State Must Abandon Colonial Mindset : Supreme Court Criticises Governments Retracting Assurances To Industries

The Supreme Court strongly criticised the States for moving back on its promises to investors, holding that industrial incentive policies must be interpreted liberally and purposively, and that the State cannot evade its commitments through technicalities or retrospective amendments, as such conduct erodes investor confidence and defeats the very purpose of industrial policies.

“Where the Government has offered an incentive of exemption to a new industry, and where an industry has been established in reliance on such representation in order to avail the benefit, that new industry may legitimately contend that the exemption cannot thereafter be withdrawn.”, observed a bench comprising Justices J.B. Pardiwala and R. Mahadevan, while allowing an industry's appeal against the Odisha High Court's decision that had upheld the Odisha State Financial Corporation's withdrawal of its assurance to grant subsidies after the appellant set up the industrial unit.

The dispute dates back to 1992, when the Appellant set up a Magneco Metrel Plant under the 1989 Industrial Policy with fresh registration, separate infrastructure and new machinery, commencing production on 21 November 1992. Subsidy applications were filed in 1993, the unit was recognised as a new industrial unit in 1998, and subsidies were sanctioned in 2003. However, the amounts were never released and were ultimately rejected in 2008 on the basis of a 1994 executive instruction and a 2008 retrospective amendment imposing an overall subsidy cap. The Odisha High Court upheld the rejection in 2018, leading IFGL to approach the Supreme Court.

Setting aside the impugned order, the judgment authored by Justice Pardiwala found the bureaucratic lethargy as the sole reason for this long-drawn litigation, which ideally shouldn't have travelled to the Supreme Court. The Court said that when the Appellant had set up the industry on the State's assurance, then it is impermissible for the State to retract on its assurance by introducing changes to the industrial policy (retrospectively) to deny benefits to the beneficiaries.

Conduct of the authorities, such as prolonged inaction, inconsistent stands, and an attempt to defeat legitimate claims through retrospective measures, the Court said undermines investor confidence and runs contrary to the objective of industrial policies, which are meant to encourage, not obstruct, industrial growth.

“This litigation is a fine specimen of the bureaucratic lethargy. It is this bureaucratic lethargy which gave rise to this long drawn litigation. This Court in many of its decisions has reminded various State Governments that if the object of formulating the industrial policy is to encourage investment, employment and growth, the bureaucratic lethargy of the State apparatus is clearly a factor which will discourage entrepreneurship.”, the court said.

Reference was made to the case of Motilal Padampat Sugar Mills v. State of Uttar Pradesh, (1979) 2 SCC 409, to observe that “where a new industrial unit had set up an industry not excluded from the purview of the scheme and had commenced commercial production before that industry was subsequently included in the exclusion list, it would be unreasonable and unjust to deprive such an industrial unit of the benefit of the scheme, especially when it had already become eligible and had started receiving the incentives.”

Further, the Court lamented the States' for displaying a colonial mindset by arbitrarily declining industrial policy benefits at their absolute discretion, instead noted that the State is bound to act fairly and transparently, consistent with the constitutional guarantee against arbitrariness enshrined in Article 14 of the Constitution of India.

“The State must abandon the colonial conception of itself as a sovereign dispensing benefits at its absolute discretion. Policies formulated and representations made by the State generate legitimate expectations that it will act in accordance with what it proclaims in the public domain. In the exercise of all its functions, the State is bound to act fairly and transparently, consistent with the constitutional guarantee against arbitrariness enshrined in Article 14 of the Constitution of India. Any curtailment or deprivation of the entitlements of private citizens or private business must be proportional to a requirement grounded in public interest. This understanding of the limits of State power has been recognised and reiterated by this Court in a consistent line of decisions.”, the court observed.

Accordingly, the appeal was allowed, and the Respondent was directed to release the sanctioned subsidies with 9% interest.

Headnote

Industrial Policy – New Industrial Unit vs. Expansion - Amalgamation and Transfer of Rights to Subsidies - Doctrine of Promissory Estoppel and Legitimate Expectation- Determination of whether an industrial unit qualifies as a "new industrial unit" under the Industrial Policy of 1989 - held that even if an entity has existing units, a newly established unit with fresh capital investment, separate registration, independent industrial license, and distinct physical location must be treated as a "new industrial unit" – Held that upon the amalgamation of companies, all properties, rights, and interests, including sanctioned subsidies and incentives, stand transferred to the successor-in-interest (the amalgamated company) as per the scheme sanctioned by the High Court - The State and its instrumentalities are bound by unequivocal promises made in Industrial Policies and specific sanction letters - Once an entrepreneur acts upon such promises by making substantial investments and setting up a unit, the authorities cannot arbitrarily resile from or retrospectively amend the policy to deny sanctioned benefits - Supreme Court noted that the MM Plant unit satisfied all criteria for a new unit: investment made after the policy's effective date, independent license, separate electricity connection, and distinct physical location (Sheds 19 & 22 vs. the old unit's Sheds 7 & 8) - The rejection based on an internal instruction from 1994 and a retrospective amendment in 2008 was held to be illegal, as the MM Plant was a "new industrial unit" and not an expansion/modernization project - Noted that the respondents' "volte-face" after sanctioning the subsidies and allowing the appellant to continue production was unfair and untenable - The Supreme Court allowed the appeal, set aside the High Court's judgment, and directed the respondents to disburse ₹11,14,750 with 9% p.a. interest within three months. [Relied on Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh (1979) 2 SCC 409; Gujarat State Financial Corpn. v. Lotus Hotels (P) Ltd. (1983) 3 SCC 379; State of Punjab v. Nestle India Ltd. (2004) 6 SCC 465; State of Jharkhand v. Brahmputra Metallics Ltd. (2023) 10 SCC 634; Paras 75-80, 90- 93, 103, 135]

Cause Title: IFGL REFRACTORIES LTD. VERSUS ORISSA STATE FINANCIAL CORPORATION & ORS.

Citation : 2026 LiveLaw (SC) 18

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Appearance:

For Petitioner(s) Mr. Nakul Dewan, Sr. Adv. Mr. Pradhuman Gohil, Adv. Mrs. Taruna Singh Gohil, AOR Mr. Alapati Sahithya Krishna, Adv. Ms. Hetvi Ketan Patel, Adv. Mr. Rushabh N. Kapadia, Adv. Mr. Siddharth Singh, Adv. Mr. Rohan Andrew Naik, Adv. Mr. Sathvik Chandrashekar, Adv.

For Respondent(s) Mr. Soumyajit Pani, Adv. Mr. Vinodh Kanna B., AOR Mr. Gaurav Khanna, AOR Ms. Natasha Sahrawat, Adv. Mr. Rudraksh Pandey, Adv. Mr. Gautam Barnwal, Adv. Ms. Deepali Bhanot, Adv. Ms. Alisha Roy, Adv.