Paid by Mistake? Here's Why Time Limits May Not Block Your Refund

Imagine this: A taxpayer, either suo-moto or subsequently, deposits a hefty sum with the tax department. Time passes, the case fizzles out, and two years later, they realize the amount was never actually payable. They rush to claim a refund—only to be told, "Sorry, you’re too late! The two-year window under Section 54(1) has closed".

But is that really the end of the road? Judicial precedents say otherwise. Courts have repeatedly stepped in to ensure that taxpayers aren’t unfairly deprived of their money due to procedural limitations. The judiciary has clarified that procedural time limits cannot override fundamental principles of justice. In this article, we’ll explore how courts have ruled in favor of refunding amounts paid by mistake even after the statutory time limit has expired.

Understanding the Legal Framework

Before diving into judicial rulings, let’s first look at what the law says. Indirect tax laws have consistently prescribed timelines for various aspects, including filing returns, initiating departmental proceedings, submitting refund applications, and lodging appeals.

Under the erstwhile regime, Section 11B of the Central Excise Act, 1944 mandated that a person seeking a refund must file an application before the expiry of one year from the relevant date.

Under the GST regime, Section 54 of the Central Goods and Services Tax Act, 2017 (CGST Act) follows a similar approach, stating that a person claiming a refund must apply before the expiry of two years from the relevant date. The provision reads as follows:

“(1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed”

At first glance, the provision seems clear: a two-year time limit is mandatory.

For residual cases, the relevant date is determined under clause (h) of Explanation 2 to Section 54, which specifies that the date of payment of tax is the starting point for calculating the two-year period.

But does this time limit apply in all cases, or are there exceptions where courts allow refunds beyond two years?

Judicial Precedents Favoring Refunds Beyond the Two-Year Limit

Courts have consistently ruled that the two-year time limit under Section 54(1) of the CGST Act cannot be used to deny refunds when the payment was never legally due. These judgments affirm that tax authorities cannot unjustly retain amounts collected due to error, reinforcing taxpayers' right to recover such payments.

❖ AalidhraTexcraft Engineers [2024(12)LCX0270]

Facts of the case:

• Due to a system mismatch, the petitioner mistakenly treated Rs. 40,00,000 as excess ITC and voluntarily deposited it via DRC-03 on 13.11.2020.

• Upon verification, the department found no tax liability. The petitioner clarified the mistake and applied for a refund on 30.03.2024, but it was rejected as time-barred under Section 54(1).

Court’s Ruling and Key Observations

• The Gujarat High Court held that Section 54(1) does not apply to mistaken payments, and the time limit starts from the date of discovering the mistake, not the date of payment.

• The amount was never a tax liability, making the department’s reliance on Section 54(1) incorrect.

• Section 72 of the Indian Contract Act, 1872, which mandates the return of money paid by mistake, overrides the CGST limitation period.

• Retaining such an amount without legal justification would violate Article 265 of the Constitution.

• The department was directed to refund Rs. 40,00,000 within 12 weeks. However, since the deposit was voluntary, no interest was awarded.

❖ Delhi Metro Rail Corporation Ltd [2023(09)LCX0016]

Facts of the case:

• Delhi Metro Rail Corporation (DMRC) issued an invoice of Rs. 19,04,520 to Surat Municipal Corporation (SMC) on 11.08.2017, including GST of Rs. 2,90,520.

• However, SMC only paid Rs. 16,14,000, excluding GST. To comply with tax laws, DMRC deposited Rs. 2,90,520 as GST via Form GSTR-3B for August 2017.

• Later, SMC informed DMRC that the service was exempt under Notification No. 12/2017 - Central Tax (Rate) dated 28.06.2017.

• DMRC applied for a refund in 2022, but it was rejected as time-barred.

The Delhi High Court’s ruling:

• Since GST was never applicable to DMRC’s services, the deposit was a mistaken payment, and the department had no right to retain it.

• Section 54(1) of the CGST Act does not apply when tax is paid under a mistake of law and was never legally due. Therefore, the two-year limitation period does not restrict the refund.

• The rejection orders were set aside, and the department was directed to process DMRC’s refund.

❖ M/s Comsol Energy Private Limited [2020(12)LCX0234]

• The Gujarat High court held that Section 54 of the CGST Act applies only to refunds of tax paid under the CGST Act. Any amount collected by the Revenue without authority of law is not considered tax, and therefore, Section 54 does not apply to its refund.

❖ Joshi Technologies International [2016(06)LCX0048]

• The Hon’ble Gujarat High Court ruled that Oil Cess does not bear the character of central excise duty, making the payment of “Education Cess and Secondary & Higher Secondary Education Cess” a mistake of law.

• Section 11B of the Central Excise Act, 1944, was inapplicable, and instead, the Limitation Act, 1963, applied. Under Section 17 of the Limitation Act, the limitation period begins only when the mistake is discovered.

• Since the petitioner applied for a refund within this timeframe, the claim was within the prescribed limitation period.

• Self-assessed payments can be refunded if later found to be made by mistake or ignorance. The authority is duty-bound to return such amounts, as Article 265 of the Constitution prohibits collecting tax without legal backing.

• The unjust enrichment principle was rejected, as there was no proof that the cess burden had been passed on to buyers.

• The court quashed the adjudicating authority’s decision and directed an immediate refund of Rs. 73,60,061 but denied interest due to the lack of a statutory provision mandating its payment.

❖ Geojit BNP Paribas Financial Services Ltd. [2015(07)LCX0038]

Facts of the case:

• Petitioner paid service tax under the mistaken belief that the transaction was taxable. Later realized that no tax was legally due and sought a refund. Department rejected the claim, arguing that it was barred by limitation and therefore, the petitioner is ineligible for refund of the amount claimed under Section 11B.

