Tax Exemptions Are 'Defeasible' Concessions, Not Enforceable Rights: Supreme Court

Holding that a tax exemption is only a “defeasible” concession, the Supreme Court has ruled that beneficiaries have no legally enforceable right to its continuation beyond the period of grant and that such benefits can be withdrawn by the State in public interest.

A bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe was allowing appeals filed by the State of Maharashtra against a batch of industrial units and captive power producers, including Reliance Industries Ltd., challenging Bombay High Court judgments that had quashed notifications withdrawing electricity duty exemptions granted to industries generating power for captive use.

The court said that an exemption under a fiscal statute is in the nature of a privilege and does not create a vested right in favour of its recipient.

“The recipient of a concession has no legally enforceable right against the Government to grant of a concession except to enjoy the benefits of the concession during the period of its grant. This right to enjoy is a defeasible one. in the sense, that it may be taken away in exercise of the very power under which the exemption was granted,” the court held.

The bench described an exemption as “a privilege granting an advantage not available to others" and emphasised that such concessions inherently remain subject to modification or withdrawal in public interest.

The court noted that the exemption was granted under Section 5A of the Bombay Electricity Duty Act, 1958, which empowers the State to grant, modify, or withdraw exemptions.

It also clarified the limits of the doctrine of promissory estoppel in fiscal matters, holding that while it applies against the State, it cannot be invoked to prevent a policy change where overriding public interest exists.

“The doctrine of promissory estoppel is applicable against the State Government but, in case there is a supervening public equity, the Government must be allowed to change its stand, it would then be able to withdraw the representation made by it which induced person to take certain steps which may have gone adverse to the interest of the such person on account of such withdrawal,” the bench observed.

The court emphasised that electricity duty constitutes an important source of State revenue and that decisions on exemptions involve balancing industrial incentives with fiscal stability. It held that revenue augmentation and budgetary constraints are valid grounds for revisiting such concessions.

The exemption, the court noted, had been introduced as a policy measure to encourage industries to generate electricity for their own consumption and reduce pressure on the public power supply system and had been enjoyed by industries from 1994 until 2000 before being modified.

Applying these principles, the court upheld the State of Maharashtra's decision to withdraw and modify electricity duty exemptions granted to captive power producers under Section 5A of the Act, reversing Bombay High Court judgments dated October 5, 2009 and November 7, 2009.

The High Court had held the withdrawal to be arbitrary and discriminatory and found that the State had failed to justify rescinding the exemption, even after industries had set up captive power plants relying on the policy.

Disagreeing, the Supreme Court held that no enforceable right accrued from such concessions and that the state was entitled to recalibrate its fiscal policy in the public interest.

At the same time, the court said that the manner of withdrawal must be fair and not impose undue hardship.

It held that a sudden withdrawal without notice would burden industries that had structured their affairs on the basis of the concession.

Balancing equities, the court directed that the withdrawal of exemption would take effect only after a period of one year, allowing industries reasonable time to adjust.

For Appellant: Senior Advocates Puneet Jain, Shyam Mehta; Advocates Shivaji M. Jadhav, Brij Kishor Sah, Vignesh Singh, Apurva, Aditya S. Jadhav, Amit Kumar Gupta, Yogit Kamat, Om Sudhir Vidyarthi, Siddharth Dharmadhikari, Aaditya Aniruddha Pande, Shrirang B. Varma, Bharat Bagla, Sourav Singh, Aditya Krishna, Adarsh Dubey, Chitransha Singh Sikarwar.

For Respondent: Senior Advocates C. S. Vaidyanathan, Harish M. Jagtiani, Basava S. Prabu Patil; Advocates K. R. Sasiprabhu, Gaurav Thakur, Mahesh Sahasranaman, Vishnu Sharma A S, Vinayak Goel, Ronak Shankar Agarwal, Namrata Saraogi, Aaditya Aniruddha Pande, Sandeep Sudhakar Deshmukh, Rakesh K. Sharma, Adviteeya, D. Tejaswi Reddy, Sanjeev K. Kapoor, Divya Chaturvedi, Srishti Rai, Jai Dhanani, Sumit Goel, Ishan Nagar, Swati Bhardwaj, Apurba Pattanayak, Akhil Shresth, Suvasita Chopra, Bhargava V. Desai, Jahnavi Vohra, Yash Jain, Shivam Sharma, Parmanand Pandey, Ruby Singh Ahuja, Kritika Sachdeva, Megha Dugar, Jappanpreet Hora, Abhyuday Mishra, Praveena Gautam, Brijendra Chahar, K. K. Gupta, Pawan Shukla, Tissy Annie Thomas, Rohan Bansla, Arijit, Pranaya Goyal, Omm Mitra