Sec 10AA - Whether a roadmap to guillotine tax exemption is not a condition precedent for Parliament to introduce sunset clause - NO: Karnataka HC

THE issues before the Bench are - Whether the action of Finance Minister to move a bill seeking amendment of the SEZ Act, which comes under the domain of Ministry of Commerce, lacks legislative competence; Whether it is a settled principle that there can be no permanent tax exemption or incentive in fiscal legislation; Whether a roadmap to end the tax exemption is not a condition precedent for the Parliament to introduce sunset clause; Whether Doctrine of Promissory estoppel and Legitimate expectation are the offsprings of equity and flexible in nature; Whether there is a difference between the doctrine of promissory estoppel and Doctrine
of Legitimate Expectancy and Whether the former is based on a legal relationship and constitutes a superior relief. And the verdict goes against the assessees.

Facts of the case

The assessees are Special Economic Zones ("SEZ") developers/co-developers/units and after having obtained necessary permissions and approvals under the Special Economic Zone Act ("SEZ Act") and Rules carrying on activities inside the SEZ. The SEZ Act was enacted in the year 2005 for attracting foreign and domestic investments for promoting export lead growth. Section 26 of the SEZ Act specifies certain concessions under the Customs Act, Customs Tariff Act, Central Excise Act, Central Excise Tariff Act, etc. Further, Section 27 of the SEZ Act specifies that provisions of Income Tax Act, 1961 to apply to SEZ units and developers subject to modifications specified in Schedule-II. As per section 10AA and 80-IAB of the Income Tax Act, 100% of the profit and gains was allowed as deduction derived by an unit engaged in export of articles from the SEZ and development of the SEZ, respectively. Further, vide Finance Act, 2011, Section 115JB and 115-0 of the Income Tax Act provided additional concessions to an SEZ unit and developer in the form of exemption against Minimum Alternate Tax ("MAT") and Dividend Distribution Tax ("DDT") w.e.f April 1, 2005.

In the year 2011, the Union Finance Minister moved the Union Budget for 2011-12 and the Finance Bill, 2011 was introduced. In terms of this Finance Bill, 2011 a proviso was inserted in Section 115 JB (6) and 115-O (6) of Income Tax Act in the Second Schedule to SEZ Act, which had put a sunset clause on the exemptions/concessions provided under these sections respectively. As per these amendments, the exemption of MAT as per section 115JB was supposed to cease w.e.f April 1, 2012. Regarding the exemption against DDT u/s 115-O, the same was to cease w.e.f from June 1, 2011. The assessee were severely aggrieved by these amendments introduced vide the Finance Bill, 2011 and consequently, they have filed these writ petitions before the High Court challenging the constitutionality of these amendments.

The main contention of the counsel of the assessees was that the the assessees had acted on the promises made under the provisions of SEZ Act, Rules and exemptions provided under various Acts including the Income Tax Act and had made huge investments in establishing the SEZ units. The assessees submitted that they had borrowed massive loans from various financial institutions and investment on land, buildings, infrastructure facilities etc, and the Government by withdrawing the said exemptions have acted in breach of the Doctrine of Promissory Estoppel. It is contended that when the assessees have made investments, they legitimately expected that the exemptions provided would be continued. Therefore, these amendments which were abrupt, arbitrary, unfair and was opposed to the Doctrine of Legitimate Expectation. It was also contended that the amendments were opposed to the very object of SEZ Act, and therefore, unconstitutional, beyond the power and authority and administrative competence of Ministry of Finance. The next contention of the counsel was that even sunset clause must be a road map to end the tax exemption and not an abrupt end. Finally, the Counsel contended that the amendment was contrary to Section 27 of the SEZ Act, as the Parliament amended Schedule-II to the SEZ Act.

The counsel also contended that as per the Government of India (Allocation of Business) Rules, all matter relating to development, operation and maintenance of special economic zones and units exclusively falls within the domain of Ministry of Commerce, Government of India and the amendments in the Schedule-II to the SEZ Act was beyond its legislative competency. Lastly, the counsel contended that the amendment was in violation of Article 14 of the Constitution.

On the other hand, the Departmental Representative contended that the legislative action of withdrawal of benefit under the fiscal policy of the State was not hit by Doctrine of Promissory Estoppel. It was also contended that the exemption granted to the assessees eroded the tax base and in the public interest the impugned amendments were brought and as such they were legal and valid.

