject
to the opening words in Section 3, viz., "unless there is
anything repugnant in the subject or context....".
Part-XI of the Constitution contains provision
governing relations between the Union and the States. This
part is divided into two chapters, viz., Chapter-I
containing Articles 245 to 255 and Chapter-II containing
Articles 256 to 263. Chapter-I carries the title
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"legislative relations" while Chapter-II is called
"Administrative relations". Article 245, which carries the
heading/marginal note "The extent of laws made by Parliament
and the Legislature of States" contains two clauses. Clause
(1) says that subject to the provisions of this
Constitution, Parliament may make laws for the whole or any
part of the territory of India and the legislature of a
State may make laws for the whole or any part of the State."
Article 246 is of crucial relevance herein and must,
therefore, be set out in its entirety:
"246. subject-matter of laws
made by Parliament and by the
Legislatures of States.-(1)
Notwithstanding anything in clauses
(2) and (3), Parliament has
exclusive power to make laws with
respect to any of the matters
enumerated in List I of the Seventh
Schedule to the Constitution
referred to as the ‘Union List’).
(2) Notwithstanding anything in
clause (3), Parliament, and,
subject to clause (1) the
legislature of any State...also,
have power to make laws with
respect to any of the matters
enumerated in List III in the
Seventh Schedule to the
Constitution referred to as the
‘Concurrent List’).
(3) Subject to clauses (1) and
(2), the Legislature of any
State....has exclusive power to
make laws for such State or any
part thereof with respect to any of
the matters enumerated in List II
in the Seventh Schedule to the
Constitution referred to as the
‘State List’).
(4) Parliament has power to make
laws with respect to any matter for
any of the territory of India not
included in a State notwithstanding
that such matter is a matter
enumerated in the State List."
[Emphasis added]
It is relevant to point out that in clauses (2) and
(3), as originally enacted - and upto the Seventh
[Amendment] Act - the expression "State" was followed by the
words "specified in Part-A or Part-B of the First Schedule".
Similarly, the words, "in a State" in clause (3), were
followed by the words "in Part-A or Part-B of the First
Schedule". In other words, clauses (2) and (3) of Article
246 expressly excluded Part ‘C’ and Part ‘D’ States from
their purview. The position is no different after the
Constitution Seventh [Amendment] Act, which designated the
Part-C States as Union territories. They ceased to be
states. As rightly pointed out by a Constitution Beach of
this Court in T.M. Kanniyan, the context of Article 246
excludes Union territories from the ambit of the expression
"State" occurring therein. As a matter of fact, this is true
of Chapter-I of Part-XI of the Constitution as a whole. It
may be remembered that during the period intervening between
The Constitution Seventh [Amendment] Act, 1962, there was no
provision for a legislature for any of the Union
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territories. Article 239-A in Part-VII - "The Union
Territories" - [which before the Seventh Amendment was
entitled "The States in Part-C of the First Schedule"]
introduced by Constitution Fourteenth [Amendment] Act did
not itself create a legislature for Union territories; it
merely empowered the Parliament to create them for certain
specified Union territories [excluding Delhi] and to confer
upon them such powers as the Parliament may think
appropriate. Thus, the legislatures created for certain
Union territories under the 1963 Act were not legislatures
in the sense used in Chapter-III of Part-IV of the
Constitution, but were mere creatures of the Parliament -
some sort of subordinate legislative bodies. They were
unlike the legislatures contemplated by Chapter-III of Part-
VI of the Constitution which are supreme in the field
allotted to them, i.e., in the field designated by List-II
of the Seventh Schedule. The legislatures created by the
1963 Act for certain Union territories owe their existence
and derive their powers from the Act of the Parliament and
are subject to its over-riding authority. In short, the
State legislatures contemplated by Chapter-I of Part-XI are
the legislatures of States referred to in Chapter-III of
Part-VI and not the legislatures of Union territories
created by the 1963 Act. Union territories are not States
for the purposes of Part-XI [Chapter-I] of the Constitution.
Article 248 confers the residuary legislative power
upon the Parliament. The said power includes the power to
make any law imposing a tax not mentioned in either List-II
or List-III. Articles 249, 250, 252 and 357 confer upon the
Parliament power to make laws with respect to matters
enumerated in List-II in certain exceptional situations,
which may, for the sake of convenience, be called a case of
"substitute legislation". It would be enough to refer to the
marginal headings of these four Articles. They read:
"249. Power of Parliament to
legislate with respect to a matter
in the State in the national
interest.
250. Power of Parliament to
legislate with respect to any
matter in the State List if a
Proclamation of Emergency is in
operation.
252. Power of Parliament to
legislate for two or more States by
consent and adoption of such
legislation by any other State.
357. Exercise of legislative powers
under Proclamation issued under
article 356."
We may now set out ARTICLE 285 AND
289:
"285. exemption of property of the
Union from State taxation.-- (1)
The property of the Union Shall,
save in so far as Parliament may by
law otherwise provide, be exempt
from all taxes imposed by a State
or by an authority within a State.
(2) Nothing in clause (1) shall,
until Parliament by law otherwise
provides, prevent any authority
within a State from levying any tax
on any property of the Union to
which such property was immediately
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before the commencement of this
Constitution liable or treated as
liable, so long as that tax
continues to be levied in that
State.
289. Exemption of property and
income of a State from Union
taxation.-- (1) The property and
income of a State shall be exempt
from Union taxation.
(2) Nothing in clause (1) shall
prevent the Union from imposing or
authorising the imposition of, any
tax to such extent, if any, as
Parliament many by law provide in
respect of a trade or business of
any kind carried on by, or on
behalf of, the Government a State,
or any operations connected
therewith, or any property used or
occupied for the purposes of such
trade or business or any income
accruing in connection therewith.
(3) Nothing in clause (2) shall
apply to any trade or business, or
to any class of trade or business,
which Parliament may by law declare
to be incidental to the ordinary
functions of Government."
A federation pre-supposes two coalescing units: the
Federal Government/Centre and the States/Provinces. Each is
supposed to be supreme in the sphere allotted it/them. Power
to tax is an incident of sovereignty. Basic premise is that
one sovereign cannot tax the other sovereign. Article 285
and 289 manifest this mutual regard and immunity but in a
manner peculiar to our constitutional scheme. While the
immunity created in favour of the Union is absolute, the
immunity created in favour of the States is a qualified one.
We may elaborate: Article 285 says that "the property of the
Union shall...be exempt from all tax imposed by a State or
by any authority within a State" unless, of course,
Parliament itself permits the same and to the extent
permitted by it. [Clause (2) of Article 285 saves the
existing taxes until the Parliament otherwise provides, but
this is only a transitional provision.] The ban, if it can
be called one, is absolute and emphatic in terms. There is
no way a State legislature can levy a tax upon the property
of the Union. So far as Article 289 is concerned, the
position is different. Clause (1), had it stood by itself,
would have been similar to clause (1) of Article 285. It
says that "the property-and income-of a State shall be
exempt from Union taxation". But it does not stand alone. It
is qualified by clause (2) and clause (3) is an exception to
clause (2). But before we refer to clause (2), a word with
respect to the meaning and ambit of the expression
"property" occurring in this article. Expression "property"
is wide enough to take in all kinds of property. In Re. the
Bill to amend Section 20 of the Sea Customs Act, 1878 and
Section 3 of the Central Excises and Salt Act, 1944 [1964
(3) S.C.R.787], all the learned Judges [both majority and
dissenting] were agreed that the expression must be
understood in its widest sense. There is no reason to put a
restricted construction thereon. Indeed, there is no
controversy about this proposition before us. Coming to
clause (2), it says that the ban imposed by clause (1) shall
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not prevent the Union from imposing or authorising the
imposition of any tax to such extent, if any, as the
Parliament may by law provide, in respect of (a) trade or
business of any kind carried on by or on behalf of the
Government of a State or (b) any operations connected with
such trade or business or (c) any property used or occupied
for the purposes of such trade or business or (d) any income
accruing or arising in connection with such trade or
business. [The inspiration for this provision may perhaps be
found in certain United States’ decision on the question of
the power of the units of a federal polity to tax each
others’ properties.] Clause (3) empowers the Parliament to
declare, by law, which trade or business or any class of
trades or businesses is incidental to the ordinary functions
of the Government, whereupon the trades/businesses so
specified go out of the purview of clause (2).
It would be appropriate at this state to notice the
ratio of two judgments of this Court dealing with Article
289. In Re: Sea Customs Act, a Special Bench of nine learned
Judges, by a majority, laid down the following propositions:
(a) clause (1) of Article 289 provides for exemption of
property and income of the States only from taxes imposed
directly upon them; it has no application to indirect taxes
like duties of excise and customs; (b) duties of excise and
customs are not taxes on property or income; they are taxes
on manufacture/production of goods and on import/export of
goods, as the case may be, and hence, outside the purview of
clause (1) of Article 239. The other decision in Andhra
Pradesh State Road Transport Corporation v. The Income Tax
Office [1964 (7) S.C.R.17] is the decision of a Constitution
Bench. The main holding in this case is that income of the
A.P.S.R.T.C. is not the income of the State of Andhra
Pradesh since the former is an independent legal entity and
hence, Article 289(1) does not avail it. At the same time,
certain observations are made in the decision regarding the
scheme of Article 289. It is held that clause (2) is an
exception of a proviso to clause (1) and as such whatever is
included in clause (2) must be deemed to be included in
clause (1). In other words, the trading and business
activities referred to in clause (2) are included in clause
(1) and precisely for this reason the exception in clause
(2) was provided. Clause (3), it was held, is an exception
to clause (2). In the words of the Constitution Bench:
"The scheme of Art.289 appears to
be that ordinarily, the income
derived by a State both from
government and non-governmental or
commercial activities shall be
immune from income-tax levied by
the Union, provided, of course, the
income in question can be said to
be income of the State. This
general proposition flows from
clause (1).
Clause (2) then provides an
exception and authorises the Union
to impose a tax in respect of the
income derived by the Government of
a State from trade or business
carried on by it, or on its behalf:
that is to say, the income from
trade or business carried on by the
Government of a State or on its
behalf which would not have been
taxable under clause (1), can be
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taxed, provided a law is made by
Parliament in that behalf. If
clause (1) had stood by itself, it
may not have been easy to include
within its purview income derived
by a State from commercial
activities, but since clause (2),
in terms, empowers Parliament to
make a law levying a tax on
commercial activities carried on by
or on behalf of a State, the
conclusion is inescapable that
these activities were deemed to
have been included in cl. (1) and
that alone can be the justification
for the words in which cl. (2) has
been adopted by the Constitution.
It is plain that cl.(2) proceeds on
the basis that but for its
provision, the trading activity
which is covered by it would have
claimed exemption from Union
taxation under cl.(1). That is the
result of reading clauses (1) and
(2) together.
Clause (3) then empowers Parliament
to declare by law that any trade or
business would be taken out of the
purview of cl.(2) and restored to
the area covered by cl.(1) by
declaring that the said trade or
business is incidental to the
ordinary functions of government.
In other words, cl.(3) is an
exception to the exception
prescribed by cl.(2). Whatever
trade or business is declared to be
incidental to the ordinary
functions of government, would then
be exempt from by cl.(2). and would
then be exempt from Union taxation.
That, broadly stated, appears to be
the result of the scheme adopted by
the three clause of Art.289."
PART - III
The crucial question arising in this batch of appeals
pertains to the meaning of the expression "Union taxation"
occurring in Article 289(1). According to the appellants-
municipal corporations, the property taxes levied either by
Punjab Municipal Act, 1911, as extended to and applicable in
the New Delhi Municipal Corporation area or by the Delhi
Municipal Corporation Act, 1957 applicable to the Delhi
Municipal Corporation area do not fall within the ambit of
the expression "Union taxation". According to them, "Union
taxation" means levy of any of the taxes mentioned in the
Union List [List-I in the Seventh Schedule to the
Constitution]. May be, it may also take in levy of Stamp
duties [which is the only taxation entry in the Concurrent
List] by Parliament, but by no stretch of imagination, they
contend, can levy of any tax provided in the State List
[List-II in the Seventh Schedule] can be characterised as
Union taxation. Merely because the Parliament levies the tax
provided in List-II, such taxation does not amount to Union
taxation. There are many situations where the Parliament is
empowered by Constitution to make laws with respect to
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matters enumerated in List-II. For example, Articles 249,
250, 252 and 357 empower the Parliament to make laws with
respect to matters enumerated in List-II in certain
specified situations. If any taxes are levied by Parliament
while legislating under any of the above articles, such
taxation cannot certainly be termed as "Union taxation". It
would still be State taxation. The levy of taxation by
Parliament within the Union territories is of a similar
nature. Either because the Union territory has no
legislature or because the Union territory has a legislature
but the Parliament chooses to act in exercise of its over-
riding power, the taxes levied by a Parliamentary enactment
within such Union territories would not be Union taxation.
It is relevant to notice, the learned counsel contend, that
the legislatures of the Union territories referred to in
Article 239-A as well as the legislature of Delhi created by
Article 239-AA are empowered to make laws with respect to
any of the matters enumerated in List-II and List-III of the
Seventh Schedule, just like any other State legislature; any
taxes levied by these legislatures cannot certainly be
characterised as "Union taxation". Merely because the
Parliament has been given an over-riding power to make a law
with respect to matters enumerated even in List-II, in
suppression of the law made by the legislature of the Union
territory, it does not follow that the law so made is any
the less a law belonging to the sphere of the State. The
test in such matters - it is contended - is not who makes
the law but to which matter in which List does the law in
question pertain. Clause (4) of Article 246 specifically
empowers the Parliament to make laws with respect to any
matter enumerated in List-II in the case of Union
territories. This shows that even the said clause recognises
the distinction between List-I and List-II in the Seventh
Schedule, it is submitted.
The learned Attorney General appearing for the Union of
India supported the contentions of the appellant-municipal
corporations.
On the other hand, the contentions of the learned
counted for the respondents are to the following effect: a
Union territory is not a "State" within the meaning of
Article 246. Even prior to the Seventh [Amendment] Act, Part
‘C’ States, or for that matter Part-D States, were not
within the purview of the said article. The division of the
legislative powers provided by clauses (1), (2) and (3) of
article 246 has no relevance in the case of a Union
territory. Union territory, as the name itself indicates, is
a territory belonging to Union. A Union territory has no
legislature as contemplated by Part-VI of the Constitution.
A Union territory may have a legislature or may not. Even
if it is bestowed with one, it is not by virtue of the
Constitution but by virtue of a Parliamentary enactments,
e.g., Government of Part ‘C’ States Act, 1951 [prior to
November 1, 1956] and Government of Union Territories Act,
1963. Even the legislature provided for Delhi by Article
239-AA of the Constitution with effect from February 1, 1992
is not a legislature like that of the States governed by
Part-VI of the Constitution. Not only the powers of he
legislature are circumscribed by providing that such
legislature cannot make laws with reference to certain
specified entries in List-II but any law made by it even
with reference to a matter enumerated in the State List is
subject to the law made by Parliament. In any event, the
position obtaining in Delhi after February 1, 1992 is not
relevant in these appeals since these appeals pertain to a
period anterior to the said date. The Punjab Municipal Act,
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1911[as extended and applied to the Union Territory of Delhi
by Part ‘C’ States [Laws] Act] and the Delhi Municipal
Corporation Act, 1957 are Parliamentary laws enacted under
and by virtue of the legislative power vested in Parliament
by clause (4) of Article 246. The taxes levied by the said
enactments constitute "Union taxation" within the meaning of
Article 289(1) and hence, the properties of the States in
the Union Territory of Delhi are exempt therefrom. Reliance
is placed upon the majority opinion in Re.: Sea Customs Act
in support of the above propositions. It is submitted that
there are no reasons to take a different view now.
On a consideration of rival contentions, we are
inclined to agree with the respondents-States. The States
put together do not exhaust the territory of India. There
are certain territories which do not form part of any State
and yet are the territories of the Union. That the States
and Union territories of the Union. That the States and
Union territories are different entities, is evident from
clause (2) of Article 1 - indeed from the entire scheme of
the Constitution. Article 245(1) says that while Parliament
may make laws for the whole or any part of the territory of
India, the legislature of a State may make laws for the
whole or any part of the State. Article 1(2) read with
Article 245(1) shows that so far as the Union territories
are concerned, the only law-making body is the Parliament.
