2-Year Limitation for Refund is Directory When Tax is Paid by Mistake; HC Orders Refund.

Issue

Whether the statutory two-year limitation period for claiming a GST refund under Section 54 acts as an absolute bar when the tax was paid under a mistake of law/fact (wrong head), or if the retention of such tax violates Article 265 of the Constitution, making the limitation merely directory.

Facts

• The Mistake: The petitioner, Merck Life Science Pvt. Ltd., paid IGST by mistake when they were not liable to pay it (likely an intra-state transaction treated as inter-state, or vice versa).

• Correct Payment: Implicit in the reliance on Section 77 (CGST) and Section 19 (IGST) is that the petitioner subsequently discharged the correct tax liability under the appropriate head.

• Refund Rejection: The Revenue department admitted that excess IGST was paid. However, they rejected the refund claim solely on the ground that it was filed beyond the two-year limitation period prescribed under Section 54 of the CGST Act.

• Challenge: The petitioner approached the High Court, arguing that the government cannot retain money collected without the authority of law, regardless of the statutory timeline.

Decision

• The Karnataka High Court set aside the rejection order.

• Article 265 Supremacy: The Court held that under Article 265 of the Constitution, no tax can be levied or collected except by authority of law. The government has no legal authority to retain tax paid by mistake or excess tax that was not due.

• Limitation is Directory: In cases where tax is collected without authority of law, the two-year limitation under Section 54 is held to be directory (a guideline) rather than mandatory (a strict bar). It cannot defeat a legitimate claim for restitution.

• Wrong Head Payments: Citing Section 77 of the CGST Act and Section 19 of the IGST Act (which deal with taxes paid under the wrong head), the Court emphasized that the legislative intent is to facilitate refunds in such scenarios to prevent double taxation.

• Remand: The matter was remanded back to the authority for a fresh decision on the merits of the claim, confirming the assessee’s entitlement to the refund despite the delay.

Key Takeaways

• Constitutional Right vs. Statutory Limit: When a payment is not legally a “tax” (because it wasn’t due), the statutory limitation periods for “tax refunds” do not strictly apply. The government cannot unjustly enrich itself at the taxpayer’s expense.

• Relief for Wrong Head Payment: This is a major relief for taxpayers who accidentally pay under the wrong head (IGST instead of CGST/SGST) and discover the mistake after the 2-year window.

• Precedents Followed: The judgment reinforces a growing judicial consensus (citing Madras and AP High Courts) that procedural timelines cannot override substantive justice in cases of inadvertent tax payments.

• Restitution Principle: The refund is treated as a form of restitution for money had and received by the government without the authority of law.