Mistake Of Law – Is It A Checkmate? Not So apparent!

The recent Mumbai Tribunal decision in ANI Technologies^[1] and Jaipur Tribunal decision in Suman Solanki^[2] dealt with cases wherein the income tax authorities had filed miscellaneous applications for rectifying a mistake apparent from record under section 254(2) of the Income-tax Act, 1961 (the Act). The contention of the tax authorities was that the decisions rendered previously by the Tribunals was a mistake, which ought to be corrected in view of the subsequent decision of the SC in the case of Checkmate Services^[3]. The SC in the case of Checkmate Services had ruled in favour of the tax authorities that a taxpayer can claim a deduction of the employee's contribution of provident fund only if deposited on or before the timelines prescribed under the relevant labour laws as against the view adopted by various High Courts that such a deduction can be allowed if the same was paid till the due date of filing the tax return. The tax authority's attempt was thus to correct the 'mistake' committed by the Tribunals considering the subsequent decision of the SC. Both Tribunals dismissed the miscellaneous applications on the premise that there was no mistake apparent from record as the said rulings when delivered were based on the then prevalent jurisdictional High Court rulings and had since attained finality as the tax authorities did not prefer an appeal before the High Court. Au contraire, the Mumbai Tribunal^[4] and Raipur Tribunal^[5] on the same matter have allowed such miscellaneous applications in favour of the tax authorities.

It is important to unravel the evolution of law and history of this aspect i.e. whether the order / judgement of a lower authority suffers from a 'mistake apparent from record' on account of the same not being in line with the legal principles laid down by a subsequent decision of the SC and whether effect of such rulings can give rise to demands / refunds for the taxpayers in matters which have attained finality.

Mistake - Indian Contract Act

The term 'mistake' means an error, misconception or misunderstanding or erroneous belief^[6]. The English law appears well settled that money paid under a mistake of law cannot be recovered, but money paid either under a mistake of fact or under pressure of coercion may be recovered^[7]. The American law provides that in the case of taxes levied and collected under statutes later held to be unconstitutional, the taxpayer cannot recover unless he protested the payment at the time made^[8].

In India, section 72 of the Indian Contract Act deals with liability of a person to whom money is paid, or thing delivered, by mistake or under coercion and provides that a person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it. A five-judge landmark ruling of the Supreme Court^[9] in the context of erstwhile sales tax laws held that Section 72 of the Indian Contract Act does not distinguish between a mistake of law and a mistake of fact and hence money paid under a mistake of law can be recovered^[10].

Jurisprudence under the Act and interplay with Civil Procedure Code (CPC)

A discussion on the interplay between the provisions of the Act and the CPC becomes relevant as a catena of rulings across judicial forums have held contrary views. The decisions have impacted the outcomes of the rectification proceedings in tax cases as where both provisions (i.e. under the Act and CPC) were held to be akin^[11] to each other, invariably rectifications to give impact of subsequent decisions of SC were denied. On the other hand, where the provisions of CPC were held to be narrower^[12], the rectifications were held to be plausible.

The provisions of section 154(1) of the Act are analogous to section 254(2) of the Act (powers of Tribunal to rectify orders), both bearing their roots from section 35 of 1922 Act, which provide that orders can be rectified for errors or mistake apparent from record^[13]. On the other hand, Order XLVIII Rule 1 of CPC provides for grounds of review of a judgment or an order which includes a review on account of some mistake or error apparent on 'the face of' the record.

A mistake apparent from record under the Act means^[14] a glaring, obvious or self-evident mistake which is not discovered by a long-drawn process of reasoning or examining arguments^[15] on points where there may conceivably be two opinions^[16]. If such an issue requires interpretation, it cannot be the subject-matter of section 154 proceedings^[17]. A 'record' does not mean only the order of assessment, but it comprises all proceedings on which the assessment order is based^[18].

As regards CPC, the Supreme Court^[19] observed that the error should not be established by a long-drawn process of reasoning or be debatable^[20] and should be self-evident^[21]. It can thus be observed that the key ingredients to constitute a mistake “apparent from the record” under the Act and 'apparent on the face of the record” under CPC appear to be identical.