The legislature of a State cannot make any law for a Union
territory; it can make laws only of that State. Clauses (1),
(2) and (3) of Article 246 speak of division of legislative
powers between the Parliament and State legislatures. This
division is only between the Parliament and the State
legislatures, i.e., between the Union and the States. There
is no division of legislative powers between the Union and
Union territories. Similarly, there is no division of powers
between States and Union territories. So far as Union
territories are concerned, it is clause (4) of Article 246
that is relevant. It says that the Parliament has power to
make laws with respect to any matter for any part of the
territory of India not included in a State notwithstanding
that such matter is a matter enumerated in the State List.
Now, the Union territory is not included in the territory of
any State. If so, Parliament is the only law-making body
available for such Union territories. It is equally relevant
to mention that the Constitution, as originally enacted did
no provided for a legislature for any of the Part ‘C’ States
[or, for that matter, Part‘D’ States]. It is only by virtue
of the Government of Part ‘C’ States Act, 1951 that some
Part ‘C’ States including Delhi got a legislature. This was
put an end to by the States Reorganisation Act, 1956. In
1962, the Constitution Fourteenth [Amendment] Act did
provide for creation/constitution of legislatures for Union
territories [excluding, of course, Delhi] but even here the
Constitution did not itself provide for legislatures for
those Part‘C’ States; it merely empowered the Parliament to
provide for the same by making a law. In the year 1991, the
Constitution did provide for a legislature for the Union
Territory of Delhi [National Capital Territory of Delhi] by
Sixty-Ninth [Amendment] Act [Article 239AA] but even here
the legislature so created was not a full fledged
legislature not did have the effect of - assuming that it
could - lift the National Capital Territory of Delhi from
Union territory category to the category of States within
the meaning of Chapter-I of Part-XI of the Constitution .
All this necessarily means that so far as the Union
territories are concerned, there is not such thing as List-
I, List-II or List-III. The only legislative body is
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Parliament - or a legislative body created by it. The
Parliament can make any law in respect of the said
territories - subject, of course, to constitutional
limitations other than those specified in Chapter-I of Part-
XI of the Constitution. Above all, Union Territories are not
"States" as contemplated by Chapter-I of Part-XI; they are
the territories of the Union falling outside the territories
of the States. Once the Union territory is a part of the
Union and not part of any State, it follows that any tax
levied by its legislative body is Union taxation.
Admittedly, it cannot be called "State taxation"- and under
the constitutional scheme, there in no third kind of
taxation. Either it is Union taxation or State taxation.
This is also the opinion of the majority in Re.:Sea Customs
Act. B.P. Sinha, C.J., speaking on behalf of himself, P.B.
Gajendragadkar, Wanchoo and Shah, JJ. - while dealing with
the argument that in the absence of a power in the
Parliament to levy taxes on lands and buildings [which power
exclusively belongs to State legislatures, i.e., Item 49 in
List-II], the immunity provided by Article 289(1) does not
make any sense - observed thus:
"It is true that List I contains no
tax directly on property like List
II, but it does not follow from
that the Union has no power to
impose a tax directly on property
under any circumstances. Article
246(4) gives power to Parliament to
make laws with respect to any
matter for any part of the
territory of India not included in
a State notwithstanding that such
matter is a matter enumerated in
the State List. This means that so
far as Union territories are
concerned Parliament has power to
legislate not only with respect to
items in List I but also with
respect to items in List I but also
with respect to items in List II.
Therefore, so far as Union
territories are concerned,
Parliament has power to impose a
tax directly on property as such.
It cannot therefore be said that
the exemption of States’ property
from Union taxation directly on
property under Art.289(1) would be
meaningless as Parliament has no
power to impose any tax directly on
property. If a State has any
property in any Union territory
that property would be exempt from
Union taxation on property under
Art.289(1). The argument therefore
that Art.289(1) cannot be confined
to tax directly on property because
there is no such tax provided in
List I cannot be accepted."
Rajagopala Iyyengar,J. agreed with Sinha, CJ. on this
aspect, as indeed on the main holding. The decision in
Re.:Sea Customs Act has been rendered by a Bench of nine
learned Judges. The decision of the majority is binding upon
us and we see no reason to take a different view. Indeed,
the view taken by the majority accords fully with the view
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expressed by us hereinabove.
Now, so far as the analogy of laws made by Parliament
under Articles 249, 250, 252 and 357 are concerned, we think
the analogy is odious. Articles 249, 250 and 357 are
exceptional situations which call for the Parliament to step
in and make laws in respect of matters enumerated in List-II
and which laws have effect for a limited period. Article 252
is a case where the State legislatures themselves invite the
Parliament to make a law on their behalf. These are all
situations of what may be called "substitute legislation" -
either because of a particular situation or because there is
no legislature at a given moment to enact laws. As against
these provisions, clause (4) of Article 246 is a permanent
features and laws made thereunder are laws made in the
regular course.
In this connection, it is necessary to remember that
all the Union territories are not situate alike. There are
certain Union territories [I.e., Andaman and Nicobar Islands
and Chandigarh] for which there can be no legislature at all
- as on today. there is a second category of Union
territories covered by Article 239-A [which applied to
Himachal Pradesh, Manipur, Tripura, Goa, Daman and Diu and
Pondicherry - now, of course, only Pondicherry survives in
this category, the rest having acquired Statehood] which
have legislatures by courtesy of Parliament. The Parliament
can, by law, provide for constitution of legislatures for
these States and confer upon these legislatures such powers,
as it may think appropriate. The Parliament had created
legislatures for these Union territories under the "The
Government of Union Territories Act, 1963", empowering them
to make laws with respect to matters in List-II and List-
III, but subject to its over-riding power. The third
category is Delhi. It had no legislature with effect from
November 1, 1956 until one has been created under and by
virtue of the Constitution Sixty-Ninth [Amendment] Act, 1991
which introduced Article 239-AA. We have already dealt with
the special features of Article 239-AA and need not repeat
it. Indeed, a reference to Article 239-B read with clause
(8) of Article 239-AA shows how the Union Territory of Delhi
is in a class by itself but is certainly not a State within
the meaning of Article 246 or Part-VI of the Constitution.
In us, it is also a territory governed by clause (4) of
Article 246. As pointed out by the learned Attorney General,
various Union territories are in different stages of
evolution. Some have already acquired Statehood and some may
be on the way to it. The fact, however, remains that those
surviving as Union territories are governed by Article
246(4) notwithstanding the differences in their respective
set-ups - and Delhi, now called the "National Capital
Territory of Delhi", is yet a Union territory.
It would be appropriate at this state to refer to a few
decisions on his aspect. In T.M. Kanniyan, a Constitution
Bench speaking through Bachawat, J. had this to say:
"Parliament has plenary power to
legislate for the Union territories
with regard to any subject. With
regard to Union territories, there
is no distribution of legislative
power. Article 246(4) enacts that
‘Parliament has power to make laws
with respect to any matter for any
part of the territory of India not
included in a State notwithstanding
that such matter is a matter
enumerated in the State List.’ In
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R.K. Sen v. Union [1966] 1
S.C.R.480, it was pointed out that
having regard to Art.367, the
definition of ‘State’ in s.3(58) of
the General Clauses Act. 1897
applies for the interpretation of
the Constitution unless there is
anything repugnant in the subject
or context. Under that definition,
the expression ‘State’ as respect
any period after the commencement
of the Constitution (Seventh
Amendment) Act, 1956 ‘shall mean a
State specified in the First
Schedule to the Constitution and
shall include a Union territory’.
But this inclusive definition is
repugnant to the subject and
context of Art.246. There, the
expression ‘State’ means the States
specified in the First Schedule.
There is a distribution of
legislative power between
Parliament and the legislatures of
the States. Exclusive power to
legislate with respect to the
mattes enumerated in the State List
is assigned to the legislatures of
the State established by Part VI.
There is no distribution of
legislative power with respect to
Union territories. That is why
Parliament is given power by
Art.246(4) to legislate even with
respect to matters enumerated in
the State List. If the inclusive
definition of ‘State’ in s.3(58) of
the General Clauses Act were to
apply to Art.246(4), Parliament
would have no power to legislate
for the Union territories with
respect to matters enumerated in
the State List and until a
legislature empowered to legislate
on those matters is created under
Art.239A for the Union territories,
there would be no legislature
competent to legislate on those
matter is created under Art.239A
for the Union territories, there
would be no legislature competent
to legislate on those matters;
moreover, for certain territories
such as the Andaman and Nicobar
Islands no legislature can be
created under Art.239A, and for
such territories there can be no
authority competent to legislate
with respect to matter enumerated
in the State List. Such a
construction is repugnant to the
subject and context to Art.246. It
follows that in view of Art.246(4),
Parliament has plenary powers to
make laws for Union territories on
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all matters. Parliament can by law
extend the Income-tax Act, 1961 to
a Union territory with such
modifications as it thinks fit. The
President in the exercise of his
powers under Art.240 can make
regulations which have the same
force and effect as an Act of
Parliament which applies to that
territory. The President can
therefore by regulation made under
Art.240 extend the Income-tax Act,
1961 to that territory with such
modifications as he thinks it.
The President can thus make
regulations under Art.240 with
respect to a Union territory
occupying the same field on which
Parliament can also make laws. We
are not impressed by the argument
that tush overlapping of powers
would lead to a clash between the
President and Parliament. The Union
territories are centrally
administered through the President
acting through an administrator. In
the cabinet system of Government
the President acts on the advice of
the Ministers who are responsible
to Parliament....It is not
necessary to make any distribution
of income-tax with respect to Union
territories as those territories
are centrally administered through
the President."
[emphasis added]
We respectfully agree with the above statement of law.
We do not think it necessary to refer to or discuss the
propositions laid down in Management of Advance Insurance
Co.Ltd. V. Shri Gurudasmal & Ors. [1970 (3) S.C.R.881]
holding that the amended definition of "State" in clause
(58) of Section 3 of the General Clauses Act applies to
interpretation of Constitution by virtue of Article 372-A
nor with the contrary proposition in the dissenting judgment
of Bhargava, J. in Shiv Kirpal Singh v. Shri V.V. Giri [1971
(2) S.C.R.197 at 313]. It is enough to say that context of
Article 246 - indeed of Chapter - I in Part XI - excludes
the application of the said amended definition.
In Mithanlan [Supra], T.L. Venkatrama Iyer, J.,
speaking for the Constitution Bench, while dealing with an
argument based on Article 248(2) observed:
"That Article has reference to the
distribution of legislative powers
between the Centre and the States
mentioned in Parts A and B under
the three Lists in Sch.VII, and it
provided that in respect of matters
not enumerated in the Lists
including taxation, it is
Parliament that has power to enact
laws. It has no application to Part
C States for which the coverning
provision is Art, 246(4). Moreover,
when a notification is issued by
the appropriate Government
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extending the law of a Part A State
to a Part C State, the law so
extended derives its force in the
State to which it is extended from
6.2 of the part C States (Laws) Act
enacted by Parliament. The result
of a notification issued under that
section is that the provisions of
the law which is extended become
incorporated by reference in the
Act itself, and therefore a tax
imposed thereunder is a tax imposed
by Parliament. There is thus no
substance in this contention."
[Emphasis added]
To the same effect is the decision of a Division Bench
in Satpal & Co. v. Lt. Governor [1979 (3) S.C.R 651].
It is then argued for the appellants that if the above
view is taken, it would lead to an inconsistency. The
reasoning in this behalf runs thus: a law made by the
legislature of a Union territory levying taxes on lands and
buildings would be "State taxation", but if the same tax is
levied by a law made by the Parliament, it is being
characterised as "Union taxation"; this is indeed a curious
and inconsistent position, say the learned counsel for the
appellants. In our opinion, however, the very premise upon
which this argument is urged is incorrect. A tax levied
under a law made by a legislature of a Union territory
cannot be called "State taxation" for the simple reason that
Union territory is not a "State" within the meaning of
Article 246 [or for that matter, Chapter-I of Part-XI] or
Part-VI or Article 285 to 289.
Lastly, we may refer to the circumstance that Delhi
Municipal Corporation Act, 1957 was enacted by Parliament.
Hence, so far as the Delhi Municipal Corporation area is
concerned, the taxes are levied under and by virtue of a
Parliamentary enactment. So far as the New Delhi Municipal
Corporation area is concerned, the taxes were levied till
1994 under the Punjab municipal Act, 1911 as extended and
applied by the Part ‘C’ State [Laws] Act, 1950 enacted by
Parliament. It is held by this Court in Mithanlal that
extension of an Act to an area has the same effect as if
that Act has been made by the extending legislature for the
area. The Court Said:
"Moreover, when a notification is
issued by the appropriate
Government extending the law of a
Part A State to a Part C State, the
law so extended derives its force
in the State to which it is
extended from s.2 of the Part C
States (Laws) Act enacted by
Parliament. The result of a
notification issued under that
section is that the provisions of
the law which is extended become
incorporated by reference in the
Act itself, and therefore a tax
imposed thereunder is a tax imposed
by Parliament. There is thus no
substance in this contention."
[Also see T.M. Kanniyan [1968 (2) S.C.R.203 at 108].]
It must accordingly be held that with effect from 1950,
it is as if the property taxes are levied by a Parliamentary
enactment. In 1994, of course, Parliament itself enacted the
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New Delhi Municipal Corporation Act [with effect from May
25, 1994] repealing the Punjab Municipal Act. Taxes levied
under these enactments cannot but be Union taxation - Union
taxation in a Union Territory.
For all the above reason, we hold that the levy of
taxes on property by the Punjab Municipal Act, 1911 [as
extended to Part ‘C’ States of Delhi by Part ‘C’ States
(Laws) Act, 1950], the Delhi Municipal Corporation Act, 1957
and the New Delhi Municipal Corporation Act, 1994 [both
Parliamentary enactments] constitutes "Union taxation "
within the meaning of Article 289(1).
PART - IV
The Delhi Municipal Corporation Act, 1957, the Punjab
Municipal Act, 1911 [as extended to the Union Territory of
Delhi] and the New Delhi Municipal Corporation Act, 1994
[N.D.M.C. Act] specifically exempt the properties of the
Union from taxation. Section 119 of the Delhi Municipal
Corporation Act is in terms of Article 285 of the
Constitution. It reads:
"119. Taxation of Union properties
-- (1) Notwithstanding anything
contained in the foregoing
provisions of this Chapter, lands
and buildings being properties of
the Union shall be exempt from the
property taxes specified in section
114:
Provided that nothing in this sub-
section shall prevent the
Corporation from levying any of the
said taxes on such lands and
buildings to which immediately
before the 26th January 1950, they
were liable or treated as liable,
so long as that tax continues to be
levied by the Corporation on other
lands and buildings."
Sub-section (3) of Section 61 is also in terms of
Article 285 of the Constitution. It reads:
"Nothing in this sub-section shall
authorise the imposition of any tax
which the provincial legislature
has no power to impose in the
Province under the Constitution--
Provided that a committee which
immediately before the commencement
of the Constitution shall lawfully
levying any such tax under this
section as then in force may
continue to levy such tax until
provision to the contrary is made
by Parliament."
Sub-section (1) of Section 65 of the N.D.M.C. Act is
again in the same terms as Article 285.
None of the above enactments provide any exemption in
favour of the properties of a State. Section 115(4) of the
Delhi Municipal Corporation Act, Section 61 of the Punjab
Municipal Act and Section 62 of the N.D.M.C Act levy
property tax on all the properties within their
jurisdiction. From the fact that properties of the Union
have been specifically exempted in terms of Article 285 but
the properties of the States have not been exempted in terms
of Article 289 shows that so far as these enactments go,
they purport to levy tax on the properties of the States as
well. The State governments, it is equally obvious, are not
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claiming exemption from municipal taxation under any
provision of the concerned State enactment but only under
and by virtue of Article 289 of the Constitution. They are
relying upon clause (1) of Article 889 which is undoubtedly
in absolute terms. Clause (1) of Article 289 says, "the
property and income of a State shall be exempt from Union
taxation". But clause (1) does not stand alone. It is
qualified by clause (2) - which in turn is qualified by
clause (3). Where an exemption is claimed under clause (1),
we cannot shut our eyes to the said qualifying clause and
give effect to clause (1) alone. In the decision in
A.P.S.R.T.C., this Court has held that clause (2) is an
exception to clause (1) and that clause (3) is an exception
to clause (2). When a claim for exemption is made under
clause (1) of Article 289, the Court has to examine and
determine the field occupied by clause (1) by reading
clauses (1) and (2) together. If there is a la w made by
Parliament within the meaning of clause (2), the area
covered by that law will be removed from the field occupied
by clause (1). By way of analogy, we may refer to sub-clause
(f) of clause (1) and clause (5) of Article 19, which has
been explained by a Special Bench of eleven Judges in R.C.
