M/S. K.B. TEA PRODUCT PVT. LTD. & ANR. versus COMMERCIAL TAX OFFICER, SILIGURI & ORS. on 12 May 2023

1. Feeling aggrieved and dissatisfied with the impugned judgmentand order passed by the High Court of Calcutta at Calcutta in respectivewrit petitions by which the Division Bench of the High Court hasdismissed the said writ petitions preferred by the appellants herein –original writ petitioners, the original writ petitioners have preferred thepresent appeals.

2. As common question of law and facts arise in this set of appeals,all these appeals are being decided and disposed of together by thiscommon judgment and order. For the sake of convenience, Civil AppealNo. 2297 of 2011 arising out of impugned judgment and order passed bythe High Court in Writ Petition No. 479 of 2006 be treated as the leadmatter. The facts leading to the present appeal in nutshell are as under:- 2.1 That Section 2(dd) of the erstwhile Bengal Finance (SalesTax) Act, 1941 (hereinafter referred to as “Act, 1941”) defined the term“manufacture” and “blending of any goods” was included within thesaid definition. That the Act, 1941 came to be replaced by the WestBengal Sales Tax Act, 1994 (hereinafter referred to as the “Act, 1994”)and in the month of April, 1998, the definition of “manufacture” providedunder section 2(17) of the Act, 1994 was amended and as a result ofwhich, “blending of any goods” was omitted from the definition of“manufacture” but “blending of tea” continued to be included in the saiddefinition.

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A2.2 By virtue of the amendment made in the definition of“manufacture” provided under section 2(17) of the Act, 1994, tax holidaywas granted to new small scale industrial units for a specified periodunder section 39 of the Act, 1994 read with section 17(3)(a)(xi) of theAct, 1994 with Rule 52 of the West Bengal Sales Tax Rules, 1995(hereinafter referred to as “Rules, 1995”).B

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2.3 Subsequently, the State Scheme of Incentives for Cottageand Small-Scale Industries, 1993 (1993 Scheme) was amended by theGovernor of West Bengal in the year 1999, thereby, implementing theWest Bengal Incentive Scheme, 1999 (hereinafter referred to as “1999Scheme”), effective for a period of five years, i.e., from 01.04.1999 tillC31.03.2004, for the purpose of providing incentives and promotion of thelarge, medium and small-scale industrial units in the State of West Bengal.

2.4 As per the provisions of the 1999 Scheme, the new industrialunits which were established after complying with all the requirementsprovided under the 1999 Scheme were given an exemption from paymentDof sales tax for a specified period upon the purchase of raw materialsrequired for carrying the manufacturing activity in said units.

2.5 It is the case on behalf of the appellants that relying upon thesaid Scheme and the amendment made in the definition of “manufacture”under section 2(17) of the Act, 1994, at the relevant time, the appellantsEhad set up a new small scale industrial unit for the purpose of carryingon the business of manufacturing blended tea.

2.6 As per the provisions of the 1999 Scheme, the small-scaleindustrial units to claim exemption from payment of sales tax, wererequired to get themselves registered as small-scale industrial unit andFobtain an eligibility certificate from the Sales Tax Department as perSection 39 read with Rule 55 of the Rules, 1995. The DeputyCommissioner granted the eligibility certificate to the appellants for aperiod of seven years from the date of first sale of the manufacturedproduct. The appellants enjoyed the benefit of exemption from paymentGof sales tax as provided under Section 2(17) and Section 39 of the Act,1994 for a period of two years till Section 2(17) came to be amended bythe West Bengal Finance Act, 2001. Section 2(17) of the Act, 1994came to be amended by the West Bengal Finance Act, 2001 w.e.f.01.08.2001, whereby the words “blending of tea” were omitted from thedefinition of “manufacture” provided under section 2(17) of the Act,1994.HConsequently, the exemption from payment of sales tax, which was granted to the appellants came to be stopped and even the eligibilitycertificate was required to be modified.

2.7 The aforesaid action / order was challenged before the Tribunalfirst and thereafter before the High Court. The Tribunal dismissed theapplication, which has been confirmed by the High Court by the impugnedjudgment and order. The impugned judgment and order passed by theHigh Court is the subject matter of present appeals, claiming theexemption from payment of sale tax as per earlier 1999 Scheme.

3. Ms. Kavita Jha, learned counsel has appeared on behalf of theappellants and Ms. Madhumita Bhattacharjee, learned counsel hasappeared on behalf of the respondents - State.

4. Learned counsel appearing on behalf of the appellants had madethe following submissions:- 4.1 That the appellants had been allured by the State of WestBengal Government to set up new industrial unit in expectation of gettingbenefit of tax for a period on fulfilment of certain requirements and onceon the basis of such requirements such industrial unit is given such benefit,subsequently, by way of amendment such right cannot be taken away.

4.2 That the State authority has in a blanket manner simplyremoved the word “blending of tea” from the definition of “manufacture”under Section 2(17) of the Act, 1994 without taking into account the factthat the appellants had received eligibility certificate for a period of sevenyears and had already availed the benefit of the scheme for a particularperiod. The appellants’ rights were crystalised from the day eligibilitycertificate had been granted under the Act, 1994 and the only justifiablemanner in which the State could have rescinded this benefit was toshow overarching public interest. In the present case as well, nooverarching public interest has been demonstrated by the respondents inorder to justify the amendment made to Section 2(17).

4.3 That the doctrine of legitimate expectation can be invokedwhere the amendment under the provision of law is not made inconsonance with public interest. It is submitted that in the present case,the respondents have failed to showcase any public interest in rescindingthe benefits.

4.4 It is submitted that since in this case, the appellants weredenied benefit on account of amendment made in the definition of A

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A“manufacture” under Section 2(17) of the Act, 1994 which is an arbitrarymove by the State without showing any accompanying public interestinvolved. Therefore, any decision taken in an arbitrary manner contradictsthe principle of legitimate expectation, if taken without specifically showingthe public interest involved in the matter.

4.5 It is submitted that the State action in this case, fails to meetthe test of reason and relevance, as no explanation has been given bythe State for rescinding the benefits.

