DOCTRINE OF LEGITIMATE EXPECTATION - MEANING, CONCEPT & ITS APPLICATION

[MANOJ NAHATA]

Introduction:

Doctrine of “Legitimate Expectation” as the name suggest is something which can be reasonably or legitimately expected by someone without having any legal rights attached thereto. There is no statutory definition prescribed for the term ‘Legitimate Expectation’ under any law. Legitimate expectation is the hope or the desire of a person to obtain a favorable order, inspired by past practice or promoted by representation. Legitimate expectation gives the applicant sufficient locus standi for judicial review.

This concept has emerged as an important doctrine in the taxation matters. The main reasons for gaining popularity of this doctrine perhaps might be the change in the Public Policy, change in the law and change in the behaviors and approach of the Executives by virtue of which someone is deprived of the express promise or representation made to him earlier. So, we can say that this doctrine not only takes care of the Promissory Estoppel but also the rules of natural justice, rule of law, non-arbitrariness, reasonableness, fairness, fiduciary duty and perhaps, to check the abuse of the exercise of administrative power. The doctrine of legitimate expectation in essence imposes a duty to act fairly.

Concept of Legitimate Expectation:

Doctrine of ‘Legitimate Expectation’ is one amongst several tools incorporated by the Court to review administrative action. This doctrine pertains to the relationship between an individual and a public authority. According to this doctrine, the public authority can be made accountable in lieu of a ‘legitimate expectation’. The doctrine of legitimate expectation has an important place in developing law of judicial review.

The doctrine is that a person may have a legitimate expectation of being treated in a certain way by an administrative authority even though he has no legal right in private law to receive such treatment. Even in cases where he has no legal right, he may still have a legitimate expectation of receiving the benefit or privilege. Such expectation may arise from a promise or from the existence of a regular practice which the applicant can reasonably expect to continue and be adopted in his case also. If his expectations are belied, the Court or the Tribunal may intervene and protect him by applying principles that are analogous to the principles of natural justice and fair play in action. The principle underlying legitimate expectation is based on Article 14 of the Constitution and the rule of fairness.

The Legitimate Expectations can be of two types viz: Procedural Legitimate Expectations and Substantive Legitimate Expectations. 

Evolution of this Doctrine in India:

The development of the doctrine of legitimate expectation in India has been in line with the principles evolved in common law English courts. In fact, it was from these English cases itself that the doctrine first came to be recognized by the courts in India.

In India this doctrine was first applied in the case of STATE OF KERALA AND ORS. VERSUS K.G. MADHAVAN PILLAI AND ORS. - 1988 (9) TMI 349 - SUPREME COURTwherein the Hon’ble Supreme Court held that a plaintiff had a right to sue for breach of contract. In this case, the respondents were given permission to open a new aided school and improve the current ones, but that permission was put on hold 15 days later by an order. The Respondents filed an appeal against this order on the grounds that it violated their rights to due process of law. The Supreme Court concluded that Respondents had a legitimate expectation of protection under the sanction, and that the second order was contrary to the natural justice.

This doctrine was applied by the Apex Court in several cases, inter-alia,

• NAVJYOTI COOP. GROUP HOUSING SOCIETY VERSUS UNION OF INDIA AND OTHERS - 1992 (9) TMI 318 - SUPREME COURT,
• UOI. VERSUS HINDUSTAN DEVELOPMENT CORPN. - 1993 (4) TMI 306 - SUPREME COURT
• M.P. OIL EXTRACTION VERSUS STATE OF M.P. - 1997 (7) TMI 660 - SUPREME COURT
• NATIONAL BUILDINGS CONSTRUCTION CORPORATION VERSUS S. RAGHUNATHAN & ORS. - 1998 (8) TMI 597 - SUPREME COURT

In MADRAS CITY WINE MERCHANTS’ ASSON. AND ANR. VERSUS STATE OF TAMIL NADU AND ANR. - 1994 (7) TMI 366 - SUPREME COURT the Supreme Court postulated circumstances which may lead to the formation of legitimate expectations namely-

• • If there was some explicit promise or representation made by the administrative body.
  • That such a promise was clear and unambiguous.
  • The existence of a consistent practice in the past which the person can reasonably expect to operate in the same way.

