MAY 19, 2020

By Bharat Raichandani, Advocate, Partner, UBR Legal Advocates

PEOPLES Happiness is the King's happiness. Welfare of the people is King's Welfare. There is no task which is individualistic or pleasurable for the king. It is the king's duty to look after the progress of the people. These words in Arthshastra are embodied in the concept of 'Public Interest'. This, however, may be true for who believe that the King cannot err.

'Public Interest', to us, is a vague, translucent and wide term, powerful enough to justify any inept, incomplete, destructive or dubious actions by modern day Governments.

The "Doctrine of Promissory Estoppel" is a rule of equity, evolved to prevent injustice against a person to whom a promise has been made with an expectation that such promise will be acted upon. It is a common law principle. Gradually, with judicial intervention post-independence, it spread its roots into public law. This growing jurisprudence, however, was given a varied perspective in the recent judgment of the Hon'ble Supreme Court in Union of India & Anr. Vs. V.V.F Limited & Anr . ¹ We shall endeavor to examine and analyze the said judgment, in some detail, in this article.

Doctrine of Promissory Estoppel

Before proceeding any further, we must, briefly, expound on this oft-repeated principle which has been hammered by Judges, over centuries, to shape, mould and remould it into a figureless creature.

A rule of equity, this doctrine was born in England. The very first instance when this principle was applied was in Hughes vs. Metropolitan Railway Company ². The doctrine of promissory estoppel is also known as equitable estoppel or quasi estoppels. The doctrine made several sporadic appearances in England. However, it was only in 1947 that the doctrine attained a stronghold. Lord Denning in Central London Property Trust Ltd. Vs. High Trees ³ which granted recognition to the doctrine. Lord Denning held that once a party has given assurance to another and the other person has acted upon it, the party who have given assurance cannot step back from it. The English law did not specifically term such principles as doctrine of estoppel. The term acquired its present name with gradual development in legal precedents in England.

A country with its roots in common law, India's jurisprudence on this doctrine can be divided into two evolutionary stages- Pre-Anglo Afghan and Post-Anglo Afghan case. The very first instance of promissory estoppel arose in the case of Ahmad Yar Khan vs. Secretary of State ⁴ , wherein it was held by the Privy Council that the Government cannot acquire private canal because it had promised the owners in the form of an incentive that all canals will be constructed by them. Prior to Anglo-Afghan Industries vs. UOI ⁵, the position was that the doctrine did not apply to the Government. It was in Anglo-Afghan that the Court proceeded to apply the doctrine against the Government, thus allowing the doctrine to spread its roots into public law.

Post-independence, a catena of judgments followed, moving backward and forward on its own interpretation. The watershed moment for the doctrine of promissory estoppel was realised in the case of Motilal Padampat Sugar Mills vs. State of UP ⁶, wherein the Court discussed how far the doctrine can stop the Government from stepping back from its promises.

Immunizing Tool of 'Public Interest'

Though the principle of promissory estoppel has been clearly enunciated under common law doctrine, the application has always been inconsistent. ⁷ Rightfully commented by Paul Craig, a renowned scholar of administrative law, the common law doctrine is applied in India with equal inconsistency by the courts.

One of the significant developments from the several legal precedents was the concept of public interest and public policy, which served, and in fact continues to serve as immunisers for the Government vis-à-vis this rule. The applicability of doctrine of promissory estoppel in public law create ripples of tension as achieving equity between state and an individual is difficult compared to private disputes. Application of promissory estoppel in public law allows courts to maneuver their stand by interpreting terms such as 'executive necessity' and 'public interest', thus leaving the ground open for inconsistent precedents.

Post Motilal case supra , the position was altered by the decision in Jit Ram vs. State of Haryana ⁸, which is a vivid exposition of the efforts by the courts to immunise the actions of the Government. The decision is significant in introducing the concept of 'public interest' vis-à-vis promissory estoppel. The court held that the doctrine of promissory estoppel will not be applicable in cases of 'public interest', thus allowing the courts to unleash another stage of judicial discipline in future. In Sharma Transport v. Govt. of A.P. &Ors ⁹. , the Apex Court ruled that resource crunch and loss of public revenue are sufficient causes for not holding the Government to its promise. Such a step was considered to be appropriate for upholding public interest. However, the Apex Court soon reinstated the position laid down in Motilal Padampat through its decision in UOI vs. Godfrey Phillips India Limited ¹⁰ by stating that the position laid down in Motilal Padampat was the correct law.

