Govt. Estoppel in Taxation

1. Introduction

The application of the legal doctrine of estoppel, legitimate expectations and their relevance in the modern legal context has resulted in numerous cases against the government and other authorities. In several legal jurisdictions, the general idea was that “the King is not bound by estoppels though he can take advantage of them.”[1]

This clearly had an adverse effect on individuals who relied on governmental representations and suffered losses. This view, however, has changed considerably. Lord Denning in Robertson v. Minister of Pensions[2], pronounced that the Crown could not claim sovereign immunity as an absolute defense from being estopped giving rise to a modern outlook on the doctrine.

Many such liberal interpretations of the doctrine of estoppel, paired with the duty imposed by the doctrine of legitimate expectations have followed, establishing a trend of numerous courts estopping governments to representations made by their agents or themselves if a degree of unfairness is involved in their actions.

Deeply rooted in the principles of equity, the doctrine of estoppel is recognized under Section 115 of the Indian Evidence Act, 1872[3]. The Indian judiciary’s view was initially in consonance with the Canadian principle of the King not being estopped.

 However, post the Anglo-Afghan case[4], their position was altered. The Government of India announced concessions regarding the import of certain raw materials in order to encourage export of garments to Afghanistan. The Government later rescinded the concessions partly. The Court held that the Government had to be estopped by its promise. This prompted a complete shift in the dynamic of applying the doctrine against the Government. Thereafter, the Government could no longer claim sovereign immunity to escape estoppel.

Due to the dynamic evolution of the doctrine, its disposition in the public law sphere is still undetermined. However, estoppel, paired with the doctrine of legitimate expectations has given rise to a plethora of claims arising in multiple public sectors. Taxation, being a fundamental public sector involving high levels of government discretion, has seen multiple pleas where the government refuses to honor its promise, or backs out leaving affected parties with no remedy.[5]

The Courts seem to forsake taxpayers who have been misled to their disadvantages by government misrepresentations, and rarely ever hold the Government liable to live up to the representations, either express or by mere conduct.[6] A taxpayer’s claim of estoppel against the state is more often denied than not.[7]

2. Evolution of Estoppel in India

The Court in Motilal Padampat Sugar Mills v. State of U.P[8] deemed the Government liable to deliver upon the assurances of the Chief Secretary of the Government on giving total exemption from sales tax to new industrial units even after the policy was changed. This further solidified the trend set in the Anglo Afghan case. In the judgment, the Court acknowledged the doctrine of equity –

‘We hold that the claim of the respondent is appropriately founded upon the equity which arises in their favour as a result of the representation made on behalf of the Union of India in the Export Promotion Scheme, and the action taken by the respondent acting upon that representation under the belief that the Government

would carry out the representation made by it.’

This trend seemed to follow in multiple judgments thereafter. In State of U.P. v. Birla Corporation Ltd.[9], the judges held the State to great scrutiny, and insisted that a highly rigorous standard of proof for any action the State deemed as supervening public interest needed to exist. Furthermore, the Court also equated the liabilities of public bodies with those of private individuals, opining that they were bound to carry out representations of facts and promises made by them on which other individuals or entities had relied on, altering their position to prejudice.[10] There could be no withdrawal from representations of a program that had already been put into action.

There were a series of lawsuits, beginning from 2009, that took an unanticipated turn from the trend that was developing. The case could be regarded as the first such judgment. Although there was an inquiry ordered in Devi Multiplex[11] to whether the aggrieved was eligible to receive the benefits of estoppel, the Court still treaded very carefully around the question of estopping the government.

The Dharampal Satyapal[12] judgment, saw the Supreme Court reverse the decision of the High Court to estop the government, and since, remedy that was being made available to adversely affected individuals started diluting. In Jit Ram Shiv Kumar v. State of Haryana[13], a municipality had granted exemption to the aggrieved from octroi for the development of a mandi but rescinded the exemption. The exemption was granted again for the original sale of plots, but levied taxes too. The Government was absolved from any estoppel on any legislative action.

Ever since, the government was granted a clear discretionary power in rescinding their representations using ‘misuse’ and ‘public good’ as a defense[14]. The ambit of usage of the doctrine against the government was being limited, and cases were starting to favour the government.[15] There were numerous cases where the government went back[16] on representations made by them in matters of taxation, duty and other such areas stating misuse of policies by a few as defense.[17][18] The Courts accepted that by preventing misuse by a few, the Government was working in public interest.[19]

The final nail in the coffin was the landmark VVF Industries[20] case. The case arose in interesting facts. In order to support Kutch, which was ravaged by the devastating earthquake in 2001, the Government of India announced an incentive scheme for setting up new industries.

 The incentive scheme primarily offered a refund of the entire Excise duty paid by units in cash on the manufacture of finished goods for a period of five years from the commencement of commercial production, subject to certain conditions of expansion, certification etc. . Appropriate notifications in public interest were issued by the Central Government to effectuate these Excise duty exemptions in identified areas of the States. The adverted aim of all these incentives was industrialization and generation of employment avenues in these areas.