The Hon’ble Supreme Court has Observed in the case of FOOD CORPORATION OF INDIA VERSUS. KAMDHENU CATTLE FEED INDUSTRIES - 1992 (11) TMI 275 - SUPREME COURT as under:

"There is no unfettered discretion in public law. A public authority possesses powers only to use them for public good. This imposes the duty to act fairly and to adopt a procedure which is ‘fair play in action’. Due observance of this obligation as part of good administration raises a reasonable or legitimate expectation in every citizen to be treated fairly in his interaction with the State and its instrumentalities with this element forming a necessary component of the decision-making process in all State actions. To satisfy this requirement of non-arbitrariness is a state action, it is therefore, necessary to consider and given due weight to the reasonable or legitimate expectations of the persons likely to be affected by the decision or else that unfairness in the exercise of the power may amount to an abuse or excess of power apart from affecting the bona fides of the decision in a given case. The decision so made would be exposed to challenge on the ground of arbitrariness. Rule of law does not completely eliminate discretion in the exercise of power, as it is unrealistic, but provides for control of its exercise by judicial review."

Application of doctrine in Taxation matters:

Let’s understand the applicability of the doctrine in taxation laws with some judicial precedents.

• In case of SMT. NAYANA P. DEDHIA. VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX. - 2002 (8) TMI 273 - ITAT HYDERABAD-A the fact of the case was that the C.B.D.T. had issued a press-release to effect that when returned income exceeds income returned in earlier year by 30 per cent, assessment should not be selected for scrutiny. Assessee satisfied conditions of said press-release. However, Assessing Officer took up assessee’s case for scrutiny and made addition. The Tribunal relying upon the doctrine of Legitimate Expectations held Assessing Officer was not justified in taking up the case of the assessee for scrutiny in violation of the promise contained in the press-release, and consequently, the additions made in the course of such scrutiny assessment also deserve to be deleted without any further consideration.

• In case of M/S ASIAD PAINTS LIMITED, VERTIV ENERGY PVT. LTD., M/S. WEIWO COMMUNICATION PVT. LTD. AND ORS. VERSUS UNION OF INDIA, GOODS AND SERVICE TAX NETWORK, THE COMMISSIONER OF COMMERCIAL TAXES (GST) , THE ASSISTANT COMMISSIONER OF COMMERCIAL TAXES - 2019 (12) TMI 464 - KARNATAKA HIGH COURT the Karnataka High Court directed GST authorities to permit assessee to file Form GST TRAN-1 either electronically or manually on or before 31-12-2019. The Court held that it is legitimate for a going concern to expect that it will be allowed to carry forward and utilize the CENVAT credit after satisfying all the conditions as mentioned in the Central Excise Law and, therefore, disallowing such vested right is offensive against Article 14 of the Constitution as it goes against the essence of doctrine of legitimate expectation.

• In case of M/S. HANDY WATERBASE INDIA PVT. LTD. VERSUS THE DCIT, COMPANY CIRCLE II (2) , CHENNAI- 34. - 2021 (4) TMI 1017 - ITAT CHENNAI held that  when a person establishes unit under any policy of a Government on legitimate expectation that Government will fulfil its promises then such person is entitled to promises made by Government even in a situation where law has been amended and disentitles person from claiming such benefit. In this case the assessee had set up a new 100 per cent EOU in year 2004 on legitimate expectation that it will get deduction towards profit derived from such unit for 10 consecutive years as per provisions of section 10B and fact that there was no change in facts prevailing at time when deduction was allowed to assessee in assessment year 2004-05 and in assessment year 2009-10 when deduction was denied, Assessing Officer, without bringing out change in activities performed by assessee in its production facility could not have denied deduction provided to assessee by virtue of amended definition of manufacture by Finance Act, 2009 with effect from 1-4-2009. The matter was decided in light of the principles of doctrine of legitimate expectations and doctrine of promissory estoppel.