The pendulum of interpretation has rocked itself between two broad propositions, one being that promises cannot be withdrawn if the same was in the nature of incentive and other being the more radical one which allows withdrawal of incentive-based notifications. The former stand of immunisation of the Government was adopted in Kasinka Trading v. Union of India ¹¹. The Apex Court held that the exemption of customs duty was not introduced as an incentive to the entrepreneurs. The notification did not extend any representation much less a promise to the company which was intended to create a legal relationship between the Government and the party drawing benefit flowing from the notification. The Court starkly deviated from its position in Motilal Padampat based on the sole element of 'intention' with which the schemes/notifications were introduced in both the cases. One can conclude that the Court through its judgment in Kasinka Trading proceeded to immunise the Government based on their 'altruist intention' towards each notification. A pure altruist notification with clear intentions of incentivisation provided a stronger case for applicability of the doctrine of promissory estoppel on the Government.

As the judicial discipline developed, the second proposition arose, more as a new filter to the doctrine. While the Court in Kasinka (supra) interpreted 'public interest' based on intentions of incentivisation, the decision in Shrijee Sales Corporation v. Union of India ¹², went forward to rule that a notification introduced for purposes of providing an incentive can also be revoked on ground of 'public interest'. As per the Court, once public interest is considered to be the superior equity, individual equity can be undermined. However, the Court clarified that there should be a case of 'supervening public interest' for the Court to rule in favour of the Government.

In Shree Durga Oil Mills ¹³ , it was held by the Court that revocation of an exemption notification on public interest is valid only if it overrides any consideration of private loss or gain. In Shree Sidhbali Steels Ltd. ¹⁴, while declaring the inapplicability of doctrine of promissory estoppel in cases of public interest, the Court also categorically held that such revocation should intend to extend equitable treatment. A similar ruling was given in Mahaveer Vegetable Oils (P) Ltd. v. State of Haryana ¹⁵.

Dissecting the ratios laid down in the above case laws, one can decipher that incentive-based notifications can be revoked but the same must provide evidence of favourable equity. Balance of equity is the parameter for applicability of the doctrine of promissory estoppel.

VVF Case

With this background in mind, let us look at the facts in the case of VVF supra . The Government of India announced an 'Incentive Scheme' for setting up new Industries in the earthquake affected district of Kutch. Notification No. 39/2001-CE dated 31.07.2001 was issued. It granted exemption to goods cleared from so much of duty of excise as was equivalent to the amount of duty paid in cash/Personal Ledger Account (PLA) on the finished goods. The petitioner set up new industrial units and made investment. The said notification was amended from time to time. However, vide Notification No. 16/2008-CE dated 27.03.2008, benefit of refund was restricted to value addition, which was notionally fixed at 34%. The same was later increased to 75%. This, according to the petitioner, virtually, amounted to withdrawal of the benefit. A challenge was set up. The same was accepted by the High Court, on a majority verdict, on the grounds that: (i) the withdrawal of the exemption is retrospective and not retroactive and (ii) violative of doctrine of promissory estoppel. Aggrieved, it was taken to the Apex Court by the Union of India.

Arguments

The Revenue contended that: (i) the High Court erred in treating Notification No.16/2008 as withdrawal of the benefit; (ii) the said notification was clarificatory in nature and hence, would apply retrospectively; (iii) Exemption is granted under section 5A of the Central Excise Act and power to grant exemption would include the power to amend, modify and rescind the same; (iv) the benefit was being misused, by unscrupulous manufacturers, leading to large scale tax evasion; hence, the clarification; (v) Doctrine of promissory estoppel is not violated; (vi) Notification No.16/2008 was issued in 'public interest'.

