Supreme Court Upholds Tax Rebate for Fly Ash Industries: State of Uttar Pradesh vs. Birla Corporation Limited (2019)

Introduction

Date of the Judgment: 20 November 2019
Citation: [Not Available in Source]
Judges: A.M. Khanwilkar, J. and Dinesh Maheshwari, J.

Can a government withdraw a tax rebate that it had previously promised to industries, especially after those industries have already invested and started production based on that promise? The Supreme Court of India recently addressed this critical question in a case concerning tax rebates for industries using fly ash in Uttar Pradesh. This judgment clarifies the limits of the government’s power to rescind such benefits and protects the interests of businesses that rely on government assurances.

The Supreme Court bench, comprising Justices A.M. Khanwilkar and Dinesh Maheshwari, delivered the judgment. The judgment was authored by Justice A.M. Khanwilkar.

Case Background

The case revolves around notifications issued by the Uttar Pradesh government to promote the use of fly ash, a byproduct of thermal power plants. The government initially offered tax rebates to industries that used fly ash in their manufacturing processes, particularly in underdeveloped areas of the state. This was intended to encourage industrial growth and address environmental concerns related to fly ash disposal.

The State of Uttar Pradesh, in exercise of its powers under Section 5 of the Uttar Pradesh Trade Tax Act, 1948 (the 1948 Act), issued a notification on 18th June, 1997, declaring goods with fly ash content of 10% or more as notified goods. The notification also granted a rebate of 25% on goods with fly ash content between 10% to 30% and a 50% rebate for goods with more than 30% fly ash content. Subsequently, on 27th February, 1998, a new notification was issued, rescinding the earlier notification and introducing certain conditions for availing the rebate. These conditions included the requirement that the goods be manufactured in a unit established in the specified areas, using fly ash purchased from thermal power stations within Uttar Pradesh.

M/s. Birla Corporation Limited (BCL) established a factory in Raibareli and commenced commercial production on 14th December, 1998, availing the rebate until 13th October, 2004. M/s. Jai Prakash Associates Limited (JPAL) also set up a factory in the notified area and commenced production on 18th September, 2004. Both companies were impacted by a subsequent notification dated 14th October, 2004, which rescinded the 1998 notification, effectively withdrawing the tax rebate.

Timeline

Course of Proceedings

The notification dated 27th February, 1998 was challenged in the High Court of Judicature at Allahabad on the grounds that the conditions specified in the notification resulted in discriminatory treatment to producers and suppliers of goods imported from neighboring states. The High Court upheld the challenge on 29th January, 2004, stating that the conditions contravened Articles 301 and 304(a) of the Constitution of India. The State of Uttar Pradesh appealed this decision, which was eventually affirmed by the Supreme Court in the case of State of Uttar Pradesh & Ors. vs. Jaiprakash Associates Limited.

Following the High Court’s decision, the State was advised to rescind the notification dated 27th February, 1998. Consequently, a notification dated 14th October, 2004, was issued, rescinding the earlier notification. This led to the filing of separate writ petitions by the respondents, asserting that the State could not resile from its promise of rebate.

Legal Framework

The case primarily involves the interpretation of Section 5 of the Uttar Pradesh Trade Tax Act, 1948, which empowers the State Government to grant tax rebates. Section 5(1) states:

“Where the State Government is satisfied that it is expedient in the public interest so to do, it may by notification, and subject to such conditions and restrictions as may be specified therein, allow a rebate up to the full amount of tax levied on any specified point on— (a) The sale or purchase of any goods, or (b) The sale or purchase of such goods, by such persons or class of persons as may be specified in the said notification.”

Section 5(2) of the Uttar Pradesh Trade Tax Act, 1948, allows for the rebate to be applied retroactively, stating:

“The rebate under sub-section (1) may be allowed with effect from a date prior to the date of the notification.”

Additionally, Section 21 of the General Clauses Act, 1897 and Section 21 of the Uttar Pradesh General Clauses Act, 1904, which deal with the power to amend or rescind notifications, are also relevant. Section 21 of the General Clauses Act, 1897 states:

“Where, by any Central Act or Regulations a power to issue notifications, orders, rules or bye-laws is conferred, then that power includes a power, exercisable in the like manner and subject to the like sanction and conditions (if any), to add to, amend, vary or rescind any notifications, orders, rules or bye-laws so issued.”