• In case of MAHARASHTRA STATE ELECTRICITY BOARD VERSUS JOINT COMMISSIONER OF INCOME-TAX - 2001 (3) TMI 1011 - ITAT MUMBAI the ITAT Mumbai Bench ‘D’ the facts were that -While assessee’s appeal against order of Commissioner (Appeals) was pending assessee filed a stay application on 27-2-200. The AO rejected stay application on very next day and issued garnishee order under section 226(3) on 01-3-2001 to assessee’s bankers. It was held that notwithstanding that AO was technically correct in issuing garnishee orders on 01-3-2001, he was not justified in ignoring legal principles that had to be followed in such circumstances and conduct to be observed consistent with those principles. It could be said that tests of rationality and procedural propriety had not been followed when AO showed undue haste in passing orders. In instant case doctrine of legitimate expectation was applied and action of Assessing Officer was struck down. The assessee had a right of legitimate expectation to expect that the income-tax authorities would act in conformity with the law while dealing with his stay application and while considering the question whether it would be reasonable or proper to recover the tax through coercive steps such as garnishee orders even during the pendency of the stay application before the Tribunal.

• In another case of SHREE JAINARAYAN HARIRAM GOEL CHARITABLE TRUST VERSUS COMMISSIONER OF INCOME TAX (EXEMPTION) , BHOPA - 2021 (8) TMI 421 - ITAT RAIPUR The assessee was a public trust engaged in running of school - Registration under section 12AA(1)(b) was granted to assessee on 07-11-2007.On basis of information from Investigation wing that assessee had received ingenuine donations, registration granted under section 12AA to trust was withdrawn and cancelled with effect from 01-4-2010 by Commissioner (Exemptions). Activity of trust was never doubted in past nor application or utilization of fund was doubted in any year since inception. No single instance was recorded by Commissioner (Exemptions) that assessee-trust was generating any unaccounted cash by any means, which had been allegedly transferred to donor in lieu of receiving donation. The doctrine of legitimate expectations demands that the assessee should be made privy to the tangible evidences in corroboration of statement sought to be relied upon. Similarly, the cross examination of deponent's statement is incumbent to prevent miscarriage of justice. Since there was no tangible material to the effect that assessee had received ingenuine donation, registration of charitable trust per se could not be withdrawn and cancelled and, thus, impugned cancellation order was set aside and issue was restored back to file of Commissioner (Exemptions)/Competent Authority.

• In the case of M/S SIDDHARTH ENTERPRISES THROUGH PARTNER MAHESH LILADHAR TIBDEWAL VERSUS THE NODAL OFFICER -  2019 (9) TMI 319 - GUJARAT HIGH COURT it has been held that the right to avail transitional credit a substantive right and cannot be allowed to be lapsed by application of Rule 117 of the CGST Rules, 2017 on failure to file necessary forms within due date prescribed therein. Such prescription in violation of Article 14 of Constitution of India. Denial of credit against doctrine of legitimate expectations.

• In a recent case of Hon’ble Gauhati High Court dated: 31.10.2022 in case of STAR CEMENT LTD., ASSAM ENTERPRISE LLP., ASSAM ROOFING LTD. AND OTHERS VERSUS UNION OF INDIA, SECRETARY TO THE GOVT OF INDIA, JOINT SECRETARY TO THE GOVT OF INDIA, THE UNDER SECRETARY TO THE GOVT OF INDIA, COMMISSIONER, CENTRAL GOODS AND SERVICE TAX, ASSTT COMMISSIONER, CENTRAL GOODS AND SERVICES TAX, CENTRAL BOARD OF EXCISE AND CUSTOMS AND OTHERS - 2022 (12) TMI 810 - GAUHATI HIGH COURT the doctrine of legitimate expectation was argued before the Hon’ble Court. In this case the notification dated: 05.10.2007 issued by the Ministry of Commerce & Industry, Department of Industrial Policy & Promotion framing Budgetary support under the GST regime was challenged on the ground of doctrine of legitimate expectations. It was argued that the UOI having made out a solemn representation in NEIIP, 2007, it is illegal and arbitrary to deprive the industrial unit from legitimate expectations and entitlement. The Hon’ble Court relying upon the judgment of Apex Court dated: 17.10.2022 in case of Hero Motorcorp Ltd. granted the liberty to the petitioner to approach their representations before GST Council and State Govt.

