Supreme Court delivers split verdict on doctrine of legitimate expectation in tax exemption case

On Friday, the Supreme Court delivered a split verdict on the issue of whether amendments to tax exemption statutes can be challenged based on the doctrine of legitimate expectation. 

The doctrine states that an entity may have a legitimate expectation of being treated in a certain way by administrative authorities even though there is no such legal right.

The top court was hearing appeals against a Calcutta High Court order that had upheld the removal of exemption of the petitioners from sales tax payments based on a 1994 act that was amended by the 2001 West Bengal Finance Act. As a result of the latter, the appellants were denied benefits of the tax exemption that they had enjoyed for two years.

Justice Krishna Murari opined that the doctrine would apply when industrial units are set up with the allurement of tax exemption for a specific period. He noted that no appropriate explanation had 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. Thus, 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.

Justice MR Shah, however, held that the same does not apply against statutes. He argued that the moment the amendment excluded tea-blending from the definition of manufacturing (which was eligible for sales tax exemption), the appellants right to any benefit had ceased. He further noted that nobody can claim the exemption as a matter of right and the exemption is always on the fulfilment of the conditions for availing the exemption and the same can be withdrawn by the State.

Justice Murari countered that if a blanket bar of the doctrine of legitimate expectation against a statute is to be allowed, no domestic or foreign investor would ever invest in local business and ventures, as any legitimate expectation by way of a statute would translate only to a façade, as such a benefit could be snatched away arbitrarily at any point in time. This would cause great havoc and only cause detriment to the rights of individuals and the society at large.

He explained that the doctrine is a limb of Article 14, which ‘fights against the contamination of arbitrary state action and misuse of power’. Further, the bar on invoking the doctrine must be removed where public interest is involved, since the doctrine itself rests on the ‘touchstone’ of public interest. To justify shifts in policy in public interest, and ‘snatch away the legitimate expectation created in favour of the appellants’, authorities have to demonstrate reasons, it was stressed.

In the present case, the same was not done, and the appellants deserve the exemptions as was specified in 1994, Justice Murari opined. He concluded that for a democratic state to function on the principles of equality and justice, the state must be ruled, not by its ruler, but by the law. To prevent such a contamination of the rule of law, the application of the doctrine of legitimate expectation becomes most important.