R.M. Sahai, J. - (1.) M/s J.K. Synthetics limited invoked the extraordinary jurisdiction of this court under Article 226 of the Constitution of India, principally, for a refund of the tax paid by it under a mistake of law for the assessment year 1970-71. Although the petition was founded on the invalidity of Rule 19A(3) of the I.T. Rules, subsequently the petitioner challenged the assessment and appellate orders as well by way of an amendment application, which was allowed, and a prayer for quashing these orders was permitted to be added.
(2.) REFUND of tax paid under a mistake of law is now a fully established principle. As far back as 1958 it was held by the Supreme Court in STO v. Kanhaiya Lal Makund Lal Saraf [1958] 9 STC 747, that (p. 756): "If one party under a mistake, whether of fact or law pays to another party money which is not due to by contract or otherwise, that money must be repaid. The mistake lies in thinking that the money paid was due when in fact it was not due and that mistake, if established, entitles the party paying the money to recover it back from the party receiving the same." Since then it has been reiterated by the Hon'ble Court and followed by other courts. In State of Kerala v. Aluminium Industries [1965] 16 STC 689 (SC), it was held to be the duty of the State to refund the money paid under a mistake of law. The court held : "In a case where tax is levied by mistake of law, it is ordinarily the duty of the State.....to refund the tax." In the present case, the mistake arose because of Sub-rule (3) of Rule 19A of the I.T. Rules which was subsequently found to be ultra vires. While claiming benefit under Section 80J of the I.T. Act in assessment year 1970-71 relating to accounting year ending 30th June, 1969, in respect of profits and gains from the new industrial undertaking, the petitioner worked out the capital employed after deducting borrowed money and debts as provided under Rule 19A(3). It was accepted by the ITO but the relief was confined to the second stage of the expansion. It was found that there was substantial increase in the output since the second stage of expansion, which commenced its manufacture or production in the previous year relating to the assessment year 1969-70. In appeal, the AAC held on 30th October, 1974, that the ITO was not justified in calculating the benefit for only the second stage of expansion. He accordingly directed that relief under Section 80J may be worked out again after allowing benefit of the first stage of expansion as well. In pursuance of this direction the ITO recalculated the benefit under Section 80J of the Act on 16th November, 1974, but while calculating the benefit the borrowed money and debt was deducted as provided in the rule to find out the capital employed. These orders became final, as, according to the petitioner, it was not aware at the time of making an assessment of the true and correct position of computation in law and was led to believe that the claim as allowed was legally correct. It has been averred that it became aware of the error in 1977 when it participated as intervener in Amar-Dye Chemical Private Ltd v. ITO, a case fixed for hearing before a five-member Bench of a specially constituted Income-tax Appellate Tribunal, Bombay, which was decided on 1st December, 1977, and communicated to the petitioner in the last week of the month. During the hearing of the appeal before the Tribunal, the petitioner was further informed by his counsel that the Calcutta High Court in Century Enka Ltd. v. ITO [1977] 107 ITR 909 and the Madras High Court in Madras Industrial Linings Limited v. ITO [1977] 110 ITR 256, held that Sub-rule (3) of Rule 19A of the Rules being in conflict with Section 80J of the Act was ultra vires. After this petition was filed in February, 1978, this court also in Kota Box Manufacturing Company v. ITO [1980] 123 ITR 638, held that Sub-rule (3) of Rule 19A was invalid. The correctness of these decisions does not appear to be in dispute because Parliament intervened and by Finance (No. 2) Act of 1980, a provision was added in Section 80J itself to overcome the difficulty retrospectively with effect from April 1, 1972.
(3.) PAYMENT made under an invalid Act or rule is a payment under a mistake of law, which cannot be and is not disputed. In State of Madhya Pradesh v. Bhailal Bhai [1964] 15 STC 450 (SC), it was held (at p. 457): "A portion of the tax thus assessed has been already paid by the petitioners. It cannot now be disputed that this payment was made under a mistake within Section 72 of the Indian Contract Act and so the Government to whom the payment has been made by mistake must in law repay it." Therefore, determination of capital employed for benefit under Section 80J both by the petitioner and the ITO under Rule 19A(3), which was subsequently held to be ultra vires, was invalid and payment of tax in consequence thereof was under a mistake of law. Effect of declaration of the rule as invalid extended to the date of its enactment. In law, it shall be deemed to have been non-existent.;