Kerala High Court’s Ruling and Key Observations

• It held that the petitioner’s payment was due to a mistake of fact in understanding the law, not a mistake of law. The petitioner incorrectly assumed that the transaction was taxable under Service Tax.

• Since the amount paid had no legal basis, it does not qualify as a valid tax collectible by the department. As the tax was never payable in the first place, the department had no authority to retain it.

• For Section 11B to apply, the levy must have been valid at the time of payment and later deemed refundable due to legal interpretation or adjudication.

• If the payment lacked legal validity from the outset, Section 11B does not apply.

• The Court held that the levy was not in accordance with Service Tax provisions. Consequently, the payment cannot be considered under Section 11B of the Central Excise Act.

• The writ petition is allowed, and the second respondent is directed to sanction the refund claimed by the petitioner. The refund must be processed within two months from the date of receipt of a copy of this judgment. No costs are awarded.

❖ Bhailal Bhai Zaver Bhai Patel [1996(10)LCX0042]

Facts of the case:

Gujarat High Court’s Ruling and Key Observations:

❖ M/s. 3E Infotech [2018(06)LCX0008]

• The Madras High Court had held that that a refund claim cannot be barred by limitation when service tax is paid by mistake, merely because the period of limitation had expired.

In this case, since the Assesses applied for refund soon after realizing their entitlement, it would be unjust to reject the claim on the basis of delay. Allowing the Revenue to retain the excess service tax would be improper and contrary to Article 265 of the Constitution of India. Therefore, an application under Section 11B cannot be dismissed merely on the ground of limitation.

Types of Mistakes That Courts Have Recognized for Refunds Beyond the Time Limit

While tax laws impose strict time limits for claiming refunds, courts have time and again ruled that certain mistakes warrant an exception. Based on judicial rulings, here are some common errors where refunds have been granted even beyond the two-year limitation:

✓ System Errors and Mismatches- Taxpayers have found themselves paying unintended amounts due to IT system glitches or reconciliation mismatches. When the payment was never truly due, courts have stepped in to prevent undue enrichment of the government.

✓ Incorrect Understanding of Taxability – When taxpayers paid tax on transactions that were actually exempt or non-taxable, often due to lack of awareness or misinterpretation of the law.

✓ Tax Paid on a Non-Taxable Transaction – In cases where GST was paid despite the transaction being outside the scope of taxation, courts have held that the government has no right to retain the amount, regardless of time limits

✓ Unintended or Unjustified Payments-When taxpayers mistakenly pay without any legal liability—whether due to oversight, confusion, or procedural complexities—courts have upheld their right to seek a refund, even after the prescribed period.

Fundamental Legal Principles Governing Refunds

Judicial precedents say otherwise. Courts have repeatedly emphasized that procedural limitations should not override fundamental legal principles—particularly when taxpayers have made payments by mistake. This is where constitutional protections, contract law principles, and the Limitation Act come into play:

• Article 265 of the Constitution prohibits the retention of tax without the authority of law, ensuring that no government can unjustly withhold a taxpayer’s money.

• Section 72 of the Indian Contract Act, 1872, mandates the return of money paid by mistake, whether of law or fact.

• Section 17 of the Limitation Act, 1963, provides relief in cases of mistake, stating that the limitation period begins only when the mistake is discovered.

These legal safeguards reinforce the principle that taxpayers should not be deprived of their rightful refunds merely because they did not realize the mistake within two years.

Core Legal Doctrines on Refunds Beyond Time Limits

Over time, courts have laid down essential legal doctrines affirming that taxpayers should not be denied refunds merely due to procedural time limits. These principles, rooted in constitutional safeguards, contract law, and the Limitation Act, ensure that mistaken payments can be rightfully recovered.

1. Voluntary Payment Does Not Bar Refund Claims: Even if a payment was made voluntarily and without protest, a mistaken payment can be recovered.

2. Mistake of Law vs. Mistake of Fact: Courts have held that both mistakes of law and mistakes of fact entitle a taxpayer to a refund.

3. Limitation Does Not Apply to Mistaken Payments: Courts have consistently ruled that the two-year time limit under Section 54(1) does not apply when a payment was made under a mistaken belief and was not legally due as tax.

4. Indian Contract Act and Limitation Act Override GST Laws:

• Section 72 of the Indian Contract Act states that if a person pays money by mistake, they have a right to recover it. If a taxpayer deposits an amount under a mistaken belief that it was legally required under GST, they are entitled to a refund, regardless of GST’s limitation period.

• The Limitation Act, 1963 (Section 17), clarifies that when a payment is made due to a mistake, the limitation period starts only when the mistake is discovered, not from the date of payment. This ensures that the taxpayer is not unfairly restricted by GST’s two-year time limit.

5. Article 265 and the Principle of No Tax Without Authority of Law: Retaining an amount not legally due is unconstitutional and violates the fundamental principle that tax can only be collected with proper authority.

6. Courts’ Inherent Powers Under Article 226: High Courts can intervene and direct refunds when no statutory remedy exists, preventing unjust enrichment by the tax department.

Conclusion: Judicial Recognition of Refunds Beyond Limitation

Judicial precedents consistently uphold the taxpayer’s right to claim refunds of amounts deposited under mistaken belief, even beyond the two-year limitation period. Courts have reinforced the principle that limitation laws cannot be used to unjustly enrich the tax department when no legal basis exists for retaining the amount.

If you’ve voluntarily deposited a sum with the tax department and later discovered that it was never legally payable, these rulings indicate that all hope is not lost. A well-structured legal argument citing these cases could help you reclaim your money—because, after all, the law stands to protect against unjust enrichment.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.