M J Antony: When the state goes back on its word

OUT OF COURT

There are times of euphoria when state governments offer various tax concessions as well as other incentives to entrepreneurs to set up industries in their states.

Later, the governments either withdraw the benefits or give strict interpretation of the terms of the scheme, virtually taking back what was offered. Then each side goes to court and the results of often vary.

In the case of Bannari Amman Sugars Ltd vs Commercial Tax Officer, decided by the Supreme Court recently, the Tamil Nadu Tax Tribunal applied the principles of promissory estoppel and legitimate expectation while ordering the state government to restore the benefits granted to the sugar mill.

The government had earlier given purchase tax exemption in case of mills that exceeded the ceiling of Rs 300 lakh during a five-year period. The government appealed to the Madras High Court against the tribunal's decision. It reversed the tribunal's ruling.

According to the high court, the grant of a subsidy is a concession and the government had good reasons, in this case, for modifying the scheme in public interest.

The order granting subsidy can be withdrawn in interest of public revenue. The government had not offered any inducement to establish industrial units and the mill had not acted on the basis of the government orders.

Therefore, neither promissory estoppel nor legitimate expectation could be invoked in this case.

The sugar mill then appealed to the Supreme Court. It argued that the two principles were applicable to its case. There was no overriding public interest to rule out the application of the two doctrines and there was no scope for retrospective withdrawal. The Supreme Court remitted the matter to the high court to examine certain factual aspects of the dispute.

However, it reviewed the development of the doctrines and laid down certain guidelines that might help industrialists in similar situations.

While the executive discretion to change policy is wide enough, it is constitutionally imperative that such shift must be made fairly and should not give the impression that it was done arbitrarily or by any ulterior criteria.

"If the state acts within the bounds of reasonableness, it would be legitimate to take into consideration the national priorities and adopt trade policies. The ultimate test is whether on the touchstone of reasonableness, the policy decision come out unscathed," the judgement said.

At the same time, the industrial unit that received the concession has no vested right in it. If any concession has been given, it can be withdrawn at any time and no time limit should be insisted upon before it is withdrawn.

The rule of promissory estoppel can be invoked only if the industry was established and availed of the benefit on the basis of the promise made by the government.

Moreover, the question whether the controversial action was arbitrary or not must be answered ultimately on the facts and circumstances of a given case. A basic and obvious test, said the court, is to see "whether there is any discernible principle emerging from the impugned action and, if so, does it really satisfy the test of reasonableness".

When the industry and the governments differ in their perspectives, what should the courts do? It can intervene when there is palpable arbitrariness or unreasonableness.

But something overwhelming must appear before it steps in. "The courts are not very good at formulating or evaluating policy," said the judgement.

"Sometimes when the courts have intervened on policy grounds, the court's view of the range of policies open under the statute or of what is unreasonable policy has not got public acceptance. On the contrary, its views of policy have been subjected to stringent criticism."

Despite these clarifications, there is a large grey area in the interpretation of the principles of promissory estoppel and legitimate expectations.

These principles are still in the development stage, especially in the context of the new economic scenario. More questions are bound to come back to the court in future, seeking more specific answers.