Money Paid or Thing Delivered by Mistake or Under Coercion under Section 72 of the Indian Contract Act, 1872: Mistake of Law and of Fact, Recovery of Tax Paid Under Mistake, and the Defences

Section 72 is one sentence long and has generated more litigation than any other provision in Chapter V, almost all of it about money paid to the State. Its two triggers are mistake and coercion, and the Act defines neither for this purpose. The courts have held both words to be used in their general and ordinary sense, so that mistake includes a mistake of law and coercion means compulsion generally and not the narrow definition in Section 15. That construction opened the door to claims for refund of taxes collected without authority of law, and the last thirty years have been largely about closing it again, not by narrowing the section but by developing defences.

1. The Provision

Section 72, Indian Contract Act, 1872

A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.

Illustrations. (a) A and B jointly owe one hundred rupees to C. A alone pays the amount to C, and B, not knowing this fact, pays one hundred rupees over again to C. C is bound to repay the amount to B. (b) A railway company refuses to deliver up certain goods to the consignee except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegally excessive.

The two Illustrations correspond to the two triggers. Illustration (a) is a payment by mistake: B believed the debt was outstanding when it had already been discharged. Illustration (b) is a payment under coercion in the general sense: the consignee was not threatened with anything forbidden by the penal law, but he could not get his goods without paying, and the payment was therefore not voluntary.

2. Coercion in Section 72

The word bears a wider meaning in Section 72 than the definition in Section 15 gives it. The Privy Council so held in Kanhaya Lal v. National Bank of India Ltd., (1913) 40 IA 56, reasoning that Section 15 is a definition framed for the chapter on free consent, where the question is whether a contract may be avoided, and that it does not control a restitutionary provision in a different chapter. For Section 72 it is enough that the payment was not voluntary, and Illustration (b) shows the kind of practical compulsion contemplated.

3. Mistake in Section 72

📖 Shiba Prasad Singh v. Maharaja Srish Chandra Nandi, (1949) 76 IA 244 (PC)

Facts: A question arose whether money paid under a mistake as to the law could be recovered under Section 72, or whether the section was confined to a mistake of fact. The High Courts had divided: several had read the section narrowly, influenced by English authority and by Section 21, while the Calcutta High Court had held that mistake in Section 72 includes a mistake of law.

Held: The Privy Council resolved the conflict in favour of the wider view. The word mistake in Section 72 is used without qualification and includes a mistake of law. Their Lordships explained the test: payment by mistake must refer to a payment which was not legally due and which could not have been enforced; the mistake is in thinking that the money paid was due when in fact it was not due. There is no inconsistency with Section 21, because Section 21 deals with a contract caused by a mistake of law, which stands and is enforceable, whereas Section 72 deals with a payment which was either not made under a contract at all, or if under a contract, was not caused by it.

Ratio: Mistake in Section 72 includes a mistake of law. The test is whether the money was legally due and enforceable; Section 21 governs the validity of contracts and does not cut down Section 72.

The Supreme Court adopted that reasoning in Sales Tax Officer, Banaras v. Kanhaiya Lal Mukundlal Saraf, AIR 1959 SC 135, where sales tax had been paid under provisions afterwards held ultra vires. The Court held the money recoverable under Section 72, that the word person in the section includes the State, and that the payment having been made under a mistake of law it was repayable although made voluntarily, subject to questions of estoppel, waiver and limitation.

⚠ Section 21 and Section 72 answer different questions

This is the distinction Shiba Prasad Singh draws and it is the key to the whole area. Section 21 governs the validity of a contract: a contract caused by a mistake as to Indian law is not voidable, and it stands. Section 72 governs the recovery of a payment: money paid under a mistaken view of the law, in the belief that it was due when it was not, may be recovered. There is no conflict, because the first concerns whether a bargain binds and the second concerns whether money that was never owed must be given back. A party may therefore be held to his contract and still recover a payment he made under it that the contract never required.

The two grounds of recovery, and the defences that answer them

4. Recovery of Tax Paid Under Mistake

Article 265 of the Constitution provides that no tax shall be levied or collected except by authority of law, so money collected as tax under a provision that is invalid was never due. Section 72 therefore appeared to give a straightforward remedy, and Kanhaiya Lal so held. The consequences for the public revenue of unrestricted refund claims led to a reconsideration by a bench of nine judges.

📖 Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536 (9 Judges)

Facts: A large number of claims were made for refund of excise duty and customs duty collected under provisions or interpretations afterwards held to be wrong. The claimants relied on Section 72 and on Article 265. In most cases the claimants had already passed on the burden of the duty to their purchasers in the price of the goods.

