Introduction
Imagine being an owner of a business who pays taxes diligently, follows all the rules and regulations. However, years later he discovers that tax that he was paying was under a mistaken belief of relevant legal provisions for instance, a rate higher than what is legally required. Then the main point of contention will be that Is the person eligible to get a refund? And if yes, then what is the limitation period and procedure required to be followed for the same.
This uncertainty leaves us at the intersection between Taxation Law, Restitution and Limitation. This situation arises from the legal principle of ‘Mistake of Law’ where a person is either ignorant of law or mistaken in their interpretation of a particular legal provision. It is derived from the Latin term ignorantia juris non excusat (ignorance of the law is no excuse). Indian courts from time to time have relied on this principle yet one such exception was established through the landmark judgement given in the case of Mahabir Kishore where the court held that the period of limitation does not begin until the plaintiff has discovered the mistake or could with ‘reasonable diligence’ have discovered it. The interpretation of the term ‘reasonable diligence’ changes according to the facts of the case.
However, as GST is still in its formative years, significant ambiguity regarding the applicability of Section 17 of the Limitation Act to refund claims arising from mistake of law continues to prevail. This article examines the scope of Section 17 of the Limitation Act with respect to the current GST regime and the applicability of the traditional doctrine to cases related to refund of taxes paid under mistaken belief.
The enactment of GST Laws in 2017 brought with it certain challenges, one of which was determining the scope of Section 17 of the Limitation Act with respect to cases related to the refund of taxes. Traditionally prior to this, the Indian courts had addressed this issue under the doctrine of ‘mistake of law’. There have been multiple judgments which have contributed to finding a solution which is suitable and fair for both the assessee and the revenue.
In the case of Mahabir Kishore and Ors. Vs. State of Madhya Pradesh (1989) the main issue was regarding the 7 1/2 per cent mahua and fuel cess on the manufacture and sale of liquor was paid by the appellants, after coming to know that it was declared illegal by the Madhya Pradesh High Court, they filed a petition seeking a refund, as the Government rejected the payment on the grounds of Limitation. High Court was of the view that money was realised under mistake of Law and appellants were equally mistaken by paying the money, hence the suit was for refund of money paid under mistake of Law. It held that mistake of Law is refundable under section 72 of the Indian Contract Act, 1872 which states that refusal to pay money received by mistake may result in unjust enrichment, however it may not be recoverable if in paying and receiving it the parties were in pari delicto (equal fault). The Court, acting equitably applied the principle of ‘Nul ne doit senrichir aux depens des autres’- no one ought to enrich himself at the expense of others.
Article 113 of the schedule to the Limitation Act, 1963 restrains the period of limitation to 3 years for cases pertaining to refund of money paid under mistake of Law, whereas section 17(1)(c) of the Act provides that the period of limitation will begin to run from the date of knowledge of the particular mistake, as generally in these matters the mistakes become known to the party when the court evaluates the validity of the Law. Though the courts are of the view that parties cannot claim a refund in cases where mistake of Law can be discovered with reasonable diligence.
The landmark case of English Common Law Moses v. Macferlan remains very valuable in drawing the current framework. In this case the Court was of the view that ‘ex aequo et bono’, the defendant ought to refund; when plaintiff has paid the money in all fairness and justice, although Lord Mansfield was of the view that money is not recoverable and law also cannot force you to pay if it is paid voluntarily and the person honestly keeps it for instance a debt that became irrecoverable due to Limitation Act.
The CGST Act, 2017 specifically tackles cases pertaining to the refund of GST, Section 54 of the Act states that the person can claim refund of GST within the period of two years from the relevant date. Not expressly stated but Section 54(5) and 54(8) of the Act convey the principle of unjust enrichment that says no one should be unjustly enriched at the expense of another, every claim for a refund of tax should pass this principle to prevent entitlements which are unjustified. To claim the refund the required person has to prove unjust enrichment with the help of certain proof such as to check if the incidence of tax is passed to another person or not, the claimant gets right to claim only if he can prove that he has himself borne the burden of tax. For greater claims of more than 2 Lakhs Rupees the person is required to have a certificate issued by a chartered accountant stating that burden of tax, interest or any other amount claimed has not been passed to any other person by the claimant.
The presence of Section 54 in the CGST act signifies that there was an intention to create a separate framework in the new act, however recent rulings by the High Courts have tended to override this section in cases where tax is paid under pure mistake of law, invoking Section 17 of the Limitation Act, 1963 thereby bypassing the two years’ limitation period prescribed in the framework. In the earlier case of D. Cawasji & Co. and Ors. Vs. State of Mysore and Ors. the Court firmly held that Article 226 of the Constitution is discretionary and subject to timely filing and held that delay can bar relief for the refund of tax paid under mistake of Law even if the law in question is void.
The central question is whether after the enactment of GST Laws a person who has paid tax under a mistaken belief is eligible to claim a refund beyond the period of two years prescribed under Section 54 of the CGST Act, with the help of Section 17 of the Limitation Act, 1963. Courts while adopting a cautious approach in some cases have given room to the aggrieved parties to claim their refund beyond the limitation period of two years prescribed in the Act by broadening the scope of Section 17 of the Limitation Act. However, only parties who are genuinely under a mistake and could not have discovered it with the help of reasonable diligence as established in the case of Mahabir Kishore and Ors can claim a refund beyond the two-year limitation period by invoking Section 17 of the Limitation Act, 1963. In the most recent cases of Rajendra Narayan Mohanty vs. Joint Commissioner of State Tax, CT and GST Circle and Ors. and Louis Dreyfus Company Private Limited vs. Union of India and Ors courts have reiterated that if a person has paid an amount to the authorities which he is not bound to pay then Limitation under Section 54 is not applicable instead the person can claim a refund under Section 17 of the Limitation Act, 1963. These cases also established the fact that the time-limit fixed under section 54(1) is purely suggestive and directory in nature and not mandatory. However, one major issue which courts still face is the interpretation of the term ‘reasonable diligence’ as it changes according to the facts of the case. On the other hand, in the landmark case of Mafatlal Industries Ltd. and Ors. Vs. Union of India (UOI) and Ors. Supreme Court emphasised that refund claims in indirect tax matters must be dealt with under specific statutory provisions which are exhaustive in nature. The court was of the view that courts should be cautious in using a general provision like Section 17 to override the framework specifically created to deal with matters relating to tax refund
The interaction between specific provisions created to deal with cases related to tax refund claims continues to create a tension with general laws. In the current times courts are adopting a more cautious approach as observed in the case of Rajendra Narayan Mohanty vs. Joint Commissioner of State Tax, CT and GST Circle and Ors. and Louis Dreyfus Company Private Limited vs. Union of India and Ors, where the court while giving priority to Section 17 of the Limitation Act gave a nuanced interpretation of section 54 of the CGST Act stating that it is not mandatory rather directory in nature, which provides a court with a wider area to deal with cases according to their own merits rather than solely relying on what was held in the case of Mafatlal Industries Ltd. and Ors. Vs. Union of India (UOI) and Ors. and D. Cawasji & Co. and Ors. Vs. State of Mysore and Ors. Going forward, the aim should be to streamline laws in a way that they do not create a tension amongst themselves but rather provide an equitable remedy to a person who is genuinely aggrieved by a mistaken belief and could not have discovered it through the process of reasonable diligence. Therefore, despite Section 54 of the CGST Act being the primary provision dealing with cases related to refund of GST Section 17 of the Limitation Act still plays a decisive role in complex matters pertaining to mistake of law.