Supreme Court Upholds Withdrawal of Tax Exemption in Sick Industry Revival Case: Augustan Textile Colours Ltd. vs. Director of Industries (2022)

Introduction

Date of the Judgment: 8 April 2022

Citation: 2022 INSC 349

Judges: Hrishikesh Roy, J. and K.M. Joseph, J. (Concurring)

Can a state government withdraw a tax exemption promised to a company during its revival under the Sick Industrial Companies Act, 1985? The Supreme Court of India recently addressed this question in a case involving Augustan Textile Colours Limited, a company that took over a sick industrial unit. The core issue was whether the government could withdraw a tax exemption granted to the company during the revival process, based on a subsequent government order.

The judgment was delivered by a two-judge bench comprising Justice Hrishikesh Roy, who authored the main opinion, and Justice K.M. Joseph, who wrote a separate concurring opinion. While both judges agreed on the final outcome, they differed in their reasoning.

Case Background

Augustan Textile Colours Limited (the appellant) took over M/s Teak Tex Processing Complex Ltd., a sick industrial unit in Kerala that was involved in dyeing clothes. The unit had been non-operational for a long time. The appellant sought to revive the unit under the Sick Industrial Companies Act, 1985 (SICA).

During the proceedings before the Board for Industrial and Financial Reconstruction (BIFR), the appellant offered to invest in the unit’s revival. Discussions led to various concessions being offered to the appellant. On 20 March 2004, the Kerala government issued an order accepting the recommendations of an Empowered Committee, which included a complete waiver of past sales tax/works contract tax arrears and an exemption on works contract tax for processing fabrics.

The BIFR sanctioned a scheme on 17 January 2005, which included these tax relief measures. The appellant availed the waiver benefit. However, on 21 November 2006, the government issued another order under Section 10(3) of the Kerala General Sales Tax Act, 1963 (KGST Act), stating that the tax exemption could not be granted to the appellant alone, as it was one of many similar industrial units in Kerala. This order effectively withdrew the tax exemption.

Although the government initially withdrew the 2006 order on 1 October 2007, it was later reinstated on 29 February 2008. This led the appellant to file a writ petition before the High Court of Kerala.

Timeline

Legal Framework

The case primarily revolves around the interpretation of the following legal provisions:

• Section 10 of the Kerala General Sales Tax Act, 1963 (KGST Act): This section empowers the government to grant exemptions or reductions in tax rates.
  • Section 10(1): “The Government may, if they consider it necessary in the public interest, by notification in the Gazette, make an exemption or reduction in rate, either prospectively or retrospectively in respect of any tax payable under this Act, (i) on the sale or purchase of any specified goods or class of goods… (ii) by any specified class of persons in regard to the whole or any part of their turnover.”
  • Section 10(3): “The Government may by notification in the Gazette, cancel or vary any notification issued under sub-section (1).”
• The Sick Industrial Companies Act, 1985 (SICA): This act deals with the revival of sick industrial units.
  • Section 19(3): “Where in respect of any scheme the consent referred to in sub-section (2) is given by every person required by the scheme to provide financial assistance, the Board may, as soon as may be, sanction the scheme and on and from the date of such sanction the scheme shall be binding on all concerned.”

Arguments

Appellant’s Arguments:

• The appellant argued that the tax exemption granted in the 2004 Government Order was part of a “package deal” to revive the sick unit under SICA.
• The appellant contended that the exemption was not granted under Section 10(1) of the KGST Act, and therefore, the government could not withdraw it under Section 10(3) of the same Act.
• The appellant submitted that the BIFR scheme, once sanctioned, is binding on all stakeholders, including the state government, under Section 19(3) of SICA.
• The appellant argued that the State of Kerala was bound by its promise of tax exemption.
• The appellant claimed that the incentives were not granted under Section 10(1) of the KGST Act, and therefore the tax exemption could not have been withdrawn by invoking the powers under Section 10(3) of the same Act.

Respondents’ Arguments:

• The respondents argued that the power to grant tax exemption is derived solely from Section 10(1) of the KGST Act.
• The respondents contended that the government has the power to cancel, vary, or modify any exemption in the public interest.
• The respondents submitted that the exemption was granted under Section 10(1) of the KGST Act and since no time limit was specified, the withdrawal was valid.
• The respondents argued that the exemption could only be granted to a class of persons and not to an individual industrial unit.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the benefit of tax exemption in respect of works contract granted in the process of revival of the industry, under the relevant provisions of the Sick Industrial Companies Act, 1985 based on the Kerala Government communication dated 20.3.2004 can be withdrawn, by the subsequent government order dated 21.11.2006.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

The Supreme Court also considered the following legal provisions:

• Section 10 of the Kerala General Sales Tax Act, 1963 (KGST Act)
• The Sick Industrial Companies Act, 1985 (SICA)

Judgment

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

How each authority was viewed by the Court?

• The Court followed the principle laid down in State of Gujarat Vs. Arcelor Mittal Nippon Steel India Ltd. [(2022) SCC OnLine SC 76]* that exemption notifications should be strictly construed.
• The Court relied on Pournami Oil Mills and Others vs. State of Kerala and Anr. [1986 (Supp) SCC 728]* to state that an order would be deemed to have been made under the provision enabling it even if the provision is not mentioned.
• The Court cited M/s. Motilal Padampat Sugar Mills Vs. State of Uttar Pradesh & Ors. [(1979) 2 SCC 409]* to state that promissory estoppel cannot be invoked to compel the government to do an act prohibited by law.
• The Court cited Amrit Banaspati Co. Ltd. Vs. State of Punjab & Anr. [(1992) 2 SCC 411]* to state that an unlawful promise is an exception to the principle of promissory estoppel.
• The Court relied on Bangalore Development Authority Vs. R. Hanumaiah [(2005) 12 SCC 508]* to state that promissory estoppel cannot be invoked to enforce a promise expressly prohibited by a statute.
• The Court considered Voltas Ltd. Vs. State of A.P. [(2004) 11 SCC 569]* to support the view that the provisions of the relevant sales tax act would prevail over the BIFR scheme where there is no express waiver.
• The Court cited Monnet Ispat & Energy Ltd. Vs. Union of India [(2012) 11 SCC 1]* to distinguish between the doctrine of promissory estoppel and the doctrine of legitimate expectation.
• The Court distinguished the facts in MRF Ltd., Kottayam Vs. Asst. Commissioner (Assessment) Sales Tax & Ors. [(2006) 8 SCC 702]* from the present case.
• The Court referred to Pawan Alloys & Casting Pvt. Ltd., Meerut Vs. U.P. State Electricity Board and Others [(1997) 7 SCC 251]* to highlight that the principle of promissory estoppel does not bar the grantor from withdrawing tax exemptions if it is necessary for public interest.
• The Court referred to Mahindra and Mahindra Limited and Ors. vs. State of Andhra Pradesh and Ors. [1986 (63) STC 274]* to discuss whether a single entity can be considered a class by itself.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several factors, including the need to adhere to the statutory provisions of the KGST Act, the principle that tax exemptions should be granted to a class of persons and not individual units, and the fact that the appellant had already benefited from the exemption for a considerable period.

Fact:Law

Logical Reasoning:

The court reasoned that the 2004 government order was ultra vires Section 10(1) of the KGST Act as it benefited only a single unit. The court also noted that the exemption was not intended to continue indefinitely.

The court also considered the argument based on promissory estoppel but held that it could not be invoked to compel the government to act contrary to law. The court also distinguished the facts of the case from the facts in MRF Ltd., Kottayam (supra) where the government was held to its promise of tax exemption.

The Supreme Court also noted that the appellant had already availed the exemption benefits for a substantial period and was now in a profitable position, thus, public interest would outweigh the interest of the individual grantee.

