1

REFUND & DOCTRINE OF UNJUST

SALES TAX LAWS
By:

ENRICHMENT IN
Abhai

Chandra,

Retd.D.C.,Com.Tax

Concept of Unjust Enrichment & Passing on of the

Burden of Tax
1.
Doctrine of UNJUST ENRICHMENT is a just and salutary doctrine.
This doctrine was originally based in English law upon the principle of
assumpsit or had and received, and was declared by Lord Mansfield in
Moses v. Mcfarlon, that the gist of this kind of action is, that the
defendant, upon the circumstances of the case, is obliged by the ties of
natural justice and equity to refund the money.
The doctrine of unjust enrichment is based on justice and equity.
The judicial mind is unconsciously moved by the major inarticulate
promise, in this breach of the law that no one should be allowed to
unjustly making himself rich at the expense or cost of another or,
unjustly retaining a benefit not due to him. The law so developed by
judicial conscience appears to discover obligations to defeat unjust
enrichment or unintended acquisition by the restitution.
Though this doctrine does not strictly apply to States, yet, the
States, excluding the circumstances where refund is not possible, do
not retain the benefits not due to it. UPTT Act and UPVAT Act provide
for refund of any amount of tax, fee or other dues paid in excess of
what is due under the Act.
2.
In the case of M/s. Sahkari Udyog Mandal Ltd. Vs. C.C.E.;
[SC, 3JB, 09-03-2005 ] (2005) 4RC 567 Honble Supreme Court
has held
In our opinion, therefore, irrespective of applicability of Section
11B of the Act, the doctrine can be invoked to deny the benefit to
which a person is not otherwise entitled. Section 11B of the Act or
similar provision merely gives legislative recognition to this doctrine.
That, however, does not mean that in the absence of statutory
provision, a person can claim or retain undue benefit. Before

claiming a relief of refund, it is necessary for the petitioner-appellant to

show that he has paid the amount for which the relief is sought, he has
not passed on the burden on consumers and if such relief is not
granted, he would suffer loss.
3. This doctrine had social recognition since the time immemorial but
it took shape of English Law in the case of Moses Vs. Mcforlon in
England and got recognition in India through British Law as a basic
tenet of law based on justice, equity and good conscience.
The decision of the Constitution Bench of Honble Supreme
Court in of the case Mafat Lal Industries Ltd. Vs. Union of India
and others 1998 (111) STC 467, insinuated Sales Tax Authorities to
deny refunds in the guise of unjust enrichment. The decisions of
Honble Supreme Court disallowing refund on the ground of unjust
enrichment relate to Law of Central Excise. Without perusing the ratio
of the law laid down in these decisions the Sales Tax Authorities are
disallowing refund by applying those decisions uniformly to Sales Tax
matters ignoring the system and the sales tax law.
The formulation of principles for determining the fact that the
burden of tax on sale or purchase of goods has passed on to
the purchaser will not be the same as it in the matters of Central
Excise because the event, the liability and the mode of
realization of tax under Sales Tax laws is different from Central Excise
laws.
The distinction was demarcated by Division Bench of Honble
Allahabad High Court in the case of M/S Dalmiya Brothers Vs.
Commissioner of Trade Tax & another VSTI 2014 (vol. 20) B-547.
Honble H.C. held that Mafat Lals
decision applies where the
petitioner seeks to collect the tax from the purchaser from one end and
also collect the same from the State.
4.
Section 22(1) of UPVAT Act requires every registered dealer to
issue Tax Invoice and charge separately on such Tax Invoice the
amount of tax where the goods are sold to the purchasers mentioned
in this sub-section. Here the passing on of burden of tax on the
purchaser is evident.
Section 22(3) of UPVAT Act requires all dealers (registered
or unregistered) to issue Sale Invoice containing prescribed
particulars. In sale invoice ingredient of tax, if not shown separately,