The Assessee contended that: (i) the reduction in the refund was contrary to the parent notification and hence, violative of principle of promissory estoppels; (ii) the original notification was not based on value addition and hence, the impugned notification No.16/2008 was not clarificatory but amending the entire basis of the exemption; (iii) mere misuse of exemption notification by some manufacturers cannot justify the withdrawal of the benefit as there is adequate machinery in the Central Excise Act to punish such offenders.

Observations

The Court framed the following questions before it:

(a) Whether the subsequent notification No.16/2008 can be said to be clarificatory in nature and hence, retrospective?

(b) Whether the amending notification takes away a vested right?

(c) Whether the subsequent notification has been issued in public interest? and

(d) Whether the subsequent notification is hit by the Doctrine of Promissory Estoppel?

The Court relying upon Kasinka and Shrijee Sales Corporation supra held that the doctrine of promissory estoppel hinges upon balance of equity and public interest. In case of supervening public interest, the Government would be allowed to change its policy. The rule of promissory estoppels is an equitable doctrine which has to be moulded to suit particular situation. It is not hard and fast but an elastic one, the objective of which is to do justice between parties.

The judgments on this rule of law expounded earlier (several of them) relied upon by the assessee were distinguished (in a single statement at Para 12) stating that none of them shall apply to the facts of the present case. This, according to us, is an admonishing feature of the judgment.

However, the Court proceeded to concluded that the subsequent notification was merely clarificatory and for removal of doubts. Hence, the amending notification did not intend to, rather did not, take away any rights accrued under the parent notification. The Court was impressed with the evidence produced on record by the Revenue that there was gross misuse of the exemption and hence, the subsequent notification only rationalizes the quantum of exemption. At the time of issuance of the notification, the Government did not visualize such modus operandi being adopted by unscrupulous manufacturers. Only with experience of cases being booked, it prompted issuance of the subsequent notification. Ergo, the subsequent notification was issued in public interest which did not impair any vested right of the assessee.

In the closing, the Court held that the judgment would not enable the Revenue to open closed matters and refunds already sanctioned to the assessee. However, it would apply to pending refund applications.

Our comments

There is discussion on the rule of promissory estoppel. However, in our view, the Court has not ruled that the principle of promissory estoppel has been done away. Rather, the court cannot hold so. In fact, the Court has proceeded to examine the evidence placed on record by the Revenue, in the facts and circumstances of the case and held that the subsequent notification is merely clarifying the intent of the Government and hence, would apply retrospectively. The intent was to grant refund, in cash, for value addition. This intent, according to the Court, is being exemplified in the subsequent notification. According to the Court, the amending notification does not impair or affect any vested right but only clarifies what vested right the assessee had under the original notification. The Court, according to us, has essentially rules that promissory estoppel cannot be a bar for the Government to clarify what is implicit based on public policy.

Thus, the above ruling, in our view, cannot be applied straight away to suggest that the doctrine of promissory estoppel cannot be raised as a contention. The said principle would be applicable, as all principles in law, to facts and circumstances of each case. If the Court finds that a vested right was created based on a promise of the Government which is being taken away, the said rule of law would come to rescue.

The term 'public interest' has rarely being defined by the Courts while interpreting decisions on promissory estoppel. Time and again the Apex Court has ruled that the Government is not bound by doctrine of promissory estoppel on matters of public policy. The definition or interpretation of the term public interest or public policy has always been debatable.

We may refer to recent decision of the Supreme Court in the case of State of Uttar Pradesh V/s Birla Corporation ¹⁶ wherein this principle was applied by the Court. The Court examined the concept of "public interest" and held that the supervening public interest should be adjudged based on material placed on record by the Government during the course of judicial review and not merely by placing a counter affidavit. The Court held that once parties have proceeded to act on the premise that the State is empowered to rescind the benefit granted, doctrine of promissory estoppel cannot be an impediment in this regard. However, this rule is hedged or laced with condition that there is heavy burden on the State to show that public interest is so overwhelming that it would be inequitable to hold the Government to be bound by its promise. The Court would not act on mere ipse dixit of the Government and must insist on highly rigorous standard of proof for discharge of this burden. Analyzing the affidavit placed by the State, the Court ruled that the logistics issues or revenue issues or lack of proper understanding cannot be reasons to support "public interest". The Court went on to examine the intent of introduction of the Notification, being development of backward areas, held that the subsequent notification/amending notification would not apply to industrial units established prior to 14.10.2004. However, this judgment was not cited before the Court in VVF case.