In a change of stance, in 2008, the Central Government sought to restrict the refund to only the “value addition” undertaken on products manufactured in such units. The restriction in the quantum of refund was brought about by amending the earlier notifications. However, its operation was made retrospective from the date of commencement of the earlier notifications. This was ostensibly done to arrest rising instances of bogus refund claims by unscrupulous players. All the amendment notifications were also issued in public interest.

The amendment notifications were successfully challenged by affected parties in the respective jurisdictional High Courts of Gujarat, Guwahati and Sikkim. The High Courts quashed the subsequent notifications on the basis that, having declared such attractive incentives and after luring investors to these States, any alteration in the incentive package to their detriment would certainly attract the doctrine of promissory estoppel.

 The plea of the Government that the restriction was in public interest, as the scheme has been misused by many fictitious units to claim refunds based on bogus documents, cut no ice with the High Courts. The Courts held that misuse cannot be a ground to retrospectively restrict benefits when there were adequate provisions in law to take action against such fictitious units. Further, retrospective restriction of the benefit did not serve any larger public interest that could outweigh the immense detriment to affected investors. The matters eventually reached the Supreme Court and the judgement in VVF Industries came to be delivered.

The Supreme Court’s judgement begins with the premise that promissory estoppel will not apply if there is a change in the Government’s stand on account of public policy or in public interest. The issue essentially hinges on whether the Government’s argument of “public interest” outweighs the vested right of aggrieved investors. The Government justified the retrospective restriction on the ground of misuse by unscrupulous manufacturers, while investors pleaded that, having acted upon the incentive package and made heavy investments, if the benefits of refund were now allowed to be curtailed retrospectively (due to instances of misuse by some), it would severely impair them financially.

The Supreme Court in its wisdom chose misuse of the benefits as a fit ground in larger public interest to validate the retrospective amendments made by the Government. The amendments were held to be clarificatory. It was further held that in cases of misuse, promissory estoppel has no application.  Perhaps to balance equities, the Court held that refunds sanctioned prior to the amendments would not be reopened and the ruling would apply only to subsequent pending claims.

3. Development of the doctrine in other Commonwealth Jurisdictions

In such times, it becomes important to understand how other legal systems have developed the doctrine. Estoppel has evolved very differently in other Commonwealth jurisdictions. The United Kingdom seems to have clubbed the duty imposed by the doctrine of legitimate expectations with the contractual obligations of estoppel and has an overly distinct outlook in comparison with India.

 A) United Kingdom

In Western Fish Products Ltd. v Penwith District Council[21], the court held that when an officer, acting within the scope of his ostensible authority, makes a representation on which other acts on it to their detriment, then a public authority is estopped from denying[22]. In R v Secretary of State for the Home Department ex parte Khan[23], it was held that a public authority could not resile from the assurance given earlier because it would be unfair to do so. In the case of MFK Underwriting Agencies[24], the Revenue could not withdraw from a representation if this would cause substantive unfairness to the applicant.

In Regina (Drax Power Ltd and another) v HM Treasury[25], the Claimants were party to a tax benefit scheme, which was rescinded without any prior notice to the Claimants, in ‘public interest’. Jay J’s judgment stated a reasonable man could foresee that the exemption could be rescinded without providing a notice for at least a period of 2 years, and the authority had made no express representation that a notice period of 2 years would be provided.

In Solar Century Holdings Ltd v SS for Energy and Climate Change[26], the Claimants claimed that the SS breached legitimate expectations, misused power, and acted unfairly by stopping the renewables obligation for larger scale solar projects. Floyd LJ held that the government could change its policy where there were rational grounds unless it amounted to abuse of power.

The Courts in the U.K have seemed to balance the principles of equity on a case to case basis, and utmost importance is given to the facts and circumstances surrounding the case. No binding precedent exists, and it is left up to the Courts to balance equity, fairness and the discretionary power enjoyed by an authority.

B) Canada

Canada, another prominent Commonwealth jurisdiction, has relied heavily on English judgments while pronouncing over cases. In Mentuk v. The Queen[27], McNair J. opined that the doctrine of estoppel was a fundamental part of reinforcing the leading roles of legitimate expectations. It was an important supplement that created a sense of social trust between the government and individuals. If individuals were denied a remedy on the grounds of estoppel, it would cause a tremendous amount of unfairness to the aggrieved. Further, it would be unjust and inequitable to allow the representor to go back on promises and assurances

In Optical Recording Corp. v. Canada[28], the applicant, a Canadian corporation, acted in accordance with a notice of assessment of the Minister of National Revenue. The Federal Court held that the Minister was estopped from benefitting from the garnishments so obtained. The judge declared that ‘public interest’ cannot be a general defense to any amount of arbitrariness and unfairness displayed by government actions. If an individual relied at his peril on the representation given by an authority, the authority could be justly estopped in public law.