shall depend on the taxability of the dealer, hence burden of tax in

such cases MAY or MAY NOT pass on on the purchaser .
5.
Section 7-D of UPTT Act and Section 6 of UPVAT Act provide for
composition of tax liability. Opening language of Section 7-D of UPTT
Act and Section 6 of UPVAT Act are almost the same and give the
provisions of these sections to have overriding effect over all other
provisions of both the Acts respectively. Section 7-D starts with the
words Notwithstanding anything contained in this Act----. Section 6
starts with the words Notwithstanding anything contained in any other
provision of this Act----.
Proviso to S/8-A(2)(a) of UPTT Act and S/6(3) of UPVAT
Act ,both, restrain the dealers availing composition facility from
realizing tax in any form or in any name from any person. Proviso to
S/8-A(2)(a) of UPTT Act reads as follows :
Provided that no dealer, from whom the Assessing Authority
agrees to accept under section 7-D, a composition money in lieu of
the amount of tax payable by him, shall realize from any person any
amount by way of trade tax on sale of goods or an amount in lieu
thereof by giving it a different name or colour.
Sub-section (3) of section 6 of UPVAT Act reads as follows :
Any dealer who opts for payment of composition money under
this section shall not issue any tax invoice and shall not realize any
amount from the purchaser by way of tax or by giving it a different
name or colour.
Therefore, a dealer opting composition scheme can neither be
deemed nor be presumed to have passed on the burden of
composition money
payable by him(self) in lieu of tax on the
purchaser, and also, the onus to prove that he has not shifted this
burden shall not lie on him unless otherwise found because the law on
this point is clear. Hence the last line of the paragraph of above quoted
decision of Honble Supreme Court, which is being repeated herein
below, shall not apply to sales tax matters as such:
Before claiming a relief of refund, it necessary for the petitionerappellant to show that he has paid the amount for which the relief is
sought, he has not passed on the burden on consumers and if such
relief is not granted, he would suffer loss.

6.
In the case of M/S Abhyuday Constructions Vs. State of UP &
another [WRIT TAX No.1295 of 2009], the Division Bench of Honble
Allahabad High Court in its order dated has held :
Even otherwise also, when the composition application
of the petitioner was accepted and it was held that the petitioner is
liable to the tax @ 2% of the contract amount, the petitioner is entitled
for refund of any amount deducted over and above the tax amount.
7.
Section 23(1) of UPVAT Act is the verbatim reproduction of S/8A(2)(a) of UPTT Act. It authorizes NO OTHER PERSON than a
registered dealer to realize tax on sale or purchase of goods.
8.
The phrases i.e., (i) purporting to do so by way of
realization of tax, realizes any amount, (ii) by way of tax, OR (iii)
in lieu of tax by giving it different name or colour employed at
many places in the language of both the Acts make it amply clear that
a dealer can be said to have passed on the burden of tax on the
purchaser under any of these Acts on sale or purchase of goods
ONLY WHEN it seems to mean or it is conveyed or suggested by the
actions of the dealer that the dealer by way of realization of tax,
realizes any amount by way of tax OR in lieu of tax by giving it
whatever name.
9.
The account books of the dealer, who is authorized to realize
and responsible for payment of tax under the Act, shall be conclusive
for determining whether the burden of tax has been shifted to the
other party or not, inasmuch as tax can be said to have been realized
when facts mentioned in para 8 are found. It is not the other partys
accounts, estimate, order, documents or even the agreement where
answer to the question of shifting of burden can be found.
This can be explained by the following illustrations :
A, a Govt. Department, for purchase of furniture, in its estimate,
calculates the cost of wood, cloth, hardware, polish, labour etc. AND
14% tax and it comes to approximately Rs. 25,000/-. A places the order
for purchase.
(a)
If this purchase is made from B, a registered dealer, and B
issues a sale invoice showing therein Rs. 22,000/ as sale price and Tax

@ 14% as 3080/- total Rs. 25080/-, then definitely B has passed on

burden of tax of Rs. 3080/- on A.
(b)
In the above case if B issues sale invoice for Rs.25000/- without
making any mention of tax in such invoice, even then, B shall be liable
to deposit an amount of Rs. 3070.18 as tax by using the formula
[(2500014)(100+14)] given in Act and Rules and B shall be taken
to have passed on the burden of tax of Rs. 3070.18 on A.
(c)
In the above case B, who has been allowed composition facility
under proviso to sub-section (1) of section 6 of UPVAT Act (or U/S 7-D
of UPTT Act), issues sale invoice for Rs.25000/- without making any
mention of tax in such invoice, inasmuch as sub-section (3) of section
6 of UPVAT Act (or proviso to sub-section (2) of section 8-A of UPTT
Act) prohibits from realization of tax from purchaser. Though B pays
the tax at an agreed rate ( Rs.125/- @0.5% on Rs.25000/- ), yet, the
burden of tax of Rs.125/- deposited by B does not pass on on A.
(d)
If this purchase is made from an unregistered dealer B2, who is
below taxable limit, and B2 issues a sale invoice showing therein Rs.
25,000/ as sale price including all, B2 shall neither be liable to pay tax
nor B2 can be held to have shifted the burden on A. BUT if B2
charges, purporting to do so by way of realization of TAX, any amount
- by way of tax - or in lieu of tax by naming it differently, then, B2
shall deposit the entire amount .
In the above instances A is paying total Rs. 25000/- (approx.),
including tax, as consideration for purchase of furniture but ingredient
of tax is different in each case. Therefore, As record will not / cannot
decide the quantum of tax and the issue of shifting or passing on of the
burden of tax on A because it depends upon Bs or B2s liability for
payment of tax and realization of tax from A and Bs or B2s account
can decide the issue.