Held: The Supreme Court held that claims for refund of indirect taxes must ordinarily be pursued under the machinery and the limitation provisions of the taxing statute itself, and not by a suit or writ petition invoking Section 72, save in defined situations such as where the levy is unconstitutional or wholly outside the Act. More importantly, the Court held that a refund will be refused where the claimant has passed on the incidence of the duty to another, because to order repayment would enrich the claimant unjustly at the public expense. The doctrine of unjust enrichment therefore operates as a defence to the claim.

Ratio: Section 72 and Kanhaiya Lal remain good law as general propositions, but claims for refund of indirect taxes are governed by the statutory machinery and are defeated by the passing-on defence, unjust enrichment operating against the claimant.

This is a specialised and closely regulated field. The current position should be checked against the relevant revenue legislation and the decisions under it before it is relied on in any particular case.

5. The Requirements of a Claim

Money must have been paid, or a thing delivered. A promise to pay is not enough; the section operates on a transfer that has taken place.
It must have been paid by mistake or under coercion. A payment made with full knowledge of the facts and of the doubt, or to compromise a genuine dispute, is neither.
The money must not have been legally due. Shiba Prasad Singh states the test: the mistake is in thinking that the money was due when it was not.
The claim lies against the person who received it, and the word person includes the State, as Kanhaiya Lal holds.
No contract need be shown, and the section applies whether or not the payment was made under a purported contract.

6. Defences

Defence	Effect
Payment in settlement of a disputed claim	The money was paid under a compromise and not by mistake; the payer cannot reopen it on afterwards concluding that he was right
Payment with knowledge of the facts and of the doubt	A party who pays knowing the liability is contestable, and chooses to pay rather than litigate, has not paid by mistake
The money was in fact due	Section 72 does not apply at all; the payment discharged a real liability
Change of position	Where the recipient has irretrievably altered his position on the faith of the receipt, restitution may be refused to that extent
Passing on the burden	Applied to indirect tax refunds in Mafatlal; repayment would unjustly enrich the claimant
Knowledge of illegality	Kuju Collieries: Sections 65, 70 and 72 do not assist a party who paid under a transaction he knew to be unlawful
Estoppel and waiver	Expressly preserved in Kanhaiya Lal as qualifications to the right of recovery
Limitation	Article 113 of the Limitation Act, 1963 read with Section 17, time running from the discovery of the mistake or when it could with reasonable diligence have been discovered

7. Section 72 Among the Quasi-Contracts

Section 72 requires no benefit to have been accepted in the sense Section 70 requires. The receipt of the money is itself the benefit.
It requires no interest in the payment, unlike Section 69, where the plaintiff must be interested and the defendant must have been bound by law to pay.
It overlaps with Section 65, which requires restoration of an advantage received under an agreement discovered to be void. Where money was paid under such an agreement, either route may be available, and Section 72 is the wider of the two because it does not depend on there having been an agreement at all.
It is the principal statutory vehicle for the recovery of unauthorised exactions, read with Article 265 of the Constitution.

8. The Position Stated Shortly

Section 72 requires a person to whom money has been paid or a thing delivered by mistake or under coercion to repay or return it.
Coercion bears its general and ordinary meaning and is not controlled by Section 15, per Kanhaya Lal v. National Bank of India.
Mistake includes a mistake of law, per Shiba Prasad Singh, the test being whether the money was legally due and enforceable.
Section 21 governs the validity of a contract caused by a mistake of law; Section 72 governs the recovery of a payment, and the two do not conflict.
Sales Tax Officer v. Kanhaiya Lal applied the section to tax paid under an invalid provision and held that person includes the State.
Mafatlal Industries requires refund claims for indirect taxes to follow the statutory machinery and defeats them where the burden has been passed on.
The claim requires an actual payment, made by mistake or under compulsion, of money that was not legally due.
The defences include payment under a compromise, payment with knowledge, change of position, passing on, knowledge of illegality under Kuju Collieries, estoppel, waiver and limitation.
Time runs under Article 113 of the Limitation Act, 1963 from the discovery of the mistake.

9. Related Topics and Provisions

Topic or provision	Connection
Mistake of Fact vs Mistake of Law	Section 21 and the distinction drawn in Shiba Prasad Singh
Quasi-Contracts under Sections 68 to 72	The chapter as a whole
Doctrine of Unjust Enrichment	The principle, and the passing-on defence
Coercion under Section 15	The narrower definition, which does not control Section 72
Section 72, Indian Contract Act	The provision and its Illustrations
Sections 20 to 22, Indian Contract Act	Mistake and its effect on a contract
Section 65, Indian Contract Act	Restoration where an agreement is discovered to be void
Article 265, Constitution of India	No tax except by authority of law
Sections 17 and 113, Limitation Act, 1963	Limitation for a suit founded on mistake