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4.6 It is further submitted that the appellants had altered theirposition to avail the benefit under the Scheme and incurred additionalCcost such of almost Rs. 18,12,967/- and procured loan for almost Rs.65,00,000/- in the K.B. Tea Products Pvt. Ltd. and since, the appellantshad made substantial expenses for availing the benefits under the Scheme,the State cannot take away such benefits unless some overriding publicinterest is involved. The said act done by the State is unfair and abuse ofpower against the appellants. Reliance is placed on the following decisions:D

Manuelsons Hotels Private Limited Vs. State of Kerala &Ors., (2016) 6 SCC 766; MRF Ltd., Kottayam Vs. AssistantCommissioner (Assessment) Sales Tax & Ors., (2006) 8SCC 702 and Motilal Padampat Sugar Mills Co. Ltd. Vs.State of Uttar Pradesh & Ors., (1979) 2 SCC 409.

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4.7 Learned counsel appearing on behalf of the appellants hasalso relied upon the decision of this Court in the case of State ofJharkhand & Ors. Vs. Brahmputra Metallics Ltd., Ranchi & Anr.[Civil Appeal Nos. 3860-3862 of 2020] and in the case of Dai-ichiKarkaria Ltd. Vs. Union of India & Ors., (2000) 4 SCC 57 inFsupport of the submission on the legitimate expectation.

4.8 Making above submissions and relying upon the abovedecisions, it is prayed to allow the present appeals.

5. Learned counsel appearing on behalf of the State while opposingthe present appeals has vehemently submitted that in the facts andGcircumstances of the case, the appellants shall not be entitled to theexemption as claimed.

5.1 It is submitted that in the year 1999, the appellants were granteda certificate of eligibility for Tax Holiday under Section 39 of the Act,1994 for a period of seven years from the date of first sale of theH

manufactured product, i.e., 18.05.1999, since at that point of time thedefinition of “manufacture” in Section 2(17) of the Act, 1994 included‘blending of tea’.

5.2 It is submitted that subsequently, the definition of “manufacture”under Section 2(17) of the Act, 1994 came to be amended by the WestBengal Finance Act, 2001 and “blending of tea” came to be omittedfrom the definition w.e.f. 01.08.2001. It is submitted that therefore, theappellant company ceased to be a manufacturer under the Act, 1994and, therefore, was ineligible to avail the benefit under Section 39 of theAct, 1994. It is submitted that therefore, the Commercial Tax Officer,Siliguri Charge sought to amend the Registration Certificate of theappellant company in terms of the amendment.

5.3 It is submitted that earlier the exemption was granted to thesmall-scale industrial units engaged in manufacturing activities. It issubmitted that at the relevant time, pre-01.08.2001, and as per Section2(17) of the Act, 1994, “blending of tea” was included in the definition of“manufacture”. It is submitted that therefore, being manufacturers, theappellants were allowed the exemption. It is submitted that however,thereafter, in view of the amendment to Section 2(17) of the Act, 1994w.e.f. 01.08.2001, “blending of tea” was excluded from the definition of“manufacture” and, therefore, the appellants ceased to be themanufacturers. It is submitted that once the appellants ceased to be themanufacturers, the appellants shall not be entitled to the exemption asthe exemption was available only to the small-scale industrial unitsengaged in manufacturing activities and to manufacturer under the Act,1994.

5.4 It is submitted that when the legislature in its wisdom, excluded“tea blending” from the definition of “manufacture”, therefore, “teablending” cannot be regarded as a manufacturing activity entitled toenjoy exemption as provided by Section 39 of the Act, 1994. It is submittedthat the submission on behalf of the appellants on legitimate expectationand that by amending Section 2(17) “vested right” in favour of theappellants could not have been taken away, has no substance.

5.5 It is submitted that as rightly observed and held by the HighCourt, this is not a case of “vested right” but a case of “existing right”.It is submitted that therefore, the existing right can be taken away. It issubmitted that there cannot be any legitimate expectation against astatute.

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5.6 It is further submitted that to grant the exemption or not is apolicy decision and nobody can claim the exemption as a matter of right.It is submitted that therefore, both the learned Tribunal as well as theHigh Court have rightly refused to grant the appellants any exemptionfrom payment of sales tax which the appellants were being grantedprior to 01.08.2001 being the manufacturers of “tea blending”.

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5.7 It is further submitted that this is not the case of retrospectiveoperation, but it is a case of prospective withdrawal of an existingcontinuing right to get exemption of sales tax. It is submitted that whenthe legislature in its wisdom amended the definition of “manufacture”contained in Section 2(17) and the “tea blending” came to be excludedCfrom the definition of “manufacture” and which resulted in withdrawing the exemption, which the appellants were availing prior to 01.08.2001 asmanufacturer, being a policy decision, the same is not subject to judicialreview. Reliance is placed on the decision of this Court in the case ofDirectorate of Film Festivals & Ors. Vs. Gaurav Ashwin Jain &DOrs., (2007) 4 SCC 737.

5.8 Making above submissions, it is prayed to dismiss the presentappeals.

6. Heard the learned counsel for the respective parties at length.

E7. The short question, which is posed for the consideration of thisCourt is:

“Whether despite Section 2(17) of the West Bengal Sales TaxAct, 1994 which came to be amended w.e.f. 01.08.2001 videWest Bengal Finance Act, 2001, omitting “tea blending” from theFdefinition of “manufacture”, still the appellants shall be entitled tothe exemption from payment of sales tax?

8. The main submission on behalf of the appellants is that as priorto 01.08.2001, the appellants were availing the benefit of sales taxexemption, the said right could not have been taken away by virtue ofamendment to Section 2(17) of the Act, 1994 on the ground of legitimateGexpectation as well as by promissory estoppel. Thus, it is the case onbehalf of the appellants that as on 01.08.2001, under the Act, 1994, whenSection 2(17) of the Act, 1994 came to be amended, the appellants hada “vested right” and therefore, the amendment to Section 2(17) of theAct, 1994 shall not affect such “vested right” of exemption from paymentHof sales tax, which the appellants were availing prior to 01.08.2001.

