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Civil Reference/Tax Reference No. 54 of 1967, decided on 7th June 1976.

S. 27 read with Contract Act (IX of 1872), Ss. 187, 195 & 201- Refund‑Assessee collecting sales tax (although not payable) from his customers and paying same to exchequer‑Such assessee deemed to have collected amount as an agent of Government and became functus officio as soon as he paid same to exchequer‑Assessee, held, not entitled to refund of such amount under S. 27.

In the instant case, the assessee, a Timber Merchant of W sold some timber at D to some purchasers and received a large amount as sales tax which he paid to the Central Exchequer. Later, the assessee made an application to the Sales Tax Officer stating that no sales tax was leviable at D, where the sale had taken place, the amount should be refunded to him. The Sales Tax Officer accepted this application and ordered that the amount in question should be refunded to him. Subsequently another Sales Tax Officer found that as the amount in question had actually been received by the assessee as sales tax, he was acting as an agent and the Central Government was entitled to its collection. He, therefore, directed the assessee to return the amount. Ultimately, on a reference by the Tribunal, the matter came before the High Court :

Held : If a person having no authority to act purports to bind another as his agent, he is a purported agent and is subject to the same liability as an agent would be, who acted without authority. The principal can elect to ratify the transaction, in which case, the purported agent is relieved from the liability to the third persons for his tortious conduct. The purported agent however, would be subject to the liability to the principal, for having received as the result of transaction, its proceeds or its value, and his liability to him for a breach of fiduciary obligations as if he had been an agent at the time. The assessee in the case in band, received the money willingly for the Government and the customers paid the same voluntarily though under a misapprehension that the same was payable. The assessee who normally collected such amounts for the Government received that amount not on his own account but as sales tax to be paid to the Government. The act of the assessee thus lay under sections 187 and 195 of the Contract Act. The assessee shall be deemed to have the implied authority of the collection of the Sales Tax and the Government ratified that act by accepting the amount.

It is thus quite clear that the assessee who collected the amount in question, did so from the very beginning, as an agent of the Government and became functus officio, as soon as he paid the same to the exchequer. He, therefore, was not entitled to its refund under section 27 of the Sales Tax Act.

David Lyell v. John Lawson Kennedy 14 A C 437 ; Brindaban Katiar's Law of Agency, 1961, 2nd Edn., p. 500 ; Chitty on Contract, 1968 Edn‑, Vol, I, para 948 ; Demottos v. Banjamin (1894) 63 L J Q B 248 ; Bhola Nath v. Mul Chand I L R 52 All. 630 ; Alliance Bank v. Amritsar Bank 31 I C 215 ; Gowers and others v. Lloyds and National Provincial Foreign Bank Ltd. (1938) 1 A E R 766 and Holland v. Russel (1863) 4 B & S 14 ref.

Sh. Abdul Haq for Appellant.

Muhammad Amin Butt for Respondent.

Dates of hearing : 21st and 24th May 1976.

‑‑The assessee is a Timber Merchant with his Headquarters at Wazirabad. He sold some timber at Durgai (Mala Kand Agency) to some purchasers and received Rs. 42,000 as Sales Tax. This amount was then paid to the Central Exchequer in the assessment year 1954‑55.

2. Later the assessee made an application to the Sales Tax Officer stating that as no sales tax was leviable at Durgai. where the sale had taken place the amount should be refunded to him. This application found favour with the Sales Tax Officer who, on 17th February 1959, ordered that the sum in question be paid back. Subsequently, another Sales Tax Officer, relying on the judgment of the Supreme Court in Abbasi Textile Mills Ltd. (1959)1 Taxation 19 found that as the amount in question had actually been received by the assessee as sales tax from his purchasers, he was acting as an agent and the Central Government was entitled to its return. He, therefore, proceeded under section 30 of the Sales Tax Act and vide his order dated the 25th April 1962, directed the respondent to return the amount. The respondent took an appeal against that order before the Appellate Assistant Commissioner who, on accepting the same on 10th August 1963, set aside the order of the Sales Tax Officer. The Department agitated the matter in a second appeal but that was dismissed on 30th November 1966. The present reference has been made by the Tribunal at the instance of the Commissioner of Income‑tax. It raises the following question :‑

