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TMI Blog2023 (10) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... xports Ltd. was incorporated on 7th September, 2007, which established its unit on May, 2012, at Kandla Special Economic Zone, Gujarat, for manufacture of specialized refractories and commenced operations from May, 2012 and IFGL Exports Ltd. allegedly became eligible for claiming exemption under Section 10AA of the Income Tax Act, 1961, from the Assessment Year 2013-14 onwards. Letter of approval was issued by the Development Commissioner, Kandla Speical Economic Zone to IFGL Exports Ltd. 7th November, 2007, for extending all the facilities and entitlements admissible to its unit established at Kandla Special Economic Zone, Gujarat, subject to the provisions of the Special Economic Zones Act, 2005. Letters of approval were issued from time to time by the Development Commissioner, Kandla Special Economic Zone to IFGL Exports Ltd. for extending the validity of the approval granted by letter dated 07.11.2007, to its unit established in new area of Kandla Special Economic Zone, Gujarat. Effective date of amalgamation of the petitioner/IFGL Refractories Ltd. with IFGL Exports Ltd. pursuant to sanction Scheme of Amalgamation by the National Company Law Tribunal, Kolkata, is 1st April, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act, i.e. without first doing any inter unit profit/loss adjustments or set off of brought forward losses and the stage of claiming exemption while computing the gross total income of the eligible undertaking under Chapter IV of the Income Tax Act, 1961, i.e. in conformity with the settled law as laid by the Hon'ble Supreme Court in the cases of Yokogawa (supra). However, the Finance Act, 2017, inserted the following Explanation after Section 10AA(1) of the Income Tax Act, 1961, w.e.f. 01.04.2018, is as follows: "Explanation .- For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this Section and the deduction under this Section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this Section and the deduction under this Section shall not exceed such total income of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is added as an Explanation. An Explanation appended to a section or a sub-section becomes an integral part of it and it has no independent existence apart from it. The purpose of an Explanation is not to limit the scope of the main section and it cannot override what the main Section provides. Therefore, the Explanation inserted to Section 10AA(1) of the Income Tax Act, 1961, w.e.f 01.04.2018, cannot override what Section 10AA(1) of the Income Tax Act, 1961 provides for and cannot limit the scope of section 10AA(1) of the Income Tax Act, 1961. The said Explanation has to be read along with Section 10AA(1) of the Income Tax Act, 1961 and has no independent existence of its own. Petitioner submits that the Explanation inserted to Section 10AA(1) of the Income Tax Act, 1961 denies the benefit otherwise available as per Section 10AA(1) of the Income Tax Act, 1961 and is thus nugatory as the whole purpose of giving tax incentive to eligible units situated in special economic zones as per Section 10AA of the Income Tax Act, 1961 stands defeated and frustrated by the said Explanation introduced by the Finance Act, 2017. An Explanation cannot override the main Section and take away or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutes, the law laid down is clear that it can be said to be a breach only when there is perversity or gross disparity resulting in clear and hostile discrimination without any rational justification for the same, as laid down in State of Himachal Pradesh -vs- Goel Bus Services, reported at 2023 SCC OnLine SC 46, (paragraphs 27-30). Respondent submits that in the instant case, there was no such hostile discrimination or perversity in the impugned legislation. Consequent to the interpretation of Section 10A of the Act, in Commissioner of Income Tax -vs- Yokogawa India Ltd., reported at [2017] 391 ITR 274 (SC), there was a possibility of vagueness in interpretation of the dominant object of Section 10AA of the Act, and to remove such vagueness, the legislature deemed it fit to insert the Explanation to Sub Section (1) of Section 10AA of the Act. This was done in order to suppress the mischief in interpreting the Section 10AA of the Act as has been done by the assessee herein, and such clarification was for the purpose of interpreting the aforesaid section in the way the legislature had always intended it to be. The legislature in its wisdom refrained from making the explanation r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd./petitioner. The new entity had 2 units, one eligible unit in Kandla SEZ, Gujarat, and one ineligible unit in Kalunga Industrial Estate, Odisha. Respondents submit that the ineligible unit was brought in solely to take advantage of its loss-making status. The assessee/petitioner through deliberate misinterpretation of Section 10AA of the Act would add the losses from the ineligible unit and bring down the total taxable income, and then take deduction under Section 