The
Karnataka High Court (“High Court”) has rendered a significant ruling in the
case of MindTree Limited and Others (“Petitioners”) wherein important
principles on judicial review by constitutional courts and the applicability of
Doctrine of Promissory Estoppel to legislature and statutes have been
articulated. The High Court confirmed the validity of the legislative amendments
made to withdraw tax exemptions in this ruling which was pronounced in respect
of a writ petition filed by various stakeholders of Special Economic Zones
(“SEZ”) against the abrupt withdrawal of exemption from Minimum Alternate Tax[1] (“MAT”) and Dividend Distribution
Tax[2] (“DDT”) on their
profits.
We have
summarized the key aspects of the decision in relation to the above issue.
Reason
for filing the writ petition
Upon enactment of the
Special Economic Zones Act, 2005 (“SEZ Act”) corresponding provisions were
introduced in the Income-tax Act, 1961 (”IT Act”) to provide complete tax
exemption on the profits earned by units located in SEZs and developers of SEZs
by way of newly introduced tax holiday sections (section 10AA and section 80-IAB
respectively) and specifically excluding SEZ units and developers of SEZ from
the purview of MAT under section 115JB of the IT Act. Profit distributions by
SEZ developers were also specially exempted from the purview of DDT under
section 115-O of the IT Act.
However, by insertion
of proviso to section 115JB(6) and 115-O(6) vide Finance Act 2011, the
exemptions from MAT and DDT were withdrawn respectively. Stakeholders of SEZ
comprising of units, developers and co-developers had committed huge capital
outlays for setting up SEZ infrastructure with the belief that there would be no
tax costs, at least in the near term. Aggrieved by the abrupt withdrawal of the
exemptions, the Petitioners (being SEZ developers/co developers /units) filed a
writ petition to challenge the constitutional validity of such amendment by
relying on the Doctrine of Promissory
Estoppel and Doctrine of Legitimate
Expectation.
Petitioner’s
contentions
·
The Petitioners, by
acting on the provisions of the SEZ Act and exemptions provided under various
Acts including the IT Act, committed huge investments in establishing SEZs / SEZ
units. The investments which were made by borrowing substantial loans from banks
and financial institutions were with the belief and expectation that their
profits would not be subject to income-tax. The abrupt and arbitrary withdrawal
of the MAT and DDT was a breach of an express promise made by the legislature
and such amendment is opposed to the Doctrine of Promissory Estoppel.
·
Amendments were
introduced abruptly and to the detriment of petitioners and as such the same
opposed to Doctrine of Legitimate Expectation. A sunset clause must be a
road map to end any tax exemption instead of arbitrarily ending the
same;
·
The impugned
amendments are opposed to the very object of SEZ Act are unconstitutional and
beyond the power and authority and administrative competence of Ministry of
Finance since matters relating to development, operation and maintenance of SEZs
were to be dealt by Ministry of Commerce. Further, it was contended that the
amendment to the IT Act proposed by the Finance Minister also resulted in the
amendment of Schedule –II of the SEZ Act (Schedule – II which is a part of the
SEZ Act contains the modifications to the provisions of IT Act which would apply
to SEZ developers and SEZ units) which was illegal and without authority of law.
Contentions of the
Respondent
·
The exemptions
provided under section 115JB and 115-O of the IT Act did not contain any sunset
provisions and as such the impugned amendments are in accordance with law.
·
It was contended that
withdrawal of benefit under the fiscal policy was a legislative action and hence
not hit by the Doctrine of Promissory Estoppel.
·
It was also argued
that the respondent that exemptions granted to petitioners eroded the tax base
and accordingly the disputed amendments were introduced in public interest and
hence they are valid.
Decision of the High
Court
The High Court dealt
with the matter in question by first examining the scope of judicial review
entrusted with the courts by virtue of Article 226 of the Constitution of India
(“Constitution”). The High Court stated that such power is to be exercised very
rarely and in exceptional circumstances only. Further, the High Court
deliberated upon the validity of the amendments in light of Article 14 of the
Constitution[3] and upheld the
validity of the amendments.
The significant
aspects of the High Court’s judgment are captured in the following
paragraphs:
·
On the scope of
judicial review, relying on the various decisions of the Apex court, the High
Court held that the Courts can invalidate the law made by the legislature only
when the legislature lacks competency to do so or when the law enacted is
violative of any constitutional provisions. In exercising the powers of
judicial review, the courts do not and cannot go into the question of wisdom
behind legislative measure. Further, it would be unwise for the Court to
interfere into a domain of economic or social spheres since they are essentially
experimental and complicated situations;
·
On the legislative
competency aspect, the High Court held that the Rules of Loksabha do not bar the
Finance Minister from moving a bill for an amendment to the SEZ Act though it
comes under the domain of the Ministry of Commerce. Further, placing reliance
on the decision of the Apex court in the case of Madurai District Central
Co-operative Bank Ltd Vs Third ITO4 , the High Court further held that the
finance Minister by introducing the Finance Act before the parliament has
legislative competence to amend IT act or any other matter relating to the tax
in any other statute.
·
In respect of abrupt
withdrawal being unfair, the High Court stated that as a settled principle,
there are no permanent tax exemptions or fiscal incentives in law and
accordingly, the withdrawal of such exemption was required to cover the lapse in
the current law. It also stated that setting a road map for the tax incentives
is not a condition precedent for the Parliament to introduce a sunset clause.
Also, the parliament has sovereign legislative power to withdraw tax exemption
by way of legislative amendment and does not have to introduce a sunset clause.
·
Examining Article 14
of the Constitution dealing with principles of equity, the High Court observed
that while all other Companies were subject to MAT and DDT, SEZ establishments
were exempted and as such this lead to a discrimination in treatment of the
companies. Accordingly, the amendments were in line with Article 14 and not
against it.
·
Further, the High
Court stated that the Doctrine of Promissory Estoppel and Legitimate
Expectation were concepts evolved by courts to avoid injustice to a party.
The High Court held that seeking relief under Doctrine of Promissory
Estoppel was a superior relief than Doctrine of Legitimate
Expectation and thus only the former was being discussed. In this regard,
relying on the Supreme Courts’ rulings in Motilal Pasampat Sugar Mills Co Ltd
Vs State of Uttar Pradesh and Union of India vs Godfrey Philips India Ltd it
in which it was held that there can be no promissory estoppel against the
legislature in the exercise of its legislative functions nor can the Government
or any public authority be debarred by promissory estoppel from enforcing a
statutory prohibition. The High Court concluded that courts would decline to
enforce this Doctrine if it results in great hardship to the government and
would be prejudicial to public interest.
·
Further, the High
Court negated the arguments on the applicability of the Doctrine of
Promissory Estoppel by stating that the amendments were in fact yielding to
equity in the instant case on account of the following:
-
The lack of the sunset
clause was a flaw in the law and the same has been
removed;
-
Inequality between SEZ
participants and other assesses has been removed;
-
Exemptions were
eroding the tax and the same have now been removed;
-
Fiscal policy of the
state and any decision in the economic sphere is within the Government’s
prerogative; and
-
The amendments have
not transgressed the Petitioner’s fundamental rights which have been guaranteed
by the Constitution
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