Full Judgment Text
REPORTABLE
2026 INSC 18
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 66 OF 2026
(Arising out of Special Leave Petition (C) No. 7013 of 2019)
IFGL REFRACTORIES LTD.
…APPELLANT
VERSUS
ORISSA STATE FINANCIAL
…RESPONDENTS
CORPORATION & ORS.
J U D G M E N T
Signature Not Verified
Digitally signed by
VISHAL ANAND
Date: 2026.01.06
15:52:01 IST
Reason:
J.B. PARDIWALA, J.:
For the convenience of exposition, this judgment is divided into the
following parts:-
INDEX
A. PARTIES TO THE APPEAL ...................................................... 2
B. FACTUAL MATRIX ................................................................. 4
C. SUBMISSIONS ON BEHALF OF THE APPELLANT .................. 24
D. SUBMISSIONS ON BEHALF OF THE RESPONDENTS ............. 27
E. ISSUES FOR DETERMINATION ............................................ 31
F. ANALYSIS ............................................................................ 32
(I). Whether the MM Plant unit set up by Indo Flogates could be termed
as a new industrial unit in accordance with the terms of industrial
policy of 1989? ............................................................................. 32
(II). If the answer to the issue no. (I) is in the affirmative then, whether
the respondents were justified in rejecting the capital investment
subsidy and DG Set subsidy respectively for MM Plant unit on the
ground that both Indo Flogates and the appellant company had already
exhausted the overall subsidy limit under the previous industrial
policies? ....................................................................................... 70
(III). Whether the respondents are estopped from refusing to disburse
the capital investment subsidy and DG Set subsidy respectively for the
MM Plant unit to the appellant company? ....................................... 75
G. CONCLUSION ..................................................................... 120
Special Civil Petition (C) No. 7013 of 2019 Page 1 of 122
1. Leave Granted.
2. This appeal arises from the judgment and order dated
07.12.2018 passed by the High Court of Orissa in the W.P. (C)
No. 17398 of 2008 by which the High Court rejected the writ
petition filed by the appellant company and thereby, denied the
sanctioned incentives of capital investment subsidy and DG Set
subsidy under industrial policy of 1989 in favour of industrial
setup namely, Magneco Metrel Plant (“ MM Plant Unit ”) as
claimed by the appellant company on the ground that the
incentive of subsidy under industrial policy of 1989 could have
been granted only once.
A. PARTIES TO THE APPEAL
3. The appellant is a company registered under the provisions of the
Companies Act, 1956, having its registered office at Sector A,
Shed Nos. 7 and 8, Kalunga Industrial Estate, Sundergarh
(Orissa) and is engaged in the manufacturing, processing,
trading, and selling of specialized refractory products and
equipment for the iron and steel industry, such as magnesia
carbon and high-alumina bricks, castables, and moulding
systems, etc. The appellant company was amalgamated with one
Indo Flogates Limited (“ Indo Flogates ”) with effect from
01.04.1999. Upon amalgamation, all the properties, rights, and
powers of Indo Flogates, including the rights, title, interest, and
subsidies in one of the units of Indo Flogates namely, MM Plant
unit came to be transferred in favour of the appellant company.
Special Civil Petition (C) No. 7013 of 2019 Page 2 of 122
4. The respondent no. 1 is the Orissa State Financial Corporation
(OSFC). The OSFC is a statutory corporation established under
the State Financial Corporations Act, 1951 with an object to lend
and advance financial assistance to the small & medium scale
industries and to recover its dues. Under the industrial policy of
1989, applications for subsidies in case of small scale industries
were required to be submitted to the respondent no. 1 directly,
whereas in case of medium / large scale industries applications
were to be submitted to the respondent no. 1 through the
respondent no. 2 authority. In the said policy, the main function
of the respondent no. 1 was to act as a disbursing agency for all
subsidies granted therein to all industrial units. Further, the
respondent no. 1 is also one of the members of the state level
committee and the respondent no. 4 sub-committee respectively
for sanctioning the investment subsidies.
5. The respondent no. 2 is the Director of Industries, Cuttack (DIC).
Respondent no. 2 is established as an administrative and
executive wing of the Industries Department, Government of
Odisha. The main functions of respondent no. 2 are to implement
the industrial policies, process the incentive proposals at
departmental level, and participate in state and district level
committees for grant and sanction of incentives.
6. The respondent no. 3 is the Industrial Promotion and Investment
Corporation of Orissa Limited (IPICOL). Respondent no. 3
authority is established as a nodal agency of the State of Orissa
for investment promotion and single-window facilitation to
promote medium and large-scale industries in the state by
providing necessary support services.
Special Civil Petition (C) No. 7013 of 2019 Page 3 of 122
7. Lastly, the respondent no. 4 is the Sub-Committee of the State
Level Committee (SLC). The state level committee is the body that
sanctions the investment subsidy on application forwarded to
them by the forwarding agencies like the respondent nos. 1 to 3
respectively. As per Clause 6 of the Orissa Capital Investment
Subsidy Rules, 1989 (“ 1989 Rules ”), the state level committee is
vested with the authority to assess the merits of each case
relating to state investment subsidy, determine eligibility, and
sanction the quantum of subsidy admissible to industrial units.
Further, the state level committee is also empowered to delegate
any of its powers and functions to the respondent no. 4 sub-
committee.
B. FACTUAL MATRIX
8. In the year 1989, the Government of Orissa came out with the
industrial policy of 1989, which came into force with effect from
01.12.1989, with the twin objectives of fostering the
establishment of new industrial enterprises and extending
institutional support to the existing industrial undertakings.
Under the said policy framework, a comprehensive scheme of
incentives was envisaged, including, inter alia , capital investment
subsidies, sales tax concessions, exemption from electricity duty,
and subsidies towards technical know-how fees, etc. all intended
to stimulate industrial growth within the State.
9. Clause 3 of the industrial policy of 1989 delineates the
classification of areas for the purpose of extending incentives.
Under this clause, the State of Orissa, having regard to the
varying degrees of industrial backwardness and the existence of
Special Civil Petition (C) No. 7013 of 2019 Page 4 of 122
non-industrial regions, was bifurcated into three distinct zones,
namely Zone A, Zone B, and Zone C respectively. Indo Flogates
and the appellant company are located within Zone C, which
comprises, inter alia , the districts of Cuttack, Puri, Sundargarh,
and Sambalpur respectively. Clause 4 of the said industrial
policy pertains to the eligibility criteria and stipulates that,
subject to the fulfilment of the conditions prescribed therein, new
industrial units shall be entitled to all incentives envisaged under
the policy.
10. Clause 5 of the industrial policy of 1989 talks about capital
investment subsidy. Clause 5.1 therein states that new
industrial units as well as expansion/
modernisation/diversification projects as defined in the policy,
shall be allowed capital investment subsidy including central
investment subsidy, if any, made available by the Government of
India. The capital investment subsidy for Zone C is fixed at 10%
(ten percent) of the fixed capital investment subject to the limit
of Rs. 10,00,000/-.
11. Clause 11.4 of the industrial policy of 1989 provides that new
generating sets of the capacity of 10KW (ten kilowatts) and above
installed by any industrial unit for its industrial use and new
captive power plants would be eligible for capital investment
subsidy of 15% (fifteen percent) of its costs subject to a maximum
limit of Rs. 5,00,000/- and that this subsidy would be in addition
to the capital investment subsidy available to the industrial unit.
The relevant clauses of the industrial policy of 1989 including its
preamble read thus:
“ 1. PREAMBLE
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The Industrial Policies of the State announced in
1980 and 1986 have led to a remarkable upsurge in
the industrial climate of the State. There has been
very encouraging response from entrepreneurs both
outside and inside the State. In the light of experience
gained from implementation of the 1986 Policy and
keeping in view the need to maintain and enhance
the tempo of industrialization in the State, State
Government have decided to further liberalize the
package of incentives announced in the 1986 Policy
with the twin objective of encouraging new industries
and providing support to industries which have come
up in the State during the last few years.
Accordingly, it has been decided to operate, in public
interest, a new Industrial Policy as outlined
hereunder:-
2. DEFINITION
2.1 "Effective Date" means the date of issue of the policy
on and from which, the provisions thereof shall
operative.
2.2 "Expansion / modernisation / diversification" of an
existing industrial unit means additional investment
of more than 25% of the underpreciated [sic] book
value of fixed capital investment of an existing unit
in acquisition of fixed capital investment of
expanding / modernising / diversifying the
production of the said unit and resulting in increased
production over and above the existing installed
capacity of the unit.
2.3 "Fixed Capital Investment" means investment on
land, building, plant and machinery and other
equipments of permanent nature.
Explanation:- The calculation of fixed capital
investment shall be made according to the principles
outlined by Government of India for administration of
Central Investment Subsidy as is or, was in force.
xxx xxx xxx
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2.5 "Industrial Unit" means, any industrial undertaking
detailed in annexure-1 to this Policy and excluded
undertakings excepted therein.
xxx xxx xxx
2.7 "New Industrial Unit" means an industrial unit where
fixed capital investment has been made only on or
after the effective date.
xxx xxx xxx
3. CLASSIFICATION OF AREA
For the purpose of incentives, depending upon
industrial backwardness of different areas and non-
industry areas, the State is divided into the following
three Zones -
Zone 'A' - Phulbani, Bolangir and Kalahandi districts
including growth centres established in these
districts.
Zone 'B' - Keonjhar, Mayurbhanj, Dhenkanal,
Koraput, Balasore, and Ganjam districts including
growth centres established in these district and
districts covered under Zone ‘C’.
Zone 'C' - Cuttack, Puri, Sundargarh and Sambalpur
districts excluding growth centres.
4. ELIGIBILITY FOR INCENTIVES
4.1 Subject to general conditions and specific conditions
for any incentive if any, stipulated in this Policy and
provisions of Annexure-1, new industrial units shall
be eligible for all incentives provided in this Policy.
Provided that incentives on Sales Tax shall be
available to new industrial units only under Part-I of
the incentives on Sales Tax and not under any other
part.
4.2 The incentives on Sales Tax comprises more than one
part and each part is mutually exclusive. An
industrial unit eligible for the incentive under one
part shall not be eligible for incentive under any other
Special Civil Petition (C) No. 7013 of 2019 Page 7 of 122
part. The types of industrial units covered under
different parts have been mentioned under each part.
4.3 The incentives of 1986 Policy and 1980 Policy shall
continue to be available to industrial units, Hotels,
Cinema Halls etc. eligible under the said Policies
except to the extent abridged / modified / enlarged
in this Policy.
4.4 Expansion / modernisation and diversification will
be eligible for specific incentives as mentioned
against the concerned incentive. Any number of
expansion / modernisation / diversification can be
taken up by an industrial unit but the concerned
specific incentive shall be allowed only once.
4.5 Industrial Units of Public Sector Undertakings will
not be eligible for any incentive unless the State
Government on special consideration, make all or
any to these incentives, applicable to any such
undertaking.
5. CAPITAL INVESTMENT SUBSIDY
5.1 New Industrial Units as well as expansion /
modernisation / diversification projects as defined
earlier, shall be allowed Capital Investment Subsidy
including Central Investment Subsidy, if any made
available by Government of India in the following
manner :- Zone 'A' 25 percent of the fixed capital
investment subject to the limit of Rs. 25,00,000/-.
Zone 'B' 15 percent of the fixed capital investment
subject to the limit of Rs. 15,00,000/-. Zone 'C' 10
percent of the fixed capital investment subject to the
limit of Rs. 10,00,000/-. Provided that if Central
Investment Subsidy for any district / area is allowed
by Government of India at a higher rate than above,
the higher rate will be applicable […]
xxx xxx xxx
11.4 CAPTIVE POWER PLANTS AND GENERATING
SETS
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11.4.1 A captive power plant is a power generation plant
with an installed capacity of not less than 1 MW set
up either by one industrial unit for its own industrial
use or by a group of industrial units for their own
industrial use, provided that surplus if any, is
supplied to OSEB grid.
11.4.2 New captive power plants with a total installed
capacity upto 60 MVW will be completely exempted
from payment of electricity duty in respect of power
generated by them for a period of 10 years from the
date of commissioning. This exemption will be 75%
for new captive power plants upto a capacity of 120
MVA and 50% for installed capacity beyond 120
MVA.
11.4.3 While computing the capacity of captive power
plants, all such plants set up by an industrial unit or
units will be taken into consideration to arrive at the
capacity of the plant and based on the said capacity,
exemption of electricity duty as mentioned above will
be allowed.
11.4.4 New generating sets of the capacity of 10 KW and
above installed by any industrial unit for its
industrial use and, new captive power plants will be
eligible for capital investment subsidy of 15% of its
cost subject to a maximum limit of Rs.5 lakh. This will
be in addition to capital investment subsidy
available to the industrial unit.
11.4.5 New generating sets up to 1 MVA capacity installed
by new and existing industrial units will be
exempted from electricity duty for a period of 10
years […]”
(Emphasis Supplied)
12. In addition to the industrial policy of 1989, the Government of
Orissa also introduced the 1989 Rules to regulate the procedure
of sanction, disbursement, and reimbursement of the capital
investment subsidy under the industrial policy of 1989.
Special Civil Petition (C) No. 7013 of 2019 Page 9 of 122
13. Upon the introduction of industrial policy of 1989, Indo Flogates,
on 18.05.1989, purportedly set up the subject new industrial
unit i.e., MM Plant unit, in the Kalunga Industrial Estate,
Rourkela, Dist. Sundargarh, with a separate registration bearing
Industrial License No. 341(89)DLR for the manufacturing and
processing of stool inserts, stool coatings, and basic gunning mix
which also falls under Zone ‘C’ as abovementioned. Thereafter,
on 01.02.1992, Indo Flogates made its first capital investment
towards the purchase of the land and shed for the establishment
of the MM Plant unit. On 21.11.1992, the said MM Plant
commenced its commercial production.
14. Thereafter, considering various incentives available to a new
industrial unit under the industrial policy of 1989, Indo Flogates
on 23.08.1993 submitted an application to the respondent no. 3
for availing assistance towards the subsidies for the Diesel
Generator Set (“ DG Set ”) set up by them in MM Plant unit under
Clause 11.4.4 of the industrial policy of 1989 inter alia stating
the following:
(a) That, Indo Flogates in technical collaboration with
Magneco / Metrel of USA had completed the
establishment of the MM Plant unit for manufacturing
stool inserts, stool coatings, and basic gunning mix;
(b) That, the commercial production in the said MM Plant
unit had also begun; and
(c) That, in view of the frequent power cuts and power supply
being erratic in the area, Indo Flogates had procured DG
Sets in the project cost for which they want to avail the
assistance of subsidy for DG Set.
Special Civil Petition (C) No. 7013 of 2019 Page 10 of 122
15. Similarly, on 29.09.1993, Indo Flogates submitted another
application to the respondent no. 3 for availing assistance
towards capital investment subsidies under Clause 5.1 of the
industrial policy of 1989 inter alia stating as following:
(a) That, MM Plant unit had been set up separately in Orissa
for which a separate registration is allotted by the
Government of India;
(b) That, new sheds had been acquired from Odisha
Industrial Infrastructure Development Corporation (IDCO)
and a separate electrical connection was taken from
Orissa State Electricity Board (OSEB);
(c) That, for the reasons above stated, the MM Plant unit had
fulfilled the criteria of a new industrial unit and that the
same is entitled to fresh capital investment subsidy under
industrial policy of 1989.
16. On 05.11.1998, the respondent no. 2 sent a letter to the
appellant company and informed that on examination of its
applications, the respondent no. 2 had been pleased to treat MM
Plant unit as a separate new industrial unit under medium scale
sector of Indo Flogates. In the said letter, the respondent no. 2
further acknowledged that the date of commencement of
commercial production of MM Plant unit manufacturing stool
inserts, stool coatings, and basic ginning mix as determined in
the production certificate issued by the office of respondent no.
2 was 21.11.1992.
17. Thereafter, on 24.12.1999, the applications of Indo Flogates were
th
placed before the respondent no. 4 in the 28 Meeting of the sub-
Special Civil Petition (C) No. 7013 of 2019 Page 11 of 122
committee of state level committee. In the said meeting, it was
observed by the respondent no. 2 that the appellant company
had not only submitted the applications for grant of subsidies
within the time limit of 6 (six) months from the date of
commercial production but had also failed to file any application
for condonation of delay.
18. Thereafter, on 09.06.2000, the respondent no. 2 informed the
appellant company that their applications had been
recommended to the State Government.
19. While the above matters stood still, Indo Flogates amalgamated
into the appellant company. Thus, on 03.08.2000, the High
Court sanctioned the proposed scheme of amalgamation of Indo
Flogates with the appellant company with effect from
01.04.1999, and, thus, all property, rights, power of Indo
Flogates in its assets came to be transferred in favour of the
appellant company.
20. Upon amalgamation, the appellant company sent a letter dated
15.12.2000 to the respondent no. 3 inter alia requesting for the
expeditious disposal of the grant and disbursement of technical
know-how subsidy of Rs. 5,00,000/-; capital investment subsidy
of Rs. 10,00,000/-; and DG Set subsidy of Rs. 1,16,000/- in
respect of the alleged new industrial unit i.e., MM Plant unit, set
up by the erstwhile Indo Flogates. In the said letter dated
15.12.2000, the appellant company also informed the
respondent no. 3 that applications for the abovementioned
subsidy were pending for more than 8 (eight) years due to the
lackadaisical approach of the office of respondent no. 2 and
Special Civil Petition (C) No. 7013 of 2019 Page 12 of 122
requested the respondent no. 3 for its intervention in the matter
so as to expedite the sanction and disbursement process.
21. As there was no response at the end of respondent no. 3 to the
letter dated 25.12.2000, the appellant company sent a follow-up
letter dated 17.01.2001 to the respondent no. 3, inter alia ,
seeking an update on the progress in the matter. Thereafter, the
appellant company again addressed a letter dated 22.05.2001 to
the respondent no. 3, inter alia , drawing attention to the fact that
the aforesaid subsidies relating to Indo Flogates had been
pending with respondent no. 2 since the amalgamation of Indo
Flogates with the appellant company; that the said subsidies
pertained to a new industrial unit which had commenced
commercial production as far back as on 22.11.1992; that the
respondent no. 3 issued the certificate of commencement of
production only after 6 (six) years of actual production; and that
even after this inordinate delay in issuing the commencement
certificate, the applications of the appellant company were being
shuttled from one office to another without any good reasons or
cogent action. At this juncture, while awaiting necessary action
at the end of the authorities, the appellant company also
expressed its willingness to assist by providing any further
information and/or documents to the respondent no. 3 as may
be required.
22. Following the above and aggrieved by the perfunctory attitude of
the respondents, the appellant company sent another letter on
13.11.2001 to the Secretary of Industries Department inter alia
requesting for ascribing the approval to the said applications of
the appellant company for the grant of the subsidies. In
Special Civil Petition (C) No. 7013 of 2019 Page 13 of 122
meantime, the respondent No. 2 vide its letter dated 26.11.2001
condoned the delay in the submission of the applications for the
grant of subsidies.
23. On 27.11.2001, the appellant company further wrote another
letter to the respondent no. 2 requesting to issue eligibility
certificate under the industrial policy of 1989. The appellant
company again vide its letter dated 27.09.2002 wrote to the
respondent no. 2 inter alia requesting to intervene in the matter,
especially considering the fact that 2 (two) years had passed by
since the delay was condoned by the respondent no. 2.
24. Finally, on 10.04.2003, the respondent no. 1 conveyed the
decision of the respondent no. 4 to the appellant company of
sanctioning the amount of Rs. 1,14,750/- towards DG Set
subsidy inter alia stating as follows:
“Sub: 15% Capital Investment Subsidy
Ref: Your application for Capital Investment Subsidy
Dear Sir,
We are pleased to inform you that the Sub-committee of
rd
the State Level Committee in its 3 meeting held on
20.02.03 has sanctioned a subsidy of Rs. 1,14,750/-
(Rupees One Lac Fourteen Thousand Seven Hundred
Fifty Only) to your unit at I.E. Kalunga […]”
(Emphasis Supplied)
25. On 19.04.2003, the respondent no. 1 also conveyed the decision
of the respondent no. 4 to the appellant company of sanctioning
Special Civil Petition (C) No. 7013 of 2019 Page 14 of 122
of the amount of Rs. 10,00,000/- towards capital investment
subsidy inter alia stating as follows:
“Sub: 10% Capital Investment Subsidy
Ref: Your application for Capital Investment Subsidy
Dear Sir,
We are pleased to inform you that the Sub-committee of
rd
the State Level Committee in its 3 meeting held on
20.02.03 has sanctioned a subsidy of Rs. 10,00,000/-
(Rupees Ten Lac Only) to your unit at I.E. Kalunga […]”
(Emphasis Supplied)
26. Following the sanction of subsidies, the appellant company sent
a letter dated 15.05.2003 to the respondent no. 1 enclosing the
necessary documents as requested in the letters dated
10.04.2003 and 19.04.2003 respectively and enclosing the
certified copy of order of High court dated 03.08.2000 inter alia
reinforming the respondents that Indo Flogates had
amalgamated with the appellant company with effect from
01.04.1999 in terms of the order passed by the High Court on
03.08.2000 by virtue of which all assets, liabilities, rights,
benefits, etc including entitlement to abovementioned subsidies
of Indo Flogates got transferred to and vested in the appellant
company. The relevant communication is as under:
“The Deputy Manager (Subsidy)
Orissa State Financial Corporation
O.M.P. Square
Cuttack 3
Dear Sir,
Special Civil Petition (C) No. 7013 of 2019 Page 15 of 122
Re: Your Sanction Letter dated 15th April, 2003 bearing
No. OSFC/32.20 addressed to Indo Flogates Ltd
regarding sanction of DG Set Subsidy of Rs. 114.750/-
Reference above, kindly be informed that Indo Flogates
Ltd has, on and from 1st April, 1999, amalgamated with
this Company in terms of an Order passed by the Hon'ble
High Court of Orissa on 3rd August, 2000. By virtue of
said Order of the Hon'ble Court, all assets, liabilities,
rights, benefits etc including entitlement to above subsidy
of said Company have got transferred to and/or vested
in this Company on and from 1st April, 1999. We enclose
herewith a certified true copy of said Order of the Hon'ble
Court and draw your attention specifically to Paragraphs
1 and 2 on Page 2 thereof.
As desired, we are now sending herewith the following :
1. Advance Stamped Money Receipt, in triplicate, in the
prescribed proforma.
2. Agreement duly executed on Non-judicial Stamp Paper
of Rs. 10/-.
3. Certified true copy of an extract of Minutes of meeting
of the Board of Directors of the Company held on Friday,
25th April, 2003 […]”
(Emphasis Supplied)
27. Between 12.05.2003 and 05.03.2007, the appellant company
addressed as many as 5 (five) letters to the respondent nos. 1 and
2 respectively seeking the disbursal of sanctioned subsidy
amounts. In the letter dated 12.05.2003, the appellant company
again brought to the attention of the respondent no. 1 that
pursuant to the amalgamation between Indo Flogates and the
appellant company with effect from 01.04.1999, all assets,
liabilities, rights, benefits, etc including the entitlement to the
capital investment subsidy and DG Set subsidy had come to be
Special Civil Petition (C) No. 7013 of 2019 Page 16 of 122
transferred in favour of the appellant company. In various letters
between this period, the appellant company requested the
respondent nos. 1 and 2 respectively to consider changing the
name of the beneficiary of these subsidies in the record from the
erstwhile Indo Flogates to the name of the appellant company
i.e., IFGL Refractories Ltd.
28. Pursuant to the above, the respondent no. 1 vide letter dated
24.03.2007 communicated to the appellant company that the
sanctioned amount may be processed for disbursement on the
receipt of the same from the respondent no. 2 authority.
29. Thereafter, on 23.08.2007, the respondent no. 2 sent a letter to
the joint director of industries, Cuttack and informed that the
fact of amalgamation of the appellant company and Indo Flogates
was already conveyed to the director and the Joint Director of
Industries, Cuttack vide internal office letters dated 27.09.2003
and 11.08.2006 respectively, thereafter which, the personnel
from the respondent no. 1 authority had visited the site of the
appellant company wherein it was found that the appellant
company was managing the continuity of production of MM Plant
unit. In such circumstances, the respondent no. 2 recommended
the respondent no. 1 to consider releasing the 10% (ten percent)
capital investment subsidy amounting to Rs. 10,00,000/- and
15% (fifteen percent) DG Set subsidy amounting to Rs.
1,14,750/- sanctioned in favour of Indo Flogates for the MM
Plant unit in favour of the appellant company. The relevant
correspondence is as under:
“To,
Shri T.K. Chatopadhyaya,
Special Civil Petition (C) No. 7013 of 2019 Page 17 of 122
Joint Director of Industries (SS)
Orissa, Cuttack.
Sub: Issue of Production Continuity Certificate of M/s.
lndo Flogates Ltd. Rourkela
Ref: Your Letter No. 4SSl-23/07-8252/ Ind dtd. 17.07.07.
Sir,
In inviting the reference to your above letter on the noted
subject, I am to say that M/s. Indo Flogates Ltd. I.E.
Kalunga, Dist Sundargarh has been amalgamated with
M/s IFGL Refractories Ltd. I.E. Kalunga with effect from
1.4.1999 in pursuance to the order passed by Hon'ble
High Court of Orissa on 3.8.2000. The matter was
already informed to the Director of Industries, Orissa,
Cuttack vide this office Letter No. 3354 dtd. 27.9.2003
and to Joint Director of Industries (SS) Orissa, Cuttack
vide this office Letter No. 3317 dtd. 11.8.2006. However,
as desired by you in your letter under reference the
undersigned along with Sri S. Dash Asst. Manager
(Finance) O.S.F.C. Rourkela have jointly visited M/s. IFGL
Refractories Ltd. Sector B, Kalunga lndl. Estate on
21.8.07 and found that it is having continuity of its
production. The production continuity certificate jointly
signed is enclosed separately for you kind reference.
Under the above circumstances, I would request that 10%
CIS amounting to Rs. 10.00 Lakhs sanctioned in favour of
M/s. Indo Flogates Ltd. (MM Plant Division) by the OSFC
Head Office, Cuttack and 15% CIS on D.G. Set amount
to Rs. 1,14,750/- by OSFC Head Office, Cuttack may be
released.”
(Emphasis Supplied)
30. Since no payments were yet released by the respondents despite
recommendations in the letters dated 24.03.2007 and
23.08.2007 respectively, the appellant company sent a letter
dated 06.08.2008 inter alia informing the respondent no. 1 that
Special Civil Petition (C) No. 7013 of 2019 Page 18 of 122
no payments had been made as of that time and further
requesting to inform the status of disbursement.
31. In the meantime, the respondent nos. 2 and 3 respectively
prepared an agenda note with the objective of placing the matter
th
of claim of subsidy in favour of Indo Flogates in the 35 Meeting
of sub-committee of state level committee. This agenda note inter
alia stated as follows:
1. That, subsidy to the tune of Rs. 11,14,750/- (Rs.
10,00,000/- towards capital investment subsidy and Rs.
1,14,750/- towards DG Set subsidy) had been sanctioned in
nd
the 32 meeting of sub-committee of state level committee
held on 20.02.2003 for MM Plant unit in favour of Indo
Flogates under industrial policy of 1989;
2. That, the unit had amalgamated with the appellant company
with effect from 01.04.1999 by the order of High court dated
03.08.2000;
3. That, the decision of amalgamation was neither recorded in
the proceedings nor any documents were produced before
the state level committee by either the unit or the authorities
below i.e., the respondent no. 3;
4. That, as per an executive instruction dated 28.10.1994, the
capital investment subsidy claims including claims for
additional subsidy on account of expansion / modernisation
/ diversification were limited to the overall financial limits
prescribed under previous industrial policies;
5. That, earlier Indo Flogates had been sanctioned a collective
subsidy of Rs. 15,00,000/- which was disbursed to them
under industrial policies of 1980 and 1986;
Special Civil Petition (C) No. 7013 of 2019 Page 19 of 122
6. That, earlier the appellant company had also been
sanctioned a collective subsidy of Rs. 20,00,000/- which
was disbursed to them under the industrial policy of 1989.
7. That, since both Indo Flogates and the appellant company
had availed the maximum limit of their respective subsidies,
thus further subsidies could not be disbursed in view of the
executive instruction dated 28.10.1994 as abovementioned.
32. Following the result of above agenda note, the respondent no. 1
sent a letter dated 04.10.2008 (“ Rejection Letter ”) and informed
the appellant company that proposal for disbursement of capital
nd
investment subsidy and DG Set subsidy sanctioned by the 32
sub-committee on 20.02.2003 in favour of erstwhile Indo
th
Flogates was placed before the 35 sub-committee on
20.02.2008 and that after a detailed discussion the committee
rejected the disbursement of capital investment subsidy and DG
Set subsidy in favour of the appellant company on the ground
that both Indo Flogates and the appellant company had availed
their maximum limit under the capital investment subsidy and
as such Indo Flogates was not entitled for disbursement of the
nd
amount sanctioned in the 32 sub-committee for Rs.
10,00,000/- towards normal capital investment subsidy and Rs.
1,14,740/- towards DG Set subsidy respectively. The relevant
extract is as under:
“To,
The Company Secretary
IFGL Refractories Ltd.
Sector 'B' Kalunga Industrial Estate
PO- Kalunga
Dist: Sundergarh-770031
Special Civil Petition (C) No. 7013 of 2019 Page 20 of 122
Sub: Disbursement of Subsidy
Ref: Your Letter No. Nil dt. 6.8.08
Sir,
In inviting a reference to the above, we are to inform you
that the proposal for disbursement of Capital Investment
Subsidy and subsidy on D.G. set sanctioned by the 32nd
Sub-Committee of SLC held on 20.2.03 in favour of M/s.
Indo Flogates Ltd., i.E., Kalunga, Rourkela was placed in
to 35th Sub-Committee held on dt. 20.2.08. After detailed
discussion, the Committee observed that both the units
(M/s. I.F.G.L Refractories Ltd. and M/s. lndo Flogates
Ltd) have availed the maximum limit under CIS Rule and
as such M/s. Indo Flogates Ltd. is not entitled for
disbursement of the amount sanctioned in the 32nd Sub-
Committee held on dt. 20.02.2003 for a total sum of Rs.
11,14,750/- (Rs. 10,00,000/- Normal CIS + Rs.
1,14,740/- DG. set subsidy). Hence the same has been
rejected by the Sub-Committee.”
(Emphasis Supplied)
33. After rejecting the subsidy benefits accrued in favour of Indo
Flogates to the appellant company, the Industries Department,
Government of Orissa vide notification dated 30.10.2008
amended the industrial policy of 1989 and the earlier Clause 4.4
as abovementioned and inserted new wordings to Clause 4.4
stating that the capital investment subsidy, including any
additional subsidy on account of expansion / modernisation /
diversification, shall in all cases remain subject to the overall
financial limit prescribed inter alia under the industrial policy of
1989. Accordingly, where an eligible unit had already availed
capital investment subsidy under a previous industrial policy
during its operational period, its entitlement to any further or
additional subsidy under the industrial policy of 1989 shall be
Special Civil Petition (C) No. 7013 of 2019 Page 21 of 122
limited to the differential amount between the subsidy actually
availed under the earlier industrial policies and the maximum
capital investment subsidy permissible under the industrial
policy of 1989. The said amended Clause 4.4 reads as under:
“4.4 “Capital Investment Subsidy claim including claims
for additional subsidy on account of E/M/D shall be
limited to the overall financial limit prescribed under this
IPR. In other words, if the eligible unit has availed of
capital investment subsidy under the previous IPR during
its operational period, its claim for additional subsidy
would be limited to the differential amount between
actual subsidy availed of during the operational period of
the previous IPR and the maximum CIS prescribed under
this IPR”.”
(Emphasis Supplied)
34. Aggrieved by the rejection of disbursement of subsidies, the
appellant company filed a Writ Petition No. 17398 of 2008 before
the High Court inter alia challenging the decision of the
respondent no. 1 rejecting the disbursal of subsidies with the
prayers to quash the rejection letter dated 04.10.2008 wherein
the disbursal of capital incentive subsidy and DG Set subsidy
had been rejected and for a direction to the respondents herein
to disburse the subsidy amounting to a total of Rs. 11,14,750/-.
In its reply before the High Court, the respondent no. 1 submitted
that capital investment subsidy and DG Set subsidy respectively
were sanctioned in favour of the unit because neither the Indo
Flogates nor the appellant company had submitted any
document of amalgamation at the time of sanction. The
respondents also argued that since both Indo Flogates and the
appellant company had availed the maximum capital investment
Special Civil Petition (C) No. 7013 of 2019 Page 22 of 122
subsidies, Indo Flogates was not entitled for disbursement of
total amount of Rs. 11,14,750/-
35. Proceeding on the aforesaid premise, the High Court vide its
impugned judgment and order dated 07.12.2018 dismissed the
appeal filed by the appellant company and denied the appellant
company the benefits of capital investment subsidy and DG Set
subsidy sanctioned in favour of MM Plant unit of Indo Flogates
under the industrial policy of 1989 inter alia taking the view that
although a new industrial unit is entitled to seek the benefit of
subsidies yet nonetheless the interpretation put forward by the
Committee that only once benefit would be granted to the
company was correct. The relevant portion of the impugned order
is as under:
“4. In view of the above, the subsidy which was entitled
to the petitioner by the merger of company was rejected
by the Committee vide decision dated 04.10.2008,
wherein the reasons have been given, which read as
under:
“After detailed discussion, the Committee observed
that both the units (M/s. I.F.G.L. Refractories Ltd. and
M/s. Indo Flogates Ltd.) have availed the maximum
limit under CIS Rule and as such M/s. Indo Flogates
Ltd. is not entitled for disbursement of the amount
nd
sanctioned in the 32 Sub-committee held on dt.
20.02.2003 for a total sum of Rs.11,14,750/-
(Rs.10,00,000/- normal CIS + Rs.1,14,750/- D.G. set
subsidy). Hence the same has been rejected by the
Sub-Committee."
5. In our considered opinion, it is true that a newly set up
Industrial Unit is entitled to get the benefit but
nonetheless the interpretation put forward by the
Special Civil Petition (C) No. 7013 of 2019 Page 23 of 122
Committee that only once benefit will be granted to the
company is correct. Hence, the prayer made in this writ
petition cannot be granted.
6. In that view of the matter, no interference is called for
this writ petition. Even otherwise, we do not find any good
ground to entertain the writ petition at this stage.
According, the writ petition stands dismissed.”
(Emphasis Supplied)
36. In such circumstances referred to as above, the appellant
company is here before us with the present appeal.
C. SUBMISSIONS ON BEHALF OF THE APPELLANT
37. Mr. Nakul Dewan, the learned senior counsel appearing for the
appellant company, submitted that the industrial policy of 1989
came into force with effect from 01.12.1989 with twin objectives
of encouraging new industries and providing support to the then
existing units. On this note, he argued that Clause 2.7 of the
industrial policy of 1989 defines “new industrial unit” in relation
to the question whether a company has made an investment in
an industrial unit after effective date of industrial policy of 1989
i.e. after 01.12.1989. Therefore, a new industrial unit in terms of
Clause 2.7 would exist even in a situation where a company that
existed prior to the industrial policy of 1989 only invested in a
particular industrial unit after the effective date of the industrial
policy of 1989.
38. The learned counsel also argued that Clause 2.2 of the industrial
policy of 1989 defines “expansion/modernisation/diversification”
Special Civil Petition (C) No. 7013 of 2019 Page 24 of 122
of an existing industrial unit to mean an additional investment
of more than 25% (twenty – five percent) of the undepreciated
book value of fixed capital investment of an existing unit in
acquisition of fixed capital investment of
expanding/modernising/diversifying the production of the said
unit and resulting in increased production over and above the
existing installed capacity. The learned counsel further
submitted that as per Clause 4.1 of industrial policy of 1989
states that all new industrial units as defined under Clause 2.7,
would be eligible for “all incentives” provided under the industrial
policy of 1989 whereas as per Clause 4.4 the incentives of
subsidy under the industrial policy of 1989 were allowed “only
once” with respect to expansion / modernisation / diversification
of an existing industrial unit as defined under Clause 2.2.
39. The learned counsel further submitted that the respondents are
also estopped from rejecting the appellant’s request to disburse
the subsidies especially after classifying the MM Plant unit as a
new industrial unit vide letter dated 05.11.1998; sanctioning the
subsidies in favour of MM Plant unit considering it to be a new
industrial unit vide letters dated 10.04.2003 and 19.04.2003
respectively; and acknowledging the sanctioning of the subsidies
vide letter dated 24.03.2007.
40. In other words, the learned counsel submitted that, having
classified the MM Plant unit as a new industrial unit and having
sanctioned the subsidies in its favour, the respondents are
estopped from rejecting the appellant company’s claim for
disbursal thereof as the appellant company had a legitimate
expectation that the subsidy would be disbursed post-
sanctioning for the reasons above stated.
Special Civil Petition (C) No. 7013 of 2019 Page 25 of 122
41. The learned counsel also submitted that the MM Plant unit is a
new industrial unit under the industrial policy of 1989 as the
same had also been classified by the respondents in 1998, and
there is no prescribed limit on the benefits available to it. This is
because Clause 4.1 of the industrial policy of 1989 states that all
new industrial units would be eligible for all incentives provided
in the industrial policy of 1989, which is different from the
treatment of existing industrial units, whereunder Clause 4.4 of
the industrial policy of 1989, incentives were allowed only once
in case of expansion / modernisation / diversification. He argued
that since the respondents had classified the MM Plant unit as a
new industrial unit, the High Court was incorrect in holding that
the benefits under the industrial policy of 1989 could have been
granted only once.
42. Lastly, the learned counsel argued that the respondents in their
counter affidavit before the High Court and further in the course
of hearing before this Court had alleged the non-disclosure of the
amalgamation between Indo Flogates and the appellant company
as the basis for the rejection of the disbursal of subsidies.
Refuting this, the learned counsel submitted that the
respondents had always been aware of the amalgamation even
prior to sanctioning of the subsidies as the appellant company,
after the amalgamation scheme was sanctioned by the High
Court by an order dated 03.08.2000, had informed the
respondents vide letter dated 22.05.2001 that an amalgamation
had taken place between Indo Flogates and the appellant
company and it is only after this the respondents had sanctioned
the subsidies for MM Plant unit vide letters dated 10.04.2003
Special Civil Petition (C) No. 7013 of 2019 Page 26 of 122
and 19.04.2003 respectively. Even otherwise, the counsel
submitted that the amalgamation between Indo Flogates and the
appellant company could not have been a basis for denying the
subsidies, as in every case of amalgamation, the successor-in-
interest becomes entitled to the rights and liabilities and assets
of the transferor company subject to the terms and conditions
set out in the scheme of amalgamation. In this case, the scheme
of amalgamation clearly stated that all rights of Indo Flogates
would vest in the appellant company without any further act or
deed. Thus, given that the MM Plant unit was recognized as a
new industrial unit before the amalgamation, the entitlement of
Indo Flogates to obtain subsidies would accrue to the appellant.
D. SUBMISSIONS ON BEHALF OF THE RESPONDENTS
43. Mr. Soumyajit Pani, the learned counsel appearing for the
respondent no. 1, submitted that the High court was right in
dismissing the writ petition of the appellant company. He argued
nd
that pursuant to the 32 state level meeting, the capital
investment subsidy was sanctioned in favor of the Indo Flogates
as no documents regarding amalgamation between Indo Flogates
and the appellant company were ever submitted to the
respondents.
44. He submitted that after receiving the letter dated 12.05.2003
from the appellant company and getting the information
regarding the amalgamation of Indo Flogates with the appellant
company, the issue as regards to the grant of subsidies was
scrutinized afresh more particularly the eligibility of the
appellant company to avail subsidy and it was after due
Special Civil Petition (C) No. 7013 of 2019 Page 27 of 122
deliberations that the sub-committee of the state level committee
th
in its 35 meeting held on 20.02.2008 decided to reject the grant
of subsidies sanctioned in favour of Indo Flogates to be disbursed
th
in favor of the appellant company. In the said 35 meeting, the
sub-committee of the state level committee had noticed that at
the time of sanction of the subsidy for the MM Plant unit of Indo
Flogates Ltd in 2003, the very existence of Indo Flogates was not
there as it was already amalgamated with the appellant
company, and since both Info Flogates and the appellant
company had already availed the individual overall maximum
limit of subsidies i.e. Rs.15,00,000/- and Rs. 20,00,000/-
respectively, the sub-committee of the state level committee
decided not to release any subsidy in favour of the appellant
company.
45. Mr. Gaurav Khanna, the learned counsel appearing for the
respondent nos. 2 and 4 respectively, submitted that as per
Clause 5.1 of the industrial policy of 1989 the incentive of capital
investment subsidy was available in cases of both new industrial
unit as well as expansion / modernisation / diversification
project in Zone C at 10% (ten percent) of the fixed capital
investment subject to the limit of Rs. 10,00,000/. He further
submitted that Clause 11.4.4 of the industrial policy of 1989
provided for subsidy for DG Set, 15% (fifteen percent) of the
investment in DG Set subject to a maximum of Rs. 5,00,000/-.
Thus, the maximum limit of subsidy that could have been
available to the appellant company was Rs. 10,00,000/- towards
capital investment subsidy and Rs. 5,00,000/- towards the DG
Set subsidy, aggregating to Rs. 15,00,000/-. While referring to
Clause 2.7 of the industrial policy of 1989, the counsel submitted
Special Civil Petition (C) No. 7013 of 2019 Page 28 of 122
that a new industrial unit has been defined as an industrial
undertaking where fixed capital investment has been made only
on or after the effective date i.e. 1.12.1989. Whereas expansion
/ modernisation / diversification under Clause 2.2 has been
defined as additional investment of more than 25% (twenty – five
percent) of the undepreciated book value of an existing unit in
acquisition of fixed capital investment of expanding /
modernising / diversifying the production of the said unit and
resulting in increased production over and above the existing
installed capacity of the unit. Further, with respect to expansion
/ modernisation / diversification, Clause 4.4 further provides
that any number of expansion / modernisation / diversification
can be taken up by an industrial unit but the concerned specific
incentive shall be allowed only once. In short, the counsel tried
to argue that the MM Plant unit is not a new industrial unit
rather it is an expansion of the existing unit i.e., the expansion
of Indo Flogates.
46. The learned counsel further submitted that Clause 20.1 of the
industrial policy of 1989 empowers the State Government to
issue operational guidelines / instructions for the administration
of incentives contained in the industrial policy of 1989. Thus, in
exercise of its power under Clause 20.1, the Industries
Department, Government of Orissa, had issued the operational
guidelines / instructions vide letter dated 28.10.1994
(“ Instruction Letter ”), to the respondent no. 3, clarifying that
capital investment subsidy claims including claims for additional
subsidy on account of expansion / modernisation /
diversification shall be limited to the overall financial limits
prescribed under different industrial policies and earlier also this
Special Civil Petition (C) No. 7013 of 2019 Page 29 of 122
procedure was followed and the same should continue to be
followed in future. On this note, the learned counsel argued that
it is clear from the instruction letter dated 28.10.1994 that
capital investment subsidy claim, including claim for additional
subsidy in case of expansion, was subject to overall financial
limits prescribed under different IPRs, therefore, the same should
also apply in case of claim of a new industrial unit for capital
investment subsidy as also in case of claim for additional subsidy
in case of expansion / modernisation / diversification.
47. The learned counsel laying much stress on the instruction letter
dated 28.10.1994, referred to as above, submitted that both Indo
Flogates and the appellant company were already being granted
to the extent of overall maximum limit of subsidy of Rs.
15,00,000/- and Rs. 20,00,000/- collectively under the previous
industrial policies i.e., industrial policy of 1980 and 1986
respectively and, therefore, the subsidies sanctioned for MM
Plant unit in favour of Indo Flogates could not have been
disbursed in favour of later transferee i.e. the appellant company
for being excessive of overall maximum limit of subsidy that can
be granted as per the instruction letter dated 28.10.1994.