"Whether on the facts and in the circumstances of the case the assessee was entitled to a refund of sales tax of Rs. 42,000 collected from the customers separately and in addition to the sale proceeds of timber

instead of paying it to the State "

3. Before proceeding with this case on merits the learned counsel for the respondent raised a preliminary objection saying that as the Sales Tax Officer passed his order permitting refund after considering the relevant provisions of law, and applying his mind to the facts of the case, there was no mistake apparent on the face of the record and the case was not all covered by section 30 of the Sales Tax Act. He further submitted that the Tribunal, in its first order, had described the controversy between the parties, as regards refundability of the amount, to be 'academic in nature and refrained from giving any finding on it. In this view, therefore, it was claimed that the question could not arise out of the second order, rendering the reference as misconceived. Reliance was also placed on Helal Jute Press Ltd. v. C.1. T., Dacca P L D 1971 Dacca 173 in which it was held that where rectification required more than mere elucidations of arguments or debates. the case was not covered by section 30.

4. The learned counsel for the petitioner, in reply to the preliminary objection. submitted that the Tribunal, in para. 4 of its final order, clarified the position by observing that judgment, on the question of refundability, had been reserved previously. In his view the question of refundability remained alive and bad been actually considered in final order. As to the application of section 30, it was pleaded that as the money did not belong to the assessee, the refund was an error apparent on the face of the record, and the Sales Tax Officer was justified in exercising his powers thereunder. We, however, do not find any force in the preliminary objection for ; firstly, the question of refundability had not been finally decided and secondly, it does arise out of the order of the Tribunal.

5. On merits it was submitted on behalf of the petitioner that as the respondent, who has his Head office at Wazirabad, did receive the amount in dispute as sales tax, be did so as an implied or purported agent of the Government and was therefore, liable to pay the same to the Government and had no right to ask for its refund thereafter.

6. The learned counsel for the respondent submitted that according to the findings of fact as available on the record, the goods had been sold at Durgai. That place, it was contended, being outside the taxable territory, the Government was not entitled to receive or retain the disputed amount which according to the respondent had been paid mistakenly. The learned counsel also relied on Commissioner of Sales Tax v. Messrs Haji & Co., Chiniot P L D 1966 Lah. 256 to plead that original order having become final it could not be re‑opened under section 30. He, however, admitted that if the goods had been sold at Wazirabad and tax received there, even though not validly, the assessee would have been liable to pay the same to the Government under section 30‑A of the Sales Tax Act.

7. It may be noted that the Tribunal decided two questions in para. 7 of the relevant order‑

(a) That refund could be allowed as the respondent had not collected the sales tax as the agent of the Government.

(b) That order allowing refund was not a mistake apparent on the face of the record as envisaged by section 30(1) of the Sales Tax Act, to provide an occasion for rectification proceedings.

No reference had been asked for and made against the second conclusion of the Tribunal. The decision to that extent is final against the Department. As regards the first point, it may be noted that the refund had been ordered on 17th February 1959, at the instance of the respondent. The matter was re‑opened by the Sales Tax Officer exercising his powers under section 30 of the Sales Tax Act.

7‑A. The main question involved is about the entitlement of the respondent to ask for refund and receive the amount which he had collected from his customers, separately from price of the timber, as sales tax. The respondent did have the lawful authority to collect this amount if it was due. But if a person having no authority to act purports to bind another as his agent, he is purported agent and is subject to the same liability as an agent would be, who acted without authority. The principal can elect to A ratify the transaction, in which case. the purported agent is relieved fro the liability to the third persons for his tortious conduct. The purport agent however, would be subject to the liability to the principal, for having received as the result of transaction, its proceeds or its value, and his liability to him for a breach of fiduciary obligations as if he had been an agent at the time. The respondent, in the case in hand, received the money willingly for the Government and the customers paid the same voluntarily though under a misapprehension that the same was payable. The respondent who normally collects such amounts for the Government received that amount not on his own account but as sales tax to be paid to the Government. The act of the respondent thus lay under sections 187 and 195 of the Contract Act. The respondent shall be deemed to have the implied authority of the collection of the sales tax and the petitioner ratified that act by accepting the amount.

