Supreme Court Upholds Withdrawal of Tax Exemption, Grants One-Year Transition Relief to Reliance

The State had granted exemption from electricity duty to industries generating power through captive power plants as part of a policy to encourage self-sufficiency. This benefit continued for several years. Later, through notifications issued in 2000 and 2001, the State modified and partially withdrew the exemption, resulting in levy of duty.

Industries challenged this move, arguing that the sudden withdrawal was arbitrary and unfair, especially since they had structured their operations based on the earlier policy. The High Court accepted their challenge and struck down the notifications. The State, however, argued that such exemptions are policy concessions and can be changed or withdrawn in public interest, particularly due to fiscal needs.

Issue Before Court: Whether the State can withdraw or modify a tax exemption and whether such withdrawal violates principles like promissory estoppel or legitimate expectation.

SC Decided: The Supreme Court upheld the State’s power to withdraw or modify tax exemptions, holding that such benefits are concessions and do not create any vested right. It clarified that doctrines like promissory estoppel or legitimate expectation cannot prevent the State from changing its policy where public interest demands it.

Courts should also be cautious in interfering with fiscal decisions unless they are clearly arbitrary. However, the Court found that the sudden withdrawal caused hardship to industries that had relied on the exemption. It held that fairness requires giving them reasonable time to adjust. Thus, while upholding the validity of the notifications, the Court directed that they would become effective only after a transition period of one year.

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