A subtle yet important difference though is the point of time of application of the ruling. As an obiter dictum, the Supreme Court^[22] observed that a mistake to be apparent 'on the face of the order' can only be judged in the light of the 'law as it stood on the day' when the order was passed. This aspect was also clarified by way of an explanation to order XLVIII Rule 1 of CPC that a subsequent ruling of a superior court shall not be a ground for review under CPC^[23]. On the other hand, the Gujarat High Court^[24] in the context of the Act dealing with 'mistake apparent from record' held that a decision of the Jurisdictional Court rendered even subsequently could make the prior decision of a lower authority to suffer from a 'mistake apparent from record', lending credence to the aspect that the point of time of application of law could be a subsequent event under the Act. From this perspective, the ambit of the provisions of the Act are wider than the provisions of CPC and subsequent Supreme Court rulings can be a basis for rectification. This perspective was further blessed by the Supreme Court,^[25] and the Central Board of Direct Taxes, vide a Circular^[26], clarifying that orders which are not in line with subsequent judgement of the Supreme Court would constitute 'a mistake apparent from the record'. This principle also flows from the ratio that a SC decision is law of the land^[27] which interprets law, from the date on which such law came into force and does not lay down a new law. Hence, the same is purportedly to be given a retrospective effect unless the decision prescribes for a prospective overruling^[28].

Principle of Finality and Refund of Taxes

Orders are often sought to be rectified on account of mistake of law to raise demand for taxes or refund of taxes already paid. Such orders may be under subsequent appeal process or could be ones which have achieved finality, as the time limit for filing appeal or rectification is over. A question which now arises is whether a subsequent Supreme Court decision can automatically disturb finality of orders for all taxpayers and whether refund of taxes / recovery of taxes can be made irrespective of the limitation period.

Article 265 of the Constitution of India provides that no tax shall be levied or collected except by authority of law. What the Article enjoins is that every stage in this entire process must be authorized by law^[29]. Section 242 of the Act (law as contemplated under Article 265) in the context of refunds bars a taxpayer from raising an objection to the validity of an assessment and from trying to get an assessment revised, reopened or otherwise modified^[30].

A 9 judge Constitutional Bench of Supreme Court ^[31] (in the context of indirect taxes) examined the interplay between Article 265 and refund of taxes in the light of subsequent Supreme Court rulings and held that tax collected contrary to law has to be refunded. While overruling the five judge Supreme Court ruling (discussed in the context of the Contract Act earlier), it dealt with many hypothetical scenarios and observed as follows (to the extent relevant for this article):

1. When tax / levy is unconstitutional:

Where an enactment by which tax is levied is unconstitutional or its provisions transgress the constitutional limitations^[32], refund becomes due as a matter of right because enactment imposing the tax or the provision itself is unconstitutional^[33].

2. When tax / levy is constitutional but tax paid and matter attains finality:

Where the levy is constitutional, the Supreme Court held that the sanctity attached to the finality of any proceeding must be respected. Where a tax has been collected under a particular order which has become final, the refund of that tax cannot be claimed unless the order is set aside according to law. So long as that order stands, the duty cannot be recovered back nor can any claim for its refund be entertained under the garb of the subsequent decision being a mistake of law. A taxpayer must thus succeed or fail in his own proceedings and the finality of the proceedings in his own case cannot be ignored and refund ordered in his favour just because in another taxpayer's case, a similar point is decided in favour of the taxpayer.

The above principle was also held valid in the context of the Act by the Delhi High Court^[34] that orders which have attained finality cannot be reopened under the garb of subsequent decisions being a 'mistake apparent from record' and taxpayers cannot be granted refund on this account. This view was further echoed by the Madras High Court^[35] and the Calcutta High Court^[36] and recently, the Supreme Court ^[37] held that the Tribunal may only rectify a mistake apparent from records and not recall and review its judgment as the provisions are akin to those in CPC.

In view of the above, the position as it stands today is that a superior court ruling cannot be invoked either by the tax authorities or the taxpayer in case of proceedings which have attained finality and thereby to recover / refund taxes. The consequences would remain the same even where tax authorities may not be able to pursue a matter in appeal on account of the low tax effect.

The principles^[38] emanating from the above discussion indicate that there must be an end to litigation as otherwise, the rights of persons would be in an endless confusion and fluidity and justice would suffer.