4. Conclusion

The VVF judgement seems problematic at various levels. It arms Governments with misuse as a valid ground to rescind or roll back tax incentives. The justification that misuse could only be discerned from cases detected much after the issuance of a scheme is worrying, as it legitimizes the element of afterthought in Governmental action and dilutes the onus on Government to anticipate misuse and incorporate robust safeguards (typically built into tax policies and statutory provisions) to bring to book such culprits. In fact, such vigilance forms an integral part of tax policy and administration. Thus, the threshold for scrutiny of post facto alteration of tax policy by Governments has been lowered.

In equating misuse with larger public interest, the judgment also dilutes the principles of promissory estoppel. “Public interest” is a fluid term and requires a contextual interpretation. Where taxation is concerned, to allow misuse by a few to outweigh the vested right of several investors, particularly when no issues of public health or national security are concerned, seems unreasonable. The judgement overlooks the crucial fact that such rollbacks will have severe financial implications on investors who have lived up to their commitments of investment in backward areas and have helped in generating employment opportunities.  

The sudden change in the interpretation of the doctrine has given rise to numerous problems. The judgement comes at a time when the country is going through its worst economic crisis. COVID & the consequent lockdown has played havoc with economy. In coming days, the Government is expected to announce stimulus/incentive packages to boost the economy & attract investments. The VVF industries ruling from the highest court of the land may not inspire confidence in existing or future investors.

India has taken a very sudden turn in its interpretation of the doctrine of estoppel against the government and has wavered from the general exposition followed by other Commonwealth nations. The VVF Industries case has set a very arbitrary precedent, which naturally will have an adverse effect on investors looking to set up in India. The discretionary power of the Government, although statutory, must have a certain degree of fairness, and the defense of ‘public good’ must be heavily scrutinized before pronouncing another case with similar facts.


[1] R. v. Royal Bank of Can. (1920), 50 D.L.R. 293

[2] [1948] 2 All E.R. 767 (K.B.)

[3] The Indian Evidence Act, 1872 s.115

[4] Union Of India & Ors vs M/S. Indo-Afghan Agencies, 1968 SCR (2) 366

[5] J. H. S., III. “The Emerging Concept of Tax Estoppel.” Virginia Law Review, vol. 40, no. 3, 1954, pp. 313–330. JSTOR, http://www.jstor.org/stable/1070323.

[6] Richard D. Manning, The Application of the Doctrine of Estoppel against the Government in Federal Tax Cases, 30 N.C. L. Rev. 356 (1952).

[7] Taxation -Estoppel Against the Government Based on Taxpayer’s Reliance Upon Commissioner’s Rulings, 6 U. Miami L. Rev. 269 (1952)

[8] Motilal Padampat Sugar Mills v. State of U.P 1979 AIR 621, 1979 SCR (2) 641

[9] State of U.P v. Birla Corporation Ltd.

[10] Century Spg & Mfg Co. Vs Ulhasnagar Municipality, AIR 1971 SC 1021

[11] Devi Multiplex and anr v. State of Gujarat, (2015) TIOL 122SC [MISC]

[12] Union of India v. Dharampal Satyapal

[13] Jit Ram Shiv Kumar v. State of Haryana

[14] Union of India v. Unicorn Industries, 2019 (368) E.L.T. 202 (S.C.)

[15] Prashanti Medical Services and Research Foundation v. Union of India, 2019-TIOL-299-SC-IT

[16] Ultratech Cement Ltd v. State of Rajasthan, 2020-TIOL-123-SC-VAT

[17] Director General of Foreign Trade v. Kanak Exports, 2015 (326) E.L.T. 26 (S.C.)

[18] Manuelsons Hotels Private v. State Of Kerala & Ors

[19] Union of India v. Meghalaya Steels and Concrete Products, 2017 (6) G.S.T.L. 353 (S.C.)

[20] Union Of India & Anr.Etc. vs M/S V.V.F.Ltd

[21] Western Fish Products Ltd. v Penwith District Council, (1981) 1981 2 ALL ER 204

[22] Western Fish Products Ltd. V Penwith District Council, 1981 2 ALL ER 204

[23] R v Secretary of State for the Home Department ex parte Khan, [1995] 2 All ER 540

[24] R. v Inland Revenue Commissioners, ex parte MFK Underwriting Agencies Ltd. & Ors. and related applications, [1989] BTC 561

[25] Regina (Drax Power Ltd. and anr) v. HM Treasury [2016] EWCA Civ 1030

[26]  Solar Century Holdings Ltd v SS for Energy and Climate Change, [2016] EWCA Civ 117

[27] Mentuk v. The Queen, [1986]1 3 F.C. 249.

[28] Optical Recording Corp. V Canada, [1991] 1 F.C. 309

Author: Paarth Samdani

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