Limitations or Restrictions of this doctrine:

The doctrine of Legitimate Expectation is not of universal application under all circumstances. There are certain limitations on the operation of this doctrine. Over the years, several Courts rejected plea of Legitimate Expectations on different grounds. Let us try to understand those situations with some judicial precedents wherein this doctrine was not appreciated.

• In ‘UNION OF INDIA AND ANR. VERSUS INTERNATIONAL TRADING CO. - 2003 (5) TMI 480 - SUPREME COURT it was held that the applicability of doctrine is a question of fact and that for invoking the doctrine of legitimate expectation there has to be a foundation.

• In ‘Travel Agents Association of India V. Balmer Lawrie & Co and others’ –2013 (10) TMI 48 - Competition Appellate Tribunal the question raised with respect to the action of the Govt. to direct Govt. officials to purchase travel tickets/tour exclusively from Balmer Lawrie & Co. Limited and/or Ashok Travel & Tours Limited. The appellant alleged that this was in contravention of provision of Sec. 4 of the Competition Act. The appellant contended that the Government had acted in a most unreasonable manner in taking out the aforesaid Government Memorandum. The Government was expected to provide free and fair opportunities to all the players and adopt a fair and transparent system of procuring tickets and tours for the officials. The appellant justified the stand on the ground that if the private players were allowed in the sector, it would be definitely cost effective. The appellant thus invoked the doctrine of legitimate expectation. The Competition Appellate Tribunal held that the appellant has not made out any case whatsoever for invoking this doctrine. Merely because the Government is a purchaser of air tickets and every ticketing agency cannot have expectation much less legitimate expectation that the Government would deal with it. No foundation has been made in this case by the appellant. In fact, no particular ticket agency could claim any right in the matter of dealing with the Government. The Government like any other consumer has a right with the agency that it likes.

• Where there exist overriding considerations on grounds of public interest, the court would be justified in refusing relief though the doctrine is found applicable to the case and the applicant has been put to hardship on account of breach of the doctrine. Union of India v. Hindustan Development Corpn. AIR 1994 SC 980. Following this principle, courts in India have refused to give relief even in cases where the doctrine was applicable, on the ground that the security of the State was involved or that the doctrine cannot override legislative power or that public interest required that no relief be given to the complainant.

• It was laid down in PTR. EXPORTS (MADRAS) PVT. LTD. & ORS. VERSUS THE UNION OF INDIA & ORS. - 1996 (5) TMI 413 - SUPREME COURT that the doctrine of legitimate expectations has no role to play when the appropriate authority is empowered to take a decision under an executive policy or the law itself and that the Government is not restricted from evolving new policy on account of ‘legitimate expectations’ as and when required in public interest.

• It was reiterated in the case of BANNARI AMMAN SUGARS LTD. VERSUS COMMERCIAL TAX OFFICER AND OTHERS - 2004 (11) TMI 320 - SUPREME COURT that guarding legitimate expectation should not come at the cost of non-fulfillment of an overriding public interest, so to say that in case a legitimate expectation of a person is not fulfilled, the decision-making body can hide behind the veil of ‘overriding public interest’.

• As per the observations of the Supreme Court in ASSISTANT EXCISE COMMISSIONER VERSUS ISSAC PETER - 1994 (2) TMI 294 - SUPREME COURT, the doctrine of legitimate expectation cannot be invoked to modify or vary the express terms of contract, more so when they are statutory in nature.