48. The learned counsel in the last submitted that Indo Flogates had
preferred the applications for sanction of capital investment
subsidy and DG Set subsidy on 29.09.1993 and 23.08.1993
respectively under the industrial policy of 1989 for
manufacturing of stool insert, stool coatings and gunning mix. It
was submitted that in the said applications there was no mention
of the existing unit or previous investments i.e., about the earlier
investment and subsidies granted while establishing Indo
Flogates and carrying out expansions therein, and that the
Special Civil Petition (C) No. 7013 of 2019 Page 30 of 122
applications of Indo Flogates simply stated that the project had
been set up separately in the State with a separate registration
with the Government of India and with new and separate
electrical connection taken from the Orissa State Electricity
Board (OSEB). On the basis of the above, it was argued that it
fulfils the criteria of a new unit for subsidy under IPR, 1989.
Therefore, on the basis of the applications, the respondent no. 2
vide letter dated 05.11.1998 had communicated to Indo Flogates
that on further examination of matter, it had decided to treat MM
Plant unit of Indo Flogates for manufacture of stool insert, stool
coatings and gunning mix as a separate new industrial unit.
E. ISSUES FOR DETERMINATION
49. Having heard the learned counsel appearing for the parties and
having gone through the materials on record, the questions that
fall for our consideration are as follows:
(I). Whether the MM Plant unit set up by Indo Flogates could
be termed as a new industrial unit in accordance with the
terms of industrial policy of 1989?
(II). If the answer to the issue no. (I), is in the affirmative then,
whether the respondents were justified in rejecting the
capital investment subsidy and DG Set subsidy
respectively for the MM Plant unit on the ground that both
Indo Flogates and the appellant company had already
exhausted the overall subsidy limit under the previous
industrial policies?
Special Civil Petition (C) No. 7013 of 2019 Page 31 of 122
(III). Whether the respondents are estopped from refusing to
disburse the capital investment subsidy and DG Set
subsidy respectively for the MM Plant unit to the appellant
company?
F. ANALYSIS
(I). Whether the MM Plant unit set up by Indo Flogates could be
termed as a new industrial unit in accordance with the terms
of industrial policy of 1989?
50. At the threshold, it is necessary to delineate the contours of the
expression “new industrial unit” . The entire case of the appellant
company proceeds on the premise that the MM Plant unit should
be regarded as a “new industrial unit” under the industrial policy
of 1989, the position which, according to the appellant company,
stood accepted by the respondents when they had earlier
accorded sanction in favour of the MM Plant as though it were a
new industrial unit. The respondents, per contra , contend that
the MM Plant unit is not a new industrial unit but merely an
expansion of the already existing unit, namely Indo Flogates unit,
and that, consequently, no further subsidy can be extended to
the appellant company in respect of the MM Plant unit, since
such subsidy can be availed only once as per Clause 4.4 of
industrial policy of 1989. It is further the case of the respondents
that, even while accepting the MM Plant qualifies as a new
industrial unit, no additional subsidy can be granted in view of
the overall maximum limit imposed by the instruction letter
dated 28.10.1994.
Special Civil Petition (C) No. 7013 of 2019 Page 32 of 122
51. Before delving into what “new industrial unit” means, we are of
the view that it is necessary to first understand the definition of
“industrial unit” as defined under the industrial policy of 1989.
In this respect, Clause 2.5 of the industrial policy of 1989 states
that an industrial unit means any “industrial undertaking”
detailed in Annexure-1 of the policy. Annexure-1 of the policy
inter alia states that an industrial unit will mean “manufacturing
/ processing industry” belonging to categories as mentioned
therein including but not limited to industries listed in the First
Schedule of the Industries (Development & Regulation) Act,
1951. Item 1 to First Schedule deals with “Metallurgical
Industries” . It is not in dispute that MM Plant unit falls within
the ambit of an industrial unit as defined in the policy. Even
otherwise, the MM Plant unit is engaged in the manufacturing
and processing of stool inserts, stool coatings, and basic gunning
mix, which would fall within the purview of metallurgical
industries.
52. Further, from a plain construction of the definition of industrial
unit as discussed above, it becomes axiomatic that the terms
“industrial unit” and “industrial undertaking” respectively have
been treated as analogous for the purposes of the industrial
policy of 1989. Though we are not concerned with the industrial
policies of years 1992, 1996, 2001, 2007, 2015, and 2022
respectively, as were issued in the State of Orissa from time to
time, it is noteworthy that even in these policies, the intention of
policy makers seems to be to define “industrial unit” analogous
to “industrial undertaking” . This is because all these successive
policies employ the phrase “industrial unit means any industrial
undertaking” while defining what an industrial unit is.
Special Civil Petition (C) No. 7013 of 2019 Page 33 of 122
53. From the above discussion, one thing is clear that the MM Plant
unit can be said to be an industrial unit. However, the moot
question that begs for an answer is as to what exactly the phrase
“new industrial unit” in the industrial policy of 1989 entails.
Clause 2.7 of the industrial policy of 1989 defines new industrial
unit to mean an industrial unit where the fixed capital investment
has been made only on or after the effective date . In this respect,
the phrase “fixed capital investment” has been defined under
Clause 2.3 to mean an investment in land, building, plant, and
machinery, and other equipment of a permanent nature.
Further, the “effective date” is also defined in Clause 2.1 to mean
the date of issue and operation of the policy, which is
01.12.1989. In view of the definitions mentioned above, it is clear
that if an industrial unit makes any investments in fixed capital
on or after 01.12.1989 for the manufacturing and processing of
items as mentioned in Annexure-1, then such an industrial unit
can be said to be a new industrial unit.
54. At this juncture, it is relevant to state that this Court had an
occasion to deliberate upon the phrase “newly established
industrial undertaking” as provided in Section 15C of the Income
Tax Act, 1922 (“ IT Act, 1922 ”) in the case of Textile Machinery
Corpn. Ltd. v. CIT, West Bengal , reported in (1977) 2 SCC 368 .
In this case, the assessee company was a heavy engineering
concern engaged in the manufacture of boilers, machinery parts,
wagons, and allied products. For the assessment years 1958–59
and 1959–60, the assessee company claimed exemption under
Section 15C in respect of the profits and gains derived from its
steel foundry division and, for the latter year, from its jute mill
division as well. The Income tax Officer rejected the claim,
Special Civil Petition (C) No. 7013 of 2019 Page 34 of 122
holding that the steel foundry division merely began producing
castings which were earlier purchased from the market and that
such castings were used exclusively within the assessee
company’s existing divisions. He further held that the expansion
was a normal incident of the assessee company’s established
business and did not amount to the setting up of a new industrial
undertaking within the meaning of Section 15C. In relation to the
jute mill division, the Income tax Officer recorded that raw
materials were supplied by the boiler division and, after
machining and forging, returned to that division; that this
activity resembled job work; that sales to outside parties were
negligible; and that the jute mill division constituted no more
than an expansion of the assessee company’s existing divisions.
Accordingly, the relief under Section 15C was denied. The
Appellate Assistant Commissioner affirmed this view, holding
that the assessee company had merely reconstructed parts of its
business and that no independent industrial undertaking had
come into existence.
55. The Income Tax Appellate Tribunal (ITAT), however, took the
contrary view, saying that both the steel foundry division and the
jute mill division constituted new industrial undertakings. The
ITAT reasoned that new machinery had been installed, housed in
separate buildings; that separate industrial licences had been
obtained for the relevant manufacturing activities; and that the
existing business of the assessee company involved
manufacturing boilers and wagons, for which spare parts,
forgings, and castings were being purchased from outside. The
manufacture of such spare parts by the new divisions, according
to the ITAT, could not be said to be formed out of the existing
Special Civil Petition (C) No. 7013 of 2019 Page 35 of 122
business, even though the major part of the output was utilised
internally, as the element of profit was nevertheless present.
56. Upon reference, the High Court held that, for the purposes of
Section 15C, the industrial undertaking must be such that a
definite quantum of capital is employed therein. In other words,
the undertaking must bear a degree of financial and functional
separateness and must not be so integrally connected with the
general capital structure of the assessee company as to render
the capital employed incapable of distinct identification. The
High Court clarified that such employment of capital need not
necessarily arise from the raising of fresh capital, however, there
must be a demonstrable and identifiable deployment of capital in
that undertaking. The underlying rationale was that Section 15C
contemplated a distinct industrial undertaking, one not formed
by the splitting up or reconstruction of an existing business, and
that the statutory exemption was intended to encourage even
existing companies to establish such new undertakings.
57. When the matter came up before this Court, it was noted that
Section 15C provided for exemption from tax in respect of a newly
established industrial undertaking and that, under sub-section
(2)(i) of Section 15C, such exemption was not available where the
undertaking is formed by the reconstruction of a business
already in existence, or by the transfer to a new business of
building, machinery, or plant previously used in any other
business. While construing the expression new industrial
undertaking in this context, this Court held that the undertaking
must not, in substance, be the same old existing undertaking;
that there must be a fresh and substantial investment of new
Special Civil Petition (C) No. 7013 of 2019 Page 36 of 122
capital; and the mere fact that a person, by setting up a new
industrial undertaking, expands his existing business does not,
by itself, disentitle him from the benefit of exemption, for every
new creation in business necessarily involves some measure of
expansion or advancement of the pre-existing enterprise.
58. This Court further held that the real test is not whether the new
undertaking represents an expansion of the existing business,
but whether it is, in truth, a new and identifiable undertaking,
separate and distinct from the existing one. To qualify as such,
there must be the emergence of a physically separate industrial
unit capable of functioning on its own as a viable entity. If an
industrial undertaking manufactures articles which are
themselves identifiable, marketable units, and if that
undertaking can meaningfully exist even upon the cessation of
the older business, it must be regarded as a new and separate
industrial undertaking.
59. It was clarified that the new undertaking may also produce the
same commodities as the earlier undertaking, or it may produce
different marketable products, including those which may serve
as inputs for the old business. What is material is that the new
undertaking should constituted an integrated unit by itself; that
new plant and machinery are installed for the purpose of
producing either the same or distinct commodities; and, lastly,
where the new industrial undertaking is a separate and
independent production unit capable of yielding commercially
tangible products and capable of being carried on without losing
its identity through complete absorption into the old business it
cannot be treated as an undertaking formed by reconstruction of
Special Civil Petition (C) No. 7013 of 2019 Page 37 of 122
the earlier business. The relevant observations made by this
Court are as under:
“17. Again, the new undertaking must not be
substantially the same old existing business. The third
excluded category mentioned above is significant. Even if
a new business is carried on but by piercing the veil of
the new business it is found that there is employment of
the assets of the old business, the benefit will be not
available. From this it clearly follows that substantial
investment of new capital is imperative. The words "the
capital employed" in the principal clause of Section 15-C
are significant, for fresh capital must be employed in the
new undertaking claiming exemption. There must be a
new undertaking where substantial investment of fresh
capital must be made in order to enable earning of profits
attributable to that new capital.
18. The assessee continues to be the same for the purpose
of assessment. It has its existing business already liable
to tax. It produced in the two concerned undertakings
commodities different from those which he has been
manufacturing or producing in its existing business.
Manufacture or production of articles yielding additional
profit attributable to the new outlay of capital in a
separate and distinct unit is the heart of the matter, to
earn benefit from the exemption of tax liability under
Section 15-C […] The fact that an assessee by
establishment of a new industrial undertaking expands
his existing business, which he certainly does, would not,
on that score, deprive him of the benefit under Section 15-
C. Every new creation in business is some kind of
expansion and advancement. The true test is not whether
the new industrial undertaking connotes expansion of the
existing business of the assessee but whether it is all the
same a new and identifiable undertaking separate and
distinct from the existing business. No particular decision
in one case can lay down an inexorable test to determine
Special Civil Petition (C) No. 7013 of 2019 Page 38 of 122
whether a given case comes under Section 15-C or not. In
order that the new undertaking can be said to be not
formed out of the already existing business, there must
be a new emergence of a physically separate industrial
unit which may exist on its own as a viable unit. An
undertaking is formed out of the existing business if the
physical identity with the old unit is preserved. This has
not happened here in the case of the two undertakings
which are separate and distinct.
19. It is clear that the principal business of the assessee
is heavy engineering in the course of which it
manufactures boilers, wagons, etc. If an industrial
undertaking produces certain machines or parts which
are, by themselves, identifiable units being marketable
commodities and the undertaking can exist even after the
cessation of the principal business of the assessee, it
cannot be anything but a new and separate industrial
undertaking to qualify for appropriate exemption under
Section 15-C. The principal business of the assessee can
be carried on even if the said two additional undertakings
cease to function. Again, the converse is also true. The
fact that the articles produced by the two undertakings
are used by the Boiler Division of the assessee will not
weigh against holding that these are new and separate
undertakings. On the other hand the fact that a portion of
the articles produced in these two new industrial
undertakings had been sold in the open market to others
is a circumstance in favour of the assessee that the new
industrial units can function on their own. Use of the
articles by the assessee is not decisive to deny the benefit
of Section 15-C.
20. Section 15-C partially exempts from tax a new
industrial unit which is separate physically from the old
one, the capital of which and the profits thereon are
ascertainable. There is no difficulty to hold that Section
15-C is applicable to an absolutely new undertaking for
the first time started by an assessee. The cases which
Special Civil Petition (C) No. 7013 of 2019 Page 39 of 122
gave rise to controversy are those where the old business
is being carried on by the assessee and a new activity is
launched by him by establishing new plants and
machinery by investing substantial funds. The new
activity may produce the same commodities of the old
business or it may produce some other distinct
marketable products, even commodities which may feed
the old business. These products may be consumed by
the assessee in his old business or may be sold in the
open market […] Such a new industrially recognisable
unit of an assessee cannot be said to be reconstruction of
his old business since there is no transfer of any assets
of the old business to the new undertaking which takes
place when there is reconstruction of the old business. For
the purpose of Section 15-C the industrial units set up
must be new in the sense that new plants and machinery
are erected for producing either the same commodities or
some distinct commodities. In order to deny the benefit of
Section 15-C the new undertaking must be formed by
reconstruction of the old business. Now in the instant
case there is no formation of any industrial undertaking
out of the existing business since that can take place only
when the assets of the old business are transferred
substantially to the new undertaking. There is no such
transfer of assets in the two cases with which we are
concerned.”
xxx xxx xxx
26. If any undertaking is not formed by reconstruction of
the old business that undertaking will not be denied the
benefit of Section 15- C simply because it goes to expand
the general business of the assessee on some directions.
As in the instant case, once the new industrial
undertakings are separate and independent production
units in the sense that the commodities produced or the
results achieved are commercially tangible products and
the undertakings can be carried on separately without
complete absorption and losing their identity in the old
Special Civil Petition (C) No. 7013 of 2019 Page 40 of 122
business, they are not to be treated as being formed by
reconstruction of the old business.”
(Emphasis Supplied)
60. Similarly, in the case of Commissioner of Income-Tax v. Indian
Aluminium Co. Ltd. , reported in (1973) 88 ITR 257 , the
assessee-company was a manufacturer of aluminium ingots from
ores. In the previous years, the assessee company had four
manufacturing units at Belur, Kalwa, Alupuram, and Hirakud
respectively. In the relevant accounting year, one more was
added at Muri. Further, there were additional extensions to the
existing factories at Belur and Alupuram. In connection with the
relevant assessment year, the assessee company had claimed the
incentive of exemption from tax under Section 15C before the
Income tax Officer in respect of fresh capital outlay at Muri as
well as additional investment in the form of extension to the
existing factory premises, installation of new plants and
machineries, etc., at Alupuram and Belur. The Income tax Officer
discussed the grant of relief under Section 15C in respect of the
unit at Hirakud but did not deal with the other three units in
dispute. The Income tax Officer also declined to grant any relief
to the assessee company in respect of all the said four units. In
the appeal before the Appellate Assistant Commissioner, the
assessee company claimed relief under Section 15C in respect of
only three units at Alupuram, Belur and Muri.
61. However, the Commissioner disallowed the relief under Section
15C in respect of Alupuram and Belur units. Further, with
respect to the unit at Muri the Commissioner found that the
assessee company already had a manufacturing unit at Muri
Special Civil Petition (C) No. 7013 of 2019 Page 41 of 122
which was only expanded in the accounting year. In short, the
Commissioner affirmed the order of the Income tax Officer.
Aggrieved, the assessee company appealed before the ITAT
wherein the tribunal came to the conclusion that all the said
three units were new undertakings and, therefore, the assessee
company was entitled to exemption from tax under Section 15C.
62. While affirming the decision of the ITAT, the Calcutta High Court
held that for the purpose of seeking or availing the benefit of
Section 15C, the sine qua non was that the assessee company
had established or commenced a new industrial undertaking,
which might either take the shape of reconstitution, reformation,
reincorporation, on the one hand, or a new production unit or
separate business, on the other. It was observed that the
separate business need not be a different kind of business. The
commodity which the original produced, manufactured or sold
might be a relevant factor in finding out whether the subsequent
business was an extended business or an independent new
business. The relevant observations are as under:
“11. Section 15C provides that the assessee should not
be taxed in respect of the profits or gains derived from its
subsequent industrial undertaking as do not exceed 6%
per annum on the capital employed by it in such
undertaking. But it is obvious from this section that the
"industrial undertaking" in clause 15C must refer to some
new undertaking or undertaking which amounts to
additions, alterations, extensions, expansions or new
units. It pre-supposes that the assessee has got an
existing business of its own. But, apart from its original
business, the assessee, for commercial expediency, might
decide to cause expansion of its business. This expansion
may take place in various ways. The original business
Special Civil Petition (C) No. 7013 of 2019 Page 42 of 122
might be carried on in the assessee's plot of land or over
the assessee's building or buildings. Several floors may
be raised on the land or the existing building of the
original business of the assessee. It may purchase new
plants or machineries or even replace the old machines
by modern plants as a result of which the assessee might
get a good return for the capital invested in such
extension or improvement. Again, the expansion, in a
wide sense, may also include new production unit,
manufacturing, producing or even selling products which
may or may not be entirely different from the nature of
the original business. All these questions arise because
the assessee happens to be the owner, proprietor or
controlling authority of both its original business and its
expanded business. Thus, we shall have to find out to
what extent or limit the principle of expansion should be
applied to the exemption clause under section 15C(2)(i).
xxx xxx xxx
13. […] There is no doubt that if the subsequent industrial
undertaking of the assessee- company in which the
capital has been invested by it and the profits of which
do not exceed 6% per annum of the capital employed by
the assessee-company is a newly established
independent industrial undertaking the assessee shall be
entitled to get the relief. But the difficulty arises when the
subsequent industrial undertaking is not a separate
independent undertaking but an expansion or mere
addition to the original business of the assessee-
company. If the assessee's original business remains
intact and retains its original character and the assessee
establishes separate independent undertakings whether
of the same or different nature in respect of the same or
different commodity the subsequent undertakings cannot
be called "reconstruction" within the meaning of section
15C(2)(i). The newness of subsequent industrial
undertaking does not necessarily exclude all cases of
expansion or extension of the original business. To
Special Civil Petition (C) No. 7013 of 2019 Page 43 of 122
illustrate, where the original business is only extended or
expanded or developed by the assessee in the same
building or enclosure with a proportionately smaller
capital or where the transactions of the original business
and the extended business are of such a nature that they
are dependent on one another or where the requirements
of the original business are subserved substantially by
the product of subsequent undertakings, it may be said
that such expansions cannot have the benefit of
exemption under section 15C. But where the assessee
invests large sums of money and establishes new
production units of similar or different nature as a result
of which the original business of the assessee does not
intrinsically alter its original character or continues to
produce, manufacture or carry on the original activity in
the same way even after the establishment of subsequent
undertakings, the latter may be called extensions of such
a nature which may be called a kind of new industrial
undertaking which is entitled to get tax relief. relief. Thus
whether the term "reconstruction" would include the case
of substantial extensions or expansions of the assessee's
original business so as to invoke the benefit or mischief
under section 15C would depend upon the facts of each
case. Exemption under section 15C would only be
available to those industrial undertakings which are not
established by division or reorientation of the assessee's
original business or which has not been formed by the
transfer to it of building, machinery or plant used in the
assessee's original business. The emphasis should be
laid on the words "is formed by" and not the form of
subsequent undertaking. To obtain relief under section
15C, the subsequent undertaking must not be formed or
constituted by remodelling or reconstituting the earlier
business. It is significant that, apart from the head-note,
the words "new business" have only been specifically
mentioned in the case of transfer of building, machinery
or plant used in the original business. Thus the new,
separate or independent character of subsequent
business is relevant but not important elements in
Special Civil Petition (C) No. 7013 of 2019 Page 44 of 122
construing the word "reconstruction". Even any
enlargement or expanded unit may be called "new
industrial undertaking" in the sense that the subsequent
unit was not originally existing but the new undertaking
must be understood in the context of the word
"reconstruction". The legal meaning of the term
"reconstruction" is, in my opinion, a mixed question of fact
and law. It will be incorrect to say that "reconstruction"
must include or exclude all kinds of expansions,
irrespective of the nature constitution or character of the
subsequent undertaking. All the facts relating to the
original business and the subsequent undertaking, as
found by the Tribunal, have to be examined before a
decision is made on the question whether an assessee is
entitled to get relief under section 15C Where, therefore,
the activities or the business of the subsequent
undertaking show substantial expansions they may be
called industrial undertakings which are not formed by
the reconstruction of the assessee's original business […]”
(Emphasis Supplied)
63. The above view taken by the Calcutta High Court in Indian
Aluminium (supra) came to be affirmed by this Court in the
matter concerning CIT v. Indian Aluminium Co. Ltd. , reported
in (1977) 4 SCC 598 (1) .
64. Moreover, in the case of Bajaj Tempo Ltd., Bombay v. CIT ,
reported in (1992) 3 SCC 78 , this Court while dealing with the
question whether the assessee company that had been found by
the ITAT found to be a new company could be denied exemption
from tax under Section 15C of the IT Act, 1922. This Court inter
alia observed that the objective behind exemption from tax under
Section 15C, read as a whole, promoted and encouraged
industrialisation by permitting an assessee company setting up
Special Civil Petition (C) No. 7013 of 2019 Page 45 of 122
a new industrial undertaking to claim benefit of not paying tax
on the capital employed to certain extent and that a provision
intended for promoting economic growth has to be interpreted
liberally, the restriction on it, too, has to be construed so as to
advance the objective of the section and not to frustrate it. Noting
above, this Court held that even if the alleged new industrial
undertaking was established by transfer of building, plant or
machinery of any existing unit still if it is not formed as a result
of such transfer the assessee could not have been denied the
benefit. In short, this Court took the view that such new
undertaking should not be a continuation of the old but
emergence of a new unit in itself. The relevant observation is as
under:
“5. The section, read as a whole, was a provision,
directed towards encouraging industrialisation by
permitting an assessee setting up a new undertaking to
claim benefit of not paying tax to the extent of six per cent
in a year on the capital employed. But the legislature took
care to restrict such benefit only to those undertakings
which were new in form and substance, by providing that
the undertaking should not be, 'formed' in any manner
provided in clause (i) of sub-section (2) of Section 15-C.
Each of these requirements, namely, formation of the
undertaking by splitting up or reconstruction of an
existing business or transfer to the undertaking of
building, raw material or plant used in any previous
business results in denial of the benefit contemplated
under sub-section (1). Since a provision intended for
promoting economic growth has to be interpreted liberally,
the restriction on it, too, has to be construed so as to
advance the objective of the section and not to frustrate it
[…]
xxx xxx xxx
Special Civil Petition (C) No. 7013 of 2019 Page 46 of 122
9. Initial exercise, therefore, should be to find out if the
undertaking was new. Once this test is satisfied then
clause (i) should be applied reasonably and liberally in
keeping with spirit of Section 15-C(1) of the Act. While
doing so various situations may arise for instance the
formation may be without anything to do with any earlier
business. That is the undertaking may be formed without
splitting up or reconstructing any existing business or
without transfer of any building material or plant of any
previous business. Such an undertaking undoubtedly
would be eligible to benefit without any difficulty. On the
other extreme may be an undertaking new in its form but
not in substance. It may be new in name only. Such an
undertaking would obviously not be entitled to the
benefit. In between the two there may be various other
situations. The difficulty arises in such cases. For
instance a new company may be formed, as was in this
case a fact which could not be disputed, even by the
Income Tax Officer. But tools and implements worth Rs
3,500 were transferred to it of previous firm. Technically
speaking it was transfer of material used in previous
business. One could say as was vehemently urged by the
learned counsel for the department that where the
language of statute was clear there was no scope for
interpretation. If the submission of the learned counsel is
accepted then once it is found that the material used in
the undertaking was of a previous business there was an
end of inquiry and the assessee was precluded from
claiming any benefit. Words of a statute are undoubtedly
the best guide. But if their meaning gets clouded then
courts are required to clear the haze. Sub-section (2)
advances the objective of sub-section (1) by including in it
every undertaking except if it is covered by clause (i) for
which it is necessary that it should not be formed by
transfer of building or machinery. The restriction or denial
of benefit arises not by transfer of building or material to
the new company but that it should not be formed by such
transfer. This is the key to the interpretation. The
formation should not be by such transfer. The emphasis
Special Civil Petition (C) No. 7013 of 2019 Page 47 of 122
is on formation not on use. Therefore it is not transfer of
building or material but the one which can be held to have
resulted in formation of the undertaking […]”
(Emphasis Supplied)
65. Further, the Calcutta High Court in the case of Commissioner
of Income-Tax v. Orient Paper Mills Ltd. , reported in (1974)
94 ITR 73 , was confronted with the question whether the
electrolysis plant set up by the assessee company was a new
industrial undertaking within the meaning of Section 15C of the
IT Act, 1922. In this case, the assessee company owned a paper
mill. It manufactured and sold paper in the market. In the
preceding year to the relevant assessment year it had set up an
electrolysis plant unit for the purpose of manufacturing caustic
soda which is an essential chemical for use in the process of
manufacture of paper. The assessee company obtained a
separate licence for the manufacture of caustic soda and the
plant unit was housed in a separate building. In assessing the
company for the relevant year the Income tax Officer held that
the plant was ancillary to the main manufacturing unit and was
not, therefore, a new industrial undertaking as contemplated
under Section 15C.
66. In appeal, the Appellate Assistant Commissioner observed that
the business of manufacture of caustic soda was merely a
process of reconstruction of the existing business of manufacture
of paper. The Appellate Assistant Commissioner observed that no
sale had taken place of the caustic soda to the outside market.
The Appellate Assistant Commissioner observed further that the
business of the appellant was manufacture of paper. Caustic
Special Civil Petition (C) No. 7013 of 2019 Page 48 of 122
soda being an essential chemical for manufacture of paper, the
assessee company had set up plant unit for manufacture of
caustic soda so as to avoid purchasing the same from outside.
Therefore, the Appellate Assistant Commissioner came to the
conclusion that the plant was set up for manufacturing caustic
soda for being used in the manufacture of paper which was the
existing business of the appellant itself. The Appellate Assistant
Commissioner was of the opinion that as long as caustic soda
was not manufactured for the purpose of selling it in the market
and introducing a separate business thereby, the mere fact that
the plant was housed in a separate building and that an
industrial licence had to be obtained for the manufacture of this
chemical were not sufficient considerations for holding that
caustic soda plant was a new industrial undertaking as
contemplated under Section 15C of the IT Act, 1922. Pursuant
to this, a further appeal was made to the ITAT. The ITAT noted
that the assessee had produced before it the computation
showing the profit of the plant out of which exemption was being
claimed on the capital employed. The ITAT was of the opinion
that, prima facie , the computation appeared to be in order and,
therefore, directed the Income tax Officer to grant exemption to
the assessee company and accordingly allowed the appeal of the
assessee company.
67. In appeal before the Calcutta High Court, it was observed that
the expressions "new industrial undertaking" in terms of Section
15C(2)(i) must be understood in broad commercial sense from a
commonsense point of view. The court stated that in order to
appreciate the meaning of these expressions one should bear in
mind the purpose of Section 15C i.e., to encourage setting up of
Special Civil Petition (C) No. 7013 of 2019 Page 49 of 122
new industries in various areas of the country. On this note, the
High court observed that it was the case of the assessee company
from the beginning that intended to produce raw materials of a
type which was capable of being available in the market
independently and which was also capable of being sold in the
market and the assessee company had set up a new and separate
unit for the same in a separate building and had obtained a
separate licence for it. The High court observed that the setting
up of a factory or a plant for the manufacture of caustic soda was
not an essential or an integral part for the setting up of the plant
and machinery for paper manufacture. Furthermore, it was
observed that the plant had been set up for production of raw
material. This raw material has an independent market both to
be purchased and to be sold apart from the production of paper.
The court had pointed out that if the undertaking of assessee
company were not to held as a new industrial undertaking simply
because the assessee company was using this in the
manufacturing process then it would lead to strange results that
should otherwise be avoided. The relevant observation is as
under:
“8. The expressions "new industrial undertaking" and
"splitting up or reconstruction of business already in
existence" must be understood in broad commercial sense
from a commonsense point of view. In order to appreciate
the meaning of these expressions one should bear in mind
industries. The other conditions in clause (iv) of sub-
section (2) of section 15C are also significant.
Reconstruction of the business or splitting up of the
business already in existence must be in relation to the
new industrial undertaking. Further, the new industrial
undertaking must not be by transferring building, plant or
machinery of the existing business. Sub-section (1)
Special Civil Petition (C) No. 7013 of 2019 Page 50 of 122
requires separate capital but not new or different capital.
But whether a new industrial undertaking is entitled to
exemption under section 15C of the Act must depend
upon the facts and circumstances of each case. We have
set out the essential facts of this case. It was the case of
an assessee beginning to produce raw materials of a type
which was capable of being available in the market
independently and which was also capable of being sold
in the market and the assessee has set up a new and
separate unit for the same in a separate building and has
obtained a separate licence for it. It must be noted that
setting up of a factory or a plant for the manufacture of
caustic soda was not an essential or ingredient part for
the setting up of the plant and machinery for paper
manufacture. It is true that caustic soda is essential for
the manufacture of paper but setting up of a plant for the
manufacture of caustic soda is not an essential ingredient
for paper manufacture. Furthermore, it is to be noted that
this plant has been set up for production of raw material.
Thirdly, it has to be noted that this raw material has an
independent market both to be purchased and to be sold
apart from the production of paper. It was pointed out that
if it was not held as a new industrial undertaking simply
because the assessee was using this in the
manufacturing process then it would lead to a strange
result. If the assessee had set up this under taking for
production of caustic soda and had sold its produce in the
market and had purchased this caustic soda from the
market then this new venture of selling caustic soda
would be entitled to exemption under section 15C but
would lose such exemption simply because the assessee
was using the same for its own products. Such an
anomalous result, if possible, should be avoided.
Furthermore, it appears to us that the expressions
"splitting up or reconstruction of business already in
existence" should be given their ordinary commercial
meaning. Judged from that point of view it appears to us
that, as a new plant was set up in a new building not by
re-fitting any existing plant or machinery for production of
Special Civil Petition (C) No. 7013 of 2019 Page 51 of 122
a raw material which can be continued irrespective of
paper manufacturing business, the assessee in this case
was entitled to the benefit of section 15C of the Act.”
(Emphasis Supplied)
68. The above view taken in Orient Paper (supra) also came to be
affirmed by this Court in CIT v. Orient Paper Mills Ltd. ,
reported in (2015) 17 SCC 305 , wherein this Court found the
appeal to be covered by the view taken by this Court in Textile
Machinery (supra) and Indian Aluminium (supra) respectively,
and thus, dismissed the same . The relevant observation is as
under:
“Admittedly, the appeal is concluded by the view taken
by this Court in Textile Machinery Corpn. Ltd. v. CIT and
CIT v. Indian Aluminium Co. Ltd. In accordance with that
view, the appeal fails and is dismissed. There is no order
as to costs.”
69. Further, the High Court of Gujarat in the case of Gujarat
Alkalies and Chemical Ltd. v. CIT , reported in 2012 SCC
OnLine Guj 1628 , wherein one of us, J.B. Pardiwala, J, authored
the judgment, dealt with Section 80-I of the Income Tax Act, 1961
(“ IT Act, 1961 ”), a provision which is pari materia to Section 15C
of IT Act, 1922. In this case, the assessee company was a public
limited company engaged in the business of manufacturing
caustic soda primarily and other chemicals. After some time, the
assessee company acquired a new industrial licence and a new
letter of intent for substantial expansion of the production
capacity of caustic soda from the existing 37425 M. Tonnes to
70425 M. Tonnes for which twelve new cells were installed.
Special Civil Petition (C) No. 7013 of 2019 Page 52 of 122
Further, the assessee company had incurred an expenditure of
Rs. 7.5 crore towards new machinery and plant added to the
existing plant. In this backdrop, the assessee company had
claimed that this new unit being a new industrial undertaking
was entitled to relief as provided under Section 80-I of the Act.
This claim of the assessee company came to be rejected by the
Income tax Officer holding that this was a case of substantial
expansion and not that of establishment of new industrial
undertaking. When the matter was carried in appeal, the
Commissioner of Income tax (Appeals) also concurred with the
decision of the Income tax Officer. Thereafter, the assessee
company carried the matter in appeal before the ITAT and the
ITAT also affirmed the order of the Commissioner of Income- tax
(Appeals). The ITAT held that since it was expansion of the same
manufacturing unit, the assessee company would not be entitled
to the benefits of Section 80-I of the IT Act, 1961.
70. When the matter came before the High court, it observed that the
only ground which weighed with the Commissioner of Income-
tax (Appeals) and the ITAT respectively was that the assessee
company had not been able to lead any evidence to show that the
new unit was capable of independently producing the goods
without the aid of the existing plant and machinery of the old
unit. The High court further observed that for the purpose of
section 80-I of the IT Act, 1961, the industrial unit set up must
be new in the sense that new plant and machinery are erected
for producing either the same commodities or some distinct
commodities. In order to deny the benefit of the exemption under
Section 80-I, the new undertaking must be formed by
reconstruction of the old business. Considering the fact that
Special Civil Petition (C) No. 7013 of 2019 Page 53 of 122
substantial capital was employed to establish the new industrial
unit and that such expansion had resulted in increase in the
production by two fold, the High court held that there was no
formation of any industrial undertaking out of the existing
business since that could take place only when the assets of the
old business are transferred substantially to the new
undertaking. The court observed that just because the new
undertaking was dependent to a certain extent on the existing
undertaking the same by itself should not deprive the new
undertaking of the status of integrated unit by itself. Thus, the
High court held the alleged unit to be a new industrial
undertaking in this case and granted incentive of exemption
under Section 80-I. The relevant observation is as under:
“20. It appears that the only ground which weighed with
the Commissioner of Income-tax (Appeals) and the
Tribunal is that the assessee has not been able to lead
any evidence to show that the new unit is capable of
independently producing the goods without the aid of the
existing plant and machinery of the old unit. It also
appears that the authorities relied on the judgment of the
Bombay High Court in the case of Associated Cement
Companies Ltd. (1979) 118 ITR 406 (Bom), wherein the
hon'ble Bombay High Court has taken the view that the
establishment of a new industrial unit as a part of an
already existing industrial establishment may result in
an expansion of the industry or the factory, but if the
newly established unit is itself an integrated independent
unit in which new plant and machinery is put up and is
itself independently of the old unit capable of production
of goods then only it could be classified as a newly
established industrial undertaking. In the present case, it
is undisputed that the company has a separate industrial
licence for the industrial undertaking and spent over Rs.
7.5 crores for putting up plant and machinery necessary
Special Civil Petition (C) No. 7013 of 2019 Page 54 of 122
for the purpose. It is also undisputed that the production
capacity of the undertaking of caustic soda has increased
from 37245 M. Tonnes to 70425 M. Tonnes. Thus, what
has been ignored by the authorities is two things : (i) the
capital employed ; and (2) the substantial expansion of
industrial undertaking, by which the production became
almost double the original capacity […]
xxx xxx xxx
25. We are not able to understand the logic of the
argument that the test would be as to whether a new
industrial undertaking can function independently of the
existing industrial undertaking. If this argument of the
Revenue is accepted, it will amount to adding a new
clause in section 80-I of the Act. Assuming for the moment
that the new unit is not capable of independently
producing the goods without taking the assistance of the
existing plant and machinery of the old unit is no ground
to reject the claim under section 80-I of the Act. It all
depends upon the mechanism and technology. As held by
the Supreme Court in Textile Machinery Corporation
(1977) 107 ITR 195 (SC), such a new industrially
recognizable unit of an assessee cannot be said to be
reconstruction of his old business since there is no
transfer of any assets of the old business to the new
undertaking which takes place when there is
reconstruction of the old business. For the purpose of
section 80-I of the Act, the industrial units set up must be
new in the sense that new plant and machinery are
erected for producing either the same commodities or
some distinct commodities. In order to deny the benefit of
section 80-I, the new undertaking must be formed by
reconstruction of the old business. In the present case,
there is no formation of any industrial undertaking out of
the existing business since that can take place only when
the assets of the old business are transferred
substantially to the new undertaking. Just because the
new undertaking is dependent to a certain extent on the
Special Civil Petition (C) No. 7013 of 2019 Page 55 of 122
existing undertaking should not deprive the new
undertaking of the status of integrated unit by itself […]
26. We are of the view that so far as the fifth test is
concerned, i .e., a separate and distinct identity, only
because to a certain extent the new undertaking is
dependent on the existing unit, will not deprive the new
undertaking the status of a separate and distinct identity.
It all depends on the nature of the technology and the
mechanism of production. We cannot ignore the fact that
new machinery and new plant have been installed at an
investment of Rs. 7 crores sometime in the year 1982-83,
i.e., almost three decades back and also the fact that the
production has gone from 34000 M. Tonnes to almost
75000 M. Tonnes.
xxx xxx xxx
41. In the present case also, it is not the case of the
Revenue that the new unit by itself is not capable of
production of goods but the case of the Revenue is that it
takes help of the old existing unit. We are of the view that,
that itself should not be the reason to reject the claim
under section 80-I of the Act. Thus, whether an
undertaking is a "new industrial undertaking" entitled to
the exemption under section 80-I of the Act depends on
the facts of each case. No hard and fast rule can be laid
down. Use by the assessee of the old undertaking for the
purpose of production in its new undertaking is not a
decisive test in construing section 80-I of the Act. The new
undertaking must not be substantially the same old
business. Substantial investment of new capital is
imperative and in the present case, there has been a huge
substantial investment of around Rs. 7 crores almost
three decades ago. The words "the capital employed" in
the principal clause of section 80-I of the Act are
significant, for fresh capital must be employed in the new
undertaking claiming exemption. Manufacture or
production of articles yielding additional profit
Special Civil Petition (C) No. 7013 of 2019 Page 56 of 122
attributable to the new outlay of capital in a separate and
distinct unit is essential to earn the benefit of section 80-
I. The fact that an assessee by establishment of a new
industrial undertaking expands his existing business
which he certainly does, would not on that score deprive
him of the benefit under section 80-I. Every new creation
in business is some kind of expansion and advancement.
The true test is not whether the new industrial
undertaking connotes expansion of the existing business
of the assessee but whether it is a new identifiable
endeavour where substantial investment of fresh capital
is made to enable earning of profit attributable to that
new capital.”
(Emphasis Supplied)
71. Recently, this Court in the case of CIT v. Sociedade de Fomento
Industrial (P) Ltd. , reported in 2022 SCC OnLine SC 623 ,
reiterated the tests applied in Textile Merchants (supra) above
and affirmed the decision of the High court as well as that of the
ITAT that had held that the new unit established by the assessee
company was fully independent unit and that the setting up of
the same resulted in the increase in production capacity in
comparison to the old existing unit. While affirming the said
decision, this Court highlighted the following tests laid in Textile
Merchants (supra) :
“(i)Manufacture or production of articles yielding
additional profit attributable to the new outlay of capital
in a separate and distinct unit is the heart of the matter;
(ii) The fact that an assessee by establishment of a new
industrial undertaking expands his existing business
which he certainly does would not on that score, deprive
him of the benefit. Every new creation in business is some
kind of expansion and advancement;
Special Civil Petition (C) No. 7013 of 2019 Page 57 of 122
(iii) The true test is not whether the new industrial
undertaking connotes expansion of the existing business
of the assessee but whether it is all the same a new and
identifiable undertaking separate and distinct from the
existing business;
(iv) In order that the new undertaking can be said to be
not formed out of the already existing business, there
must be a new emergence of a physically separate
industrial unit which may exist on its own as a viable
unit;
(v) The new unit may produce the same commodities of
the old business or it may produce some other distinct
marketable products, even commodities which may feed
the old business.
(vi) The products produced by the new unit may be
consumed by the assessee in his old business or may be
sold in the open market. One thing is certain that the new
undertaking must be an integrated unit by itself wherein
articles are produced.
(vii) The industrial unit set up must be new in the sense
that new plant and machinery are erected for producing
either the same commodities or some distinct
commodities.
(viii) In order to deny the benefit the new undertaking
must be formed by reconstruction of the old unit which
can take place only when the assets of more than 20
percent value of new unit are transferred to the new unit
from the old unit."
(Emphasis Supplied)
72. To limit our reference to a multitude of other precedents, we
consider it sufficient to observe that the tests delineated above
for determining what constitutes a new industrial undertaking
Special Civil Petition (C) No. 7013 of 2019 Page 58 of 122
have been consistently applied by this Court as well as by various
High Courts in a wide array of cases. These decisions have
considered not only claims for income tax exemptions available
to new industrial undertakings but also to disputes relating to
incentives such as sales tax exemptions, electricity duty
concessions, and similar fiscal benefits, many of which also form
part of the incentive framework under the industrial policy of
1989.
73. Adverting now to the facts of the present case, it is evident that
the expression “new industrial unit” in Clause 2.7 of industrial
policy of 1989 is defined solely with reference to the timing of the
investment made in a particular fixed capital. In essence, where
any fixed capital investment is made after the effective date, i.e.,
01.12.1989, the unit in which such investment is made is to be
treated as a new industrial unit. This would imply that if a
company already in existence prior to the effective date makes a
post effective date investment in fixed capital for setting up
another unit, the latter would qualify as a new industrial unit. If
our inquiry were to conclude at this point, there would be little
doubt that the MM Plant unit satisfies the definition of a new
industrial unit, as the fixed capital investment in its
establishment was made after the effective date. However, in our
considered view, a further inquiry becomes necessary i.e.,
whether the unit so invested in is genuinely a new industrial unit
or merely an expansion of the existing unit masquerading as a
new one. For such determination, reliance can be placed on
various tests prescribed by the courts as mentioned above
particularly in Textile Machinery (supra) and Indian
Special Civil Petition (C) No. 7013 of 2019 Page 59 of 122
Aluminium (supra) and later affirmed in Bajaj Tempo (supra) ,
Orient Papers (supra) , and Gujarat Alkalies (supra) .
74. The higher threshold laid down in the various decisions above to
determine the newness of industrial unit, assume even greater
relevance for consideration and application to the facts of the
present case as those tests were evolved in the context of Section
15C of the IT Act, 1922 (later Section 80-I of the IT Act, 1961),
the underlying objective of which was to foster industrial
development by encouraging the deployment of fresh capital
through the establishment of new industrial undertakings. In a
similar vein, the promotion of industrialization in the State of
Orissa by facilitating the setting up of new industrial units
through incentives such as capital investment subsidy, tax
exemptions, and related fiscal benefits, constitutes the ultimate
object of the industrial policy of 1989 as well.
75. Having said that, we are of the opinion that an enquiry
undertaken beyond the limited requirement of Clause 2.7 of the
industrial policy of 1989 would also reveal that the MM Plant unit
is, in fact, a new industrial unit and not merely an expansion of
the existing Indo Flogates unit. This is because, first , the
documents produced by the respondent authorities indicate that
the date of investment by Indo Flogates in the fixed capital for
the MM Plant unit stands recorded as 01.02.1992 i.e., well after
the effective date of the industrial policy of 1989. The date of
commencement of commercial production is similarly recorded
as 21.11.1992. Second , Indo Flogates was granted a new and
independent industrial licence by the State of Orissa, and a
separate electricity connection was sanctioned by the Orissa
Special Civil Petition (C) No. 7013 of 2019 Page 60 of 122
State Electricity Board. Third , the documents placed on record
also reveal that Indo Flogates made a fresh outlay of capital
investment in fixed assets such as land, sheds, a diesel generator
set, and plant and machinery, clearly indicating the creation of a
distinct industrial unit.
