Supreme Court gives split verdict on whether doctrine of legitimate expectation applies to tax exemptions

The Supreme Court on Friday delivered a split verdict on the issue of whether amendments to tax exemption statutes can be challenged based on the doctrine of legitimate expectation. [KB Tea Product Pvt Ltd & anr v. Commercial Tax Officer, Siliguri and ors].The doctrine states that an entity may have a legitimate expectation of being treated in a certain way by administrative authorities even though there is no such legal right.Justice Krishna Murari opined that the doctrine would apply when industrial units are set up with the allurement of tax exemption for a specific period, observing, "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."Justice MR Shah, however, held that the same does not apply against statutes.Nevertheless, the judges agreed on the point of firms not having a vested right to claim tax exemptions..The top court was hearing appeals against a Calcutta High Court order that had upheld the removal of exemption of the petitioners from sales tax payments based on a 1994 that was amended by the 2001 West Bengal Finance Act.As a result of the latter, the appellants were denied benefits of the tax exemption that they had enjoyed for two years..Justice Shah opined that the moment the amendment excluded tea-blending from the definition of manufacturing (which was eligible for sales tax exemption), the appellants right to any benefit had ceased."As per the settled position of law, nobody can claim the exemption 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 The exemption is always on the fulfilment of the conditions for availing the exemption and the same can be withdrawn by the State.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 Murari, in a more detailed 47-page judgment, began by explaining the implications of the doctrine."If the public authority fails to do so [fulfill its legitimate expectations], the individual or group has a right to challenge the decision and seek a remedy, such as an order to enforce the legitimate expectation, as is the situation in the case at hand."He added that the doctrine is a limb of Article 14, which 'fights against the contamination of arbitrary state action and misuse of power'. Further, the bar on invoking the doctrine must be removed where public interest is involved, since the doctrine itself rests on the 'touchstone' of public interest."For an amendment to claim a bar against legitimate expectation, it must demonstrate that the said change in policy was constructed in public interest."If amendments of the nature under challenge are allowed to effectively evade the doctrine, it would be an 'antithesis to the rule of law', Justice Murari added. As a counter to Justice Shah's reasoning, he underscored,"If a blanket bar of the doctrine of legitimate expectation against a statute is to be allowed, no domestic or foreign investor would ever invest in local business and ventures, as any legitimate expectation by way of a statute would translate only to a façade, as such a benefit could be snatched away arbitrarily at any point in time. Hence, any contrary interpretation of the doctrine of legitimate expectation, would cause great havoc, and only cause detriment to the rights of individuals and the society at large." To justify shifts in policy in public interest, and 'snatch away the legitimate expectation created in favour of the appellants', authorities have to demonstrate reasons, it was stressed. In the present case, the same was not done, and the appellants deserve the exemptions as was specified in 1994, Justice Murari opined. He concluded,"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.".Advocate Kavita Jha appeared for the appellants and Advocate Madhumita Bhattacharjee appeared for the State government..[Read judgment]