Having heard the parties, the High Court held that,

Scope of judicial review

+ it is for the legislature to decide as to what laws they should enact. The task of the courts is to interpret the laws and to adjudicate about their validity. It is in this back ground the Supreme Court in State of A.P. vs. Mcdowell and Co. held that “a law made by the Parliament or the Legislature can be struck down by courts on two grounds and two grounds alone, viz., (1) lack of legislative competence and (2) violation of any of the fundamental rights guaranteed in Part-III of the Constitution or of any other constitutional provision. There is no third ground.” Further the Supreme Court in Government of A.P. vs. Smt. P.Lakshmidevi held that [“the constitutional courts do have the power to declare a law to be invalid. Invalidating a statute is a grave step and must therefore be taken in very rare and exceptional circumstances. The court must not invalidate a statute lightly, for invalidation of a statute made by the legislature elected by the people is a grave step....];

+ thus the scope of judicial review power of this court under Article 226 of the Constitution is subject to certain conditions. This power of judicial review is to be exercised very rarely and in exceptional circumstances. The courts can invalidate the law made by the legislature only when the legislature lacks the competency to do and the law enacted is violative of any of the constitutional provisions. It will be wholly unwise for the court to encroach into the domain of the executive or legislative in economic and social spheres since they are essentialy adhoc, experimental, extremely complicated and they are made under special situations. Keeping these principles in view, it is necessary to examine the fact situation in the present case;

Lack of legislative competency

+ I decline to accept this contention of counsel for the petitioners. Firstly, the Government of India (Allocation of Business) Rules relied on by the petitioners are not applicable to the proceedings and the business of parliament. These Rules are only applicable to the Government of India and not to the Parliament. The proceedings and the business of the parliament is governed by “Rules of Procedure and Conduct of Business in the Lok Sabha” (for short “Rules of Loksabha”). Chapter-I , Rule 2(1) of Rules of Loksabha defines “Finance Minister” includes any Minister. Further “Member incharge of the Bill” means the Member who has introduced the Bill and every Minister in the case of Government Bill. “Minister” means a member of the Council of Ministers and includes a member of the Cabinet, a Minister of State, a Deputy Minister or a Parliamentary Secretary. Further the Rules of Loksabha provides for Government bill and private members bill. A perusal of the Rules of Loksabha do not bar the Finance Minister from moving a bill for amendment to SEZ Act. On the other hand, a reading of the Rules specifies that Finance Minister includes any minister and as such he is competent to move a bill seeking amendment of SEZ Act which comes under the domain of Ministry of Commerce. Therefore, I decline to accept the contention of counsel for the petitioners that the impugned amendment to the SEZ Act suffers from lack of legislative competency;

+ The Supreme Court in Madurai District Central Cooperative Bank Ltd. vs. Third ITO held as under: [Once Parliament has the legislative competence to enact a law with respect to a certain subject-matter, the limits of that competence cannot be judged further by the form or manner in which that power is exercised. Though it would be unconventional for Parliament to amend a taxing statute by incorporating the amending provision in an Act of a different pith and substance, such a course would not be unconstitutional. In view of the law declared by the Supreme Court the Finance Minister by introducing the Finance Act before the Parliament has the legislative competence to amend the Income Tax Act or any matter relating to the tax in any other statute. Therefore, the impugned amendment to the SEZ Act passed by the parliament on the Finance Bill introduced by the Finance Minister is well within the legislative competency since the same relates to a charge in the Income Tax Act;

Amendment in violation of Article 14 of the Constitution

+ I decline to accept this contention of counsel for the petitioners. It is settled position of law that every tax exemption and incentive shall have a sunset clause. Every fiscal legislation providing for tax exemption must have a life span fixed in the enactment. In the instant case by introducing sub-section 6 to Section 115JB and sub-section 6 to Section 115O of Income Tax Act a permanent exemption was given to SEZ establishments/units. It is settled principle that there can be no permanent tax exemption or incentive in fiscal legislation. Realizing this lapse on the part of the Government the impugned provisos were introduced restricting the exemption only for a particular period. In the impugned amendment it is made clear that it is prospective in nature. Therefore the impugned amendments can neither be said unreasonable or arbitrary;

+ in the instant case, the exemption was provided in the SEZ Act in the year 2005. The petitioners enjoyed this benefit for a period of five years. The impugned amendments are shown in the Finance Bill and placed before the Parliament in the month of March 2011 for the years 2011-2012. The proposed amendments specify that the MAT will come to an end from 1st April, 2012 and tax on distribution of dividends will come to an end from 1st June 2011. Thus the impugned amendments are prospective in nature. The road map is not a condition precedent for the Parliament to introduce sunset clause. The Parliament has the sovereign legislative power to withdraw the tax exemption by way of legislative amendment;