76. For fixed capital, Indo Flogates had acquired land and two sheds
being shed nos. 19 and 22 respectively from the Odisha
Industrial Infrastructure Development Corporation (IDCO) in the
Kalunga Industrial Estate for Rs. 11,73,000/- and Rs.
55,05,000/- respectively, and had further invested Rs.
75,24,000/- towards plant and machinery, aggregating to a
substantial investment of Rs. 1,42,02,000/-. It is also significant
to note that the location of the MM Plant unit in shed nos. 19
and 22 respectively of the Kalunga Industrial Estate was entirely
separate from that of the erstwhile Indo Flogates unit, which
operated from shed nos. 7 and 8 respectively. This clearly
indicates that the MM Plant unit had a new physical emergence
as an independent industrial unit capable of existing as a viable
unit on its own. We say so because, even if the Indo Flogates unit
had ceased to operate, the MM Plant unit would still have been
able to function independently as a viable industrial unit.
Fourthly , the manufacturing outputs of the MM Plant unit and
the Indo Flogates unit were distinct. Prior to amalgamation, Indo
Flogates was engaged in the production of slide gates and slide
gate valves, whereas the MM Plant unit had been established for
the manufacture of special refractory products such as stool
inserts, stool coatings, and basic gunning mix. In fact, the project
cost for establishing the MM Plant unit had been separately
appraised and financed by the IDBI Bank. In our view, therefore,
Special Civil Petition (C) No. 7013 of 2019 Page 61 of 122
the MM Plant unit constituted an identifiable undertaking,
separate and distinct from the existing business of Indo Flogates.
77. Even assuming that the products manufactured by the MM Plant
unit could have been utilised in the operations of the Indo
Flogates unit, it nonetheless remains a well-settled principle that
a new industrial unit does not lose its character merely because
it produces the same or similar commodities as the old unit, or
even products which may serve as inputs for the existing unit.
The rationale underlying this principle is rooted in the expertise
of an industrialist or a company. An industrialist or company
already experienced and well-versed in the manufacture and
trade of a particular commodity would ordinarily seek to develop
the industry in which it possesses skill and familiarity. In doing
so, such an entity may understandably choose to set up a new
industrial unit for the further development of its existing
industry, without being compelled to expose its capital to the
risks associated with an industry engaged in an entirely
unfamiliar commodity.
78. Furthermore, as briefly noted earlier, the objectives underlying
the introduction of the industrial policy of 1989 were grounded
in public interest and in the broader framework of liberalizing the
package of incentives so as to encourage the establishment of
new industrial units in the backward areas of the State of Orissa,
while simultaneously providing support to existing industries. To
fulfil the objective of promoting new industries in the State, the
Government of Orissa resolved to extend subsidy-based
incentives to all such units that were established through
investment in fixed capital made after the effective date, i.e.,
Special Civil Petition (C) No. 7013 of 2019 Page 62 of 122
01.12.1989. In this regard, Clause 4.1 of the industrial policy of
1989 expressly provides that, subject to certain stipulated
conditions, a new industrial unit shall be eligible to seek all
incentives contemplated under the policy. Capital investment
subsidy and DG Set subsidy are among the incentives available
to new industries under Clause 4.1. Clause 5.1 further stipulates
that capital investment subsidy shall be mandatorily granted to
new industrial units on the basis of their fixed capital investment
in the scheduled zones, and at the percentage rates specified
therein. The MM Plant unit of Indo Flogates was situated in Zone
“C”, where the subsidy admissible was equivalent to 10% (ten
percent) of the fixed capital investment, subject to a maximum
ceiling of Rs. 10,00,000/-. Additionally, under Clause 11.4.4, an
industrial unit is entitled to capital investment subsidy for the
establishment of new generating sets at the rate of 15% (fifteen
percent) of the cost of installation, subject to a maximum of Rs.
5,00,000/-.
79. Having discussed the meaning of a new industrial unit under
industrial policy of 1989, a discussion on the expansion of
existing industrial unit is also required. Expansion, among other
two i.e., modernisation and diversification, of an existing
industrial unit has been defined under Clause 2.2 of the
industrial policy of 1989 to mean an additional investment (ought
to be more than 25% (twenty – five percent) of undepreciated
value of fixed capital investment of existing unit) in acquisition
of fixed capital investment of expanding the production of said
existing unit and resulting in the increased production over and
above the capacity of existing unit. This means in order to fall
within the phrase “expansion of an existing unit” under Clause
Special Civil Petition (C) No. 7013 of 2019 Page 63 of 122
2.2 of the industrial policy of 1989, four essentials at the least
are required: (i) There must be an additional investment; (ii) such
additional investment must exceed 25% (twenty – five percent) of
undepreciated value of existing unit’s fixed capital investment;
(iii) such additional investment must be made in acquiring new
fixed capital; and (iv) such additional investment must result in
increase in the production over and above the existing capacity.
80. Having explained the meaning of expansion of existing unit
under industrial policy of 1989, it is now pertinent to highlight
the fact that the respondent nos. 2 and 4 respectively in their
counter affidavit before this Court have stated that the
sanctioned subsidies were rejected due to the reason that MM
Plant unit was nothing but an expansion of the Indo Flogates
unit and that under Clause 4.4 of the industrial policy of 1989
though an industrial unit may carry any number of expansions
but the subsidy incentive for such industrial unit would be
allowed once only. It is the case of the respondent nos. 2 and 4
respectively that the decision to reject the subsidies was followed
when they found out that the MM Plant unit was an expansion
of the Indo Flogates unit and that Indo Flogates had already
availed subsidy for the expansion of the Indo Flogates unit under
the previous industrial policy which was supposed to be granted
only once as per Clause 4.4 of the industrial policy of 1989.
However, while rejecting the subsidies vide letter dated
04.10.2008, the respondents were unable to assign any reasons
as to why the MM Plant unit was an expansion of Indo Flogates
unit and/or how the abovementioned four essentials of Clause
2.2 were met. It was essential for the respondent authorities to
provide cogent reasons behind their decision in recognizing the
Special Civil Petition (C) No. 7013 of 2019 Page 64 of 122
MM Plant unit as an expansion, especially in the context of
Clause 20.1 of the industrial policy of 1989, which mandated
that the respondents reject the application for incentives on
merit . Thus, in view of the above, the requirement of Clause 2.7
of industrial policy of 1989 and the tests for qualifying as a new
unit appears to have been met by Indo Flogates while
establishing MM Plant unit and there being nothing on record to
prove contrary, we are of the view that MM Plant should be
treated as a new industrial unit only.
81. Having thus answered, on the basis of the material on record,
that the MM Plant unit satisfies the requirements of a new
industrial unit and that the respondents failed to justify its
classification as an expansion, it also becomes necessary to
examine the manner in which the respondents sought to defend
their stance before this Court and the High Court.
82. At this juncture, we are constrained to note that a major part of
the respondents’ submissions before this Court and the High
Court are an afterthought, primarily to cover the failure in their
duty to be objective, efficient, and reasoned while examining and
processing applications for the grant of subsidies. It is significant
to highlight at this moment one of the submissions of the
respondents against the appellant company wherein it was
submitted that in the applications of Indo Flogates there was no
mention of the existing unit or previous investments i.e., about
the earlier investment and subsidies granted while establishing
Indo Flogates and carrying out expansions therein, and that the
applications of Indo Flogates simply stated that this unit has
been set up separately in the state with a separate registration
Special Civil Petition (C) No. 7013 of 2019 Page 65 of 122
with the Government of India and with new and separate
electrical connection obtained from the Orissa State Electricity
Board (OSEB). On the basis of the above, it was stated that it
fulfilled the criteria of a new unit for subsidy under industrial
policy of 1989. Therefore, on the basis of the applications, the
respondent no. 2 vide letter dated 05.11.1998, communicated to
Indo Flogates that on further examination of matter, it had
decided to treat MM Plant unit of Indo Flogates for manufacture
of stool insert, stool coatings and gunning mix as a separate new
industrial unit. It is relevant to note here that there was already
a pre-formatted application form issued by the state wherein the
applicant while applying for subsidy for new industrial unit had
no choice but to accept to the pre-formatted clause in the draft
application which stated that the applicant certifies that they had
not either applied for or have received any amount by way of state
investment subsidy before.
83. We do not agree with the argument of the respondents that MM
Plant unit was recognised as a separate new industrial unit by
merely relying on the contents of the application submitted by
the appellant company. We must state that in such
circumstances, the respondent authorities should have closely
scrutinised and examined the merits and antecedents of each
application before recognising a unit as new or an expansion of
an existing unit, mentioning the reasons to do so, before
forwarding the application internally for approval, and
sanctioning the subsidies in favour of the applicant. It is a lame
excuse to say that believing the contents of an application, the
recognition of any unit as new or the expansion of an existing
unit was followed. We are of the view that non-application of
mind has no space in matters concerning policy decisions. We
Special Civil Petition (C) No. 7013 of 2019 Page 66 of 122
are aware that although during such processes the authorities
do exercise discretion, however, such exercise of discretion
cannot merely be on some flimsy grounds. Having said this, a
closer look into the applications of the Indo Flogates would reveal
that what it had mentioned was not something incorrect. In its
application, Indo Flogates mentioned that in collaboration with
Magneco/Metrel of USA, it had established MM Plant unit as a
separate unit meaning thereby with separate industrial
registration, land and sheds, electricity connection, and thus,
found itself fulfilling the criteria of being a new industrial unit
entitled to fresh subsidy under the industrial policy of 1989. It is
pertinent to state that in the same application, Indo Flogates had
also mentioned that “in case you need any further information /
clarification, please write to us” yet no information / clarification
was sought by the respondent authorities in regards to the
antecedents of Indo Flogates and subsidy having given before.
Respondent no. 2 vide letter dated 05.11.1998 went on to
recognise the MM Plant unit as a separate new industrial unit
while mentioning that “this is to certify that on further
examination of the matter the director of industries have been
pleased to decide to treat MM Plant as a separate new industrial
unit under medium scale sector of M/s Indo Flogates” .
84. Unlike and contrary to the above submission, the respondents in
their counter affidavit before the High Court had stated that the
earlier sanction of subsidy of Rs. 11,14,750/- (Rs. 10,00,000/-
towards capital investment subsidy and Rs. 1,14,750/- towards
DG Set subsidy) was based on the documents submitted by Indo
Flogates. It was also argued that the fact of amalgamation of Indo
Flogates and the appellant company was not disclosed to or
Special Civil Petition (C) No. 7013 of 2019 Page 67 of 122
brought to the knowledge of the respondents before sanctioning
the subsidies, therefore, MM Plant unit was earlier recognised as
a new industrial unit and on that basis capital investment
subsidy was sanctioned for MM Plant in favour of Indo Flogates.
th
The respondents further argued that in the 35 meeting of sub-
committee of state level committee, the very existence of Indo
Flogates was not there as it was already amalgamated with the
appellant company. However, we do not find any merit in this
argument as the fact of amalgamation was also referred to by the
appellant company (which till this time had amalgamated with
Indo Flogates) in its letter dated 22.05.2001 wherein the
respondents were asked to “kindly be informed that following
subsidy matters relating to erstwhile lndo Flogates Ltd (since
amalgamated with the Company) are lying pending with the
Industries Department” . Whereas, the subsidies were sanctioned
by the respondent nos. 2 and 4 respectively, later in point of time
vide their letters dated 10.04.2003 and 19.04.2003 respectively.
In fact, even before the letter dated 22.05.2001, a letter was sent
to the respondent no. 3 on 15.12.2000, wherein the undersigned
person was a representative of the appellant company and not
that of Indo Flogates. Further, the said letter clearly mentions to
that the issue of subsidy related to the erstwhile entity Indo
Flogates. The relevant portion of the letter reads thus:
“discussion yesterday undersigned had with you, kindly be
informed that following subsidy matters relating to erstwhile Indo
Flogates ltd are presently lying pending with the Industries
Department at Bhubaneswar” . Thus, had the respondent
authorities not acted in an absent-minded, lackadaisical, and
procrastinated manner, they would have known the fact that
Indo Flogates was not in existence anymore and that Indo
Special Civil Petition (C) No. 7013 of 2019 Page 68 of 122
Flogates had amalgamated with the appellant company. That
was precisely why the undersigned representative of the
appellant company was liaising for sanctioned subsidies for MM
Plant unit on behalf of Indo Flogates in all correspondence post
amalgamation. In case the respondents had not acted in such an
unmindful manner, they would have noted that amalgamation
had taken place and would have sought supporting documents
to that effect. Whatsoever the case could have been, even
otherwise, the non-disclosure of amalgamation could not have
been the ground for rejection of subsidies as the rights and
benefits in the subsidies sanctioned in favour of Indo Flogates
came to be transferred in favour of the appellant company after
the amalgamation and, a new industrial unit, irrespective of its
ownership, would have been entitled to the subsidies. At this
juncture, it is also pertinent to mention that Part III of the
amalgamation order dated 03.08.2000 explicitly states that all
properties belonging to or in the ownership of or vested in or
granted in favour of Indo Flogates including but without being
limited to all subsidies , will stand vested in the appellant
company upon amalgamation.
85. Thus, in view of all that is stated above, we hold this issue to be
in favour of the appellant company. We hold that the MM Plant
unit is a new industrial unit under the industrial policy of 1989,
as the same had also been classified by the respondents in the
year 1998.
Special Civil Petition (C) No. 7013 of 2019 Page 69 of 122
(II). If the answer to the issue no. (I) is in the affirmative then,
whether the respondents were justified in rejecting the
capital investment subsidy and DG Set subsidy respectively
for MM Plant unit on the ground that both Indo Flogates and
the appellant company had already exhausted the overall
subsidy limit under the previous industrial policies?
86. The respondents contended that the Industries Department,
Government of Orissa while exercising its power under Clause
20.1 of the industrial policy of 1989 had issued to the respondent
no. 3 the instructions letter vide dated 28.10.1994, clarifying
that the capital investment subsidy claims including the claims
for additional subsidy on account of expansion / modernisation
/ diversification shall be limited to the overall financial limits
prescribed under different IPRs and that this procedure was
followed earlier also and that the same may continue to be
followed in future. In this background, the respondents had
argued that it is clear from the instruction letter dated
28.10.1994 that capital investment subsidy claim, including
claim for additional subsidy in case of expansion, was subject to
overall financial limits prescribed under different IPRs, therefore,
the same should also apply in case of claim of a new industrial
unit for capital investment subsidy as also in case of claim for
additional subsidy in case of expansion / modernisation /
diversification. On the basis of the instruction letter dated
28.10.1994, the respondents had submitted that both Indo
Flogates and the appellant company was already being granted
to their extent of overall maximum limit of subsidy of Rs.
15,00,000/- and Rs. 20,00,000/-, collectively, under the
previous industrial policies i.e., industrial policies of 1980 and
Special Civil Petition (C) No. 7013 of 2019 Page 70 of 122
1986 and, therefore, the subsidies sanctioned for MM Plant unit
in favour of Indo Flogates could not have been disbursed in
favour of later transferee i.e. the appellant company for being
excessive of overall maximum limit of subsidy that can be
granted as per the instruction letter dated 28.10.1994.
87. Before going into the merits of the aforesaid submission, we deem
it necessary to reiterate a few important dates in the present
matter:
(a) The effective date of the industrial policy of 1989 was
01.12.1989;
(b) The date of initial fixed capital investment was 01.02.1992;
(c) The date of commencement of commercial production was
21.11.1992;
(d) The dates of applications for DG Set subsidy and capital
investment subsidy were 28.08.1993 and 29.09.1993
respectively;
(e) The instruction letter under Clause 20.1 of the industrial
policy was issued to the respondent no. 3 on 28.10.1994;
(f) On 05.11.1998, the respondent no. 2 recognised the MM Plant
unit as a separate new industrial unit of Indo Flogates;
(g) The amalgamation of Indo Flogates and the appellant company
was approved vide High Court order dated 03.08.2000;
(h) The fact of amalgamation was informed to the respondents vide
letter dated 22.05.2001;
(i) The DG Set subsidy and capital investment subsidy were
sanctioned by the respondents vide letters dated 10.04.2003
and 19.04.2003 respectively;
(j) The respondents, on the basis of the instruction letter dated
28.10.1994, rejected the said subsidies vide letter dated
Special Civil Petition (C) No. 7013 of 2019 Page 71 of 122
04.10.2008 on the ground that both Indo Flogates and the
appellant company had availed the maximum overall limit of
individual subsidies prescribed under the industrial policy of
1989;
(k) Industries Department, Government of Orissa had issued the
notification dated 30.10.2008 and amended industrial policy
of 1989 retrospectively to insert a new sub-clause being Clause
4.4, containing a verbatim requirement as had been provided
under the instruction letter dated 28.10.1994.
88. Having set the important dates above, a close reading of Clause
20.1 of the industrial policy of 1989 is also required. Clause 20.1
of industrial policy of 1989 inter alia provides that the State
Government may issue operational guidelines / instructions for
administration of incentives and that an industrial unit, which
considers itself eligible for any incentive under the policy, shall
apply for the same in accordance with the operation guidelines /
instructions and the same shall be considered and disposed of
on merits . This means if an industrial unit, while submitting the
application for subsidies to the respondent authorities, considers
itself to be eligible for any incentive then it shall apply “in
accordance” with the operational guidelines / instructions. At
this juncture, it is pertinent to note that at the time when Indo
Flogates had applied for DG Set subsidy and capital investment
subsidy i.e., on 23.08.1993 and 29.09.1993 respectively, the
instruction letter dated 28.10.1994 did not exist. This is why
Indo Flogates, without there being any further instruction till this
time, had applied under Clause 2.7 read with Clauses 4.1 and
5.1 of industrial policy of 1989 for capital investment subsidy
vide application dated 29.09.1993, in accordance with the
Special Civil Petition (C) No. 7013 of 2019 Page 72 of 122
existing eligibility requirements of being a new industrial unit
and having no prescribed overall maximum limits for such new
industrial unit. This is precisely the reason why Indo Flogates
might have suggested to the respondent authorities in its
application 29.09.1993 that it found itself fulfilling the criteria of
a new industrial unit and considered itself entitled for a fresh
subsidy under the policy.
89. Even otherwise, the requirement of a prescribed overall
maximum limit for capital investment subsidy contained in the
instruction letter dated 28.10.1994, though mentioned to be
retrospective, was inserted as it is and in verbatim in the main
industrial policy of 1989 vide amendment notification dated
30.10.2008. This amendment notification dated 30.10.2008
while adopting the verbatim requirement of the instruction letter
dated 28.10.1994 further clarified that "Capital Investment
Subsidy claim including claims for additional subsidy on account
of E/M/D shall be limited to the overall financial limit prescribed
under this IPR. In other words, if the eligible unit has availed of
capital investment subsidy under the previous IPR during its
operational period, its claim for additional subsidy would be
limited to the differential amount between actual subsidy availed
of during the operational period of the previous IPR and the
maximum CIS prescribed under this IPR ". The phrase “claim for
additional subsidy” read with words “eligible unit” used in the
context therein is of paramount importance. This means if an
eligible unit had already availed the benefit of capital investment
subsidy under previous industrial policies then such eligible
unit’s claim for additional subsidy would be limited to differential
Special Civil Petition (C) No. 7013 of 2019 Page 73 of 122
amount between subsidy availed under previous policies and the
maximum limit under industrial policy of 1989.
90. We are of the opinion that a claim for additional subsidy could
only be made when an eligible unit had already availed the
benefits of the same and/or part of the same earlier in the
previous policies. This means such eligible unit would
necessarily would have to be an existing unit first. This is
because a new industrial unit (in which fixed capital investment
is required to take place only after the effective date of industrial
policy of 1989) on the other hand would be receiving a fresh
subsidy as per the scheme and objective of entire industrial
policy of 1989 and not the additional subsidy which is otherwise
meant for an industrial unit which was set up during the
operation of previous policies. In such circumstances, the word
“eligible unit” used in the instruction letter dated 28.10.1994 and
in the amendment notification dated 30.10.2008 would require
to be read as the existing industrial unit which is undergoing
either expansion / modernisation / diversification. This view
would fall squarely into place when one would refer to the
heading of the amendment notification dated 30.10.2008 that
clarified the intent behind the requirement of the instruction
letter dated 28.10.1994. The heading of the amendment
notification dated 30.10.2008 states that an amendment to
industrial policy of 1989 is being carried out for the provisions of
sanction of capital investment subsidy under expansion /
modernisation / diversification programme and not for a new
industrial unit. The relevant excerpt is as follows:
“Sub: Amendment of IPR-80, IPR-86, IPR-89, IPR-92 and
IP-96 - Provisions for sanction of Capital Investment
Special Civil Petition (C) No. 7013 of 2019 Page 74 of 122
Subsidy (CIS) and exemption of sale Tax under Expansion
/ Modernization / Diversification (E / M / D) Programme
with retrospective effect.”
(Emphasis Supplied)
91. Thus, in the conspectus of the aforesaid discussion and having
already held the MM Plant unit to be a new industrial unit under
the industrial policy of 1989, we are of the view that the
respondent authorities were absolutely wrong in rejecting the
capital investment subsidy and DG Set subsidy for MM Plant unit
on the ground that since both Indo Flogates and the appellant
company had already availed the overall subsidy limit under the
previous industrial policies of 1980 and 1986 respectively, no
further subsidies could have been sanctioned for the MM Plant
unit in favour of Indo Flogates.
(III). Whether the respondents are estopped from refusing to
disburse the capital investment subsidy and DG Set subsidy
respectively for the MM Plant unit to the appellant
company?
92. The learned counsel appearing for appellant company contended
that the doctrine of promissory estoppel ought to operate in their
favour in the present case. Although the conclusions we have
reached on the foregoing two issues are, in our considered view,
sufficient to finally resolve the controversy yet, we deem it
appropriate, indeed necessary, with a view to doing complete
justice between the parties and for the definitive settlement of all
questions arising in the present lis , to also examine this issue.
Special Civil Petition (C) No. 7013 of 2019 Page 75 of 122
93. The common law acknowledges multiple forms of equitable
estoppel, one such doctrine being promissory estoppel. In Crabb
v. Arun DC , reported in [1976] 1 Ch 179 , Lord Denning,
speaking for the Court of Appeal, examined the equitable origins
of the doctrine of promissory estoppel and observed as follows:
“The basis of this proprietary estoppel – as indeed of
promissory estoppel – is the interposition of equity. Equity
comes in, true to form, to mitigate the rigours of strict law.
The early cases did not speak of it as “estoppel”. They
spoke of it as “raising an equity” If I may expand that,
Lord Cairns said: “It is the first principle upon which all
Courts of Equity proceed”, that it will prevent a person
from insisting on his legal rights – whether arising under
a contract or on his title deed, or by statute – when it
would be inequitable for him to do so having regard to the
dealings which have taken place between the parties.”
94. The essential elements of the doctrine of promissory estoppel
have also been discussed in Chitty on Contracts : Hugh Beale,
nd
Chitty on Contracts (32 edn., Sweet & Maxwell 2017):
“4.086. For the equitable doctrine to operate there must
be a legal relationship giving rise to rights and duties
between the parties; a promise or a representation by one
party that he will not enforce against the other his strict
legal rights arising out of that relationship; an intention
on the part of the former party that the latter will rely on
the representation; and such reliance by the latter party.
Even if these requirements are satisfied, the operation of
the doctrine may be excluded if it is, nevertheless, not
“inequitable” for the first party to go back on his promise.
The doctrine most commonly applies to promises not to
enforce contractual rights, but it also extends to certain
other relationships.
Special Civil Petition (C) No. 7013 of 2019 Page 76 of 122
xxx xxx xxx
4.088 […] The doctrine can also apply where the
relationship giving rise to rights and correlative duties is
non-contractual: e.g. to prevent the enforcement of a
liability imposed by statute on a company director for
signing a bill of exchange on which the company’s name
is not correctly given; or to prevent a man from ejecting a
woman, with whom he has been cohabitating, from the
family home.”
95. Chitty (supra) clarifies that the doctrine of promissory estoppel
may operate even in the absence of a pre-existing legal
relationship between the parties. It is, however, cautioned that
such an application may be misconceived, as it would result in
the creation of new rights inter se the parties, whereas the true
purpose of the doctrine is to prevent the enforcement of pre-
existing rights in circumstances where it would be inequitable to
do so:
“4.089. It has, indeed, been suggested that the doctrine
can apply where, before the making of the promise or
representation, there is no legal relationship giving rise
to rights and duties between the parties, or where there
is only a putative contract between them: e.g. where the
promisee is induced to believe that a contract into
which he had undoubtedly entered was between him
and the promisor, when in fact it was between the
promisee and another person. But it is submitted that
these suggestions mistake the nature of the doctrine,
which is to restrict the enforcement by the promisor of
previously existing rights against the promisee. Such
rights can arise only out of a legal relationship existing
between these parties before the making of the promise
or representation. To apply doctrine where there was
no such relationship would contravene the rule (to be
Special Civil Petition (C) No. 7013 of 2019 Page 77 of 122
discussed in para.4-099 below) that the doctrine
creates no new rights.”
96. Under English law, judicial pronouncements have historically
postulated that the doctrine of promissory estoppel cannot be
employed as a ‘sword’ to found an independent cause of action
for enforcing a promise unsupported by consideration. Its
application in those decisions has been confined to a ‘shield’,
whereby the promisor is estopped from insisting upon the
enforcement of strict legal rights when, by words or conduct, a
representation has been made to suspend or modify the exercise
of such rights. In Combe v. Combe , reported in [1951] 2 K.B.
215 , the Court of Appeal held that consideration is an essential
element of the cause of action:
“It [promissory estoppel] may be part of a cause of action,
but not a cause of action itself […] The principle
[promissory estoppel] never stands alone as giving a
cause of action in itself, it can never do away with the
necessity of consideration when that is an essential part
of the cause of action. The doctrine of consideration is too
firmly fixed to be overthrown by a side-wind”
97. Even within English law, the application of the rule laid down in
Combe (supra) has not been consistent, and the width of the
principle itself has been a matter of doubt. In the absence of any
authoritative pronouncement by the House of Lords recognising
promissory estoppel as an independent cause of action, it has
been considered difficult to state with certainty that English law
has moved away from the traditional position of treating the
doctrine as a ‘shield’ rather than a ‘sword’. In contrast, the
Special Civil Petition (C) No. 7013 of 2019 Page 78 of 122
position in the United States and Australia is comparatively less
restrictive.
98. Whereas India adopted a more broader formulation of the
doctrine. Comparative law enables countries which apply a
doctrine from across international frontiers to have the benefit of
hindsight.
99. This Court has given an expansive interpretation to the doctrine
of promissory estoppel with a view to remedy the injustice being
done to a party who has relied on a promise. In Motilal
Padampat Sugar Mills v. State of Uttar Pradesh , reported in
(1979) 2 SCC 409 , this Court viewed promissory estoppel as a
doctrine rooted in equity, unrestrained by the requirement of
consideration that traditionally circumscribed its application
under English law. Thus, speaking through Justice P. N.
Bhagwati (as His Lordship then was), the Court observed as
follows:
“12 […] having regard to the general opprobrium to
which the doctrine of consideration has been subjected
by eminent jurists, we need not be unduly anxious to
project this doctrine against assault or erosion nor
allow it to dwarf or stultify the full development of the
equity of promissory estoppel or inhibit or curtail its
operational efficacy as a justice device for preventing
injustice […] We do not see any valid reason why
promissory estoppel should not be allowed to found a
cause of action where, in order to satisfy the equity, it
is necessary to do so.”
(Emphasis Supplied)
Ø From estoppel to expectations
Special Civil Petition (C) No. 7013 of 2019 Page 79 of 122
100. Under English law, the doctrine of promissory estoppel has
evolved alongside the doctrine of legitimate expectation. The
latter is anchored in principles of fairness in public
administration and is attracted where a public authority, by its
representation or conduct, leads an individual to entertain an
expectation of receiving a substantive benefit. The contours of
the doctrine of substantive legitimate expectation were
elucidated in R v. North and East Devon Health Authority, ex
p Coughlan , reported in [2001] QB 213 , in the following terms:
“55 […] But what was their legitimate expectation?"
Where there is a dispute as to this, the dispute has
to be determined by the court, as happened in In re
Findlay. This can involve a detailed examination of
the precise terms of the promise or representation
made, the circumstances in which the promise was
made and the nature of the statutory or other
discretion.
56 […] Where the court considers that a lawful
promise or practice has induced a legitimate
expectation of a benefit which is substantive, not
simply procedural, authority now establishes that
here too the court will in a proper case decide
whether to frustrate the expectation is so unfair that
to take a new and different course will amount to an
abuse of power. Here, once the legitimacy of the
expectation is established, the court will have the
task of weighing the requirements of fairness against
any overriding interest relied upon for the change of
policy.”
(Emphasis Supplied)
Special Civil Petition (C) No. 7013 of 2019 Page 80 of 122
101. Under English law, the doctrine of legitimate expectation initially
emerged within the domain of public law as an analogue to the
doctrine of promissory estoppel in private law. Over time,
however, English law has drawn a clear distinction between the
two, treating legitimate expectation and promissory estoppel as
discrete remedies operating in the spheres of public law and
private law respectively. In this context, De Smith’s Judicial
Review , authored by Harry Woolf and others (8th edn., Thomson
Reuters, 2018), highlights the contrast between the public law
orientation of the doctrine of legitimate expectation and the
private law foundations of promissory estoppel:
“despite dicta to the contrary [Rootkin v Kent CC,
(1981) 1 WLR 1186 (CA); R v Jockey Club Ex p RAM
Racecourses Ltd, [1993] AC 380 (HL); R v IRC Ex p
Camacq Corp, (1990) 1 WLR 191 (CA)], it is not
normally necessary for a person to have changed his
position or to have acted to his detriment in order to
qualify as the holder of a legitimate expectation [R v
Ministry for Agriculture, Fisheries and Foods Ex p
Hamble Fisheries (Offshore) Ltd, (1995) 2 All ER 714
(QB)] […] Private law analogies from the field of
estoppel are, we have seen, of limited relevance where
a public law principle requires public officials to
honour their undertakings and respect legal certainty,
irrespective of whether the loss has been incurred by
the individual concerned [Simon Atrill, ‘The End of
Estoppel in Public Law?’ (2003) 62 Cambridge Law
Journal 3].”
(Emphasis Supplied)
102. Another point of distinction between the doctrines of promissory
estoppel and legitimate expectation under English law is that the
latter is capable of constituting an independent cause of action.
The ambit of the doctrine of legitimate expectation is wider than
Special Civil Petition (C) No. 7013 of 2019 Page 81 of 122
that of promissory estoppel, inasmuch as it takes into account
not only an express promise made by a public authority but also
consistent official practice. Further, in the application of
promissory estoppel, it may be necessary to demonstrate that the
promisee has suffered detriment as a consequence of acting in
reliance upon the promise. While it is generally sufficient to show
that the promisee has altered its position on the faith of the
representation, the absence of any resulting prejudice may
nonetheless be a relevant consideration in determining whether
it would be inequitable to permit the promisor to resile from the
promise. No such requirement, however, inheres in the doctrine
of legitimate expectation. In Regina (Bibi) vs Newham London
Borough Council , reported in [2002] 1 W.L.R. 237 , the Court
of Appeal held:
“55. The present case is one of reliance without
concrete detriment. We use this phrase because there
is moral detriment, which should not be dismissed
lightly, in the prolonged disappointment which has
ensued; and potential detriment in the deflection of
the possibility, for a refugee family, of seeking at the
start to settle somewhere in the United Kingdom
where secure housing was less hard to come by. In
our view these things matter in public law, even
though they might not found an estoppel or
actionable misrepresentation in private law, because
they go to fairness and through fairness to possible
abuse of power. To disregard the legitimate
expectation because no concrete detriment can be
shown would be to place the weakest in society at a
particular disadvantage. It would mean that those
who have a choice and the means to exercise it in
reliance on some official practice or promise would
gain a legal toehold inaccessible to those who,
lacking any means of escape, are compelled simply
Special Civil Petition (C) No. 7013 of 2019 Page 82 of 122
to place their trust in what has been represented to
them.”
(Emphasis Supplied)
103. Consequently, while the basis of the doctrine of promissory
estoppel in private law is a promise made between two parties,
the basis of the doctrine of legitimate expectation in public law is
premised on the principles of fairness and non-arbitrariness
surrounding the conduct of public authorities. This is not to
suggest that the doctrine of promissory estoppel has no
application in circumstances when a State entity has entered
into a private contract with another private party. Rather, in
English law, it is inapplicable in circumstances when the State
has made representation to a private party, in furtherance of its
public functions.
Ø
Doctrine of legitimate expectations in Indian Law
104. Under Indian law, the doctrines of promissory estoppel and
legitimate expectation have often tended to be conflated in
judicial discourse. This tendency has been noted and analysed
in Jain and Jain’s well-known treatise, Principles of
Administrative Law (7th edn., EBC 2013):
“At times, the expressions ‘legitimate expectation’ and
‘promissory estoppel’ are used interchangeably, but
that is not a correct usage because ‘legitimate
expectation’ is a concept much broader in scope than
‘promissory estoppel’.
xxx xxx xxx
Special Civil Petition (C) No. 7013 of 2019 Page 83 of 122
A reading of the relevant Indian cases, however, exhibit
some confusion of ideas. It seems that the judicial
thinking has not as yet crystallised as regards the
nature and scope of the doctrine. At times, it has been
referred to as merely a procedural doctrine; at times, it
has been treated interchangeably as promissory
estoppel. However both these ideas are incorrect. As
stated above, legitimate expectation is a substantive
doctrine as well and has much broader scope than
promissory estoppel.
xxx xxx xxx
In Punjab Communications Ltd. v. Union of India, the
Supreme Court has observed in relation to the doctrine
of legitimate expectation:
“the doctrine of legitimate expectation in the
substantive sense has been accepted as part of our law
and that the decision maker can normally be compelled
to give effect to his representation in regard to the
expectation based on previous practice or past conduct
unless some overriding public interest comes in the
way Reliance must have been placed on the said
representation and the representee must have thereby
suffered detriment."
It is suggested that this formulation of the doctrine of
legitimate expectation is not correct as it makes
"legitimate expectation" practically synonymous with
promissory estoppel. Legitimate expectation may arise
from conduct of the authority; a promise is not always
necessary for the purpose.”
105. While such doctrinal conflation has the regrettable effect of
introducing uncertainty into the law, it is ultimately citizens who
bear its adverse consequences. Representations made by public
authorities must, therefore, be subjected to the most exacting
standards, for citizens order their affairs and regulate their
Special Civil Petition (C) No. 7013 of 2019 Page 84 of 122
conduct on the basis of the trust they repose in the State. The
same considerations apply with equal force in the commercial
sphere, where predictability and consistency are indispensable
to rational business planning. A failure on the part of public
authorities to honour their representations, absent adequate and
cogent justification, undermines the confidence of citizens in the
State and erodes the credibility of governmental action. The
creation of a business-friendly environment conducive to
investment and trade is intrinsically linked to the degree of faith
that may be placed in government to fulfil the expectations it
engenders. Professors Jain and Deshpande have characterised
the consequences of this doctrinal confusion in the following
terms:
“Thus, in India, the characterization of legitimate
expectations is on a weaker footing, than in
jurisdictions like UK where the courts are now willing
to recognize the capacity of public law to absorb the
moral values underlying the notion of estoppel in the
light of the evolution of doctrines like LE [Legitimate
Expectations] and abuse of power. If the Supreme
Court of India has shown its creativity in transforming
the notion of promissory estoppel from the limitations
of private law, then it does not stand to reason as to
why it should also not articulate and evolve the
doctrine of LE for judicial review of resilement of
administrative authorities from policies and
longstanding practices. If such a notion of LE is
adopted, then not only would the Court be able to do
away with the artificial hierarchy between promissory
estoppel and legitimate expectation, but, it would also
be able to hold the administrative authorities to
account on the footing of public law outside the zone
of promises on a stronger and principled anvil.
Presently, in the absence of a like doctrine to that of
Special Civil Petition (C) No. 7013 of 2019 Page 85 of 122
promissory estoppel outside the promissory zone, the
administrative law adjudication of resilement of
policies stands on a shaky public law foundation.”
106. Further, the necessity for this doctrine to possess an
independent and autonomous existence was articulated by
Justice Frankfurter of the United States Supreme Court in
Vitarelli v. Seaton , reported in 359 U.S. 535 (1959) , in the
following words:
“An executive agency must be rigorously held to the
standards by which it professes its action to be judged.
Accordingly, if dismissal from employment is based on
a defined procedure, even though generous beyond the
requirements that bind such agency, that procedure
must be scrupulously observed. This judicially evolved
rule of administrative law is now firmly established
and, if I may add, rightly so. He that takes the
procedural sword shall perish with the sword.”
107. In National Buildings Construction Corporation v. S.
Raghunathan reported in [2003] 1 WLR 348 , a three Judge
bench of this Court, speaking through Justice S. Saghir Ahmad,
held that:
“18. The doctrine of “legitimate expectation” has its
genesis in the field of administrative law. The
Government and its departments, in administering the
affairs of the country, are expected to honour their
statements of policy or intention and treat the citizens
with full personal consideration without any iota of
abuse of discretion. The policy statements cannot be
disregarded unfairly or applied selectively. Unfairness
in the form of unreasonableness is akin to violation of
natural justice. It was in this context that the doctrine
Special Civil Petition (C) No. 7013 of 2019 Page 86 of 122
of “legitimate expectation” was evolved which has
today become a source of substantive as well as
procedural rights. But claims based on “legitimate
expectation” have been held to require reliance on
representations and resulting detriment to the claimant
in the same way as claims based on promissory
estoppel.”
(Emphasis Supplied)
108. However, it is necessary to bear in mind that the aforesaid
observation was made by this Court in the context of examining
the contours of the doctrine of legitimate expectation under
English law as it then stood. As noticed earlier, at that stage of
its development, English law exhibited a significant degree of
overlap between the doctrines of legitimate expectation and
promissory estoppel, the former often being invoked by analogy
with the latter. Subsequent developments in English law,
particularly following the decision of this Court in National
Buildings Construction Corporation (supra) , reflect a
conscious effort to disentangle the two doctrines and to locate
the doctrine of legitimate expectation on a distinct and more
expansive doctrinal footing. In Regina ( Reprotech (Pebsham)
Ltd) vs East Sussex County Council , reported in [2003] 1 WLR
348 , the House of Lords has held thus:
“33. In any case, I think that it is unhelpful to introduce
private law concepts of estoppel into planning law. As
Lord Scarman pointed out in Newbury District Council
v Secretary of State for the Environment [1981] AC 578
, 616, estoppels bind individuals on the ground that it
would be unconscionable for them to deny what they
have represented or agreed. But these concepts of
private law should not be extended into “the public law
of planning control, which binds everyone. (See also
Special Civil Petition (C) No. 7013 of 2019 Page 87 of 122
Dyson J in R v Leicester City Council, Ex p Powergen
UK Ltd [2000] JPL 629 , 637.)
34. There is of course an analogy between a private
law estoppel and the public law concept of a legitimate
expectation created by a public authority, the denial of
which may amount to an abuse of power… But it is no
more than an analogy because remedies against public
authorities also have to take into account the interests
of the general public which the authority exists to
promote. Public law can also take into account the
hierarchy of individual rights which exist under the
Human Rights Act 1998, so that, for example, the
individual's right to a home is accorded a high degree
of protection (see Coughlan's case, at pp 254–255)
while ordinary property rights are in general far more
limited by considerations of public interest: see R
(Alconbury Developments Ltd) v Secretary of State for
the Environment, Transport and the Regions [2001] 2
WLR 1389.
35. It is true that in early cases such as the Wells case
[1967] 1 WLR 1000 and Lever Finance Ltd v
Westminster (City) London Borough Council [1971] 1
QB 222 , Lord Denning MR used the language of
estoppel in relation to planning law. At that time the
public law concepts of abuse of power and legitimate
expectation were very undeveloped and no doubt the
analogy of estoppel seemed useful […] It seems to me
that in this area, public law has already absorbed
whatever is useful from the moral values which
underlie the private law concept of estoppel and the
time has come for it to stand upon its own two feet.”
(Emphasis Supplied)
109. In a concurring opinion in Monnet Ispat and Energy Ltd. v.
Union of India , reported in (2012) 11 SCC 1 , Justice H. L.
Special Civil Petition (C) No. 7013 of 2019 Page 88 of 122
Gokhale underscored the distinct considerations underlying the
doctrines of promissory estoppel and legitimate expectation. It
was observed that the invocation of promissory estoppel
presupposes the existence of a clear promise, acting upon which
the promisee has altered its position to its detriment. In contrast,
the application of the doctrine of legitimate expectation is
primarily informed by considerations of fairness and
reasonableness in State action. The relevant observation is as
under:
“Promissory Estoppel and Legitimate Expectations
289. As we have seen earlier, for invoking the principle
of promissory estoppel there has to be a promise, and
on that basis the party concerned must have acted to
its prejudice. In the instant case it was only a proposal,
and it was very much made clear that it was to be
approved by the Central Government, prior whereto it
could not be construed as containing a promise.
Besides, equity cannot be used against a statutory
provision or notification.
290. [...] In any case, in the absence of any promise, the
Appellants including Aadhunik cannot claim
promissory estoppel in the teeth of the notifications
issued under the relevant statutory powers.
Alternatively, the Appellants are trying to make a case
under the doctrine of legitimate expectations. The basis
of this doctrine is in reasonableness and fairness.
However, it can also not be invoked where the decision
of the public authority is founded in a provision of law,
and is in consonance with public interest.”
(Emphasis Supplied)
Special Civil Petition (C) No. 7013 of 2019 Page 89 of 122
110. In Union of India v. Lt. Col. P. K. Choudhary , reported in
(2016) 4 SCC 236 , this Court considered the decision in Monnet
Ispat (supra ) and noted its reliance on the judgment in Attorney
General for New South Wales v. Quinn , reported in (1990) 64
Aust LJR 327 . This Court thereafter observed as follows:
“This Court went on to hold that if denial of legitimate
expectation in a given case amounts to denial of a right
that is guaranteed or is arbitrary, discriminatory,
unfair or biased, gross abuse of power or in violation of
principles of natural justice, the same can be
questioned on the well-known grounds attracting
Article 14 of the Constitution but a claim based on mere
legitimate expectation without anything more cannot
ipso facto give a right to invoke these principles.”
111. Thus, the Court 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.
112. As regards the relationship between Article 14 and the doctrine
of legitimate expectation, a three judge Bench in Food
Corporation of India v. Kamdhenu Cattle Feed Industries ,
reported in (1993) 1 SCC 71 , held thus:
“7. In contractual sphere as in all other State actions,
the State and all its instrumentalities have to conform
to Article 14 of the Constitution of which non-
arbitrariness is a significant facet. There is no
unfettered discretion in public law: A public authority
possesses powers only to use them for public good.
This imposes the duty to act fairly and to adopt a
procedure which is ‘fairplay in action’. Due observance
Special Civil Petition (C) No. 7013 of 2019 Page 90 of 122
of this obligation as a part of good administration raises
a reasonable or legitimate expectation in every citizen
to be treated fairly in his interaction with the State and
its instrumentalities, with this element forming a
necessary component of the decision-making process in
all State actions. To satisfy this requirement of non-
arbitrariness in a State action, it is, therefore,
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
an 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. Rule of law does not completely
eliminate discretion in the exercise of power, as it is
unrealistic, but provides for control of its exercise by
judicial review.
8. The mere reasonable or legitimate expectation of a
citizen, in such a situation, may not by itself be a
distinct enforceable right, but failure to consider and
give due weight to it may render the decision arbitrary,
and this is how the requirement of due consideration of
a legitimate expectation forms part of the principle of
non-arbitrariness, a necessary concomitant of the rule
of law. Every legitimate expectation is a relevant factor
requiring due consideration in a fair decision-making
process. Whether the expectation of the claimant is
reasonable or legitimate in the context is a question of
fact in each case. Whenever the question arises, it is to
be determined not according to the claimant's
perception but in larger public interest wherein other
more important considerations may outweigh what
would otherwise have been the legitimate expectation
of the claimant. A bona fide decision of the public
authority reached in this manner would satisfy the
requirement of non-arbitrariness and withstand
judicial scrutiny. The doctrine of legitimate expectation
Special Civil Petition (C) No. 7013 of 2019 Page 91 of 122
gets assimilated in the rule of law and operates in our
legal system in this manner and to this extent.”
