01 Dec 2020

Unreasonable failure of the state to fulfil the legitimate expectation is arbitrary and violative of Article 14 of the Constitution - Supreme Court of India

Case : State of Jharkhand and Ors. v. Brahmputra Metallics Ltd., Ranchi and Anr. Civil Appeal Nos. 3860-3862 of 2020

Court : Supreme Court of India

Bench : Justice Dr. Dhananjaya Y. Chandrachud and Justice Indu Malhotra

Decided on : 01 Dec 2020

Relevant Statues

Article 226 of the Constitution of India

Section 9 of the Bihar Electricity Duty Act 1948

Rule 4, 6, 9 of the Bihar (Jharkhand) Electricity Duty Rules 1949

Brief Facts and Procedural History

1. The respondent commenced commercial production in the integrated manufacturing unit of Sponge Iron and Mild Steel Billets, together with a captive thermal plant with a capacity of 20 MW. A certificate of registration was granted to the respondent on 22 November 2011 under Rule 4 of the Bihar (Jharkhand) Electricity Duty Rules 1949, according to which it was liable to pay duty for distribution and/or consumption of the energy from 1 October 2011. Based on the returns submitted by the respondent in Form-III, read with Rule 9 of the Bihar Rules 1949, assessment orders were passed by the assessing officer for the Financial Years 2011-12, 2012-13 and 2013-14.

2. The Industrial Policy 2012 was notified by the State government on 16 June 2012. Clause 38(b) of the Policy envisaged that notifications by the Departments of the State government would be issued within one month, but there was a failure to comply with the schedule. To give effect to the exemption from electricity duty, a notification under Section 9 of the Bihar Act 1948 was necessary. Since an exemption notification was not issued by the State of Jharkhand under Section 9, a writ petition was filed under Article 226 of the Constitution before the High Court of Jharkhand by a company by the name of Usha Martin Limited.

3. Eventually, the State government issued an exemption notification on 8 January 2015 but made it effective from the date on which it was issued. The Industrial Policy 2012 announced an incentive in the form of a rebate or deduction on electricity duty for five years from the commencement of production. If a notification under Section 9 had been issued by the State government within a month, in terms of the representation held out by the Industrial Policy 2012, the respondent would have had the benefit of almost the entire period of exemption contemplated by the policy. But since the exemption notification dated 8 January 2015 was made prospective, the respondent would receive the benefit of the exemption from electricity duty for a much lesser period. Faced with this situation, the respondent instituted writ proceedings before the High Court of Jharkhand in August 2019.

4. Finding fault with the delay on the part of the government in issuing an exemption notification, the High Court held that there was no specific reason for the delay and that “but for the lethargic approach of the state authorities” the exemption should have been issued within a month of the issuance of the Industrial Policy 2012. It was contrary to the doctrine of promissory estoppel. The High Court concluded that the notification dated 8 January 2015 issued by the Commercial Tax Department of the State government ought not to be construed with prospective effect and the clause making it prospective would have to be struck down. The electricity duty deposited for Financial Years 2011-12, 2012-13 and 2013-14 was directed to be adjusted against the future liability of the respondent towards electricity duty.

5. The Appellant challenged this judgement in appeal before the Supreme Court.

The Issue of the Case

Whether the respondent is entitled to claim a rebate or deduction of 50% of the amount assessed towards electricity duty for Financial Years 2011-12, 2012-13 and 2013-14?

The Observations of the Court

1. Industrial Policy 2012 was brought to “boost economic activities to sustain the current level of growth and achieve an even better pace of development”.

2. As an integral component of the policy, Clause 32.10 envisages the grant of an exemption from the payment of 50 per cent of the electricity duty for five years both for new and existing industrial units setting up captive power plants for self-consumption or captive use. The period of five years was to be reckoned from the date of the commissioning of the plant. Under Clause 35.7(b), the entitlement would ensue from the financial year following the date of production.

3. The State government was cognizant of the need to implement the policy immediately to secure the benefit to eligible units over the entire term of five years. Recognizing this need, Clause 38(b) envisaged that notifications by its diverse departments to enforce the terms of the policy would be issued within one month.

