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 He added that the said legitimate expectation was rescinded by the State without any demonstration of public interest.Justice Murari held that if a legitimate expectation is being taken away by way of a modification to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...

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

Parina Katyal

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