Arguments

Arguments by the State of Uttar Pradesh:

• The State argued that it had the power to rescind the notification dated 27th February, 1998, and withdraw the rebate due to supervening circumstances.
• The State contended that the High Court’s judgment of 29th January, 2004, which extended the benefit of the rebate to units outside Uttar Pradesh, nullified the public interest in granting the rebate.
• The State also argued that it lacked the territorial jurisdiction to verify the fly ash consumption and sources of units operating outside Uttar Pradesh.
• The State highlighted the need to promote the utilization of fly ash and prevent future revenue loss as reasons for rescinding the rebate.

Arguments by the Respondents (M/s. Birla Corporation Limited and M/s. Jai Prakash Associates Limited):

• The respondents argued that the State could not resile from the promise or representation made in the notification dated 27th February, 1998, and that the impugned notification dated 14th October, 2004, was violative of promissory estoppel.
• They contended that the State, in exercise of its executive power, could not withdraw the rebate with retrospective effect, and that could only be done by the legislature.
• The respondents asserted that the notification dated 14th October, 2004, was intended to discontinue the rebate for industries set up after that date and for industries in neighboring states, but not for industries that had already commenced production before that date.
• The respondents argued that the State had failed to establish any supervening circumstances warranting the withdrawal of the rebate with retrospective effect.

Sub-Submissions by Parties

Innovativeness of the Argument: The respondents innovatively argued that the State’s action was not only a breach of promise but also arbitrary, violating Article 14 of the Constitution. They emphasized that the core objective of the initial notification—promoting fly ash usage—was still valid, thus questioning the necessity of the rescinding notification.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue:

1. Whether the State has the power to rescind the notification providing for rebate in respect of tax payable under the Uttar Pradesh Trade Tax Act, 1948, and thus withdraw the facility even in respect of industrial units, which had commenced production and had complied with the conditions for grant of such rebate in terms of Notification dated 27th February, 1998.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Cases:

• State of Uttar Pradesh & Ors. vs. Jaiprakash Associates Limited, (2014) 4 SCC 720 (Supreme Court of India) – This case affirmed the High Court’s decision that the rebate should also apply to cement manufacturing units of the neighboring states.
• Kazi Lhendup Dorji vs. Central Bureau of Investigation & Ors., 1994 Suppl. (2) SCC 116 (Supreme Court of India) – Cited by the respondents to argue that the executive cannot issue notifications with retrospective effect.
• Industrial Infrastructure Development Corporation (Gwalior) Madhya Pradesh Limited vs. Commissioner of Income Tax, Gwalior, Madhya Pradesh, (2018) 4 SCC 494 (Supreme Court of India) – Cited by the respondents to argue that the executive cannot issue notifications with retrospective effect.
• MRF Limited, Kottayam vs. Assistant Commissioner (Assessment) Sales Tax & Others, (2006) 8 SCC 702 (Supreme Court of India) – Cited by the respondents to argue that notifications cannot apply to units already set up prior to their issuance.
• Southern Petrochemical Industries Co. Ltd. vs. Electricity Inspector & ETIO & Others, (2007) 5 SCC 447 (Supreme Court of India) – Cited by the respondents to argue that notifications cannot apply to units already set up prior to their issuance.
• Pournami Oil Mills & Ors. vs. State of Kerala & Anr., 1986 Suppl. SCC 728 (Supreme Court of India) – Cited by the respondents to argue that notifications cannot apply to units already set up prior to their issuance.
• Director General of Foreign Trade & Anr. vs. Kanak Exports & Anr., (2016) 2 SCC 226 (Supreme Court of India) – Cited by the respondents to argue that subordinate legislation cannot have retrospective effect.
• M/s. Motilal Padampat Sugar Mills Co. Ltd. vs. State of Uttar Pradesh & Others, (1979) 2 SCC 409 (Supreme Court of India) – Cited by the respondents to argue that there is a heavy burden on the State to show supervening public interest.
• Manuelsons Hotels Pvt. Ltd. vs. State of Kerala & Others, (2016) 6 SCC 766 (Supreme Court of India) – Cited by the respondents to argue that there is a heavy burden on the State to show supervening public interest.
• State of Bihar & Others vs. Kalyanpur Cement Limited, (2010) 3 SCC 274 (Supreme Court of India) – Cited by the respondents to argue that the doctrine of promissory estoppel applies to notifications.
• Lok Prahari Through Its General Secretary vs. State of Uttar Pradesh & Others, (2018) 6 SCC 128 (Supreme Court of India) – Cited by the respondents to argue that the notification violates Article 14 of the Constitution.
• State of Jammu & Kashmir vs. Trikuta Roller Flour Mills Pvt. Ltd. & Anr., (2018) 11 SCC 260 (Supreme Court of India) – Cited by the State to argue that the State can withdraw the rebate due to supervening public interest.
• Sales Tax Officer & Anr. vs. Shree Durga Oil Mills & Anr., (1998) 1 SCC 572 (Supreme Court of India) – Cited by the State to argue that the State can withdraw the rebate due to supervening public interest.
• Shree Digvijay Cement Co. Ltd. & Anr. vs. Union of India & Anr., (2003) 2 SCC 614 (Supreme Court of India) – Cited by the State to argue that the State can withdraw the rebate due to supervening public interest.

