DECISIONS OF FOREIGN COURTS.

ON THE SUBJECT: HOW DIFFERENT

CONSTITUTIONAL COURTS ARE VIEWING THE PROBLEM, OF REFUND OF
TAXES COLLECTED CONTRARY TO LAW.

United Kingdom: Until 1992, the law in England was that taxes paid under a mistake or law
were not recoverable whereas taxes paid under a mistake of fact or under compulsion were
held recoverable. This position was radically altered by the decision of House of Lords in
Woolwich Building Society v. Inland Revenue Commissioners (1993) 1 A.C. 70.

However the decision in Woolwich Building Society is that it deals with a direct tax, viz.,
income tax and not with a indirect tax.
Secondly, it is a case where the Regulations under which taxes were demanded and
collected, were held to be ultra vires and void. In other words, it was a case "in which an
excessive assessment was made on a taxpayer due to some error of fact or law". For this
reason, it was held that the remedy of the taxpayer lay in common law and not the ones
provided by the statute itself.
The majority even while holding that taxes paid under a mistake of law are recoverable,
hedged the rule with certain riders.
Where a tax or duty is paid by a citizen pursuant to an unlawful demand "common justice
seems to require that tax to be repaid, unless special circumstances or some principle of
policy require otherwise; prima facie, the taxpayer should be entitled to repayment as of
right"

This principle he deduced from the Bills of Rights (1688) which proclaimed inter alia that
taxes should not be levied without the authority of Parliament.
However the law can place shorter time-limits for making such claims of restitution as in
German Law where formal objection has to be lodged within one month of the notification to
enable a citizen to claim refund of amounts collected unlawfully.
The German Law further provides that one citizen cannot benefit from the successful formal
objection of another citizen; the rule is that the person should himself object and take
proceedings within the prescribed time-limit.

CANADA : Air Canada v. British Columbia (59 D.L.R. (4th) 161), examines the claim of
refund of taxes recovered contrary to law from two standpoints, viz., Constitutional Law and
Law of Restitution.

It was laid down that : “The distinction between mistake of fact and mistake of law should
play no part in the law of restitution. Both species of mistake, if one can be distinguished
from the other, should, in an appropriate case, be considered as factors which can make an
enrichment at the plaintiff's expense 'unjust' or 'unjustified'. This does not imply, however,
that recovery will follow in every case where a mistake has been shown to exist. If the
defendant can show that the payment was made in settlement of an honest claim, or that he
has changed his position as a result of the enrichment, then restitution will be denied.
However the ' mistake of law rule' should not be extended to the constitutional plane as this
rule is replete with technicality and difficulty . Constitutional adjudication invites the
formulation of broad principles suitable to the accommodation and resolution of broad social
and political values, and this much criticized rule seems singularly unsuited for that purpose.”

The claim of the Airlines was denied on the ground that it passed on the burden to its
customers despite the fact that by doing so, the province would be benefitted at the expense
of the Airlines.
It was held that even if the Airlines could show that they themselves bore the burden of
taxes, recovery of ultra vires taxes should be denied, at least in the case of unconstitutional
statutes except where the relationship between the State and a particular taxpayer resulting in
the collection of taxes is unjust or oppressive in the circumstances.
This rule against recovery, is based on concerns for the protection of the treasury and the
recognition of the reality that if the tax was refunded, modern government would be driven to
the inefficient course of re-imposing it either on the same or a new generation of taxpayers to
finance the operations of the government.

However this rule does not apply to cases where the tax is extracted from a taxpayer through
a misapplication of law. The following observations are relevant:
“While it will take some time for the courts to work out the limits of the developing law of
restitution, it is useful on this point to examine the American experience. Professor George C.
Palmer, in his work, the Law of Restitution, makes the following comment (1986)
Supplement, at p. 255):
There is no doubt that if the tax authority retains a payment to which it was not entitled it has
been unjustly enriched. It has not been enriched at the taxpayer's expense, however, if he has
shifted the economic burden of the tax to others. Unless restitution for their benefit can be
worked out, it seems preferable to leave the enrichment with the tax authority instead of
putting the judicial machinery in motion for the purpose of shifting the same enrichment to
the taxpayer.The law of restitution is not intended to provide windfalls to plaintiffs who have
suffered no loss. Its function is to ensure that where a plaintiff has been deprived of wealth
that is either in his possession or would have accrued for his benefit, it is restored to him. In
cases where the effect of an unconstitutional or ultra vires statute is in issue, special
considerations operate to take this case out of the normal restitutionary framework, and
require a rule responding to the specific underlying policy concerns in this area...A related
concern, and one prevalent through many of the authorities and much of the academic
literature is the fiscal chaos that would result if the general rule favoured recovery,
particularly where a long-standing taxation measure is involved.”

