Hey learners,
In the bustling markets of Banaras, Kanhaiya Lal Mukundlal Saraf carried on his business like countless other traders — selling goods and paying taxes demanded by the authorities. For years, he paid sales tax without protest, believing it was lawfully due.
Later, the law changed. A judicial decision clarified that the tax he had paid was never legally payable in the first place. Realising this, Kanhaiya Lal asked a simple question that many taxpayers silently wonder:
👉 If the government collects money without legal authority, must it return it?
The Sales Tax Officer refused. The matter escalated, transforming an ordinary tax dispute into a landmark ruling on mistake of law and restitution.
Sales Tax Officer, Banaras v. Kanhaiya Lal Mukundlal Saraf (1959) Case Details
| Particular | Information |
|---|---|
| Case Name | Sales Tax Officer, Banaras v. Kanhaiya Lal Mukundlal Saraf |
| Court | Supreme Court of India |
| Year | 1959 |
| Citation | AIR 1959 SC 135 |
| Area of Law | Tax Law, Contract & Restitution |
| Core Issue | Refund of tax paid under mistake of law |
Facts of the Case
- Kanhaiya Lal Mukundlal Saraf paid sales tax under the U.P. Sales Tax Act.
- At the time of payment, the prevailing interpretation suggested the tax was valid.
- Later, a court decision clarified that the levy was ultra vires (beyond legal authority).
- The trader sought a refund of tax paid.
- The Sales Tax Officer rejected the claim, arguing that tax once paid cannot be recovered, especially when paid under a mistake of law.
- The dispute reached the Supreme Court.
Legal Issues Before the Court
- Can money paid under a mistake of law be recovered?
- Does Section 72 of the Indian Contract Act, 1872 apply to payments made to the government?
- Is the State obligated to refund tax collected without legal authority?
Arguments of the Parties
Arguments by the Sales Tax Department
- Section 72 applies only to private parties, not to the government.
- Payments made under a mistake of law are irrecoverable.
- Allowing refunds would cause administrative inconvenience and financial instability.
Arguments by the Trader
- The tax was collected without authority of law.
- Section 72 clearly allows recovery of money paid under mistake or coercion.
- The State cannot retain money to which it has no legal right.
Judgment
The Supreme Court ruled in favour of Kanhaiya Lal Mukundlal Saraf and held:
- Section 72 of the Indian Contract Act applies equally to the government.
- There is no distinction between mistake of fact and mistake of law under Section 72.
- Money paid under a mistake of law is recoverable, even if paid voluntarily.
- The State has no right to retain money collected without authority of law.
The Court directed that the wrongly collected tax must be refunded.
Legal Principle (Ratio Decidendi)
- Money paid under a mistake of law or fact is recoverable under Section 72 of the Indian Contract Act.
- The government stands on the same footing as a private individual in matters of unjust enrichment.
- Tax collected without authority of law must be returned.
Why This Case Is Important
- It firmly established the doctrine of restitution against the State.
- It protected taxpayers from unlawful tax collection.
- It clarified that ignorance or mistake of law does not prevent recovery.
- The ruling continues to guide tax refund and unjust enrichment cases in India.
The decision in Sales Tax Officer, Banaras v. Kanhaiya Lal Mukundlal Saraf reinforced a fundamental principle of justice: the State cannot profit from its own mistake. By allowing recovery of tax paid under a mistake of law, the Supreme Court ensured fairness, accountability, and constitutional discipline in taxation.