Supreme Court delivers Split Verdict on Tax Holiday Exemption Applicability on Legitimate Expectation [Read Order]

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, has resulted in a split verdict from the Supreme Court bench comprising Justices M.R. Shah and Krishna Murari. On 01.08.2001, the West Bengal Finance Act, 2001, resulted in an amendment to Section 2(17) of the 1994 Act, which omitted the words "blending of tea" from the definition of "manufacture." This amendment impacted M/s. K.B. Tea Product Pvt Ltd, who was manufacturing blended tea and enjoying a two-year exemption from paying sales tax under Section 39 of the WB Sales Tax Act. However, following the amendment to Section 2(17), the appellant was no longer eligible for the sales tax exemption. The West Bengal-based appellant, M/s. K.B. Tea Product Pvt Ltd, disputed its exclusion from the tax holiday and sales tax exemption under the amended Section 2(17) of the 1994 Act through the West Bengal Finance Act. The appellant argued before the Supreme Court that it had established new industrial units based on the government's promise of tax exemption for a specified period. Additionally, it claimed that the State had not provided any justification for withdrawing the benefits and that the doctrine of legitimate expectation was applicable in this situation. However, the State objected to the argument, claiming that the High Court had correctly distinguished between a "vested right" and an "existing right" that could be revoked. Furthermore, it contended that there could be no legitimate expectation against a statute. The appellant's plea had previously been dismissed by the Tribunal and the Calcutta High Court. Although Justice Murari agreed with Justice Shah that the appellant had no "vested right" to claim exemption from sales tax under the 1994 Act after the amendment, he disagreed with Justice Shah's opinion on the applicability of the doctrine of legitimate expectation. The appellant contended that the doctrine of legitimate expectation and/or promissory estoppel applied to the case, but Justice Shah dismissed this argument, stating that no one can claim exemption from sales tax as a matter of right, which falls within the purview of the State Government as a policy decision. In the dissenting opinion, Justice Murari acknowledged that the appellant had established small-scale industrial units based on the tax holiday granted to them. This, in turn, created a legitimate expectation in favor of the appellant. Justice Murari stated that the appellant's legitimate expectation was broken when the words "blending of tea" were removed from the definition of "manufacture" by a subsequent amendment. He added that the state had failed to demonstrate any public interest in rescinding the appellant's legitimate expectation. Justice Murari stated that when an existing policy is modified and a legitimate expectation is taken away, the public interest behind such an action must be demonstrated. Additionally, for a statute to be invoked against the applicability of legitimate expectation, it must show that the policy shift is for the advancement of public interest. He further stated that a total prohibition on the invocation of legitimate expectation against a statute would be detrimental to the rights of individuals and society, and would contradict the rule of law. Consequently, he allowed the appeal and ruled that the legitimate expectation created in the mind of the appellant must be protected. Justice Murari also observed that the appellant was issued a certificate of eligibility for tax holiday under Section 39 of the West Bengal Sales Tax Act for a seven-year period. Therefore, he held that the benefits that were originally granted to the appellant must be applicable for the promised duration and 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. “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,” the Supreme Court Justice opined. 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 stated and allowed the appeal. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates