2010 (7) TMI 921 - HC - VAT and Sales Tax

Whether the petitioner is entitled to the deferment of payment of tax both under the KST and the CST Acts for the period 2002-14 in respect of phase III of its project? Held that - Though there is no promise by the State Government to take any corrective measures, with the reduction in the rate of tax under the CST Act resulting in the complete decimation of the incentive granted to the petitioner. The intention of the State Government to continuously provide relief from the burden of tax during the intended period is no longer in existence and to that extent, the principles can be pressed into service. Even the decision in the case of Kasinka Trading 1994 (10) TMI 64 - SUPREME COURT OF INDIA that an exemption notification can be revoked without falling foul of the principle of promissory estoppel, since it was also found that the Government of India had justified the withdrawal of exemption notification on relevant reasons in the public interest, would have no application in the present case as the State Government has not withdrawn exemption nor does it seek to justify the benefit conferred on the petitioner having been rendered illusory, but only assigns a dispassionate reasoning, that it is the misfortune of the petitioner to be faced with the circumstance of the incentive becoming redundant for the reasons stated above. It is therefore necessary for the State Government to reconsider the request made by the petitioner and to evolve measures in order to address the petitioner s plight and to afford such relief as may be warranted. The writ petition is accordingly allowed. The order at annexure M is quashed and the State Government is directed to reconsider the request of the petitioner in the light of the observations made hereinabove

Issues Involved:
1. Entitlement to deferment of payment of tax under the KST and CST Acts.
2. Impact of the reduction in the CST rate on the incentive scheme.
3. Legality of the rejection of the petitioner's request for modification of the Government order.
4. Application of the principles of promissory estoppel and legitimate expectation.

Detailed Analysis:

1. Entitlement to Deferment of Payment of Tax under the KST and CST Acts
The petitioner, a company registered under the Companies Act, 1956, and the Karnataka Sales Tax Act, 1957 (KST Act), sought deferment of tax payments under the KST and CST Acts for its expansion projects (Phase I, II, and III). Initially, the Government of Karnataka provided tax deferment incentives from 1994 to 2006, with a base tax liability of Rs. 4.44 crores per annum. For Phase III, the Government extended the deferment period from 2002 to 2014, subject to specific conditions, including a base tax liability of Rs. 8.84 crores or Rs. 4.44 crores plus the average tax liability of three years prior to the commissioning of Phase III, whichever was higher.

2. Impact of the Reduction in the CST Rate on the Incentive Scheme
With the introduction of the Taxation Laws (Amendment) Act, 2007, the CST rate was progressively reduced, affecting the petitioner's ability to collect and defer taxes. The petitioner argued that the reduction in the CST rate from 4% to eventually nil by 2010 rendered the tax deferment incentive illusory, as the petitioner could no longer retain any amount by way of taxes under the CST Act. This reduction diminished the incentive initially provided, leading to financial hardship for the petitioner.

3. Legality of the Rejection of the Petitioner's Request for Modification of the Government Order
The petitioner requested the Finance Department to modify the base tax liability in light of the reduced CST rate, which was rejected without a hearing. The Finance Department's rejection was based on the premise that there was no promise to modify the incentives if the CST rate changed and that the State Government could not grant an interest-free loan solely due to changes in the CST Act. The court found this rejection to be illegal, as it effectively removed the incentive that prompted the petitioner's investments.

4. Application of the Principles of Promissory Estoppel and Legitimate Expectation
The petitioner relied on several judicial precedents to argue that the Government's promise of incentives should be honored, even if the CST rate changed. The court agreed, noting that the principle of promissory estoppel prevents the Government from reneging on its promises if the petitioner acted on those promises. The court also recognized the doctrine of legitimate expectation, which holds that the petitioner had a reasonable expectation of continued incentives based on the Government's initial promise.

Conclusion
The court allowed the writ petition, quashing the Finance Department's order and directing the State Government to reconsider the petitioner's request in light of the observations made. The court emphasized that the State Government should evolve measures to address the petitioner's financial hardship resulting from the reduced CST rate, ensuring that the initial incentive scheme remains effective and meaningful.

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