8.1 However, it is required to be noted that this is a case of claimingexemption from payment of sales tax. As per the settled position of law,nobody can claim the exemption as a matter of right. The exemption isalways on the fulfilment of the conditions for availing the exemption andthe same can be withdrawn by the State. To grant the exemption and/orto continue and/or withdraw the exemption is always within the domainof the State Government and it falls within the policy decision and as perthe settled position of law, unless withdrawal is found to be so arbitrary,the Court would be reluctant to interfere with such a policy decision.

8.2 In the present case, prior to 2001, as per Section 2(17) of theAct, 1994, the activity of “tea blending” was included in the definition of“manufacture”. Therefore, being in the activity of “tea blending”, theappellants were entitled to the exemption from payment of sales tax asmanufacturers. It cannot be disputed that being the manufacturer in theactivity of “tea blending” the appellants would have always been entitledto the exemption from payment of sales tax. Being a manufacturer, beingin the activity of “tea blending”, the appellants were availing the salestax exemption. However, thereafter, the definition of “manufacture” ascontained 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 “teablending” came to be excluded from the definition of “manufacture”.Consequently, the appellants ceased to be the manufacturers. Once theappellants ceased to be the manufacturers, the appellants shall not beentitled to the exemption from the payment of sales tax, which wasavailable to the appellants as a manufacturer being in the activity of “teablending”. Therefore, on and from 01.08.2001, “tea blending” activityceased to be the manufacturing activity and the appellants ceased to bethe manufacturers and therefore, on and from 01.08.2001, the appellantsshall not be entitled to the exemption from payment of sales tax. Thus,the withdrawal of exemption from payment of sales tax would beprospective and not retrospective. So long as the appellants continue tobe the manufacturers as per Section 2(17) of the Act, 1994 prevailingprior to 01.08.2001, the appellants can be said to be entitled to the benefitof exemption from payment of sales tax as manufacturers being in theactivity of “tea blending”. The moment, “tea blending” activity ceases tobe the manufacturing activity, on and from that day, the appellants shallnot be entitled to the exemption from payment of sales tax.

8.3 Now, so far as the submission on behalf of the appellants onlegitimate expectation and/or promissory estoppel and the submission on AB

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Abehalf of the appellants that the “vested right” cannot be taken away isconcerned, the aforesaid has no substance. There cannot be anypromissory estoppel against the statute as per the settled position of law.As rightly observed and held by the High Court, this is not a case of“vested right” but a case of “existing right”, which can be varied ormodified and/or withdrawn. In the present case, as per amendment inBthe definition contained in Section 2(17) of the Act, 1994 w.e.f. 01.08.2001by which “tea blending” activity is excluded from the definition of“manufacture” and therefore, on and from that day itself, the appellantsceased to be the manufacturers and shall not be entitled to the benefit ofexemption from payment of sales tax as was available to them asCmanufacturers.

8.4 At this stage, it is also required to be noted that as per Section39 of the Act, 1994, under which the appellants are claiming the exemptionfrom payment of sales tax, no tax shall be payable by a dealer for suchperiod as may be prescribed in respect of his sales – goods manufacturedDby him. Therefore, the word “manufacture” is very relevant and is acondition sine qua non to be satisfied. Therefore, the definition of“manufacture” is really relevant. Therefore, if a dealer ceased to be themanufacturer, he shall not be entitled to the benefit of exemption underSection 39. The relevant portion of Section 39 reads as under:- E“39. Tax holiday for new small-scale industrial units- (1)Subject to such conditions and restrictions as may be prescribed,no tax shall be payable by a dealer for such period as may beprescribed in respect of his sales of goods manufactured by himin his newly set up small-scale industrial unit situated in theprescribed area, and in calculating his taxable turnover of salesFunder sub-section (3) of section 17, that part of his gross turnoverof sales which represents the turnover of sales of such goodsshall be deducted from his gross turnover of sales under sub-clause (viii) of clause (a) of sub-section (3) of that section.

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8.5 Under the circumstances, the decisions relied on behalf ofthe appellants referred to hereinabove, shall not be applicable tothe facts of the case on hand.

9. In view of the above and for the reasons stated above, I am incomplete agreement with the view taken by the learned Tribunal as wellH

as the High Court that on and after 01.08.2001 and in view of theamendment to Section 2(17) of the Act, 1994, by which the definition of“manufacture” is amended and “tea blending” is excluded from thedefinition of “manufacture”, the appellants shall not be entitled to theexemption from payment of sales tax.

Under the circumstances, all these appeals fail and the samedeserve to be dismissed and are accordingly dismissed. However, in thefacts and circumstances of the case, there shall be no order as to costs.

KRISHNA MURARI, J.

1. I have had the advantage of reading the judgment proposed bymy esteemed brother, Hon’ble Mr. Justice M.R. Shah. However, I amunable to agree with the reasoning as well as the result arrived at by myesteemed brother, and thus separately pen down my conclusion.

2. In brief, Section 2(dd) of the erstwhile Bengal Finance (SalesTax) Act, 1941 defined the term “manufacture”, under the definition ofwhich, “blending of any goods” was also included. The said act wasthen replaced by the West Bengal Sales Tax Act, 1994, under which, thedefinition of “manufacture” was changed, and the term “blending of anygoods” was omitted, however, “blending of tea” was still included underthe definition of “manufacture”. Further, by virtue of the said amendment,a tax holiday was granted to new small scale industrial units for a specifiedperiod.

3. Subsequent to the amendments, the State scheme of Incentivesfor Cottage and Small-Scale Industries, 1993 was amended, for thepurpose of providing incentives and promotion of large, medium andsmall scale industrial units.

4. Subsequent to this tax holiday being granted, and on the basisof such tax holiday, the Appellants herein set up small-scale industrialunits for the purpose of carrying on the business of manufacturing blendedtea. After the setting up of the unit by the appellants, by way of anamendment, the term “blending of tea” was omitted from the definitionof “manufacture”, leading to the appellant’s exclusion from claiming thesaid tax holiday. It is against this exclusion and omission that the appellantshave filed the present batch of civil appeals.

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A5. A detailed factual matrix of the present case at hand has beenrendered by my esteemed brother in his opinion, and for the sake ofbrevity, I am not replicating the same herein.

