In Mafatlal Industries Ltd v. Union of India , 1997 (5) SCC 536; 1996 INSC 1514. a decision by a bench of nine judges of Supreme Court, the majority opinion in Mafatlal, Justice Jeevan Reddy (speaking for himself and four other judges) observed: “[t]that ‘the material resources of the community are not confined to public resources but include all resources, natural and manmade, public, and private owned’ is repeatedly affirmed by this Court “
In Mafatlal, a Bench of nine Judges of the Court adjudicated on the rights and remedies available to a citizen against the State in relation to the refund of unlawfully recovered taxes and imposts. The court dealt with whether a manufacturer or assessee who has passed on the burden of an illegally recovered tax is entitled to a refund or whether a refund in such cases will amount to unjust enrichment. One of the several arguments made by the counsel appearing for the Union of India was that this question must be decided in light of the constitutional values of social and economic justice, including those laid down in the Preamble and Articles 39(b) and (c). More specifically, it was urged that Article 265[1] must be interpreted in the context of these constitutional values.
Faced with the above argument, the majority opinion authored by Justice Jeevan Reddy, on behalf of himself and four other judges, made certain observations which referred to Article 39(b). These observations are found in paragraphs 84 to 86 of the judgement.
Justice Jeevan Reddy attempted to locate the question of refund of unlawfully recovered duty within the framework of the “philosophy and core values” which guide our Constitution. In this context, it was observed that these values can be located inter alia in the Directive Principles contained in Part IV, including Article 39(b) and the Preamble of the Constitution. Justice Jeevan Reddy observed:
“84. […] Unlike the economically neutral – if not procapitalist – Constitutions governing those countries, the Indian Constitution has set before itself the goal of “Justice, Social, Economic and Political” – a total restructuring of our society – the goal being what is set out in Part IV of the Constitution and, in particular, in Articles 38 and 39. Indeed, the aforesaid words in the Preamble constitute the motto of our Constitution, if we can call it one. Article 38 enjoins upon the State to “strive to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice, social, economic and political shall inform all the institutions of the national life”.
Article 39 lays down the principles of policy to be followed by the State. It says that the State shall, in particular, direct its policy towards securing “(b) that the ownership and control of the material resources of the community are so distributed as best to subserve the common good; and (c) that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment”.
Refunding the duty paid by a manufacturer/assessee in situations where he himself has not suffered any loss or prejudice (i.e., where he has passed on the burden to others) is no economic justice; it is the very negation of economic justice. By doing so, the State would be conferring an unearned and unjustifiable windfall upon the manufacturing community thereby contributing to concentration of wealth in a small class of persons which may not be consistent with the common good. The Preamble and the aforesaid articles do demand that where a duty cannot be refunded to the real persons who have borne the burden, for one or the other reason, it is but appropriate that the said amounts are retained by the State for being used for public good […]
In the next paragraph, Justice Jeevan Reddy made further observations about ‘philosophy and values’ which must be kept in mind while interpreting the Constitution. Significantly, Justice Jeevan Reddy borrowed from the observations by Justice Krishna Iyer in Ranganatha Reddy and noted:
“85. […] As observed by Thomas Jefferson, as far back as in 1816, “laws and institutions must go hand-in- hand with the progress of the human mind … as new discoveries are made, new truths are discovered and manners and opinions change with the change of circumstances, institutions must advance also and keep pace with the time…”. The very same thought was expressed by Krishna Iyer, J. in State of Karnataka v. Ranganatha Reddy with particular reference to our constitutional philosophy and values:
“Constitutional problems cannot be studied in a socio-economic vacuum, since sociocultural changes are the source of the new values, and sloughing off old legal thought is part of the process of the new equity loaded legality…. It is right that the rule of law enshrined in our Constitution must and does reckon with the roaring current of change which shifts our social values and shrivels our feudal roots, invades our lives and fashions our destiny.”
The learned Judge quoted Granville Austin, saying: “The Judiciary was to be the arm of the social revolution, upholding the quality that Indians had longed for in colonial days…. The courts were also idealised because, as guardians of the Constitution, they would be the expression of a new law created by Indians for Indians.”
Having made these observations, the Court went on to accept the submission of the counsel for the Union of India and held that the ‘philosophy and core values’ of our Constitution must be kept in mind while understanding the provisions of the Constitution, including Article 265. Before reaching this conclusion, the judgement stated in a single sentence that “the ‘material resources of the community’ are not confined to public resources” but include all resources, including privately owned resources. The observations were as follows:
“86. That “the material resources of the community” are not confined to public resources but include all resources, natural and man-made, public and private owned” is repeatedly affirmed by this Court . (See Ranganatha Reddy, Sanjeev Coke Manufacturing Co. v. Bharat Coking Coal and State of T.N. v. L. Abu Kavur Bai), We are of the considered opinion that Shri Parasaran is right in saying that the philosophy and the core values of our Constitution must be kept in mind while understanding and applying the provisions of Article 265 of the Constitution of India and section 72 of the Contract Act (containing as it does an equitable principle) – for that matter, in construing any other provision of the Constitution and the laws.
Accordingly, we hold that even looked at from the constitutional angle, the right to refund of tax paid under an unconstitutional provision of law is not an absolute or an unconditional right. Similar is the position even if Article 265 can be invoked – we have held, it cannot be – for claiming refund of taxes collected by misinterpretation or misapplication of a provision of law, rules, notifications or regulation.”
The above observations indicate that the relevance of Article 39(b) to the judgement was limited to the larger socio-economic values which it espouses. The ratio decidendi of the majority judgement was that the constitutional values contained in the Preamble and Part IV of the Constitution, including Article 39(b) must be considered while interpreting Article 265 and determining whether a refund of taxes is permissible to a person who has passed on the burden.
[1] Article 265, Constitution of India . [It reads: “265. Taxes not to be imposed save by authority of law – No tax shall be levied or collected except by authority of law