Supreme Court Delivers Split Verdict On Question Of Tax Exemption Based On Doctrine Of Legitimate Expectation

The Bench of Justice M.R. Shah and Justice Krishna Murari of the Supreme Court while deciding a batch of appeals has delivered a split verdict regarding the question of tax exemption based on the Doctrine of Legitimate Expectation.

Justice M.R. Shah observed, “I am in complete agreement with the view taken by the learned Tribunal as well as the High Court that on and after 01.08.2001 and in view of the amendment to Section 2(17) of the Act, 1994, by which the definition of “manufacture” is amended and “tea blending” is excluded from the definition of “manufacture”, the appellants shall not be entitled to the exemption from payment of sales tax.”

Justice MR Shah said that the appeals fail and the same deserve to be dismissed in view of the facts and circumstances of the case and accordingly, dismissed the same.

Whereas, Justice Krishna Murari observed, “For a democratic state to function on the principles of equality and justice, the state must be ruled, not by its ruler, but by the law. In such a circumstance, to prevent such a contamination of the rule of law, the application of the doctrine of legitimate expectation becomes most important. If a state is allowed to make promises, and rescind the same without justification or explanation, it would lead to a situation wherein every action of the state would be bereft of accountability, and every person governed by the laws of this country would live in a state of fear and unrest, causing a chilling effect on the civil liberties of the people.”

Justice Krishna Murari said that the authority must be held accountable to the legitimate expectation created by it, and therefore, a direction is liable to be issued to the respondents to extend the benefits of the original amendment to the appellants, till the expiry of such a benefit as per the original amendment.

Advocate Kavita Jha appeared for the appellants while Advocate Madhumita Bhattacharjee appeared for the respondents.

Brief Facts -

There were amendments to the West Bengal Finance Act, 2001, Section 2(17) of the 1994 Act in the year 2001, and the term “blending of tea” was omitted from the definition of “manufacture” provided under Section 2(17). The appellant i.e., a company engaged in the business of manufacturing blended tea enjoyed the benefit of exemption from payment of sales tax under Section 39 of the 1994 Act for a period of two years but then was excluded from availing the said exemption once Section 2(17) was amended.

As per the provisions of the 1999 Scheme, the new industrial units which were established after complying with all the requirements provided under the 1999 Scheme were given an exemption from payment of sales tax for a specified period upon the purchase of raw materials required for carrying the manufacturing activity in said units. Consequently, the exemption from payment of sales tax, which was granted to the appellants came to be stopped and even the eligibility certificate was required to be modified and such an order was challenged before the Tribunal first and thereafter before the High Court.

The following were the two issues before the Apex Court:

1. Whether the appellants herein have a vested right in claiming exemption from payment of sales tax under the Act, since the vested right was accrued upon the appellants before the amendment was made under Section 2(170) of the Act?

2. Whether the doctrine of legitimate expectation is applicable in the present case since the appellants had set up their industrial units on the basis of the allurement of a tax holiday granted by the Government?

Justice Murari in the above context agreed with the conclusion arrived at by Justice Shah on the first issue and limited his dissent only to the second issue. He noted, “… it can be clearly seen that a legitimate expectation was created by the public authority, and such an expectation, accrued in the favour of the appellants herein, was rescinded by the said authority without any demonstration of public interest. No appropriate explanation has been provided as to why a shift was made in Law, and why such a shift, in spite of the loss which would occur to the appellants and similarly situated persons, was necessary to advance public interest. In such a circumstance, the legitimate expectation created in the minds of the appellants, must be protected, and the benefits given originally must be made applicable to the appellants herein for the period promised by the respondent authority.”

While allowing the appeal, he concluded that the doctrine of legitimate expectation is a facet of Article 14, and is essential to maintain the rule of law and that such a doctrine, which ensures predictability in the application of the law, in its very essence, fights against the corrosion of the rule of law, and prevents arbitrary state action.

Cause Title- M/s. K.B. Tea Product Pvt. Ltd. & Anr. v. Commercial Tax Officer, Siliguri & Ors.

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