ANALYSIS

6. Learned counsel appearing on behalf of both the parties wereBheard in great detail.

7. Through the present batch of civil appeals, two substantialquestions of law have been raised, and for a ready reference, the twoissues are being mentioned hereunder:

I.Whether the appellants herein have a vested right inclaiming exemption from payment of sales tax under theAct, since the vested right was accrued upon the appellantsbefore the amendment was made under Section 2(170) ofthe Act?

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DII. Whether the doctrine of legitimate expectation isapplicable in the present case since the appellants had setup their industrial units on the basis of the allurement of atax holiday granted by the Government?

8. I am in agreement with the conclusion arrived at by myesteemed brother on the first issue, and hence, my dissent is limited onlyEto the second question posed before this Court.

RULE OF LAW

9. The doctrine of rule of law, as an ideal, denotes that a statemust be governed, not by men, but by law. This concept finds its originsFin the work of Aristotle, where he remarks that in a state that functionson the principles of justice and equality, rule of law must be supreme,and the state as an institution must not be subject to the whims andfancies of its ruler.

10. While the origins of rule of law date back to ancient Greece,Gthe modern conception of rule of law, which is the bedrock for mostdemocratic constitutions across the world, finds its roots in the book“The Law of the Constitution” authored by professor A.V. Dicey.

11. Professor Dicey, in his conception of the doctrine of rule oflaw, while echoing the thoughts of Aristotle, states that all individualsHand entities must be subject to law, and that no one, not even the government or its officials, are above the law. For such a functioning ofthe law, Dicey points out that the law must be clear, unambiguous, andmust apply to all equally. To further such a conception and bring clarityon the same, Professor Dicey elucidated on three principles thatcharacterize a smooth application of the law.

12. The first principle, which is most relevant to the context of thepresent case, is the ideal that the law is supreme, and no entity can beabove it. A reading of this principle would also mean that for law to besupreme, it must be applicable to all, it cannot be arbitrary, and nor can ittake away anything conferred by it in an arbitrary manner. In simplerterms, for law to be supreme, it must be clear, and it must stay true toitself, without falling prey to other powers inside or outside of it.

13. This principle of rule of law, in the context of our nation, hasfound refuge within the basic structure of our constitution. In the case ofSub-Committee on Judicial Accountability vs. Union Of India andOrs.1, while expounding on the importance of the independence of thejudiciary, a Constitution Bench of this Court held that rule of law is a partof the basic structure of the constitution of India, the relevant observationsmade in this regard are as under:

“Before we discuss the merits of the arguments it is necessaryto take a conspectus of the constitutional provisionsconcerning the judiciary and its independence. In interpretingthe constitutional provisions in this area the Court shouldadopt a construction which strengthens the foundationalfeatures and the basic structure of the Constitution. Rule oflaw is a basic feature of the Constitution which permeates thewhole of the constitutional fabric and is an integral part of”the constitutional structure.

14. It is from this principle of rule of law, does the doctrine oflegitimate expectation flow. The doctrine of legitimate expectation, asdescribed in detail below, is closely linked with, and is essential for thefunctioning of the rule of law. This is because both, the rule of law andlegitimate expectation form the bedrock for fairness and predictabilityof the legal system. The doctrine of rule of law ensures that laws areapplied equally and consistently, while the doctrine of legitimateexpectation ensures that public authorities act reasonably and consistently A

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Ain their decision-making processes. Together, these principles promotetransparency and accountability in government actions, and they help tomaintain the trust of the people in the legal system.

DOCTRINE OF LEGITIMATE EXPECTATION

15. The doctrine of legitimate expectation, in simple terms, is aBlegal principle that arises when a public authority makes a promise oracts in a manner that leads an individual or a group to expect a particularoutcome. This doctrine , which flows from the doctrine of rule of law, isbased on the idea of fairness and consistency in the decision-makingprocesses of public authorities.

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16. When a legitimate expectation of a specific outcome is createdby a public authority, the said public authority is required to take intoaccount such expectation created by it when making a decision thataffects the interests of the individual or group concerned. If the publicauthority fails to do so, the individual or group has a right to challenge theDdecision and seek a remedy, such as an order to enforce the legitimateexpectation, as is the situation in the case at hand.

17. In Halsbury’s Laws of England, Fourth Edition, Volume I(I)151,the concept of legitimate expectation has been elucidated on, andfor the sake of convenience, the same is being extracted herein:

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ELegitimate expectations. A person may have a legitimateexpectation of being treated in a certain way but anadministrative authority even though he has no legal right inprivate law to receive such treatment. The expectation mayarise either from a representation or promise made by theFauthority, including an implied representation, or fromconsistent past practice. The existence of a legitimateexpectation may have a number of different consequences; itmay give locus standi to seek leave to apply for judicial review;it may mean that the authority ought not to act so as to defeatthe expectation without some overriding reason of public policyGto justify its doing so; or it may mean that, if the authorityproposes to defeat a person’s legitimate expectation, it mustafford” him an opportunity to make representations on thematter. The Courts also distinguish, for example in licensingcases, between original applications, applications to renewand revocations; a party who has been granted a licence may G

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have a legitimate expectation that it will be renewed unlessthere is some good reason not to do so, and may therefore beentitled to greater procedural protection than a mere applicantfor a grant.

18. The Courts of United Kingdom, while conceptualizing thedoctrine of legitimate expectation, have adopted other key aspects ofjudicial review such as Wednesbury unreasonableness in the case of R vs. Inland Revenue Commissioners, exparte M.F.K. UnderwirtingAgents Limited2 and abuse of power in the case of R. (Bancoult) vs.Secretary of State for Foreign and Commonwealth Affairs)3 to justifythe existence and the protection of legitimate expectations.

19. The term legitimate expectation was first used in the case ofSchmidt v Secretary of State for Home Affairs4 by the UK Courts.The doctrine however, was not applied to the facts therein. Subsequently,in the case of O’Reilly v Mackman5, the doctrine of legitimateexpectation was recognized as a ground for judicial review, allowingindividuals to challenge the legality of decisions on the grounds that thedecision-maker “had acted out with the powers conferred upon it”.

20. Further in the cases of Council of Civil Service Unions vMinister for the Civil Service6 andR v North and East Devon HealthAuthority, ex parte Coughlan7, the boundaries of the doctrine werefurther elaborated upon. Notwithstanding efforts of the Courts, someambiguity as to when legitimate expectations arise persisted, and inresponse, Lord Justice of Appeal, John Laws proposed the aspiration of“good administration” as a justification for the protection of legitimateexpectations in the case of Nadarajah v. Secretary of State for the8Home Department.