(Emphasis Supplied)
113. In NOIDA Entrepreneurs Assn. v. NOIDA , reported in (2011) 6
SCC 508 , a two judge bench of this Court, speaking through
Justice B. S. Chauhan, elaborated on this relationship in the
following terms:
“39. State actions are required to be non-arbitrary and
justified on the touchstone of Article 14 of the
Constitution. Action of the State or its instrumentality
must be in conformity with some principle which meets
the test of reason and relevance. Functioning of a
“democratic form of Government demands equality and
absence of arbitrariness and discrimination”. The rule
of law prohibits arbitrary action and commands the
authority concerned to act in accordance with law.
Every action of the State or its instrumentalities should
neither be suggestive of discrimination, nor even
apparently give an impression of bias, favouritism and
nepotism. If a decision is taken without any principle or
without any rule, it is unpredictable and such a
decision is antithesis to the decision taken in
accordance with the rule of law.
xxx xxx xxx
41. Power vested by the State in a public authority
should be viewed as a trust coupled with duty to be
exercised in larger public and social interest. Power is
to be exercised strictly adhering to the statutory
provisions and fact situation of a case. “Public
authorities cannot play fast and loose with the powers
vested in them.” A decision taken in an arbitrary
manner 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.
In this context, “in good faith” means “for legitimate
Special Civil Petition (C) No. 7013 of 2019 Page 92 of 122
reasons”. It must be exercised bona fide for the purpose
and for none other [...]”
As such, we can see that the doctrine of substantive legitimate
expectation is one of the ways in which the guarantee of non-
arbitrariness enshrined under Article 14 finds concrete
expression.
114. As briefly discussed above, the operation of doctrine of
promissory estoppel against government instrumentalities finds
its reference in a pivotal decision of this Court in the case of
Motilal Padampat (supra). In this case, the State Government
of UP in 1968 had taken a policy decision to grant the incentive
of exemption from sales tax for a period of three years to all new
industrial units being established within the State. Pursuant to
this policy, the appellant addressed a communication to the
Director of Industries, stating that, in view of the sales-tax
exemption announced by the Government, it intended to set up
a plant unit for the manufacture of vanaspati and sought
confirmation regarding the availability of the exemption. The
Director of Industries affirmed the position, and the assurance
was further endorsed and confirmed by the Chief Secretary to the
State Government. Acting on the strength of these assurances,
the appellant proceeded to establish the plant unit. In and
around 1969, the State Government expressed reservations
regarding the grant of exemption and requested the appellant to
attend a meeting, during which the appellant reiterated that the
government had already granted sales-tax exemption and that it
had proceeded with the establishment of the plant unit on the
strength of that assurance. Subsequently, in 1970, the State
Government adopted a revised policy decision whereby new
vanaspati units in the State that commenced commercial
Special Civil Petition (C) No. 7013 of 2019 Page 93 of 122
production by 30.09.1970 would be entitled only to a partial
concession in sales tax. Although the appellant’s unit went into
commercial production on 02.07.1970, the State Government
once again altered its policy and, on 12.08.1970, communicated
its decision to rescind the concession earlier granted in favour of
the appellant. On this note, this Court thoroughly examined the
doctrine of promissory estoppel and observed that it is a principle
evolved by equity to avoid injustice. It is neither in the realm of
contract nor in the realm of estoppel.
115. According to this Court, the true principle of promissory estoppel
seemed to be that where one party has, by his words or conduct,
made to the other a clear and unequivocal promise which is
intended to create legal relations or effect a legal relationship to
arise in the future, knowing or intending that it would be acted
upon by the other party to whom the promise is made. Where it
is in fact so acted upon by the other party, the promise would be
binding on the party making it, and he would not be entitled to
go back upon it, if it would be inequitable to allow him to do so,
having regard to the dealings which have taken place between
the parties. This would be so irrespective of whether there is any
pre-existing relationship between the parties or not.
116. It was further observed that it is not necessary, in order to attract
the applicability of the doctrine of promissory estoppel, that the
promisee, acting on the promise, should suffer any detriment.
What is necessary is only that the promisee should have altered
his position in reliance on the promise. This Court was of the
view that the doctrine of promissory estoppel is also applicable
against the government, where the government makes a promise
Special Civil Petition (C) No. 7013 of 2019 Page 94 of 122
knowing or intending that it would be acted upon by the
promisee. Where, in fact, the promisee, acting on it, alters his
position, the government would be held bound by the promise.
The promise would be enforceable against the government at the
instance of the promisee, notwithstanding that there is no
consideration for the promise and the promise is not recorded in
the form of a formal contract.
117. Applying the said doctrine to facts of that case, this Court had
observed that the in the letter of the chief secretary to the
government, a categorical representation was made by him on
behalf of the government that the proposed vanaspati unit of the
appellant would be entitled to exemption sales tax for a period of
three years from the date of commencement of production. This
representation was made by way of clarification and as a definite
commitment on the part of the government to grant exemption.
Therefore, the representation was made by the government
knowing and intending that it would be acted on by the
appellant, because, the appellant had decided to set up a unit for
manufacture of vanaspati only on account of the exemption from
sales tax promised by the government. The relevant observations
are as under:
“7. That takes us to the question whether the assurance
given by respondent 4 on behalf of the State Government
that the appellant would be exempt from Sales Tax for a
period of three years from the date of commencement of
production could be enforced against the State
Government by invoking the doctrine of promissory
estoppel. Though the origins of the doctrine of promissory
estoppel may be found in Hughes v. Metropolitan Railway
Co. and Birmingham and District Land Co. v. London and
Special Civil Petition (C) No. 7013 of 2019 Page 95 of 122
North-Western Rail Co. authorities of old standing
decided about a century ago by the House of Lords, it was
only recently in 1947 that it was rediscovered by Mr.
Justice Denning, as he then was, in his celebrated
judgment in Central London Property Trust Ltd. v. High
Trees House Ltd.. This doctrine has been variously called
'promissory estoppel', 'equitable estoppel', 'quasi estoppel'
and 'new estoppel'. It is a principle evolved by equity to
avoid injustice and though commonly named 'promissory
estoppel', it is, as we shall presently point out, neither in
the realm of contract nor in the realm of estoppel […]
8. […] The true principle of promissory estoppel, therefore,
seems to be that where one party has by his words or
conduct made to the other a clear and unequivocal
promise which is intended to create legal relations or
affect a legal relationship to arise in the future, knowing
or intending that it would be acted upon by the other party
to whom the promise is made and it is in fact so acted
upon by the other party, the promise would be binding on
the party making it and he would not be entitled to go
back upon it, if it would be inequitable to allow him to do
so having regard to the dealings which have taken place
between the parties, and this would be so irrespective of
whether there is any pre-existing relationship between
the parties or not.
xxx xxx xxx
32. We may now turn to examine the facts in the light of
the law discussed by us. It is clear from the letter of
respondent 4 dated January 23, 1969 that a categorical
representation was made by respondent 4 on behalf of
the Government that the proposed vanaspati factory of
the appellant would be entitled to exemption from sales
tax in respect of sales of vanaspati effected in Uttar
Pradesh for a period of three years from the date of
commencement of production, This representation was
made by way of clarification in view of the suggestion in
Special Civil Petition (C) No. 7013 of 2019 Page 96 of 122
the appellant's letter dated January 22, 1969 that the
financial institutions were not prepared to regard the
earlier letter of respondent 4 dated December 22, 1968 as
a definite commitment on the part of the Government to
grant exemption from sales tax. Now the letter dated
January 23, 1969 clearly shows that respondent 4 made
this representation in his capacity as the Chief Secretary
of the Government, and it was therefore, a representation
on behalf of the Government […] We must, therefore,
proceed on the basis that this representation made by
respondent 4 was a representation within the scope of his
authority and was binding on the Government. Now,
there can be no doubt that this representation was made
by the Government knowing or intending that it would be
acted on by the appellant, because the appellant had
made it clear that it was only on account of the exemption
from sales tax promised by the Government that the
appellant had decided to set up the factory for
manufacture of vanaspati at Kanpur. The appellant, in
fact, relying on this representation of the Government,
borrowed moneys from various financial institutions, pur-
chased plant and machinery from M/s. De Smet (India)
Pvt. Ltd., Bombay and set up a vanaspati factory at
Kanpur. The facts necessary for invoking the doctrine of
promissory estoppel were, therefore, clearly present and
the Government was bound to carry out the
representation and exempt the appellant from sales tax
in respect of sales of vanaspati effected by it in Uttar
Pradesh for a period of three years from the date of
commencement of the production.
33. The State, however, contended that the doctrine of
promissory estoppel had no application in the present
case because the appellant did not suffer any detriment
by acting on the representation made by the Government:
the vanaspati factory set up by the appellant was quite a
profitable concern and there was no prejudice caused to
the appellant. This contention of the State is clearly
unsustainable and must be rejected. We do not think it is
Special Civil Petition (C) No. 7013 of 2019 Page 97 of 122
necessary, in order to attract the applicability of the
doctrine of promissory estoppel, that the promisee, acting
in reliance on the promise, should suffer any detriment.
What is necessary is only that the promisee should have
altered his position in reliance on the promise […]”
(Emphasis Supplied)
118. Further, this Court in the case of Pawan Alloys & Casting (P)
Ltd. v. U.P. SEB , reported in (1997) 7 SCC 251 , had the
occasion to consider the application of the doctrine of promissory
estoppel against the government with respect to an incentive
policy. In this case, the U.P. State Electricity Board had issued
three notifications dated 29.10.1982, 13.07.1984, and
28.01.1986 respectively on identical terms, notifying the revised
rate schedules appended thereto, which were to apply to all
consumers directly supplied with electricity by the Board
throughout the State of U.P. Each of these notifications
stipulated that the revised rate schedule would come into force
from the respective dates mentioned therein. Among the items
incorporated in these rate schedules was one relating to
incentives for new industrial units. The corresponding item in the
last notification dated 28.01.1986 provided that a development
rebate of 10% (ten percent) on the amount of the bill pertaining
to energy charges would be granted to a new industrial unit for
a period of three years from the date of commencement of supply.
The Board, however, issued a subsequent notification dated
31.07.1986 deleting the said item relating to incentives for new
industrial units from the notification dated 28.01.1986. The
appellant contended that, by virtue of the principle of promissory
estoppel, the Board was not entitled to withdraw the rebate
prematurely through its notification dated 31.07.1986.
Special Civil Petition (C) No. 7013 of 2019 Page 98 of 122
119. This Court, for the purpose of applying the doctrine of promissory
estoppel to the above set of facts, held that the Board had issued
the notifications in question, acting in its wisdom and pursuant
to the directions of the State, in furtherance of the package of
incentives offered by the State of U.P. to new industrial units. By
the plain terms of these notifications, the Board, functioning as
an arm of the State Government had extended concessions in the
form of rebates in electricity duty to the new industrial units,
with the objective of attracting such units to invest in the state
and bringing them within its fold as prospective consumers of
electricity. Through these notifications, the Board had clearly
held out a promise to new industries, and since such industries
had admittedly established themselves in the region where the
Board operated, acting upon that promise, equity required that
the Board be held bound by it. It was further observed that the
new industrial units, having been induced to establish
themselves in the region on the strength of the promise, had
altered their position irretrievably. They had invested substantial
amounts in setting up infrastructure and had necessarily
changed their position relying on the representation that they
would receive the promised benefit i.e., a rebate of 10% (ten
percent) on their electricity bills for at least three years as an
infancy benefit, so as to enable them to effectively compete with
existing industries in the market. On the force of these facts, this
Court was of the opinion that the Board could certainly be pinned
down to its promise by the application of the doctrine of
promissory estoppel. The relevant observation is as under:
“ 19. It is, therefore, not possible to agree with the
contention of learned Senior Counsel for the Board that
Special Civil Petition (C) No. 7013 of 2019 Page 99 of 122
these three notifications did not hold out any promise or
any representation to the general public enabling the new
industries to get established acting on the said
representation. It is obvious that after the expiry of this
three-year period the Board would be able to charge full
rate for electricity supplied to these new customers who
would then become sufficiently old and mature and
would not need any more rebate. It cannot, therefore, be
said that the Board had no interest in these new
industries, their prospective customers, and was not
interested in attracting them to the territory catered to by
it by the supply of electricity. It may be that the Board
exercised its statutory powers under Section 49 of the Act
for that purpose but all the same it in its wisdom and
acting on the direction under Section 78-A of the Act
pursuant to the package of incentives offered by the State
of U.P. to these new industries, had issued the said
notifications holding out these promises. But even
assuming that the State had no role to play in this
connection as submitted by Shri Dave for the
respondents, these three notifications on their own
wordings leave no room for doubt that they did contain
offers of incentives to new industries who would be the
prospective new consumers of electricity and, therefore,
the Board's future customers.
xxx xxx xxx
21. In the present case even leaving aside the promissory
estoppel against the State of U.P. it can clearly be
visualised that by the mere wordings of the aforesaid
three notifications the Board acting as a limb of the State
of U.P. had offered these concessions by way of rebate in
electricity duty to the new industries so as to attract them
to the State to enable the Board to take them in its fold as
prospective consumers of electricity to be sold by it to
them.
xxx xxx xxx
Special Civil Petition (C) No. 7013 of 2019 Page 100 of 122
24. Consequently it cannot be held on the clear recitals
found in the aforesaid three notifications issued by the
Board that no representation whatsoever guaranteeing
10% rebate on electricity consumption bills could be culled
out from these notifications. We, therefore, agree with the
finding of the High Court on Issue No. 1 that by these
notifications the Board had clearly held out a promise to
these new industries and as these new industries had
admittedly got established in the region where the Board
was operating, acting on such promise, the same in equity
would bind the Board. Such a promise was not contrary
to any statutory provision but on the contrary was in
compliance with the directions issued under Section 78-A
of the Act. These new industries which got attracted to
this region relying upon the promise had altered their
position irretrievably. They had spent large amounts of
money for establishing the infrastructure, had entered
into agreements with the Board for supply of electricity
and, therefore, had necessarily altered their position
relying on these representations thinking that they would
be assured of at least three years' period guaranteeing
rebate of 10% on the total bill of electricity to be consumed
by them as infancy benefit so that they could effectively
compete with the old industries operating in the field and
their products could effectively compete with their
products. On these well-established facts the Board can
certainly be pinned down to its promise on the doctrine of
promissory estoppel.”
(Emphasis Supplied)
120. Additionally, in the case of Gujarat State Financial Corpn. v.
Lotus Hotels (P) Ltd. , reported in (1983) 3 SCC 379 , this Court
had observed that the doctrine of promissory estoppel applies
against a statutory corporation which in the discharge of its
duties makes a clear and unequivocal promise that is acted upon
by the promisee. In this case, the appellant was Gujarat State
Financial Corporation (GSFC) that had sanctioned a loan in
Special Civil Petition (C) No. 7013 of 2019 Page 101 of 122
favour of the respondent for setting up a hotel. On the basis of
such sanctioning, the respondent invested in securities, incurred
expenditures, and undertook substantial liabilities upon for its
business. Subsequently, the appellant GSFC refused to disburse
the loan. Dismissing the appeal, this Court held that the GSFC,
being an instrumentality of the State under Article 12 of the
Constitution of India, 1950, could not have arbitrarily resiled
from its solemn promise, particularly when the promisee had
altered its position by relying thereon. In such circumstances,
this Court held that promissory estoppel would operate against
the appellant GSFC, and such promise would be enforceable to
compel the performance of its obligation. The relevant
observation is as under:
“9. It was next contended that the dispute between the
parties is in the realm of contract and even if there was a
concluded contract between the parties about grant and
acceptance of loan, the failure of the Corporation to carry
out its part of the obligation may amount to breach of
contract for which a remedy lies elsewhere but a writ of
mandamus cannot be issued compelling the Corporation
to specifically perform the contract. It is too late in the day
to contend that the instrumentality of the State which
would be "other authority" under Article 12 of the
Constitution can commit breach of a solemn undertaking
on which other side has acted and then contend that the
party suffering by the breach of contract may sue for
damages but cannot compel specific performance of the
contract. It was not disputed and in fairness to Mr Bhatt,
it must be said that he did not dispute that the
Corporation which is set up under Section 3 of the State
Financial Corporation Act, 1955 is an instrumentality of
the State and would be "other authority" under Article 12
of the Constitution. By its letter of offer dated July 24,
1978 and the subsequent agreement dated February 1,
Special Civil Petition (C) No. 7013 of 2019 Page 102 of 122
1979 the appellant entered into a solemn agreement in
performance of its statutory duty to advance the loan of
Rs 30 lakhs to the respondent. Acting on the solemn
undertaking, the respondent proceeded to undertake and
execute the project of setting up a 4-star hotel at Baroda.
The agreement to advance the loan was entered into in
performance of the statutory duty cast on the Corporation
by the statute under which it was created and set up. On
its solemn promise evidenced by the aforementioned two
documents, the respondent incurred expenses, suffered
liabilities to set up a hotel. Presumably, if the loan was
not forthcoming, the respondent may not have
undertaken such a huge project. Acting on the promise of
the appellant evidenced by documents, the respondent
proceeded to suffer further liabilities to implement and
execute the project. In the back drop of this
incontrovertible fact situation, the principle of promissory
estoppel would come into play. In Motilal Padampat
Sugar Mills Co. (P) Ltd. v. State of U.P.2 this Court
observed as under : [SCC para 8, p. 425 : SCC (Tax) p.
160]
“The true principle of promissory estoppel, therefore,
seems to be that where one party has by his words
of conduct made to the other a clear and unequivocal
promise which is intended to create legal relations or
affect a legal relationship to arise in the future,
knowing or intending that it would be acted upon by
the other party to whom the promise is made and it
is in fact so acted upon by the other party, the
promise would be binding on the party making it and
he would not be entitled to go back upon it, if it would
be inequitable to allow him to do so having regard to
the dealings which have taken place between the
parties, and this would be so irrespective of whether
there is any preexisting relationship between the
parties or not.”
Special Civil Petition (C) No. 7013 of 2019 Page 103 of 122
10. Thus the principle of promissory estoppel would
certainly estop the Corporation from backing out of its
obligation arising from a solemn promise made by it to the
respondent.
xxx xxx xxx
13. Now if appellant entered into a solemn contract in
discharge and performance of its statutory duty and the
respondent acted upon it, the statutory corporation
cannot be allowed to act arbitrarily so as to cause harm
and injury, flowing from its unreasonable conduct, to the
respondent. In such a situation, the court is not powerless
from holding the appellant to its promise and it can be
enforced by a writ of mandamus directing it to perform its
statutory duty. A petition under Article 226 of the
Constitution would certainly lie to direct performance of a
statutory duty by "other authority" as envisaged by
Article 12.
(Emphasis Supplied)
121. Furthermore, the Gujarat High Court, in Tata Metals and
Strips Ltd. v. State of Gujara t , reported in 1991 SCC OnLine
Guj 220 , was also seized of a similar issue. The issue arose in a
situation where the State Government, with a view to
encouraging the establishment of industries within the State and
achieving the objectives of developing small, medium, and large
scale industries in rural and backward areas. This was intended
to ensure balanced industrial growth and reduce congestion in
developed centres such as Ahmedabad, Baroda, and Surat
respectively. For the said purpose, the State Government had
introduced two distinct schemes by way of two separate
resolutions. By the first resolution, it framed the “State Cash
Subsidy Scheme for Industries”. By the second, it introduced a
scheme providing for sales tax exemption and the grant of loans
equivalent to the amount of sales tax paid on the sale of finished
Special Civil Petition (C) No. 7013 of 2019 Page 104 of 122
products. Under this scheme, sales tax exemption was to be
granted to all small-scale new industrial units commissioned on
or after 01.11.1977, and interest-free sales-tax loan benefits were
made available to medium and large-scale industrial units
commissioned during the currency of the scheme, including for
expansion and diversification of existing units. All three schemes
came into effect from 01.11.1977. However, on 27.08.1980, the
State Government reviewed the package of incentives introduced
under the said resolutions and decided to introduce a new
scheme of sales tax benefits in place of the then prevailing sales
tax exemption and loan scheme, with effect from 01.06.1980. The
earlier cash subsidy scheme was retained without modification.
The newly framed scheme, titled “The New Sales Tax Incentive
Scheme for Industries”, became effective from 01.06.1980 and
was intended to remain in force for a period of five years. Under
this scheme, new industrial units, including expansion or
diversification by existing units, commissioned i.e., having
commenced commercial production on or after 01.06.1980 were
eligible to opt for the new sales tax benefits in lieu of the benefits
under the older scheme. Under the new scheme, all eligible
industrial units were given the choice between two modes of
sales-tax incentives: (a) sales tax exemption incentives or (b)
sales tax deferment incentives. Where a new industrial unit opted
for the sales tax deferment scheme, the recovery of sales tax
payable on the sale of its products was to be deferred to the
extent and for the period stipulated in the resolution.
122. In the aforesaid backdrop, the petitioner contended that, relying
upon the aforesaid sales tax incentive schemes, it had made
substantial investments of approximately Rs. 2 crore in the
Special Civil Petition (C) No. 7013 of 2019 Page 105 of 122
specified area during the period 1979 to 1982. The commercial
production also commenced on 31.03.1982. It was therefore
asserted that the petitioner had become entitled to the benefits
of the sales tax incentive schemes notwithstanding the
subsequent government resolution dated 07.01.1982, by which
cold rolled steel strips and re-rolling of steel, including stainless
steel industries, were declared ineligible for any incentives under
Government resolutions.
123. The High court, while relying on Motilal Padampat (supra) and
applying the doctrine of promissory estoppel as explained
therein, observed that although the scheme itself stated that the
State Government might, from time to time, review the list of
industries excluded from its purview and may remove, amend, or
add any item to that list, yet such a stipulation did not render
the assurance held out by the State Government a conditional
one. By incorporating such a statement in the resolution, the
State Government merely indicated the power it already
possessed i.e., it made explicit what was otherwise implicit. The
court was of the opinion that on the strength of this clause, it
could not have been inferred that the assurance extended under
the scheme was that a new industrial unit would continue to
receive benefits only so long as its industry was not included in
the list of excluded industries. The assurance was not a limited
or qualified one. It was not intended to mean that the benefit
would be available only until the industry came to be excluded
from the scheme. Where a new industrial unit had set up an
industry not excluded from the purview of the scheme and had
commenced commercial production before that industry was
subsequently included in the exclusion list, it would be
Special Civil Petition (C) No. 7013 of 2019 Page 106 of 122
unreasonable and unjust to deprive such an industrial unit of
the benefit of the scheme, especially when it had already become
eligible and had started receiving the incentives. In other words,
the Government may withdraw an exemption previously granted,
but only if such withdrawal does not offend the doctrine of
promissory estoppel or deprive an industrial unit of an exemption
which it is otherwise entitled to claim by virtue of that doctrine.
Where the Government has offered an incentive of exemption to
a new industry, and where an industry has been established in
reliance on such representation in order to avail the benefit, that
new industry may legitimately contend that the exemption
cannot thereafter be withdrawn. The relevant observation is as
under:
“Though it is true that in the scheme itself it is declared
that the Government might review the list of industries
excluded from the purview of the scheme from time to time
and remove, amend or add any item from and to the said
list, it cannot be said that the assurance which the
Government held out under the scheme was a conditional
one. As rightly pointed out by the learned counsel for the
petitioner, by stating such a thing in the resolution what
the Government had done was merely to indicate the
power which it possesses. Thus, by stating like that in the
resolution, what the Government did was to make explicit
what was implicit. On the basis of such a statement in the
scheme, it is not possible to hold that the assurance which
the Government held out was that the new industrial unit
will continue to get the benefit under the scheme so long
as it is an industry not included in the list of industries
excluded from the purview of the scheme. The assurance
held out by the Government was not a limited one in the
sense that the benefit under the scheme was to be
available to the new units so long as that industry was
not excluded from the purview of the scheme. If a new
Special Civil Petition (C) No. 7013 of 2019 Page 107 of 122
unit had set up an industry which was not excluded from
the purview of the scheme and had started commercial
production before it came to be included in that list, it
would be unreasonable and unjust to deprive that new
industrial unit of the benefit of the scheme even though it
had become eligible under the scheme and had started
receiving benefits under the scheme […]
[…] In other words, the Government can withdraw an
exemption granted by it earlier if such withdrawal can be
done without offending the rule of promissory estoppel
and depriving an industry entitled to claim exemption
from payment of tax under the said rule. If the
Government grants exemption to a new industry and if on
the basis of the representation made by the Government
an industry is established in order to avail of the benefit
of exemption, the new industry can legitimately raise a
grievance that the exemption cannot be withdrawn except
by means of legislation.
In our opinion, on true interpretation of the resolution of
1980, it will have to be held that the Government did give
a promise to the entrepreneurs that if a new unit or project
was set up on the basis of the assurance held out under
the scheme, and that the new industrial project was
commissioned on or after 1st June, 1980, then it was
entitled to the benefits available under that scheme, if by
the time it was commissioned, i.e., by the time it
commenced commercial production, the said industry
was not included in the list of excluded industries. As the
scheme was operative for a period of five years only from
1st June, 1980, it will have to be further held that the
assurance of benefits was available to those new
industrial units or projects which had started commercial
production on or after 1st June, 1980, but before 31st
May, 1985, and which were not excluded earlier from the
benefits of the scheme. So far as the petitioner is
concerned, the petitioner had started commercial
production on 31st March, 1982. The industry in which it
Special Civil Petition (C) No. 7013 of 2019 Page 108 of 122
was engaged came to be included in the list of excluded
industries on 15th September, 1982, that is after it
started commercial production, and as we are not called
upon to decide in this case whether it stood excluded by
the resolution dated 7th January, 1982, it will have to be
held that the petitioner was entitled and continued to
remain entitled to the sales tax deferment benefit under
the scheme for the full period, if other conditions were
satisfied by it […]”
(Emphasis Supplied)
124. We shall now proceed to consider two more decisions on this
issue, particularly because the High Court of Orissa, in those
cases, has cogently articulated the application of the doctrine of
promissory estoppel in the context of the industrial policy of 1986
and the industrial policy of 1989 respectively.
125. In the case of Camma Textile Industries v. State of Orissa ,
reported in 1994 SCC OnLine Ori 207 , wherein the Government
of Orissa had announced several incentives in the form of tax
concession as well as subsidy to those entrepreneurs who
decided to set up industries within the State of Orissa and such
incentive based policies were called as the industrial policies. The
High Court noted that the industrial policies of the state
announced in 1980 and 1986 respectively brought about an
upsurge in the industrial climate of the State and even
entrepreneurs from outside the State became excited to set up
industries within the State. Therefore, in order to enhance the
tempo of industrialisation in the State, the government had
decided to further liberalise the package of incentives and
announced the industrial policy of 1989 with the twin objective
of encouraging new industries and providing support to
Special Civil Petition (C) No. 7013 of 2019 Page 109 of 122
industries which had come up in the State during the last few
years and, therefore, the new industrial policy of 1989 was
allowed to operate with effect from 01.12.1989, the date on which
the said policy was issued. The petitioner's case in nutshell was
that prior to the issuance of the industrial policy of 1989 and
while the industrial policy of 1986 was in force, the state level
committee held a meeting on 29.03.1989 and sanctioned a
capital investment subsidy of Rs. 25,00,000/- in favour of the
petitioner for the project of synthetic fabrics to be set up by the
petitioner in the district of Balasore. Under the Industrial Policy,
1986, the capital investment subsidy in respect of the new
industrial units as well as expansion / modernisation /
diversification projects in Zone-B for the district of Balasore was
25% (twenty – five percent) of the fixed capital subject to the limit
of Rs. 25,00,000/-. The IPICOL (which is the respondent no. 3 in
the present appeal) to whom the petitioner had applied for
financial assistance had intimated the petitioner vide letter dated
10.03.1989, about the financial assistance sanctioned by the
corporation and indicated therein that the central subsidy of Rs.
25,00,000/- has been taken into account while deciding the term
loan to be granted by the IPICOL. The OSFC (which is the
respondent no. 1 in the present appeal) also intimated vide letter
dated 26.07.1989 that the state level committee (sub-committee
of state level committee is the respondent no. 4 in the present
rd
appeal) in its 53 meeting had sanctioned a subsidy of Rs.
25,00,000/- to the petitioner's unit.
126. Upon the aforesaid unequivocal assurances from the OSFC and
the IPICOL as well as the decision of the State Government taken
by its state level committee, the petitioner had started making
Special Civil Petition (C) No. 7013 of 2019 Page 110 of 122
investments for setting-up the industrial unit in the district of
Balasore and had invested a substantial amount by 30.11.1989.
Thereafter on 03.08.1992, the OSFC intimated the petitioner that
the subsidy which had been sanctioned earlier in their favour to
the tune of Rs. 25,00,000/- stood cancelled and instead only a
sum of Rs. 15,00,000/- had been sanctioned as subsidy by the
state level committee in its meeting dated 04.07.1992. Since the
petitioner had already made a huge investment pursuant to the
unequivocal assurances held out to it by the State Government,
OSFC, and IPICOL, respectively with regard to the grant of
subsidy to the tune of Rs. 25,00,000/-, on receiving the letter of
the OSFC reducing the subsidy to the tune of Rs. 15,00,000/-, a
representation was made to the OSFC and the matter was also
brought to the notice of the director of industries. However, since
the petitioner did not receive any favourable communication from
either of them, it approached the High Court for enforcement of
the promises held out to it by the opposite parties and for a
declaration that the opposite parties were bound by the principle
of promissory estoppel.
127. The High Court held that there was no dispute that the opposite
parties had sanctioned a subsidy of Rs. 25,00,000/- in favour of
the petitioner’s new industrial unit, which had been duly
communicated to the petitioner by IPICOL vide letter dated
10.03.1989 and again by the OSFC through its letter dated
26.07.1989. The Court further noted that even the State
Government, in its counter affidavit, had conceded this position.
It was also undisputed that the industrial unit had been set up
in 1989 and that the petitioner had made substantial
investments between July 1989 and January 1990. Although the
Special Civil Petition (C) No. 7013 of 2019 Page 111 of 122
State Government contended that the Government of India had
withdrawn the central subsidy and had communicated this
withdrawal to the State in 1989, the said fact had never been
conveyed to the petitioner until the rejection letter dated
03.08.1992, by which time a reduced amount of subsidy had
again been sanctioned and communicated by the OSFC, and by
that stage, the petitioner had already made substantial
investment in establishing the unit. In view of the unequivocal
promise and assurance extended to the petitioner, and the
petitioner having established the industrial unit pursuant to that
promise and having incurred substantial expenditure in doing
so, the High Court held that the opposite parties were bound by
the assurances given and could not be permitted to resile
therefrom. The conclusion was irresistible that the petitioner had
relied upon the assurances contained in the letters dated
10.03.1989 and 26.07.1989, and, acting upon them, had altered
its position by making significant financial investment in setting
up the industrial unit. Consequently, the opposite parties were
obliged to honour the representation made to the petitioner by
sanctioning and disbursing the amount of Rs. 25,00,000/-. In
this manner, the High Court, relying upon this Court’s decision
in Motilal Padampat (supra) , held that the principle of
promissory estoppel squarely applied to the facts of the case and
that the opposite parties must be held bound by it. The relevant
observations are as under:
“8. The principle of promissory estoppel is a principle
evolved by equity to avoid injustice and, as has been
said by the apex Court in the case of Motilal Padampat
Sugar Mills Co. Ltd. v. The State of Uttar Pradesh, (1979)
2 SCC 409 : A.I.R. 1979 S.C. 621, it is neither in the
realm of contract nor in the realm of estoppel. According
Special Civil Petition (C) No. 7013 of 2019 Page 112 of 122
to the law laid down by the Supreme Court in the
aforesaid case, the true principle of promissory estoppel
is that where one party has by his words or conduct made
to the other a clear and unequivocal promise which is
intended to create legal relationship or effect a legal
relationship to arise in future knowing or int ending that
it would be acted upon by the other party to whom the
promise is made and, in fact, it is so acted upon by the
other party, the promise would be binding upon the party
making it and he would not be entitled to go back upon it,
if it would be inequitable to allow him to do so having
regard to the dealings which have taken place between
the parties. The learned Judges in the said case also
observed that it is not necessary, in order to attract the
applicability of the doctrine, that the promisee acting in
reliance on the promise should suffer any detriment and
what is necessary is that the promisee should have
altered his position in reliance on the promise.
xxx xxx xxx
11. Bearing in mind the law laid down by the apex Court
in the aforesaid cases, and examining the averments
made in the writ application as well as the documents
appended thereto, there cannot be any dispute that the
opposite parties had sanctioned a subsidy of Rs. 25 lakhs
in favour of the petitioner-industry which was
communicated to be petitioner by the IPICOL in its letter
dated 10- 3-1989, annexed as Annexure-2, and also by
the OSFC in its letter dated 26-7-1989, which has been
annexed as Annexure-3. Even the State Government in
its counter affidavit has conceded to the aforesaid
position. It is also an admitted fact that the industry was
set-up in the year 1989 and substantial investment was
made by the petitioner during the period July, 1989 to
January, 1990, as is apparent from Annexures-3, 5, 6
and 7. Though the State Government had taken a stand
that the Government of India had withdrawn the Central
Subsidy and communicated the same to the State
Special Civil Petition (C) No. 7013 of 2019 Page 113 of 122
Government in 1989, but the said fact had never been
communicated to the petitioner until 3-8- 1992, when the
reduced amount of subsidy was sanctioned again and
was communicated to the petitioner by the OSFC under
Annexure-8 and by that time the petitioner had made
substantial investment in setting-up the factory. In view
of the unequivocal promise and assurances to the
petitioner under Annexures-2 and 3, and the petitioner
having set-up the industry pursuant to the promise in
question and having made substantial expenses for
setting-up the industry, the opposite parties must be
bound by the assurances given by them to the petitioner
and cannot be permitted to back out from the same. In the
facts pleaded and proved, the conclusion is irresistible
that the petitioner has relied upon the assurance given to
it under Annexures 2 and 3 and acting on the said
assurances has altered its position by way of making
huge financial investment in setting up the industry and,
therefore, the opposite parties must adhere to the
representation made by them to the petitioner by way of
sanctioning Rs. 25 lakhs as subsidy and intimating the
same to the petitioner through the financial institutions of
the State Government, namely the OSFC and the IPICOL.
In our considered opinion, the principle of promissory
estoppel squarely applies and the opposite parties must
be bound by the same. We accordingly hold that the
opposite parties were not entitled to cancel the
sanctioned amount of subsidy of Rs. 25 lakhs to the
petitioner communicated to it under letter dated 26-7-
1989 and the said order is grossly (sic) detrimental to the
petitioner's interest. In the aforesaid premises we allow
this writ application and issue a writ of mandamus
calling upon the opposite parties to disburse the balance
amount of Rs. 10 lakhs to the petitioner which they are
bound by their earlier sanction and promise pursuant to
which the petitioner has acted to its detriment. The
amount in question representing the balance subsidy
should be paid to the petitioner within 2 months from the
Special Civil Petition (C) No. 7013 of 2019 Page 114 of 122
date of the receipt of our order. There will, however, be no
order as to costs.”
(Emphasis Supplied)
128. The second decision of High Court of Orissa relevant for our
purpose is the case of Prachi Engineering Pvt. Ltd. v. State of
Ori ssa , reported in 1998 SCC OnLine Ori 27 , wherein the High
Court, while dealing with the application of doctrine of
promissory estoppel to the incentive of electricity concession
promised by the State Government under industrial policy of
1989, unequivocally held that it is a settled law that industrial
policy regulations issued by the State Government constitute a
set of promises which the State Government is bound to honour
if an industrial unit satisfies the various criteria prescribed
under the relevant clauses. The High Court further held that
where such benefits are denied, a cause of action may arise
before a court of law in an appropriate case. In that view of the
matter, the High Court observed that there existed sufficient
justification for the government to extend the benefits under a
particular policy if an industrial unit has come into existence or
has commenced commercial production at any time during the
period for which the policy remains in force.
129. The High Court observed that, since the industrial policy was of
the year 1989, the relevant five-year period would run from
01.12.1989 to 30.11.1993. As the object of the policy was to
extend various incentives enumerated therein to eligible units,
such benefits ought not to be denied by interpreting any clause
of the policy in a manner that frustrates its object, creates
bottlenecks, or deprives an industrial unit of incentives to which
it is otherwise entitled. In essence, the High Court held that if an
Special Civil Petition (C) No. 7013 of 2019 Page 115 of 122
industrial unit is set up and goes into commercial production at
any point after the commencement of a particular policy and
during the period for which the policy remains operative, the
government has no justification to deny the benefits
contemplated under that policy. The relevant observation is as
under:
“8. It is settled law that the I.P.Rs. by the Government are
a set of promises which the Government is bound to
honour if an industry fulfils various criteria laid down
under the clauses. In case of denial of these benefits,
action may lie in Courts of law in appropriate cases. In
that view of the matter, there is every justification for the
Government to extend the benefit under a particular
policy, if the industrial unit has come into existence on set
up or goes for commercial production any time during the
period when that particular policy is in force. In the
present case, the I.P.R. being of 1989, the period of five
years would be from 1-12-1989 to 30-11-1993. Since the
object of the policy is to grant various incentives
enumerated under the policy to an eligible unit the same
should not be denied merely by interpreting the clause of
the policy in such a way that such interpretation instead
of furthering the objects for which the policy is framed
would create bottle-neck and deprive the particular
industrial unit from availing the incentives to which it is
otherwise entitled, but for the mere fact that capital
investment either in small or big scale has been made
prior to the effective date. In other words, if any time after
the date of coming into force of any particular policy (in
the present case 1-12-1989) an industrial unit is set up
and goes into commercial production during the period
in which the policy is in force, there is no justification for
the Government to deny the benefits under the police (sic)
even though capital investment might have made prior to
the effective date.”
(Emphasis Supplied)
Special Civil Petition (C) No. 7013 of 2019 Page 116 of 122
Ø Respondent authorities in breach of policy commitments
130. Now adverting to the facts of the present case, it is pertinent to
reiterate that the industrial policy of 1989 was introduced with
the twin objectives of encouraging new industries as well as
supporting the existing industries. The effective date from which
the industrial policy of 1989 came into force was 01.12.1989. On
the strength of the incentives made available to a new industrial
unit and having regard to the objectives underlying the industrial
policy of 1989, Indo Flogates invested funds for the
establishment of the MM Plant unit. The date of initial fixed
capital investment in the said MM Plant unit was 01.02.1992,
and thereafter the unit commenced commercial production. The
date of commencement of commercial production stood recorded
as 21.11.1992. Pursuant thereto, Indo Flogates submitted two
applications dated 28.08.1993 and 29.09.1993 respectively to
the respondent no. 3, inter alia seeking the grant of DG Set
subsidy and capital investment subsidy. Thereafter, the
respondent no. 2, on 05.11.1998, communicated the decision of
the respondent no. 3 recognising the MM Plant unit as a separate
new industrial unit of Indo Flogates. Subsequently, the
respondent no. 2 informed Indo Flogates, vide letter dated
09.06.2000, that the applications for the respective subsidies
had been recommended to the State Government for approval.
131. Finally, the respondent no. 1 vide letters dated 10.04.2003 and
19.04.2003 respectively conveyed the decision of the respondent
no. 4 of sanctioning an amount of Rs. 1,14,750/- towards the DG
Set subsidy and Rs. 10,00,000/- towards the capital investment
Special Civil Petition (C) No. 7013 of 2019 Page 117 of 122
subsidy. In the meanwhile, the MM Plant unit was still in
production and continued to incur substantial expenses in its
operation on the assurances given by the respondent authorities.
Further, Indo Flogates and the appellant company came to be
amalgamated vide the High Court order dated 03.08.2000.
Therefore, all rights and interests including the benefit of
subsidies in favour of Indo Flogates came to be transferred in
favour of the appellant company. It is pertinent to note here that
the fact of amalgamation was informed to the respondents vide
letter dated 22.05.2001 i.e. even before the sanction letters dated
10.04.2003 and 19.04.2003 respectively. Pursuant to
sanctioning of subsidies, the appellant company between 2003
and 2007, made as many as nine written requests to the
respondent authorities for disbursement of the sanctioned
subsidies in their favour.
132. During the period referred to above, the respondents had also
acknowledged the sanction of the subsidies on two occasions.
Firstly , on 24.03.2007 wherein the respondent no. 1 had
communicated to the appellant company that sanctioned
amount may be processed for disbursal on the receipt of the
respondent no. 3. Secondly , on 23.08.2007 wherein the
respondent no. 3 after conducting a site inspection of the MM
Plant unit recommended the disbursal of amounts towards
subsidies. Therefore, in view of the unequivocal promises and
assurances made to the appellant company under various
communications particularly the letters dated 05.11.1998,
10.04.2003, 19.04.2003, 24.03.2007, and 23.08.2007
respectively as mentioned above, and the appellant having set up
and continuing the production in the MM Plant unit by incurring
Special Civil Petition (C) No. 7013 of 2019 Page 118 of 122
substantial expenses in the expectation to such promises and
assurances, we are in complete agreement with the views of the
High Court of Orissa adopted in Camma Textile (supra) and
Prachi Engineering (supra) respectively. Thus, on this note also,
we are of the opinion that the appellant company is entitled to
disbursal of capital investment subsidy and DG Set subsidy and
that the respondents are precluded from refusing to disburse the
same in favour of the appellant company.
133. This litigation is a fine specimen of the bureaucratic lethargy. It
is this bureaucratic lethargy which gave rise to this long drawn
litigation. This Court in many of its decisions has reminded
various State Governments that if the object of formulating the
industrial policy is to encourage investment, employment and
growth, the bureaucratic lethargy of the State apparatus is
clearly a factor which will discourage entrepreneurship.
134. The State must abandon the colonial conception of itself as a
sovereign dispensing benefits at its absolute discretion. Policies
formulated and representations made by the State generate
legitimate expectations that it will act in accordance with what it
proclaims in the public domain. In the exercise of all its
functions, the State is bound to act fairly and transparently,
consistent with the constitutional guarantee against
arbitrariness enshrined in Article 14 of the Constitution of India.
Any curtailment or deprivation of the entitlements of private
citizens or private business must be proportional to a
requirement grounded in public interest. This understanding of
the limits of State power has been recognised and reiterated by
this Court in a consistent line of decisions. As an illustration, we
Special Civil Petition (C) No. 7013 of 2019 Page 119 of 122
would like to extract this Court’s observations in National
Buildings Construction Corporation (supra) :
“The Government and its departments, in administering
the affairs of the country are expected to honour their
statements of policy or intention and treat the citizens
with full personal consideration without any iota of
abuse of discretion. The policy statements cannot be
disregarded unfairly or applied selectively. Unfairness
in the form of unreasonableness is akin to violation of
natural justice.”
(See: The State of Jharkhand and Ors. v.
Brahmputra Metallics Ltd, Ranchi and anr. ,
reported in (2023) 10 SCC 634)
G. CONCLUSION
135. In view of the foregoing and considering the totality of the
circumstances, our conclusion on each issue is as follows:
(i) The MM Plant unit fulfils the definition of a “new industrial
unit” under Clause 2.7 of the industrial policy of 1989. This
is because the fixed capital investment for the MM Plant unit
was made after the effective date of the industrial policy of
1989, i.e., 01.12.1989, and the unit was separately
registered, separately located, independently powered, and
commenced independent commercial production in 1992.
(ii) The MM Plant is not an expansion/modernisation/
diversification of an existing unit as defined under Clause
2.2 of the industrial policy of 1989. The MM Plant unit
constitutes a physically and functionally distinct industrial
Special Civil Petition (C) No. 7013 of 2019 Page 120 of 122
undertaking, meeting the judicial tests as more particularly
discussed above, distinguishing a new unit from an
expanded unit.
