Can Tax Exemption Be Claimed Based On Doctrine Of Legitimate Expectation? Supreme Court Delivers Split Verdict

The Supreme Court bench comprising Justices M.R. Shah and Krishna Murari has rendered a split verdict on the issue concerning the applicability of the doctrine of legitimate expectation where a tax holiday/ sales tax exemption granted to the appellant- manufacturer was stopped pursuant to the amendments made to the West Bengal Sales Tax Act, 1994.

Pursuant to the amendments made by the West Bengal Finance Act, 2001, Section 2(17) of the 1994 Act was amended w.e.f. 01.08.2001, and the words “blending of tea” were omitted from the definition of “manufacture” provided under Section 2(17).

As a result, the appellant, M/s. K.B. Tea Product Pvt Ltd, who was engaged in the business of manufacturing blended tea, and who enjoyed the benefit of exemption from payment of sales tax under Section 39 of the 1994 Act for a period of two years, was excluded from availing the said exemption once Section 2(17) was amended.

While Justice Murari concurred with the view taken by Justice Shah that the appellant had no “vested right” in claiming exemption from payment of sales tax under the 1994 Act after the amendment, Justice Murari dissented with Justice Shah on the applicability of the doctrine of legitimate expectation.

Justice Shah dismissed the contention of the appellant that legitimate expectation and/or promissory estoppel were attracted to the case, holding that nobody can claim exemption from payment of sales tax as a matter of right. He held that the same falls within the domain of the State Government and is a policy decision.

Justice Murari, however, in his separate judgment reckoned that it was on the basis of such tax holiday that the appellant had set up small-scale industrial units for the purpose of carrying on the business of manufacturing blended tea. Thus, the same created a legitimate expectation in favour of the appellant who was lured into pouring its hard-earned money into setting up small scale industrial units. Justice Murari said that the said legitimate expectation was broken when by a subsequent amendment, the words “blending of tea” was removed from the definition of “manufacture”. He added that the said legitimate expectation was rescinded by the State without any demonstration of public interest.

Justice Murari held that if a legitimate expectation is being taken away by way of a modification to an existing policy on grounds of public interest, such public interest must be demonstrated by the said modification.

He further held that for a statue to claim a bar against the applicability of legitimate expectation, it must demonstrate that the shift in policy is for the advancement of public interest.

He, however, ruled that a blanket bar on the invocation of legitimate expectation against a statute is contrary to the rule of law, and the same would cause great havoc and would be detrimental to the rights of the individuals and the society.

Justice Murari thus allowed the appeal and held that the legitimate expectation created in the mind of the appellant, must be protected. Noting that the appellant was granted a certificate of eligibility for Tax Holiday under Section 39 of the 1994 Act for a period of seven years, Justice Murari ruled that the benefits originally given to the appellant must be made applicable for the period promised by the public authority.

The appellant, M/s. K.B. Tea Product, challenged its exclusion from the tax holiday/ sales tax exemption in view of the amendments made by the West Bengal Finance Act to Section 2(17) of the 1994 Act. The Tribunal dismissed the challenge, and the same was confirmed by the Calcutta High Court in appeal.

It was the case of the appellant before the Supreme Court that it had been allured by the State of West Bengal to set up new industrial units in expectation of getting the benefit of sales tax exemption for a certain period. It pleaded that the doctrine of legitimate expectation was attracted in the said case, and that the State had failed to showcase any public interest in rescinding the benefits.

Against this, the State submitted that the High Court had correctly held that it was not a case of “vested right” but a case of “existing right”, and the same can be taken away. It further pleaded that there cannot be any legitimate expectation against a statute.

Justice M.R. Shah, however, ruled that nobody can claim exemption from payment of sales tax as a matter of right. “The exemption is always on the fulfilment of the conditions for availing the exemption and the same can be withdrawn by the State. To grant the exemption and/or to continue and/or withdraw the exemption is always within the domain of the State Government and it falls within the policy decision and as per the settled position of law, unless withdrawal is found to be so arbitrary, the Court would be reluctant to interfere with such a policy decision,” Justice Shah remarked.

Justice Shah noted that w.e.f. 01.08.2001, the activity of “tea blending” was excluded from the definition of “manufacture” under Section 2(17) of the 1994 Act. Consequently, the appellant ceased to be the manufacturer. Thus, once the appellant ceased to be a “manufacturer” under the 1994 Act, it was not entitled to the benefit of sales tax exemption under Section 39, which was previously available to it only as a “manufacturer”.

Dismissing the contention of the appellant that legitimate expectation and/or promissory estoppel were attracted to the case and that their “vested right” to seek sales tax exemption cannot be taken away, Justice Shah ruled that as per the settled position of law, there cannot be any promissory estoppel against the statute.

He added: “As rightly observed and held by the High Court, this is not a case of “vested right” but a case of “existing right”, which can be varied or modified and/or withdrawn. In the present case, as per amendment in the definition contained in Section 2(17) of the Act, 1994 w.e.f. 01.08.2001 by which “tea blending” activity is excluded from the definition of “manufacture” and therefore, on and from that day itself, the appellants ceased to be the manufacturers and shall not be entitled to the benefit of exemption from payment of sales tax as was available to them as manufacturers.”

