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The State of Uttar Pradesh v. M/s Birla Corporation Limited

Civil Appeal · 2019 INSC 1268Decided 20 Nov 2019
Civil Appeal No. 1579 of 2019
Justice A.M. Khanwilkar · Justice Dinesh Maheshwari

Background

In 1998, Uttar Pradesh issued a notification offering a tax rebate to industries that used fly ash (a waste product from thermal power plants) in manufacturing, to encourage industrial development and reduce an environmental hazard. Companies including Birla Corporation and Jai Prakash Associates set up or expanded factories and began commercial production relying on this promised rebate. In 2004, after a High Court ruling (later upheld by the Supreme Court) extended the rebate even to out-of-state manufacturers, which the State had not intended, the State rescinded the entire 1998 notification, cutting off the rebate even for companies that had already set up units and started production in reliance on it. The companies challenged this in the Allahabad High Court, which partly ruled in their favour by giving the rescinding notification only prospective effect; the State then appealed to the Supreme Court.

Decision Breakdown

The Supreme Court held that the law (Section 5 of the UP Trade Tax Act) gave the State power to grant rebates retrospectively but not to withdraw or rescind them retrospectively, so the 2004 notification could not be read as applying to industries that had already started production and complied with conditions before it was issued. The Court also rejected the State's argument of "supervening public interest" justifying the withdrawal, finding that the thermal power stations were still generating the same fly ash, the companies were still using it as intended, and the State's real motive was simply to avoid the extra cost of the earlier court ruling, which, by itself, is not a strong enough reason to go back on a promise already acted upon. Accordingly, both Birla Corporation and Jai Prakash Associates were held entitled to their rebate for the full originally-promised period (up to 2008 and 2014 respectively), though the actual refund amounts must still be verified by the tax authorities, including checking that the companies had not already passed on the tax burden to their own customers.

Lesson Learnt

When the government makes a public promise (like a tax incentive) and people or businesses genuinely act on it, the government generally cannot go back on that promise retrospectively just because it later turns out to be more costly than expected: this is the legal principle of "promissory estoppel," and the burden is on the government to prove a truly overwhelming change in circumstances before it can be excused from its commitment.

Official source (sci.gov.in)View Judgment (PDF)

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