(iii) The concept of overall financial limit under the amended
Clause 4.4 as introduced retrospectively vide the instruction
letter dated 28.10.1994 and later the amended notification
dated 30.10.2008 applies only to expansion / modernisation
/ diversification of an existing unit. It has no application to
new industrial units, which are governed by Clause 4.1 and
are entitled to all incentives including fresh subsidy subject
inter alia to the unit wise caps specified in Clause 5.1 and
Clause 11.4.4 of industrial policy of 1989 respectively.
(iv) The appellant company is entitled to the disbursement of
sanctioned subsidies. We have held that a clear and
unequivocal representation was made by the respondent
authorities with respect to sanction and grant of subsidies
by way of various communications particularly the letters
dated 05.11.1998, 10.04.2003, 19.04.2003, 24.03.2007,
and 23.08.2007 respectively as mentioned above, and the
appellant company having legitimate expectation that
sanctioned subsidies would be disbursed, and acting upon
the same set up and continued the production in the MM
Plant unit by incurring substantial expenses pursuant to
such promises and assurances. This reliance on the
promises and assurances of respondents was neither
speculative nor unilateral, but flowed directly from
unequivocal sanction and official communications issued by
Special Civil Petition (C) No. 7013 of 2019 Page 121 of 122
the respondents, rendering the subsequent volte-face not
only unfair but also untenable.
136. In view of the above, the appeal succeeds and is hereby allowed.
Accordingly, the impugned judgment and order of the High Court
is hereby set aside.
137. The respondents are hereby directed to disburse an amount of
Rs. 11,14,750/- along with interest at the rate of 9% p.a. from
the date of sanction of respective subsidies towards the capital
investment and the DG Set for MM Plant unit in favour of the
appellant company within a period of 3 months from the date of
this judgment.
138. Pending applications, if any, shall stand disposed of.
....................................... J.
(J.B. Pardiwala)
....................................... J.
(R. Mahadevan)
New Delhi;
th
6 January, 2026
Special Civil Petition (C) No. 7013 of 2019 Page 122 of 122
2026 INSC 18
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 66 OF 2026
(Arising out of Special Leave Petition (C) No. 7013 of 2019)
IFGL REFRACTORIES LTD.
…APPELLANT
VERSUS
ORISSA STATE FINANCIAL
…RESPONDENTS
CORPORATION & ORS.
J U D G M E N T
Signature Not Verified
Digitally signed by
VISHAL ANAND
Date: 2026.01.06
15:52:01 IST
Reason:
J.B. PARDIWALA, J.:
For the convenience of exposition, this judgment is divided into the
following parts:-
INDEX
A. PARTIES TO THE APPEAL ...................................................... 2
B. FACTUAL MATRIX ................................................................. 4
C. SUBMISSIONS ON BEHALF OF THE APPELLANT .................. 24
D. SUBMISSIONS ON BEHALF OF THE RESPONDENTS ............. 27
E. ISSUES FOR DETERMINATION ............................................ 31
F. ANALYSIS ............................................................................ 32
(I). Whether the MM Plant unit set up by Indo Flogates could be termed
as a new industrial unit in accordance with the terms of industrial
policy of 1989? ............................................................................. 32
(II). If the answer to the issue no. (I) is in the affirmative then, whether
the respondents were justified in rejecting the capital investment
subsidy and DG Set subsidy respectively for MM Plant unit on the
ground that both Indo Flogates and the appellant company had already
exhausted the overall subsidy limit under the previous industrial
policies? ....................................................................................... 70
(III). Whether the respondents are estopped from refusing to disburse
the capital investment subsidy and DG Set subsidy respectively for the
MM Plant unit to the appellant company? ....................................... 75
G. CONCLUSION ..................................................................... 120
Special Civil Petition (C) No. 7013 of 2019 Page 1 of 122
1. Leave Granted.
2. This appeal arises from the judgment and order dated
07.12.2018 passed by the High Court of Orissa in the W.P. (C)
No. 17398 of 2008 by which the High Court rejected the writ
petition filed by the appellant company and thereby, denied the
sanctioned incentives of capital investment subsidy and DG Set
subsidy under industrial policy of 1989 in favour of industrial
setup namely, Magneco Metrel Plant (“ MM Plant Unit ”) as
claimed by the appellant company on the ground that the
incentive of subsidy under industrial policy of 1989 could have
been granted only once.
A. PARTIES TO THE APPEAL
3. The appellant is a company registered under the provisions of the
Companies Act, 1956, having its registered office at Sector A,
Shed Nos. 7 and 8, Kalunga Industrial Estate, Sundergarh
(Orissa) and is engaged in the manufacturing, processing,
trading, and selling of specialized refractory products and
equipment for the iron and steel industry, such as magnesia
carbon and high-alumina bricks, castables, and moulding
systems, etc. The appellant company was amalgamated with one
Indo Flogates Limited (“ Indo Flogates ”) with effect from
01.04.1999. Upon amalgamation, all the properties, rights, and
powers of Indo Flogates, including the rights, title, interest, and
subsidies in one of the units of Indo Flogates namely, MM Plant
unit came to be transferred in favour of the appellant company.
Special Civil Petition (C) No. 7013 of 2019 Page 2 of 122
4. The respondent no. 1 is the Orissa State Financial Corporation
(OSFC). The OSFC is a statutory corporation established under
the State Financial Corporations Act, 1951 with an object to lend
and advance financial assistance to the small & medium scale
industries and to recover its dues. Under the industrial policy of
1989, applications for subsidies in case of small scale industries
were required to be submitted to the respondent no. 1 directly,
whereas in case of medium / large scale industries applications
were to be submitted to the respondent no. 1 through the
respondent no. 2 authority. In the said policy, the main function
of the respondent no. 1 was to act as a disbursing agency for all
subsidies granted therein to all industrial units. Further, the
respondent no. 1 is also one of the members of the state level
committee and the respondent no. 4 sub-committee respectively
for sanctioning the investment subsidies.
5. The respondent no. 2 is the Director of Industries, Cuttack (DIC).
Respondent no. 2 is established as an administrative and
executive wing of the Industries Department, Government of
Odisha. The main functions of respondent no. 2 are to implement
the industrial policies, process the incentive proposals at
departmental level, and participate in state and district level
committees for grant and sanction of incentives.
6. The respondent no. 3 is the Industrial Promotion and Investment
Corporation of Orissa Limited (IPICOL). Respondent no. 3
authority is established as a nodal agency of the State of Orissa
for investment promotion and single-window facilitation to
promote medium and large-scale industries in the state by
providing necessary support services.
Special Civil Petition (C) No. 7013 of 2019 Page 3 of 122
7. Lastly, the respondent no. 4 is the Sub-Committee of the State
Level Committee (SLC). The state level committee is the body that
sanctions the investment subsidy on application forwarded to
them by the forwarding agencies like the respondent nos. 1 to 3
respectively. As per Clause 6 of the Orissa Capital Investment
Subsidy Rules, 1989 (“ 1989 Rules ”), the state level committee is
vested with the authority to assess the merits of each case
relating to state investment subsidy, determine eligibility, and
sanction the quantum of subsidy admissible to industrial units.
Further, the state level committee is also empowered to delegate
any of its powers and functions to the respondent no. 4 sub-
committee.
B. FACTUAL MATRIX
8. In the year 1989, the Government of Orissa came out with the
industrial policy of 1989, which came into force with effect from
01.12.1989, with the twin objectives of fostering the
establishment of new industrial enterprises and extending
institutional support to the existing industrial undertakings.
Under the said policy framework, a comprehensive scheme of
incentives was envisaged, including, inter alia , capital investment
subsidies, sales tax concessions, exemption from electricity duty,
and subsidies towards technical know-how fees, etc. all intended
to stimulate industrial growth within the State.
9. Clause 3 of the industrial policy of 1989 delineates the
classification of areas for the purpose of extending incentives.
Under this clause, the State of Orissa, having regard to the
varying degrees of industrial backwardness and the existence of
Special Civil Petition (C) No. 7013 of 2019 Page 4 of 122
non-industrial regions, was bifurcated into three distinct zones,
namely Zone A, Zone B, and Zone C respectively. Indo Flogates
and the appellant company are located within Zone C, which
comprises, inter alia , the districts of Cuttack, Puri, Sundargarh,
and Sambalpur respectively. Clause 4 of the said industrial
policy pertains to the eligibility criteria and stipulates that,
subject to the fulfilment of the conditions prescribed therein, new
industrial units shall be entitled to all incentives envisaged under
the policy.
10. Clause 5 of the industrial policy of 1989 talks about capital
investment subsidy. Clause 5.1 therein states that new
industrial units as well as expansion/
modernisation/diversification projects as defined in the policy,
shall be allowed capital investment subsidy including central
investment subsidy, if any, made available by the Government of
India. The capital investment subsidy for Zone C is fixed at 10%
(ten percent) of the fixed capital investment subject to the limit
of Rs. 10,00,000/-.
11. Clause 11.4 of the industrial policy of 1989 provides that new
generating sets of the capacity of 10KW (ten kilowatts) and above
installed by any industrial unit for its industrial use and new
captive power plants would be eligible for capital investment
subsidy of 15% (fifteen percent) of its costs subject to a maximum
limit of Rs. 5,00,000/- and that this subsidy would be in addition
to the capital investment subsidy available to the industrial unit.
The relevant clauses of the industrial policy of 1989 including its
preamble read thus:
“ 1. PREAMBLE
Special Civil Petition (C) No. 7013 of 2019 Page 5 of 122
The Industrial Policies of the State announced in
1980 and 1986 have led to a remarkable upsurge in
the industrial climate of the State. There has been
very encouraging response from entrepreneurs both
outside and inside the State. In the light of experience
gained from implementation of the 1986 Policy and
keeping in view the need to maintain and enhance
the tempo of industrialization in the State, State
Government have decided to further liberalize the
package of incentives announced in the 1986 Policy
with the twin objective of encouraging new industries
and providing support to industries which have come
up in the State during the last few years.
Accordingly, it has been decided to operate, in public
interest, a new Industrial Policy as outlined
hereunder:-
2. DEFINITION
2.1 "Effective Date" means the date of issue of the policy
on and from which, the provisions thereof shall
operative.
2.2 "Expansion / modernisation / diversification" of an
existing industrial unit means additional investment
of more than 25% of the underpreciated [sic] book
value of fixed capital investment of an existing unit
in acquisition of fixed capital investment of
expanding / modernising / diversifying the
production of the said unit and resulting in increased
production over and above the existing installed
capacity of the unit.
2.3 "Fixed Capital Investment" means investment on
land, building, plant and machinery and other
equipments of permanent nature.
Explanation:- The calculation of fixed capital
investment shall be made according to the principles
outlined by Government of India for administration of
Central Investment Subsidy as is or, was in force.
xxx xxx xxx
Special Civil Petition (C) No. 7013 of 2019 Page 6 of 122
2.5 "Industrial Unit" means, any industrial undertaking
detailed in annexure-1 to this Policy and excluded
undertakings excepted therein.
xxx xxx xxx
2.7 "New Industrial Unit" means an industrial unit where
fixed capital investment has been made only on or
after the effective date.
xxx xxx xxx
3. CLASSIFICATION OF AREA
For the purpose of incentives, depending upon
industrial backwardness of different areas and non-
industry areas, the State is divided into the following
three Zones -
Zone 'A' - Phulbani, Bolangir and Kalahandi districts
including growth centres established in these
districts.
Zone 'B' - Keonjhar, Mayurbhanj, Dhenkanal,
Koraput, Balasore, and Ganjam districts including
growth centres established in these district and
districts covered under Zone ‘C’.
Zone 'C' - Cuttack, Puri, Sundargarh and Sambalpur
districts excluding growth centres.
4. ELIGIBILITY FOR INCENTIVES
4.1 Subject to general conditions and specific conditions
for any incentive if any, stipulated in this Policy and
provisions of Annexure-1, new industrial units shall
be eligible for all incentives provided in this Policy.
Provided that incentives on Sales Tax shall be
available to new industrial units only under Part-I of
the incentives on Sales Tax and not under any other
part.
4.2 The incentives on Sales Tax comprises more than one
part and each part is mutually exclusive. An
industrial unit eligible for the incentive under one
part shall not be eligible for incentive under any other
Special Civil Petition (C) No. 7013 of 2019 Page 7 of 122
part. The types of industrial units covered under
different parts have been mentioned under each part.
4.3 The incentives of 1986 Policy and 1980 Policy shall
continue to be available to industrial units, Hotels,
Cinema Halls etc. eligible under the said Policies
except to the extent abridged / modified / enlarged
in this Policy.
4.4 Expansion / modernisation and diversification will
be eligible for specific incentives as mentioned
against the concerned incentive. Any number of
expansion / modernisation / diversification can be
taken up by an industrial unit but the concerned
specific incentive shall be allowed only once.
4.5 Industrial Units of Public Sector Undertakings will
not be eligible for any incentive unless the State
Government on special consideration, make all or
any to these incentives, applicable to any such
undertaking.
5. CAPITAL INVESTMENT SUBSIDY
5.1 New Industrial Units as well as expansion /
modernisation / diversification projects as defined
earlier, shall be allowed Capital Investment Subsidy
including Central Investment Subsidy, if any made
available by Government of India in the following
manner :- Zone 'A' 25 percent of the fixed capital
investment subject to the limit of Rs. 25,00,000/-.
Zone 'B' 15 percent of the fixed capital investment
subject to the limit of Rs. 15,00,000/-. Zone 'C' 10
percent of the fixed capital investment subject to the
limit of Rs. 10,00,000/-. Provided that if Central
Investment Subsidy for any district / area is allowed
by Government of India at a higher rate than above,
the higher rate will be applicable […]
xxx xxx xxx
11.4 CAPTIVE POWER PLANTS AND GENERATING
SETS
Special Civil Petition (C) No. 7013 of 2019 Page 8 of 122
11.4.1 A captive power plant is a power generation plant
with an installed capacity of not less than 1 MW set
up either by one industrial unit for its own industrial
use or by a group of industrial units for their own
industrial use, provided that surplus if any, is
supplied to OSEB grid.
11.4.2 New captive power plants with a total installed
capacity upto 60 MVW will be completely exempted
from payment of electricity duty in respect of power
generated by them for a period of 10 years from the
date of commissioning. This exemption will be 75%
for new captive power plants upto a capacity of 120
MVA and 50% for installed capacity beyond 120
MVA.
11.4.3 While computing the capacity of captive power
plants, all such plants set up by an industrial unit or
units will be taken into consideration to arrive at the
capacity of the plant and based on the said capacity,
exemption of electricity duty as mentioned above will
be allowed.
11.4.4 New generating sets of the capacity of 10 KW and
above installed by any industrial unit for its
industrial use and, new captive power plants will be
eligible for capital investment subsidy of 15% of its
cost subject to a maximum limit of Rs.5 lakh. This will
be in addition to capital investment subsidy
available to the industrial unit.
11.4.5 New generating sets up to 1 MVA capacity installed
by new and existing industrial units will be
exempted from electricity duty for a period of 10
years […]”
(Emphasis Supplied)
12. In addition to the industrial policy of 1989, the Government of
Orissa also introduced the 1989 Rules to regulate the procedure
of sanction, disbursement, and reimbursement of the capital
investment subsidy under the industrial policy of 1989.
Special Civil Petition (C) No. 7013 of 2019 Page 9 of 122
13. Upon the introduction of industrial policy of 1989, Indo Flogates,
on 18.05.1989, purportedly set up the subject new industrial
unit i.e., MM Plant unit, in the Kalunga Industrial Estate,
Rourkela, Dist. Sundargarh, with a separate registration bearing
Industrial License No. 341(89)DLR for the manufacturing and
processing of stool inserts, stool coatings, and basic gunning mix
which also falls under Zone ‘C’ as abovementioned. Thereafter,
on 01.02.1992, Indo Flogates made its first capital investment
towards the purchase of the land and shed for the establishment
of the MM Plant unit. On 21.11.1992, the said MM Plant
commenced its commercial production.
14. Thereafter, considering various incentives available to a new
industrial unit under the industrial policy of 1989, Indo Flogates
on 23.08.1993 submitted an application to the respondent no. 3
for availing assistance towards the subsidies for the Diesel
Generator Set (“ DG Set ”) set up by them in MM Plant unit under
Clause 11.4.4 of the industrial policy of 1989 inter alia stating
the following:
(a) That, Indo Flogates in technical collaboration with
Magneco / Metrel of USA had completed the
establishment of the MM Plant unit for manufacturing
stool inserts, stool coatings, and basic gunning mix;
(b) That, the commercial production in the said MM Plant
unit had also begun; and
(c) That, in view of the frequent power cuts and power supply
being erratic in the area, Indo Flogates had procured DG
Sets in the project cost for which they want to avail the
assistance of subsidy for DG Set.
Special Civil Petition (C) No. 7013 of 2019 Page 10 of 122
15. Similarly, on 29.09.1993, Indo Flogates submitted another
application to the respondent no. 3 for availing assistance
towards capital investment subsidies under Clause 5.1 of the
industrial policy of 1989 inter alia stating as following:
(a) That, MM Plant unit had been set up separately in Orissa
for which a separate registration is allotted by the
Government of India;
(b) That, new sheds had been acquired from Odisha
Industrial Infrastructure Development Corporation (IDCO)
and a separate electrical connection was taken from
Orissa State Electricity Board (OSEB);
(c) That, for the reasons above stated, the MM Plant unit had
fulfilled the criteria of a new industrial unit and that the
same is entitled to fresh capital investment subsidy under
industrial policy of 1989.
16. On 05.11.1998, the respondent no. 2 sent a letter to the
appellant company and informed that on examination of its
applications, the respondent no. 2 had been pleased to treat MM
Plant unit as a separate new industrial unit under medium scale
sector of Indo Flogates. In the said letter, the respondent no. 2
further acknowledged that the date of commencement of
commercial production of MM Plant unit manufacturing stool
inserts, stool coatings, and basic ginning mix as determined in
the production certificate issued by the office of respondent no.
2 was 21.11.1992.
17. Thereafter, on 24.12.1999, the applications of Indo Flogates were
th
placed before the respondent no. 4 in the 28 Meeting of the sub-
Special Civil Petition (C) No. 7013 of 2019 Page 11 of 122
committee of state level committee. In the said meeting, it was
observed by the respondent no. 2 that the appellant company
had not only submitted the applications for grant of subsidies
within the time limit of 6 (six) months from the date of
commercial production but had also failed to file any application
for condonation of delay.
18. Thereafter, on 09.06.2000, the respondent no. 2 informed the
appellant company that their applications had been
recommended to the State Government.
19. While the above matters stood still, Indo Flogates amalgamated
into the appellant company. Thus, on 03.08.2000, the High
Court sanctioned the proposed scheme of amalgamation of Indo
Flogates with the appellant company with effect from
01.04.1999, and, thus, all property, rights, power of Indo
Flogates in its assets came to be transferred in favour of the
appellant company.
20. Upon amalgamation, the appellant company sent a letter dated
15.12.2000 to the respondent no. 3 inter alia requesting for the
expeditious disposal of the grant and disbursement of technical
know-how subsidy of Rs. 5,00,000/-; capital investment subsidy
of Rs. 10,00,000/-; and DG Set subsidy of Rs. 1,16,000/- in
respect of the alleged new industrial unit i.e., MM Plant unit, set
up by the erstwhile Indo Flogates. In the said letter dated
15.12.2000, the appellant company also informed the
respondent no. 3 that applications for the abovementioned
subsidy were pending for more than 8 (eight) years due to the
lackadaisical approach of the office of respondent no. 2 and
Special Civil Petition (C) No. 7013 of 2019 Page 12 of 122
requested the respondent no. 3 for its intervention in the matter
so as to expedite the sanction and disbursement process.
21. As there was no response at the end of respondent no. 3 to the
letter dated 25.12.2000, the appellant company sent a follow-up
letter dated 17.01.2001 to the respondent no. 3, inter alia ,
seeking an update on the progress in the matter. Thereafter, the
appellant company again addressed a letter dated 22.05.2001 to
the respondent no. 3, inter alia , drawing attention to the fact that
the aforesaid subsidies relating to Indo Flogates had been
pending with respondent no. 2 since the amalgamation of Indo
Flogates with the appellant company; that the said subsidies
pertained to a new industrial unit which had commenced
commercial production as far back as on 22.11.1992; that the
respondent no. 3 issued the certificate of commencement of
production only after 6 (six) years of actual production; and that
even after this inordinate delay in issuing the commencement
certificate, the applications of the appellant company were being
shuttled from one office to another without any good reasons or
cogent action. At this juncture, while awaiting necessary action
at the end of the authorities, the appellant company also
expressed its willingness to assist by providing any further
information and/or documents to the respondent no. 3 as may
be required.
22. Following the above and aggrieved by the perfunctory attitude of
the respondents, the appellant company sent another letter on
13.11.2001 to the Secretary of Industries Department inter alia
requesting for ascribing the approval to the said applications of
the appellant company for the grant of the subsidies. In
Special Civil Petition (C) No. 7013 of 2019 Page 13 of 122
meantime, the respondent No. 2 vide its letter dated 26.11.2001
condoned the delay in the submission of the applications for the
grant of subsidies.
23. On 27.11.2001, the appellant company further wrote another
letter to the respondent no. 2 requesting to issue eligibility
certificate under the industrial policy of 1989. The appellant
company again vide its letter dated 27.09.2002 wrote to the
respondent no. 2 inter alia requesting to intervene in the matter,
especially considering the fact that 2 (two) years had passed by
since the delay was condoned by the respondent no. 2.
24. Finally, on 10.04.2003, the respondent no. 1 conveyed the
decision of the respondent no. 4 to the appellant company of
sanctioning the amount of Rs. 1,14,750/- towards DG Set
subsidy inter alia stating as follows:
“Sub: 15% Capital Investment Subsidy
Ref: Your application for Capital Investment Subsidy
Dear Sir,
We are pleased to inform you that the Sub-committee of
rd
the State Level Committee in its 3 meeting held on
20.02.03 has sanctioned a subsidy of Rs. 1,14,750/-
(Rupees One Lac Fourteen Thousand Seven Hundred
Fifty Only) to your unit at I.E. Kalunga […]”
(Emphasis Supplied)
25. On 19.04.2003, the respondent no. 1 also conveyed the decision
of the respondent no. 4 to the appellant company of sanctioning
Special Civil Petition (C) No. 7013 of 2019 Page 14 of 122
of the amount of Rs. 10,00,000/- towards capital investment
subsidy inter alia stating as follows:
“Sub: 10% Capital Investment Subsidy
Ref: Your application for Capital Investment Subsidy
Dear Sir,
We are pleased to inform you that the Sub-committee of
rd
the State Level Committee in its 3 meeting held on
20.02.03 has sanctioned a subsidy of Rs. 10,00,000/-
(Rupees Ten Lac Only) to your unit at I.E. Kalunga […]”
(Emphasis Supplied)
26. Following the sanction of subsidies, the appellant company sent
a letter dated 15.05.2003 to the respondent no. 1 enclosing the
necessary documents as requested in the letters dated
10.04.2003 and 19.04.2003 respectively and enclosing the
certified copy of order of High court dated 03.08.2000 inter alia
reinforming the respondents that Indo Flogates had
amalgamated with the appellant company with effect from
01.04.1999 in terms of the order passed by the High Court on
03.08.2000 by virtue of which all assets, liabilities, rights,
benefits, etc including entitlement to abovementioned subsidies
of Indo Flogates got transferred to and vested in the appellant
company. The relevant communication is as under:
“The Deputy Manager (Subsidy)
Orissa State Financial Corporation
O.M.P. Square
Cuttack 3
Dear Sir,
Special Civil Petition (C) No. 7013 of 2019 Page 15 of 122
Re: Your Sanction Letter dated 15th April, 2003 bearing
No. OSFC/32.20 addressed to Indo Flogates Ltd
regarding sanction of DG Set Subsidy of Rs. 114.750/-
Reference above, kindly be informed that Indo Flogates
Ltd has, on and from 1st April, 1999, amalgamated with
this Company in terms of an Order passed by the Hon'ble
High Court of Orissa on 3rd August, 2000. By virtue of
said Order of the Hon'ble Court, all assets, liabilities,
rights, benefits etc including entitlement to above subsidy
of said Company have got transferred to and/or vested
in this Company on and from 1st April, 1999. We enclose
herewith a certified true copy of said Order of the Hon'ble
Court and draw your attention specifically to Paragraphs
1 and 2 on Page 2 thereof.
As desired, we are now sending herewith the following :
1. Advance Stamped Money Receipt, in triplicate, in the
prescribed proforma.
2. Agreement duly executed on Non-judicial Stamp Paper
of Rs. 10/-.
3. Certified true copy of an extract of Minutes of meeting
of the Board of Directors of the Company held on Friday,
25th April, 2003 […]”
(Emphasis Supplied)
27. Between 12.05.2003 and 05.03.2007, the appellant company
addressed as many as 5 (five) letters to the respondent nos. 1 and
2 respectively seeking the disbursal of sanctioned subsidy
amounts. In the letter dated 12.05.2003, the appellant company
again brought to the attention of the respondent no. 1 that
pursuant to the amalgamation between Indo Flogates and the
appellant company with effect from 01.04.1999, all assets,
liabilities, rights, benefits, etc including the entitlement to the
capital investment subsidy and DG Set subsidy had come to be
Special Civil Petition (C) No. 7013 of 2019 Page 16 of 122
transferred in favour of the appellant company. In various letters
between this period, the appellant company requested the
respondent nos. 1 and 2 respectively to consider changing the
name of the beneficiary of these subsidies in the record from the
erstwhile Indo Flogates to the name of the appellant company
i.e., IFGL Refractories Ltd.
28. Pursuant to the above, the respondent no. 1 vide letter dated
24.03.2007 communicated to the appellant company that the
sanctioned amount may be processed for disbursement on the
receipt of the same from the respondent no. 2 authority.
29. Thereafter, on 23.08.2007, the respondent no. 2 sent a letter to
the joint director of industries, Cuttack and informed that the
fact of amalgamation of the appellant company and Indo Flogates
was already conveyed to the director and the Joint Director of
Industries, Cuttack vide internal office letters dated 27.09.2003
and 11.08.2006 respectively, thereafter which, the personnel
from the respondent no. 1 authority had visited the site of the
appellant company wherein it was found that the appellant
company was managing the continuity of production of MM Plant
unit. In such circumstances, the respondent no. 2 recommended
the respondent no. 1 to consider releasing the 10% (ten percent)
capital investment subsidy amounting to Rs. 10,00,000/- and
15% (fifteen percent) DG Set subsidy amounting to Rs.
1,14,750/- sanctioned in favour of Indo Flogates for the MM
Plant unit in favour of the appellant company. The relevant
correspondence is as under:
“To,
Shri T.K. Chatopadhyaya,
Special Civil Petition (C) No. 7013 of 2019 Page 17 of 122
Joint Director of Industries (SS)
Orissa, Cuttack.
Sub: Issue of Production Continuity Certificate of M/s.
lndo Flogates Ltd. Rourkela
Ref: Your Letter No. 4SSl-23/07-8252/ Ind dtd. 17.07.07.
Sir,
In inviting the reference to your above letter on the noted
subject, I am to say that M/s. Indo Flogates Ltd. I.E.
Kalunga, Dist Sundargarh has been amalgamated with
M/s IFGL Refractories Ltd. I.E. Kalunga with effect from
1.4.1999 in pursuance to the order passed by Hon'ble
High Court of Orissa on 3.8.2000. The matter was
already informed to the Director of Industries, Orissa,
Cuttack vide this office Letter No. 3354 dtd. 27.9.2003
and to Joint Director of Industries (SS) Orissa, Cuttack
vide this office Letter No. 3317 dtd. 11.8.2006. However,
as desired by you in your letter under reference the
undersigned along with Sri S. Dash Asst. Manager
(Finance) O.S.F.C. Rourkela have jointly visited M/s. IFGL
Refractories Ltd. Sector B, Kalunga lndl. Estate on
21.8.07 and found that it is having continuity of its
production. The production continuity certificate jointly
signed is enclosed separately for you kind reference.
Under the above circumstances, I would request that 10%
CIS amounting to Rs. 10.00 Lakhs sanctioned in favour of
M/s. Indo Flogates Ltd. (MM Plant Division) by the OSFC
Head Office, Cuttack and 15% CIS on D.G. Set amount
to Rs. 1,14,750/- by OSFC Head Office, Cuttack may be
released.”
(Emphasis Supplied)
30. Since no payments were yet released by the respondents despite
recommendations in the letters dated 24.03.2007 and
23.08.2007 respectively, the appellant company sent a letter
dated 06.08.2008 inter alia informing the respondent no. 1 that
Special Civil Petition (C) No. 7013 of 2019 Page 18 of 122
no payments had been made as of that time and further
requesting to inform the status of disbursement.
31. In the meantime, the respondent nos. 2 and 3 respectively
prepared an agenda note with the objective of placing the matter
th
of claim of subsidy in favour of Indo Flogates in the 35 Meeting
of sub-committee of state level committee. This agenda note inter
alia stated as follows:
1. That, subsidy to the tune of Rs. 11,14,750/- (Rs.
10,00,000/- towards capital investment subsidy and Rs.
1,14,750/- towards DG Set subsidy) had been sanctioned in
nd
the 32 meeting of sub-committee of state level committee
held on 20.02.2003 for MM Plant unit in favour of Indo
Flogates under industrial policy of 1989;
2. That, the unit had amalgamated with the appellant company
with effect from 01.04.1999 by the order of High court dated
03.08.2000;
3. That, the decision of amalgamation was neither recorded in
the proceedings nor any documents were produced before
the state level committee by either the unit or the authorities
below i.e., the respondent no. 3;
4. That, as per an executive instruction dated 28.10.1994, the
capital investment subsidy claims including claims for
additional subsidy on account of expansion / modernisation
/ diversification were limited to the overall financial limits
prescribed under previous industrial policies;
5. That, earlier Indo Flogates had been sanctioned a collective
subsidy of Rs. 15,00,000/- which was disbursed to them
under industrial policies of 1980 and 1986;
Special Civil Petition (C) No. 7013 of 2019 Page 19 of 122
6. That, earlier the appellant company had also been
sanctioned a collective subsidy of Rs. 20,00,000/- which
was disbursed to them under the industrial policy of 1989.
7. That, since both Indo Flogates and the appellant company
had availed the maximum limit of their respective subsidies,
thus further subsidies could not be disbursed in view of the
executive instruction dated 28.10.1994 as abovementioned.
32. Following the result of above agenda note, the respondent no. 1
sent a letter dated 04.10.2008 (“ Rejection Letter ”) and informed
the appellant company that proposal for disbursement of capital
nd
investment subsidy and DG Set subsidy sanctioned by the 32
sub-committee on 20.02.2003 in favour of erstwhile Indo
th
Flogates was placed before the 35 sub-committee on
20.02.2008 and that after a detailed discussion the committee
rejected the disbursement of capital investment subsidy and DG
Set subsidy in favour of the appellant company on the ground
that both Indo Flogates and the appellant company had availed
their maximum limit under the capital investment subsidy and
as such Indo Flogates was not entitled for disbursement of the
nd
amount sanctioned in the 32 sub-committee for Rs.
10,00,000/- towards normal capital investment subsidy and Rs.
1,14,740/- towards DG Set subsidy respectively. The relevant
extract is as under:
“To,
The Company Secretary
IFGL Refractories Ltd.
Sector 'B' Kalunga Industrial Estate
PO- Kalunga
Dist: Sundergarh-770031
Special Civil Petition (C) No. 7013 of 2019 Page 20 of 122
Sub: Disbursement of Subsidy
Ref: Your Letter No. Nil dt. 6.8.08
Sir,
In inviting a reference to the above, we are to inform you
that the proposal for disbursement of Capital Investment
Subsidy and subsidy on D.G. set sanctioned by the 32nd
Sub-Committee of SLC held on 20.2.03 in favour of M/s.
Indo Flogates Ltd., i.E., Kalunga, Rourkela was placed in
to 35th Sub-Committee held on dt. 20.2.08. After detailed
discussion, the Committee observed that both the units
(M/s. I.F.G.L Refractories Ltd. and M/s. lndo Flogates
Ltd) have availed the maximum limit under CIS Rule and
as such M/s. Indo Flogates Ltd. is not entitled for
disbursement of the amount sanctioned in the 32nd Sub-
Committee held on dt. 20.02.2003 for a total sum of Rs.
11,14,750/- (Rs. 10,00,000/- Normal CIS + Rs.
1,14,740/- DG. set subsidy). Hence the same has been
rejected by the Sub-Committee.”
(Emphasis Supplied)
33. After rejecting the subsidy benefits accrued in favour of Indo
Flogates to the appellant company, the Industries Department,
Government of Orissa vide notification dated 30.10.2008
amended the industrial policy of 1989 and the earlier Clause 4.4
as abovementioned and inserted new wordings to Clause 4.4
stating that the capital investment subsidy, including any
additional subsidy on account of expansion / modernisation /
diversification, shall in all cases remain subject to the overall
financial limit prescribed inter alia under the industrial policy of
1989. Accordingly, where an eligible unit had already availed
capital investment subsidy under a previous industrial policy
during its operational period, its entitlement to any further or
additional subsidy under the industrial policy of 1989 shall be
Special Civil Petition (C) No. 7013 of 2019 Page 21 of 122
limited to the differential amount between the subsidy actually
availed under the earlier industrial policies and the maximum
capital investment subsidy permissible under the industrial
policy of 1989. The said amended Clause 4.4 reads as under:
“4.4 “Capital Investment Subsidy claim including claims
for additional subsidy on account of E/M/D shall be
limited to the overall financial limit prescribed under this
IPR. In other words, if the eligible unit has availed of
capital investment subsidy under the previous IPR during
its operational period, its claim for additional subsidy
would be limited to the differential amount between
actual subsidy availed of during the operational period of
the previous IPR and the maximum CIS prescribed under
this IPR”.”
(Emphasis Supplied)
34. Aggrieved by the rejection of disbursement of subsidies, the
appellant company filed a Writ Petition No. 17398 of 2008 before
the High Court inter alia challenging the decision of the
respondent no. 1 rejecting the disbursal of subsidies with the
prayers to quash the rejection letter dated 04.10.2008 wherein
the disbursal of capital incentive subsidy and DG Set subsidy
had been rejected and for a direction to the respondents herein
to disburse the subsidy amounting to a total of Rs. 11,14,750/-.
In its reply before the High Court, the respondent no. 1 submitted
that capital investment subsidy and DG Set subsidy respectively
were sanctioned in favour of the unit because neither the Indo
Flogates nor the appellant company had submitted any
document of amalgamation at the time of sanction. The
respondents also argued that since both Indo Flogates and the
appellant company had availed the maximum capital investment
Special Civil Petition (C) No. 7013 of 2019 Page 22 of 122
subsidies, Indo Flogates was not entitled for disbursement of
total amount of Rs. 11,14,750/-
35. Proceeding on the aforesaid premise, the High Court vide its
impugned judgment and order dated 07.12.2018 dismissed the
appeal filed by the appellant company and denied the appellant
company the benefits of capital investment subsidy and DG Set
subsidy sanctioned in favour of MM Plant unit of Indo Flogates
under the industrial policy of 1989 inter alia taking the view that
although a new industrial unit is entitled to seek the benefit of
subsidies yet nonetheless the interpretation put forward by the
Committee that only once benefit would be granted to the
company was correct. The relevant portion of the impugned order
is as under:
“4. In view of the above, the subsidy which was entitled
to the petitioner by the merger of company was rejected
by the Committee vide decision dated 04.10.2008,
wherein the reasons have been given, which read as
under:
“After detailed discussion, the Committee observed
that both the units (M/s. I.F.G.L. Refractories Ltd. and
M/s. Indo Flogates Ltd.) have availed the maximum
limit under CIS Rule and as such M/s. Indo Flogates
Ltd. is not entitled for disbursement of the amount
nd
sanctioned in the 32 Sub-committee held on dt.
20.02.2003 for a total sum of Rs.11,14,750/-
(Rs.10,00,000/- normal CIS + Rs.1,14,750/- D.G. set
subsidy). Hence the same has been rejected by the
Sub-Committee."
5. In our considered opinion, it is true that a newly set up
Industrial Unit is entitled to get the benefit but
nonetheless the interpretation put forward by the
Special Civil Petition (C) No. 7013 of 2019 Page 23 of 122
Committee that only once benefit will be granted to the
company is correct. Hence, the prayer made in this writ
petition cannot be granted.
6. In that view of the matter, no interference is called for
this writ petition. Even otherwise, we do not find any good
ground to entertain the writ petition at this stage.
According, the writ petition stands dismissed.”
(Emphasis Supplied)
36. In such circumstances referred to as above, the appellant
company is here before us with the present appeal.
C. SUBMISSIONS ON BEHALF OF THE APPELLANT
37. Mr. Nakul Dewan, the learned senior counsel appearing for the
appellant company, submitted that the industrial policy of 1989
came into force with effect from 01.12.1989 with twin objectives
of encouraging new industries and providing support to the then
existing units. On this note, he argued that Clause 2.7 of the
industrial policy of 1989 defines “new industrial unit” in relation
to the question whether a company has made an investment in
an industrial unit after effective date of industrial policy of 1989
i.e. after 01.12.1989. Therefore, a new industrial unit in terms of
Clause 2.7 would exist even in a situation where a company that
existed prior to the industrial policy of 1989 only invested in a
particular industrial unit after the effective date of the industrial
policy of 1989.
38. The learned counsel also argued that Clause 2.2 of the industrial
policy of 1989 defines “expansion/modernisation/diversification”
Special Civil Petition (C) No. 7013 of 2019 Page 24 of 122
of an existing industrial unit to mean an additional investment
of more than 25% (twenty – five percent) of the undepreciated
book value of fixed capital investment of an existing unit in
acquisition of fixed capital investment of
expanding/modernising/diversifying the production of the said
unit and resulting in increased production over and above the
existing installed capacity. The learned counsel further
submitted that as per Clause 4.1 of industrial policy of 1989
states that all new industrial units as defined under Clause 2.7,
would be eligible for “all incentives” provided under the industrial
policy of 1989 whereas as per Clause 4.4 the incentives of
subsidy under the industrial policy of 1989 were allowed “only
once” with respect to expansion / modernisation / diversification
of an existing industrial unit as defined under Clause 2.2.
39. The learned counsel further submitted that the respondents are
also estopped from rejecting the appellant’s request to disburse
the subsidies especially after classifying the MM Plant unit as a
new industrial unit vide letter dated 05.11.1998; sanctioning the
subsidies in favour of MM Plant unit considering it to be a new
industrial unit vide letters dated 10.04.2003 and 19.04.2003
respectively; and acknowledging the sanctioning of the subsidies
vide letter dated 24.03.2007.
40. In other words, the learned counsel submitted that, having
classified the MM Plant unit as a new industrial unit and having
sanctioned the subsidies in its favour, the respondents are
estopped from rejecting the appellant company’s claim for
disbursal thereof as the appellant company had a legitimate
expectation that the subsidy would be disbursed post-
sanctioning for the reasons above stated.
Special Civil Petition (C) No. 7013 of 2019 Page 25 of 122
41. The learned counsel also submitted that the MM Plant unit is a
new industrial unit under the industrial policy of 1989 as the
same had also been classified by the respondents in 1998, and
there is no prescribed limit on the benefits available to it. This is
because Clause 4.1 of the industrial policy of 1989 states that all
new industrial units would be eligible for all incentives provided
in the industrial policy of 1989, which is different from the
treatment of existing industrial units, whereunder Clause 4.4 of
the industrial policy of 1989, incentives were allowed only once
in case of expansion / modernisation / diversification. He argued
that since the respondents had classified the MM Plant unit as a
new industrial unit, the High Court was incorrect in holding that
the benefits under the industrial policy of 1989 could have been
granted only once.
42. Lastly, the learned counsel argued that the respondents in their
counter affidavit before the High Court and further in the course
of hearing before this Court had alleged the non-disclosure of the
amalgamation between Indo Flogates and the appellant company
as the basis for the rejection of the disbursal of subsidies.
Refuting this, the learned counsel submitted that the
respondents had always been aware of the amalgamation even
prior to sanctioning of the subsidies as the appellant company,
after the amalgamation scheme was sanctioned by the High
Court by an order dated 03.08.2000, had informed the
respondents vide letter dated 22.05.2001 that an amalgamation
had taken place between Indo Flogates and the appellant
company and it is only after this the respondents had sanctioned
the subsidies for MM Plant unit vide letters dated 10.04.2003
Special Civil Petition (C) No. 7013 of 2019 Page 26 of 122
and 19.04.2003 respectively. Even otherwise, the counsel
submitted that the amalgamation between Indo Flogates and the
appellant company could not have been a basis for denying the
subsidies, as in every case of amalgamation, the successor-in-
interest becomes entitled to the rights and liabilities and assets
of the transferor company subject to the terms and conditions
set out in the scheme of amalgamation. In this case, the scheme
of amalgamation clearly stated that all rights of Indo Flogates
would vest in the appellant company without any further act or
deed. Thus, given that the MM Plant unit was recognized as a
new industrial unit before the amalgamation, the entitlement of
Indo Flogates to obtain subsidies would accrue to the appellant.
D. SUBMISSIONS ON BEHALF OF THE RESPONDENTS
43. Mr. Soumyajit Pani, the learned counsel appearing for the
respondent no. 1, submitted that the High court was right in
dismissing the writ petition of the appellant company. He argued
nd
that pursuant to the 32 state level meeting, the capital
investment subsidy was sanctioned in favor of the Indo Flogates
as no documents regarding amalgamation between Indo Flogates
and the appellant company were ever submitted to the
respondents.
44. He submitted that after receiving the letter dated 12.05.2003
from the appellant company and getting the information
regarding the amalgamation of Indo Flogates with the appellant
company, the issue as regards to the grant of subsidies was
scrutinized afresh more particularly the eligibility of the
appellant company to avail subsidy and it was after due
Special Civil Petition (C) No. 7013 of 2019 Page 27 of 122
deliberations that the sub-committee of the state level committee
th
in its 35 meeting held on 20.02.2008 decided to reject the grant
of subsidies sanctioned in favour of Indo Flogates to be disbursed
th
in favor of the appellant company. In the said 35 meeting, the
sub-committee of the state level committee had noticed that at
the time of sanction of the subsidy for the MM Plant unit of Indo
Flogates Ltd in 2003, the very existence of Indo Flogates was not
there as it was already amalgamated with the appellant
company, and since both Info Flogates and the appellant
company had already availed the individual overall maximum
limit of subsidies i.e. Rs.15,00,000/- and Rs. 20,00,000/-
respectively, the sub-committee of the state level committee
decided not to release any subsidy in favour of the appellant
company.
45. Mr. Gaurav Khanna, the learned counsel appearing for the
respondent nos. 2 and 4 respectively, submitted that as per
Clause 5.1 of the industrial policy of 1989 the incentive of capital
investment subsidy was available in cases of both new industrial
unit as well as expansion / modernisation / diversification
project in Zone C at 10% (ten percent) of the fixed capital
investment subject to the limit of Rs. 10,00,000/. He further
submitted that Clause 11.4.4 of the industrial policy of 1989
provided for subsidy for DG Set, 15% (fifteen percent) of the
investment in DG Set subject to a maximum of Rs. 5,00,000/-.
Thus, the maximum limit of subsidy that could have been
available to the appellant company was Rs. 10,00,000/- towards
capital investment subsidy and Rs. 5,00,000/- towards the DG
Set subsidy, aggregating to Rs. 15,00,000/-. While referring to
Clause 2.7 of the industrial policy of 1989, the counsel submitted
Special Civil Petition (C) No. 7013 of 2019 Page 28 of 122
that a new industrial unit has been defined as an industrial
undertaking where fixed capital investment has been made only
on or after the effective date i.e. 1.12.1989. Whereas expansion
/ modernisation / diversification under Clause 2.2 has been
defined as additional investment of more than 25% (twenty – five
percent) of the undepreciated book value of an existing unit in
acquisition of fixed capital investment of expanding /
modernising / diversifying the production of the said unit and
resulting in increased production over and above the existing
installed capacity of the unit. Further, with respect to expansion
/ modernisation / diversification, Clause 4.4 further provides
that any number of expansion / modernisation / diversification
can be taken up by an industrial unit but the concerned specific
incentive shall be allowed only once. In short, the counsel tried
to argue that the MM Plant unit is not a new industrial unit
rather it is an expansion of the existing unit i.e., the expansion
of Indo Flogates.
