Supreme Court Rules on Refund of Excise Duty: Upholds Constitutional Mandate, Limits Claims to Specific Provisions

Nine-Judge Bench clarifies refund claims under Central Excise Act, emphasizes burden of proof on manufacturer, and strikes down provisions violating Article 265 of the Constitution

In a landmark judgment delivered on December 19, 1996, the Supreme Court of India, in a nine-judge bench comprising Chief Justice A.M. Ahmadi and Justices Jagdish Saran Verma, S.C. Agrawal, B.P. Jeevan Reddy, A.S. Anand, B.L. Hansaria, S.C. Sen, K.S. Paripoornan and B.N. Kirpal, delivered a comprehensive verdict in the case of Mafatlal Industries Ltd. v. Union of India, addressing critical issues relating to refund of Central Excise and Customs duties collected contrary to law.

The Court examined the maintainability of refund claims when excise or customs duties are collected due to misinterpretation, mistake of law, or unconstitutional provisions. It clarified the interplay between Section 72 of the Indian Contract Act, Articles 226 and 32 of the Constitution, and the Central Excise and Salt Act, 1944 and Customs Act, 1962.

Key Highlights:

1. Refund Claims Under Constitutional and Statutory Provisions

 - The Court distinguished three categories of refund claims:

  (i) Where a provision under which tax was levied is declared unconstitutional ("unconstitutional levy") — here, claims can be made by suit or writ petition, as the law does not contemplate such situations.

  (ii) Where tax is collected under a misinterpretation or erroneous application of statutory provisions ("illegal levy") — claims must be preferred exclusively under the provisions of the Central Excise Act or Customs Act within prescribed limitation periods; suits invoking Section 72 of the Contract Act are not maintainable.

  (iii) Where an assessee seeks to reopen final orders based on a later judicial decision in another’s case — such claims are barred by the principle of res judicata; an assessee must succeed or fail in his own case.

2. Burden of Proof and Doctrine of Passing On

 - The Court emphasized that excise duty is an indirect tax, ordinarily passed on by the manufacturer to the consumer.

 - For claiming refund under Section 72 or statutory provisions, the claimant must plead and prove that he has *not* passed on the tax burden to others and has suffered a loss or injury.

 - This is a rebuttable presumption under Section 12-B of the Central Excise Act.

 - Claims by manufacturers who have passed on the burden are liable to be rejected to prevent unjust enrichment.

3. Constitutional Interpretation and Article 265

 - Article 265 mandates that "no tax shall be levied or collected except by authority of law."

 - The Court held that this applies to both direct and indirect taxes.

 - Illegal or unconstitutional collections must be refunded to the person from whom the tax was collected, subject to equitable considerations.

 - However, refund is not automatic or unconditional; it is subject to proving that the claimant has not passed on the burden.

4. Validity and Impact of 1991 Amendments

 - The Central Excises and Customs Law (Amendment) Act, 1991, introducing Sections 11-B, 11-D and Chapter II-A (Sections 12-A to 12-D), was upheld as constitutionally valid.

 - These amendments provide a structured refund mechanism emphasizing proof of non-passing on and create a Consumer Welfare Fund for amounts not refunded.

 - Section 11-D, requiring manufacturers to deposit excise duty collected from buyers with the government, was held unconstitutional as imposing unreasonable restrictions violating Article 19(1)(g).

 - The Court struck down provisions that act as devices to retain illegally collected taxes, emphasizing the need for strict compliance with constitutional safeguards.

5. Jurisdiction of Courts

 - The Court held that jurisdiction of civil courts is barred in claims for refund covered by the Central Excise Act or Customs Act.

 - However, suits or writ petitions are maintainable where the levy is unconstitutional or the authorities have acted without jurisdiction or in violation of fundamental principles of judicial procedure.

 - The Court will exercise writ jurisdiction consistently with the legislative intent and regime of law.

6. Passing On Defense and Unjust Enrichment

 - Drawing on comparative law and academic commentary, the Court recognized the complexity of the passing on defense.

 - It concluded that the defense is valid and necessary to prevent unjust enrichment of manufacturers who have passed on the tax burden.

 - The doctrine of unjust enrichment does not apply to the State, which acts as parens patriae.

7. Retrospective Effect and Pending Proceedings

 - The amended Section 11-B applies to pending claims, including those before courts or tribunals, except where refund has already become final.

 - The Court directed that petitioners in pending writ petitions or suits may file refund applications under Section 11-B within 60 days of the judgment to avail relief.

8. Exclusion of Other Remedies

 - All refund claims, except those arising from declaration of unconstitutionality, must be filed and adjudicated under the Central Excise Act or Customs Act.

 - Section 72 of the Contract Act cannot be invoked as an independent remedy for refund in such cases.

9. Property Tax on State Properties in Delhi

 - Separately, the Court held that property taxes levied under various municipal Acts in Delhi constitute "Union taxation" under Article 289 of the Constitution.

 - State properties in Delhi are exempt from such Union taxation, except when used for trade or business purposes.

 - The exemption applies prospectively from the financial year 1996-97.

Significance:

The judgment brings clarity to the complex interplay of constitutional guarantees, statutory provisions, and equitable doctrines in the refund of indirect taxes in India. It balances the rights of taxpayers, the interests of the State, and the principles of economic justice enshrined in the Constitution. The ruling upholds the exclusivity of statutory refund mechanisms while preserving remedies against unconstitutional levies.

The Court’s insistence on proof that the tax burden has not been passed on introduces a pragmatic safeguard against unjust enrichment and fiscal chaos. The striking down of provisions imposing unreasonable restrictions underscores the judiciary’s role in maintaining constitutional sanctity.

Statutory provisions

Central Excises and Salt Act, 1944 Sections 3, 4, 5A, 9, 11A, 11B, 11C, 11D, 12A, 12B, 12C, 12D; Customs Act, 1962 Section 27; Contract Act, 1872 Section 72; Evidence Act, 1872 Section 106; Constitution of India Articles 14, 19, 32, 38, 39, 64A (Sale of Goods Act), 226, 265, 289; Civil Procedure Code, 1908 Section 9; Limitation Act, 1963 Section 17

Mafatlal Industries Ltd. v. Union of India (SC) : Law Finder Doc Id # 191264