• Similarly, in HOWRAH MUNICIPAL CORPN. & OTHERS VERSUS GANGES ROPE CO. LTD. & OTHERS - 2003 (12) TMI 634 - SUPREME COURT it has been held that no right can be claimed on the basis of legitimate expectation when it is contrary to statutory provisions which have been enforced in public interest.

• In Madras City Wine Merchants Association v. State of Tamil Nadu, the doctrine of legitimate expectation was held to become inoperative when there was a change in public policy or in public interest as has been reaffirmed in some of the aforementioned decisions.

• In SHRIJEE SALES CORPORATION VERSUS UNION OF INDIA - 1996 (12) TMI 61 - SUPREME COURT, it was observed that once public interest is accepted as the superior equity which can override individual equity the principle would be applicable even in cases where a period has been indicated for operation of the promise. If there is a supervening public equity, the Government would be allowed to change its stand and has the power to withdraw from representation made by it which induced persons to take certain steps which may have gone adverse to the interest of such persons on account of such withdrawal.

Legitimate Expectation under GST:

The doctrine of legitimate expectation can be applied in the matters related to ITC under the GST. Seamless credit was the promise made by the Govt. while implementing GST law. Had seamless flow of credit not been visualized as the pillar of GST, the purpose of GST would have been lost and there was no necessity to implement GST.

Let’s explore some probable situations under GST where this doctrine can be possibly argued to help the assessee.

1. ITC mismatch (GSTR-2A v. 3B) cases:

Presently, tax dept. is issuing mismatch notices in respect of ITC appearing in GSTR-2A (Auto populated as per Pt III Sr. No. 8A of GSTR-9) vis-à-vis ITC actually claimed in the GSTR-3B. In fact, despite satisfactory reply, dept. is confirming demand in many cases. The author is of the view that this doctrine can act as a savior for the assessee in such cases.

The Govt. has issued Press release on 03.07.2019 whereby it was made clear that taxpayers need not be concerned about the values reflected in this table. This is merely an information that the Government needs for settlement purposes. Further para 4 of the press release dated: 18.10.2018 already clarified that the facility to view the ITC in FORM GSTR-2A by the recipient is in the nature of taxpayer facilitation and does not impact the ability of the taxpayer to avail ITC on self-assessment basis in consonance with the provisions of section 16 of the Act. Thus, one can legitimately expect that GSTR-2A appearing in table 8A would not impact the actual claim of ITC. The press release issued by the Govt. is one sort of clarification of its intent or its promise to the stakeholder to not to disallow ITC merely due to non-reflection in GSTR-2A. Further officers of the dept. are well aware of the press releases and in fact it acts like instructions to them. Hence author is of the view that one can successfully argue case invoking this doctrine.

2. No recovery /reversal of ITC due to non-payment of tax by the suppliers:

In order to claim ITC, section 16(2)(c) of the CGST Act, 2017 stipulates that payment of tax on such supply has been actually paid by the supplier. But practically it is not possible for the recipient to verify whether the supplier has actually reported such supply and paid tax thereon. This is because the recipient has got limited access on the GST portal whereby, he can just know whether the supplier has filed its GSTR-3B return or not. Further we all know GSTR-3B return cannot be filed without payment of tax. Thus, it can be legitimately expected that once supplier has filed its GSTR-3B return he must have included all its supplies and paid the tax thereon.  So, the author is of the view that this doctrine can also be applied in such scenario. Moreover, one may also invoke ‘Doctrine of impossibility’ along with this doctrine to present a strong case.

3. Claim of ITC beyond the statutory timeliness u/s 16(4):

The Govt. vide section 16(4) of the CGST Act,2017 has fixed an upper time frame within which ITC can be taken. As per the amended section 16(4) no ITC shall be taken after the thirtieth day of November following the end of financial year or furnishing of the relevant annual return, whichever is earlier. Now, the dispute arising here is what will be the fate of ITC which was though taken or availed in the books of accounts well within time frame but GSTR-3B in respect thereof was filed beyond the time prescribed i.e post 30^th November.

