2023 (5) TMI 595 - SC - VAT and Sales Tax

Doctrine of legitimate expectation - exemption from payment of sales tax - Vested Rights - dissenting / Split judgment - Section 2(17) of the West Bengal Sales Tax Act, 1994 which came to be amended w.e.f. 01.08.2001 vide West Bengal Finance Act, 2001, omitting tea blending from the definition of manufacture . - legitimate expectation was created by the competent authority, which lured the appellants to act in a certain manner As per M. R. SHAH , J. HELD THAT - In the present case, prior to 2001, as per Section 2(17) of the Act, 1994, the activity of tea blending was included in the definition of manufacture . Therefore, being in the activity of tea blending , the appellants were entitled to the exemption from payment of sales tax as manufacturers. It cannot be disputed that being the manufacturer in the activity of tea blending the appellants would have always been entitled to the exemption from payment of sales tax. Being a manufacturer, being in the activity of tea blending , the appellants were availing the sales tax exemption. However, thereafter, the definition of manufacture as contained in Section 2(17) of the Act, 1994 came to be amended w.e.f. 01.08.2001 vide West Bengal Finance Act, 2001 and the activity of tea blending came to be excluded from the definition of manufacture . Consequently, the appellants ceased to be the manufacturers. Once the appellants ceased to be the manufacturers, the appellants shall not be entitled to the exemption from the payment of sales tax, which was available to the appellants as a manufacturer being in the activity of tea blending . Therefore, on and from 01.08.2001, tea blending activity ceased to be the manufacturing activity and the appellants ceased to be the manufacturers and therefore, on and from 01.08.2001, the appellants shall not be entitled to the exemption from payment of sales tax. The view taken by the learned Tribunal as well as the High Court agreed upon, that on and after 01.08.2001 and in view of the amendment to Section 2(17) of the Act, 1994, by which the definition of manufacture is amended and tea blending is excluded from the definition of manufacture , the appellants shall not be entitled to the exemption from payment of sales tax - appeal dismissed. As per KRISHNA MURARI, J. HELD THAT - The doctrine of legitimate expectation, in simple terms, is a legal principle that arises when a public authority makes a promise or acts in a manner that leads an individual or a group to expect a particular outcome. This doctrine , which flows from the doctrine of rule of law, is based on the idea of fairness and consistency in the decision-making processes of public authorities - When a legitimate expectation of a specific outcome is created by a public authority, the said public authority is required to take into account such expectation created by it when making a decision that affects the interests of the individual or group concerned. If the public authority fails to do so, the individual or group has a right to challenge the decision and seek a remedy, such as an order to enforce the legitimate expectation, as is the situation in the case at hand. The doctrine of legitimate expectation was elaborated upon in the case of FOOD CORPORATION OF INDIA VERSUS. KAMDHENU CATTLE FEED INDUSTRIES 1992 (11) TMI 275 - SUPREME COURT , wherein, this Court held that the duty of public authorities to act in a reasonable manner, entitles every person to have a legitimate expectation to be treated in such a reasonable manner. This legitimate expectation imposed on public authorities to act in a fair manner, as has been held, is imperative to ensure non-arbitrariness of state action. It was further held by this Court that while such a legitimate expectation might not by itself be an enforceable right, however, the failure to take into account such expectation may deem a decision of the public authority to be arbitrary. The doctrine of legitimate expectation finds its home within the doctrine of rule of law and is a limb of Article 14 that fights against the contamination of arbitrary state action and misuse of power - The doctrine of promissory estoppel and the doctrine of legitimate expectation, while they share a common root and a similar theme, by way of going through the rigours of common law, have developed into two distinct doctrines. The doctrine of promissory estoppel is a remedy in private law; however, the doctrine of legitimate expectation is a remedy in public law, and as stated above, is rooted in Article 14 of the Constitution of India. This legitimate expectation, created by the appropriate and competent authority, was broken when a subsequent amendment was brought in, wherein the words blending of tea was removed from the definition of manufacture . Such an amendment, by removing the said words, snatched away the legitimate expectation of a specific outcome, and ousted the appellants from claiming the tax holiday, to which they were promised by the original amendment. As can be seen, a reasonable legitimate expectation was created by the competent authority, which lured the appellants to act in a certain manner. Such a legitimate expectation was then snatched away, leaving the appellants without remedy, and in losses - In the present case at hand, while perusing through the subsequent amendment, it can be clearly seen that no such appropriate justification has been provided by the government. No appropriate reason for the enactment of the amendment, nor the considerations of the affected party have been discussed. A mere claim of change of policy is not sufficient to discharge the burden of proof vested in the government. The government must precisely show what the change of policy is, and why such a change of law is in furtherance of public policy, and the public good. It can be clearly seen that a legitimate expectation was created by the public authority, and such an expectation, accrued in the favour of the appellants herein, was rescinded by the said authority without any demonstration of public interest. No appropriate explanation has been provided as to why a shift was made in Law, and why such a shift, in spite of the loss which would occur to the appellants and similarly situated persons, was necessary to advance public interest. In such a circumstance, the legitimate expectation created in the minds of the appellants, must be protected, and the benefits given originally must be made applicable to the appellants herein for the period promised by the respondent authority. The Authority must be held accountable to the legitimate expectation created by it, and therefore, a direction is liable to be issued to the respondents herein to extend the benefits of the original amendment to the appellants herein, till the expiry of such a benefit as per the original amendment - Appeal allowed.

Summary

Issues Involved:
1. Whether the appellants are entitled to exemption from payment of sales tax despite the amendment to Section 2(17) of the West Bengal Sales Tax Act, 1994.
2. Whether the doctrine of legitimate expectation is applicable in the present case.

Summary:

Issue 1: Exemption from Payment of Sales Tax
The appellants argued that they were entitled to the exemption from payment of sales tax based on the definition of "manufacture" under the West Bengal Sales Tax Act, 1994, which included "blending of tea" before the amendment on 01.08.2001. They claimed this right could not be taken away by the amendment. The respondents contended that the appellants ceased to be manufacturers after the amendment, thus losing eligibility for the exemption. The Court held that exemption from sales tax is not a vested right but an existing right, which can be withdrawn by the State. The amendment to Section 2(17) excluded "blending of tea" from the definition of "manufacture," and thus, the appellants were no longer entitled to the exemption from 01.08.2001.

Issue 2: Doctrine of Legitimate Expectation
The appellants invoked the doctrine of legitimate expectation, arguing that they set up their industrial units based on the promise of a tax holiday and that this expectation was unfairly rescinded. The Court noted that legitimate expectation arises when a public authority makes a promise or acts in a manner that leads an individual to expect a particular outcome. However, the Court emphasized that public interest takes precedence over legitimate expectation. In this case, the respondents failed to demonstrate any public interest justifying the amendment. Consequently, the legitimate expectation created by the original amendment should be protected, and the benefits should be extended to the appellants for the promised period.

Conclusion:
The majority judgment dismissed the appeals, stating that the appellants were not entitled to the exemption from payment of sales tax post-amendment. However, Justice Krishna Murari dissented, holding that the legitimate expectation created by the original amendment should be honored, and the benefits should be extended to the appellants till the expiry of the promised period.