Tax Deduction at Source (TDS) and Refund :

10.
Deduction of Tax at source is a mode of recovery of tax.
S/34(1) of VAT Act says that by notification in the Gazette, the State
Government may direct that every specified person in specified case,
shall, at the time of making payment of sale price of goods to a
dealer, deduct specified amount, towards the satisfaction of tax
payable by the dealer

According to S/34(11) of UPVAT Act any deduction so made shall

be treated as a payment of tax on behalf of the selling dealer, and
credit of the amount so deducted shall be given to him on the
production of the certificate in Form-XXXI, and any amount found
in excess of tax due shall be refunded to the selling dealer.
Provision for TDS in UPTT Act is a bit different from UPVAT Act.
S/8-D of UPTT Act provided deduction in the cases of works contract
whereas, S/34 of UPVAT Act provides for deduction in all kinds of sale
as defined in S/ 2(ac) of UPVAT Act .
11.
Section 40 of UPVAT Act and S/29 of UPTT Act, subject to other
provisions of the Act and after adjustment against any outstanding due
under UPVAT Act, CST Act or UPTT Act, make it obligatory for an
assessing authority to refund, within the periods specified in these
sections (30 days in VAT and 3 months in UPTT), to the dealer (except
excess amount of ITC) an amount of tax, fee or other dues which has
been paid in excess of the amount what is actually due from him
under the Act. Rule 50 of UPVAT Rules lays down the procedure for
refund and adjustment.
.
12.
Any dealer, registered or unregistered, if, on sale or purchase
of goods, realizes, purporting to do so by way of realization of
tax, in contravention of the provisions of S/22 and 23 of UPVAT Act or
S/8-A(2) of UPTT Act , from any person any amount (i) by way of
tax , or (ii) in lieu of tax by giving it different name or colour,
shall deposit the entire amount under the provisions of S/43(1) of
UPVAT Act or S/29-A(1) of UPTT Act. The amount so deposited shall, to
the extent it is not due as tax, be held by the State Govt. in TRUST
for the person on whom such liability has been passed
ultimately and be refunded to such person or his legal
representative on a claim made by him under the provisions of
S/43(2)&(3) of UPVAT Act & S/29-A(2)&(3) of UPTT Act .
.
Illustrations:
(i) B, a registered dealer, charges from C, a consumer, Rs.
1400/- as tax on Rs. 10,000/- being sale price of a commodity taxable
@ 5% . B shall deposit the entire amount of Rs.1400/- whereas, the
liability of tax is that of only Rs. 500/-. The excess amount of Rs. 900/shall be held by the Government in trust for C. On claim C or his
representative shall get refund of Rs. 900/-.)