However, it does not mean that past orders which have attained finality cannot be revived at all. Certain instances (not exhaustive) in which orders can be rectified are:

1. In case a taxpayer due to error or inadvertence includes an amount in their income which is exempt from income tax or not considered as income under the law, the Assessing officer may provide^[39] necessary relief and refund any excess tax paid
   [40].
2. In case a decision of the 'Jurisdictional Court' was not brought to the notice of the Tribunal during the hearing or was not considered even when cited before it^[41], it would be construed as a mistake apparent from record^[42] and was liable for rectification.
3. If a taxpayer is over-assessed due to a mistake, misconception, or lack of proper guidance, authorities under the law are obligated to assist him and ensure that only due taxes are collected
   [43].

The principles thus succinctly emerging out of the evolution of law in this vexed issue is that though the provisions of the Act are now construed as similar to the provisions of order XLVIII Part 1 of CPC, rectification of orders by Tribunals or lower authorities is not a complete bar and is feasible in certain cases as indicated above.

Practically, it is often observed that where a matter is debatable, a taxpayer / tax authorities prefer keeping the matter alive by way of an appeal and such matters can be subject to the decisions of superior courts even rendered subsequently. This is often a strategic call and also on the basis that once a matter attains finality and facts remain the same in subsequent years, even though principles of res judicata do not apply to tax cases, the final decision is followed on a year-on-year basis^[44].

Based on the above, the rationale of Mafatlal case and the interplay between the provisions of CPC and the Act may put some wind in the sails of the taxpayers in eluding Revenue's attempts to wring out additional taxes for cases that have been settled qua the parties inter-se, even if such cases / orders were based on legal principles that subsequently stand overturned by decision of SC.

Authors: Sudin Sabnis (Partner) And Siddhesh Khandalkar (Associate) at Lakshmikumaran Sridharan Attorneys. Views are personal.

1. DCIT v. ANI Integrated Services Ltd., 162 taxmann.com 889, Mumbai Tribunal ↑

2. DCIT v. Suman Solanki, 162 taxmann.com 433, Jaipur Tribunal ↑

3. Checkmate Services (P.) Ltd. v. CIT, 143 taxmann.com 178, Supreme Court ↑

4. ACIT v. Silkasia, 202 ITD 542, Mumbai Tribunal, DCIT v. Inventys Research Co. (P.) Ltd, 203 ITD 24, Mumbai Tribunal ↑

5. DCIT v. N R Wires, 154 taxmann.com 434, Raipur Tribunal ↑

6. Blacks Law Dictionary, 2015 edition ↑

7. 'Maskell v Horner', (1915) 3 KB 106 (D), Court of Appeal UK ↑

8. Willoghby on the Constitution of United States, Vol. 1, p. 12 ↑

9. Sales Tax Officer v. Kanhaiya Lal Mukund Lal Saraf. 1959 AIR 135, Supreme Court ↑

10. This decision was upheld by a 7-judge bench of SC in State of Kerala v. Aluminum Industries Limited. However, a 9-judge constitution bench in the case of Mafatlal Industries has overruled this principle. ↑

11. DCIT v. Inventys Research Co. (P.) Ltd., 154 taxmann.com 648, Mumbai Tribunal; Joint CIT v Reuters, 153 taxmann.com 391, Mumbai Tribunal; Geo Miller & Co. v. DCIT, 134 Taxman 552, High Court of Calcutta ↑

12. T Manickvasagam Chettiar v. CIT, 14 Taxman 248, High Court of Madras; CIT v. Mithala Ashok Kumar, 32 Taxman 370, High Court Of Madhya Pradesh; Kil Kotagiri Tea & Coffee Estates Co. Ltd. v. ITAT, 42 Taxman 33, High Court of Kerala; CIT v. Devilal Soni, 134 Taxman 8, High Court of Rajasthan ↑

13. Section 154(1A) of the Act provides that matters which are decided and considered in appeals cannot be a subject matter of rectification. This aspect is conspicuously absent in section 254 of the Act ↑

14. National Rayon Corporation v. Bahmani, 56 ITR 114, High Court of Bombay, as affirmed by ACIT v. Saurashtra Kutch Stock Exchange Ltd, 173 Taxman 322, Supreme Court ↑

