Author: Ashwarya Sharma, Advocate | Co-Founder & Legal Head, RB LawCorp
Date: 07/03/2026
Introduction: Can the State Retain What It Was Never Entitled to Collect?
Tax statutes operate through a structured framework of rates, valuation rules, procedural compliance and refund mechanisms. Yet, occasionally a deeper constitutional question arises: what happens when money is paid to the State under a mistaken understanding of law?
Does such payment automatically become “tax” merely because it was deposited through the statutory machinery? Can the Revenue retain it simply because the refund claim does not neatly fit within the procedural framework of Section 54 of the CGST Act?
The doctrine of mistake of law refund addresses this question. It is not merely a statutory remedy but a constitutional principle rooted in Article 265 of the Constitution, which mandates that no tax shall be levied or collected except by authority of law.
In the GST regime—marked by evolving interpretations, judicial invalidation of notifications and frequent classification disputes—this doctrine has acquired renewed relevance.
The Concept of Mistake of Law
A mistake of law arises where payment is made under an incorrect understanding of legal liability.
Such situations may occur where:
- A levy is subsequently declared unconstitutional or ultra vires
- Tax is paid twice on the same transaction due to misinterpretation
- Payment is made under departmental insistence or interpretational uncertainty
- A levy later turns out to be inapplicable to the transaction
The defining element is that the amount was never legally due, even though it was paid under the belief that it was payable.
The Supreme Court recognised this doctrine in Salonah Tea Co. Ltd. v. Superintendent of Taxes, holding that tax realised without authority of law must be refunded as a corollary to Article 265.
Similarly, in Union of India v. ITC Ltd., the Court clarified that even where payment was initially made without protest, refund cannot be denied once the mistake of law is established.
These decisions firmly establish that payment under mistake does not convert an unlawful levy into lawful tax.
Constitutional Foundation: Article 265 and the Doctrine of Restitution
Article 265 of the Constitution declares:
“No tax shall be levied or collected except by authority of law.”
This constitutional mandate operates not only at the stage of imposition but also at the stage of retention of tax.
In Shri Vallabh Glass Works Ltd. v. Union of India, the Supreme Court held that ignorance of illegality at the time of payment does not legitimise the collection. Once it is demonstrated that the levy lacked authority of law, refund becomes a constitutional consequence.
The doctrine of restitution ensures that the State does not unjustly enrich itself at the expense of taxpayers. Procedural limitations cannot override the constitutional prohibition against unlawful exaction.
Mistake of Law Refund and Section 54 of the CGST Act
Refund disputes under GST frequently arise in the context of Section 54 of the CGST Act, which prescribes a two-year limitation period.
The departmental view often is that all refunds must necessarily fall within Section 54. However, judicial interpretation has consistently drawn a distinction between:
- Refund of tax validly levied but excess paid, and
- Refund of amounts collected without authority of law
Where the levy itself is unconstitutional or inapplicable, the amount never acquires the character of tax under the statute. In such circumstances, Section 54—which presupposes a lawful levy—cannot be invoked to defeat constitutional restitution.
This issue gained prominence in the ocean freight cases following the Supreme Court’s decision in Union of India v. Mohit Minerals Pvt. Ltd., where IGST on ocean freight under reverse charge was declared ultra vires. High Courts subsequently directed refund of the amounts collected pursuant to the invalid notification, rejecting limitation objections under Section 54.
The Supreme Court’s Approach in BLA Infrastructure
The Supreme Court’s order in State of Jharkhand v. BLA Infrastructure (P.) Ltd. offers important guidance on refund jurisprudence under GST.
Although the case concerned refund of statutory pre-deposit made during appellate proceedings, the Court clarified that refund must be governed by the nature of the payment and the statutory framework applicable to it, not automatically by Section 54.
The Court set aside the High Court’s approach of routing the refund through Section 54 and emphasised that refund provisions cannot be applied indiscriminately.
This reasoning carries broader implications for mistake-of-law refunds. If statutory pre-deposits cannot be forced into Section 54, amounts collected without authority of law cannot be confined within its limitation framework either.
Rajendra Narayan Mohanty: Orissa High Court on Mistaken Payment
The Orissa High Court in Rajendra Narayan Mohanty v. Joint Commissioner of State Tax dealt directly with mistaken payment under GST.
In that case, tax had been paid twice on the same transaction due to an erroneous understanding of legal liability. The department rejected the refund claim as time-barred under Section 54.
The Court rejected this approach and held that payment made under mistake cannot be treated as tax lawfully collected under the Act.
Invoking Article 265, the Court observed that once it is established that the collection lacked authority of law, retention of such amount becomes unconstitutional. Refund in such circumstances flows from constitutional mandate, not merely statutory procedure.
The Court also relied upon earlier High Court rulings including:
- Delhi Metro Rail Corporation Ltd. v. Additional Commissioner, CGST
- Comsol Energy Private Limited v. State of Gujarat
These decisions consistently hold that Section 54 presupposes a lawful levy and cannot legitimise retention of amounts collected without authority of law.
Limitation and Discovery of Mistake
Courts have also recognised that limitation in cases of mistake of law begins from the date of discovery of the mistake.
The Supreme Court in Salonah Tea acknowledged that where a levy is subsequently invalidated, the cause of action to seek refund arises only upon such judicial declaration.
Section 17 of the Limitation Act, which postpones limitation in cases of mistake until its discovery, has also been relied upon to ensure that the State does not benefit from interpretational uncertainty or delayed judicial clarification.
Lawful Levy versus Unconstitutional Exaction
The jurisprudence ultimately rests on a fundamental distinction:
- If tax is validly leviable but excess is paid, the claim may fall within statutory refund provisions.
- If the levy itself lacks authority of law, the amount never acquires the character of tax.
Such payment remains a deposit recoverable under constitutional principles of restitution.
Retention of such money amounts to unjust enrichment by the State, which is impermissible under Article 265.
Conclusion: Constitutional Supremacy over Procedural Rigidity
In a tax regime increasingly governed by timelines, electronic filings and procedural compliance, refund disputes are often reduced to questions of form and limitation.
However, the doctrine of mistake of law refund reminds us that taxation ultimately derives legitimacy from constitutional authority.
The judicial reasoning in BLA Infrastructure and Rajendra Narayan Mohanty demonstrates that refund jurisprudence must be contextual, principled and constitutionally anchored.
Where there is no authority of law, there can be no lawful retention.
Mistake-of-law refund is therefore not a concession extended by the State. It is a constitutional imperative flowing directly from Article 265.
In the final analysis, constitutional supremacy prevails over procedural rigidity, and restitution becomes the inevitable consequence of unlawful exaction.
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(The author is a practicing advocate, Co-Founder and Legal Head of RB LawCorp.
He specializes in GST law. Suggestions or queries can be directed to
ashsharma@rblawcorp.in. The views expressed in this article are strictly
personal.)