The law in Canada appears rather paradoxical to an Indian Lawyer. It says that while taxes
collected under an unconstitutional statute need not be refunded (even if the Burden of tax
has not been passed on to a third party), taxes collected by misinterpreting/misapplying the
provisions of the statute ought to be refunded. This circumstances emphasises how the
jurisprudence in each country has developed differently.

Therefore in India, appropriate principle must be evolved to meet the emerging situation,
keeping in mind the development of law in our own country, our own circumstances and
above all, our own constitutional philosophy.

AUSTRALIA : In Commissioner of State Revenue v. Royal Insurance Australia Ltd. (1995)

69 A.L.J. 51, the Australian High Court rejected the plea of the State that inasmuch as the
plaintiff has passed on the burden of illegally collected tax to others, it is not entitled to
restitution,

It was held that:

A plaintiff who passes on a tax or charge will receive a windfall and will unjustly be
enriched if recovery from a public authority is permitted rests on the foundation upon the
economic view that the plaintiff should not recover if the burden of the imposition of the tax
or charge has been shifted to third parties.
In the context of the law of restitution, this economic view encounters major difficulties. The
first is that to deny recovery when the plaintiff shifts the burden of the imposition of the tax
or charge to third parties will often leave a plaintiff who suffers loss or damage without a
remedy. That consequence suggests that, if the economic argument is to be converted into a
legal proposition the proposition must be that, the plaintiff's recovery should be limited to
compensation for loss or damage sustained.

Moreover an inquiry into and a determination of the loss or damage sustained by a plaintiff
who passes on a tax or charge is a very complex undertaking. The basis of restitutionary
relief is not compensation for loss or damage sustained but restoration to the plaintiff of what
has been taken or received from the plaintiff without justification.

USA. :
United States of America v. Jefferson Electric Manufacturing Co., 78 L.Ed. 859.

Section 424 of the Revenue Act, 1928 provided that "no refund shall be made of any amount
paid by or collected from any manufacturer, producer, or importer unless it is established to
the satisfaction of the Commissioner that such amount was in excess of the amount properly
payable upon the sale or lease of an article, subject to tax, or that such amount was not
collected, directly or indirectly, from the purchaser or lessee, or that such amount although
collected from the purchaser or lessee, was returned to him.

The said provision was attacked as violative of the due process clause in the Fifth
Amendment to the United States Constitution. The attack was repelled holding that the
provision being based upon equitable principles which underlie an action for relief for
money received is not an unreasonable provision.
The Court further observed that an action for money received is of equitable character
aiming at the abstract justice of the case and is less restricted and fettered by technical rules
and formalities than any other form of action.
The Court conceded that if the tax was illegally levied, under the system then in force, the
taxpayer had acquired a right to have it refunded without showing whether he bore the burden
of the tax or had shifted it to the purchases.
Even so, it was held that the requirements imposed by the relevant provisions of the statute ,
that the taxpayer should satisfy before he can claim refund were reasonable and equitable.

The following observations of the Court are significant:

“But it cannot be conceded that in imposing this restriction the section strikes down prior
rights, or does more than to require that it be shown or made certain that the money when
refunded will go to the one who has borne the burden of the illegal tax, and therefore is
entitled in justice and good conscience to such relief. This plainly is but another way of
providing that the money shall go to the one who has been the actual sufferer and therefore
is the real party in interest.
We do not perceive in the restriction any infringement of due process of law. If the tax payer
has borne the burden of the tax, he readily can show it; and certainly there is nothing
arbitrary in requiring that he make such a showing. If he has shifted the burden to the
purchasers, they and not he have been the actual sufferers and are the real parties in
interest; and in such a situation there is nothing arbitrary in requiring, as a condition of
refunding the tax to him, that he give a bond to use the refunded money in reimbursing
them....The present contention is particularly faulty in that it overlooks the fact that the
Statutes providing for refunds and for suits on claims therefore proceed on the same
equitable principles that underlie an action in assumpsit for money had and received. Of
such an action it rightly has been said : 'This is often called an equitable action and is less
restricted and fettered by technical rules and formalities than any other form of thereon. It
aims at the abstract justice of the case, and looks solely to the inquiry, whether the defendant
holds money, which ex aequo at bono belongs to the plaintiff.”