Legal Provisions:

• Section 5 of the Uttar Pradesh Trade Tax Act, 1948 – This section empowers the State Government to grant tax rebates.
• Section 21 of the General Clauses Act, 1897 – This section deals with the power to amend or rescind notifications.
• Section 21 of the Uttar Pradesh General Clauses Act, 1904 – This section deals with the power to amend or rescind notifications.
• Articles 301 and 304(a) of the Constitution of India – These articles deal with freedom of trade and commerce.
• Article 14 of the Constitution of India – This article guarantees equality before the law.

Authority Analysis Table

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court relied on State of Uttar Pradesh & Ors. vs. Jaiprakash Associates Limited [ (2014) 4 SCC 720 ]* to highlight that the rebate should also apply to cement manufacturing units of the neighboring states. The Court used Kazi Lhendup Dorji vs. Central Bureau of Investigation & Ors. [ 1994 Suppl. (2) SCC 116 ]* and Industrial Infrastructure Development Corporation (Gwalior) Madhya Pradesh Limited vs. Commissioner of Income Tax, Gwalior, Madhya Pradesh [ (2018) 4 SCC 494 ]* to support the argument that the executive cannot issue notifications with retrospective effect. Further, the Court relied on MRF Limited, Kottayam vs. Assistant Commissioner (Assessment) Sales Tax & Others [ (2006) 8 SCC 702 ]*, Southern Petrochemical Industries Co. Ltd. vs. Electricity Inspector & ETIO & Others [ (2007) 5 SCC 447 ]* and Pournami Oil Mills & Ors. vs. State of Kerala & Anr. [ 1986 Suppl. SCC 728 ]* to argue that notifications cannot apply to units already set up prior to their issuance. The Court also relied on Director General of Foreign Trade & Anr. vs. Kanak Exports & Anr. [ (2016) 2 SCC 226 ]* to support the argument that subordinate legislation cannot have retrospective effect. The Court used M/s. Motilal Padampat Sugar Mills Co. Ltd. vs. State of Uttar Pradesh & Others [ (1979) 2 SCC 409 ]* and Manuelsons Hotels Pvt. Ltd. vs. State of Kerala & Others [ (2016) 6 SCC 766 ]* to highlight that there is a heavy burden on the State to show supervening public interest. The Court also relied on State of Bihar & Others vs. Kalyanpur Cement Limited [ (2010) 3 SCC 274 ]* to support the argument that the doctrine of promissory estoppel applies to notifications and Lok Prahari Through Its General Secretary vs. State of Uttar Pradesh & Others [ (2018) 6 SCC 128 ]* to support the argument that the notification violates Article 14 of the Constitution. The Court distinguished State of Jammu & Kashmir vs. Trikuta Roller Flour Mills Pvt. Ltd. & Anr. [ (2018) 11 SCC 260 ]*, Sales Tax Officer & Anr. vs. Shree Durga Oil Mills & Anr. [ (1998) 1 SCC 572 ]* and Shree Digvijay Cement Co. Ltd. & Anr. vs. Union of India & Anr. [ (2003) 2 SCC 614 ]*, stating that they turned on the facts of the concerned cases and not applicable in the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the principle of promissory estoppel and the need to protect the legitimate expectations of industries that had relied on the government’s promise of tax rebates. The court emphasized that the State had failed to demonstrate any supervening public interest that would justify withdrawing the rebate with retrospective effect. The court also noted that the dominant purpose for which the notification dated 27th February, 1998, was issued, namely, the utilization of fly ash, still existed. The court also highlighted the fact that the notification dated 14th October, 2004, rescinding the earlier notification, did not explicitly state that it would apply retrospectively.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

Logical Reasoning Flowchart

The Court considered alternative interpretations, such as the State’s argument that the High Court’s decision necessitated the withdrawal of the rebate. However, the Court rejected this argument, emphasizing that the core objective of the initial notification—promoting fly ash usage—was still valid. The final decision was reached by focusing on the principle of promissory estoppel and the lack of any explicit retrospective application in the notification dated 14th October, 2004.