21. The doctrine of legitimate expectation was first introduced toIndian jurisprudence in the case of State Of Kerala & Ors. vs. K.G.9Madhavan Pillai & Ors.. In the aforesaid case, the government had 2 [1982] AC 617

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4 [1969] 2 WLR 337

5 [1983] 2 AC 237

6 [1984] 3 WLR 1174

7 [2001] Q.B. 213

8 [2005] EWCA Civ 1363

9 (1988) 4 SCC 669

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Aissued a sanction in favour of the respondent therein to open a newschool and to upgrade certain already existing schools. However,subsequent to the abovementioned sanction, a new direction was givenby the government to keep the said sanction in abeyance. This Court,while deciding the said issue, was of the opinion that the original sanctiongiven by the government gave rise to a legitimate expectation in theBminds of the respondents. This legitimate expectation was howeverbreached by the subsequent direction for abeyance, and hence therewas a violation of the principles of natural justice. The relevantobservations in this regard from the said judgment are being reproducedhereunder:C“…In other words once the Government approves anapplication for opening a new unaided school or a higherclass in an existing unaided school and passes an order underRule 2-A(5), then the successful applicant acquires a right oflegitimate expectation to have his application furtherDconsidered under Rules 9 and 11 for the issue of a sanctionorder under Rule 11 for opening a new school or upgradingan existing school. It is no doubt true, as pointed out by theDivision Bench, that by the mere grant of an approval underRule 2-A(5), an applicant will not acquire a right to open anew school or to upgrade an existing school but he certainlyEacquires a right enforceable in law to have his applicationtaken to the next stage of consideration under Rule 11. TheDivision Bench was therefore, right in taking the view thatthe general power of rescindment available to the StateGovernment under Section 20 of the Kerala General ClausesFAct has to be determined in the light of the “subject matter,context and the effect of the relevant provisions of the statute”.

22. InNavjyoti Coop. Group Housing Society & Ors. vs. UnionOf India & Ors.10, the original policy for allotment of land to housingsocieties therein was based on the principle of seniority, and seniorityGunder the said policy was decided on the basis of the date of registration.Subsequently, a change was made to the original policy, wherein thecriteria for deciding seniority was changed from the date of registrationto the date of approval of the final list. The said deviation from theoriginal policy was challenged on the touchstone of legitimate expectation H10 (1992) 4 SCC 477

by the petitioners therein. This Court, while deciding on the said challenge,held that the original policy, as well as the past practice of allotting land,gave rise to a legitimate expectation to the parties therein of a predictablepattern of allotment, and the new change in policy broke such legitimateexpectation. This interpretation by way of the abovementioned judgment,expanded the width of the doctrine of legitimate expectation further, andextended it to not just an explicit guarantee, but also to expectationsarising out of past practice. The relevant observations of the said-judgment, for a ready reference, are being reproduced hereunder:

“It also appears to us that in any event the new policy decisionas contained in the impugned memorandum of January 20,1990 should not have been implemented without making suchchange in the existing criterion for allotment known to theGroup Housing Societies if necessary by way of a public noticeso that they might make proper representation to theconcerned authorities for consideration of their viewpoints.Even assuming that in the absence of any explanation of theexpression “first come first served” in Rule 6(vi) of NazulRules there was no statutory requirement to make allotmentwith reference to date of registration, it has been rightly held,as a matter of fact, by the High Court that prior to the newguideline contained in the memo of January 20, 1990 theprinciple for allotment had always been on the basis of dateof registration and not the date of approval of the list ofmembers. In the brochure issued in 1982 by the DDA evenafter Gazette notification of Nazul Rules on September 26,1981 the policy of allotment on the basis of seniority inregistration was clearly indicated. In the aforesaid facts, theGroup Housing Societies were entitled to ‘legitimateexpectation’ of following consistent past practice in the matterof allotment, even though they may not have any legal rightin private law to receive such treatment. The existence of‘legitimate expectation’ may have a number of differentconsequences and one of such consequences is that theauthority ought not to act to defeat the ‘legitimate expectation’without some overriding reason of public policy to justify itsdoing so. In a case of ‘legitimate expectation’ if the authorityproposes to defeat a person’s ‘legitimate expectation’ it shouldafford him an opportunity to make representations in the matter.

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In this connection reference may be made to the discussionson ‘legitimate expectation’ at page 151 of Volume 1(1)of Halsbury’s Laws of England, 4th edn. (re-issue). We mayalso refer to a decision of the House of Lords in Council ofCivil Service Unions v. Minister for the Civil Service [(1984)3 All ER 935] . It has been held in the said decision that anaggrieved person was entitled to judicial review if he couldshow that a decision of the public authority affected him ofsome benefit or advantage which in the past he had beenpermitted to enjoy and which he legitimately expected to bepermitted to continue to enjoy either until he was given reasonsfor withdrawal and the opportunity to comment on suchreasons.

It may be indicated here that the doctrine of ‘legitimateexpectation’ imposes in essence a duty on public authority toact fairly by taking into consideration all relevant factorsrelating to such ‘legitimate expectation’. Within the conspectusof fair dealing in case of ‘legitimate expectation’, thereasonable opportunities to make representation by theparties likely to be affected by any change of consistent pastpolicy, come in. We have not been shown any compellingreasons taken into consideration by the Central Government to make a departure from the existing policy of allotment withreference to seniority in registration by introducing a newguideline. On the contrary, Mr Jaitley the learned counselhas submitted that the DDA and/or Central Government donot intend to challenge the decision of the High Court and the impugned memorandum of January 20, 1990 has sincebeen withdrawn. We therefore feel that in the facts of the caseit was only desirable that before introducing or implementingany change in the guideline for allotment, an opportunity tomake representations against the proposed change in theguideline should have been given to the registered GroupHousing Societies, if necessary, by way of a public notice.”

