Introduction 

• This is a landmark judgment where the Court laid down that the law on restitution under Section 72 of the Indian Contract Act, 1872.  
• The Judgment was delivered by a 2- judge Bench consisting of Justice BL J Hansaria and Justice BNJ Kirpal. 

Facts

• Mafatlal Industries Ltd., a textile mill in Ahmedabad, was involved in a legal dispute over excise duty refunds for blended yarn manufactured for captive consumption. 
• Prior to March 16^th /17^th , 1972, the mills paid excise duty on blended yarn under Tariff Item 18 or 18A of the Excise Act. 
• In a previous case, a Division Bench of the Gujarat High Court held that the levy of excise duty on blended yarn before March 16^th /17^th , 1972, was ultra vires (beyond legal power). 
• The mill owners claimed they had paid excise duty under a "mistake of law" and requested a refund for the period up to March 16^th /17^th , 1972. 
• The Revenue department refused to refund the excise duty, prompting the mills to file suits within three years of the earlier High Court judgment. 
• The trial court initially decreed the suits in favor of the mills, but the High Court of Gujarat subsequently reversed these decisions on appeal. 
• The key legal question became whether a person claiming a tax refund must prove "loss or injury" if they have effectively passed on the tax burden to the buyer. 
•  The case involved claims for refund made through different proceedings: departmental authorities, civil suits, and writ petitions under Article 226 of the Constitution. 
• The refund claims were broadly categorized into three groups: unconstitutional levy, levy based on misconstruction of provisions, and mistake of law discovered through other legal proceedings. 
• The applicable legal provisions for refund claims varied across different time periods, from 1977 to 1991, with changing rules and sections in the Central Excises and Salt Act. 

Issues Involved  

• Whether claim for refund is tenable in any of the proceedings for any period based on Section 72 of Indian Contract Act, 1872 (ICA) if the assessee has “passed on” the liability to the consumer or third party? 

Observations 

• The Chapter V of the ICA is styled as “Of certain relations resembling those created by contract.” 
• The Chapter contains five sections Section 68 to Section 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. 
• The law of restitution is founded upon the principle of "unjust enrichment". 
• The Court finally laid down the following points: 
  • If an excise duty paid by an assessee was ultimately passed on to buyers or other parties, and the assessee has not suffered any financial loss, their claim for restitution under Section 72 of the ICA is not sustainable. 
  • Article 265 of the Constitution of India, 1950 should be interpreted in conjunction with the Preamble and Article 39(b) and (c), meaning that an invalid levy does not automatically entitle the assessee to a full refund of all collected amounts. 
  • There is a presumption that the taxpayer has passed on the tax liability to consumers, and the burden of proof lies with the taxpayer to demonstrate that they have not done so.

Conclusion 

The Court in this case discussed the law on restitution and held that if an excise duty paid by an assessee was ultimately passed on to buyers or other parties, and the assessee has not suffered any financial loss, their claim for restitution under Section 72 of the Contract Act is not sustainable.