4. The High Court has justifiably referred to this as a case of bureaucratic lethargy. It did issue a notification. But it did so on 8 January 2015, after a period of a month envisaged under the Industrial Policy 2012 had dragged on for nearly three years. By making the notification prospective, it deprived units such as the respondent of the full benefit of the exemption which was originally envisaged in terms of the Industrial Policy 2012. Such attitude defeats the objective sought to be achieved.

5. The Honourable Supreme Court referred to earlier decisions in the cases of State of Bihar v. Kalyanpur Cement Limited, (2010) 3 SCC 274, Manuelsons Hotels Private Limited v. State of Kerala, (2016) 6 SCC 766 and Motilal Padampat Sagar Mills Co. Ltd. v. State of UP, (1979) 2 SCC 409 to justify its observations.

6. PN Bhagwati, J. and Motilal Padampat Sagar Mills Co. Ltd. v. State of UP, (1979) 2 SCC 409 viewed promissory estoppel as a principle in equity and accepted that it could give rise to a cause of action and thus, it no more remained a shield but could also be used as a sword.7. 

7. The Honourable Supreme Court highlighted the doctrinal confusion prevailing in India with respect to the doctrines of promissory estoppel and legitimate expectation that creates ambiguity about law and the citizen consequently become victims, and traced a more clear position of law through the following cases:

8. In Monnet Ispat and Energy Ltd. v. Union of India [(2012) 11 SCC 1] H L Gokhale, J. highlighted the different considerations that underlie the doctrines of promissory estoppel and legitimate expectation. The learned judge held that for the application of the doctrine of promissory estoppel, there has to be a promise, based on which the promise has acted to its prejudice. In contrast, while applying the doctrine of legitimate expectation, the primary considerations are reasonableness and fairness of the State action.

9. In Union of India v. Lt. Col. P.K. Choudhary [(2016) 4 SCC 236] it was held that the doctrine of legitimate expectation cannot be claimed as a right in itself, but can be used only when the denial of a legitimate expectation leads to the violation of Article 14 of the Constitution.

10. In Food Corporation of India v. Kamdhenu Cattle Feed Industries, 4 (1993) 1 SCC 71 it was held that it is necessary to consider and give due weight to the reasonable or legitimate expectations of the persons likely to be affected by the decision or else that unfairness in the exercise of the power may amount to abuse or excess of power apart from affecting the bona fides of the decision in a given case. The decision so made would be exposed to challenge on the ground of arbitrariness.

11. In NOIDA Entrepreneurs Assn. v. NOIDA, 5 (2011) 6 SCC 508 it was observed that the decision taken arbitrarily contradicts the principle of legitimate expectation. An authority is under a legal obligation to exercise the power reasonably and in good faith to effectuate the purpose for which power stood conferred.

12. It was concluded that the State had made a representation to the respondent and similarly situated industrial units under the Industrial Policy 2012. This representation gave rise to a legitimate expectation on their behalf, that they would be offered a 50% rebate/deduction in electricity duty for the next five years. However, due to the failure to issue a notification within the stipulated time and by the grant of the exemption only prospectively, the expectation and trust in the State stood violated. Since the State has offered no justification for the delay in issuance of the notification or provided reasons for it being in the public interest, we hold that such a course of action by the State is arbitrary and is violative of Article 14.

13. Once the High Court holds the respondent’s writ petition to be legally sustainable on merits, this Court should not interfere on grounds on delays and laches alone (Dayal Singh v. Union of India, (2003) 2 SCC 593). The State cannot possibly contend that the result of the delay has led to it altering its position to its detriment. Nor is it a case where third parties may be affected as a consequence of a delay in instituting writ proceedings (Hindustan Petroleum Corporation Ltd. v. Dolly Das, (1999) 4 SCC 450).

14. In the line of the decisions in Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536 and Indian Council for Enviro-Legal Action v. Union of India, (2011) 8 SCC 161, no unjust enrichment was found on the part of the petitioner.

The Decision Held by the Court

1. The respondent is entitled to a rebate/deduction from electricity duty for Financial Years 2012-13 and 2013-14

2. The respondent would not be entitled to a rebate/deduction for Financial Year 2011-12 as in terms of Clause 35.7(b) of the Industrial Policy 2012; the entitlement ensues from the financial year following the commencement of production and the respondent commenced production on 17 August 2011.

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