Unconstitutional Levies Don't Trigger Tax Refund Deadlines: Bombay High Court Orders Interest Payment in IGST Case - 2025-10-17

Bombay High Court Rejects Revenue’s "Statutory Deadline" Defense on Unconstitutional Tax Refunds

In a significant ruling for taxpayers, the Bombay High Court has declared that tax authorities cannot rely on the 60-day refund window stipulated under the CGST Act to deny interest on tax collected without the authority of law. The bench, comprising Justice M.S. Sonak and Justice Advait M. Sethna, held that when a tax levy is declared unconstitutional—such as the IGST on ocean freight—the state's retention of those funds without penalty amounts to unjust enrichment.

A Long-Standing Legal Dispute

The Petitioner, West India Continental Oils Fats Pvt. Ltd. , was among the numerous companies that had paid IGST on ocean freight under the Reverse Charge Mechanism (RCM)—a levy that was eventually struck down by the Supreme Court in the landmark case of * Union of India Vs. Mohit Minerals Pvt. Ltd. (2022)*.

Following the Supreme Court's ruling, the Petitioner sought a refund of ₹2.62 crore along with interest. While the Revenue eventually sanctioned the principal amount, they rejected the interest claim of ₹71.31 lakh, arguing that the refund had been processed within the 60-day statutory limit prescribed under Sections 54 and 56 of the CGST Act.

The Arguments: Statutory Limits vs. Constitutional Mandate

The Revenue contended that since the payment was processed within the administrative timelines set out in the GST legislation, no interest was payable to the taxpayer.

The Petitioner, represented by Mr. Jas Sanghavi, countered this by arguing that because the levy itself was unconstitutional and violated Article 265 of the Constitution of India, the Revenue never possessed the lawful authority to collect the money in the first place. Consequently, the Petitioner urged that the Revenue’s reliance on the CGST Act to truncate interest claims was a "misplaced and misconceived" application of law.

The Court’s Reasoning: Restitution Over Bureaucracy

The Bombay High Court sided with the Petitioner, distinguishing between a valid tax refund and the return of money illegally collected.

In its detailed analysis, the Court emphasized that Sections 54 and 56 of the CGST Act apply only to refunds of taxes paid in accordance with the law under the GST framework. Once a tax levy is deemed unconstitutional, it loses its character as a "tax" under the Act.

The Court further observed that failing to pay interest on such amounts would incentivize "unjust enrichment" on the part of the State. Drawing on the principles established in Mafatlal Industries Ltd. Vs. Union of India , the judges affirmed that the obligation to make restitution for wrongful retention of funds is a fundamental principle of justice that supersedes administrative convenience.

Key Observations

The judgment features several critical remarks regarding the state’s duty to taxpayers:

• "The IGST collected by the revenue was without authority of law, when collected on ocean freight, under reverse charge mechanism."
• "The respondents cannot shirk the statutory obligation to pay interest within the time line of 60 days as stipulated under Section 54 read with Section 56 of the CGST Act."
• "One cannot enrich oneself illegally and consequently, one is bound to return the amount wrongfully paid without legal authority."
• "It is trite law that a judgment is an authority for what it decides... Such decisions are judgments in rem and the ratio cannot be restricted."

Final Decision: A Win for Restitution

The High Court ordered the Revenue to pay the full interest amount of ₹71.31 lakh within four weeks. By rejecting the Revenue's restrictive interpretation of the CGST Act, this decision reinforces the doctrine of restitution. It serves as a stern reminder that the machinery of the State cannot be used to benefit from taxes that stand in direct violation of the Constitutional protections afforded to taxpayers.

For future cases, this ruling provides a strong precedent for individuals and businesses seeking compensation for the interest lost on funds held captive by the Revenue via unconstitutional notification mandates.