23. The doctrine of legitimate expectation was then furtherelaborated upon in the case of Food Corporation Of India vs.Kamdhenu Cattle Feed Industries11, wherein, this Court held that the duty of public authorities to act in a reasonable manner, entitles everyperson to have a legitimate expectation to be treated in such a reasonablemanner. This legitimate expectation imposed on public authorities to actin a fair manner, as has been held, is imperative to ensure non-arbitrarinessof state action. It was further held by this Court that while such a legitimateexpectation might not by itself be an enforceable right, however, thefailure to take into account such expectation may deem a decision of thepublic authority to be arbitrary. It is my opinion, that the above saiddecision rendered by this Court, remarkably weaves in the doctrine ofrule of law, the doctrine of legitimate expectation, and the doctrine ofarbitrariness together, and firmly roots the doctrine of legitimateexpectation within Article 14 of the Constitution Of India. The relevantparagraphs of the said judgment are being reproduced hereunder:

“In our view, Shri A.K. Sen is right in the first part of hissubmission. However, in the present case, the respondent doesnot get any benefit there from. The High Court’s decision isbased on the only ground that once tenders have been invitedand the highest bidder has come forward to comply with theconditions stipulated in the tender notice, it is not permissibleto switch over to negotiation with all the tenderers and therebyreject the highest tender. According to the High Court, such aprocedure is not countenanced by the rule of law. This is notthe same as the submission of Shri Sen which is limited topermissibility of such a course only on cogent groundsindicated while deciding to switch over to the procedure ofnegotiation after receiving the tenders to satisfy therequirement of non-arbitrariness, a necessary concomitantof the rule of law. The proposition enunciated by the HighCourt which forms the sole basis of its decision is too wide tobe acceptable and has to be limited in the manner indicatedhereafter.

In contractual sphere as in all other State actions, the Stateand all its instrumentalities have to conform to Article 14 ofthe Constitution of which non-arbitrariness is a significantfacet. There is no unfettered discretion in public law: A publicauthority possesses powers only to use them for public good.This imposes the duty to act fairly and to adopt a procedurewhich is ‘fairplay in action’. Due observance of this obligationas a part of good administration raises a reasonable or A

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Alegitimate expectation in every citizen to be treated fairly inhis interaction with the State and its instrumentalities, withthis element forming a necessary component of the decision-making process in all State actions. To satisfy this requirementof non-arbitrariness in a State action, it is, therefore,necessary to consider and give due weight to the reasonableBor legitimate expectations of the persons likely to be affectedby the decision or else that unfairness in the exercise of thepower may amount to an abuse or excess of power apart fromaffecting the bona fides of the decision in a given case. Thedecision so made would be exposed to challenge on the groundCof arbitrariness. Rule of law does not completely eliminatediscretion in the exercise of power, as it is unrealistic, butprovides for control of its exercise by judicial review.”

24. Further, in the case of M.P.Oil Extraction & Anr. vs. StateOf M.P. & Ors.12,this Court held that the doctrine of legitimateDexpectation operates in the sphere of public law and as such, is asubstantive and enforceable right depending on the facts andcircumstances of the case. The relevant paragraph from the said judgmentis being extracted hereunder:- “The renewal clause in the impugned agreements executed infavour of the respondents does not also appear to be unjustEor improper. Whether protection by way of supply of sal seedsunder the terms of agreement requires to be continued for afurther period, is a matter for decision by the State Governmentand unless such decision is patently arbitrary, interferenceby the Court is not called for. In the facts of the case, theFdecision of the State Government to extend the protection forfurther period cannot be held to be per se irrational, arbitraryor capricious warranting judicial review of such policydecision. Therefore, the High Court has rightly rejected theappellant’s contention about the invalidity of the renewalclause. The appellants failed in earlier attempts to challengeGthe validity of the agreement including the renewal clause.The subsequent challenge of the renewal clause, therefore,should not be entertained unless it can be clearlydemonstrated that the fact situation has undergone suchchanges that the discretion in the matter of renewal ofH12 (1997) 7 SCC 592

agreement should not be exercised by the State. It has beenrightly contended by Dr Singhvi that the respondentslegitimately expect that the renewal clause should be giveneffect to in usual manner and according to past practice unlessthere is any special reason not to adhere to such practice.The doctrine of “legitimate expectation” has been judiciallyrecognised by this Court in a number of decisions. The doctrineof “legitimate expectation” operates in the domain of publiclaw and in an appropriate case, constitutes a substantive andenforceable right.”

25. While the abovementioned judgments discuss the breadth ofapplicability of the doctrine of legitimate expectations, however, such aright is not all encompassing, and as such has limitations placed on it. Itis on these restrictions, as has been discussed in detail below, therespondent places their reliance on.

26. In the case of MRF Ltd. Kottayam vs. AssistantCommissioner Sales Tax & Ors.13, while analyzing the doctrine oflegitimate expectation, this Court held that legitimate expectation, as aground for challenge, can be done away with in circumstances whereinit has been demonstrated by the public authority that the withdrawal ofthe said expectation has been done on grounds of public interest. Insimpler terms, this Court clarified that public interest takes precedenceover a created legitimate expectation.

“The principle underlying legitimate expectation which isbased on Article 14 and the rule of fairness has been re-statedby this Court in Bannari Amman Sugars Ltd. Vs. CommercialTax Officer & Ors.[14],. It was observed in paras 8 & 9:

“A person may have a ‘legitimate expectation’ of being treatedin a certain way by an administrative authority even thoughhe has no legal right in private law to receive such treatment.The expectation may arise either from a representation orpromise made by the authority, including an impliedrepresentation, or from consistent past practice. The doctrineof legitimate expectation has an important place in thedeveloping law of judicial review. It is, however, not necessaryto explore the doctrine in this case, it is enough merely to 13 (2006) 8 SCC 702

14 (2005) 1 SCC 625

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note that a legitimate expectation can provide a sufficientinterest to enable one who cannot point to the existence of asubstantive right to obtain the leave of the Court to apply forjudicial review. It is generally agreed that ‘legitimateexpectation’ gives the applicant sufficient locus standi forjudicial review and that the doctrine of legitimate expectationto be confined mostly to right of a fair hearing before adecision which results in negativing a promise or withdrawingan undertaking is taken. The doctrine does not give scope toclaim relief straightway from the administrative authoritiesas no crystallized right as such is involved. The protection ofsuch legitimate expectation does not require the fulfilment ofthe expectation where an overriding public interest requiresotherwise. In other words, where a person’s legitimateexpectation is not fulfilled by taking a particular decisionthen the decision maker should justify the denial of suchexpectation by showing some overriding public interest.