10AA of the Act to further reduce taxable income. This sort of tax evasion was not the intended object behind the provision. The legislature had to bring in the Explanation to Section 10AA of the Act to prevent such tax evasion and to specify that the deduction was available only on the total profits of the 2 units combined, and not only the profit-making unit. Respondents submit that the intention of the legislature in inserting the Explanation to Section 10AA of the Act is evident from paragraph numbers 15.2 and 15.3 of the CBDT Circular No. 3 of 2008, dated 12th March, 2008, in [2008] 299 ITR, which specifies that the deduction under Section 10AA of the Act was being provided to incentivise new industry and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arbitrary or perverse. Respondents submit that in paragraph 73 of judgment in KB Tea (supra), it has been held in point VII that the expectation sought to be protected by judicial review must be based on a legitimate interest. In paragraph 44 of Sivanandan (supra), it has been held that the individual who claims the violation of legitimate expectation must establish the legitimacy of the expectation first. Here, there is no legitimate expectation on the part of the assessee, since its sole motive of challenging the Explanation inserted is to continue evading tax by deliberately misinterpreting the scope of Section 10AA of the Act. It has been held in Sivanandan (supra) at paragraph 36 therein, that legitimate expectation cannot hinder the power of a public authority in its policy making role, which forms the basis of the law making functions of the legislature. The legislature has to take into consideration diverse factors, concerns and interest before making any policy decision or legislation. This has also been the opinion of the Hon'ble Apex Court in Indian Ex-Servicemen Movement -vs- Union of India, reported at (2022) 7 SCC 323, specifically paragraph 68 therein. Responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d proved that such taxing statute is manifestly unjust or glaringly unconstitutional. Taxing statutes cannot be placed or tested or viewed on the same principles as laws affecting civil rights such as freedom of speech, religion, etc. The test of taxing statutes would be viewed on more stringent tests and the law makers should be given greater latitude. It would be useful to refer to a couple of judgments on the above proposition. 28. In the case of R.K. Garg etc. vs. Union of India and others, (1981) 4 SCC 675, the Constitution Bench was judging the constitutionality of economic legislation wherein challenge was to the validity of the provisions of Special Bearer Bonds (Immunities and Exemption Act, 1981) on the grounds of discrimination and violation of Article 14. P.N. Bhagwati J., speaking for himself, Chief Justice Chandrachud, A.C. Gupta, S. Murtaza Fazal Ali and A.N. Sen, J.J., observed in paragraph 7 regarding the presumption in favour of constitutionality of the statute and that the burden is on the person who attacks it, to establish that there has been clear transgression of the constitutional principles. In paragraph 8, it was laid down that laws relating to economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Kerala & Ors being Writ Petition (Civil) No. 229 of 2017 reported in 2023 INSC 709 which are quoted hereunder: "36. The doctrine of legitimate expectation does not impede or hinder the power of the public authorities to lay down a policy or withdraw it. The public authority has the discretion to exercise the full range of choices available within its executive power. The public authority often has to take into consideration diverse factors, concerns, and interests before arriving at a particular policy decision. The courts are generally cautious in interfering with a bona fide decision of public authorities which denies a legitimate expectation provided such a decision is taken in the larger public interest. Thus, public interest serves as a limitation on the application of the doctrine of legitimate expectation. Courts have to determine whether the public interest is compelling and sufficient to outweigh the legitimate expectation of the claimant. While performing a balancing exercise, courts have to often grapple with the issues of burden and standard of proof required to dislodge the claim of legitimate expectation." "44. From the above discussion, it is evident that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to explore the doctrine in this case, it is enough merely to note that a legitimate expectation can provide a sufficient interest to enable one who cannot point to the existence of a substantive right to obtain the leave of the court to apply for judicial review. It is generally agreed that 'legitimate expectation' gives the applicant sufficient locus standi for judicial review and that the doctrine of legitimate expectation to be confined mostly to right of a fair hearing before a decision which results in negativing a promise or withdrawing an undertaking is taken. The doctrine does not give scope to claim relief straightway from the administrative authorities as no crystallized right as such is involved. The protection of such legitimate expectation does not require the fulfillment of the expectation where an overriding public interest requires otherwise. In other words, where a person's legitimate expectation is not fulfilled by taking a particular decision then the decision maker should justify the denial of such expectation by showing some overriding public interest. (See Union of India and Ors. v. Hindustan Development Corporation and Ors. (AIR 1994 SC 988). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise of its legislative functions. 69. Undisputedly, the Notification dated 18th July 2017 withdrawing the exemption notifications was issued in pursuance of the statutory mandate as provided under Section 174(2)(c) of the CGST Act. If the contention as raised by the appellants is to be accepted, it would make the provisions under the proviso to Section 174(2)(c) of the CGST Act redundant and otiose. The legislature in its wisdom has specifically incorporated the proviso to Section 174(2)(c) providing therein that any tax exemption granted as an incentive against investment through a notification shall not continue as privilege if the said notification is rescinded. If the contention is accepted, it will amount to enforcing a representation made in the said O.M. of 2003 and 2003 Notification contrary to the legislative incorporation in the proviso to Section 174(2)(c) of the CGST Act. In other words, it will permit an estoppel to be operated against the legislative functions of the Parliament. We are, therefore, of the considered view that the claim of the appellants on estoppel is without merit and deserves to be rejected. 70. It is further to be noted that this Court has also c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivity is excluded from the definition of "manufacture" and therefore, on and from that day itself, the appellants ceased to be the manufacturers and shall not be entitled to the benefit of exemption from payment of sales tax as was available to them as manufacturers." Respondents have relied on the relevant paragraph no. 17 of the judgment in the case of Sedco Forex International Drill. Inc. & Ors. -Vs- Commissioner of Income Tax, Dehradun & Anr. reported in (2005) 12 Supreme Court Cases 717 which is quoted hereunder: "17. As was affirmed by this Court in Goslino Mario (supra), a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. [See also Reliance Jute and Industries vs. CIT ]. An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force. But if it changes the law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to the law in force. The legislature also is incompetent to overrule the decision of a Court without properly removing the base on which the judgment is founded." "56. From a resume of the above decisions the following principles would emerge: [1] The adjudication of the rights of the parties is the essential judicial function. Legislature has to lay down the norms of conduct or rules which will govern the parties and the transaction and require the court to give effect to them; [2] The Constitution delineated delicate balance in the exercise of the sovereign power by the Legislature, Executive and Judiciary; [3] In a democracy governed by rule of law, the Legislature exercises the power under Articles 245 and 246 and other companion Articles read with the entries in the respective Lists in the Seventh Schedule to make the law which includes power to amend the law. [4] Courts in their concern and endeavor to preserve judicial power equally must be guarded to maintain the delicate balance devised by the Constitution between the three sovereign functionaries. In order that rule of law permeates to fulfil constitutional objectives of establishing an egalitarian so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the declaration by the court or the direction given for recovery thereof. [9] The consistent thread that runs through all the decisions of this Court is that the legislature cannot directly overrule the decision or make a direction as not binding on it but has power to make the decision ineffective by removing the base on which the decision was rendered, consistent with the law of the Constitution and the legislature must have competence to do the same." Considering the facts and circumstances of the case, relevant provisions of law, submission of the parties and judgment cited by them, I am of the considered opinion that principle of legitimate expectation is not applicable to the case of the petitioner and Explanation after Sub-section (1) of Section 10AA of the Income Tax Act, 1961, inserted by amendment with prospective from 1st April, 2018, applicable in respect of the assessment year 2018-19 and subsequent years is constitutional and is a valid piece of legislation and is not arbitrary, discriminatory and is not violative of Articles 14, 19 & 265 of the Constitution of India. Accordingly the Writ Petition being WPO No. 544 of 2019 is dismissed. No order as to costs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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