Cooper v. Union of India [1970 (1) S.C.C.248] in the
following words: "Clause (5) of Article 19 and clauses (1)
and (2) of Article 31 prescribe restrictions upon State
action, subject to which the right to property may be
exercised." But before we elaborate this aspect, it would be
appropriate to examine the meaning and scheme of Article 289
and the object underlying it.
Since Article 289 is successor to Section 155 of the
Government of India Act, 1935 - no doubt, with certain
changes - it would be helpful to refer to and examine the
purport and scope of Section 155 [as it obtained prior to
its amendment in 1947]. We would also be simultaneously
examining the scheme and purport of Article 289. It would be
appropriate to read both Article 289 and Section 155
together:
"289. Exemption of property and
income of a State from Union
taxation -- (1) The property and
income of a State shall be exempt
from Union taxation.
(2) Nothing in clause (1) shall
prevent the Union from imposing, or
authorising the imposition of, any
tax to such extent, if any, as
Parliament may by law provide in
respect of a trade or business of
any kind carried on by, or on
behalf of, the Government of a
State, or any operations connected
therewith, or any property used or
occupied for the purposes of such
trade or business, or any income
accruing or arising in connection
therewith.
(3) nothing in clause (2) shall
apply to any trade or business,
which Parliament may by law declare
to be incidental to the ordinary
functions of Government.
155.(1) Subject as hereinafter
provided, the Government of a
Province and the Ruler of a
federated State shall not be liable
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to Federal taxation in respect of
lands or buildings situate in
British India or income accruing,
arising or received in British
India;
Provide that-
(a) where a trade or business of
any kind is carried on by or on
behalf of the Government of a
province in any part of British
India, outside that Province or by
a Ruler in any part of British
India, nothing in this sub-section
shall exempt that Government or
Ruler from any Federal taxation in
respect of that trade or business,
or any operations connected
therewith, or any property occupied
for the purposes thereof;
(b) nothing in this sub-section
shall exempt a Ruler from any
Federal taxation in respect of any
lands, buildings or income being
his personal property or personal
income.
(2) Nothing in this Act affects
any exemption from taxation enjoyed
as of right at the passing of this
act by the Ruler of an Indian State
in respect of any Indian Government
securities issued before that
date."
The first distinguishing feature to be noticed is that
while Section 155 spoke of "lands and buildings" belonging
to the Government of a Province situate in British India
being exempt from Federal taxation [we are leaving out the
portion relating to Rulers of Acceding States/Federating
States], Article 289(1) speaks of "the property" of a State
being exempt from Union taxation. The second material
difference is between proviso (a) to Section 155(1) and
clause (2) of article 289 corresponding to it. Under the
proviso, trade or business carried on by a Provincial
government was excluded from the exemption provided in the
main limb of sub-section (1) whereas clause (2) does not
itself deny the exemption to such trade or business; it
merely enable the Parliament to make a law levying tax on
such trade or business. This change has a certain
background, which we shall refer to later. The third
distinguishing feature between the said proviso and clause
(2) is this: while the denial of exemption provided by the
proviso was to the trade or business carried on by a
Provincial government outside its territory, clause (2) of
Article 289 contains no such restrictive words. The fourth
distinguishing feature is the provision in clause (3) of
Article 289, which enables the Parliament to declare which
trades/ businesses are incidental to ordinary functions of
government, in which event those trades/businesses go out of
the purview of clause (2); no such provision existed in
Section 155.
Even under the Government of India Act, 1935 the power
to levy taxes on lands and buildings was vested in the
Provincial legislatures alone. Federal legislature had no
power to levy such taxes. If so, the question arises - why
did the British Parliament provide that the lands and
buildings of a Provincial government situated in British
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India are exempt from Federal taxation. Since, no Federal
tax could ever have been levied by the Federal legislature
on lands or buildings, is the exemption meaningless? This is
the question which was also agitated before the learned
Judges who answered the Presidential reference in Re.: Sea
Customs Act. Sri P.P. Rao and other learned counsel
appearing for the State governments submit that the said
exemption is neither meaningless nor unnecessary. They
submit that the language used in the main limb of sub-
section (1) of Section 155 was used advisedly to meet a
specific situation. Their explanation, as condensed by us in
our words, is to the following effect:
even at the time of enactment and
commencement of the Government of
India Act, 1935, the area now
comprised in the Union Territory of
Delhi was comprised in the Chief
Commissioner’s Province of Delhi;
besides Delhi, there were several
other Chief Commissioner’s
Provinces within British India;
every Provinces government and
almost every major native State had
properties in Delhi for one or the
other purpose; prior to the
commencement of the 1935 Act, there
was no such thing as division of
powers between the Centre and the
Provinces; Provinces were mere
administrative units; the concept
of division of powers between the
Federation [Centre] and its units
[Provinces], i.e., the concept of a
Federation, broadly speaking, was
introduced by the said Act for the
first time; in such a situation, it
was necessary that the mutual
respect and regard between the
Centre and the Provinces basic to a
federal concept, is affirmed and
given due constitutional
recognition even before the
enactment of the Delhi Laws Act,
1912, the Governor General in
Council with the sanction and
approbation of the Secretary of
State for India, had, by
proclamation published in
Notification No.911 dated the 17th
day of September, 1912, taken under
his immediate authority and
management, the territories
mentioned in Schedule-A to the Act
[that portion of the district of
Delhi comprising the tehsil of
Delhi and police station of
Mehrauli] which were formerly
included in the Province of Punjab,
with a view to provide for the
administration thereof by a Chief
Commissioner as a separate
Province to be known as the
Province of Delhi; it was the said
status which was affirmed by the
Delhi Laws Act, 1912; Section 5 of
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the Government of India Act, 1935
made a clear distinction between
the Provinces and the Chief
Commissioner’s Provinces; while the
Provinces were provided with
legislatures [Chapter-III of Part-
III of the Act], the Chief
Commissioner’s Provinces, governed
by Part - IV of the Act, had no
legislatures of their own; the only
legislature for them was the
Federal legislature; any tax levied
in the Chief Commissioner’s
Province should have been levied
only by the Federal legislature or
the Governor General, as the case
may be; Section 99(1) of the Act
provided that "the Federal
Legislature may make laws for the
whole or any part of British India
or for any Federated State and a
Provincial Legislature may make
laws for the Province or for any
part thereof"; all this shows that
the tax on lands or buildings in
the Chief Commissioner’s Provinces
including Delhi could have been
levied only by Federal legislature;
Section 155(1) was meant to exempt
the lands or buildings of
Provincial governments from such
federal taxation - it is submitted.
We find the above explanation cogent and acceptable. It
fully explains the use of the words "lands and buildings" in
Section 155(1) of the Act. We think it unnecessary to repeat
the whole reasoning once again.
As against the words "lands and buildings" belonging to
a Provincial government in Section 155 of the Government of
India Act, 1935, Article 289(1) uses a single expression
"Property" and says that property of a State shall be exempt
from Union taxation. The expression "Property" is
indubitably much wider. It takes in not only lands and
buildings but all forms of property. While the Constituent
Assembly debates do not throw any light upon the reason for
this change - from "lands or buildings" to "property" - it
is, in all probability, attributable to the large number of
representations made by several Provincial governments to
the Constituent Assembly that not merely the lands or
buildings but any and every trade and business carried on by
a State government should equally be entitled to exemption.
Sri B.Sen invited our attention to those representations and
submitted that it is these representations which induced the
Constituent Assembly to draft clause (2) of Article 289 in a
manner different from proviso (1) to Section 155(1). Be that
as it may, The fact remains that the expression "property"
in Article 289(1) has to be given its natural and proper
meaning. It includes not only lands and buildings but all
forms of property. The explanation offered by the learned
counsel appearing for the States, set out in extension
hereinabove, for the use of the words "lands or buildings"
in Section 155(1) is equally valid for clause (1) of Article
289 insofar as it pertains to lands and buildings.
It must be remembered that both Section 155(1) and
Article 289(1) exempt the income as well derived by a
Provincial Government/State government from Union taxation.
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Both the property and income of the States are thus exempt
under clause (1) of Article 289 subject, of course, to
clause (2) thereof.
Now what does clause (2) of Article 289 say? It may be
noticed that the language of the first proviso to Section
155 and of clause (2) of Article 289 is practically
identical [except for the two distinguishing features
mentioned hereinbefore]. It would, therefore, suffice if we
discuss the proviso. It says - omitting reference t Princely
States - that where a trade or business of any kind is
carried on by or on behalf of the government of a Province
in any part of British India [outside that Province],
nothing in sub-section (1) shall exempt that Government from
any Federal taxation in respect of that trade of business or
any operations connected therewith or any income arising in
connection therewith or any property [i.e., lands and
buildings] occupied for the purposes thereof. It is
necessary to emphasis that the proviso to Section 155(1)
which by its own force levied taxes upon the trading and
business operations carried on by the Provincial governments
did not either define the said expressions or specify which
trading or business operations are subject to taxation. On
this account. the proviso was not and could not be said to
have been, ineffective or unenforceable. It was effective
till January 26, 1950. Clause (2) of Article 289 also
similarly does not define or specify - nor does it require
that the law made thereunder should so define or specify. It
cannot be said that unless the law made under and with
reference to clause (2) specifies the particular trading or
business operations to be taxed, it would not be a law
within the meaning of clause (2). Coming back to the
language of clause (2), a question is raised, why does the
proviso speak of taxation in respect of trade or business
when the main limb of sub-section (1) speaks only of taxes
in respect of lands or buildings and income? Is the ambit of
proviso wider than the main limb? Is it an independent
provision of a substantive nature notwithstanding the label
given to it as a proviso? Or is it only an exception? It is
asked. We are, however, of the considered opinion that it is
more important to give effect to the language of and the
intention underlying the proviso than to find a label for
it. It is clarificatory in nature without a doubt; it
appears to be more indeed. It is concerned mainly with the
"income" [of Provincial governments] referred to in the main
limb of sub-section (1). It speaks of tax on the "lands or
buildings" in that context alone, as we shall explain in the
next paragraph. The idea underlying the proviso is to make
it clear that the exemption of income of Provincial
government operates only where the income is earned or
received by it as a government; it will not avail where the
income is earned or received by the Provincial government
on account of or from any trade or business carried on by it
- that is a trade or a business carried on with profit
motive. In the light of the language of the proviso to
Section 155 and clause (2) of Article 289, it is not
possible to say that every activity carried on by the
government is governmental activity. A distinction has to be
made between governmental activity and trade and business
carried on by the government, at least for the purpose of
this clause. It is for this reason, we say, that unless an
activity in the nature of trade and business is carried on
with a profit motive, it would not be a trade or business
contemplated by clause (2). For example, mere sale of
government properties, immovable or movable, or granting of
leases and licences in respect of its properties does not
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amount to carrying on trade or business. Only where a trade
or business is carried on with a profit motive - or any
property is used or occupied for the purpose of carrying on
such trade of business - that the proviso [or for that
matter clause (2) of Article 289] would be attracted. Where
there is no profit motive involved in any activity carried
on by the State government, it cannot be said to be carrying
on a trade or business within the meaning of the
proviso/clause (2), merely because some profit results from
the activity*. We may pause here a while and explain why we
are attaching such restricted meaning to the words "trade or
business" in the proviso to Section 155 and in clause (2) of
Article 289. Both the word import substantially the same
idea though, ordinarily speaking, the expression "business"
appears to be wider in its content. The expression, however,
has no definite meaning; its meaning varies with the context
and several other factors. See Board of Revenue v. A.M.
Ansari [1976 (3) S.C.C.512] and State of Gujarat v. Raipur
Manufacturing Company [1967 (1) S.C.R.618]. As observed by
Lord Diplock in Town Investments Limited v. Department of
Environment [1977 (1) All.E.R.813-H.L.], "the word
‘business’ is an etymological chameleon; it suits its
meaning to the context in which it is found. It is not a
term of legal art and its dictionary meanings, as Lindley,
C.J. pointed out in Rolls v. Miller embrace almost anything
which is an occupation, as distinct from a pleasure -
anything which is an occupation or a duty which requires
attention is a business....’." Having regard to the context
in which the words "trade or business" occur - whether in
the proviso to Section 155 of the Government of Indian Act,
1935 or in clause (2) of Article 289 of our Constitution -
they must be given, and we have given, a restricted meaning,
the context being levy of tax by one unit of federal upon
the income of the other unit, the manifold activities
carried on by governments under out constitutional scheme,
the necessity to maintain a balance between the Centre and
the States and so on.
*For example, almost every State government maintains
one or more guest-houses in Delhi for accommodation their
officials and others connected with the affairs of the
State. But, when some rooms/accommodation are not occupied
by such persons and remain vacant, outsiders are
accommodated therein, though at higher rates. This activity
cannot obviously be called carrying on trade or business nor
can it be said that the building is used or occupied for the
purpose of any trade or business carried on by the State
government.
ordinarily speaking, the expression "business" appears to be
wider in its content. The expression, however, has no
definite meaning; its meaning varies with the context and
several other factors. See Board of Revenue v. A.M.Ansari
[1976 (3) S.C.C.512] and State of Gujarat v. Raipur
Manufacturing Company [1967 (1) ALL.E.R.813-H.L.], "the word
‘business’ is an etymological chameleon; it suits its
meaning to the context in which it is found. It is not a
term of legal art and its dictionary meanings, as
Lindlay,C.J. pointed out in Rolls v. Miller embrace ‘almost
anything which is an occupation, as distinct from a pleasure
- anything which is an occupation or a duty which requires
attention is a business..."-" Having regard to the context
in which the words "trade or business" occur - whether in
the proviso to Section 155 of the Government of Indian Act,
1935 or in clause (2) of Article 289 of our constitution -
they must be given, and we have given, a restricted meaning,
the context being levy of tax by one unit of federation upon
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the income of the other unit, the manifold activities
carried on by governments under our constitutional scheme,
the necessity to maintain a balance between the Centre and
the State and so on.
Proviso (i) not only speaks of trade or business
carried on by the Provincial governments [outside their
respective territories] but also "any operations connected
therewith or any income arising in connection therewith or
any property occupied for the purposes thereof." So far as
operations connected with the trade or business is
concerned, they naturally go along with the main trade or
business. No difficulty is expressed by anyone on this
count. Similarly, with respect to any income arising in
connection with such trade or business too, no difficulty is
expressed since the income is an incident of the trade of
business. Difficulty is, however, expressed regarding the
other set of words "or any property occupied for the
purposes thereof". The said words, in our opinion, mean that
if any property, i.e., any land or building is occupied by
the Provincial government for the purpose of any trade or
business carried on by the Provincial government, such land
or building too loses the benefit of exemption contained in
the main limb of sub-section (1); it becomes liable to
Federal taxation. To repeat, the central idea underlying the
proviso is to remove the trading or business operations from
the purview of the main limb of sub-section (1) of Section
155. Now, coming to clause (2) of Article 289, position is
the same with the two distinguishing features mentioned
supra, viz., (a) under this clause, removal of exemption is
not automatic; it comes about only when the Parliament makes
a law imposing taxes in respect of any trade or business
carried on by a State government and all activities
connected therewith or any property used or occupied for
the purposes of such business as also the income derived
therefrom. If any property - whether movable or immovable -
is used or occupied for the purpose of any such trade or
business, it can be denied the exemption provided by clause
(1) but this denial can be only by way of a law made by
Parliament and (b) the exception contemplated by clause (2)
is not confined to trade and business carried on by a State
outside its territory as was provided by the first proviso
to Section 155. Even the trade or business carried on by a
State within its own territory can also be brought within
the purview of the enactment made [by Parliament] in terms
of the said clause.
Adverting to the matters before us, the question is
whether the Parliament has made any law as contemplated by
clause (2) of Article 289? For, if no such law is made, it
is evident, all the properties of State governments in the
Union Territory of Delhi would be exempt from taxation.
[Parliament has admittedly not made any law as contemplated
by clause (3) of Article 289.] We have observed hereinbefore
that the claim of exemption put forward by State governments
in respect of their properties situated in N.D.M.C. and
Delhi Municipal Corporation areas is founded - and can only
be founded - on Article 289. The States invoke clause (1) of
he article but we are of the considered opinion that clause
(1) cannot be looked at in isolation; it must be read
subject to clause (2). All the three clauses of Article 289
are parts of one single scheme. Hence, when a claim for
exemption with reference to clause (1) is made, one must see
what is the field on which it operates and that can be
determined only by reading it along with clause (2). The
exemption provided by Article 289(1) is a qualified one -
qualified by clause (2), as explained hereinbefore. It is
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not an absolute exemption like the one provided by Article
285(1). If there is a law within the meaning of clause (2),
the field occupied by clause (1) gets curtailed to the
extent specified in clause (2) and the law made thereunder.