The majority opinion was authored by Justice Hrishikesh Roy, with a separate concurring opinion by Justice K.M. Joseph. Both judges agreed on the outcome, but Justice Joseph provided a different line of reasoning. Justice Joseph opined that the exemption was granted under Section 19 of the SICA, and not under Section 10 of the KGST Act. However, he also agreed that the exemption could not be indefinite and the appellant had already benefited from it for a considerable period.

The court’s decision was based on the interpretation of the relevant legal provisions, the principles of promissory estoppel, and the need to balance public interest with individual rights.

Key quotes from the judgment:

• “The exemption notification should be strictly construed and given meaning according to legislative intendment. The Statutory provisions providing for exemption have to be interpreted in the light of the words employed in them and there cannot be any addition or subtraction from the statutory provisions.”
• “It is a well settled principle of law that where the authority making an order has power conferred upon it by statute to make an order made by it and an order is made without indicating the provision under which it is made, the order would be deemed to have been made under the provision enabling the making of it ….”
• “The principle of promissory estoppel shall not be applicable contrary to the Statute. Merely because erroneously and/or on misinterpretation, some benefits in the earlier assessment years were wrongly given, cannot be a ground to continue the wrong and to grant the benefit of exemption though not eligible under the exemption notification.”

Key Takeaways

• Tax exemptions granted during the revival of sick industrial units must adhere to the provisions of the relevant tax laws.
• Exemptions cannot be granted to individual units if the law requires them to be given to a class of persons.
• The principle of promissory estoppel cannot be invoked to compel the government to act against the law.
• Tax exemptions are not intended to continue indefinitely and can be withdrawn if they are not in the public interest.
• BIFR schemes are not above the law of the land and cannot be used to circumvent the provisions of the KGST Act.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that tax exemptions granted during the revival of sick industrial units must adhere to the provisions of the relevant tax laws, and such exemptions cannot be granted to individual units if the law requires them to be given to a class of persons. The court also held that the principle of promissory estoppel cannot be invoked to compel the government to act against the law. This judgment reinforces the principle that statutory provisions must be strictly interpreted and that tax exemptions cannot be granted in violation of the law.

Conclusion

The Supreme Court dismissed the appeal filed by Augustan Textile Colours Limited, upholding the Kerala High Court’s decision. The court held that the tax exemption granted to the appellant was not in accordance with the provisions of the KGST Act and could be withdrawn by the government. This judgment clarifies the scope of tax exemptions in the context of sick industry revival and reinforces the principle that statutory provisions must be strictly adhered to.

Category

Parent Category: Kerala General Sales Tax Act, 1963

Child Category: Section 10, Kerala General Sales Tax Act, 1963

Parent Category: Sick Industrial Companies Act, 1985

Child Category: Section 19, Sick Industrial Companies Act, 1985

Parent Category: Tax Law

Child Category: Tax Exemption

Parent Category: Corporate Law

Child Category: Sick Industry Revival

FAQ

Q: Can the government withdraw a tax exemption promised to a company during its revival?

A: Yes, the government can withdraw a tax exemption if it was not granted according to the law or if it is not in the public interest.

Q: What is the significance of Section 10 of the Kerala General Sales Tax Act?

A: Section 10 of the Kerala General Sales Tax Act empowers the government to grant or withdraw tax exemptions.

Q: What is the role of the Sick Industrial Companies Act in this case?

A: The Sick Industrial Companies Act deals with the revival of sick industrial units, and the court had to consider whether the tax exemption was a part of the revival scheme.

Q: Can a company claim a tax exemption as a legal right?

A: No, tax exemptions are not a legal right and can be withdrawn by the government if they are not in accordance with the law.

Q: What is promissory estoppel, and how does it apply to this case?

A: Promissory estoppel is a legal principle that prevents a party from going back on a promise. However, it cannot be used to force the government to do something that is against the law.

Q: What does it mean for a tax exemption to be granted to a “class of persons”?

A: It means that the exemption should apply to a group of similar entities or individuals, not just a single company or person.