While the discretion to change the policy in exercise of theexecutive power, when not trammelled by any statute or ruleis wide enough, what is imperative and implicit in termsof Article 14 is that a change in policy must be made fairlyand should not give the impression that it was so donearbitrarily or by any ulterior criteria. The wide sweepof Article 14 and the requirement of every State actionqualifying for its validity on this touchstone irrespective ofthe field of activity of the State is an accepted tenet. The basicrequirement of Article 14 is fairness in action by the State,and non- arbitrariness in essence and substance is the heartbeat of fair play. Actions are amenable, in the panorama ofjudicial review only to the extent that the State must act validlyfor discernible reasons, not whimsically for any ulteriorpurpose. The meaning and true import and concept ofarbitrariness is more easily visualized than precisely defined.A question whether the impugned action is arbitrary or not isto be ultimately answered on the facts and circumstances of agiven case. A basic and obvious test to apply in such cases isto see whether there is any discernible principle emergingfrom the impugned action and if so, does it really satisfy thetest of reasonableness.”

[Emphasis supplied]

MRF made a huge investment in the State of Kerala under apromise held to it that it would be granted exemption frompayment of sales tax for a period of seven years. It wasgranted the eligibility certificate. The exemption order hadalso been passed. It is not open to or permissible for the StateGovernment to seek to deprive MRF of the benefit of taxexemption in respect of its substantial investment in expansionin respect of compound rubber when the State Governmenthad enjoyed the benefit from the investment made by the MRFin the form of industrial development in the State, contributionto labour and employment and also a huge benefit to the Stateexchequer in the form of the State’s share, i.e. 40% of theCentral Excise duty paid on compound rubber of Rs. 177crores within the State of Kerala. The impugned action on thepart of the State Government is highly unfair, unreasonable,arbitrary and, therefore, the same is violative of Article 14 ofthe Constitution of India. The action of the State cannot bepermitted to operate if it is arbitrary or unreasonable. ThisCourt in E.P. Royappa Vs. State of Tamil Nadu[15], observedthat where an act is arbitrary, it is implicit in it that it is unequalboth according to political logic and constitutional law andis therefore violative of Article 14. Equity that arises in favourof a party as a result of a representation made by the State isfounded on the basic concept of “justice and fair play”. Theattempt to take away the said benefit of exemption with effectfrom 15.1.1998 and thereby deprive MRF of the benefit ofexemption for more than 5 years out of a total period of 7years, in our opinion, is highly arbitrary, unjust andunreasonable and deserves to be quashed. In any event theState Government has no power to make a retrospectiveamendment to SRO 1729/93 affecting rights already accruedto MRF there under.”

27. Further, in the case of Howrah Municipal Corporation &16Ors. vs. Ganges Rope Company Ltd. & Ors., it was held by thisCourt that no right can be claimed on the basis of legitimate expectation,when the said expectation is contrary to statutory provisions enforced inthe public interest. Similarly, in the case ofMadras City Wine Merchants 15 (1974) 4 SCC 3

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AAssociation & Anr. vs. State Of Tamil Nadu & Anr.17, It was heldthat the doctrine of legitimate expectation is rendered defunct in caseswhere the said expectation is rescinded by the public authority by wayof a change in public policy because of public interest.

28. While a cursory reading of the abovementioned judgments onBthe limitations of the doctrine of legitimate expectation would show thatthe said doctrine would not be available against policy or statutory change,a careful perusal of the same would show otherwise. The doctrine oflegitimate expectation finds its home within the doctrine of rule of lawand is a limb of Article 14 that fights against the contamination of arbitrarystate action and misuse of power. In all the above mentioned judgmentsCthat discuss the limitations of legitimate expectation, what is mostimportant, is the principle that public interest is supreme.

29. In such a circumstance, wherein all limitations on the doctrineof legitimate expectation rest on the touchstone of public interest, then,in cases where public interest itself is defeated by barring the applicabilityDof legitimate expectation, the bar on the legitimate expectation must beremoved. Further, it would also mean that for an amendment to claim abar against legitimate expectation, it must demonstrate that the said changein policy was constructed in public interest.

30. In simpler terms, on the basis of the abovementioneddiscussions, legitimate expectation can be inferred against a statute,Eprovided that such a claim of legitimate expectation is in public interest,and for a statute to claim a bar against legitimate expectation, it mustdemonstrate that the shift in policy is for the advancement of publicinterest.

31. To elucidate on why such a blanket bar on the invocation ofFlegitimate expectation against a statute is contrary to the rule of law, wemust first take such an interpretation to its logical conclusion. If theaforesaid interpretation is adopted, then the state, by way of amendments,can entice persons and institutions to act in a certain manner with theexpectation of a certain outcome, and suddenly, without any demonstrationGof public interest, rescind the same. Such a scenario, if allowed tomanifest into reality, would remove any and all certainty of the legalsystem, and directly become an antithesis to the rule of law. Further, if ablanket bar of the doctrine of legitimate expectation against a statute isto be allowed, no domestic or foreign investor would ever invest in local business and ventures, as any legitimate expectation by way of a statutewould translate only to a façade, as such a benefit could be snatchedaway arbitrarily at any point in time. Hence, any contrary interpretationof the doctrine of legitimate expectation, would cause great havoc, andonly cause detriment to the rights of individuals and the society at large.

32. Further, it must be borne in mind that the doctrine of legitimateexpectation and the doctrine of promissory estoppel are two separateprinciples, and as such, the blanket ban on promissory estoppel against astatute cannot be applicable to the doctrine of legitimate expectation.

33. The doctrine of promissory estoppel and the doctrine oflegitimate expectation, while they share a common root and a similartheme, by way of going through the rigours of common law, havedeveloped into two distinct doctrines. The doctrine of promissory estoppelis a remedy in private law; however, the doctrine of legitimate expectationis a remedy in public law, and as stated above, is rooted in Article 14 ofthe Constitution of India.