It is, therefore, necessary in this case to determine
whether the Punjab Municipal Act, Delhi Municipal
Corporation Act and N.D.M.C. Act are or can be deemed to be
enactments within the meaning of clause (2) of Article 289.
These enactments - and certainly the Delhi Municipal
Corporation Act and N.D.M.C. Act - are post-constitutional
enactments. As stated hereinbefore, these enactments while
specifically exempting the Union properties in terms of
Article 285, do not exempt the properties of the States in
terms of Article 289*. The
*As a matter of fact, "Section 115(4) of the Delhi
Municipal Corporation Act and Section 62(1) of the N.D.M.C.
Act expressly exempt properties used exclusively for
‘charitable purposes’ or ‘for public worship’ [as defined by
them] but do not provide for an exemption in the case of the
properties of the States in terms of Article 289. It cannot
be said, or presumed, that Parliament was not aware of, or
conscious of, Article 289 while enacting the said Acts.
Section 62(1) and (2) of the N.D.M.C Act read: "62(1). Save
as otherwise provided in this Act, the property tax shall be
levied in respect of all lands and buildings in New Delhi
except -- (a) lands and buildings or portions of lands and
buildings exclusively occupied and used for public worship
or by a society or body for a charitable purpose:
Provided that such society of body is supported wholly
or in part by voluntary constitutions, applies its profits,
if any, or other income in promoting its objects and does
not pay any dividend or bonus to its members.
Explanation.-- ‘Charitable purpose’ includes relief of
the poor, education and medical relief but does not include
a purpose which relates exclusively to religious teaching;
(b) lands and buildings vested in the Council, in
respect of which the said tax, if levied, would under the
provisions of this Act be leviable primarily on the Council;
omission cannot be said to be unintentional - particularly
in the case of Delhi Municipal Corporation Act and N.D.M.C.
Act. The intention is clear and obvious: the enactments do
not wish to provide for any exemption in favour of
properties of the States situated within their respective
jurisdictions. Texes are levied on all properties within
their jurisdiction [except the properties specifically
exempted], irrespective of who owns then and to what use
they are put. In such a situation, the question is, how
should they be understood? Two views can be taken: one that
since the said enactments do not expressly purport to have
been made under and as contemplated by clause (2) of Article
289, they should not be read and understood as laws
contemplated by or within the meaning of the said clause
(2). The effect of this view would be that the properties of
the State in Union Territory of Delhi will be totally exempt
irrespective of the manner of their
(c) agricultural lands and buildings (other than dwelling
houses).
(2) Lands and buildings or portions thereof shall not be
deemed to be exclusively occupied and used for public
worship or for a charitable purpose within the meaning of
clause (1) of sub-section (1) if any trade or business is
carried on in such lands and buildings or portions thereof
or if in respect of such lands and buildings or portions
thereof, any rent is derived.
use and occupation. In other words, the consequence would be
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that the relevant provisions of the said enactments would be
ineffective and unenforceable against all the properties
held by the States in the Union Territory/National Capital
Territory of Delhi, irrespective of the nature of their user
or occupation. The second view is that since there is always
a presumption of constitutionality in favour of the statutes
and also because the declaration of invalidity or
inapplicability of a statute should be only to the extent
the enactment is clearly outside the legislative competence
of the legislative body making it or is squarely covered by
the ban or prohibition in question, the declaration of
invalidity should not extend to the extent the enactments
can be related to and upheld with reference to some
constitutional provision, even though not cited by or
recited in the enactment. Similarly, the declaration of
inapplicability should only be to the extent the law is
plainly covered by the ban or prohibition, as the case may
be. What is not covered by the constitutional bar should be
held to be applicable and effective. In our respectful
opinion the latter view is consistent with the well-known
principles of constitutional interpretation and should be
preferred. We may pause here and explain our view-point. If
the law had expressly stated that it is a law made under and
with reference to clause (2) of Article 289, no further
question would have arisen. The only question is where it
does not say so*, can its validity or applicability be
sustained with reference to clause (2). In our considered
opinion, it should be so sustained, even though it may be
that the appellant-corporations have not chose to argue this
point specifically. As would b evident from some of the
decisions referred to hereinafter, the fact that a party or
a government does not choose to put forward an argument
cannot be a ground for the court not to declare the correct
position in law. The appellants are saying that all the
properties of the States are not exempt because the taxes
levied by them do not constitute "Union taxation" within the
main of clause (1) of Article 289. We have not agreed with
them. We have held that the taxes levied by the aforesaid
enactments do constitute "Union taxation" within the meaning
of
*This is the normal situation. No enactment states that it
is made under and with reference to a particular head of
legislation in the Seventh Schedule to the Constitution or a
provision in the Constitution. Only when the enactment is
questioned on the ground of legislative competence, is the
court required to ascertain the head of legislation or
provision to which the enactment is referable.
clause (1) of Article 289 and that by virtue of the
exemption provided by clause (1), taxes are not leviable on
State properties. In view of the fact that clauses (1) and
(2) of Article 289 go together, form part of one scheme and
have to be read together, we cannot ignore the operation and
applicability of clause (2), at the same time. Reference to
a few decisions would bear out our view. In Charanjit Lal
Chowdhary v. Union of India [1950 S.C.R.869], Fazl Ali, J.
stated: "....it is the accepted doctrine of the American
Courts, which I consider to be well-founded on principle,
that the presumption is always in favour of the
constitutionality of an enactment, and the burden is upon
him who attacks it to show that there has been a clear
transgression of the constitutional principles". In Burrakur
Coal Co. V. Union of India [A.I.R.1961 S.C. 654 at 963 =
1962 (1) S.C.R.44], Mudholkar, j., speaking for the
Constitution Bench, observed: "Where the validity of a law
made by a competent legislature is challenged in a Court of
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law, that Court is bound to presume in favour of its
validity. Further, while considering the validity of the law
the court will not consider itself restricted to the
pleadings of the State and would be free to satisfy itself
whether under any provision of the Constitution the law can
be sustained." In Rt.Rev.Msgr. Mark Netto v. State of Kerala
& Ors. [1979 (1) S.C.C.23], the Constitution Bench
considered the question whether a rule made by the
Government of Kerala is violative of the right conferred
upon the minorities by Article 30. It was held:
"In that view of the matter the
Rule in question its wide amplitude
sanctioning the withholding of
permission for admission of girl
students in the boys minority
school is violative of Article 30.
if so widely interpreted it crosses
comes in the region of interference
with the administration of the
institution, a right which is
guaranteed to the minority under
Article 30. The Rule, therefore,
must be interpreted narrowly and is
held to be inapplicable to a
minority educational institution in
a situation of the kind with which
we are concerned in this case. We
do not think it necessary or
advisable to strike down the Rule
as a whole but do restrict its
operation and make it inapplicable
to a minority educational
institution in a situation like the
one which arose in this case."
Reference may also be made to another Constitution
Bench decision in Sanjeev Coke Manufacturing Co. v. M/s.
Bharat Coking Ltd. & Anr. [A.I.R.1983 S.C.239 = 1983 (1)
S.C.C.147]. The following observation in Para 26 are
apposite:
"The deponents of the affidavits
filed into Court may speak for the
parties on whose behalf they swear
to the statements. They do not
speak for the Parliament. No one
may speak for the Parliament and
Parliament is never before the
Court. After Parliament has said
what it intends to say, only the
Court may say what the Parliament
meant to say. None else. Once a
statute leaves Parliament House,
the Court’s is the only authentic
voice which may echo (interpret)
the Parliament. This the Court will
do with reference to the language
of the statute and other
permissible aids. The executive
Government may place before the
Court their understanding of what
Parliament has said or intended to
say or what they think was
Parliament’s object and all the
facts and circumstances which in
their view led to the legislation.
When they do so, they do not speak
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for Parliament. No Act of
Parliament may be struck down
because of the understanding or
misunderstanding of Parliamentary
intention by the executive
government or because their (the
Government’s) spokesmen do not
bring out relevant circumstances
but indulge in empty and self-
defeating affidavits. They do not
and they cannot bind Parliament.
Validity of legislation is not to
be judged merely by affidavits
filed on behalf of the State, but
by all the relevant circumstances
which the Court may ultimately find
and more especially by what may be
gathered from what the legislature
has itself said."
Lastly, we may quote the pertinent propositions
enunciated in Ram Krishna Dalmia v. Justice Tendolkar [1959
S.C.R.279] to the following effect:
"(b) that there is always a
presumption in favour of the
constitutionality of an enactment
and the burden is upon him who
attacks it to show that there has
been a clear transgression of the
constitutional principles;
(e) that in order to sustain the
presumption of constitutionality
the Court may take into
consideration matters of common
knowledge, matters of common
report, the history of the times
and may assume every state of facts
which can be conceived existing at
the time of legislation; and...."
These are well-settled propositions. Applying them, it must
be held that the aforesaid Municipal Laws are inapplicable
to the properties of State governments to the extent such
properties are governed and saved by clause (1) of Article
289 and that insofar as the properties used or occupied for
the purpose of a trade or business carried on by the state
government [as explained hereinbefore] are concerned, the
ban in clause (1) does not avail them and the taxes thereon
must be held to be valid and effective. It may be reiterated
that the Delhi Municipal Corporation Act, 1957 and the
N.D.M.C. Act, 1994 are post-constitutional enactments and
that the Punjab Municipal Act too must be deemed to be a
post-constitutional enactment for the reasons given
hereinabove. It must, therefore, be held that the levy of
property taxes by the said enactments is valid to the extent
it relates to lands and buildings owned by State governments
and used or occupied for the purposes of any trade or
business carried on by such State government. In other
words, the levy must be held to be invalid and inapplicable
only to the extent of those lands and buildings which are
not used or occupied for the purposes of any trade or
business carried on by the State government, as explained
hereinbefore. It is for the appropriate assessing
authorities to determine which land/building falls within
which category in accordance with law and in the light of
this judgment and take appropriate further action. In this
connection, we may mention that the assessing authorities
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under the Act have to decide several questions under the Act
including the questions whether any land or building is
being used for "charitable purpose" or "public worship".
They also have to decide whether a land is an "agricultural
land". These are difficult questions as would be evident
from a reference to the plethora of decisions under the
Income Tax Act where these expressions occur. For this
reason, neither the exemption can be held to be ineffective
nor the authorities can be said to have no jurisdiction to
decide these questions. Appeals are provided to civil courts
against the orders of the assessing authorities.
In the light of the above position of law, it is for
the Union of India to consider whether any steps are to be
taken to maintain the balance between the Union and the
States in the matter of taxation.
PART - V
The following conclusions flow from the above
discussion:
(a) the property taxes levied by and under the Punjab
Municipal Act, 1911, the New Delhi Municipal Corporation
Act, 1994 and the Delhi Municipal Corporation Act, 1957
constitute "Union taxation" within the meaning of clause (1)
of Article 289 of the Constitution of India;
(b) the levy of property taxes under the aforesaid
enactments on lands and/or buildings belonging to the State
governments is invalid and incompetent by virtue of the
mandate contained in clause (1) of Article 289. However, if
any land or building is used or occupied for the purposes of
any trade or business - trade or business as explained in
the body of this judgment - carried on by or on behalf of
the State government, such land or building shall be subject
to levy of property taxes levied by the said enactments. In
other words, State property exempted under clause (1) means
such property as is used for the purpose of the government
and not for the purposes of trade or business;
(c) it is for the authorities under the said enactments to
determine with notice to the affected State government,
which land or building is used or occupied for the purposes
of any trade or business carried on by or on behalf of that
State government.
We direct that this judgment shall operate only
prospectively. It will govern the Financial Year 1996-97
[commencing on April 1, 1996] and onwards. For this purpose,
we invoke our power under Article 142 of the Constitution.
The reasons are the following;
(a) according to the judgment under appeal, the properties
of the State were exempt in toto whereas according to this
judgment, some of the properties of the State situated
within the Union Territory of Delhi may become liable to
tax. The assessees are the State governments and the taxes
are being levied under a Parliamentary enactment. This
inter-State character of the dispute is a relevant factor;
(b) from the year 1975 upto now, there have been no
assessments because of the judgment of the High Court; and
(c) retrospective assessment of properties under the above
enactments appears to be a doubtful proposition - at any
rate, not an advisable thing to do in all the facts and
circumstances of this case.
Before parting with this case, it would be appropriate
to refer to a submission of Sri B.Sen. He submitted that the
exemption provided by clause (1) of Article 289 does not and
cannot apply to compensatory taxes like water tax, drainage
tax and so on. Even where the enactment does not
specifically and individually enumerate these components of
property taxes, i.e., where the levy is of a composite tax
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known as "Property tax", it must be presumed, says Sri
B.Sen, that part of the property taxes are compensatory in
nature. We are, however, not inclined to express any opinion
on this aspect in the absence of any material placed in
support thereof. We cannot permit this new plea, which does
not appear to be a pure question of law, to be raised for
the first time at the time of arguments in these
appeals/writ petitions.
The appeals and writ petitions are accordingly disposed
of in the above terms. The judgment of the High Court shall
stand modified to the extent it is contrary to this
judgment.
There shall be no order as to costs.
____________________________________________________________
Paripoornan, J.
1. Common questions of law arise for consideration 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 Bench comprising of 5
Judges in Sales Tax Officer, Benaras and Ors. v. Kanhaiya Lal Mukundlal
Saraf 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 Lal’s case (supra) was expressly approved by a bench
of 7 Judges in the decision reported in State of Kerala 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 of
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
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
under the Central Excises and Salt Act, 1944, now titled as Central Excise
Act, 1944 (hereinafter referred to as ’the Excise Act’) on the ground that
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 Industries Ltd.,
Ahmedabad v. Union of India. The appellant is a textile mill situate at
Ahmedabad. The appellant and a few other mills manufacture "blended 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 consuming
blended yarn, produced by it for manufacturing fabric known 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. 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 on blended yarn 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 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
suits. In the appeals filed by the Union of India against the aforesaid
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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" 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
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 consideration
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 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 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 perused the draft judgment prepared by my learned brother 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 restitution, 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 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.
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.
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 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 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
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.
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;
(b) Period from 7.8.1977 to 16.11.80 - Rule 11 of the Central Excise Rules,
as amended;
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(c) Period from 16.11.1980 to 19.9.1991 - Section 11A and Section 11B of
the then Central Excises & Salt Act;
(d) Period after 19.9.1991 - Section 11A read along with Section 11B 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
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.
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 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 months from the date of such payment or adjustment, as the
case may be.
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
and Sections 11A 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 preferred
during different periods. After Rule 11 was amended and Sections 11A 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 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 character of the statutory provisions
either providing 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 on" the liability to the consumer or third party?
7. The levy under the Excise Act is an indirect tax (duty). A duty of
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
manufacturer or producer. The levy being a component of the price for which
the goods are sold, is ordinarily passed on to the customer. It is a matter
of common knowledge that every prudent businessman will adjust his affairs
in his best interests and pass on the duty levied or leviable on the
commodity 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 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, 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 to C, and
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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 carriage. 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 sections -
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
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.
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 Edn.) 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; 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.)
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:
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’ terminology a ’subtraction from’
the plaintiff’. 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
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 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 Court
in Mulamchand v. State of Madhya Pradesh affords some guidance. The
appellant in that case, purchased a right to 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 the right to collect lac from the forest. It
turned out that the provisions of Article 299 of the Constitution were not
complied with and the contract entered into by appellant therein with the
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State of Madhya Pradesh was void. The appellant claimed refund on the basis
that there was no valid contract. The trial court as well as the appellant
court held that the appellant having worked out the contract by collecting
the lac from the jungles in pursuance of the agreement, was not entitled to
refund of the amount of deposit. In the 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. This Court further held at pages 1222-23, thus:
The juristic basis of the obligation in such a case is not founded upon any
contract or tort but upon a third category of law, namely, quasi-contract
or restitution. In Fibrosa v. Fairbaim, (1943) AC 32 Lord Wright has stated
the legal position as follows:
...any civilised system of law is bound to provide remedies for
cases of what has been called unjust enrichment or unjust benefit,
that is, to prevent a man from retaining the money of, or some
benefit derived from, another which it is against conscience that
he should keep. Such remedies in English Law are generically
different from remedies in contract or in tort, and are now
recognised to fall within a third category of the common law which
has been called quasi-contract or restitution.
(7) In Nelson v. Larholt (1948) 1 KB 339 Lord Denning has observed
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 old forms 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.