8. The Judicial Committee of the Privy Council in David Lyell v. John Lawson Kennedy 14AC437 while reversing the decision of the Court of Appeal (I8 Q B D 796) held that the defendant's acts as such agent though unauthorised might be ratified by the true owner, and were ratified by the plaintiff, bringing his actions within a reasonable time after the hire was ascertained: that as to the accumulated rents and profits the defendant had made himself a trustee; that the action was not barred by Statute of Limitation; and that the plaintiff was entitled to judgment for recovery of possession of land and to an account of the rents and profits since D's death. A passage from the Law of Agency by Brindaban Katiar, 2nd Edition, 1961 at page 500, may also be usefully reproduced in this connection :‑

"An agent who receives money on account of his principal is responsible for its payment to the principal. He cannot dispute the claim of the principal in such a case, as for example, on the ground that other persons are interested in the subject‑matter of the agency, their claim being a matter between them and the principal with which the agent has nothing to do."

Another passage at page 503 is as under :‑

"Section 216 of the Contract Act is wide enough to allow recovery of gains made by the agent in an illegal manner. So, an agent who con tracts for bribes with a party adverse to his principal is accountable for any commission received, though he, is ordinarily barred from enforcing the illegal contract against the third party. An agent is bound to account to his principal even if the moneys received by him on behalf of the latter relate to an illegal or void contract. The agent who has received the money has no right to retain it and to plead that the money was paid to him under an illegal or void agreement. So, where an agent has received money under a wagering contract for his principal, he cannot retain it. The case is, however, different where the contract of agency itself is illegal. The agent has a good defence, also where he has, for a lawful reason, repaid the money to the person from whom he received it."

Paragraph 948 of Chitty on Contract, Edn. 1968, Vol. I, may also be reproduced with advantage to support the view :‑

"Where money is received by an agent for his principal from a third party under an illegal contract it would seem that the principal may recover the money from the agent in an action for money had and received. (See Sykes v. Beadon (1879) 11 Ch. D 170 and Bridger v. Savage (1885) 15 Q B D 363; cf. Rawlings v. General Trading Corporation (1921) 1 K B 635 (642) ; Hill v. William Hill (Parklane) Ltd. (1949) A C 530)."

It was held in Demottos v. Benjamin (1894) 63 L J Q B 248 and Bhola Nath v: Mul Chand I L R 52 All. 630 that it is not a valid excuse for the agent to refuse payment on the ground that the money was received under an illegal or void contract or that the ,claims are made in respect of it by third persons.

9. In fact, on payment of the amount to the exchequer, the respondent became functus officio so far as that transaction was concerned, as his implied agency came to an end, as soon as the amount was deposited, as held in Alliance Bank v. Amritsar Bank 31 I C 215. Reference may also be made to section 201 of the Contract Act. Even the customers who paid the amount could not sue the respondent to recover the amount thereafter for the view taken in Gowers and others v. Lloyds and National Provincial Foreign Bank Ltd. (1938) 1 A E R 766 and Holland v. Russel (1863) 4 B & S 14. The respondent was, therefore, out of the picture for all legal and practical purposes and the matter lay between the customers who paid the amount and the Government.

10. It is thus quite clear that the respondent who collected the amount in question, did so from the very beginning, as an agent of the Government and became functus officio, as soon as he paid the same to the exchequer. He, therefore, was not entitled to its refund under section 27 of the Sales Tax Act.

Our reply to the question referred to us is, therefore, in the negative. Respondent shall pay the costs of the case.

S. Q. Question answered in negative.

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