15. Hotz Hotels (P.) Ltd. v. CIT, 118 TAXMAN 94, High Court of Delhi ↑

16. T.S. Balaram ITO v. Volkart Bros, 82 ITR 50, SC, Supreme Court ↑

17. Mitsubishi Corporation v. CIT, 12 taxmann.com 254, High Court of Delhi ↑

18. Maharana Mills Pvt Ltd v. ITO, 36 ITR 350, Supreme Court ↑

19. Satyanarayan Laxminarayan Hegde v. Millikarjun Bhavanappa Tirumale, AIR1960 SC137, Supreme Court

    ↑

20. Parsion Devi v. Sumitri Devi, 8 SCC 715, Supreme Court ↑

21. The power of review can also be exercised by the court in the event discovery of new and important matter or evidence takes place which despite exercise of due diligence was not within the knowledge of the applicant or could not be produced by him at the time when the order was made - Inderchand Jain v. Motilal, 14 SCC 663, Supreme Court ↑

22. ITO v. Bombay Dyeing and Mfg. Co. Ltd.,  34 ITR 143, Supreme Court ↑

23. Explanation inserted w.e.f. 1976 based on the Law Commission Report published to curb litigations in civil domain ↑

24. Suhrid Geigy Ltd. v Commissioner of Surtax  237 ITR 834, High Court of Gujarat ↑

25. CIT v. Asok Textiles, 41 ITR 372 Supreme Court ↑

26. Circular 68 of 1971 which appears to accept a subsequent SC ruling in the case of S.A.L. Narayana Row, CIT v Model Milk Nagpur Ltd. 64 ITR 67, Supreme Court followed by B.V.K. Seshavataram v. CIT, 75 Taxman 491 High Court of Andhra Pradesh ↑

27. Article 141 of Constitution of India ↑

28. ACIT v. Saurashtra Kutch Stock Exchange, 305 ITR 227, Supreme Court ↑

29. District Mining Officer v. Tata Iron & Steel Co., 7 SCC 358, Supreme Court ↑

30. CIT v. Tribune Trust, 16 ITR 214, Privy Council; Ramkrishna Ashanna Bukekar v. CIT, 30 ITR 833, High Court of Nagpur ↑

31. Mafatlal Industries Ltd. v Union of India, 5 SCC 536, Supreme Court ↑

32. Instances for levy to be unconstitutional: (1) where legislative competence of the legislature is challenged and questioned on the basis of entries in the Seventh Schedule of the Constitution, (2) where law is prohibited by any particular provision of the Constitution ↑

33. Chhotabhai Jethabhai Patel Co. v Union of India, [1962] Suppl. (2) SCR 1, Supreme Court ↑

34. Indglonal Investment & Finance Ltd. v. ITO, 12 taxmann.com 108, High Court of Delhi; CIT v M/s. Kultar Exports, 369 ITR 440, High Court of Delhi ↑

35. Seshasayee Paper & Boards Ltd. v. IAC, 24 Taxman 604, High Court of Madras ↑

36. Geo Miller & Co. Ltd. v. Deputy CIT, 262 ITR 237, High Court of Calcutta ↑

37. CIT v. Reliance Telecom Ltd, 440 ITR 1, Supreme Court ↑

38. Commissioner of CGST v. Saraswati Agro Chemicals Pvt. Ltd., 25 GSTR-OL 281, Supreme Court; CIT v. Gracemac Corporation, 153 taxmann.com 681, Supreme Court ↑

39. BSCPL Infrastructure Ltd. v. UOI, 163 taxmann.com 470, High Court of Telangana ↑

40. CIT v Shelly Products, 261 ITR 367, Supreme Court ↑

41. Honda Siel Power Products Ltd. v. CIT 165 Taxman 307, Supreme Court and Lachman Dass Bhatia Hingwala (P.) Ltd.v. ACIT, 196 Taxman 563, High Court of Delhi ↑

42. ACIT v. Saurashtra Kutch Stock Exchange Ltd, 173 Taxman 322, Supreme Court ↑

43. Balmukund Acharya v. DCIT,  221 310 ITR 310, High Court of Bombay ↑

44. Radhasoami Satsang v. CIT, 193 ITR 321, Supreme Court ↑