2024 (1) TMI 509 - HC - VAT and Sales Tax

Invocation of doctrine of promissory estoppel against the State for continuing to avail the tax concessions - whether tax incentives granted to the petitioner-industrial units under specific Rules and statutory Notifications framed issued pursuant to the State Industrial Policy, 2004, could be withdrawn during the currency of the exemption period promised under the Industrial Policy/ Rules/Notifications? - HELD THAT - It is, thus, quite apparent that petitioner units had acted upon the promise extended to them by the State for investing in backward Panchayats of the State categorized as tax free zone. The promise being exemption from payment of VAT/CST for a period of ten years from the date of commencement of production. The petitioner units changed their position and invested in the State by setting up industrial units in backward areas/tax free zone. The doctrine of promissory estoppel is definitely applicable to the facts of the instant case. Having promised the petitioners exemption from payment of VAT/CST for a specific period, the respondents-State cannot be permitted to now assert that it is entitled to withdraw the tax concessions and to direct the industrial units to pay VAT/CST merely because in the subsequent years the Panchayats where the petitioners had set up their industrial units were de-notified and no longer carried the backward status. The growth of industrial sector can be said to be one significant factor in the development of an area. Doctrine of promissory estoppel is applicable in the facts of the cases and can certainly be successfully invoked by the petitioners in such circumstances to compel the State to adhere to its side of bargain promised under the Industrial Policy, 2004 and the Rules framed thereunder. The action of the respondent in withdrawing tax concessions granted to the petitioner units is not in consonance with law. The notifications withdrawing the backward area status from the concerned Panchayats will have only prospective effect i.e. will be applicable to industries being set up/expanded after the date of withdrawal notifications. These cannot be applied retrospectively to the petitioner units which had already come into production by the time the backward areas status was withdrawn from such Panchayats. These Panchayats shall have to be construed as backward areas/ tax free zone for the purpose of grant of tax incentives to the petitioners for specific period as per the promise extended by the State. The impugned office communication dated 26.04.2013 directing realization of tax from the petitioner Industrial units established in tax free zones, the consequent notices issued to the petitioners to deposit tax are quashed and set aside. Petitioners are held entitled to tax exemptions in terms of the Industrial Policy, 2004, the Incentive Rules, 2004 and the tax exemption notifications dated 30.03.2005(GST CST) and 19.01.2006 (VAT) till the coming into force of GST regime in the year 2017. Petition allowed.

Summary

Issues Involved:
1. Whether tax incentives granted under the State Industrial Policy, 2004, could be withdrawn during the currency of the exemption period.
2. Whether the doctrine of promissory estoppel applies against the State in this context.
3. Validity of the notifications withdrawing the backward area status of Panchayats.

Summary:

Issue 1: Withdrawal of Tax Incentives During Exemption Period

The core question is whether tax incentives granted to the petitioner-industrial units under specific Rules and statutory Notifications issued pursuant to the State Industrial Policy, 2004, could be withdrawn during the currency of the exemption period promised under the Industrial Policy/ Rules/Notifications. The Industrial Policy, 2004 aimed to attract entrepreneurs to set up projects in backward areas by promising tax concessions. Clauses 8.1, 8.3, and 8.4 of the policy outlined the incentives, concessions, and facilities. The respondent-State issued notifications granting tax exemptions, which were later withdrawn when the areas where the petitioners had set up their units were de-notified as backward areas. The petitioners challenged these actions, seeking directions to fulfill the commitments as per the Industrial Policy, 2004, and the Incentive Rules framed thereunder.

Issue 2: Doctrine of Promissory Estoppel

The petitioners invoked the doctrine of promissory estoppel, arguing that they altered their positions based on the State's promise of tax incentives. The Court held that the government cannot claim immunity from the doctrine of promissory estoppel. The petitioners had set up their units based on the promise of tax exemptions for ten years, and the State cannot withdraw these incentives during the promised period. The Court cited several precedents, including Union of India Vs. Indo-Afgan Agencies Ltd., M/s Motilal Padampat Sugar Mills Vs. State of Uttar Pradesh, and Manuelsons Hotels (P) Ltd. Vs. State of Kerala, to support this position. The Court also noted that the statutory exemption notifications had not been withdrawn, and the Industrial Policy, 2004 remained unchanged.

Issue 3: Validity of Notifications Withdrawing Backward Area Status

The Court refrained from examining the validity of the notifications withdrawing the backward area status of the concerned Panchayats. However, it held that these notifications would have only prospective effect and could not be applied retrospectively to the petitioner units that had already commenced production. The petitioners were entitled to the promised tax exemptions for the specified period, despite the subsequent de-notification of the areas.

Conclusion:

The Court concluded that the petitioners had acted upon the State's promise and set up their units in backward areas based on the promise of tax exemptions. The doctrine of promissory estoppel was applicable, and the State could not withdraw the tax concessions during the promised period. The notifications withdrawing the backward area status would only have prospective effect. The Court quashed the impugned office communication and notices directing the petitioners to pay VAT/CST and held that the petitioners were entitled to tax exemptions till the enforcement of the GST regime in 2017.