(Emphasis supplied)
This Court further 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 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)
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 is claimed under Section 72 of the Contract Act, on the
ground of payment due to mistake of law, the person claiming restitution,
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, 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 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 unsustainable. (This is the legal position even under
general law, without reference to Section 11B of Central Excises & Salt Act
as amended by Act 40/1991).
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 Lal’s case (supra), which was followed by a
Bench of 7 Judges in Aluminium Industries’ case (1965) 16 STC 689. It was
argued that the decision in Kanhaiya Lal’s case was followed subsequently
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in Tilokchand Motichand and Ors. v. H.B. Munshi and Anr. D. Cawasji & Co.,
Etc. Etc. v. The State of Mysore and Anr. [1975] 2 SCR 511; Dhanyalakshmi
Rice Mills Etc. v. The Commissioner of Civil Supplies and Anr. Etc. The
plea was that the law laid down in Kanhaiya Lal’s case has stood the test
of time for nearly four decades and there is no requirement either in
Section 72 of the Indian 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 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.P.A. 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’ 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 restitution, 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 consideration in
Kanhaiya Lal’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 of restitution.
Counsel also contended that the principle in Kanhaiya Lal’s case (supra)
has not been uniformally followed by this Court subsequently. Counsel also
distinguished the various foreign decisions that were brought to our notice
and highlighted the fact that those decisions were rendered on their own
facts. Counsel further contended that in cases of indirect levy of tax (ess
or fee) which was passed on, this Court has negatived the claim for refund
in a few cases. Our attention was invited to the following decisions:
Shiv Shanker Dal Mills Etc. Etc. v. State of Haryana and Ors. Etc.; State
of Madhya Pradesh v. Vyankatlal and Anr, 566-568; Amar Nath Om Parkash and
Ors. Etc. v. State of Punjab and Ors. Etc; Indian Aluminium Company Limited
v. Thane Municipal Corporation [1992] Supp. 1 SCC 480 (488-489) and State
of Rajasthan and Ors. v. Novelty Stores Etc.
13. The main case relied on, Kanhaiya Lal’s case (supra) requires a little
detailed examination. The respondent, Kanhaiya Lal was a firm. 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
27.2.1952, the Allahabad High Court in Messrs Budh Prakash Jai Prakash v.
Sales Tax Officer, Kanpur and 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 ease before the statutory
authorities were futile. Thereafter, 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 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 procedure 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 Court. Mainly, two questions arose before this Court for
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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"?
(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
within its fold "mistake of law" as well as "mistake of fact". On the
second question, this Court held that once it is established that the
payment, even 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 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 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 considerations should weigh in
interpreting Section 72, the Court held that the 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 observations to the following
effect:
If it is once established that the payment, even though it be of a tax, has
been made by the party labouring under a mistake of 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
Section 72 of the Indian Contract Act, 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 Section 72 will be not to
interpret the law but to make a law by adding some such words as "otherwise
than by way of taxes" after the word "paid".
Voluntary payment of such tax liability was not by itself enough to
preclude the respondent from recovering the said amounts, once it was
established that the payments were made under a mistake of law. On a true
interpretation of Section 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 party receiving the same is bound to repay or
return them irrespective of any consideration whether the monies had been
voluntarily, subject however to questions of estoppel, waiver, limitation
or the like. If, once that circumstance is established the party is
entitled to the relief claimed.
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.
The other circumstances would be such as would entitle a court of equity to
refuse the relief claimed by the plaintiff because on 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.
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
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plain terms of Section 72 of the Indian Contract Act the respondent would
be entitled to recover back the monies paid by it to the State of U.P.
under mistake of Law.
(Emphasis supplied)
14. It is apparent that in Kanhaiya Lal’s case there was no plea by the
Revenue that since the assessee has passed on the tax, the claim for refund
is unsustainable. Such a question was not posed before this Court 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. In such a situation the following observations of Lord Halsbury
in Quinn v. Leathem (1901) A.C. 495 at p. 506, quoted with approval by a
Constitution Bench of this Court in State of Orissa v. Sudhansu Sekhar
Misra and again in Orient Paper and Industries Ltd. and Anr. v. State of
Orissa and Ors. [1991] Supp. 1 SCC 81, at page 96, should govern the
matter.
...there are two observations of a general character which I wish
to0 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
expressions which may be found there are not intended to be
expositions of the whole law, but governed and qualified by the
particular facts of the case in which such expressions are to be
found. The other is that a case is only an authority for 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 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 in Kanhaiya Lal’s case, and the cases following the said case.
The said decisions 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.
It also appears that there is some inconsistency in the Kanhaiya Lal’s
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
estoppel, waiver, limitation or the like". Even so, at page 1366, the Court
has observed "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 adjudicating the claim for restitution (refund)? If an
assessee has passed on the tax to the consumer or a third 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 enriched. 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 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
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
collection to itself. The plea was that Article 265 of the Constitution of
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India contains a mandate to the effect that "no tax shall be levied or
collected except by authority of law". It was argued 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
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 Constructions v. Dy. Commercial Tax Officer, 10 STC 345
(355-356) and affirmed by this Court in Dy. Commercial Tax Officer, Madras
v. Rayalaseema Constructions 17 STC 505. The plea urged was that, if the
assessee, is denied the refund, the State Government could 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 and Article 39(b) and
(c) of the Constitution to contend that Article 265 of the Constitution
cannot be construed in a vacuo or isolation, but should be construed in the
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 constitute
India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to
secure to all its citizen:
JUSTICE, social, economic and political;
xxxx xxxx xxxx
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;
(c) that the operation of the economic system does not result in the
concentration of wealth and means of production to the common detriment;
(Emphasis supplied)
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. Boddu Paidanna and Sons (1942) F.C.R. 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 Karnataka and Anr. Etc, v. Shri Ranganatha Reddy and Anr. Etc.;
Sanjeev Coke Mfg. Co. v. Bharat Coking Coal Ltd. and Anr.; State of Tamil
Nadu Etc. Etc. v. L. Abu Kavur Bai and Ors. was highlighted. Reliance was
placed on Amar Nath Om Prakash and Ors. Etc. v. State of Punjab and Ors.
Etc., at pp. 96, 97, 99, 100; Shiv Shanker Dal Mills Etc. Etc. v. State of
Haryana and Ors. Etc. and Walaiti Ram Mahabir Prasad v. State of Punjab and
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 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 State is allowed to retain
the collection of tax, which could be made/spent, for the benefit of the
"public.
16. On an evaluation of the rival pleas urged in the matter, I am 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. Jall v. Union of India
(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 or 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 the consumer.
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(Emphasis supplied)
Section 64A of the Sale of Goods Act after its amendment by Act 33 of 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,
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 and L. Abu go to show that the words "material resources" occuring
in Article 39 Clause (b) will take in, natural or physical resources and
also movable or immovable property and it would include 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 SCR 1170, Amar Nath Om Prakash’s case [1985] 2 SCR 72 and Walaiti Ram
Mahabir Prasad, AIR 1984 (P&H) 120, emphasise the principle that the
persons who have passed on the burden of 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 isolation, and refund
ordered, in cases where excise duty has been passed on, it will result in a
mockery, totally ignoring the other salient features of the Constitution
and the ground realities. As the Preamble states, the Constitution 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
fundamental in the governance of this country and all organs of the State
including the judiciary are bound to enforce those directives. In
interpreting 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 responsibility to ensure proper and meaningful interpretation of the
directive principle and to adjust or harmonise the objectives enshrined in
the Preamble - justice, political, social and economic and the directive
principles contained in Part IV, with the individual rights. In the
process, it is permissible to 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, I hold that
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 the claim of restitution or refund. The fact that the levy is invalid
need not automatically 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. 1 SCC 430 (498
para 69), is apposite in this 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 automatically 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 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.
17. 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
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
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could be made use of for public purposes. On this basis as well, the denial
of refund or restitution is valid. There is nothing abhorrent 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 ; State of Madhya Pradesh v. Vyankatlal and Anr.; Amar Nath Om
Prakash and Ors. v. State of Punjab and Ors.; Indian Aluminium Company
Limited v. Thane Municipal Corporation [1992] 1 Supp. 1 SCC 480 (488-489)
and State of Rajasthan and Ors. v. Novelty Stores etc.
18. It now remains to consider the foreign decisions brought to our notice.
The various decisions of foreign courts and their scope have been very
exhaustively considered by Jeevan Reddy, J. in his judgment under the
heading "Decisions of foreign courts on the subject". I am in broad
agreement with my learned brother Jeevan Reddy, J., in the analysis of the
various decisions aforesaid. It is unnecessary to cover that ground over
again.
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 -
(1) When Money is paid in Pursuance of a void authority...." - A duty to
replay? by Peter Birks: (Public Law (1992) page 580)
(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.
(3) "Restitution of Overpaid Tax, Discretion and Passing-on" - by J.
Beatson. (Law Quarterly Review Vol. 111 (1995) page 375 Notes.
(4) "Unjust Enrichment" - by Steve Hedley (Cambridge Law Journal 1995
(578-599).
(5) "Unjust Enrichment Claims: A Comparative Overview" - by 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 Review (1993) (442-467)
(7) "Payments of Money under Mistake of Law: A Comparative View" - by
Gareth Jones [Cambridge Law Journal (1993) Comment (225)]
(8) "Restitution, Misdirected Funds and Change of Position" - by Ewen
McKendrick [Modern Law Review (1992) Vol. 55 (377-385)].
In some of the articles, 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 Restitution", pages 462 and 463 under the sub-heading "Passing on", the
learned author has made the following comment:
(vii) Passing on 484
Since restitution at common law is based upon the principle of reversing an
unjust enrichment, it is important to determine whether the defendant was
actually enriched at the plaintiff’s 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 could arise if the taxpayer pays excessive VAT and passes the
amount overpaid on to customers 495. As a matter of principle it could be
argued that, in such a case, the taxpayer should not be allowed to recovery
the amount overpaid from the Revenue, because recovery would mean that the
taxpayer was unjustly enriched at the expense of those who ultimately bore
the burden of the tax 506. A possible solution to this is to allow those
who effectively paid the tax to recover from the tax payer, who in turn
should recover from the Revenue, However, typically in cases of passing on
there are many people who effectively bear the burden of the tax and to
encourage actions by them would be impractical and unrealistic, Thus, in
such cases the best approach is to allow the Revenue a defence of passing
on and enable it to retain the tax and use it for the public benefit.
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However, it remains uncertain to what extent a defence of passing on exists
in English law 517. Such a defence is recognised by European Community law.
In Administration delle Finanze dello 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 incorporated in the price of goods and passed on to
purchasers, Although this decision is confined to charges 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 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 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 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 and because of the consequent impossibility of
definitively relating any part of 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 on when the
initial taxpayer suffers a net loss.
It is submitted that in principle a defence of passing on should exist,
with a burden of proving this being on the Revenue: in unlawfully demanded
the taxes and so it should show that repayment would unjustly enrich the
taxpayer. It is unlikely that such a defence would operate successfully in
practice in many cases because of the difficulty of proving that the tax
was actually passed on.
(Emphasis supplied)
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 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 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 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 limit would achieve the same policy ends as the
"reasonable and just" limit in provisions such as Section 33 of the Taxes
Management Act 1970 and, if so, it might provide a useful method of
achieving a measure of rationalisation. (pp. 427-428)
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
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and other jurisdiction, an observation is made thus:
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 consulters on the general issue of a
"passing on" defence are invited.
In Kanhaiya Lal’s case [1959] SCR 1350 at page 1367, this Court was 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 in
this behalf by a two-Member Bench of this Court in D. Cawasji & Co. v.
State of Mysore
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 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
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 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 held accordingly.
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 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 jurisdiction of courts provided in Rule 11 (as amended)
and Section 11(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 11C, 11D and also to Sections 12A to D of the Act, to stress
the scheme of the Act). On the other hand, counsel for the assesses-
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 the Civil Courts is not barred
to annul the levy and/or order refund.
23. As stated by me earlier 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 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 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
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
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period of limitation) he initiated action for refund of the tax paid by
him, due to mistake of law.
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:
(a) Period up to 7.8.1977 - Rule 11 of the Central Excise Rules, before
amendment;
(b) Period from 7.8.1977 to 16.11.80 - Rule 11 of the Central Excise Rules,
as amended;
(c) Period from 16.11.1980 to 19.9.1991 - Section 11A and Section 11B of
the Central Excises & Salt Act; and
(d) Period after 19.9.1991 - Section 11A read along with Section 11B 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.
25. Rule 11 of the Central Excise Rules as amended, Section 11A and Section
11B before Amendment Act 40 of 1991 and Section 11B, as amended by Act 40
of 1991, will be more important to consider the question of ouster of
jurisdiction of courts. Sections 11C, 11D as also Sections 12A to D of the
Act, will throw light on the scheme of the Act as 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. -
(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.
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 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.
(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.
(3) Whether 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.
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.
Section 11-A
11A. 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 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:
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 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. -...
(u) ’relevant date’ means, -
(a) in the case of excisable goods on which duty of excise has not been
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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 under this
Act or the rules made thereunder;
SECTION 11-B BEFORE AMENDMENT BY ACT 40/1991
11B. 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 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 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 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 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 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.
Explanation. - For the purpose of this section....
(B) ’relevant date’ means -
(1) in any other case, the date of payment of duty.
SECTIONS 11B, 11D AND 12A TO D, AS AMENDED BY ACT 40/1991
11B. Claim for refund of duty. - (1) Any person claiming refund of any duty
or excise may make as 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 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:
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 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.
(2) If, on receipt of any such application, the Assistant Commissioner 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:
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 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 material used in the manufacture of goods which are exported out
of India;
(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 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 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;
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(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) 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.
(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).
Explanation. - For the purposes of this section,...
(B) ’relevant date’ means -
(f) in any other case, the date of payment of duty.
(Emphasis supplied)
Section 11C 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 11D and Sections 12A to D highlight the new
scheme of the Act, relating to refund and they are as follows:
11D. Duties of excise collected from the buyer to be deposited with 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 provisions
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.
(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 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 11B 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 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 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 assessment, sale invoice and
other like documents, the amount of such duty which will form part of the
price at which such goods are to 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 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
(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 be
prescribed, -
(a) the amount of duty of excise referred to in Sub-section (2) of Section
11B or Sub-section (2) of Section 11C or Sub-section (2) of Section 11D;
(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 Government for 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 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
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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 for refund. Rule 11(4) as amended, Section 11B Clauses (4) and (5)
before amendment and Section 11B 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 11D and
12A to D - Section 11D 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 concerned
on finalisation of the assessment. Section 11D requires clarification.
Excise duty is, ordinarily paid or payable at the time of clearance of the
goods. The sale of the goods may be later. So, if excise duty due is
already paid by the manufacturer, and later collected by him when the goods
are sold, such collection, need not be paid to the Government. 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 excess collected - and this is the purport of Section 11D. The
said section (Section 11D) 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 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.
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 way of appeals, revisions, claims
for refund and the period of limitation provided therefor, etc. and
specifically excluding the jurisdiction of the civil courts for claiming
refund? In discussing this aspect, one has to bear in mind the content of
Article 265 also. It will apply where the statute is unconstitutional or
invalid and also where the collection is unauthorised/illegal, i.e.,
without "authority of law".
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 Committee 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 (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
settled that even if jurisdiction is so excluded, the Civil Courts
have jurisdiction to examine into cases where the provisions of the
Act have not been complied with, or the statutory tribunal has not
acted in conformity with the fundamental principles of judicial
procedure.
(Emphasis supplied)
The scope of the above observation has been explained by a Constitution
Bench of this Court, in Firm of Illuri Subbayya Chetty and Sons v. State of
Andhra Pradesh . 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 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
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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 "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 maintainable in view of the adequate alternate remedies
provided by the Act 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 Committee in Secretary of State v. Mask & Co.
(supra). After referring to the observations of the Judicial Committee
quoted hereinabove, this Court in Firm of Illuri Subbayya Chetty and Sons
v. State of Andhra Pradesh explained the said observations thus:
...It is necessary to add that these observations, though made 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 incorrect on the merits and as such,
it can be claimed that the provisions of the said statute have not
been 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 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 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 cannot be the
subject-matter of the suit because S. 18-A clearly bars such a
claim in the civil courts.
(Emphasis supplied)
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 affirmed and explained.
28. The decision of the Privy Council in Mask & Co. case (supra), and other
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 Madhya
Pradesh and Anr. In that case, the assessees filed 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 Constitution.
