Exemption Provisions And Notifications To Be Read As Whole, In Accordance With Legislative Intent – Supreme Court
A two-judge Bench of Justice KM Joseph and Justice Hrishikesh Roy has held that exemption provisions and notifications have to be read as a whole and strictly interpreted in accordance with the legislative intent without any addition and subtraction.
In this case, two separate concurring judgments were authored by the Bench.
The issue which was dealt with by the Court was whether the benefit of tax exemption in respect of works contract granted in the process of revival of the industry and the relevant provisions of Sick Industrial Companies Act, 1985 (SICA) based on the Kerala Government communication dated 20.3.2004 could be withdrawn by the subsequent Government order dated 21.11.2006.
The Appellant had taken over a sick industrial unit that was engaged in the dyeing of clothes. An attempt was made to revive the unit under SICA. The proceedings were pending before the Board for Industrial and Financial Reconstruction (BIFR). In tune with the recommendations of the Empowered Committee constituted for the purpose, the GO was issued on 20.3.2004.
The relevant clause in this case was –
Sales Tax/Works Contract Tax
"(a) The past arrears of Sales Tax/Works contract tax will be completely waived. (b) Works contract Tax on processing of Fabrics like bleaching and dyeing etc. will be exempted in the State."
The Appellant availed the benefit of such waiver and after 30 months of such an arrangement, another GO was issued on 21.11.2006 under Section 10(3) of the Kerala General Sales Tax Act, 1963 (KGST) under which the Appellant was not allowed the benefits of exemption of Works Contract Tax. Thereafter, another GO was issued on 1.10.2007 in which the Government withdrew the 2006 GO as the concession was one already allowed in the rehabilitation scheme of the BIFR of the company. However, on 29.02.2008 again, the Government in the Tax Department requested to cancel the GO dated 01.10.2007 as it did not have any legally binding effect and thereupon GO dated 01.10.2007 in turn was canceled with immediate effect. Thus, it was decided to withdraw the waiver/exemption granted to the Appellant. Aggrieved, the Appellant approached the Kerala High Court.
The Appellant contended before the Apex Court that the benefit of the tax exemption granted by the State under the Scheme, was binding on the State under Section 19(3) of SICA and the State must be held accountable for its promise.
While the Respondent argued that the source of power to grant tax exemption was only traceable under Section 10(1) of the KGST Act.
Justice Roy's Analysis
Justice Hrishikesh Roy noted that the outer cap of 5 years was specified in the 1994 GO and the benefits could not have been intended to continue without limit.
Further, Justice Roy observed that even the 2004 GO and the BIFR sanctioned scheme of 2005 were enacted in furtherance of the 1994 Order, both these documents do not specify the timeline for tax exemption prescribed in the 1994 GO.
Also, Justice Roy placed reliance on the recent judgment of State of Gujarat Vs. Arcelor Mittal Nippon Steel India Ltd., where it was held that exemption provisions and notifications are to be strictly interpreted in accordance with the legislative intent without any addition or subtraction.
The Judge additionally held that the benefit of exemption of tax must be traced from the powers conferred under KGST Act and such benefits could not have been granted in terms of the BIFR Scheme.
Justice Roy also placed heavy reliance on Pournami Oil Mills and Others vs. State of Kerala and Anr., where it was held – It is a well-settled principle of law that where the authority making an order has the power conferred upon it by statute to make an order made by it and an order is made without indicating the provision under which it is made, the order would be deemed to have been made under the provision enabling the making of it.
Justice Roy furthermore held that the Government was empowered under Section 10(3) of the KGST Act to withdraw the exemption at any time and therefore it could not be said that the principle of promissory estoppel by itself will facilitate the Appellant to challenge the 2006 GO.
The Judge also held that such an exemption could not continue indefinitely and particularly not beyond the point at which the revival of the sick unit is seen.
Justice Roy held that even though the Appellant was granted tax exemptions under the 2004 GO, it was ultra vires Section 10 of the KGST Act.
"Such exemption cannot be continued for further assessment years, as that would amounts to perpetuating and condoning a wrong, which is opposed to public policy," Justice Roy noted.
Finally, Justice Roy opined that the Appellant had availed the exemption benefits for a substantial period and was the only of its category which enjoyed such advantage in the State and the Appellant now is out of the red and more importantly in a situation where enforcing the promise against the State is likely to affect the public interest.
In the light of these observations, Justice Roy dismissed the appeal.
Justice Joseph's Analysis
Justice Joseph agreed with the final conclusion rendered by Justice Roy that the appeal must be dismissed, however, chose to author a separate judgment.
Justice Joseph after referring to various provisions of the SICA Act noted that not every sick industrial company becomes the subject matter of a scheme contemplated under Section 18 read with Section 19 of the Act.
The Judge further held, "An exemption under Section 10 cannot ordinarily be claimed as a legal right. The provisions of Section 19 of the Act made an inroad into the said principle. In other words, when to a scheme under Section 19 of the Act the State Government has given consent or its deemed consent, the law commanded the State Government to honor its consent.
Justice Joseph further held that there was merit in the contention of the Appellant that the exemption granted initially in 2004 was not the one premised on under Section 10 of the KGST Act but rather under Section 19 of the SICA Act. In this context, the Judge noted –
"In other words, consent being forthcoming from the state, a scheme being sanctioned under section 19 providing for financial assistance in the form of tax exemption, inter alia, the Government became obliged to honour its consent and the dictate of the statute."
"…the exemption granted can be understood as springing from the provisions of Section 19(3) read with 19(1) in this regard. Thus, the exemption is not to be treated as falling under Section 10 of the State Act. In other words, Section 10 cannot be treated as the sole repository of power to grant exemption," Justice Joseph opined.
Justice Joseph also held that there is merit in the view that the exemption does not envisage any outer limit. But it is obvious that it could not be an unending bonanza even after the company breaks even and even made profits
In the light of these observations, Justice Joseph also dismissed the appeal.