The Court’s decision was based on several key reasons:

• The State failed to prove any supervening public interest to justify the withdrawal of the rebate for units that had already commenced production.
• The notification dated 14th October, 2004, did not explicitly state that it would apply retrospectively.
• The principle of promissory estoppel applies to the State, and it cannot resile from its promise of rebate.
• The dominant purpose for which the notification dated 27th February, 1998, was issued, namely, the utilization of fly ash, still existed.

The Court quoted from the judgment:

“On a bare reading of this provision, it is evident that there is no express authority given to the Executive to issue notification for “withdrawing or rescinding the rebate facility” from a date prior to the date of notification.”

“Section 5(2) merely constrict that power only for “allowing” rebate with effect from a dateprior to the date of notification. The State Government cannot exercise power to withdraw the rebate with retrospective effect.”

Final Decision

The Supreme Court held that the notification dated 14th October, 2004, which rescinded the earlier notification providing for tax rebates for fly ash industries, could not be applied retrospectively. Therefore, the Court ruled that industries that had already commenced production before 14th October, 2004, were entitled to the tax rebate as promised in the earlier notification. The Court emphasized that the State could not resile from its promise and that the principle of promissory estoppel applied in this case. The Court also noted that the State had failed to establish any supervening public interest that would justify the retrospective withdrawal of the rebate.

The Supreme Court also directed that the respondents should be able to substantiate that the amount claimed has not been passed on to their consumers. The court clarified that if the respondents had passed on the benefit of the tax rebate to their consumers, they would not be entitled to claim the benefit.

Impact

The Supreme Court’s judgment has significant implications for future cases involving government promises and tax rebates. The judgment reinforces the principle of promissory estoppel and emphasizes that governments cannot arbitrarily withdraw benefits that they have promised to industries, especially after those industries have relied on those promises and invested accordingly. The ruling also highlights the importance of clarity and precision in government notifications, particularly when it comes to retrospective application. The judgment also underscores the need for the government to provide sufficient justification and evidence when claiming supervening public interest to withdraw promised benefits.

Impact on Future Cases:

• Promissory Estoppel: The judgment solidifies the application of promissory estoppel against the government, ensuring that promises made to industries are binding.
• Retrospective Application: It clarifies that government notifications cannot have retrospective effect unless explicitly stated and justified by a supervening public interest.
• Legitimate Expectations: The judgment protects the legitimate expectations of businesses that rely on government assurances and invest accordingly.
• Burden of Proof: It places a heavy burden on the government to demonstrate a supervening public interest when withdrawing promised benefits.

Impact on Government Policies:

• Policy Clarity: Governments need to be more careful and precise when issuing notifications regarding tax rebates and incentives.
• Transparency: There is a need for transparency in government decision-making regarding tax policies, with clear justifications for any changes.
• Investor Confidence: The judgment is likely to boost investor confidence by ensuring that government promises are reliable.
• Environmental Incentives: It reinforces the importance of consistent government policies to promote environmental initiatives, such as the use of fly ash.

Key Legal Principles

The Supreme Court’s judgment established the following key legal principles:

• Promissory Estoppel: The doctrine of promissory estoppel applies to the government, preventing it from resiling from promises made to industries, especially when those industries have acted on those promises.
• No Retrospective Application: Government notifications cannot have retrospective effect unless explicitly stated and justified by a supervening public interest. The power to allow rebate with retrospective effect under Section 5(2) of the Uttar Pradesh Trade Tax Act, 1948, does not extend to withdrawing the rebate with retrospective effect.
• Supervening Public Interest: The government bears a heavy burden to demonstrate a supervening public interest when withdrawing promised benefits. The reasons for withdrawing the benefit must be clear and compelling.
• Legitimate Expectations: The legitimate expectations of businesses that rely on government assurances must be protected.
• Clarity in Notifications: Government notifications must be clear and precise, particularly regarding their application and any retrospective effect.
• Unjust Enrichment: The respondents should be able to substantiate that the amount claimed has not been passed on to their consumers.

Conclusion

The Supreme Court’s judgment in the case of State of Uttar Pradesh vs. Birla Corporation Limited (2019) is a landmark decision that upholds the principle of promissory estoppel and protects the legitimate expectations of industries that rely on government assurances. The Court’s ruling clarifies that governments cannot arbitrarily withdraw tax rebates or incentives after industries have made investments based on those promises. The judgment reinforces the importance of transparency and consistency in government policies and underscores the need for clear justifications when withdrawing promised benefits. This decision serves as a significant precedent for future cases involving government promises and tax rebates, ensuring that businesses can operate with confidence and predictability.