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 ’
and no order passed under the Act or the Rules by any of the statutory
authorities, shall be called in question in any case. The court held that
notwithstanding, the alternate remedies by way of appeal, revision,
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rectification and reference to the High Court, the tax therein was levied
without a complete charging section and this affected the jurisdiction of
the tax authorities, and so, the suit was maintainable, and decreed the
suit. After referring to the relevant decisions and in particular,
Secretary of State v. Mask & Co., AIR (1940) P.C. 105; Firm of Illuri
Subbayya Chetty and Sons v. State of Andhra Pradesh , 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 Realign Investment Co.’s cases, 67
Ind App 222 - AIR (1940) PC 105 and 74 Ind App 50 : 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...
(Emphasis supplied)
Referring to the facts Firm of Illuri Subbayya Chetty and Sons v. State of
Andhra Pradesh, it was further observed:
The case of Firm of Illuri Subbayya 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
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
Bench of of 7-Judges in Kamala Mills Ltd. v. State of Bombay 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 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 & 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 Swamp v. Shikar Chand, 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 Swamp’s case arose under the U.P.
(Temporary) Control of Rent and Eviction Act. 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 within the provisions of
Sections 3(4) and 16 of the said Act. The Constitution 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 jurisdiction, has 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 used in S. 3(4) and S. 16 are clear. Section 16
in terms provides that the order 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 civil 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
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.
(Emphasis supplied)
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Even so, this Court proceeded to state in paragraph 13 at page 896, to the
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 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 root of the matter
and would, if upheld, lead to the conclusion that the impugned order is a
nullity.
(Emphasis supplied)
This Court referred to the decisions of the Judicial Committee, in
Secretary of State v. Jatindra Nath Choudhry AIR (1924) PC 175 and the
decision in Mask & Co., and also quoted the observations in the latter case
which have been quoted hereinbefore (para 27 - supra) and concluded thus:
In Kamala Mills Ltd. v. The State of Bombay, C.A. No. 481 of 1963, dated
23.4.1965 ; while dealing with a similar point, this Court has considered
the effect of the two decisions of the Privy Council, one in the case of
Mask and Co., 67 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: AIR (1947) PC 78 at pp. 80-81. The Conclusion reached by this Court
in M/s. Kamala Mill’s case C.A. No. 481 of 1963 dated 23.4.1965: (supra)
also support the view which we are taking in the present appeal.
(Emphasis supplied)
It is evident that in Ram Swamp’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 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’ 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: Illuri Subbayya Chetty AIR (1.964) 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 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.
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 (1965) SC 1942) can be
said to run 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 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.
(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 civil 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 creates a special right or a liability and
provides for the determination of the right or liability and further lays
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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 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 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. 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 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 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 to
be inferred unless the conditions above set down apply.
(Emphasis supplied)
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 and Ors. and other cases.
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/unauthorised levy of tax, can be made only in accordance with the
provisions of the Act (Rule 11, Section 11B 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, 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 procedure and period of limitation provided by the
specific statute will have no application. Collector of Central Excise,
Chandigarh v. Doaba Co-operative Sugar Mills Ltd., Jalandhar [1988] Supp.
SCC 683; Escorts Ltd. v. Union of India and Ors. [1994] Supp. 3 SCC 86.
Rule 11 before and after amendment, or S. 11B, cannot affect Section 72 of
the Contract Act or the 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:-
In such cases, 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 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)].
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 fundamental provisions
of the Act or by acting in violation of the Fundamental Principles of
judicial procedure:-
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 has not acted in conformity with fundamental principles of
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judicial procedure", as stated in Mask & Co.’s (supra) and in Dulabhai’s
case (supra). 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 Firm of Illuri Subbayya Chetty and Sons v. State of
Andhra Pradesh, to the following effect:
...Non-compliance with the provisions of the statute, to which
reference is made by the Privy Council must, we think, be
noncompliance 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 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....
[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
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
jurisdiction) and, so found in a 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:
In this category, assessees who initiated proceedings and impugned the
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 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. Tilokchand Motichand and Ors. v. H.B. Munshi, Commissioner of
Sales Tax, Bombay and Anr. (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 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 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 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, proposition No. (1) or clause No. (1) enunciated
in Dulabhai’s case (supra) should be understood in the background of or in
accord with the observations of the earlier Constitution Bench in 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"
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domain, the entire proceeding before the appropriate authority is illegal
and without jurisdiction or the defect or infirmity in the order goes to
the root of the matter and makes 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 may, the question that frequently arises for consideration,
is, in what situation/cases the non-compliance or error or mistake,
committed by the statutory authority or Tribunal, makes the decision
rendered ultra-vires or a nullity 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 in Anisminic 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 modern 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 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 determinable at the
commencement, and not at the conclusion of the inquiry. The said approach
has been given a go bye in Anisminic case, as we shall see from the
discussion hereinafter (See De Smith, Woolf and Jowell - Judicial Review of
Administrative Action (1995 edn.) P. 268; Halsbuny’s Laws of England (4th
edn.) p. 114 - 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 must retain it unimpaired
until it has discharged its task". The decision in Anisminic 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. A.R. Antulay v. R.S.
Nayak and Anr. R.B. Shreeram Durga Prasad and Fatehchand Nursing Das v.
Settlement Commission (IT & WT) and Anr. N. Parthasarathy Etc. Etc. v.,
Controller of Capital Issues and Anr. Etc. Etc.; Associated Engineering Co.
v. Government of Andhra Pradesh and Anr.; Shiv Kumar Chadha v. Municipal
Corporation of Delhi and Ors. Delivering the judgment of a two-Member Bench
in Shri M.L. Sethi v. Shri R.P. Kapur 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. Jurisdiction
originally seems to have had the meaning which Lord Baid ascribed to it in
Anisminic Ltd. v. Foreign Compensation Commission (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 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. In
Anisminic Ltd., (1969) 2 AC 147 Lord Reid said:
Put there are many cases where, although the tribunal had jurisdiction 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 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 provisions setting it up, it had
no right to take into account. I do not intend this list to be exhaustive.
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In the same case, Lord Pearce Said:
Lack of jurisdiction may arise in various ways. There may be an absence of
those formalities or things which are conditions precedent 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 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 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 things would
cause its purported decision to be a nullity.
11. The dicta or the majority of the House of Lords, in the above case
would show the extent to which ’lack’ and ’excess’ of jurisdiction 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
error of law within jurisdiction almost to vanishing point. The practical
effect of the decision is that any error of law can be reckoned as
jurisdictional. 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" 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 construing the
empowering statute, which will give little guidance. It is really a
question of how much latitude the Court is prepared to allow....
In a subsequent Constitution Bench decision, Hari Prasad Mulshankar Trivedi
v. V.B. Raju and Ors., delivering the judgment of the Bench, Mathew, J., in
para 27 at page 2608 of the 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 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 (see Per
Diplock, J. at p. 394 in the Anisminic Case). Whereas the ’pure’
theory of jurisdiction would reduce jurisdictional 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 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)
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
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
developments in the law and the academic opinion that has emerged due to
the change in the perspective.
32. After 1980, the decision in Anisminic case came up for further
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consideration 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
Communications Ltd. (1981) AC 374, O’Reilly and Ors. v. Mackman and Ors.
(1983) 2 AC 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 and Ors. v. Minister For 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 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. The
authors have discussed the pure theory of jurisdiction, the innovative
decision in "Anisminic" case (1969) 2 AC 147, the development of the law 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
propositions at pages 250-256 which could be advanced on the subject. The
authors have concluded the discussion thus at page 256 ;
After Anisminic virtually every error of law is a jurisdictional error, 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 admission of evidence). Perhaps the most precise
indication of jurisdictional 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 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 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. Much of
the superstructure has already crumbled. What remains is likely quickly to
fall away as the courts rightly insist that all administrative action
should be, simply, lawful, whether or not jurisdictionally lawful.
(Emphasis supplied)
33. The jurisdictional control exercised by superior courts over
subordinate courts, tribunals or other statutory bodies and the scope and
content of such power has been pithily stated in Halsbury Laws of England :
4th edition (Reissue), 1989, volume 1(1), P. 113 to the following effect:
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 error of substance, form or procedure, or by making an
order or taking action outside its limited area of competence. Not every
error committed by an inferior Court or tribunal or other body, however,
goes to jurisdiction. Jurisdiction to decide a matter imports a limited
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power to decide that matter incorrectly.
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 of any other prerequisite of a valid adjudication.
Excess of jurisdiction is not materially distinguishable from lack of
jurisdiction and the expressions may be used interchangeably.
Where the jurisdiction of a tribunal is dependent on the 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 powers on a body, that if that body makes an error of law
while purporting to act within that jurisdiction 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 irrelevant 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 particular
statute, so that the relevant body will not exceed its jurisdiction by
going wrong in law. Previously, the courts were more likely to find that
errors of law were within jurisdiction; but with the modem approach errors
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" (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 failing to take
relevant considerations into account when purporting to apply the law to
the facts; admitting inadmissible evidence or rejecting admissible and
relevant evidence; exercising a discretion on the basis of incorrect legal
principles; giving reasons which disclose faulty legal reasoning or which
are inadequate to fulfil an express duty to give reasons, and misdirecting
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 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:
Jurisdiction over fact and law: Summary
At the end of a chapter which is top-heavy with obsolescent material it may
be useful to summarise the position as shortly as possible. The overall
picture is of an expanding system struggling to free itself 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 broader rules
which have now superseded them, much for the benefit of the law. Together
they are as follows:
Errors of fact
Old rule The court would quash only if the erroneous fact was
jurisdictional.
New rule The court will quash if an erroneous and decisive fact was
(a) jurisdictional
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(b) found on the basis of no evidence; or
(c) wrong, misunderstood or ignored.
Errors of law
Old rule The court would quash only if the error was
(a) jurisdictional; or
(b) on the face of the record.
New rule The court will quash for any decisive error, because all errors of
law are now jurisdictional.
(emphasis supplied)
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
"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 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.
(2) Cases of nullity may arise when there is lack of jurisdiction at the
stage of commencement of enquiry e.g., when (a) authority 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.
(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) 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 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.
With great respect to the learned author, I would adopt the above statement
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
mentioned 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 11B of the Act was
amended in 1991, deserve mention. They are - Union of India and Ors. v.
Jain Spinners Limited and Anr; Union of India and Ors. v. ITC Ltd. [1993]
Supp. (4) SCC 326. In 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 11B of the
Act came into force. There was an earlier interim order passed by the High
Court directing the deposit of the duty levied with a liberty to the
Revenue 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 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
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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 unauthorised or
unconstitutional or without jurisdiction or illegal. In Union 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 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 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 (11B, 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
not assailed as unconstitutional or illegal or without jurisdiction and, in
consequence refund was called for. The above two cases did not 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.
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 11B 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 refund
legitimately due. The relevant statutory provisions have been extracted
earlier in this judgment. Briefly stated the position is this. Clause (3)
of Section 11B 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,
therefore, shall be made under Section 11B(1) and dealt with by the
concerned authority under Section 11B(2) of the Act. These 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 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 12D of the Act.
38. As stated, Section 11B(2) and Section 11B(3) go together. The
applications for refund made before the commencement of the Amendment Act,
1991, shall be deemed to have been made under Section 11B(1) 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 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 or due as per orders passed by Court, in a 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.
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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
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 11B, Clauses (1) (2) and (3) of the Act. The provisions contemplate
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 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 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 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.
and Anr. v. Broach Borough Municipality and Ors and Madan Mohan Pathak v.
Union of India and Ors. Etc.. See also Comorin Match Industries (P) Ltd. v.
State of Tamil Nadu,. 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
apply to such cases. It need hardly be stated, that Section 11B(1), 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 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
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 11B(2), that in such cases where the duty is
refundable, it will be credited to the Consumer Welfare Fund (Section 12C).
However, 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 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 11B 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 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 Collector of
Customs, Madras v. Nathella Sampathu Chetty and Anr. [1962] 3 SCR 786;
Khyerbari Tea Company and Anr. v. State of Assam and Ors. AIR (1984) SC
925; R.K. Garg v. Union of India and Ors. AIR (1981) SC 2138; Gaurishanker
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and Ors. v. Union of India and Ors. and Union of India and Anr. Etc. Etc.
v. A. Sanyasi Rao and Ors. Etc. Etc. etc.]
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
captively consumed.
Chapter II-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 by
the appropriate authorities in order to vouchsafe that the scheme is not
rendered a mere ritual 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 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 on Section 72 of the Contract Act,
is unsustainable. (This is the legal position even under general law,
without reference to Section 11B of Central Excises & Salt Act as amended
by Act 40/1991.)
(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 following the
said decision, enables such a person to claim refund (restitution), with
great respect of the learned Judges, who rendered the above decisions, I
express my dissent thereto. In this context, the observations in para 29 -
Clause III shall also be borne in mind.
(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 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 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 find out whether the
taxpayer has passed on the liability. The matter being within the exclusive
knowledge to the taxpayer, the burden of proving that the liability 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 11B 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, in cases covered by propositions No. (1)
(3) (4) and (5) in Dulabhai’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.
(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
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under Article 226 of the Constitution of India will lie in the cases, and
subject to the conditions stated in paragraphs 29 and 30 of the judgment.
(G) 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 mentioned 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).
(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 follows from a plain reading of Section 11B,
Clauses (1) (2) and (3) of the Act. The provisions contemplate 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 contemplated under law, to
obtain a refund, after the Amendment Act 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. The legislature does not
possess such power. 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
apply to such cases.
(I) It need hardly be stated, that Section 11B(1), the proviso thereto,
Section 11B(2) and Section 11B(3) read together will apply, only to (1)
refund applications made under the statute 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 "commencement 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).
(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 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 11B and 12A to B -- (in
the light of 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 are excluded to the extent stated therein).
42. The principles laid down in this judgment should be applied to 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.
___________________________________________________________________________
Hansaria, J.
The conclusions arrived at by learned brother Paripoornan, J. and the
reasons given in support thereof, have my respectful 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 case got me in the evening
of 13th of this month.
___________________________________________________________________________
Sen, J.
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1. Leave granted in the Special Leave Petitions.
2. 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 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 law 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 on
September 20, 1991? By virtue of this amendment Section 11B 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
’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
3. 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
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
include any tax general, local or special. That means every kind of tax
direct or indirect will come within the ambit of Article 265.
4. 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
and indirect taxes 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 than agricultural land, estate duty in respect of property
other than agricultural land, terminal taxes on goods or passengers, taxes
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 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 Government 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. 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- exchanges 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 types of taxes which were
specifically enumerated in a number of other Articles in Chapter I of Part
XII of the Constitution.
5. Moreover, this argument, if accepted, will have dangerous implications.
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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 levies, the
constitutional protection against unlawful taxes will become meaningless
and devoid of any substance.
6. 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 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 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
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 38 nor Article 39, in any way, empower the State
to levy or retain taxes without any authority of law.
7. The importance and effectiveness of the Directive Principles of the
State Policy have been laid down in Article 31C in the following words:
37C 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 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 State, the
provisions of this article shall not apply thereto unless such law, having
been reserved for the consideration of the President, has received his asS.
8. The disputes raised in this case do not relate to enforcement of the
guarantees contained in Article 14 or Article 19 of the Constitution in any
manner. The laws 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
the Constitution.
9. 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
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 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.
10. 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
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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 caused by the unlawful exaction of tax. There is usually considerable
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 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
in Article 265. The constitutional guarantee is unconditional and
unequivocal 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 illegal levy, then the Court would be
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.
11. 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 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
unlawfully. The bar is absolute. It protects the citizens from any unlawful
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 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 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.
12. The Court cannot, by torturing the language of Article 265 or by any
other means, construe it so as to give it a meaning which it does not
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
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. 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 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 separate
act is passed to provide for denial of refund to the taxpayer, in any
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manner, then such amendment 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.
13. 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 All. 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 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 (Barring of
Claims and Remedies) Act, 1954 was passed barring and extinguishing the
right of recovery of any sums collected or recovered under the 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 Judicial Committee
that if the Act was valid, it would be a complete answer 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 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.
14. The Judicial Committee posed the following question"....Then the
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 Section 92, it is not equally an offence to deny the right
to recover them after they have been unlawfully exacted."
15. 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 repeated that, in
the words of the High Court, the immunity given by Section 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.
16. The Judicial Committee clearly recognised Section 92 of the 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.
17. 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 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 spirit, Section 92 is in the same measure defeated.
18. An argument was advanced before the Judicial Committee that the Barring
Act did not impose any burden on trade but only barred the right of
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property viz., the right to sue for money...which accrued after 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".