46. The learned counsel further submitted that Clause 20.1 of the
industrial policy of 1989 empowers the State Government to
issue operational guidelines / instructions for the administration
of incentives contained in the industrial policy of 1989. Thus, in
exercise of its power under Clause 20.1, the Industries
Department, Government of Orissa, had issued the operational
guidelines / instructions vide letter dated 28.10.1994
(“ Instruction Letter ”), to the respondent no. 3, clarifying that
capital investment subsidy claims including claims for additional
subsidy on account of expansion / modernisation /
diversification shall be limited to the overall financial limits
prescribed under different industrial policies and earlier also this
Special Civil Petition (C) No. 7013 of 2019 Page 29 of 122
procedure was followed and the same should continue to be
followed in future. On this note, the learned counsel argued that
it is clear from the instruction letter dated 28.10.1994 that
capital investment subsidy claim, including claim for additional
subsidy in case of expansion, was subject to overall financial
limits prescribed under different IPRs, therefore, the same should
also apply in case of claim of a new industrial unit for capital
investment subsidy as also in case of claim for additional subsidy
in case of expansion / modernisation / diversification.
47. The learned counsel laying much stress on the instruction letter
dated 28.10.1994, referred to as above, submitted that both Indo
Flogates and the appellant company were already being granted
to the extent of overall maximum limit of subsidy of Rs.
15,00,000/- and Rs. 20,00,000/- collectively under the previous
industrial policies i.e., industrial policy of 1980 and 1986
respectively and, therefore, the subsidies sanctioned for MM
Plant unit in favour of Indo Flogates could not have been
disbursed in favour of later transferee i.e. the appellant company
for being excessive of overall maximum limit of subsidy that can
be granted as per the instruction letter dated 28.10.1994.
48. The learned counsel in the last submitted that Indo Flogates had
preferred the applications for sanction of capital investment
subsidy and DG Set subsidy on 29.09.1993 and 23.08.1993
respectively under the industrial policy of 1989 for
manufacturing of stool insert, stool coatings and gunning mix. It
was submitted that in the said applications there was no mention
of the existing unit or previous investments i.e., about the earlier
investment and subsidies granted while establishing Indo
Flogates and carrying out expansions therein, and that the
Special Civil Petition (C) No. 7013 of 2019 Page 30 of 122
applications of Indo Flogates simply stated that the project had
been set up separately in the State with a separate registration
with the Government of India and with new and separate
electrical connection taken from the Orissa State Electricity
Board (OSEB). On the basis of the above, it was argued that it
fulfils the criteria of a new unit for subsidy under IPR, 1989.
Therefore, on the basis of the applications, the respondent no. 2
vide letter dated 05.11.1998 had communicated to Indo Flogates
that on further examination of matter, it had decided to treat MM
Plant unit of Indo Flogates for manufacture of stool insert, stool
coatings and gunning mix as a separate new industrial unit.
E. ISSUES FOR DETERMINATION
49. Having heard the learned counsel appearing for the parties and
having gone through the materials on record, the questions that
fall for our consideration are as follows:
(I). Whether the MM Plant unit set up by Indo Flogates could
be termed as a new industrial unit in accordance with the
terms of industrial policy of 1989?
(II). If the answer to the issue no. (I), is in the affirmative then,
whether the respondents were justified in rejecting the
capital investment subsidy and DG Set subsidy
respectively for the MM Plant unit on the ground that both
Indo Flogates and the appellant company had already
exhausted the overall subsidy limit under the previous
industrial policies?
Special Civil Petition (C) No. 7013 of 2019 Page 31 of 122
(III). Whether the respondents are estopped from refusing to
disburse the capital investment subsidy and DG Set
subsidy respectively for the MM Plant unit to the appellant
company?
F. ANALYSIS
(I). Whether the MM Plant unit set up by Indo Flogates could be
termed as a new industrial unit in accordance with the terms
of industrial policy of 1989?
50. At the threshold, it is necessary to delineate the contours of the
expression “new industrial unit” . The entire case of the appellant
company proceeds on the premise that the MM Plant unit should
be regarded as a “new industrial unit” under the industrial policy
of 1989, the position which, according to the appellant company,
stood accepted by the respondents when they had earlier
accorded sanction in favour of the MM Plant as though it were a
new industrial unit. The respondents, per contra , contend that
the MM Plant unit is not a new industrial unit but merely an
expansion of the already existing unit, namely Indo Flogates unit,
and that, consequently, no further subsidy can be extended to
the appellant company in respect of the MM Plant unit, since
such subsidy can be availed only once as per Clause 4.4 of
industrial policy of 1989. It is further the case of the respondents
that, even while accepting the MM Plant qualifies as a new
industrial unit, no additional subsidy can be granted in view of
the overall maximum limit imposed by the instruction letter
dated 28.10.1994.
Special Civil Petition (C) No. 7013 of 2019 Page 32 of 122
51. Before delving into what “new industrial unit” means, we are of
the view that it is necessary to first understand the definition of
“industrial unit” as defined under the industrial policy of 1989.
In this respect, Clause 2.5 of the industrial policy of 1989 states
that an industrial unit means any “industrial undertaking”
detailed in Annexure-1 of the policy. Annexure-1 of the policy
inter alia states that an industrial unit will mean “manufacturing
/ processing industry” belonging to categories as mentioned
therein including but not limited to industries listed in the First
Schedule of the Industries (Development & Regulation) Act,
1951. Item 1 to First Schedule deals with “Metallurgical
Industries” . It is not in dispute that MM Plant unit falls within
the ambit of an industrial unit as defined in the policy. Even
otherwise, the MM Plant unit is engaged in the manufacturing
and processing of stool inserts, stool coatings, and basic gunning
mix, which would fall within the purview of metallurgical
industries.
52. Further, from a plain construction of the definition of industrial
unit as discussed above, it becomes axiomatic that the terms
“industrial unit” and “industrial undertaking” respectively have
been treated as analogous for the purposes of the industrial
policy of 1989. Though we are not concerned with the industrial
policies of years 1992, 1996, 2001, 2007, 2015, and 2022
respectively, as were issued in the State of Orissa from time to
time, it is noteworthy that even in these policies, the intention of
policy makers seems to be to define “industrial unit” analogous
to “industrial undertaking” . This is because all these successive
policies employ the phrase “industrial unit means any industrial
undertaking” while defining what an industrial unit is.
Special Civil Petition (C) No. 7013 of 2019 Page 33 of 122
53. From the above discussion, one thing is clear that the MM Plant
unit can be said to be an industrial unit. However, the moot
question that begs for an answer is as to what exactly the phrase
“new industrial unit” in the industrial policy of 1989 entails.
Clause 2.7 of the industrial policy of 1989 defines new industrial
unit to mean an industrial unit where the fixed capital investment
has been made only on or after the effective date . In this respect,
the phrase “fixed capital investment” has been defined under
Clause 2.3 to mean an investment in land, building, plant, and
machinery, and other equipment of a permanent nature.
Further, the “effective date” is also defined in Clause 2.1 to mean
the date of issue and operation of the policy, which is
01.12.1989. In view of the definitions mentioned above, it is clear
that if an industrial unit makes any investments in fixed capital
on or after 01.12.1989 for the manufacturing and processing of
items as mentioned in Annexure-1, then such an industrial unit
can be said to be a new industrial unit.
54. At this juncture, it is relevant to state that this Court had an
occasion to deliberate upon the phrase “newly established
industrial undertaking” as provided in Section 15C of the Income
Tax Act, 1922 (“ IT Act, 1922 ”) in the case of Textile Machinery
Corpn. Ltd. v. CIT, West Bengal , reported in (1977) 2 SCC 368 .
In this case, the assessee company was a heavy engineering
concern engaged in the manufacture of boilers, machinery parts,
wagons, and allied products. For the assessment years 1958–59
and 1959–60, the assessee company claimed exemption under
Section 15C in respect of the profits and gains derived from its
steel foundry division and, for the latter year, from its jute mill
division as well. The Income tax Officer rejected the claim,
Special Civil Petition (C) No. 7013 of 2019 Page 34 of 122
holding that the steel foundry division merely began producing
castings which were earlier purchased from the market and that
such castings were used exclusively within the assessee
company’s existing divisions. He further held that the expansion
was a normal incident of the assessee company’s established
business and did not amount to the setting up of a new industrial
undertaking within the meaning of Section 15C. In relation to the
jute mill division, the Income tax Officer recorded that raw
materials were supplied by the boiler division and, after
machining and forging, returned to that division; that this
activity resembled job work; that sales to outside parties were
negligible; and that the jute mill division constituted no more
than an expansion of the assessee company’s existing divisions.
Accordingly, the relief under Section 15C was denied. The
Appellate Assistant Commissioner affirmed this view, holding
that the assessee company had merely reconstructed parts of its
business and that no independent industrial undertaking had
come into existence.
55. The Income Tax Appellate Tribunal (ITAT), however, took the
contrary view, saying that both the steel foundry division and the
jute mill division constituted new industrial undertakings. The
ITAT reasoned that new machinery had been installed, housed in
separate buildings; that separate industrial licences had been
obtained for the relevant manufacturing activities; and that the
existing business of the assessee company involved
manufacturing boilers and wagons, for which spare parts,
forgings, and castings were being purchased from outside. The
manufacture of such spare parts by the new divisions, according
to the ITAT, could not be said to be formed out of the existing
Special Civil Petition (C) No. 7013 of 2019 Page 35 of 122
business, even though the major part of the output was utilised
internally, as the element of profit was nevertheless present.
56. Upon reference, the High Court held that, for the purposes of
Section 15C, the industrial undertaking must be such that a
definite quantum of capital is employed therein. In other words,
the undertaking must bear a degree of financial and functional
separateness and must not be so integrally connected with the
general capital structure of the assessee company as to render
the capital employed incapable of distinct identification. The
High Court clarified that such employment of capital need not
necessarily arise from the raising of fresh capital, however, there
must be a demonstrable and identifiable deployment of capital in
that undertaking. The underlying rationale was that Section 15C
contemplated a distinct industrial undertaking, one not formed
by the splitting up or reconstruction of an existing business, and
that the statutory exemption was intended to encourage even
existing companies to establish such new undertakings.
57. When the matter came up before this Court, it was noted that
Section 15C provided for exemption from tax in respect of a newly
established industrial undertaking and that, under sub-section
(2)(i) of Section 15C, such exemption was not available where the
undertaking is formed by the reconstruction of a business
already in existence, or by the transfer to a new business of
building, machinery, or plant previously used in any other
business. While construing the expression new industrial
undertaking in this context, this Court held that the undertaking
must not, in substance, be the same old existing undertaking;
that there must be a fresh and substantial investment of new
Special Civil Petition (C) No. 7013 of 2019 Page 36 of 122
capital; and the mere fact that a person, by setting up a new
industrial undertaking, expands his existing business does not,
by itself, disentitle him from the benefit of exemption, for every
new creation in business necessarily involves some measure of
expansion or advancement of the pre-existing enterprise.
58. This Court further held that the real test is not whether the new
undertaking represents an expansion of the existing business,
but whether it is, in truth, a new and identifiable undertaking,
separate and distinct from the existing one. To qualify as such,
there must be the emergence of a physically separate industrial
unit capable of functioning on its own as a viable entity. If an
industrial undertaking manufactures articles which are
themselves identifiable, marketable units, and if that
undertaking can meaningfully exist even upon the cessation of
the older business, it must be regarded as a new and separate
industrial undertaking.
59. It was clarified that the new undertaking may also produce the
same commodities as the earlier undertaking, or it may produce
different marketable products, including those which may serve
as inputs for the old business. What is material is that the new
undertaking should constituted an integrated unit by itself; that
new plant and machinery are installed for the purpose of
producing either the same or distinct commodities; and, lastly,
where the new industrial undertaking is a separate and
independent production unit capable of yielding commercially
tangible products and capable of being carried on without losing
its identity through complete absorption into the old business it
cannot be treated as an undertaking formed by reconstruction of
Special Civil Petition (C) No. 7013 of 2019 Page 37 of 122
the earlier business. The relevant observations made by this
Court are as under:
“17. Again, the new undertaking must not be
substantially the same old existing business. The third
excluded category mentioned above is significant. Even if
a new business is carried on but by piercing the veil of
the new business it is found that there is employment of
the assets of the old business, the benefit will be not
available. From this it clearly follows that substantial
investment of new capital is imperative. The words "the
capital employed" in the principal clause of Section 15-C
are significant, for fresh capital must be employed in the
new undertaking claiming exemption. There must be a
new undertaking where substantial investment of fresh
capital must be made in order to enable earning of profits
attributable to that new capital.
18. The assessee continues to be the same for the purpose
of assessment. It has its existing business already liable
to tax. It produced in the two concerned undertakings
commodities different from those which he has been
manufacturing or producing in its existing business.
Manufacture or production of articles yielding additional
profit attributable to the new outlay of capital in a
separate and distinct unit is the heart of the matter, to
earn benefit from the exemption of tax liability under
Section 15-C […] The fact that an assessee by
establishment of a new industrial undertaking expands
his existing business, which he certainly does, would not,
on that score, deprive him of the benefit under Section 15-
C. Every new creation in business is some kind of
expansion and advancement. The true test is not whether
the new industrial undertaking connotes expansion of the
existing business of the assessee but whether it is all the
same a new and identifiable undertaking separate and
distinct from the existing business. No particular decision
in one case can lay down an inexorable test to determine
Special Civil Petition (C) No. 7013 of 2019 Page 38 of 122
whether a given case comes under Section 15-C or not. In
order that the new undertaking can be said to be not
formed out of the already existing business, there must
be a new emergence of a physically separate industrial
unit which may exist on its own as a viable unit. An
undertaking is formed out of the existing business if the
physical identity with the old unit is preserved. This has
not happened here in the case of the two undertakings
which are separate and distinct.
19. It is clear that the principal business of the assessee
is heavy engineering in the course of which it
manufactures boilers, wagons, etc. If an industrial
undertaking produces certain machines or parts which
are, by themselves, identifiable units being marketable
commodities and the undertaking can exist even after the
cessation of the principal business of the assessee, it
cannot be anything but a new and separate industrial
undertaking to qualify for appropriate exemption under
Section 15-C. The principal business of the assessee can
be carried on even if the said two additional undertakings
cease to function. Again, the converse is also true. The
fact that the articles produced by the two undertakings
are used by the Boiler Division of the assessee will not
weigh against holding that these are new and separate
undertakings. On the other hand the fact that a portion of
the articles produced in these two new industrial
undertakings had been sold in the open market to others
is a circumstance in favour of the assessee that the new
industrial units can function on their own. Use of the
articles by the assessee is not decisive to deny the benefit
of Section 15-C.
20. Section 15-C partially exempts from tax a new
industrial unit which is separate physically from the old
one, the capital of which and the profits thereon are
ascertainable. There is no difficulty to hold that Section
15-C is applicable to an absolutely new undertaking for
the first time started by an assessee. The cases which
Special Civil Petition (C) No. 7013 of 2019 Page 39 of 122
gave rise to controversy are those where the old business
is being carried on by the assessee and a new activity is
launched by him by establishing new plants and
machinery by investing substantial funds. The new
activity may produce the same commodities of the old
business or it may produce some other distinct
marketable products, even commodities which may feed
the old business. These products may be consumed by
the assessee in his old business or may be sold in the
open market […] Such a new industrially recognisable
unit of an assessee cannot be said to be reconstruction of
his old business since there is no transfer of any assets
of the old business to the new undertaking which takes
place when there is reconstruction of the old business. For
the purpose of Section 15-C the industrial units set up
must be new in the sense that new plants and machinery
are erected for producing either the same commodities or
some distinct commodities. In order to deny the benefit of
Section 15-C the new undertaking must be formed by
reconstruction of the old business. Now in the instant
case there is no formation of any industrial undertaking
out of the existing business since that can take place only
when the assets of the old business are transferred
substantially to the new undertaking. There is no such
transfer of assets in the two cases with which we are
concerned.”
xxx xxx xxx
26. If any undertaking is not formed by reconstruction of
the old business that undertaking will not be denied the
benefit of Section 15- C simply because it goes to expand
the general business of the assessee on some directions.
As in the instant case, once the new industrial
undertakings are separate and independent production
units in the sense that the commodities produced or the
results achieved are commercially tangible products and
the undertakings can be carried on separately without
complete absorption and losing their identity in the old
Special Civil Petition (C) No. 7013 of 2019 Page 40 of 122
business, they are not to be treated as being formed by
reconstruction of the old business.”
(Emphasis Supplied)
60. Similarly, in the case of Commissioner of Income-Tax v. Indian
Aluminium Co. Ltd. , reported in (1973) 88 ITR 257 , the
assessee-company was a manufacturer of aluminium ingots from
ores. In the previous years, the assessee company had four
manufacturing units at Belur, Kalwa, Alupuram, and Hirakud
respectively. In the relevant accounting year, one more was
added at Muri. Further, there were additional extensions to the
existing factories at Belur and Alupuram. In connection with the
relevant assessment year, the assessee company had claimed the
incentive of exemption from tax under Section 15C before the
Income tax Officer in respect of fresh capital outlay at Muri as
well as additional investment in the form of extension to the
existing factory premises, installation of new plants and
machineries, etc., at Alupuram and Belur. The Income tax Officer
discussed the grant of relief under Section 15C in respect of the
unit at Hirakud but did not deal with the other three units in
dispute. The Income tax Officer also declined to grant any relief
to the assessee company in respect of all the said four units. In
the appeal before the Appellate Assistant Commissioner, the
assessee company claimed relief under Section 15C in respect of
only three units at Alupuram, Belur and Muri.
61. However, the Commissioner disallowed the relief under Section
15C in respect of Alupuram and Belur units. Further, with
respect to the unit at Muri the Commissioner found that the
assessee company already had a manufacturing unit at Muri
Special Civil Petition (C) No. 7013 of 2019 Page 41 of 122
which was only expanded in the accounting year. In short, the
Commissioner affirmed the order of the Income tax Officer.
Aggrieved, the assessee company appealed before the ITAT
wherein the tribunal came to the conclusion that all the said
three units were new undertakings and, therefore, the assessee
company was entitled to exemption from tax under Section 15C.
62. While affirming the decision of the ITAT, the Calcutta High Court
held that for the purpose of seeking or availing the benefit of
Section 15C, the sine qua non was that the assessee company
had established or commenced a new industrial undertaking,
which might either take the shape of reconstitution, reformation,
reincorporation, on the one hand, or a new production unit or
separate business, on the other. It was observed that the
separate business need not be a different kind of business. The
commodity which the original produced, manufactured or sold
might be a relevant factor in finding out whether the subsequent
business was an extended business or an independent new
business. The relevant observations are as under:
“11. Section 15C provides that the assessee should not
be taxed in respect of the profits or gains derived from its
subsequent industrial undertaking as do not exceed 6%
per annum on the capital employed by it in such
undertaking. But it is obvious from this section that the
"industrial undertaking" in clause 15C must refer to some
new undertaking or undertaking which amounts to
additions, alterations, extensions, expansions or new
units. It pre-supposes that the assessee has got an
existing business of its own. But, apart from its original
business, the assessee, for commercial expediency, might
decide to cause expansion of its business. This expansion
may take place in various ways. The original business
Special Civil Petition (C) No. 7013 of 2019 Page 42 of 122
might be carried on in the assessee's plot of land or over
the assessee's building or buildings. Several floors may
be raised on the land or the existing building of the
original business of the assessee. It may purchase new
plants or machineries or even replace the old machines
by modern plants as a result of which the assessee might
get a good return for the capital invested in such
extension or improvement. Again, the expansion, in a
wide sense, may also include new production unit,
manufacturing, producing or even selling products which
may or may not be entirely different from the nature of
the original business. All these questions arise because
the assessee happens to be the owner, proprietor or
controlling authority of both its original business and its
expanded business. Thus, we shall have to find out to
what extent or limit the principle of expansion should be
applied to the exemption clause under section 15C(2)(i).
xxx xxx xxx
13. […] There is no doubt that if the subsequent industrial
undertaking of the assessee- company in which the
capital has been invested by it and the profits of which
do not exceed 6% per annum of the capital employed by
the assessee-company is a newly established
independent industrial undertaking the assessee shall be
entitled to get the relief. But the difficulty arises when the
subsequent industrial undertaking is not a separate
independent undertaking but an expansion or mere
addition to the original business of the assessee-
company. If the assessee's original business remains
intact and retains its original character and the assessee
establishes separate independent undertakings whether
of the same or different nature in respect of the same or
different commodity the subsequent undertakings cannot
be called "reconstruction" within the meaning of section
15C(2)(i). The newness of subsequent industrial
undertaking does not necessarily exclude all cases of
expansion or extension of the original business. To
Special Civil Petition (C) No. 7013 of 2019 Page 43 of 122
illustrate, where the original business is only extended or
expanded or developed by the assessee in the same
building or enclosure with a proportionately smaller
capital or where the transactions of the original business
and the extended business are of such a nature that they
are dependent on one another or where the requirements
of the original business are subserved substantially by
the product of subsequent undertakings, it may be said
that such expansions cannot have the benefit of
exemption under section 15C. But where the assessee
invests large sums of money and establishes new
production units of similar or different nature as a result
of which the original business of the assessee does not
intrinsically alter its original character or continues to
produce, manufacture or carry on the original activity in
the same way even after the establishment of subsequent
undertakings, the latter may be called extensions of such
a nature which may be called a kind of new industrial
undertaking which is entitled to get tax relief. relief. Thus
whether the term "reconstruction" would include the case
of substantial extensions or expansions of the assessee's
original business so as to invoke the benefit or mischief
under section 15C would depend upon the facts of each
case. Exemption under section 15C would only be
available to those industrial undertakings which are not
established by division or reorientation of the assessee's
original business or which has not been formed by the
transfer to it of building, machinery or plant used in the
assessee's original business. The emphasis should be
laid on the words "is formed by" and not the form of
subsequent undertaking. To obtain relief under section
15C, the subsequent undertaking must not be formed or
constituted by remodelling or reconstituting the earlier
business. It is significant that, apart from the head-note,
the words "new business" have only been specifically
mentioned in the case of transfer of building, machinery
or plant used in the original business. Thus the new,
separate or independent character of subsequent
business is relevant but not important elements in
Special Civil Petition (C) No. 7013 of 2019 Page 44 of 122
construing the word "reconstruction". Even any
enlargement or expanded unit may be called "new
industrial undertaking" in the sense that the subsequent
unit was not originally existing but the new undertaking
must be understood in the context of the word
"reconstruction". The legal meaning of the term
"reconstruction" is, in my opinion, a mixed question of fact
and law. It will be incorrect to say that "reconstruction"
must include or exclude all kinds of expansions,
irrespective of the nature constitution or character of the
subsequent undertaking. All the facts relating to the
original business and the subsequent undertaking, as
found by the Tribunal, have to be examined before a
decision is made on the question whether an assessee is
entitled to get relief under section 15C Where, therefore,
the activities or the business of the subsequent
undertaking show substantial expansions they may be
called industrial undertakings which are not formed by
the reconstruction of the assessee's original business […]”
(Emphasis Supplied)
63. The above view taken by the Calcutta High Court in Indian
Aluminium (supra) came to be affirmed by this Court in the
matter concerning CIT v. Indian Aluminium Co. Ltd. , reported
in (1977) 4 SCC 598 (1) .
64. Moreover, in the case of Bajaj Tempo Ltd., Bombay v. CIT ,
reported in (1992) 3 SCC 78 , this Court while dealing with the
question whether the assessee company that had been found by
the ITAT found to be a new company could be denied exemption
from tax under Section 15C of the IT Act, 1922. This Court inter
alia observed that the objective behind exemption from tax under
Section 15C, read as a whole, promoted and encouraged
industrialisation by permitting an assessee company setting up
Special Civil Petition (C) No. 7013 of 2019 Page 45 of 122
a new industrial undertaking to claim benefit of not paying tax
on the capital employed to certain extent and that a provision
intended for promoting economic growth has to be interpreted
liberally, the restriction on it, too, has to be construed so as to
advance the objective of the section and not to frustrate it. Noting
above, this Court held that even if the alleged new industrial
undertaking was established by transfer of building, plant or
machinery of any existing unit still if it is not formed as a result
of such transfer the assessee could not have been denied the
benefit. In short, this Court took the view that such new
undertaking should not be a continuation of the old but
emergence of a new unit in itself. The relevant observation is as
under:
“5. The section, read as a whole, was a provision,
directed towards encouraging industrialisation by
permitting an assessee setting up a new undertaking to
claim benefit of not paying tax to the extent of six per cent
in a year on the capital employed. But the legislature took
care to restrict such benefit only to those undertakings
which were new in form and substance, by providing that
the undertaking should not be, 'formed' in any manner
provided in clause (i) of sub-section (2) of Section 15-C.
Each of these requirements, namely, formation of the
undertaking by splitting up or reconstruction of an
existing business or transfer to the undertaking of
building, raw material or plant used in any previous
business results in denial of the benefit contemplated
under sub-section (1). Since a provision intended for
promoting economic growth has to be interpreted liberally,
the restriction on it, too, has to be construed so as to
advance the objective of the section and not to frustrate it
[…]
xxx xxx xxx
Special Civil Petition (C) No. 7013 of 2019 Page 46 of 122
9. Initial exercise, therefore, should be to find out if the
undertaking was new. Once this test is satisfied then
clause (i) should be applied reasonably and liberally in
keeping with spirit of Section 15-C(1) of the Act. While
doing so various situations may arise for instance the
formation may be without anything to do with any earlier
business. That is the undertaking may be formed without
splitting up or reconstructing any existing business or
without transfer of any building material or plant of any
previous business. Such an undertaking undoubtedly
would be eligible to benefit without any difficulty. On the
other extreme may be an undertaking new in its form but
not in substance. It may be new in name only. Such an
undertaking would obviously not be entitled to the
benefit. In between the two there may be various other
situations. The difficulty arises in such cases. For
instance a new company may be formed, as was in this
case a fact which could not be disputed, even by the
Income Tax Officer. But tools and implements worth Rs
3,500 were transferred to it of previous firm. Technically
speaking it was transfer of material used in previous
business. One could say as was vehemently urged by the
learned counsel for the department that where the
language of statute was clear there was no scope for
interpretation. If the submission of the learned counsel is
accepted then once it is found that the material used in
the undertaking was of a previous business there was an
end of inquiry and the assessee was precluded from
claiming any benefit. Words of a statute are undoubtedly
the best guide. But if their meaning gets clouded then
courts are required to clear the haze. Sub-section (2)
advances the objective of sub-section (1) by including in it
every undertaking except if it is covered by clause (i) for
which it is necessary that it should not be formed by
transfer of building or machinery. The restriction or denial
of benefit arises not by transfer of building or material to
the new company but that it should not be formed by such
transfer. This is the key to the interpretation. The
formation should not be by such transfer. The emphasis
Special Civil Petition (C) No. 7013 of 2019 Page 47 of 122
is on formation not on use. Therefore it is not transfer of
building or material but the one which can be held to have
resulted in formation of the undertaking […]”
(Emphasis Supplied)
65. Further, the Calcutta High Court in the case of Commissioner
of Income-Tax v. Orient Paper Mills Ltd. , reported in (1974)
94 ITR 73 , was confronted with the question whether the
electrolysis plant set up by the assessee company was a new
industrial undertaking within the meaning of Section 15C of the
IT Act, 1922. In this case, the assessee company owned a paper
mill. It manufactured and sold paper in the market. In the
preceding year to the relevant assessment year it had set up an
electrolysis plant unit for the purpose of manufacturing caustic
soda which is an essential chemical for use in the process of
manufacture of paper. The assessee company obtained a
separate licence for the manufacture of caustic soda and the
plant unit was housed in a separate building. In assessing the
company for the relevant year the Income tax Officer held that
the plant was ancillary to the main manufacturing unit and was
not, therefore, a new industrial undertaking as contemplated
under Section 15C.
66. In appeal, the Appellate Assistant Commissioner observed that
the business of manufacture of caustic soda was merely a
process of reconstruction of the existing business of manufacture
of paper. The Appellate Assistant Commissioner observed that no
sale had taken place of the caustic soda to the outside market.
The Appellate Assistant Commissioner observed further that the
business of the appellant was manufacture of paper. Caustic
Special Civil Petition (C) No. 7013 of 2019 Page 48 of 122
soda being an essential chemical for manufacture of paper, the
assessee company had set up plant unit for manufacture of
caustic soda so as to avoid purchasing the same from outside.
Therefore, the Appellate Assistant Commissioner came to the
conclusion that the plant was set up for manufacturing caustic
soda for being used in the manufacture of paper which was the
existing business of the appellant itself. The Appellate Assistant
Commissioner was of the opinion that as long as caustic soda
was not manufactured for the purpose of selling it in the market
and introducing a separate business thereby, the mere fact that
the plant was housed in a separate building and that an
industrial licence had to be obtained for the manufacture of this
chemical were not sufficient considerations for holding that
caustic soda plant was a new industrial undertaking as
contemplated under Section 15C of the IT Act, 1922. Pursuant
to this, a further appeal was made to the ITAT. The ITAT noted
that the assessee had produced before it the computation
showing the profit of the plant out of which exemption was being
claimed on the capital employed. The ITAT was of the opinion
that, prima facie , the computation appeared to be in order and,
therefore, directed the Income tax Officer to grant exemption to
the assessee company and accordingly allowed the appeal of the
assessee company.
67. In appeal before the Calcutta High Court, it was observed that
the expressions "new industrial undertaking" in terms of Section
15C(2)(i) must be understood in broad commercial sense from a
commonsense point of view. The court stated that in order to
appreciate the meaning of these expressions one should bear in
mind the purpose of Section 15C i.e., to encourage setting up of
Special Civil Petition (C) No. 7013 of 2019 Page 49 of 122
new industries in various areas of the country. On this note, the
High court observed that it was the case of the assessee company
from the beginning that intended to produce raw materials of a
type which was capable of being available in the market
independently and which was also capable of being sold in the
market and the assessee company had set up a new and separate
unit for the same in a separate building and had obtained a
separate licence for it. The High court observed that the setting
up of a factory or a plant for the manufacture of caustic soda was
not an essential or an integral part for the setting up of the plant
and machinery for paper manufacture. Furthermore, it was
observed that the plant had been set up for production of raw
material. This raw material has an independent market both to
be purchased and to be sold apart from the production of paper.
The court had pointed out that if the undertaking of assessee
company were not to held as a new industrial undertaking simply
because the assessee company was using this in the
manufacturing process then it would lead to strange results that
should otherwise be avoided. The relevant observation is as
under:
“8. The expressions "new industrial undertaking" and
"splitting up or reconstruction of business already in
existence" must be understood in broad commercial sense
from a commonsense point of view. In order to appreciate
the meaning of these expressions one should bear in mind
industries. The other conditions in clause (iv) of sub-
section (2) of section 15C are also significant.
Reconstruction of the business or splitting up of the
business already in existence must be in relation to the
new industrial undertaking. Further, the new industrial
undertaking must not be by transferring building, plant or
machinery of the existing business. Sub-section (1)
Special Civil Petition (C) No. 7013 of 2019 Page 50 of 122
requires separate capital but not new or different capital.
But whether a new industrial undertaking is entitled to
exemption under section 15C of the Act must depend
upon the facts and circumstances of each case. We have
set out the essential facts of this case. It was the case of
an assessee beginning to produce raw materials of a type
which was capable of being available in the market
independently and which was also capable of being sold
in the market and the assessee has set up a new and
separate unit for the same in a separate building and has
obtained a separate licence for it. It must be noted that
setting up of a factory or a plant for the manufacture of
caustic soda was not an essential or ingredient part for
the setting up of the plant and machinery for paper
manufacture. It is true that caustic soda is essential for
the manufacture of paper but setting up of a plant for the
manufacture of caustic soda is not an essential ingredient
for paper manufacture. Furthermore, it is to be noted that
this plant has been set up for production of raw material.
Thirdly, it has to be noted that this raw material has an
independent market both to be purchased and to be sold
apart from the production of paper. It was pointed out that
if it was not held as a new industrial undertaking simply
because the assessee was using this in the
manufacturing process then it would lead to a strange
result. If the assessee had set up this under taking for
production of caustic soda and had sold its produce in the
market and had purchased this caustic soda from the
market then this new venture of selling caustic soda
would be entitled to exemption under section 15C but
would lose such exemption simply because the assessee
was using the same for its own products. Such an
anomalous result, if possible, should be avoided.
Furthermore, it appears to us that the expressions
"splitting up or reconstruction of business already in
existence" should be given their ordinary commercial
meaning. Judged from that point of view it appears to us
that, as a new plant was set up in a new building not by
re-fitting any existing plant or machinery for production of
Special Civil Petition (C) No. 7013 of 2019 Page 51 of 122
a raw material which can be continued irrespective of
paper manufacturing business, the assessee in this case
was entitled to the benefit of section 15C of the Act.”
(Emphasis Supplied)
68. The above view taken in Orient Paper (supra) also came to be
affirmed by this Court in CIT v. Orient Paper Mills Ltd. ,
reported in (2015) 17 SCC 305 , wherein this Court found the
appeal to be covered by the view taken by this Court in Textile
Machinery (supra) and Indian Aluminium (supra) respectively,
and thus, dismissed the same . The relevant observation is as
under:
“Admittedly, the appeal is concluded by the view taken
by this Court in Textile Machinery Corpn. Ltd. v. CIT and
CIT v. Indian Aluminium Co. Ltd. In accordance with that
view, the appeal fails and is dismissed. There is no order
as to costs.”
69. Further, the High Court of Gujarat in the case of Gujarat
Alkalies and Chemical Ltd. v. CIT , reported in 2012 SCC
OnLine Guj 1628 , wherein one of us, J.B. Pardiwala, J, authored
the judgment, dealt with Section 80-I of the Income Tax Act, 1961
(“ IT Act, 1961 ”), a provision which is pari materia to Section 15C
of IT Act, 1922. In this case, the assessee company was a public
limited company engaged in the business of manufacturing
caustic soda primarily and other chemicals. After some time, the
assessee company acquired a new industrial licence and a new
letter of intent for substantial expansion of the production
capacity of caustic soda from the existing 37425 M. Tonnes to
70425 M. Tonnes for which twelve new cells were installed.
Special Civil Petition (C) No. 7013 of 2019 Page 52 of 122
Further, the assessee company had incurred an expenditure of
Rs. 7.5 crore towards new machinery and plant added to the
existing plant. In this backdrop, the assessee company had
claimed that this new unit being a new industrial undertaking
was entitled to relief as provided under Section 80-I of the Act.
This claim of the assessee company came to be rejected by the
Income tax Officer holding that this was a case of substantial
expansion and not that of establishment of new industrial
undertaking. When the matter was carried in appeal, the
Commissioner of Income tax (Appeals) also concurred with the
decision of the Income tax Officer. Thereafter, the assessee
company carried the matter in appeal before the ITAT and the
ITAT also affirmed the order of the Commissioner of Income- tax
(Appeals). The ITAT held that since it was expansion of the same
manufacturing unit, the assessee company would not be entitled
to the benefits of Section 80-I of the IT Act, 1961.
70. When the matter came before the High court, it observed that the
only ground which weighed with the Commissioner of Income-
tax (Appeals) and the ITAT respectively was that the assessee
company had not been able to lead any evidence to show that the
new unit was capable of independently producing the goods
without the aid of the existing plant and machinery of the old
unit. The High court further observed that for the purpose of
section 80-I of the IT Act, 1961, the industrial unit set up must
be new in the sense that new plant and machinery are erected
for producing either the same commodities or some distinct
commodities. In order to deny the benefit of the exemption under
Section 80-I, the new undertaking must be formed by
reconstruction of the old business. Considering the fact that
Special Civil Petition (C) No. 7013 of 2019 Page 53 of 122
substantial capital was employed to establish the new industrial
unit and that such expansion had resulted in increase in the
production by two fold, the High court held that there was no
formation of any industrial undertaking out of the existing
business since that could take place only when the assets of the
old business are transferred substantially to the new
undertaking. The court observed that just because the new
undertaking was dependent to a certain extent on the existing
undertaking the same by itself should not deprive the new
undertaking of the status of integrated unit by itself. Thus, the
High court held the alleged unit to be a new industrial
undertaking in this case and granted incentive of exemption
under Section 80-I. The relevant observation is as under:
“20. It appears that the only ground which weighed with
the Commissioner of Income-tax (Appeals) and the
Tribunal is that the assessee has not been able to lead
any evidence to show that the new unit is capable of
independently producing the goods without the aid of the
existing plant and machinery of the old unit. It also
appears that the authorities relied on the judgment of the
Bombay High Court in the case of Associated Cement
Companies Ltd. (1979) 118 ITR 406 (Bom), wherein the
hon'ble Bombay High Court has taken the view that the
establishment of a new industrial unit as a part of an
already existing industrial establishment may result in
an expansion of the industry or the factory, but if the
newly established unit is itself an integrated independent
unit in which new plant and machinery is put up and is
itself independently of the old unit capable of production
of goods then only it could be classified as a newly
established industrial undertaking. In the present case, it
is undisputed that the company has a separate industrial
licence for the industrial undertaking and spent over Rs.
7.5 crores for putting up plant and machinery necessary
Special Civil Petition (C) No. 7013 of 2019 Page 54 of 122
for the purpose. It is also undisputed that the production
capacity of the undertaking of caustic soda has increased
from 37245 M. Tonnes to 70425 M. Tonnes. Thus, what
has been ignored by the authorities is two things : (i) the
capital employed ; and (2) the substantial expansion of
industrial undertaking, by which the production became
almost double the original capacity […]
xxx xxx xxx
25. We are not able to understand the logic of the
argument that the test would be as to whether a new
industrial undertaking can function independently of the
existing industrial undertaking. If this argument of the
Revenue is accepted, it will amount to adding a new
clause in section 80-I of the Act. Assuming for the moment
that the new unit is not capable of independently
producing the goods without taking the assistance of the
existing plant and machinery of the old unit is no ground
to reject the claim under section 80-I of the Act. It all
depends upon the mechanism and technology. As held by
the Supreme Court in Textile Machinery Corporation
(1977) 107 ITR 195 (SC), such a new industrially
recognizable unit of an assessee cannot be said to be
reconstruction of his old business since there is no
transfer of any assets of the old business to the new
undertaking which takes place when there is
reconstruction of the old business. For the purpose of
section 80-I of the Act, the industrial units set up must be
new in the sense that new plant and machinery are
erected for producing either the same commodities or
some distinct commodities. In order to deny the benefit of
section 80-I, the new undertaking must be formed by
reconstruction of the old business. In the present case,
there is no formation of any industrial undertaking out of
the existing business since that can take place only when
the assets of the old business are transferred
substantially to the new undertaking. Just because the
new undertaking is dependent to a certain extent on the
Special Civil Petition (C) No. 7013 of 2019 Page 55 of 122
existing undertaking should not deprive the new
undertaking of the status of integrated unit by itself […]
26. We are of the view that so far as the fifth test is
concerned, i .e., a separate and distinct identity, only
because to a certain extent the new undertaking is
dependent on the existing unit, will not deprive the new
undertaking the status of a separate and distinct identity.
It all depends on the nature of the technology and the
mechanism of production. We cannot ignore the fact that
new machinery and new plant have been installed at an
investment of Rs. 7 crores sometime in the year 1982-83,
i.e., almost three decades back and also the fact that the
production has gone from 34000 M. Tonnes to almost
75000 M. Tonnes.
xxx xxx xxx
41. In the present case also, it is not the case of the
Revenue that the new unit by itself is not capable of
production of goods but the case of the Revenue is that it
takes help of the old existing unit. We are of the view that,
that itself should not be the reason to reject the claim
under section 80-I of the Act. Thus, whether an
undertaking is a "new industrial undertaking" entitled to
the exemption under section 80-I of the Act depends on
the facts of each case. No hard and fast rule can be laid
down. Use by the assessee of the old undertaking for the
purpose of production in its new undertaking is not a
decisive test in construing section 80-I of the Act. The new
undertaking must not be substantially the same old
business. Substantial investment of new capital is
imperative and in the present case, there has been a huge
substantial investment of around Rs. 7 crores almost
three decades ago. The words "the capital employed" in
the principal clause of section 80-I of the Act are
significant, for fresh capital must be employed in the new
undertaking claiming exemption. Manufacture or
production of articles yielding additional profit
Special Civil Petition (C) No. 7013 of 2019 Page 56 of 122
attributable to the new outlay of capital in a separate and
distinct unit is essential to earn the benefit of section 80-
I. The fact that an assessee by establishment of a new
industrial undertaking expands his existing business
which he certainly does, would not on that score deprive
him of the benefit under section 80-I. Every new creation
in business is some kind of expansion and advancement.
The true test is not whether the new industrial
undertaking connotes expansion of the existing business
of the assessee but whether it is a new identifiable
endeavour where substantial investment of fresh capital
is made to enable earning of profit attributable to that
new capital.”
(Emphasis Supplied)
71. Recently, this Court in the case of CIT v. Sociedade de Fomento
Industrial (P) Ltd. , reported in 2022 SCC OnLine SC 623 ,
reiterated the tests applied in Textile Merchants (supra) above
and affirmed the decision of the High court as well as that of the
ITAT that had held that the new unit established by the assessee
company was fully independent unit and that the setting up of
the same resulted in the increase in production capacity in
comparison to the old existing unit. While affirming the said
decision, this Court highlighted the following tests laid in Textile
Merchants (supra) :
“(i)Manufacture or production of articles yielding
additional profit attributable to the new outlay of capital
in a separate and distinct unit is the heart of the matter;
(ii) The fact that an assessee by establishment of a new
industrial undertaking expands his existing business
which he certainly does would not on that score, deprive
him of the benefit. Every new creation in business is some
kind of expansion and advancement;
Special Civil Petition (C) No. 7013 of 2019 Page 57 of 122
(iii) The true test is not whether the new industrial
undertaking connotes expansion of the existing business
of the assessee but whether it is all the same a new and
identifiable undertaking separate and distinct from the
existing business;
(iv) In order that the new undertaking can be said to be
not formed out of the already existing business, there
must be a new emergence of a physically separate
industrial unit which may exist on its own as a viable
unit;
(v) The new unit may produce the same commodities of
the old business or it may produce some other distinct
marketable products, even commodities which may feed
the old business.
(vi) The products produced by the new unit may be
consumed by the assessee in his old business or may be
sold in the open market. One thing is certain that the new
undertaking must be an integrated unit by itself wherein
articles are produced.
(vii) The industrial unit set up must be new in the sense
that new plant and machinery are erected for producing
either the same commodities or some distinct
commodities.
(viii) In order to deny the benefit the new undertaking
must be formed by reconstruction of the old unit which
can take place only when the assets of more than 20
percent value of new unit are transferred to the new unit
from the old unit."
(Emphasis Supplied)
72. To limit our reference to a multitude of other precedents, we
consider it sufficient to observe that the tests delineated above
for determining what constitutes a new industrial undertaking
Special Civil Petition (C) No. 7013 of 2019 Page 58 of 122
have been consistently applied by this Court as well as by various
High Courts in a wide array of cases. These decisions have
considered not only claims for income tax exemptions available
to new industrial undertakings but also to disputes relating to
incentives such as sales tax exemptions, electricity duty
concessions, and similar fiscal benefits, many of which also form
part of the incentive framework under the industrial policy of
1989.
73. Adverting now to the facts of the present case, it is evident that
the expression “new industrial unit” in Clause 2.7 of industrial
policy of 1989 is defined solely with reference to the timing of the
investment made in a particular fixed capital. In essence, where
any fixed capital investment is made after the effective date, i.e.,
01.12.1989, the unit in which such investment is made is to be
treated as a new industrial unit. This would imply that if a
company already in existence prior to the effective date makes a
post effective date investment in fixed capital for setting up
another unit, the latter would qualify as a new industrial unit. If
our inquiry were to conclude at this point, there would be little
doubt that the MM Plant unit satisfies the definition of a new
industrial unit, as the fixed capital investment in its
establishment was made after the effective date. However, in our
considered view, a further inquiry becomes necessary i.e.,
whether the unit so invested in is genuinely a new industrial unit
or merely an expansion of the existing unit masquerading as a
new one. For such determination, reliance can be placed on
various tests prescribed by the courts as mentioned above
particularly in Textile Machinery (supra) and Indian
Special Civil Petition (C) No. 7013 of 2019 Page 59 of 122
Aluminium (supra) and later affirmed in Bajaj Tempo (supra) ,
Orient Papers (supra) , and Gujarat Alkalies (supra) .
