Sales Tax Officer, Banaras and Ors. vs. Kanhaiya Lal Mukundlal Saraf

Sales Tax Officer, Banaras and Ors. vs. Kanhaiya Lal Mukundlal Saraf

AIR 1959 SC 135

Key Words: mistake, mistake of law, mistake of fact, equitable consideration


Plaintiff claimed refund under section 72 of the sales tax levied by the defendant for the forward transactions entered into by the former, after the impugned collection of tax on such transactions was declared illegal, alleging that such levy was done under a mistake of law.

ISSUE: Whether S.72 includes within its scope mistake as to law.

LAW: Coercion under S.72: Money must be paid voluntarily without compulsion, extortion, undue influence, or even fraud and with full knowledge of facts.


Section 72 of the Indian Contract Act, which does not deal with the contractual relations between the parties but the relations which resemble those of contracts (quasi contractual), is not in conflict with the provisions of Section 21 of the Act (which renders contract made in mistake as to law as valid) which operates at the stage of formation of contract.

If mistake of law has led to the formation of a contract, S.21 enacts that that contract is not for that reason voidable. If money is paid under that contract, it cannot be said that that money was paid under “mistake of law” for it was paid under a valid contract, and had it not been paid it could have been enforced. Payment, “by mistake” in S.72 refers to a payment which wasn’t legally due and which couldn’t have been enforced; mistake is in thinking that money paid was due when in fact it was not due.

Further laying stress on literal interpretation of unequivocal terms of Indian Contract Act to ascertain its true meaning and intent of the legislature, divorced from English law considerations, Court held that by using the term “mistake” in S.72 without any qualification or limitation, it must include within its ambit mistake as to law and mistake as to fact.

In the present case, plaintiff committed mistake in thinking that the monies paid were due while in fact they were not due and that mistake on being established, entitled plaintiff to recover the same from the state under Section 72.

However, on the contention raised by the State that it has altered its position by appropriating the tax collections in developmental works and it will now be inequitable for it to repay; Court disputably observed that no equitable considerations are to be imported u/s 72, albeit it is clearly established in Lipkin Gorman case that when the person receiving money in quasi-contractual relationship has changed his position but for the money so received, it will be inequitable to require him to repay/return it.


The position in this case was later reviewed in Mafat Lal Industries Ltd. v. Union of India(1997) 5 SCC 536 wherein the Court observed that either when defendant who has received any advantage arising independent of contract, has altered his position but for the advantage so received and it will be inequitable to require him to make restitution or compensation for such advantage; or when plaintiff who has conferred upon him any advantage, but defendant has not been unjustly enriched “at plaintiff’s expense”, i.e. plaintiff by passing on the costs to his final customers has recovered any loss sustained; then equity steps in to present any claim arising under unjust enrichment. The same rule is applicable to S.72 for it also deals with quasi contractual relationships.

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