M J Antony: The state can't back out

OUT OF COURT

Two recent Supreme Court judgements ruled against governments pulling back on incentives to industries.

It is common to find state governments floating incentive schemes to attract industries, especially in backward areas. Cheap land, subsidised power and tax sops are offered to attract them. However, often the governments go back on their word for inexplicable reasons. This leads to litigation in high courts and the Supreme Court. There were two such cases in the Supreme Court in recent weeks which did not put the respective governments in a positive light.

In the first case, Mahabir Vegetable Oil Ltd vs State of Haryana, the Supreme Court dealt with the incentive scheme offered by the Haryana government to industries set up in backward areas of the state. It offered concessions in sales tax to new units. The company concerned established solvent extraction plants. It obtained a no-objection certificate from the pollution control board, entered into agreements for erecting the plant, power contracts were signed and licences were obtained. However, the government by then made amendments in the rules, which denied the incentive benefits to the new unit. When it applied for grant of exemption from payment of sales tax, it was rejected on a narrow interpretation of the rules.

In the case of another company, Bharat Rasayan Ltd also, the story was repeated. When these two firms moved the high court, it dismissed their petitions asserting that the benefit of exemption could be withdrawn in public interest. It said that "There cannot be any restraint on the state government to exercise the delegated legislative functions within the parameters laid down by the statute."

The companies appealed to the Supreme Court, which quashed the high court ruling and accepted their arguments. It emphasised that by amendments, the government could not take away the rights of the companies with retrospective effect. "Not only have they invested huge amounts but the authorities of the state sanctioned benefits and granted permissions," the judgement pointed out. "Parties had also taken other steps which could be taken only for the purpose of setting up of a new industrial unit. An entrepreneur who sets up an industry in a backward area, unless otherwise prohibited, is entitled to alter his position pursuant to the promises made by the state."

Another case which followed the Haryana judgement came from Jharkhand, involving Tata Cummins Ltd. The Bihar government announced an industrial policy in 1993, following which the company invested Rs 302 crore in a project in a backward region and paid about Rs 600 crore in taxes. However, when the company claimed sales tax exemption according to the government notifications, it was denied on technical grounds. The company moved the Jharkhand High Court. It asked the government to refund Rs 54.5 crore to the company. The state government appealed to the Supreme Court in vain.

The judgement explained that an exemption from payment of tax is an exemption from tax liability and the rules should normally be read strictly. "However, when an assessee is promised a tax exemption for setting up an industry in a backward area as a term of the industrial policy, we have to read the implementing notifications in the context of the industrial policy. In such a case, the exemption notifications have to be read liberally and not in a strict sense as in the case of exemptions from tax liability under the taxing statute," the court pointed out.

In these two cases, the Supreme Court recalled earlier such disputes between state governments and industrial units. In 1999, the court had held in State of Bihar vs Suprabhat Steel Ltd that the notifications meant for implementing the industrial policy of the state government could not override the incentive policy.

This judgement was followed in two cases last year involving the Himachal Pradesh government, Gujarat Ambuja and Associated Cement Ltd. The first company invested Rs 500 crore in a cement plant expecting deferment of payment of sales tax, electricity dues and other encumbrances. The government had granted these incentives and declared it a "prestigious cement unit" of the state. But then the government changed and a coalition of parties took over. The company moved the high court, which quashed the government orders. The Supreme Court upheld that decision.

The Supreme Court dealt with similar situations in a number of recent cases, for example, Tisco vs State of Jharkhand, and State of Bihar vs Bihar Rajya Mahasangh. The apex court has reiterated its view in these judgements. If entrepreneurs still trust the promises of the governments, they are motivated purely by the spirit of enterprise. Their situation becomes especially tenuous when there is a change in the government. The new one tries to extract its pound of flesh from the hapless industrialist. The string of judgements of the Supreme Court and high courts show that this vicious circle goes on unabated, even in this liberalised economic regime.