74. The higher threshold laid down in the various decisions above to
determine the newness of industrial unit, assume even greater
relevance for consideration and application to the facts of the
present case as those tests were evolved in the context of Section
15C of the IT Act, 1922 (later Section 80-I of the IT Act, 1961),
the underlying objective of which was to foster industrial
development by encouraging the deployment of fresh capital
through the establishment of new industrial undertakings. In a
similar vein, the promotion of industrialization in the State of
Orissa by facilitating the setting up of new industrial units
through incentives such as capital investment subsidy, tax
exemptions, and related fiscal benefits, constitutes the ultimate
object of the industrial policy of 1989 as well.
75. Having said that, we are of the opinion that an enquiry
undertaken beyond the limited requirement of Clause 2.7 of the
industrial policy of 1989 would also reveal that the MM Plant unit
is, in fact, a new industrial unit and not merely an expansion of
the existing Indo Flogates unit. This is because, first , the
documents produced by the respondent authorities indicate that
the date of investment by Indo Flogates in the fixed capital for
the MM Plant unit stands recorded as 01.02.1992 i.e., well after
the effective date of the industrial policy of 1989. The date of
commencement of commercial production is similarly recorded
as 21.11.1992. Second , Indo Flogates was granted a new and
independent industrial licence by the State of Orissa, and a
separate electricity connection was sanctioned by the Orissa
Special Civil Petition (C) No. 7013 of 2019 Page 60 of 122
State Electricity Board. Third , the documents placed on record
also reveal that Indo Flogates made a fresh outlay of capital
investment in fixed assets such as land, sheds, a diesel generator
set, and plant and machinery, clearly indicating the creation of a
distinct industrial unit.
76. For fixed capital, Indo Flogates had acquired land and two sheds
being shed nos. 19 and 22 respectively from the Odisha
Industrial Infrastructure Development Corporation (IDCO) in the
Kalunga Industrial Estate for Rs. 11,73,000/- and Rs.
55,05,000/- respectively, and had further invested Rs.
75,24,000/- towards plant and machinery, aggregating to a
substantial investment of Rs. 1,42,02,000/-. It is also significant
to note that the location of the MM Plant unit in shed nos. 19
and 22 respectively of the Kalunga Industrial Estate was entirely
separate from that of the erstwhile Indo Flogates unit, which
operated from shed nos. 7 and 8 respectively. This clearly
indicates that the MM Plant unit had a new physical emergence
as an independent industrial unit capable of existing as a viable
unit on its own. We say so because, even if the Indo Flogates unit
had ceased to operate, the MM Plant unit would still have been
able to function independently as a viable industrial unit.
Fourthly , the manufacturing outputs of the MM Plant unit and
the Indo Flogates unit were distinct. Prior to amalgamation, Indo
Flogates was engaged in the production of slide gates and slide
gate valves, whereas the MM Plant unit had been established for
the manufacture of special refractory products such as stool
inserts, stool coatings, and basic gunning mix. In fact, the project
cost for establishing the MM Plant unit had been separately
appraised and financed by the IDBI Bank. In our view, therefore,
Special Civil Petition (C) No. 7013 of 2019 Page 61 of 122
the MM Plant unit constituted an identifiable undertaking,
separate and distinct from the existing business of Indo Flogates.
77. Even assuming that the products manufactured by the MM Plant
unit could have been utilised in the operations of the Indo
Flogates unit, it nonetheless remains a well-settled principle that
a new industrial unit does not lose its character merely because
it produces the same or similar commodities as the old unit, or
even products which may serve as inputs for the existing unit.
The rationale underlying this principle is rooted in the expertise
of an industrialist or a company. An industrialist or company
already experienced and well-versed in the manufacture and
trade of a particular commodity would ordinarily seek to develop
the industry in which it possesses skill and familiarity. In doing
so, such an entity may understandably choose to set up a new
industrial unit for the further development of its existing
industry, without being compelled to expose its capital to the
risks associated with an industry engaged in an entirely
unfamiliar commodity.
78. Furthermore, as briefly noted earlier, the objectives underlying
the introduction of the industrial policy of 1989 were grounded
in public interest and in the broader framework of liberalizing the
package of incentives so as to encourage the establishment of
new industrial units in the backward areas of the State of Orissa,
while simultaneously providing support to existing industries. To
fulfil the objective of promoting new industries in the State, the
Government of Orissa resolved to extend subsidy-based
incentives to all such units that were established through
investment in fixed capital made after the effective date, i.e.,
Special Civil Petition (C) No. 7013 of 2019 Page 62 of 122
01.12.1989. In this regard, Clause 4.1 of the industrial policy of
1989 expressly provides that, subject to certain stipulated
conditions, a new industrial unit shall be eligible to seek all
incentives contemplated under the policy. Capital investment
subsidy and DG Set subsidy are among the incentives available
to new industries under Clause 4.1. Clause 5.1 further stipulates
that capital investment subsidy shall be mandatorily granted to
new industrial units on the basis of their fixed capital investment
in the scheduled zones, and at the percentage rates specified
therein. The MM Plant unit of Indo Flogates was situated in Zone
“C”, where the subsidy admissible was equivalent to 10% (ten
percent) of the fixed capital investment, subject to a maximum
ceiling of Rs. 10,00,000/-. Additionally, under Clause 11.4.4, an
industrial unit is entitled to capital investment subsidy for the
establishment of new generating sets at the rate of 15% (fifteen
percent) of the cost of installation, subject to a maximum of Rs.
5,00,000/-.
79. Having discussed the meaning of a new industrial unit under
industrial policy of 1989, a discussion on the expansion of
existing industrial unit is also required. Expansion, among other
two i.e., modernisation and diversification, of an existing
industrial unit has been defined under Clause 2.2 of the
industrial policy of 1989 to mean an additional investment (ought
to be more than 25% (twenty – five percent) of undepreciated
value of fixed capital investment of existing unit) in acquisition
of fixed capital investment of expanding the production of said
existing unit and resulting in the increased production over and
above the capacity of existing unit. This means in order to fall
within the phrase “expansion of an existing unit” under Clause
Special Civil Petition (C) No. 7013 of 2019 Page 63 of 122
2.2 of the industrial policy of 1989, four essentials at the least
are required: (i) There must be an additional investment; (ii) such
additional investment must exceed 25% (twenty – five percent) of
undepreciated value of existing unit’s fixed capital investment;
(iii) such additional investment must be made in acquiring new
fixed capital; and (iv) such additional investment must result in
increase in the production over and above the existing capacity.
80. Having explained the meaning of expansion of existing unit
under industrial policy of 1989, it is now pertinent to highlight
the fact that the respondent nos. 2 and 4 respectively in their
counter affidavit before this Court have stated that the
sanctioned subsidies were rejected due to the reason that MM
Plant unit was nothing but an expansion of the Indo Flogates
unit and that under Clause 4.4 of the industrial policy of 1989
though an industrial unit may carry any number of expansions
but the subsidy incentive for such industrial unit would be
allowed once only. It is the case of the respondent nos. 2 and 4
respectively that the decision to reject the subsidies was followed
when they found out that the MM Plant unit was an expansion
of the Indo Flogates unit and that Indo Flogates had already
availed subsidy for the expansion of the Indo Flogates unit under
the previous industrial policy which was supposed to be granted
only once as per Clause 4.4 of the industrial policy of 1989.
However, while rejecting the subsidies vide letter dated
04.10.2008, the respondents were unable to assign any reasons
as to why the MM Plant unit was an expansion of Indo Flogates
unit and/or how the abovementioned four essentials of Clause
2.2 were met. It was essential for the respondent authorities to
provide cogent reasons behind their decision in recognizing the
Special Civil Petition (C) No. 7013 of 2019 Page 64 of 122
MM Plant unit as an expansion, especially in the context of
Clause 20.1 of the industrial policy of 1989, which mandated
that the respondents reject the application for incentives on
merit . Thus, in view of the above, the requirement of Clause 2.7
of industrial policy of 1989 and the tests for qualifying as a new
unit appears to have been met by Indo Flogates while
establishing MM Plant unit and there being nothing on record to
prove contrary, we are of the view that MM Plant should be
treated as a new industrial unit only.
81. Having thus answered, on the basis of the material on record,
that the MM Plant unit satisfies the requirements of a new
industrial unit and that the respondents failed to justify its
classification as an expansion, it also becomes necessary to
examine the manner in which the respondents sought to defend
their stance before this Court and the High Court.
82. At this juncture, we are constrained to note that a major part of
the respondents’ submissions before this Court and the High
Court are an afterthought, primarily to cover the failure in their
duty to be objective, efficient, and reasoned while examining and
processing applications for the grant of subsidies. It is significant
to highlight at this moment one of the submissions of the
respondents against the appellant company wherein it was
submitted that in the applications of Indo Flogates there was no
mention of the existing unit or previous investments i.e., about
the earlier investment and subsidies granted while establishing
Indo Flogates and carrying out expansions therein, and that the
applications of Indo Flogates simply stated that this unit has
been set up separately in the state with a separate registration
Special Civil Petition (C) No. 7013 of 2019 Page 65 of 122
with the Government of India and with new and separate
electrical connection obtained from the Orissa State Electricity
Board (OSEB). On the basis of the above, it was stated that it
fulfilled the criteria of a new unit for subsidy under industrial
policy of 1989. Therefore, on the basis of the applications, the
respondent no. 2 vide letter dated 05.11.1998, communicated to
Indo Flogates that on further examination of matter, it had
decided to treat MM Plant unit of Indo Flogates for manufacture
of stool insert, stool coatings and gunning mix as a separate new
industrial unit. It is relevant to note here that there was already
a pre-formatted application form issued by the state wherein the
applicant while applying for subsidy for new industrial unit had
no choice but to accept to the pre-formatted clause in the draft
application which stated that the applicant certifies that they had
not either applied for or have received any amount by way of state
investment subsidy before.
83. We do not agree with the argument of the respondents that MM
Plant unit was recognised as a separate new industrial unit by
merely relying on the contents of the application submitted by
the appellant company. We must state that in such
circumstances, the respondent authorities should have closely
scrutinised and examined the merits and antecedents of each
application before recognising a unit as new or an expansion of
an existing unit, mentioning the reasons to do so, before
forwarding the application internally for approval, and
sanctioning the subsidies in favour of the applicant. It is a lame
excuse to say that believing the contents of an application, the
recognition of any unit as new or the expansion of an existing
unit was followed. We are of the view that non-application of
mind has no space in matters concerning policy decisions. We
Special Civil Petition (C) No. 7013 of 2019 Page 66 of 122
are aware that although during such processes the authorities
do exercise discretion, however, such exercise of discretion
cannot merely be on some flimsy grounds. Having said this, a
closer look into the applications of the Indo Flogates would reveal
that what it had mentioned was not something incorrect. In its
application, Indo Flogates mentioned that in collaboration with
Magneco/Metrel of USA, it had established MM Plant unit as a
separate unit meaning thereby with separate industrial
registration, land and sheds, electricity connection, and thus,
found itself fulfilling the criteria of being a new industrial unit
entitled to fresh subsidy under the industrial policy of 1989. It is
pertinent to state that in the same application, Indo Flogates had
also mentioned that “in case you need any further information /
clarification, please write to us” yet no information / clarification
was sought by the respondent authorities in regards to the
antecedents of Indo Flogates and subsidy having given before.
Respondent no. 2 vide letter dated 05.11.1998 went on to
recognise the MM Plant unit as a separate new industrial unit
while mentioning that “this is to certify that on further
examination of the matter the director of industries have been
pleased to decide to treat MM Plant as a separate new industrial
unit under medium scale sector of M/s Indo Flogates” .
84. Unlike and contrary to the above submission, the respondents in
their counter affidavit before the High Court had stated that the
earlier sanction of subsidy of Rs. 11,14,750/- (Rs. 10,00,000/-
towards capital investment subsidy and Rs. 1,14,750/- towards
DG Set subsidy) was based on the documents submitted by Indo
Flogates. It was also argued that the fact of amalgamation of Indo
Flogates and the appellant company was not disclosed to or
Special Civil Petition (C) No. 7013 of 2019 Page 67 of 122
brought to the knowledge of the respondents before sanctioning
the subsidies, therefore, MM Plant unit was earlier recognised as
a new industrial unit and on that basis capital investment
subsidy was sanctioned for MM Plant in favour of Indo Flogates.
th
The respondents further argued that in the 35 meeting of sub-
committee of state level committee, the very existence of Indo
Flogates was not there as it was already amalgamated with the
appellant company. However, we do not find any merit in this
argument as the fact of amalgamation was also referred to by the
appellant company (which till this time had amalgamated with
Indo Flogates) in its letter dated 22.05.2001 wherein the
respondents were asked to “kindly be informed that following
subsidy matters relating to erstwhile lndo Flogates Ltd (since
amalgamated with the Company) are lying pending with the
Industries Department” . Whereas, the subsidies were sanctioned
by the respondent nos. 2 and 4 respectively, later in point of time
vide their letters dated 10.04.2003 and 19.04.2003 respectively.
In fact, even before the letter dated 22.05.2001, a letter was sent
to the respondent no. 3 on 15.12.2000, wherein the undersigned
person was a representative of the appellant company and not
that of Indo Flogates. Further, the said letter clearly mentions to
that the issue of subsidy related to the erstwhile entity Indo
Flogates. The relevant portion of the letter reads thus:
“discussion yesterday undersigned had with you, kindly be
informed that following subsidy matters relating to erstwhile Indo
Flogates ltd are presently lying pending with the Industries
Department at Bhubaneswar” . Thus, had the respondent
authorities not acted in an absent-minded, lackadaisical, and
procrastinated manner, they would have known the fact that
Indo Flogates was not in existence anymore and that Indo
Special Civil Petition (C) No. 7013 of 2019 Page 68 of 122
Flogates had amalgamated with the appellant company. That
was precisely why the undersigned representative of the
appellant company was liaising for sanctioned subsidies for MM
Plant unit on behalf of Indo Flogates in all correspondence post
amalgamation. In case the respondents had not acted in such an
unmindful manner, they would have noted that amalgamation
had taken place and would have sought supporting documents
to that effect. Whatsoever the case could have been, even
otherwise, the non-disclosure of amalgamation could not have
been the ground for rejection of subsidies as the rights and
benefits in the subsidies sanctioned in favour of Indo Flogates
came to be transferred in favour of the appellant company after
the amalgamation and, a new industrial unit, irrespective of its
ownership, would have been entitled to the subsidies. At this
juncture, it is also pertinent to mention that Part III of the
amalgamation order dated 03.08.2000 explicitly states that all
properties belonging to or in the ownership of or vested in or
granted in favour of Indo Flogates including but without being
limited to all subsidies , will stand vested in the appellant
company upon amalgamation.
85. Thus, in view of all that is stated above, we hold this issue to be
in favour of the appellant company. We hold that the MM Plant
unit is a new industrial unit under the industrial policy of 1989,
as the same had also been classified by the respondents in the
year 1998.
Special Civil Petition (C) No. 7013 of 2019 Page 69 of 122
(II). If the answer to the issue no. (I) is in the affirmative then,
whether the respondents were justified in rejecting the
capital investment subsidy and DG Set subsidy respectively
for MM Plant unit on the ground that both Indo Flogates and
the appellant company had already exhausted the overall
subsidy limit under the previous industrial policies?
86. The respondents contended that the Industries Department,
Government of Orissa while exercising its power under Clause
20.1 of the industrial policy of 1989 had issued to the respondent
no. 3 the instructions letter vide dated 28.10.1994, clarifying
that the capital investment subsidy claims including the claims
for additional subsidy on account of expansion / modernisation
/ diversification shall be limited to the overall financial limits
prescribed under different IPRs and that this procedure was
followed earlier also and that the same may continue to be
followed in future. In this background, the respondents had
argued that it is clear from the instruction letter dated
28.10.1994 that capital investment subsidy claim, including
claim for additional subsidy in case of expansion, was subject to
overall financial limits prescribed under different IPRs, therefore,
the same should also apply in case of claim of a new industrial
unit for capital investment subsidy as also in case of claim for
additional subsidy in case of expansion / modernisation /
diversification. On the basis of the instruction letter dated
28.10.1994, the respondents had submitted that both Indo
Flogates and the appellant company was already being granted
to their extent of overall maximum limit of subsidy of Rs.
15,00,000/- and Rs. 20,00,000/-, collectively, under the
previous industrial policies i.e., industrial policies of 1980 and
Special Civil Petition (C) No. 7013 of 2019 Page 70 of 122
1986 and, therefore, the subsidies sanctioned for MM Plant unit
in favour of Indo Flogates could not have been disbursed in
favour of later transferee i.e. the appellant company for being
excessive of overall maximum limit of subsidy that can be
granted as per the instruction letter dated 28.10.1994.
87. Before going into the merits of the aforesaid submission, we deem
it necessary to reiterate a few important dates in the present
matter:
(a) The effective date of the industrial policy of 1989 was
01.12.1989;
(b) The date of initial fixed capital investment was 01.02.1992;
(c) The date of commencement of commercial production was
21.11.1992;
(d) The dates of applications for DG Set subsidy and capital
investment subsidy were 28.08.1993 and 29.09.1993
respectively;
(e) The instruction letter under Clause 20.1 of the industrial
policy was issued to the respondent no. 3 on 28.10.1994;
(f) On 05.11.1998, the respondent no. 2 recognised the MM Plant
unit as a separate new industrial unit of Indo Flogates;
(g) The amalgamation of Indo Flogates and the appellant company
was approved vide High Court order dated 03.08.2000;
(h) The fact of amalgamation was informed to the respondents vide
letter dated 22.05.2001;
(i) The DG Set subsidy and capital investment subsidy were
sanctioned by the respondents vide letters dated 10.04.2003
and 19.04.2003 respectively;
(j) The respondents, on the basis of the instruction letter dated
28.10.1994, rejected the said subsidies vide letter dated
Special Civil Petition (C) No. 7013 of 2019 Page 71 of 122
04.10.2008 on the ground that both Indo Flogates and the
appellant company had availed the maximum overall limit of
individual subsidies prescribed under the industrial policy of
1989;
(k) Industries Department, Government of Orissa had issued the
notification dated 30.10.2008 and amended industrial policy
of 1989 retrospectively to insert a new sub-clause being Clause
4.4, containing a verbatim requirement as had been provided
under the instruction letter dated 28.10.1994.
88. Having set the important dates above, a close reading of Clause
20.1 of the industrial policy of 1989 is also required. Clause 20.1
of industrial policy of 1989 inter alia provides that the State
Government may issue operational guidelines / instructions for
administration of incentives and that an industrial unit, which
considers itself eligible for any incentive under the policy, shall
apply for the same in accordance with the operation guidelines /
instructions and the same shall be considered and disposed of
on merits . This means if an industrial unit, while submitting the
application for subsidies to the respondent authorities, considers
itself to be eligible for any incentive then it shall apply “in
accordance” with the operational guidelines / instructions. At
this juncture, it is pertinent to note that at the time when Indo
Flogates had applied for DG Set subsidy and capital investment
subsidy i.e., on 23.08.1993 and 29.09.1993 respectively, the
instruction letter dated 28.10.1994 did not exist. This is why
Indo Flogates, without there being any further instruction till this
time, had applied under Clause 2.7 read with Clauses 4.1 and
5.1 of industrial policy of 1989 for capital investment subsidy
vide application dated 29.09.1993, in accordance with the
Special Civil Petition (C) No. 7013 of 2019 Page 72 of 122
existing eligibility requirements of being a new industrial unit
and having no prescribed overall maximum limits for such new
industrial unit. This is precisely the reason why Indo Flogates
might have suggested to the respondent authorities in its
application 29.09.1993 that it found itself fulfilling the criteria of
a new industrial unit and considered itself entitled for a fresh
subsidy under the policy.
89. Even otherwise, the requirement of a prescribed overall
maximum limit for capital investment subsidy contained in the
instruction letter dated 28.10.1994, though mentioned to be
retrospective, was inserted as it is and in verbatim in the main
industrial policy of 1989 vide amendment notification dated
30.10.2008. This amendment notification dated 30.10.2008
while adopting the verbatim requirement of the instruction letter
dated 28.10.1994 further clarified that "Capital Investment
Subsidy claim including claims for additional subsidy on account
of E/M/D shall be limited to the overall financial limit prescribed
under this IPR. In other words, if the eligible unit has availed of
capital investment subsidy under the previous IPR during its
operational period, its claim for additional subsidy would be
limited to the differential amount between actual subsidy availed
of during the operational period of the previous IPR and the
maximum CIS prescribed under this IPR ". The phrase “claim for
additional subsidy” read with words “eligible unit” used in the
context therein is of paramount importance. This means if an
eligible unit had already availed the benefit of capital investment
subsidy under previous industrial policies then such eligible
unit’s claim for additional subsidy would be limited to differential
Special Civil Petition (C) No. 7013 of 2019 Page 73 of 122
amount between subsidy availed under previous policies and the
maximum limit under industrial policy of 1989.
90. We are of the opinion that a claim for additional subsidy could
only be made when an eligible unit had already availed the
benefits of the same and/or part of the same earlier in the
previous policies. This means such eligible unit would
necessarily would have to be an existing unit first. This is
because a new industrial unit (in which fixed capital investment
is required to take place only after the effective date of industrial
policy of 1989) on the other hand would be receiving a fresh
subsidy as per the scheme and objective of entire industrial
policy of 1989 and not the additional subsidy which is otherwise
meant for an industrial unit which was set up during the
operation of previous policies. In such circumstances, the word
“eligible unit” used in the instruction letter dated 28.10.1994 and
in the amendment notification dated 30.10.2008 would require
to be read as the existing industrial unit which is undergoing
either expansion / modernisation / diversification. This view
would fall squarely into place when one would refer to the
heading of the amendment notification dated 30.10.2008 that
clarified the intent behind the requirement of the instruction
letter dated 28.10.1994. The heading of the amendment
notification dated 30.10.2008 states that an amendment to
industrial policy of 1989 is being carried out for the provisions of
sanction of capital investment subsidy under expansion /
modernisation / diversification programme and not for a new
industrial unit. The relevant excerpt is as follows:
“Sub: Amendment of IPR-80, IPR-86, IPR-89, IPR-92 and
IP-96 - Provisions for sanction of Capital Investment
Special Civil Petition (C) No. 7013 of 2019 Page 74 of 122
Subsidy (CIS) and exemption of sale Tax under Expansion
/ Modernization / Diversification (E / M / D) Programme
with retrospective effect.”
(Emphasis Supplied)
91. Thus, in the conspectus of the aforesaid discussion and having
already held the MM Plant unit to be a new industrial unit under
the industrial policy of 1989, we are of the view that the
respondent authorities were absolutely wrong in rejecting the
capital investment subsidy and DG Set subsidy for MM Plant unit
on the ground that since both Indo Flogates and the appellant
company had already availed the overall subsidy limit under the
previous industrial policies of 1980 and 1986 respectively, no
further subsidies could have been sanctioned for the MM Plant
unit in favour of Indo Flogates.
(III). Whether the respondents are estopped from refusing to
disburse the capital investment subsidy and DG Set subsidy
respectively for the MM Plant unit to the appellant
company?
92. The learned counsel appearing for appellant company contended
that the doctrine of promissory estoppel ought to operate in their
favour in the present case. Although the conclusions we have
reached on the foregoing two issues are, in our considered view,
sufficient to finally resolve the controversy yet, we deem it
appropriate, indeed necessary, with a view to doing complete
justice between the parties and for the definitive settlement of all
questions arising in the present lis , to also examine this issue.
Special Civil Petition (C) No. 7013 of 2019 Page 75 of 122
93. The common law acknowledges multiple forms of equitable
estoppel, one such doctrine being promissory estoppel. In Crabb
v. Arun DC , reported in [1976] 1 Ch 179 , Lord Denning,
speaking for the Court of Appeal, examined the equitable origins
of the doctrine of promissory estoppel and observed as follows:
“The basis of this proprietary estoppel – as indeed of
promissory estoppel – is the interposition of equity. Equity
comes in, true to form, to mitigate the rigours of strict law.
The early cases did not speak of it as “estoppel”. They
spoke of it as “raising an equity” If I may expand that,
Lord Cairns said: “It is the first principle upon which all
Courts of Equity proceed”, that it will prevent a person
from insisting on his legal rights – whether arising under
a contract or on his title deed, or by statute – when it
would be inequitable for him to do so having regard to the
dealings which have taken place between the parties.”
94. The essential elements of the doctrine of promissory estoppel
have also been discussed in Chitty on Contracts : Hugh Beale,
nd
Chitty on Contracts (32 edn., Sweet & Maxwell 2017):
“4.086. For the equitable doctrine to operate there must
be a legal relationship giving rise to rights and duties
between the parties; a promise or a representation by one
party that he will not enforce against the other his strict
legal rights arising out of that relationship; an intention
on the part of the former party that the latter will rely on
the representation; and such reliance by the latter party.
Even if these requirements are satisfied, the operation of
the doctrine may be excluded if it is, nevertheless, not
“inequitable” for the first party to go back on his promise.
The doctrine most commonly applies to promises not to
enforce contractual rights, but it also extends to certain
other relationships.
Special Civil Petition (C) No. 7013 of 2019 Page 76 of 122
xxx xxx xxx
4.088 […] The doctrine can also apply where the
relationship giving rise to rights and correlative duties is
non-contractual: e.g. to prevent the enforcement of a
liability imposed by statute on a company director for
signing a bill of exchange on which the company’s name
is not correctly given; or to prevent a man from ejecting a
woman, with whom he has been cohabitating, from the
family home.”
95. Chitty (supra) clarifies that the doctrine of promissory estoppel
may operate even in the absence of a pre-existing legal
relationship between the parties. It is, however, cautioned that
such an application may be misconceived, as it would result in
the creation of new rights inter se the parties, whereas the true
purpose of the doctrine is to prevent the enforcement of pre-
existing rights in circumstances where it would be inequitable to
do so:
“4.089. It has, indeed, been suggested that the doctrine
can apply where, before the making of the promise or
representation, there is no legal relationship giving rise
to rights and duties between the parties, or where there
is only a putative contract between them: e.g. where the
promisee is induced to believe that a contract into
which he had undoubtedly entered was between him
and the promisor, when in fact it was between the
promisee and another person. But it is submitted that
these suggestions mistake the nature of the doctrine,
which is to restrict the enforcement by the promisor of
previously existing rights against the promisee. Such
rights can arise only out of a legal relationship existing
between these parties before the making of the promise
or representation. To apply doctrine where there was
no such relationship would contravene the rule (to be
Special Civil Petition (C) No. 7013 of 2019 Page 77 of 122
discussed in para.4-099 below) that the doctrine
creates no new rights.”
96. Under English law, judicial pronouncements have historically
postulated that the doctrine of promissory estoppel cannot be
employed as a ‘sword’ to found an independent cause of action
for enforcing a promise unsupported by consideration. Its
application in those decisions has been confined to a ‘shield’,
whereby the promisor is estopped from insisting upon the
enforcement of strict legal rights when, by words or conduct, a
representation has been made to suspend or modify the exercise
of such rights. In Combe v. Combe , reported in [1951] 2 K.B.
215 , the Court of Appeal held that consideration is an essential
element of the cause of action:
“It [promissory estoppel] may be part of a cause of action,
but not a cause of action itself […] The principle
[promissory estoppel] never stands alone as giving a
cause of action in itself, it can never do away with the
necessity of consideration when that is an essential part
of the cause of action. The doctrine of consideration is too
firmly fixed to be overthrown by a side-wind”
97. Even within English law, the application of the rule laid down in
Combe (supra) has not been consistent, and the width of the
principle itself has been a matter of doubt. In the absence of any
authoritative pronouncement by the House of Lords recognising
promissory estoppel as an independent cause of action, it has
been considered difficult to state with certainty that English law
has moved away from the traditional position of treating the
doctrine as a ‘shield’ rather than a ‘sword’. In contrast, the
Special Civil Petition (C) No. 7013 of 2019 Page 78 of 122
position in the United States and Australia is comparatively less
restrictive.
98. Whereas India adopted a more broader formulation of the
doctrine. Comparative law enables countries which apply a
doctrine from across international frontiers to have the benefit of
hindsight.
99. This Court has given an expansive interpretation to the doctrine
of promissory estoppel with a view to remedy the injustice being
done to a party who has relied on a promise. In Motilal
Padampat Sugar Mills v. State of Uttar Pradesh , reported in
(1979) 2 SCC 409 , this Court viewed promissory estoppel as a
doctrine rooted in equity, unrestrained by the requirement of
consideration that traditionally circumscribed its application
under English law. Thus, speaking through Justice P. N.
Bhagwati (as His Lordship then was), the Court observed as
follows:
“12 […] having regard to the general opprobrium to
which the doctrine of consideration has been subjected
by eminent jurists, we need not be unduly anxious to
project this doctrine against assault or erosion nor
allow it to dwarf or stultify the full development of the
equity of promissory estoppel or inhibit or curtail its
operational efficacy as a justice device for preventing
injustice […] We do not see any valid reason why
promissory estoppel should not be allowed to found a
cause of action where, in order to satisfy the equity, it
is necessary to do so.”
(Emphasis Supplied)
Ø From estoppel to expectations
Special Civil Petition (C) No. 7013 of 2019 Page 79 of 122
100. Under English law, the doctrine of promissory estoppel has
evolved alongside the doctrine of legitimate expectation. The
latter is anchored in principles of fairness in public
administration and is attracted where a public authority, by its
representation or conduct, leads an individual to entertain an
expectation of receiving a substantive benefit. The contours of
the doctrine of substantive legitimate expectation were
elucidated in R v. North and East Devon Health Authority, ex
p Coughlan , reported in [2001] QB 213 , in the following terms:
“55 […] But what was their legitimate expectation?"
Where there is a dispute as to this, the dispute has
to be determined by the court, as happened in In re
Findlay. This can involve a detailed examination of
the precise terms of the promise or representation
made, the circumstances in which the promise was
made and the nature of the statutory or other
discretion.
56 […] Where the court considers that a lawful
promise or practice has induced a legitimate
expectation of a benefit which is substantive, not
simply procedural, authority now establishes that
here too the court will in a proper case decide
whether to frustrate the expectation is so unfair that
to take a new and different course will amount to an
abuse of power. Here, once the legitimacy of the
expectation is established, the court will have the
task of weighing the requirements of fairness against
any overriding interest relied upon for the change of
policy.”
(Emphasis Supplied)
Special Civil Petition (C) No. 7013 of 2019 Page 80 of 122
101. Under English law, the doctrine of legitimate expectation initially
emerged within the domain of public law as an analogue to the
doctrine of promissory estoppel in private law. Over time,
however, English law has drawn a clear distinction between the
two, treating legitimate expectation and promissory estoppel as
discrete remedies operating in the spheres of public law and
private law respectively. In this context, De Smith’s Judicial
Review , authored by Harry Woolf and others (8th edn., Thomson
Reuters, 2018), highlights the contrast between the public law
orientation of the doctrine of legitimate expectation and the
private law foundations of promissory estoppel:
“despite dicta to the contrary [Rootkin v Kent CC,
(1981) 1 WLR 1186 (CA); R v Jockey Club Ex p RAM
Racecourses Ltd, [1993] AC 380 (HL); R v IRC Ex p
Camacq Corp, (1990) 1 WLR 191 (CA)], it is not
normally necessary for a person to have changed his
position or to have acted to his detriment in order to
qualify as the holder of a legitimate expectation [R v
Ministry for Agriculture, Fisheries and Foods Ex p
Hamble Fisheries (Offshore) Ltd, (1995) 2 All ER 714
(QB)] […] Private law analogies from the field of
estoppel are, we have seen, of limited relevance where
a public law principle requires public officials to
honour their undertakings and respect legal certainty,
irrespective of whether the loss has been incurred by
the individual concerned [Simon Atrill, ‘The End of
Estoppel in Public Law?’ (2003) 62 Cambridge Law
Journal 3].”
(Emphasis Supplied)
102. Another point of distinction between the doctrines of promissory
estoppel and legitimate expectation under English law is that the
latter is capable of constituting an independent cause of action.
The ambit of the doctrine of legitimate expectation is wider than
Special Civil Petition (C) No. 7013 of 2019 Page 81 of 122
that of promissory estoppel, inasmuch as it takes into account
not only an express promise made by a public authority but also
consistent official practice. Further, in the application of
promissory estoppel, it may be necessary to demonstrate that the
promisee has suffered detriment as a consequence of acting in
reliance upon the promise. While it is generally sufficient to show
that the promisee has altered its position on the faith of the
representation, the absence of any resulting prejudice may
nonetheless be a relevant consideration in determining whether
it would be inequitable to permit the promisor to resile from the
promise. No such requirement, however, inheres in the doctrine
of legitimate expectation. In Regina (Bibi) vs Newham London
Borough Council , reported in [2002] 1 W.L.R. 237 , the Court
of Appeal held:
“55. The present case is one of reliance without
concrete detriment. We use this phrase because there
is moral detriment, which should not be dismissed
lightly, in the prolonged disappointment which has
ensued; and potential detriment in the deflection of
the possibility, for a refugee family, of seeking at the
start to settle somewhere in the United Kingdom
where secure housing was less hard to come by. In
our view these things matter in public law, even
though they might not found an estoppel or
actionable misrepresentation in private law, because
they go to fairness and through fairness to possible
abuse of power. To disregard the legitimate
expectation because no concrete detriment can be
shown would be to place the weakest in society at a
particular disadvantage. It would mean that those
who have a choice and the means to exercise it in
reliance on some official practice or promise would
gain a legal toehold inaccessible to those who,
lacking any means of escape, are compelled simply
Special Civil Petition (C) No. 7013 of 2019 Page 82 of 122
to place their trust in what has been represented to
them.”
(Emphasis Supplied)
103. Consequently, while the basis of the doctrine of promissory
estoppel in private law is a promise made between two parties,
the basis of the doctrine of legitimate expectation in public law is
premised on the principles of fairness and non-arbitrariness
surrounding the conduct of public authorities. This is not to
suggest that the doctrine of promissory estoppel has no
application in circumstances when a State entity has entered
into a private contract with another private party. Rather, in
English law, it is inapplicable in circumstances when the State
has made representation to a private party, in furtherance of its
public functions.
Ø
Doctrine of legitimate expectations in Indian Law
104. Under Indian law, the doctrines of promissory estoppel and
legitimate expectation have often tended to be conflated in
judicial discourse. This tendency has been noted and analysed
in Jain and Jain’s well-known treatise, Principles of
Administrative Law (7th edn., EBC 2013):
“At times, the expressions ‘legitimate expectation’ and
‘promissory estoppel’ are used interchangeably, but
that is not a correct usage because ‘legitimate
expectation’ is a concept much broader in scope than
‘promissory estoppel’.
xxx xxx xxx
Special Civil Petition (C) No. 7013 of 2019 Page 83 of 122
A reading of the relevant Indian cases, however, exhibit
some confusion of ideas. It seems that the judicial
thinking has not as yet crystallised as regards the
nature and scope of the doctrine. At times, it has been
referred to as merely a procedural doctrine; at times, it
has been treated interchangeably as promissory
estoppel. However both these ideas are incorrect. As
stated above, legitimate expectation is a substantive
doctrine as well and has much broader scope than
promissory estoppel.
xxx xxx xxx
In Punjab Communications Ltd. v. Union of India, the
Supreme Court has observed in relation to the doctrine
of legitimate expectation:
“the doctrine of legitimate expectation in the
substantive sense has been accepted as part of our law
and that the decision maker can normally be compelled
to give effect to his representation in regard to the
expectation based on previous practice or past conduct
unless some overriding public interest comes in the
way Reliance must have been placed on the said
representation and the representee must have thereby
suffered detriment."
It is suggested that this formulation of the doctrine of
legitimate expectation is not correct as it makes
"legitimate expectation" practically synonymous with
promissory estoppel. Legitimate expectation may arise
from conduct of the authority; a promise is not always
necessary for the purpose.”
105. While such doctrinal conflation has the regrettable effect of
introducing uncertainty into the law, it is ultimately citizens who
bear its adverse consequences. Representations made by public
authorities must, therefore, be subjected to the most exacting
standards, for citizens order their affairs and regulate their
Special Civil Petition (C) No. 7013 of 2019 Page 84 of 122
conduct on the basis of the trust they repose in the State. The
same considerations apply with equal force in the commercial
sphere, where predictability and consistency are indispensable
to rational business planning. A failure on the part of public
authorities to honour their representations, absent adequate and
cogent justification, undermines the confidence of citizens in the
State and erodes the credibility of governmental action. The
creation of a business-friendly environment conducive to
investment and trade is intrinsically linked to the degree of faith
that may be placed in government to fulfil the expectations it
engenders. Professors Jain and Deshpande have characterised
the consequences of this doctrinal confusion in the following
terms:
“Thus, in India, the characterization of legitimate
expectations is on a weaker footing, than in
jurisdictions like UK where the courts are now willing
to recognize the capacity of public law to absorb the
moral values underlying the notion of estoppel in the
light of the evolution of doctrines like LE [Legitimate
Expectations] and abuse of power. If the Supreme
Court of India has shown its creativity in transforming
the notion of promissory estoppel from the limitations
of private law, then it does not stand to reason as to
why it should also not articulate and evolve the
doctrine of LE for judicial review of resilement of
administrative authorities from policies and
longstanding practices. If such a notion of LE is
adopted, then not only would the Court be able to do
away with the artificial hierarchy between promissory
estoppel and legitimate expectation, but, it would also
be able to hold the administrative authorities to
account on the footing of public law outside the zone
of promises on a stronger and principled anvil.
Presently, in the absence of a like doctrine to that of
Special Civil Petition (C) No. 7013 of 2019 Page 85 of 122
promissory estoppel outside the promissory zone, the
administrative law adjudication of resilement of
policies stands on a shaky public law foundation.”
106. Further, the necessity for this doctrine to possess an
independent and autonomous existence was articulated by
Justice Frankfurter of the United States Supreme Court in
Vitarelli v. Seaton , reported in 359 U.S. 535 (1959) , in the
following words:
“An executive agency must be rigorously held to the
standards by which it professes its action to be judged.
Accordingly, if dismissal from employment is based on
a defined procedure, even though generous beyond the
requirements that bind such agency, that procedure
must be scrupulously observed. This judicially evolved
rule of administrative law is now firmly established
and, if I may add, rightly so. He that takes the
procedural sword shall perish with the sword.”
107. In National Buildings Construction Corporation v. S.
Raghunathan reported in [2003] 1 WLR 348 , a three Judge
bench of this Court, speaking through Justice S. Saghir Ahmad,
held that:
“18. The doctrine of “legitimate expectation” has its
genesis in the field of administrative law. The
Government and its departments, in administering the
affairs of the country, are expected to honour their
statements of policy or intention and treat the citizens
with full personal consideration without any iota of
abuse of discretion. The policy statements cannot be
disregarded unfairly or applied selectively. Unfairness
in the form of unreasonableness is akin to violation of
natural justice. It was in this context that the doctrine
Special Civil Petition (C) No. 7013 of 2019 Page 86 of 122
of “legitimate expectation” was evolved which has
today become a source of substantive as well as
procedural rights. But claims based on “legitimate
expectation” have been held to require reliance on
representations and resulting detriment to the claimant
in the same way as claims based on promissory
estoppel.”
(Emphasis Supplied)
108. However, it is necessary to bear in mind that the aforesaid
observation was made by this Court in the context of examining
the contours of the doctrine of legitimate expectation under
English law as it then stood. As noticed earlier, at that stage of
its development, English law exhibited a significant degree of
overlap between the doctrines of legitimate expectation and
promissory estoppel, the former often being invoked by analogy
with the latter. Subsequent developments in English law,
particularly following the decision of this Court in National
Buildings Construction Corporation (supra) , reflect a
conscious effort to disentangle the two doctrines and to locate
the doctrine of legitimate expectation on a distinct and more
expansive doctrinal footing. In Regina ( Reprotech (Pebsham)
Ltd) vs East Sussex County Council , reported in [2003] 1 WLR
348 , the House of Lords has held thus:
“33. In any case, I think that it is unhelpful to introduce
private law concepts of estoppel into planning law. As
Lord Scarman pointed out in Newbury District Council
v Secretary of State for the Environment [1981] AC 578
, 616, estoppels bind individuals on the ground that it
would be unconscionable for them to deny what they
have represented or agreed. But these concepts of
private law should not be extended into “the public law
of planning control, which binds everyone. (See also
Special Civil Petition (C) No. 7013 of 2019 Page 87 of 122
Dyson J in R v Leicester City Council, Ex p Powergen
UK Ltd [2000] JPL 629 , 637.)
34. There is of course an analogy between a private
law estoppel and the public law concept of a legitimate
expectation created by a public authority, the denial of
which may amount to an abuse of power… But it is no
more than an analogy because remedies against public
authorities also have to take into account the interests
of the general public which the authority exists to
promote. Public law can also take into account the
hierarchy of individual rights which exist under the
Human Rights Act 1998, so that, for example, the
individual's right to a home is accorded a high degree
of protection (see Coughlan's case, at pp 254–255)
while ordinary property rights are in general far more
limited by considerations of public interest: see R
(Alconbury Developments Ltd) v Secretary of State for
the Environment, Transport and the Regions [2001] 2
WLR 1389.
35. It is true that in early cases such as the Wells case
[1967] 1 WLR 1000 and Lever Finance Ltd v
Westminster (City) London Borough Council [1971] 1
QB 222 , Lord Denning MR used the language of
estoppel in relation to planning law. At that time the
public law concepts of abuse of power and legitimate
expectation were very undeveloped and no doubt the
analogy of estoppel seemed useful […] It seems to me
that in this area, public law has already absorbed
whatever is useful from the moral values which
underlie the private law concept of estoppel and the
time has come for it to stand upon its own two feet.”
(Emphasis Supplied)
109. In a concurring opinion in Monnet Ispat and Energy Ltd. v.
Union of India , reported in (2012) 11 SCC 1 , Justice H. L.
Special Civil Petition (C) No. 7013 of 2019 Page 88 of 122
Gokhale underscored the distinct considerations underlying the
doctrines of promissory estoppel and legitimate expectation. It
was observed that the invocation of promissory estoppel
presupposes the existence of a clear promise, acting upon which
the promisee has altered its position to its detriment. In contrast,
the application of the doctrine of legitimate expectation is
primarily informed by considerations of fairness and
reasonableness in State action. The relevant observation is as
under:
“Promissory Estoppel and Legitimate Expectations
289. As we have seen earlier, for invoking the principle
of promissory estoppel there has to be a promise, and
on that basis the party concerned must have acted to
its prejudice. In the instant case it was only a proposal,
and it was very much made clear that it was to be
approved by the Central Government, prior whereto it
could not be construed as containing a promise.
Besides, equity cannot be used against a statutory
provision or notification.
290. [...] In any case, in the absence of any promise, the
Appellants including Aadhunik cannot claim
promissory estoppel in the teeth of the notifications
issued under the relevant statutory powers.
Alternatively, the Appellants are trying to make a case
under the doctrine of legitimate expectations. The basis
of this doctrine is in reasonableness and fairness.
However, it can also not be invoked where the decision
of the public authority is founded in a provision of law,
and is in consonance with public interest.”
(Emphasis Supplied)
Special Civil Petition (C) No. 7013 of 2019 Page 89 of 122
110. In Union of India v. Lt. Col. P. K. Choudhary , reported in
(2016) 4 SCC 236 , this Court considered the decision in Monnet
Ispat (supra ) and noted its reliance on the judgment in Attorney
General for New South Wales v. Quinn , reported in (1990) 64
Aust LJR 327 . This Court thereafter observed as follows:
“This Court went on to hold that if denial of legitimate
expectation in a given case amounts to denial of a right
that is guaranteed or is arbitrary, discriminatory,
unfair or biased, gross abuse of power or in violation of
principles of natural justice, the same can be
questioned on the well-known grounds attracting
Article 14 of the Constitution but a claim based on mere
legitimate expectation without anything more cannot
ipso facto give a right to invoke these principles.”
