JUDGMENT 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."
3. 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."
4. 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.
5. 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."
6. 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.
7. Realising the futility of resistance on merits, the learned standing counsel for the Commissioner vehemently urged that the orders having been passed in the year 1973 and 1974, the petitioner was guilty of laches and this court should not exercise its extraordinary jurisdiction in favour of a person who was asleep and not watchful and diligent. We do not agree that the petitioner can be considered to be optimistically asleep, as was held in Raja Jagdambika Pratap Narain Singh v. CBDT [1975] 100 ITR 698, or it could pursue its remedy before Revenue authorities.
8. In Dhulabhai v. State of Madhya Pradesh [1968] 22 STC 416 (SC), it was held by the Supreme Court that provisions of a particular Act as ultra vires could not be raised before the taxing authorities or even before the High Court in reference proceedings. In such circumstances, the remedy was to approach by way of writ of certiorari which may include direction for refund as well. The petitioner, therefore, could not have approached the authorities under the Act who were debarred from adjudicating on the vires of the Rules.
9. But within what time ? The answer was given by the Supreme Court in Aluminium Industries [1965] 16 STC 689 (SC), where it observed:
"If refund is not made, remedy through court is open subject to the same restriction and also to the period of limitations (See article 94 of the Limitation Act, 1908), namely, three years from the date when the mistake becomes known to the person who has made the payment by mistake."
10. The petitioner became aware of the mistake in December, 1977, and it approached this court in February, 1978, and it cannot be said that it was asleep so as to deprive it of its remedy under article 226 of the Constitution. Further, the petitioner has sought quashing of part of the order relating to Section 80J which were void and illegal being based on an invalid rule.
11. True, the remedy to file appeals, etc., had become barred but the principle of statutory finality was not available as the order computing benefit under Section 80J suffered from an inherent defect that it was illegal, being based on a rule which was ultra vires. In Raja J.P.N. Singh's case [1975] 100 ITR 698 (SC), a distinction was drawn between exemptions claimed from taxation and levy being invalid. It was observed (p. 703):
"Merely because an order has been passed by the officer and has not been appealed against, it does not become legal and final if otherwise it is void."
12. And if this be so, as it is in this case, then the petitioner's only remedy was to approach this court. While examining the scope of the writ jurisdiction and the remedy under statute, it was observed in Raja J.P.N. Singh's case [1975] 100 ITR 698, 701 (SC):
"The surviving issue of some moment is whether the writ jurisdiction is muzzled by statutory finality to orders regardless of their illegality. We think not. If the levy is illegal the constitutional remedy goes into action....."
13. In the result, the petition succeeds and is allowed. The orders dated 24th January, 1973, and 30th October, 1974, passed by the ITO and the AAC so far as they relate to benefit under Section 80J of the Act and the order dated 16th November, 1974, passed by the ITO computing the benefit under Section 80J are quashed. The ITO is directed to recompute the benefit under Section 80J for assessment year 1970-71 in respect of both the first and second phases of expansion in accordance with law. He is further directed to refund the amount found due after recalculation of the benefit. The petitioner shall be entitled to its costs.