+ while all other companies are made liable to pay MAT and tax on dividend distribution, the SEZ establishments and units were exempted though they are making profits. This situation has lead to discrimination amongst SEZ establishment/units and other companies. Realizing this discrimination among the companies the legislature in their wisdom brought the impugned amendments to remove the discrimination. Therefore, the impugned amendments are in accordance with Article 14 of the Constitution and not against it;

+ the SEZ Act is an outcome of Globalisation. The investment contribution by the SEZ units/establishments has lead to some development. The question is this development is for whose benefit and at what cost. The Government in assessing this aspect of the matter in its wisdom felt the necessity to withdraw the tax benefit and accordingly passed the impugned amendments. As held by the Supreme Court in Lakshmidevi’s case all decisions in the economic and social spheres are essentially adhoc and experimental. Since the economic matters are extremely complicated, this inevitably entails special treatment for special situations. The State must, therefore, be left with wide latitude in devising ways and means of fiscal or regulatory measures, and the courts should not unless compelled by the statute or by the Constitution, encroach into this field or invalidate such law;

Doctrine of Promissory Estoppel/Doctrine of Legitimate Expectation

+ the concept of Promissory Estoppel and Legitimate Expectancy are not defined in any law. These two concepts are fashioned by the courts while reviewing the administrative acts in the field of administrative law. The judicial pronouncements defines “Promissory Estoppel” means ‘where one party has by his words written or oral or by conduct made to other a clear and unequivocal promise which is intended to create legal relations or affect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so acted upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it, if it would be inequitable to allow him to do so.’ So also the judicial pronouncements defines “Legitimate expectation” means ‘an expectation of a person from a representation or promise made by an administrative authority including an implied representation or from consistent past practice that he will be treated in certain way even though he has no legal right in private law to receive such treatment.';

+ the Doctrine of Promissory estoppel and Legitimate expectation are the offsprings of equity and they are flexible in nature. These Doctrines are evolved by the courts to avoid injustice to a party. The distinction between these two concepts/principles/doctrines is very narrow. The relief of promissory estoppel springs out of legal relationship. On the other hand, the Doctrine of Legitimate Expectancy is not based on any legal right but on reasonable expectation. Therefore, the relief of Legitimate Expectation is far below the promissory estoppel. In the instant case the petitioners are seeking relief on the Doctrine of Promissory Estoppel, a superior relief based on statutory promise made under sub-section 6 of Section 115JB and sub-section 6 of Section 115O of Income Tax Act. When petitioners are claiming relief under the Doctrine of Promissory Estoppel then it is not necessary for this Court to consider the doctrine of legitimate expectation;

+ as already stated the Doctrine of Promissory Estoppel is an offspring of equity and the same is flexible in nature. It is necessary to notice the law laid down by the Apex Court while considering the scope of Promissory Estoppel;

+ from the above referred decisions it is manifest that the legislature can never be precluded from exercising its legislative power by resort to the Doctrine of Promissory Estoppel. Since it is an equitable doctrine, it must yield when equity so requires. The courts would decline to enforce this doctrine if it results in great hardship to government and would be prejudicial to the public interest. Keeping these principles in mind it is necessary to examine the fact situation in the instant case;

Concluding Paragraph

+ it is not in dispute that by inserting sub-section 6 to Section 115JB and Section 115O of the Income Tax Act the petitioners are exempted from paying minimum alternate tax and tax on distribution of dividends. By introducing the impugned provisos in the second schedule to SEZ Act the benefit extended is now withdrawn. In the circumstances, the petitioners are claiming relief on the basis of Doctrine of Promissory Estoppel. It is settled position of law that this doctrine must yield when the equity so requires. Firstly the exemption provided do not have a sunset clause and now under the impugned amendment this flaw in the law is removed. Secondly, the inequality between SEZ companies and other companies is removed. Thirdly, the exemptions provided to SEZ companies resulted in erosion of tax base. Respondents in their statement of objections stated that they have foregone revenue from SEZ units to the tune of Rs.692 crores in 2006-07, Rs.2710 crores in 2007-08, Rs.4099 crores in 2008-09 and Rs.4990 crores in 2009-10. Fourthly, the impugned amendment relates to fiscal policy of the state and any decision in the economic sphere is adhoc and experimental in its nature and therefore the Government is well within it sovereign power to regulate the same. Lastly the impugned amendments do not transgress any of the fundamental rights of the petitioners guaranteed under the Constitution. Therefore, I hold that Doctrine of Promissory Estoppel cannot be made applicable to nullify the impugned amendments. Accordingly these two points 3 and 4 are held in negative.