The fulcrum of the case of the Revenue before the Court was that there is large scale evasion and misuse of the exemption notification. However, laudable and stretched meaning could be given to "public interest", in our humble opinion; it cannot; within it contours; cover cases of tax evasion. It is well settled that any statement which is too general cannot be accepted as true. If that be the case, the said reasoning would be good enough for withdrawal of all exemption notifications or benefits or concessions granted by the Government. Then why grant exemptions in the first place? Why only exemptions, statutory provisions would not be required. If "A" does not pay tax, can the entire community be punished for his misdeeds, especially when no evidence was placed on record that there was any attempt to evade tax by the petitioners before the court or any such cases booked against them.

There would be no need for any explanation or discussion or debate, if "public interest" were to be equated with "tax evasion". This is a clear departure from the settled law cited before the Court, which seems to have been, with respect, brushed aside. Then, we may ponder what would be the need for section 11A or Section 11 of the Central Excise Act? The entire statutory machinery has been overlooked, rather mocked at. It is as if saying that the statutory machinery has failed or the tax officers are so incompetent to check evasion that there is a need to withdraw the exemption benefit, from those who are purportedly innocent. If that line of reasoning were to be given credence, where would a dividing line be drawn?

The Court has, yet again, alluded premium on the follies of the Government. The intention of providing exemption was to promote industrialization in areas struggling with problems of underdevelopment either due to calamities or due geographical disadvantage. Such industries generate employment for lakhs. Such industries are set up on incentives promised by the Government. This would compel manufacturers to not invest in far-flung areas of the country, as such schemes are susceptible of being withdrawn depending upon the whims of the Government.

In the current pandemic situation, the government is likely to introduce several benefits to industries as an incentive. Considering this judgment, it is equally likely on the part of the Government to cancel the incentives midway based on 'public interest'. Trust could be betrayed again.

To our mind, in conclusion, it appears that the said judgment would not be applicable universally and would vary from the facts and circumstances of each case which need to be examined by the Court, in subsequent cases, in light of: (i) the intention and purport of the exemption; (ii) the benefit granted; (iii) vested or accrued interest created or not; (iv) withdrawal of earlier benefit or not; (v) public interest and degree of evidence in support thereof.

In the end, we must be reminded that Lord Krishna (speaking to Warrior Arjuna), on whether King Yudhishthira was right in maintaining his promise, Lord states: "He, who promises, must maintain the same, even if the promise results in unintended or unwarranted or unwanted consequences for the maker thereof, else he must not promise at all".

[The views expressed are strictly personal.]

¹ Civil Appeal Nos. 2256-2263 OF 2020- 2020-TIOL-83-SC-CX-LB

²[1877] UKHL 1, [1877] 2 AC 439

³ [1947] K.B. 130

⁴ 7 1901 1.L.R. 28 Cal. 6

⁵AIR 1968 SC 718

⁶ - 2002-TIOL-1041-SC-CT

⁷Chandralekha Ghosh, Promissory Estoppel: Its Space in Public Law, Student Bar Review, Vol. 18, No. 2 (2006)

⁸ (1981) 1 SCC 11

⁹ AIR 2002 SC 322

¹⁰ -2002-TIOL-384-SC-CX-LB

¹¹ - 2002-TIOL-583-SC-CUS

¹² (1997) 3 SCC 398

¹³ (1998) 1 SCC 572

¹⁴ (2011) 3 SCC 193

¹⁵ (2006) 3 SCC 620

¹⁶Civil Appeal No.1580 of 2019 (decided on 20.11.2019) - 2019-TIOL-508-SC-MISC