(ii)
B, a registered dealer, charges from B1, a registered
dealer , Rs. 1400/- as tax on Rs. 10,000/- being sale price of a
commodity taxable @ 5% . B shall provide B1 with a credit note of
Rs.900/- and B1 shall provide B with a debit note of Rs. 900/- within 30
days from the date of issue of invoice as per S/21(14) of UPVAT Act.
But if B and B1 do not do so within 30 days, B shall deposit the entire
amount of Rs.1400/. The excess amount of Rs. 900/- shall be held by
the Govt. in trust for B1. B1 can claim refund of Rs.900/-. But again, if,
B1 passes on the whole liability of Rs.1400/- ULTIMATELY on C, a
consumer then, C alone or Cs representative shall get refund of Rs.
900/-.
(iii) B, a registered dealer, charges from C, a consumer, Rs.
500/- as tax on Rs. 10,000/- being sale price of a commodity taxable @
14% . B shall have to deposit an amount of Rs.1400/- even though, B
has realised only Rs. 500/- from C. There is no provision in sales tax
laws which empowers B to recover Rs. 900/- from C.
(iv) B2, an unregistered non- taxable dealer, charges from C,
a consumer, Rs. 1400/- as tax on Rs. 10,000/- being sale price of a
commodity taxable @ 5% . B shall deposit the entire amount of
Rs.1400/- and the whole amount of Rs. 1400/- shall be held by the
Govt. in trust for C. On claim, the whole amount of Rs. 1400/- shall be
refunded to C or his representative because no tax was due from B2
and the entire amount of Rs. 1400/- was in excess of what was due
under the Act. B2 can otherwise be punished.
(v) C, not a dealer as defined in S/2(h), sells his house-hold
articles for Rs.2,00,000/- and realizes from different purchasers total
Rs.28,000/- as Tax @ 14% in addition to sale price and does not pay Rs.
28000/- to Govt.. Here C is not a dealer and S/43, by using the word
dealer, requires only such dealer to deposit the money who has
realized any amount as tax, hence, under UPVAT Act, C cannot be
required to deposit the amount. Utmost, C can be penalized under
S/54(1)22. to the extent of Rs.10,000/-. However, IPC and/or civil
remedies can be invoked against C.

Dealers Availing Composition Facility, Burden Of

Tax & Refund :
13.
Composition of tax liability U/S 7-D and composition of offences
U/S 15 of UPTT Act provided wider powers to Government or authorities

than what is there in VAT. Besides, compounding of tax and penalty U/S
6-A of VAT Act, schemes for composition of tax liability U/S-6 are
presently available to
(i) manufacturer of certain goods i.e., bricks etc. ;
(ii) tent dealers for transfer of right to use certain goods ;
(iii) dealers executing works contract, civil and/or electrical ;
(iv) dealers making re-sale of goods within U.P. purchased from
registered dealers
within U.P..
Dealers at point nos. (i) & (ii) pay composition money in lieu of tax in
lump sum, and, at (iii)&(iv) pay composition money in lieu of tax at an
agreed rate. None of them is allowed to realize tax on sale or purchase of
goods. The same prohibition was in UPTT era.
14.
The tax liability of a dealer availing composition scheme cannot go
beyond composition money, inasmuch as, composition provisions prevail
over all other provisions of the Act and liability is determined on the basis
of an agreement between a dealer and the Government in which, on
fulfillment of certain conditions of the Act, certain dealers may propose in
prescribed manner for option of composition, acceptance whereof allows
the dealer the facility of compounding scheme.
15.
Section 16 of UPVAT Act lays down the law relating to burden
of proof. First part of S/16 requires the assessee to prove those facts
which are within his knowledge. The second part lays the burden of
proving the existence of those circumstances on the dealer on the
basis of which he claims exemption or other reliefs under the Act. In the
matters relating to unjust enrichment, the Act itself forbids the dealers
availing compounding from realizing tax from the purchaser, therefore,
such dealers, under no law of evidence, can ever be required to prove
the fact that he has not passed on the burden of tax on the other party
because he himself pays composition money in lieu of tax from his own
pocket.
The corollary of the law dealt in the aforesaid paragraphs can be
concluded in the following points :

(a)
Tax can be said to have been realized as tax only when any
dealer with a view to realizing tax, realizes any amount by way of
tax or in lieu of tax naming it differently.
(b)
Tax-Departments share shall not go beyond tax liability of the
dealer. Any amount deposited in excess of tax due from the dealer
shall be kept in trust for the person upon whom the burden of the
amount in excess of tax has ultimately passed on, and on claim, be
refunded to him. Such excess amount is trust-money and not
revenue earned as tax, hence, it should be kept under a head
separate from sales-tax head.
(c)
So long as a dealer is availing compounding facility, onus of
proving the fact that he has not passed on of the burden of tax on the
purchaser, in view of the legal provisions, shall not lie on him and he
shall be refunded any amount paid in excess of tax due from him.
(d)
All the contractees/ purchasers may claim refund of such trustmoney in case where contractors/ sellers refund is denied on the
ground of unjust enrichment. Any amount paid in excess of tax is
either purchasers money or the sellers money and not the Govt.s
money.
Abhai Chandra,
Advocate Mob: 9415770060
(Retd.Dy. Commissioner, Com. Tax)
1/171 Vishesh Khand,
Gomtinagar, Lucknow
E-mail
abhai.chandra4&gmail.com