34. Such a distinction between public law and private law becomesimportant, because once a law enters the public sphere, it affects therights of the society, and thus becomes liable to a stricter level of scrutiny,and as such, becomes more susceptible to judicial review.

35. In light of the abovementioned discussions, and to bring clarityto the scope and limitations of the doctrine of legitimate expectations, Ifind it essential to chart out the following principles for the application oflegitimate expectations:

I.The expectation must be reasonable:The expectation ofthe individual or group must be reasonable and not based on anyarbitrary or irrational grounds. The expectation must be based onan established practice or a clear promise made by the publicauthority.

II. The expectation must be based on a clear representation:The expectation must be based on a clear and unambiguousrepresentation made by the public authority.

III. The representation must be made by an authorizedperson: The representation must be made by an authorized personor body within the public authority. The authority must have thepower and competence to make such a representation.

IV. The representation must be legitimate: The representationmade by the public authority must be legitimate and not against A

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any law or policy. It must also not be against any public interest orpublic policy.

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VI. Public Interest must supersede change in policy: In caseswhere a legitimate expectation is being taken away by way of amodification to policy, such modification must not be antithesis topublic policy, and if such a modification runs counter to publicinterest, the remedy of legitimate expectation would becomeCexercisable.

VII. The expectation must be based on a legitimate interest:

The expectation must be based on a legitimate interest of theindividual or group. It must not be based on any vested interest orpersonal gain.

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VIII. The expectation must be protected: Once a legitimateexpectation is created, it must be protected and not arbitrarily orcapriciously withdrawn by the public authority. The public authoritymust provide a reasonable opportunity for the individual or groupto be heard before any decision is taken to withdraw or modifyEthe expectation.

APPLICATION OF LEGITIMATE EXPECTATION INTHE PRESENT FACTUAL MATRIX

36. A tax holiday was granted to new small scale industrial unitsinvolved in the manufacture of tea for a specified period of time underSection 39 of the Bengal Finance (Sales Tax) Act, 1941 (hereinafterreferred to as the ‘1941 Act’) read with Section 17(3)(1)(xi) of the saidAct with Rule 52 of the West Bengal Sales Tax Rules, 1995.

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37. It is important to note that at this period, statutorily, blending oftea was read under the definition of “manufacture”, and as such, the taxholiday was also applicable to small scale industrial units involved in theGblending of tea.

38. Subsequent to such a tax holiday being granted, the appellantsherein, relying upon the assurance and faith made by the government,set up small scale industrial units, and got the necessary authorizationsto certify them as the same. However, by way of an amendment in theHWest Bengal Finance Act, 2001, the words “blending of tea” were omitted from the definition of “manufacture”, as a consequence of which, theappellants herein became ineligible to claim benefit under the tax holiday.

39. From an understanding of the facts, it can be clearly seen thatthe tax holiday, granted by way of an amendment to small scale industriesinvolved in the manufacture and blending of tea, created a legitimateexpectation in favour of the appellants herein. Such a legitimateexpectation, created by way of an amendment, lured the appellants topour their hard earned money into setting up small scale industrial units,under the assumption that the authority would hold true to its promise,act in a fair manner and abide by the decision made by it.

40. This legitimate expectation, created by the appropriate andcompetent authority, was broken when a subsequent amendment wasbrought in, wherein the words “blending of tea” was removed from thedefinition of “manufacture”. Such an amendment, by removing the saidwords, snatched away the legitimate expectation of a specific outcome,and ousted the appellants from claiming the tax holiday, to which theywere promised by the original amendment. As can be seen, a reasonablelegitimate expectation was created by the competent authority, whichlured the appellants to act in a certain manner. Such a legitimateexpectation was then snatched away, leaving the appellants withoutremedy, and in losses.

41. To justify such a shift in policy, and snatch away the legitimateexpectation created in favour of the appellants, the public authority mustdemonstrate the reasons for such a shift, and while giving its justifications,must take into consideration the rights of the affected persons, and whythe snatching away of such rights is essential for the state to advancepublic interest.

42. In the present case at hand, while perusing through thesubsequent amendment, it can be clearly seen that no such appropriatejustification has been provided by the government. No appropriate reasonfor the enactment of the amendment, nor the considerations of theaffected party have been discussed. In my opinion, a mere claim ofchange of policy is not sufficient to discharge the burden of proof vestedin the government. The government must precisely show what the changeof policy is, and why such a change of law is in furtherance of publicpolicy, and the public good.

43. In light of the factual matrix herein and the abovementioneddiscussions, it can be clearly seen that a legitimate expectation was A

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Acreated by the public authority, and such an expectation, accrued in thefavour of the appellants herein, was rescinded by the said authority withoutany demonstration of public interest. No appropriate explanation hasbeen 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 similarlysituated persons, was necessary to advance public interest. In such aBcircumstance, the legitimate expectation created in the minds of theappellants, must be protected, and the benefits given originally must bemade applicable to the appellants herein for the period promised by therespondent authority.

CONCLUSIONC

44. The doctrine of legitimate expectation, as has been mentionedabove, is a facet of Article 14, and is essential to maintain the rule oflaw. Such a doctrine, which ensures predictability in the application oflaw, in its very essence, fights against the corrosion of the rule of law,and prevents arbitrary state action.D

45. For a democratic state to function on the principles of equalityand justice, the state must be ruled, not by its ruler, but by the law. Insuch a circumstance, to prevent such a contamination of the rule of law,the application of the doctrine of legitimate expectation becomes mostimportant. If a state is allowed to make promises, and rescind the sameEwithout justification or explanation, it would lead to a situation whereinevery action of the state would be bereft of accountability, and everyperson governed by the laws of this country would live in a state of fearand unrest, causing a chilling effect on the civil liberties of the people.

46. Hence, I am of the opinion that in the present case at hand,Fthe Authority must be held accountable to the legitimate expectationcreated by it, and therefore, a direction is liable to be issued to therespondents herein to extend the benefits of the original amendment tothe appellants herein, till the expiry of such a benefit as per the originalamendment. In light of the same, the present batch of civil appeals areallowed.G

Divya Pandey(Assisted by : Abhishek Agnihotri andShevali Monga, LCRAs)

Matters to be placed before Hon’ble CJI.

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