19. In the case before us, a very similar situation has arisen. The levy
and 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 Constitution 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 Article 265 of the Constitution. That will be putting a rider
on the Constitution. The Court is not permitted to write the Constitution
but is duty bound to enforce it.
20. The view of the Judicial Committee was that but for Section 92 of the
Australian Constitution, the Barring Act might have been held to be valid.
In the instant case also, the amended provisions of Section 11B of 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
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.
21. The American Constitution does not contain anything similar to Article
265 of our Constitution. The U.S. Supreme Court, therefore, had no
difficulty in upholding the validity of Section 424 of Revenue Act of 1928
in the case of United States v. Jefferson Electric Manufacturing Company 78
L.Ed. 859. Section 424 provided:
Section 424 Refund of automobile accessories tax.
(a) No refund shall be made of any amount paid by or collected from any
manufacturer, producer, or importer in respect of the tax imposed by
subdivision (3) of Section 600 of the Revenue Act of 1924...unless either -
(1) pursuant to a judgment of a court in an action duly begun 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 lessee, or that such amount,
although collected from the purchaser or lessee, was returned to him:....
22. The Act came into force on 29th May, 1928. The section was challenged
on the ground that it was violative of the Fifth Amendment of the American
Constitution in that a taxpayer was being deprived of his property 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 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
Section 424 was enacted, which was May 29, 1928.
If the tax was erroneous and illegal, as is alleged, it must be conceded
that, under the system then in force, there accrued 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 the purchasers. And it must
be conceded also that Section 424 applies to rights accrued theretofore and
still subsisting, but not sued on prior to April 30, 1928, and subjects
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them to the restriction that the taxpayer (a) must 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. 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. 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....
23. 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
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 to the purchaser.
(2) Section 424 applied to rights accrued theretofore and still subsisting
but not sued on prior to April 30, 1928.
24. 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 mind the peculiar
facts of the case which has been recorded in detail in the judgment of La
Forest, J.
25. 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
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 gasoline
when sold for the first time after its manufacture in or importation into
the Province.
26. An identical provision in a cognate statute was struck down by the
Privy Council which led to retroactive amendment of the Gasoline Tax Act 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 purchased or
received delivery of gasoline for his own use or consumption or for the use
or consumption by other persons at his expense, or on behalf of, or as an
agent for a principal who was acquiring the gasoline for use or consumption
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 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
(b) where gasoline in the form of liquefied petroleum gas or natural gas
was purchased to propel a motor vehicle the tax shall be 10c 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 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 5c
a gallon, and
(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
(5) Where after August 1, 1974 and before July 8, 1976, money was collected
or purported to have been collected as taxes, penalties or interest under
this Act, the money shall by this section be conclusively deemed to have
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been confiscated by the government without compensation.
27. 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 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 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 amended provision. The tax
retained and the tax payable were identical amounts. This in sum and
substance, was the judgment of La Forest, J. The rest of the observations
of La Forest, J. in Air Canada case appears to be obiter.
28. After referring to the amended Section, La Forest, J. said:
That the tax is a direct tax I have no doubt. Since at least bank of
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 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).
29. 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 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
Section 25(1) to (4). What they really disagreed about was the effect of
Section 25(5) on those provisions. In common with these judges. I am unable
to see any constitutional impediment to the province’s enacting Section
25(1) to (4). On the reasoning regarding 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 effect, a result that is not constitutionally barred. The real
question, then, is whether when Section 25(1) to (4) are conjoined to
Section 25(5), they become so coloured by the latter provision as to make
all of Section 25 ultra vires.
30. That question was answered by La Forest, J. in the following words:
That, of course, raises the issue whether Section 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
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. notes, the expression
"confiscated" is distasteful, one should not permit it to mislead us
regarding the purpose of Section 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 used, a task that should, as already noted,
be informed by the presumption that the legislature intended to stay within
its constitutional powers.
In the context in which it appears, Section 25(5) seems to be nothing more
nor less than machinery for collecting the taxes properly imposed in the
first four subsections of Section 25. It must be remembered that the
amounts illegally collected under the ultra vires provision before 1974
would be equal to the taxes levied under Section 25(1) to (4).
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Administratively, the taxes levied under the invalid scheme were collected
in the same manner and in the same amounts and from the same taxpayers as
would have occurred if the scheme had originally been framed along the
lines of Section 25(1) to (4). What the legislature attempted to do by
Section 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
the invalid tax. It was in that sense that the moneys were deemed to have
been confiscated by the government.
31. Having reached this conclusion, La Forest, J. distinguished this case
with the principles laid down in Amax case in the following manner:
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 to do impose a direct tax
under Sub-sections (1) to (4). I see no reason why it could not then take
that tax out of moneys it had improperly collected from the taxpayers under
the ultra vires statutes, just as it could have set it off against any
other obligation 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 under Section
25(1) to (4) affords no reason to brand as unconstitutional a tax that it
can validly impose and collect.
32. 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
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.
33. 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
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...."
34. The view on ultra vires taxes as expressed by La Forest, J. is an
extreme proposition which may be acceptable in accordance with the
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 Section 25(1) to (4) from Section
25(5) of the Gasoline Tax Act, R.S.B.C. 1979, c.152. The only possible
basis for the confiscation under Section 25(5) is the imposition of the
retroactive tax under Section 25(1) to (4). Certainly the payments made
under the ultra vires legislation could not support such a confiscation
since the moneys were not as a constitutional matter properly exigible
under that legislation....
Averting to "Mistake of Law" Wilson, J. observed:
...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 circumstances. My colleague
concludes that there was unjust enrichment 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 be at the expense of the appellants. The second is that the general rule
of recovery should, as a matter of policy, be reversed where the person
unjustly enriched is a governmental body....
Wilson, J. went on to observe:
It is, however, my view that payments made under unconstitutional
legislation are not ’voluntary’ in a sense which should prejudice the
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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 payments are made pursuant 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 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.
35. Adverting to the argument that any refund to the taxpayer who has
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 appellants would be
receiving a "windfall" if they received their money back because in all
likelihood they have already recouped the payments made on account of the
ultra vires tax from their customers. In terms 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. Where the payments were made pursuant to an
unconstitutional statute there is no legitimate basis on which they can be
retained. As 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 burdens.
...
Indeed, even on my colleague’s unjust enrichment analysis Dickson, J. found
in Nepean, supra, that there were no equitable reasons of principle or
policy to preclude recovery from Ontario Hydro.
36. I shall deal with Sections 11B, 11D 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 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 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 11B, 11D and 12A to 12D these provisions, in effect, have
confiscated without any compensation all illegally gathered taxes which
came within their ambit.
37. 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
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.
38. 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"); 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 equipment
and parts, but the tax paid on alcoholic beverages sold to passengers was
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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
inapplicable, La Forest, J. concluded "there seems no reason to refuse Air
Canada the recovery it seeks. There is nothing to indicate it ever
abandoned 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
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."
39. 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-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. Air in which it allowed a passing-on defence where the tax
was "directly and specifically" passed on to customers but not where the
tax was merely included generally in the price of airline tickets.
40. 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:
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 shown. The evidence
discloses that many factors, including the competitive environment and the
plaintiff’s profit margin goals, 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 comparisons, 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 amounts they are
claiming as wrongly paid taxes, subject to any applicable limitation
period.
41. In the case of Woolwich building Society v. Inland Revenue
Commissioners (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) 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.
I cannot deny that I find the reasoning of Wilson, J. most attractive.
Moreover, I agree with her that, if there is to be a right to recovery in
respect of taxes exacted unlawfully by the Revenue, it is irrelevant to
consider whether the old rule barring recovery of money paid under mistake
of law should be abolished, for that rule can have no application where the
remedy arises not from error on 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’.
42. 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 ;
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
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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 availability of such a defence may depend on the
nature of the tax or other levy....
43. 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
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 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 dissenting judgment for
reasons which, to my mind, are compelling....
44. 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
observed:
...In the context of the law of restitution, this economic view 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, the proposition must be that the plaintiff’s
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 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.
45. After a review of the large number of cases cited, Mason, C.J.
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 established that the defendant’s
enrichment is not at the expense of the plaintiff but at the expense of
some other person or persons.
46. Brennan, J. who agreed with Mason, C.J. that the appeal should be
dismissed, held that:
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 Commissioner and
Royal, the former was enriched at the expense of the latter.
47. In the concurrent judgment of Dawson, J., there are certain
observations to which I shall refer later on in this judgment.
48. All these cases go to show the complexity of the problem of doctrine 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
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.
49. 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 Constitution in our country. The protection afforded to the taxpayer is
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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
or not is a matter of no consequence.
50. 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 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 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 Municipal Council, Khurai and Anr.
v. Kamal Kumar and Anr. that Article 265 of the Constitution clearly
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
ratepayer were not dealt with by the Municipal Council as a whole but by a
sub-committee. The Court held that this was erroneous. The phrase ’levy and
collection’ indicates that all the steps in making a man liable to pay 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.
51. 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
common good and that the operation of the economic system does not result
in the concentration of wealth and means of production to the 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 Government
for common good. Simply stated the Directive Principles of State Policy do
not license the Government to rob Peter to pay Paul.
52. 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 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 become meaningless.
Independent tribunals of justice...will be naturally led to resist every
encroachment upon- rights expressly stipulated for in the Constitution by
the declaration of rights.
Madison, I Annals of Cong. 439 (1789).
53. Repeatedly, in various contexts, it has been emphasised that
constitutional 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 perceived 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 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.
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If it is allowed to be destroyed in this case, there is no reason why other
Articles of the Constitution 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.
54. Apart from that, the Government cannot be allowed to say that it has
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 invites every man to become a
law unto himself; it invites anarchy.
55. 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 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 in true administration of
justice.
56. 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.
Whatever the consequence may be, the provisions of the Constitution must be
upheld as they stand.
57. 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
matters. This protection given to the citizens must be jealously guarded by
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 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?
58. 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
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 has
grown up piecemeal over many years and has been considerably 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 (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 Acts are
identical or closely similar; and this is the case also with many of the
statutory rules. The an glomeration of statute and regulations dealing with
similar matters is neither convenient for the public nor conducive to well-
organised administration.
...
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 modernising the language or for
dovetailing the provisions and otherwise adapting them to present
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circumstances. These amendments are the minimum consistent with each
blending and adaptation.
59. Section 39 of the Act, when it was passed in 1944, stood as under:
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 with this Act, be deemed to have
been respectively made, published, 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, 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.
60. In all these Acts the Central Government were empowered to make rule
for assessment and collection of duty, issue of notice requiring payment,
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.
61. 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
succeeded in appeal, the appellate authority was competent to give suitable
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
dispute could be determined by a suitably empowered officer (Rule 11) and
appeal also lay to such authority as the Local Government might direct
(Rule 12). Any order of the Collector or such authority could be revised by
the Local Government or such higher authority as the Local Government 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, error or misconstruction of the law by the Collector, or
through misstatement as to quantify 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 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). 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 assessment. The
Collector was empowered to make a summary assessment (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 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 refunds had been made. Such claims of refund
had to be, made within three months from the date of such payment. Some
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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 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."
62. This scheme was continued in the consolidating Act of 1944. As was
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 was
understood and interpreted.
63. 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 the
real tax-payers.
64. 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 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 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 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.
65. Before that the Central Excise Act did not recognise any right of the
consumer of excisable goods to get a refund of duty.
(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
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 justification
of law. This was highlighted by Mason, C.J. in the Australian Case (supra).
It is not without significance that in all the tax laws, the word ’refund’
has been 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 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 the tax-payer is the person who pays the charge levied by
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. 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 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 judgment.
66. Section 3, which is the charging Section, reads:
3. Duties specified in the Schedule to the Central Excise Tariff Act, 1985
to be levied.
(1) There shall be levied and collected in such manner as may be prescribed
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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 collected on
any excisable goods which are produced or manufactured, -
(i) in a free trade zone and brought to any other place in India; or
(ii) by a hundred per cent export-oriented undertaking and allowed 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 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, 1975 (51 of 1975).
Explanation 1 : 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 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 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 undertaking
which has been approved as a hundred per cent export-oriented undertaking
by the Board appointed in this behalf by the Central Government in exercise
of the powers conferred by Section 14 of the Industries (Development and
Regulation) Act, 1951 (65 of 1951), 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 manufactured 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 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.
(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 --
(i) produced or manufactured by different classes of producers or
manufacturers; or
(ii) sold to different classes of buyers:
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.
67. 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 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 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 thereon
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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 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:
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:
68. Rule 9A inter alia lays down that the rate of duty and tariff valuation
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:
Rule 9A(4). The rate and valuation, if any, applicable to cases of losses
of goods shall -
(i)...
(ii)...
(iii) where the loss occurs in storage, whether in a factory or in 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.
69. These provisions have undergone minor alterations from 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
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 of law has to be restored to the person from whom such illegal
levy has been extracted. Otherwise the guarantee under Article 265 becomes
meaningless.
70. 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 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 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.
71. 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 11A). 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 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 goes into liquidation after
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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 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 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 cum-duty price will be
deductible from his income under the Income Tax Act.
72. The charge of duty under the Central Excise act is imposed by 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 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 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 (Rule 7). Time and manner of payment of
duty is laid down by Rule 9. Date for determination of duty and tariff
valuation is provided by Rule 9A 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 provisionally 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 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
10A provided residuary powers for recovery of duties for which any specific
provision had not been made in the Act or the Rules. Rule 10B dealt with
claim for refund of duties.
73. Rules 10A and 10B were as under:
10A. Residuary Powers for Recovery of Sums Due to Government. - (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 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.
(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 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 Central Excise may, in any
particular case, allow.
10B. Claim for refund of duty. - 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:
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
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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.
(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, 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.
Explanation : For the purposes of these rule ’refund’ includes rebate
referred to in Rules 12 and 12A.
74. Rules 10A and 10B were in force till 1980. These two rules were
substantially adopted in Section 11A and 11B of the Central Excises and
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 10A and 10B)
are complementary. Rule 10A 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 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.
75. Likewise, Rule 10B enabled a person to claim "refund of any duty paid
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 officer had to refund the amount to such person even
without any application.
76. There is nothing in the Act which enables or enjoins the manufacturer
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
or erroneous refund of duty. Only a person who was under a legal obligation
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
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 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
manufacturer 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 unavoidable
accident during handling or storage of such goods.
77. The procedure of clearance is contained in Rule 52. The manufacturer
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 provided
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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 make stock account of his goods. Monthly return has to 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
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.
78. 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 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 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 Ayurved Bhawan (P) Ltd. v. Excise
Commissioner, U.P. and Ors. a Bench of Three Judges of 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 a tax. Nothing is
to be read in, nothing is to be implied. One can only look fairly at the
language used."
79. In the case of R.C Parsi v. Union of India after quoting with approval
the observations of Lord Simonds in The Judicial 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
production, is not lost. The method of collection does not affect the
essence of the duty, but only relates to the machinery of 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.
80. 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 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 anything
done in disregard of the Constitution is prohibited. Such a prohibition is
to be read in every enactment.
81. Here we are dealing with a taxing legislation. 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 11A) and also for refund of duty (Section 11B). 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 realised any
duty from the ultimate consumer.
82. The structure of the Excise Act has to be borne in mind. Duty is levied
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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. In the case of
Assistant Collector of Central Excise, Calcutta Division v. National
Tobacco Co. of India Ltd. it was held by this Court that:
The term "levy" appears to us to be wider in its import than the 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-matter 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 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 payment of tax is enforced, there is a levy". We think that,
although the connotation of the term "levy" seems wider than that of
"assessment", 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 N.B. Sanjana,
Assistant Collector of Central Excise, Bombay and Ors. 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 us. It said
there with reference to Rule 10:
We are not inclined to accept the contention of Dr. Syed Mohammad 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 be prescribed the duty of
excise....It is to be noted that Sub-section (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.
83. 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
against Article 265 of the Constitution.
REFUND
84. Sections 11A and 11B before its amendment in 1991 stood as under:
11A. 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 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:
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 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 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 aforesaid
period of six months or five years, as the 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 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,
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(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;
(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 -
(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 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 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:
(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.
11B. 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 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 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 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 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 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.
Explanation : For the purpose of this section:
(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 are
exported out of India;
(b) "relevant date" means. -
(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 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
(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 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 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 Government by
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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;
(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;
(f) In any other case, the date of payment of duty.
85. Section 11B 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-
section (2), the Assistant Collector was required to examine the
application 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.
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 excisable or were entitled to exemption from duty.
86. 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 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 the
refund of duty under Section 11B. "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 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.
87. 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 precluded from making any application for refund under
Section 11B. 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.