The author here again is of the view that this doctrine may be useful. In this respect the author would place reliance on the legacy law of the Service Tax. As per rule 4 of the CENVAT credit rules 2004 the claim of input was never linked to the filing of return by the recipient. In other words, the recipient was entitled to claim input merely on the basis of recording transactions in its books of account within a period of 1 year from the date of invoice. Under GST law also the wordings used in section 16(4) is ‘entitled to take’ which does not necessarily mean that ITC can be claimed only by way of filing GSTR-3B. It may be taken based on the accounting entry recorded well within the time frame. So based on the past precedence one may legitimately expect that once input is recorded in the books of accounts within the time frame prescribed under section 16(4) then it becomes vested property of the assessee and one can legitimately expect to avail or utilize the same at a later point of time. At the same time, one may also argue that unlike GST there was no concept of electronic credit ledger under service tax law. Hence there was never a condition to file return for claim of ITC. But still author would stick to its view that credit under GST is not based on filing of return rather entries in the books of accounts within the prescribed time frame.

4. Mismatch /Difference in GSTR-1 v. GSTR-3B:

Presently, tax dept. is issuing notices on account of differences/excess liability reported in GSTR-1 vis-à-vis GSTR-3B. Further section 75(12) of the CGST Act, 2017 and explanation thereto empowers tax dept. to recover such self -assessed liability directly under section 79. As a result, the tax dept. is trying to recover self-assessed liability without issuance of SCN. But in view of the author the same is wrong and not in line with the doctrine of legitimate expectation. The principles of natural justice and procedural fairness is always expected in any quasi-judicial proceedings. If the opportunity is denied then it is violation of protections granted under article 14 of the constitution. The Govt. has finally realized the fact that difference in GSTR-1 vs. GSTR-3B may be on account of genuine mistakes etc. Accordingly, Govt. issued instructions no: 01/2022 dated:07.01.2022 allowing tax payers to explain such differences. The author is of the view that even if these instructions wasn’t issued then also one can argue such cases based on the doctrine of legitimate expectation.

5. Suspension of registration without affording opportunity:

The proper officer is empowered to suspend registration under rule 21A where he has reason to believe that the registration of a person is liable to be cancelled under section 29 and rule 21 of the CGST Rules,2017. Till 21.12.2020 the same was allowed after affording reasonable opportunity of being heard. But w.e.f. 22.12.2020 the Govt. vide notification 94/2020 – Central Tax dated: 22.12.2020 has omitted the opportunity of being heard in suspension of registration. Thus, he may now straightway suspend the registration without any notice/opportunity. Again, the author is of the view that in such cases doctrine of legitimate expectation may be applied. A reasonable opportunity of being heard is foundation of principles of natural justice and it is always expected even though not specified in the rule 21A. Thus, doctrine of legitimate expectation fits in such cases to get relief.

Conclusion:

The application of doctrine of legitimate expectations depends on the facts and circumstances of each case. There is no straight jacket formula or a thumb rule to apply this doctrine. No doubt this doctrine can be applied even where no specific rights are conferred under a statute but at the same time it must be kept in mind that public policy and public interest overweigh this doctrine. If a denial of legitimate expectation in a given case amounts to denial of right guaranteed or is arbitrary, discriminatory, unfair or biased, gross abuse of power or violation of principles of natural justice, the same can be questioned on the well-known grounds attracting Article 14 of the Constitution of India but claim based on mere legitimate expectation without anything more cannot 'ipso facto' give a right to invoke these principles. Hence this doctrine must be applied carefully after due consideration of all the facts and circumstances.

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By: CA Manoj Nahata, FCA, DISA (ICAI)

Guwahati

The author is a practicing Chartered Accountant at Guwahati and can be reached at: [email protected]