Justice Murari, on the other hand, in his separate judgment, ruled that the doctrine of legitimate expectation was applicable to the case.

He observed that the doctrine of legitimate expectation is closely linked with/ flows from the doctrine of rule of law, and is essential for the functioning of the rule of law.

Referring to a catena of judgments rendered by the Apex Court, Justice Murari concluded that the said decisions remarkably weave in the doctrine of rule of law- the doctrine of legitimate expectation and the doctrine of arbitrariness, together. Further, the said decisions firmly root the doctrine of legitimate expectation within Article 14 of the Constitution of India.

While considering the limitations placed by the said decisions on the applicability of the doctrine of legitimate expectation, Justice Murari remarked, “In all the above-mentioned judgments that discuss the limitations of legitimate expectation, what is most important, is the principle that public interest is supreme.”

Justice Murari held that since all limitations on the doctrine of legitimate expectation rest on the touchstone of public interest, in cases where public interest itself is defeated by barring the applicability of legitimate expectation, the bar on legitimate expectation must be removed.

He further held that a blanket bar on the invocation of legitimate expectation against a statute is contrary to the rule of law.

“Further, it must be borne in mind that the doctrine of legitimate expectation and the doctrine of promissory estoppel are two separate principles, and as such, the blanket ban on promissory estoppel against a statute cannot be applicable to the doctrine of legitimate expectation,” Justice Murari added, noting that while the doctrine of promissory estoppel is a remedy in private law, the doctrine of legitimate expectation is a remedy in public law and is rooted in Article 14 of the Constitution of India.

Justice Murari went on to further enumerate the principles for application of the doctrine of legitimate expectation. Firstly, the expectation must be reasonable, and must not be based on any arbitrary or irrational grounds. Secondly, the expectation must be based on a clear representation made by the public authority, which must be made by an authorized person or body within the public authority. Additionally, the representation must be legitimate and not against any law or policy. It must also not be against any public interest or public policy.

Justice Murari further held that if a legitimate expectation is being taken away by way of a modification to an existing policy on grounds of public interest, such public interest must be demonstrated by the said modification. However, the said modification must not be antithesis to public policy, and if such a modification runs counter to public interest, the remedy of legitimate expectation would become exercisable. Lastly, the expectation must be based on a legitimate interest of the individual or group and must not be based on any vested interest or personal gain.

“Once a legitimate expectation is created, it must be protected and not arbitrarily or capriciously withdrawn by the public authority. The public authority must provide a reasonable opportunity for the individual or group to be heard before any decision is taken to withdraw or modify the expectation,” Justice Murari added.

Referring to the facts of the case, Justice Murari remarked that no appropriate justification had been provided by the government in order to justify a shift in policy, and snatch away the legitimate expectation created in favour of the appellant.

“No appropriate reason for the enactment of the amendment, nor the considerations of the affected party have been discussed. In my opinion, a mere claim of change of policy is not sufficient to discharge the burden of proof vested in the government. The government must precisely show what the change of policy is, and why such a change of law is in furtherance of public policy, and the public good,” Justice Murari said while allowing the appeal.

Case Title: M/s K.B. Tea Product Pvt Ltd & Anr vs Commercial Tax Officer, Siliguri & Ors

Citation : 2023 LiveLaw (SC) 428

Counsel for the Appellant: Ms. Kavita Jha, AOR Mr. Shammi Kapoor, Adv. Mr. Aditeya Bali, Adv.

Counsel for the Respondent: Ms. Madhumita Bhattacharjee, AOR Ms. Urmila Kar Purkayastha, Adv. Ms. Srija Choudhury, Adv. Ms. Arushi Mishra, Adv. Mr. Annant, Adv. Mr. Sandeep, Adv.

West Bengal Sales Tax Act, 1994; doctrine of legitimate expectation, promissory estoppel:

The Supreme Court has passed a split judgment on the issue concerning the applicability of the doctrine of legitimate expectation where a tax holiday/ sales tax exemption granted to the appellant- manufacturer was stopped pursuant to the amendments made to the West Bengal Sales Tax Act, 1994.

Pursuant to the amendments made by the West Bengal Finance Act, 2001, Section 2(17) of the 1994 Act was amended w.e.f. 01.08.2001, and the words “blending of tea” were omitted from the definition of “manufacture” provided under Section 2(17).

While Justice Krishna Murari concurred with the view taken by Justice M.R. Shah that the appellant had no “vested right” in claiming exemption from payment of sales tax under the 1994 Act after the amendment, Justice Murari dissented with Justice Shah on the applicability of the doctrine of legitimate expectation.

Justice Murari in his separate judgment reckoned that it was on the basis of such tax holiday that the appellant had set up small-scale industrial units for the purpose of carrying on the business of manufacturing blended tea. Thus, the same created a legitimate expectation in favour of the appellant. Justice Murari held that if a legitimate expectation is being taken away by way of a modification to an existing policy on grounds of public interest, such public interest must be demonstrated by the said modification. He further ruled that a blanket bar on the invocation of legitimate expectation against a statute is contrary to the rule of law.