88. 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
imposed by Section 3 out of any extra-statutory considerations. If more tax
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
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 11B, he
will not be given this refund if he has included the duty element in the
price of the goods manufactured by him.
89. The Excise Officer has no discretionary power to refuse to pay refund
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even when he was satisfied that excess payment of duty contrary to law has
been collected or paid. Though Sub-section (2) of Section 11B or earlier
Rule 11A 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 Commissioner of State Revenue v. Royal Insurance
(1995) 69 Australian Law Journal 51 by Dawson, J. There, Section 111(1) of
the Stamps Act, provided:
Where the comptroller finds 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 of persons which or who paid the duty
the amount of duty found to be overpaid.
90. This section was later on amended to provide that the Comptroller "must
refund the amount of the overpaid duty" upon an application made 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 unsuccessful
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 ’shall’
in place of ’may’. Dawson, J. observed that this was of no consequence. 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 considerations was
the impossibility of ensuring that where the duty had been passed on to
some other person, any refund should be similarly passed on. It was 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.
91. Dawson, J. repelled this contention by saying ;
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.
...
The absence of any qualification of this kind in Section 111(1) suggests to
my mind an obligation to refund the overpaid duty rather than a discretion
to withhold repayment in situations which the legislature might have
specified but did not.
It must be borne in mind that the occasion for the exercise of the
authority conferred by Section 111(1) is the finding of an overpayment of
stamp duty; that is to say, a finding that the comptroller received moneys
to which she had no entitlement. The sub-section must be read either as
requiring her to refund the overpayment or as conferring a discretion upon
her to keep the moneys notwithstanding 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
expressed has been described as a firmly established rule of law’.
92. Dawson, J. also expressed the view that the Comptroller did not have a
discretion which had to 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 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."
93. In fact, this principle is very important to understand the problem
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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 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 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:
However, as I have said, I do not regard Section 111(1) as conferring a
discretion. Once the Comptroller found that duty had been overpaid, she was
under an obligation to refund it.
94. Since Dawson, J. concluded that Section 111(1) did not confer any
discretion to the Comptroller to withhold payment of an unlawful levy, he
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 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.
95. I am also of the view that the Excise Act before its amendment in 1991,
in particular Rule 10B and later Section 11B, 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.
96. 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 Act. These provisions are indicative of the fact that
refund claim has to be made regardless of the sale of the goods.
97. That passing on of the incidence of tax was not relevant consideration
is also borne out by Sub-section (3) of Section 11B as well as Sub-rule (3)
of Rule 10B, 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, before refunding the money, to make an enquiry as to whether
the duty has been passed on to the consumers.
98. 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 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 concerned
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 circumscribed
by the Act. He cannot take into consideration anything which is not
specifically contained in the Act.
99. 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 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 imposable
because of short levy or under levy 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 to pay duty on the lost goods.
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100. The sum up, 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 on
whom it is imposed. Refund of tax must not be confused with restitution or
compensation. In my judgment, 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 Central Excise Act. No notice of these considerations 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 ! 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 sidetracked in any
manner.
PRICE
101. 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 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 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
consumers by raising the price.
102. 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 and
indirect taxes.
103. 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 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 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 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. 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. 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
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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 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 manufacturer has to get rid of the unsold products by organising
first sale at a discount thereafter at even lower prices.
104. 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.
105. In the case of British Paints India Limited v. Commissioner of Income
Tax, West Bengal, the problem was once again of valuation of unsold stock
of a paint manufacturer. It was recognised that 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 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.
106. 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
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 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 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.
107. 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 appear from
the terms of the contract.
108. 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:
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 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,-
(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
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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
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 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;
(a) any duty of customs or excise on goods;
(b) any tax on the sale or purchase of goods.
109. The English Law in this regard is the same.
110. 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.
111. In the case of Paprika 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
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 affected
by the tax element but "it does not cease to be the price which buyer has
to pay even if the price is expressed to be as X plus purchase tax."
112. This case was cited with approval by Lord Goddard, J. (as His Lordship
then was) in the case of Love v. Norman 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 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.
113. In George Oakes (Private) Ltd. v. State of Madras and Ors. 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 Anr. v.
Board of Trade (supra) and Goddard, L.J., in Love v. Norman Wright
(Builders) Ltd. (supra).
114. In the former case, Lawrence, J. observed:
Whenever a sale attracts purchase tax, that tax presumably affects the
price which the seller who is liable to pay the tax demands it does not
cease to be the price which the buyer has to pay even if the price is
expressed as X plus purchase tax.
115. In love’s Case, Goddard, LJ. observed:
Where an article is taxed, whether by purchase tax, customs duty or excise
duty, the tax becomes part of the price which ordinarily the buyer will
have to pay. The price of an ounce 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 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.
116. In that decision, reference was also made to the decision of this
Court in Tata Iron and Steel Co. Ltd. v. State of Bihar [1958] SCR 1355.
Therein Das, C.J. who delivered the majority judgment of the court said:
The circumstance that the 1947 Act, after the amendment, permitted 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 by the fact that the
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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 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. Norman Wright
(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 - loses all significance.
117. 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.
118. In the case of Delhi Cloth and General Mils Co. Ltd. v. The
Commissioner of Sales Tax, Indore, 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. 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 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
consideration for the goods sold.
119. 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 account of tax, the same can only be considered as valuable
consideration for the ’price’ of the goods sold.
120. 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 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 explained how it can be readily assumed that all
that the seller has to do to absorb higher duty is to include it in its
price and pass it on to the consumers?
121. 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
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.
122. But, here we are not concerned with social and economic theories, 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
said, "We have to add, so to say, a teleology to law."
123. In this case also we are not entitled to add any teleology to law. We
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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
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) +
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
124. The facile assumption that when excise duty is imposed or raised,, it
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 legislature. The basic
premise of this line of reasoning is fallacious. The Finance Minister in
his 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 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
distortions....
125. 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
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
manufacturers because they can merrily pass it on to the consumers. In
fact, in very many cases, the Central Government had to issue exemption
notifications 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 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.
126. The Central Duties of Excise (Retrospective Exemption) Act. 1986 was
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:
(2) The duties of excise which have been collected, but which would not
have been so collected if the said notification had been 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.
(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 Collector
of Central Excise before the expiry of six months from the. commencement of
this Act.
127. It had the effect of refunding the duties of excise which had already
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)
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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.
128. 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 of the matter and we shall not add a rider to the Central Excise Act
to deny any refund due to the manufacturer.
129. 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
Manufacturing 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.
130. Mason, C.J. 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, C.J. observed that
this economic theory had major difficulties. The first was that to deny
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, C.J. 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 undertaking.
131. 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
justification. Mason, CJ in his judgment illustrated the proposition with a
number of cases to show that the doctrine of "Passing on" was fraught with
many 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 Corporation (1968) 392 US 481. Commenting on this,
Mason, CJ. observed that though the context is different, the reasons given
for the rejection were relevant for the present case. They include the
difficulty of determining the economic impact upon the plaintiff’s business
of passing on the overpayment, the practical problems which availability of
the defence would generate involving "massive evidence and complicated
theories". Further the defence would probably apply all the way down the .
chain of distribution to the ultimate consumer who would have little
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 Administration delle
Finanze dello Stato v. San Giorgio SPA (1985) 2 CMLR 658.
132. Mason, C J. Concluded that:
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 established that the defendant’s
enrichment is not at the expense of the plaintiff but at the expense of
some other person or persons.
133. In view of all these, I see 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. The
absurdity of this doctrine of "passing on" can well be demonstrated by the
following examples.
134. 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 and
includes it in his price when he sells his yarn to a cloth manufacturer.
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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
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 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?
135. 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
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.
136. 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
of the Central Excise Act as well as Excise Tariff Act.
137. 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 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 use or for common man. The list of excisable
commodities starts with Animal Products, which may include products of the
kind unfit or unsuitable 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, 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
Combustible Preparations (Chapter 36) will only be used by large
industries. A large number of chemical products are taxed under the heading
Miscellaneous Chemical Products, like Graphite, Activated Carbon, Rubber
Accelerators, compound plasticisers, organic composite solvents (Chapter
38), charged fire extinguishing grenade are not used by the common man.
138. 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 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 converters,
electro-magnets, etc. (Chapter 85). The Schedule also include 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
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vehicles and also parts and accessories of the motor cars and motor
vehicles principally designed for transport of persons, motor vehicles for
the transport of goods. Even here it should be noted that, having regard 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
benefitting the weaker section, unlawfully and illegally levied duty of
excise on parts and accessories and various inputs manufactured by small
manufacturers for use of the large manufacturers will not be returned to
them but handed over to the large manufacturer or rich consumers who has
the resource and ability to claim it.
139. 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 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
(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
manufacturing company and that large company is given the refund, the
weaker section will not benefit in any way.
140. 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 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 the
country.
141. 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 separately. How will the common man know that he has paid any duty
and if so of what amount?
142. 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
to the manufacturer by the levy or enhancement of the duty. To take this
position is to ignore the economic realities.
143. 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.
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
reduces the profit element to Rs. 5 "and sells the goods at Rs. 100, can 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 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 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 optimum level the manufacturer had to suffer loss of profit. The
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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
made by the industry, duties have been reduced or exempted by issuing
appropriate notifications or even by legislation.
SCOPE OF SECTION 11B, 11D, 12A, 12B, 12C AND
12D OF THE CENTRAL EXCISE ACT, 1944
144. Sections 11B and 11D in Chapter II and Sections 12A, 12B, 12C and 12D
in Chapter II-A are now to be considered:
11B. 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 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
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:
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 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.
(2) If, on receipt of any such application, the Assistant Commissioner 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:
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 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;
(b) unspent advance deposits lying in balance in the applicant’s 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;
(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 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 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.
(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).
(4) Every Notification under Clause (f) of the first proviso to 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 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
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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 prejudice to the validity of anything previously done thereunder.
(5) For the removal of doubts, it is hereby declared that any notification
issued under Clause (f) of the first proviso to Sub-section (2), including
any such notification approved or modified under Sub-section (4), may be
rescinded by the Central Government at any time by notification in the
Official Gazette.
Explanation : For the purposes of this section, -
(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, -
(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, -
(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 india, or
(ii) if the goods are exported by land, the date on which 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, 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 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 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 such
reduction;
(e) in the case of a person, other than the manufacturer, the date of
purchase of the goods by such person;
(ea) in the case of goods which are exempt from payment of duty by a
special 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.
...
11D. Duties of excise collected from the buyer to be deposited with 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
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 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 11B
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.
...
12A. Price of goods to indicate the amount of duty paid thereon.
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
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indicate in all the documents relating to assessment, sale invoice and
other like documents, the amount of such duty which will form part of the
price at which such goods are to 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 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.
(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 be
prescribed, -
(a) the amount of duty of excise referred to in Sub-section (2) of Section
11B or Sub-section (2) of Section 11C or Sub-section (2) of Section 11D;
(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 Government for 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 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 form as may be prescribed
in consultation with the Comptroller and Auditor-General of India.
145. Section 11B(1) contemplates that for claiming refund of any duty of
excise a person has to apply with documentary evidence to establish, (1)
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 11B 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
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
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 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 that the
contract between the manufacturer and a buyer is of no consequence in the
matter of payment and collection of excise duty. The question 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 to a contract with
the manufacturer, but that is a matter of contract.
146. The duty impose 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
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
is beyond the competence of the Act and also violates Article 265 of the
Constitution. It was pointed out in the case of Assistant Collector of
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Central Excise, Calcutta Division v. National Tobacco Co. of India Ltd.,
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
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 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 by the Excise Officer. The Central Excise Act, as
Hegde, J. pointed out in the case of Delhi Cloth and General Mills (supra),
duty is imposed by a statute whereas the cum-duty price is paid by the j
purchaser under a contract with the manufacturer. 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". 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 retention of
such amount will be unlawful.
147. Any provision appearing or trying to bar recovery of illegally
collected 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 Commissioner for Motor Transport v. Antill Ranger & Co. Pty. Ltd.
(supra). If the realisation of tax in excess of the chance 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
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 declared to be bad and ultra vires the Constitution.
148. 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. 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 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 holding of the amount or utilisation
of the amount by the Government. The entire amount was collected
unlawfully. The original sin has not been cured as in Canada by a
retroactive charge.
149. I shall now examine the other provisions of the newly added sections.
Sub-section (1) of Section 11B requires an application for refund to be
made. Sub-section (2) requires the Assistant Commissioner to pass an 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 judgment,
decree, order etc. It is obvious that new provisions will apply in cases
where applications for refund were made before the new provisions came into
force and also subsequently. Sub-section (3) has no retrospective effect.
When a case has been finally heard and disposed of and no application 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
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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.
150. 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 11B. 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 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
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
incomprehensible 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 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.
151. Now I shall deal with Section 11D. 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
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 state 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
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 be removed
from the factory. The assessee has also to maintain an Account Current.
This is laid down by Section 173G:
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 as the Commissioner may
require, of the duties payable on the excisable goods and in particular
such account...shall be maintained 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 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:
152. This rule requires advance payment of tax. Money has to be deposited
in the treasury well in advance before removal of the goods.
153. Section 11D is a curious piece of legislation. Even after the full
amount of duty has been paid and goods have been cleared, the manufacturer
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 duty 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
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
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borne the incidence of the duty in accordance with the provisions of
Section 11B which means the ultimate consumer.
154. 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 statutory direction to pay everything collected from a buyer on
account of excise duty to be paid over to the Excise Officer. If it is in
the nature of 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 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?
155. 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 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.
156. That is not the scheme here. So, this cannot be treated something in
the nature of advance collection of tax where duty has not at all been paid
on the goods.
157. 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
has been collected, the excise authority cannot control any contract
between 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 excess
collection by the manufacturer from the buyer. Any question of execess
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
contractual 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 purpose of directing it to the Fund or to the actual consumer.
The entire Section 11D is ultra vires the charge levied by the Excise Act
itself.
158. Moreover, the entire sale price (duty included), will form part of the
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
sales proceeds will be income of the assessee for the purpose of levy of
income tax.
159. 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
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 (or course at his own peril). Here he has no option
but to pay without any hearing.
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160. 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 or a bank
guarantee. This is provided by the Rules.
161. 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.
162. The position gets curio user after the deposit. After adjustment of
the tax against the deposit, the surplus amount is not returned to the
manufacturer. 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 reason. This may also have the effect of nullifying the sale contract
entered into by the manufacturer 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 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? The only effect of Section 11D is to rob the
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.
163. It appears to me that by these newly amended provisions, the
Legislature 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, 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 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 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
ground for striking down the Act.
164. 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
by Lord Goddard, J. in the case of Love v. Norman 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.
165. Apart from what has been stated hereinabove, I find that the entire
group of these sections is dehors the charging section of the Central
Excise 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
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.
166. The Legislature has now authorised the Excise Department to retain 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 Insurance Association Ltd. v.
Commissioners of Inland Revenue 27 Tax Cases 331, 337, the legislature has
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missed fire.
167. 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 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. Nothing can be collected under a taxing Act which is not authorised by
the charging section read with the machinery provisions.
168. 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. 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.
169. 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 India.
170. I am further of the view, 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 11D places unreasonable fetter to the freedom to carry on
trade and commerce and violates the guarantee given by Article 19(1)(g) of
the Constitution.
171. 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 circumstances
of the case. I am entirely 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.
172. In conclusion, I hold that the Government is permitted to levy and
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 unlawful 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
but also offends Article 265 of the Constitution of India.
173. I am of the view that the provisions of Section 11B 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 the levy was made in any way. It is also a colourable piece of
legislation and must be struck down.
174. Section 11D imposes unreasonable restriction on the right to carry
trade and violates Article 19(1)(g). Excise authority cannot deny the
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 11D is
arbitrary and is a colourable piece of legislation and is hereby struck
down.
175. 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.
176. 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
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
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 107 of 107
judgment. I also agree with my learned brother Paripoornan, J.’s holding on
points ’H’ and T subject to my views that in view of Article 265 of the
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.
177. In my judgment, the appeal should be allowed and the writ petitions
should succeed.
178. There will be no order as to costs.
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1. 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 made it a basis for contending that any decision over-turning
Kanhaiyalal must only have prospective effect.
2. Situation would be the same where he fights upto High Court and failing
therein, he keeps quiet.
3 This discussion, we may 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.
4. 48 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.
5. 49 This specifically dealt with by F.A. 1989, Section 24(5) discussed
infra, which denies the repayment of VAT if it would unjustly enrich the
recipient of the payment.
6. 50 In Moses 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 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.
7. 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
determining whether the burden of the tax really was passed on.