111. Thus, the Court 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.
112. As regards the relationship between Article 14 and the doctrine
of legitimate expectation, a three judge Bench in Food
Corporation of India v. Kamdhenu Cattle Feed Industries ,
reported in (1993) 1 SCC 71 , held thus:
“7. In contractual sphere as in all other State actions,
the State and all its instrumentalities have to conform
to Article 14 of the Constitution of which non-
arbitrariness is a significant facet. There is no
unfettered discretion in public law: A public authority
possesses powers only to use them for public good.
This imposes the duty to act fairly and to adopt a
procedure which is ‘fairplay in action’. Due observance
Special Civil Petition (C) No. 7013 of 2019 Page 90 of 122
of this obligation as a part of good administration raises
a reasonable or legitimate expectation in every citizen
to be treated fairly in his interaction with the State and
its instrumentalities, with this element forming a
necessary component of the decision-making process in
all State actions. To satisfy this requirement of non-
arbitrariness in a State action, it is, therefore,
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
an 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. Rule of law does not completely
eliminate discretion in the exercise of power, as it is
unrealistic, but provides for control of its exercise by
judicial review.
8. The mere reasonable or legitimate expectation of a
citizen, in such a situation, may not by itself be a
distinct enforceable right, but failure to consider and
give due weight to it may render the decision arbitrary,
and this is how the requirement of due consideration of
a legitimate expectation forms part of the principle of
non-arbitrariness, a necessary concomitant of the rule
of law. Every legitimate expectation is a relevant factor
requiring due consideration in a fair decision-making
process. Whether the expectation of the claimant is
reasonable or legitimate in the context is a question of
fact in each case. Whenever the question arises, it is to
be determined not according to the claimant's
perception but in larger public interest wherein other
more important considerations may outweigh what
would otherwise have been the legitimate expectation
of the claimant. A bona fide decision of the public
authority reached in this manner would satisfy the
requirement of non-arbitrariness and withstand
judicial scrutiny. The doctrine of legitimate expectation
Special Civil Petition (C) No. 7013 of 2019 Page 91 of 122
gets assimilated in the rule of law and operates in our
legal system in this manner and to this extent.”
(Emphasis Supplied)
113. In NOIDA Entrepreneurs Assn. v. NOIDA , reported in (2011) 6
SCC 508 , a two judge bench of this Court, speaking through
Justice B. S. Chauhan, elaborated on this relationship in the
following terms:
“39. State actions are required to be non-arbitrary and
justified on the touchstone of Article 14 of the
Constitution. Action of the State or its instrumentality
must be in conformity with some principle which meets
the test of reason and relevance. Functioning of a
“democratic form of Government demands equality and
absence of arbitrariness and discrimination”. The rule
of law prohibits arbitrary action and commands the
authority concerned to act in accordance with law.
Every action of the State or its instrumentalities should
neither be suggestive of discrimination, nor even
apparently give an impression of bias, favouritism and
nepotism. If a decision is taken without any principle or
without any rule, it is unpredictable and such a
decision is antithesis to the decision taken in
accordance with the rule of law.
xxx xxx xxx
41. Power vested by the State in a public authority
should be viewed as a trust coupled with duty to be
exercised in larger public and social interest. Power is
to be exercised strictly adhering to the statutory
provisions and fact situation of a case. “Public
authorities cannot play fast and loose with the powers
vested in them.” A decision taken in an arbitrary
manner 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.
In this context, “in good faith” means “for legitimate
Special Civil Petition (C) No. 7013 of 2019 Page 92 of 122
reasons”. It must be exercised bona fide for the purpose
and for none other [...]”
As such, we can see that the doctrine of substantive legitimate
expectation is one of the ways in which the guarantee of non-
arbitrariness enshrined under Article 14 finds concrete
expression.
114. As briefly discussed above, the operation of doctrine of
promissory estoppel against government instrumentalities finds
its reference in a pivotal decision of this Court in the case of
Motilal Padampat (supra). In this case, the State Government
of UP in 1968 had taken a policy decision to grant the incentive
of exemption from sales tax for a period of three years to all new
industrial units being established within the State. Pursuant to
this policy, the appellant addressed a communication to the
Director of Industries, stating that, in view of the sales-tax
exemption announced by the Government, it intended to set up
a plant unit for the manufacture of vanaspati and sought
confirmation regarding the availability of the exemption. The
Director of Industries affirmed the position, and the assurance
was further endorsed and confirmed by the Chief Secretary to the
State Government. Acting on the strength of these assurances,
the appellant proceeded to establish the plant unit. In and
around 1969, the State Government expressed reservations
regarding the grant of exemption and requested the appellant to
attend a meeting, during which the appellant reiterated that the
government had already granted sales-tax exemption and that it
had proceeded with the establishment of the plant unit on the
strength of that assurance. Subsequently, in 1970, the State
Government adopted a revised policy decision whereby new
vanaspati units in the State that commenced commercial
Special Civil Petition (C) No. 7013 of 2019 Page 93 of 122
production by 30.09.1970 would be entitled only to a partial
concession in sales tax. Although the appellant’s unit went into
commercial production on 02.07.1970, the State Government
once again altered its policy and, on 12.08.1970, communicated
its decision to rescind the concession earlier granted in favour of
the appellant. On this note, this Court thoroughly examined the
doctrine of promissory estoppel and observed that it is a principle
evolved by equity to avoid injustice. It is neither in the realm of
contract nor in the realm of estoppel.
115. According to this Court, the true principle of promissory estoppel
seemed to be that where one party has, by his words or conduct,
made to the other a clear and unequivocal promise which is
intended to create legal relations or effect a legal relationship to
arise in the future, knowing or intending that it would be acted
upon by the other party to whom the promise is made. Where it
is in fact so acted upon by the other party, the promise would be
binding on the party making it, and he would not be entitled to
go back upon it, if it would be inequitable to allow him to do so,
having regard to the dealings which have taken place between
the parties. This would be so irrespective of whether there is any
pre-existing relationship between the parties or not.
116. It was further observed that it is not necessary, in order to attract
the applicability of the doctrine of promissory estoppel, that the
promisee, acting on the promise, should suffer any detriment.
What is necessary is only that the promisee should have altered
his position in reliance on the promise. This Court was of the
view that the doctrine of promissory estoppel is also applicable
against the government, where the government makes a promise
Special Civil Petition (C) No. 7013 of 2019 Page 94 of 122
knowing or intending that it would be acted upon by the
promisee. Where, in fact, the promisee, acting on it, alters his
position, the government would be held bound by the promise.
The promise would be enforceable against the government at the
instance of the promisee, notwithstanding that there is no
consideration for the promise and the promise is not recorded in
the form of a formal contract.
117. Applying the said doctrine to facts of that case, this Court had
observed that the in the letter of the chief secretary to the
government, a categorical representation was made by him on
behalf of the government that the proposed vanaspati unit of the
appellant would be entitled to exemption sales tax for a period of
three years from the date of commencement of production. This
representation was made by way of clarification and as a definite
commitment on the part of the government to grant exemption.
Therefore, the representation was made by the government
knowing and intending that it would be acted on by the
appellant, because, the appellant had decided to set up a unit for
manufacture of vanaspati only on account of the exemption from
sales tax promised by the government. The relevant observations
are as under:
“7. That takes us to the question whether the assurance
given by respondent 4 on behalf of the State Government
that the appellant would be exempt from Sales Tax for a
period of three years from the date of commencement of
production could be enforced against the State
Government by invoking the doctrine of promissory
estoppel. Though the origins of the doctrine of promissory
estoppel may be found in Hughes v. Metropolitan Railway
Co. and Birmingham and District Land Co. v. London and
Special Civil Petition (C) No. 7013 of 2019 Page 95 of 122
North-Western Rail Co. authorities of old standing
decided about a century ago by the House of Lords, it was
only recently in 1947 that it was rediscovered by Mr.
Justice Denning, as he then was, in his celebrated
judgment in Central London Property Trust Ltd. v. High
Trees House Ltd.. This doctrine has been variously called
'promissory estoppel', 'equitable estoppel', 'quasi estoppel'
and 'new estoppel'. It is a principle evolved by equity to
avoid injustice and though commonly named 'promissory
estoppel', it is, as we shall presently point out, neither in
the realm of contract nor in the realm of estoppel […]
8. […] The true principle of promissory estoppel, therefore,
seems to be that where one party has by his words or
conduct made to the other a clear and unequivocal
promise which is intended to create legal relations or
affect a legal relationship to arise in the future, knowing
or intending that it would be acted upon by the other party
to whom the promise is made and it is in fact so acted
upon by the other party, the promise would be binding on
the party making it and he would not be entitled to go
back upon it, if it would be inequitable to allow him to do
so having regard to the dealings which have taken place
between the parties, and this would be so irrespective of
whether there is any pre-existing relationship between
the parties or not.
xxx xxx xxx
32. We may now turn to examine the facts in the light of
the law discussed by us. It is clear from the letter of
respondent 4 dated January 23, 1969 that a categorical
representation was made by respondent 4 on behalf of
the Government that the proposed vanaspati factory of
the appellant would be entitled to exemption from sales
tax in respect of sales of vanaspati effected in Uttar
Pradesh for a period of three years from the date of
commencement of production, This representation was
made by way of clarification in view of the suggestion in
Special Civil Petition (C) No. 7013 of 2019 Page 96 of 122
the appellant's letter dated January 22, 1969 that the
financial institutions were not prepared to regard the
earlier letter of respondent 4 dated December 22, 1968 as
a definite commitment on the part of the Government to
grant exemption from sales tax. Now the letter dated
January 23, 1969 clearly shows that respondent 4 made
this representation in his capacity as the Chief Secretary
of the Government, and it was therefore, a representation
on behalf of the Government […] We must, therefore,
proceed on the basis that this representation made by
respondent 4 was a representation within the scope of his
authority and was binding on the Government. Now,
there can be no doubt that this representation was made
by the Government knowing or intending that it would be
acted on by the appellant, because the appellant had
made it clear that it was only on account of the exemption
from sales tax promised by the Government that the
appellant had decided to set up the factory for
manufacture of vanaspati at Kanpur. The appellant, in
fact, relying on this representation of the Government,
borrowed moneys from various financial institutions, pur-
chased plant and machinery from M/s. De Smet (India)
Pvt. Ltd., Bombay and set up a vanaspati factory at
Kanpur. The facts necessary for invoking the doctrine of
promissory estoppel were, therefore, clearly present and
the Government was bound to carry out the
representation and exempt the appellant from sales tax
in respect of sales of vanaspati effected by it in Uttar
Pradesh for a period of three years from the date of
commencement of the production.
33. The State, however, contended that the doctrine of
promissory estoppel had no application in the present
case because the appellant did not suffer any detriment
by acting on the representation made by the Government:
the vanaspati factory set up by the appellant was quite a
profitable concern and there was no prejudice caused to
the appellant. This contention of the State is clearly
unsustainable and must be rejected. We do not think it is
Special Civil Petition (C) No. 7013 of 2019 Page 97 of 122
necessary, in order to attract the applicability of the
doctrine of promissory estoppel, that the promisee, acting
in reliance on the promise, should suffer any detriment.
What is necessary is only that the promisee should have
altered his position in reliance on the promise […]”
(Emphasis Supplied)
118. Further, this Court in the case of Pawan Alloys & Casting (P)
Ltd. v. U.P. SEB , reported in (1997) 7 SCC 251 , had the
occasion to consider the application of the doctrine of promissory
estoppel against the government with respect to an incentive
policy. In this case, the U.P. State Electricity Board had issued
three notifications dated 29.10.1982, 13.07.1984, and
28.01.1986 respectively on identical terms, notifying the revised
rate schedules appended thereto, which were to apply to all
consumers directly supplied with electricity by the Board
throughout the State of U.P. Each of these notifications
stipulated that the revised rate schedule would come into force
from the respective dates mentioned therein. Among the items
incorporated in these rate schedules was one relating to
incentives for new industrial units. The corresponding item in the
last notification dated 28.01.1986 provided that a development
rebate of 10% (ten percent) on the amount of the bill pertaining
to energy charges would be granted to a new industrial unit for
a period of three years from the date of commencement of supply.
The Board, however, issued a subsequent notification dated
31.07.1986 deleting the said item relating to incentives for new
industrial units from the notification dated 28.01.1986. The
appellant contended that, by virtue of the principle of promissory
estoppel, the Board was not entitled to withdraw the rebate
prematurely through its notification dated 31.07.1986.
Special Civil Petition (C) No. 7013 of 2019 Page 98 of 122
119. This Court, for the purpose of applying the doctrine of promissory
estoppel to the above set of facts, held that the Board had issued
the notifications in question, acting in its wisdom and pursuant
to the directions of the State, in furtherance of the package of
incentives offered by the State of U.P. to new industrial units. By
the plain terms of these notifications, the Board, functioning as
an arm of the State Government had extended concessions in the
form of rebates in electricity duty to the new industrial units,
with the objective of attracting such units to invest in the state
and bringing them within its fold as prospective consumers of
electricity. Through these notifications, the Board had clearly
held out a promise to new industries, and since such industries
had admittedly established themselves in the region where the
Board operated, acting upon that promise, equity required that
the Board be held bound by it. It was further observed that the
new industrial units, having been induced to establish
themselves in the region on the strength of the promise, had
altered their position irretrievably. They had invested substantial
amounts in setting up infrastructure and had necessarily
changed their position relying on the representation that they
would receive the promised benefit i.e., a rebate of 10% (ten
percent) on their electricity bills for at least three years as an
infancy benefit, so as to enable them to effectively compete with
existing industries in the market. On the force of these facts, this
Court was of the opinion that the Board could certainly be pinned
down to its promise by the application of the doctrine of
promissory estoppel. The relevant observation is as under:
“ 19. It is, therefore, not possible to agree with the
contention of learned Senior Counsel for the Board that
Special Civil Petition (C) No. 7013 of 2019 Page 99 of 122
these three notifications did not hold out any promise or
any representation to the general public enabling the new
industries to get established acting on the said
representation. It is obvious that after the expiry of this
three-year period the Board would be able to charge full
rate for electricity supplied to these new customers who
would then become sufficiently old and mature and
would not need any more rebate. It cannot, therefore, be
said that the Board had no interest in these new
industries, their prospective customers, and was not
interested in attracting them to the territory catered to by
it by the supply of electricity. It may be that the Board
exercised its statutory powers under Section 49 of the Act
for that purpose but all the same it in its wisdom and
acting on the direction under Section 78-A of the Act
pursuant to the package of incentives offered by the State
of U.P. to these new industries, had issued the said
notifications holding out these promises. But even
assuming that the State had no role to play in this
connection as submitted by Shri Dave for the
respondents, these three notifications on their own
wordings leave no room for doubt that they did contain
offers of incentives to new industries who would be the
prospective new consumers of electricity and, therefore,
the Board's future customers.
xxx xxx xxx
21. In the present case even leaving aside the promissory
estoppel against the State of U.P. it can clearly be
visualised that by the mere wordings of the aforesaid
three notifications the Board acting as a limb of the State
of U.P. had offered these concessions by way of rebate in
electricity duty to the new industries so as to attract them
to the State to enable the Board to take them in its fold as
prospective consumers of electricity to be sold by it to
them.
xxx xxx xxx
Special Civil Petition (C) No. 7013 of 2019 Page 100 of 122
24. Consequently it cannot be held on the clear recitals
found in the aforesaid three notifications issued by the
Board that no representation whatsoever guaranteeing
10% rebate on electricity consumption bills could be culled
out from these notifications. We, therefore, agree with the
finding of the High Court on Issue No. 1 that by these
notifications the Board had clearly held out a promise to
these new industries and as these new industries had
admittedly got established in the region where the Board
was operating, acting on such promise, the same in equity
would bind the Board. Such a promise was not contrary
to any statutory provision but on the contrary was in
compliance with the directions issued under Section 78-A
of the Act. These new industries which got attracted to
this region relying upon the promise had altered their
position irretrievably. They had spent large amounts of
money for establishing the infrastructure, had entered
into agreements with the Board for supply of electricity
and, therefore, had necessarily altered their position
relying on these representations thinking that they would
be assured of at least three years' period guaranteeing
rebate of 10% on the total bill of electricity to be consumed
by them as infancy benefit so that they could effectively
compete with the old industries operating in the field and
their products could effectively compete with their
products. On these well-established facts the Board can
certainly be pinned down to its promise on the doctrine of
promissory estoppel.”
(Emphasis Supplied)
120. Additionally, in the case of Gujarat State Financial Corpn. v.
Lotus Hotels (P) Ltd. , reported in (1983) 3 SCC 379 , this Court
had observed that the doctrine of promissory estoppel applies
against a statutory corporation which in the discharge of its
duties makes a clear and unequivocal promise that is acted upon
by the promisee. In this case, the appellant was Gujarat State
Financial Corporation (GSFC) that had sanctioned a loan in
Special Civil Petition (C) No. 7013 of 2019 Page 101 of 122
favour of the respondent for setting up a hotel. On the basis of
such sanctioning, the respondent invested in securities, incurred
expenditures, and undertook substantial liabilities upon for its
business. Subsequently, the appellant GSFC refused to disburse
the loan. Dismissing the appeal, this Court held that the GSFC,
being an instrumentality of the State under Article 12 of the
Constitution of India, 1950, could not have arbitrarily resiled
from its solemn promise, particularly when the promisee had
altered its position by relying thereon. In such circumstances,
this Court held that promissory estoppel would operate against
the appellant GSFC, and such promise would be enforceable to
compel the performance of its obligation. The relevant
observation is as under:
“9. It was next contended that the dispute between the
parties is in the realm of contract and even if there was a
concluded contract between the parties about grant and
acceptance of loan, the failure of the Corporation to carry
out its part of the obligation may amount to breach of
contract for which a remedy lies elsewhere but a writ of
mandamus cannot be issued compelling the Corporation
to specifically perform the contract. It is too late in the day
to contend that the instrumentality of the State which
would be "other authority" under Article 12 of the
Constitution can commit breach of a solemn undertaking
on which other side has acted and then contend that the
party suffering by the breach of contract may sue for
damages but cannot compel specific performance of the
contract. It was not disputed and in fairness to Mr Bhatt,
it must be said that he did not dispute that the
Corporation which is set up under Section 3 of the State
Financial Corporation Act, 1955 is an instrumentality of
the State and would be "other authority" under Article 12
of the Constitution. By its letter of offer dated July 24,
1978 and the subsequent agreement dated February 1,
Special Civil Petition (C) No. 7013 of 2019 Page 102 of 122
1979 the appellant entered into a solemn agreement in
performance of its statutory duty to advance the loan of
Rs 30 lakhs to the respondent. Acting on the solemn
undertaking, the respondent proceeded to undertake and
execute the project of setting up a 4-star hotel at Baroda.
The agreement to advance the loan was entered into in
performance of the statutory duty cast on the Corporation
by the statute under which it was created and set up. On
its solemn promise evidenced by the aforementioned two
documents, the respondent incurred expenses, suffered
liabilities to set up a hotel. Presumably, if the loan was
not forthcoming, the respondent may not have
undertaken such a huge project. Acting on the promise of
the appellant evidenced by documents, the respondent
proceeded to suffer further liabilities to implement and
execute the project. In the back drop of this
incontrovertible fact situation, the principle of promissory
estoppel would come into play. In Motilal Padampat
Sugar Mills Co. (P) Ltd. v. State of U.P.2 this Court
observed as under : [SCC para 8, p. 425 : SCC (Tax) p.
160]
“The true principle of promissory estoppel, therefore,
seems to be that where one party has by his words
of conduct made to the other a clear and unequivocal
promise which is intended to create legal relations or
affect a legal relationship to arise in the future,
knowing or intending that it would be acted upon by
the other party to whom the promise is made and it
is in fact so acted upon by the other party, the
promise would be binding on the party making it and
he would not be entitled to go back upon it, if it would
be inequitable to allow him to do so having regard to
the dealings which have taken place between the
parties, and this would be so irrespective of whether
there is any preexisting relationship between the
parties or not.”
Special Civil Petition (C) No. 7013 of 2019 Page 103 of 122
10. Thus the principle of promissory estoppel would
certainly estop the Corporation from backing out of its
obligation arising from a solemn promise made by it to the
respondent.
xxx xxx xxx
13. Now if appellant entered into a solemn contract in
discharge and performance of its statutory duty and the
respondent acted upon it, the statutory corporation
cannot be allowed to act arbitrarily so as to cause harm
and injury, flowing from its unreasonable conduct, to the
respondent. In such a situation, the court is not powerless
from holding the appellant to its promise and it can be
enforced by a writ of mandamus directing it to perform its
statutory duty. A petition under Article 226 of the
Constitution would certainly lie to direct performance of a
statutory duty by "other authority" as envisaged by
Article 12.
(Emphasis Supplied)
121. Furthermore, the Gujarat High Court, in Tata Metals and
Strips Ltd. v. State of Gujara t , reported in 1991 SCC OnLine
Guj 220 , was also seized of a similar issue. The issue arose in a
situation where the State Government, with a view to
encouraging the establishment of industries within the State and
achieving the objectives of developing small, medium, and large
scale industries in rural and backward areas. This was intended
to ensure balanced industrial growth and reduce congestion in
developed centres such as Ahmedabad, Baroda, and Surat
respectively. For the said purpose, the State Government had
introduced two distinct schemes by way of two separate
resolutions. By the first resolution, it framed the “State Cash
Subsidy Scheme for Industries”. By the second, it introduced a
scheme providing for sales tax exemption and the grant of loans
equivalent to the amount of sales tax paid on the sale of finished
Special Civil Petition (C) No. 7013 of 2019 Page 104 of 122
products. Under this scheme, sales tax exemption was to be
granted to all small-scale new industrial units commissioned on
or after 01.11.1977, and interest-free sales-tax loan benefits were
made available to medium and large-scale industrial units
commissioned during the currency of the scheme, including for
expansion and diversification of existing units. All three schemes
came into effect from 01.11.1977. However, on 27.08.1980, the
State Government reviewed the package of incentives introduced
under the said resolutions and decided to introduce a new
scheme of sales tax benefits in place of the then prevailing sales
tax exemption and loan scheme, with effect from 01.06.1980. The
earlier cash subsidy scheme was retained without modification.
The newly framed scheme, titled “The New Sales Tax Incentive
Scheme for Industries”, became effective from 01.06.1980 and
was intended to remain in force for a period of five years. Under
this scheme, new industrial units, including expansion or
diversification by existing units, commissioned i.e., having
commenced commercial production on or after 01.06.1980 were
eligible to opt for the new sales tax benefits in lieu of the benefits
under the older scheme. Under the new scheme, all eligible
industrial units were given the choice between two modes of
sales-tax incentives: (a) sales tax exemption incentives or (b)
sales tax deferment incentives. Where a new industrial unit opted
for the sales tax deferment scheme, the recovery of sales tax
payable on the sale of its products was to be deferred to the
extent and for the period stipulated in the resolution.
122. In the aforesaid backdrop, the petitioner contended that, relying
upon the aforesaid sales tax incentive schemes, it had made
substantial investments of approximately Rs. 2 crore in the
Special Civil Petition (C) No. 7013 of 2019 Page 105 of 122
specified area during the period 1979 to 1982. The commercial
production also commenced on 31.03.1982. It was therefore
asserted that the petitioner had become entitled to the benefits
of the sales tax incentive schemes notwithstanding the
subsequent government resolution dated 07.01.1982, by which
cold rolled steel strips and re-rolling of steel, including stainless
steel industries, were declared ineligible for any incentives under
Government resolutions.
123. The High court, while relying on Motilal Padampat (supra) and
applying the doctrine of promissory estoppel as explained
therein, observed that although the scheme itself stated that the
State Government might, from time to time, review the list of
industries excluded from its purview and may remove, amend, or
add any item to that list, yet such a stipulation did not render
the assurance held out by the State Government a conditional
one. By incorporating such a statement in the resolution, the
State Government merely indicated the power it already
possessed i.e., it made explicit what was otherwise implicit. The
court was of the opinion that on the strength of this clause, it
could not have been inferred that the assurance extended under
the scheme was that a new industrial unit would continue to
receive benefits only so long as its industry was not included in
the list of excluded industries. The assurance was not a limited
or qualified one. It was not intended to mean that the benefit
would be available only until the industry came to be excluded
from the scheme. Where a new industrial unit had set up an
industry not excluded from the purview of the scheme and had
commenced commercial production before that industry was
subsequently included in the exclusion list, it would be
Special Civil Petition (C) No. 7013 of 2019 Page 106 of 122
unreasonable and unjust to deprive such an industrial unit of
the benefit of the scheme, especially when it had already become
eligible and had started receiving the incentives. In other words,
the Government may withdraw an exemption previously granted,
but only if such withdrawal does not offend the doctrine of
promissory estoppel or deprive an industrial unit of an exemption
which it is otherwise entitled to claim by virtue of that doctrine.
Where the Government has offered an incentive of exemption to
a new industry, and where an industry has been established in
reliance on such representation in order to avail the benefit, that
new industry may legitimately contend that the exemption
cannot thereafter be withdrawn. The relevant observation is as
under:
“Though it is true that in the scheme itself it is declared
that the Government might review the list of industries
excluded from the purview of the scheme from time to time
and remove, amend or add any item from and to the said
list, it cannot be said that the assurance which the
Government held out under the scheme was a conditional
one. As rightly pointed out by the learned counsel for the
petitioner, by stating such a thing in the resolution what
the Government had done was merely to indicate the
power which it possesses. Thus, by stating like that in the
resolution, what the Government did was to make explicit
what was implicit. On the basis of such a statement in the
scheme, it is not possible to hold that the assurance which
the Government held out was that the new industrial unit
will continue to get the benefit under the scheme so long
as it is an industry not included in the list of industries
excluded from the purview of the scheme. The assurance
held out by the Government was not a limited one in the
sense that the benefit under the scheme was to be
available to the new units so long as that industry was
not excluded from the purview of the scheme. If a new
Special Civil Petition (C) No. 7013 of 2019 Page 107 of 122
unit had set up an industry which was not excluded from
the purview of the scheme and had started commercial
production before it came to be included in that list, it
would be unreasonable and unjust to deprive that new
industrial unit of the benefit of the scheme even though it
had become eligible under the scheme and had started
receiving benefits under the scheme […]
[…] In other words, the Government can withdraw an
exemption granted by it earlier if such withdrawal can be
done without offending the rule of promissory estoppel
and depriving an industry entitled to claim exemption
from payment of tax under the said rule. If the
Government grants exemption to a new industry and if on
the basis of the representation made by the Government
an industry is established in order to avail of the benefit
of exemption, the new industry can legitimately raise a
grievance that the exemption cannot be withdrawn except
by means of legislation.
In our opinion, on true interpretation of the resolution of
1980, it will have to be held that the Government did give
a promise to the entrepreneurs that if a new unit or project
was set up on the basis of the assurance held out under
the scheme, and that the new industrial project was
commissioned on or after 1st June, 1980, then it was
entitled to the benefits available under that scheme, if by
the time it was commissioned, i.e., by the time it
commenced commercial production, the said industry
was not included in the list of excluded industries. As the
scheme was operative for a period of five years only from
1st June, 1980, it will have to be further held that the
assurance of benefits was available to those new
industrial units or projects which had started commercial
production on or after 1st June, 1980, but before 31st
May, 1985, and which were not excluded earlier from the
benefits of the scheme. So far as the petitioner is
concerned, the petitioner had started commercial
production on 31st March, 1982. The industry in which it
Special Civil Petition (C) No. 7013 of 2019 Page 108 of 122
was engaged came to be included in the list of excluded
industries on 15th September, 1982, that is after it
started commercial production, and as we are not called
upon to decide in this case whether it stood excluded by
the resolution dated 7th January, 1982, it will have to be
held that the petitioner was entitled and continued to
remain entitled to the sales tax deferment benefit under
the scheme for the full period, if other conditions were
satisfied by it […]”
(Emphasis Supplied)
124. We shall now proceed to consider two more decisions on this
issue, particularly because the High Court of Orissa, in those
cases, has cogently articulated the application of the doctrine of
promissory estoppel in the context of the industrial policy of 1986
and the industrial policy of 1989 respectively.
125. In the case of Camma Textile Industries v. State of Orissa ,
reported in 1994 SCC OnLine Ori 207 , wherein the Government
of Orissa had announced several incentives in the form of tax
concession as well as subsidy to those entrepreneurs who
decided to set up industries within the State of Orissa and such
incentive based policies were called as the industrial policies. The
High Court noted that the industrial policies of the state
announced in 1980 and 1986 respectively brought about an
upsurge in the industrial climate of the State and even
entrepreneurs from outside the State became excited to set up
industries within the State. Therefore, in order to enhance the
tempo of industrialisation in the State, the government had
decided to further liberalise the package of incentives and
announced the industrial policy of 1989 with the twin objective
of encouraging new industries and providing support to
Special Civil Petition (C) No. 7013 of 2019 Page 109 of 122
industries which had come up in the State during the last few
years and, therefore, the new industrial policy of 1989 was
allowed to operate with effect from 01.12.1989, the date on which
the said policy was issued. The petitioner's case in nutshell was
that prior to the issuance of the industrial policy of 1989 and
while the industrial policy of 1986 was in force, the state level
committee held a meeting on 29.03.1989 and sanctioned a
capital investment subsidy of Rs. 25,00,000/- in favour of the
petitioner for the project of synthetic fabrics to be set up by the
petitioner in the district of Balasore. Under the Industrial Policy,
1986, the capital investment subsidy in respect of the new
industrial units as well as expansion / modernisation /
diversification projects in Zone-B for the district of Balasore was
25% (twenty – five percent) of the fixed capital subject to the limit
of Rs. 25,00,000/-. The IPICOL (which is the respondent no. 3 in
the present appeal) to whom the petitioner had applied for
financial assistance had intimated the petitioner vide letter dated
10.03.1989, about the financial assistance sanctioned by the
corporation and indicated therein that the central subsidy of Rs.
25,00,000/- has been taken into account while deciding the term
loan to be granted by the IPICOL. The OSFC (which is the
respondent no. 1 in the present appeal) also intimated vide letter
dated 26.07.1989 that the state level committee (sub-committee
of state level committee is the respondent no. 4 in the present
rd
appeal) in its 53 meeting had sanctioned a subsidy of Rs.
25,00,000/- to the petitioner's unit.
126. Upon the aforesaid unequivocal assurances from the OSFC and
the IPICOL as well as the decision of the State Government taken
by its state level committee, the petitioner had started making
Special Civil Petition (C) No. 7013 of 2019 Page 110 of 122
investments for setting-up the industrial unit in the district of
Balasore and had invested a substantial amount by 30.11.1989.
Thereafter on 03.08.1992, the OSFC intimated the petitioner that
the subsidy which had been sanctioned earlier in their favour to
the tune of Rs. 25,00,000/- stood cancelled and instead only a
sum of Rs. 15,00,000/- had been sanctioned as subsidy by the
state level committee in its meeting dated 04.07.1992. Since the
petitioner had already made a huge investment pursuant to the
unequivocal assurances held out to it by the State Government,
OSFC, and IPICOL, respectively with regard to the grant of
subsidy to the tune of Rs. 25,00,000/-, on receiving the letter of
the OSFC reducing the subsidy to the tune of Rs. 15,00,000/-, a
representation was made to the OSFC and the matter was also
brought to the notice of the director of industries. However, since
the petitioner did not receive any favourable communication from
either of them, it approached the High Court for enforcement of
the promises held out to it by the opposite parties and for a
declaration that the opposite parties were bound by the principle
of promissory estoppel.
127. The High Court held that there was no dispute that the opposite
parties had sanctioned a subsidy of Rs. 25,00,000/- in favour of
the petitioner’s new industrial unit, which had been duly
communicated to the petitioner by IPICOL vide letter dated
10.03.1989 and again by the OSFC through its letter dated
26.07.1989. The Court further noted that even the State
Government, in its counter affidavit, had conceded this position.
It was also undisputed that the industrial unit had been set up
in 1989 and that the petitioner had made substantial
investments between July 1989 and January 1990. Although the
Special Civil Petition (C) No. 7013 of 2019 Page 111 of 122
State Government contended that the Government of India had
withdrawn the central subsidy and had communicated this
withdrawal to the State in 1989, the said fact had never been
conveyed to the petitioner until the rejection letter dated
03.08.1992, by which time a reduced amount of subsidy had
again been sanctioned and communicated by the OSFC, and by
that stage, the petitioner had already made substantial
investment in establishing the unit. In view of the unequivocal
promise and assurance extended to the petitioner, and the
petitioner having established the industrial unit pursuant to that
promise and having incurred substantial expenditure in doing
so, the High Court held that the opposite parties were bound by
the assurances given and could not be permitted to resile
therefrom. The conclusion was irresistible that the petitioner had
relied upon the assurances contained in the letters dated
10.03.1989 and 26.07.1989, and, acting upon them, had altered
its position by making significant financial investment in setting
up the industrial unit. Consequently, the opposite parties were
obliged to honour the representation made to the petitioner by
sanctioning and disbursing the amount of Rs. 25,00,000/-. In
this manner, the High Court, relying upon this Court’s decision
in Motilal Padampat (supra) , held that the principle of
promissory estoppel squarely applied to the facts of the case and
that the opposite parties must be held bound by it. The relevant
observations are as under:
“8. The principle of promissory estoppel is a principle
evolved by equity to avoid injustice and, as has been
said by the apex Court in the case of Motilal Padampat
Sugar Mills Co. Ltd. v. The State of Uttar Pradesh, (1979)
2 SCC 409 : A.I.R. 1979 S.C. 621, it is neither in the
realm of contract nor in the realm of estoppel. According
Special Civil Petition (C) No. 7013 of 2019 Page 112 of 122
to the law laid down by the Supreme Court in the
aforesaid case, the true principle of promissory estoppel
is that where one party has by his words or conduct made
to the other a clear and unequivocal promise which is
intended to create legal relationship or effect a legal
relationship to arise in future knowing or int ending that
it would be acted upon by the other party to whom the
promise is made and, in fact, it is so acted upon by the
other party, the promise would be binding upon the party
making it and he would not be entitled to go back upon it,
if it would be inequitable to allow him to do so having
regard to the dealings which have taken place between
the parties. The learned Judges in the said case also
observed that it is not necessary, in order to attract the
applicability of the doctrine, that the promisee acting in
reliance on the promise should suffer any detriment and
what is necessary is that the promisee should have
altered his position in reliance on the promise.
xxx xxx xxx
11. Bearing in mind the law laid down by the apex Court
in the aforesaid cases, and examining the averments
made in the writ application as well as the documents
appended thereto, there cannot be any dispute that the
opposite parties had sanctioned a subsidy of Rs. 25 lakhs
in favour of the petitioner-industry which was
communicated to be petitioner by the IPICOL in its letter
dated 10- 3-1989, annexed as Annexure-2, and also by
the OSFC in its letter dated 26-7-1989, which has been
annexed as Annexure-3. Even the State Government in
its counter affidavit has conceded to the aforesaid
position. It is also an admitted fact that the industry was
set-up in the year 1989 and substantial investment was
made by the petitioner during the period July, 1989 to
January, 1990, as is apparent from Annexures-3, 5, 6
and 7. Though the State Government had taken a stand
that the Government of India had withdrawn the Central
Subsidy and communicated the same to the State
Special Civil Petition (C) No. 7013 of 2019 Page 113 of 122
Government in 1989, but the said fact had never been
communicated to the petitioner until 3-8- 1992, when the
reduced amount of subsidy was sanctioned again and
was communicated to the petitioner by the OSFC under
Annexure-8 and by that time the petitioner had made
substantial investment in setting-up the factory. In view
of the unequivocal promise and assurances to the
petitioner under Annexures-2 and 3, and the petitioner
having set-up the industry pursuant to the promise in
question and having made substantial expenses for
setting-up the industry, the opposite parties must be
bound by the assurances given by them to the petitioner
and cannot be permitted to back out from the same. In the
facts pleaded and proved, the conclusion is irresistible
that the petitioner has relied upon the assurance given to
it under Annexures 2 and 3 and acting on the said
assurances has altered its position by way of making
huge financial investment in setting up the industry and,
therefore, the opposite parties must adhere to the
representation made by them to the petitioner by way of
sanctioning Rs. 25 lakhs as subsidy and intimating the
same to the petitioner through the financial institutions of
the State Government, namely the OSFC and the IPICOL.
In our considered opinion, the principle of promissory
estoppel squarely applies and the opposite parties must
be bound by the same. We accordingly hold that the
opposite parties were not entitled to cancel the
sanctioned amount of subsidy of Rs. 25 lakhs to the
petitioner communicated to it under letter dated 26-7-
1989 and the said order is grossly (sic) detrimental to the
petitioner's interest. In the aforesaid premises we allow
this writ application and issue a writ of mandamus
calling upon the opposite parties to disburse the balance
amount of Rs. 10 lakhs to the petitioner which they are
bound by their earlier sanction and promise pursuant to
which the petitioner has acted to its detriment. The
amount in question representing the balance subsidy
should be paid to the petitioner within 2 months from the
Special Civil Petition (C) No. 7013 of 2019 Page 114 of 122
date of the receipt of our order. There will, however, be no
order as to costs.”
(Emphasis Supplied)
128. The second decision of High Court of Orissa relevant for our
purpose is the case of Prachi Engineering Pvt. Ltd. v. State of
Ori ssa , reported in 1998 SCC OnLine Ori 27 , wherein the High
Court, while dealing with the application of doctrine of
promissory estoppel to the incentive of electricity concession
promised by the State Government under industrial policy of
1989, unequivocally held that it is a settled law that industrial
policy regulations issued by the State Government constitute a
set of promises which the State Government is bound to honour
if an industrial unit satisfies the various criteria prescribed
under the relevant clauses. The High Court further held that
where such benefits are denied, a cause of action may arise
before a court of law in an appropriate case. In that view of the
matter, the High Court observed that there existed sufficient
justification for the government to extend the benefits under a
particular policy if an industrial unit has come into existence or
has commenced commercial production at any time during the
period for which the policy remains in force.
129. The High Court observed that, since the industrial policy was of
the year 1989, the relevant five-year period would run from
01.12.1989 to 30.11.1993. As the object of the policy was to
extend various incentives enumerated therein to eligible units,
such benefits ought not to be denied by interpreting any clause
of the policy in a manner that frustrates its object, creates
bottlenecks, or deprives an industrial unit of incentives to which
it is otherwise entitled. In essence, the High Court held that if an
Special Civil Petition (C) No. 7013 of 2019 Page 115 of 122
industrial unit is set up and goes into commercial production at
any point after the commencement of a particular policy and
during the period for which the policy remains operative, the
government has no justification to deny the benefits
contemplated under that policy. The relevant observation is as
under:
“8. It is settled law that the I.P.Rs. by the Government are
a set of promises which the Government is bound to
honour if an industry fulfils various criteria laid down
under the clauses. In case of denial of these benefits,
action may lie in Courts of law in appropriate cases. In
that view of the matter, there is every justification for the
Government to extend the benefit under a particular
policy, if the industrial unit has come into existence on set
up or goes for commercial production any time during the
period when that particular policy is in force. In the
present case, the I.P.R. being of 1989, the period of five
years would be from 1-12-1989 to 30-11-1993. Since the
object of the policy is to grant various incentives
enumerated under the policy to an eligible unit the same
should not be denied merely by interpreting the clause of
the policy in such a way that such interpretation instead
of furthering the objects for which the policy is framed
would create bottle-neck and deprive the particular
industrial unit from availing the incentives to which it is
otherwise entitled, but for the mere fact that capital
investment either in small or big scale has been made
prior to the effective date. In other words, if any time after
the date of coming into force of any particular policy (in
the present case 1-12-1989) an industrial unit is set up
and goes into commercial production during the period
in which the policy is in force, there is no justification for
the Government to deny the benefits under the police (sic)
even though capital investment might have made prior to
the effective date.”
(Emphasis Supplied)
Special Civil Petition (C) No. 7013 of 2019 Page 116 of 122
Ø Respondent authorities in breach of policy commitments
130. Now adverting to the facts of the present case, it is pertinent to
reiterate that the industrial policy of 1989 was introduced with
the twin objectives of encouraging new industries as well as
supporting the existing industries. The effective date from which
the industrial policy of 1989 came into force was 01.12.1989. On
the strength of the incentives made available to a new industrial
unit and having regard to the objectives underlying the industrial
policy of 1989, Indo Flogates invested funds for the
establishment of the MM Plant unit. The date of initial fixed
capital investment in the said MM Plant unit was 01.02.1992,
and thereafter the unit commenced commercial production. The
date of commencement of commercial production stood recorded
as 21.11.1992. Pursuant thereto, Indo Flogates submitted two
applications dated 28.08.1993 and 29.09.1993 respectively to
the respondent no. 3, inter alia seeking the grant of DG Set
subsidy and capital investment subsidy. Thereafter, the
respondent no. 2, on 05.11.1998, communicated the decision of
the respondent no. 3 recognising the MM Plant unit as a separate
new industrial unit of Indo Flogates. Subsequently, the
respondent no. 2 informed Indo Flogates, vide letter dated
09.06.2000, that the applications for the respective subsidies
had been recommended to the State Government for approval.
131. Finally, the respondent no. 1 vide letters dated 10.04.2003 and
19.04.2003 respectively conveyed the decision of the respondent
no. 4 of sanctioning an amount of Rs. 1,14,750/- towards the DG
Set subsidy and Rs. 10,00,000/- towards the capital investment
Special Civil Petition (C) No. 7013 of 2019 Page 117 of 122
subsidy. In the meanwhile, the MM Plant unit was still in
production and continued to incur substantial expenses in its
operation on the assurances given by the respondent authorities.
Further, Indo Flogates and the appellant company came to be
amalgamated vide the High Court order dated 03.08.2000.
Therefore, all rights and interests including the benefit of
subsidies in favour of Indo Flogates came to be transferred in
favour of the appellant company. It is pertinent to note here that
the fact of amalgamation was informed to the respondents vide
letter dated 22.05.2001 i.e. even before the sanction letters dated
10.04.2003 and 19.04.2003 respectively. Pursuant to
sanctioning of subsidies, the appellant company between 2003
and 2007, made as many as nine written requests to the
respondent authorities for disbursement of the sanctioned
subsidies in their favour.
132. During the period referred to above, the respondents had also
acknowledged the sanction of the subsidies on two occasions.
Firstly , on 24.03.2007 wherein the respondent no. 1 had
communicated to the appellant company that sanctioned
amount may be processed for disbursal on the receipt of the
respondent no. 3. Secondly , on 23.08.2007 wherein the
respondent no. 3 after conducting a site inspection of the MM
Plant unit recommended the disbursal of amounts towards
subsidies. Therefore, in view of the unequivocal promises and
assurances made to the appellant company under various
communications particularly the letters dated 05.11.1998,
10.04.2003, 19.04.2003, 24.03.2007, and 23.08.2007
respectively as mentioned above, and the appellant having set up
and continuing the production in the MM Plant unit by incurring
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substantial expenses in the expectation to such promises and
assurances, we are in complete agreement with the views of the
High Court of Orissa adopted in Camma Textile (supra) and
Prachi Engineering (supra) respectively. Thus, on this note also,
we are of the opinion that the appellant company is entitled to
disbursal of capital investment subsidy and DG Set subsidy and
that the respondents are precluded from refusing to disburse the
same in favour of the appellant company.
133. This litigation is a fine specimen of the bureaucratic lethargy. It
is this bureaucratic lethargy which gave rise to this long drawn
litigation. This Court in many of its decisions has reminded
various State Governments that if the object of formulating the
industrial policy is to encourage investment, employment and
growth, the bureaucratic lethargy of the State apparatus is
clearly a factor which will discourage entrepreneurship.
134. The State must abandon the colonial conception of itself as a
sovereign dispensing benefits at its absolute discretion. Policies
formulated and representations made by the State generate
legitimate expectations that it will act in accordance with what it
proclaims in the public domain. In the exercise of all its
functions, the State is bound to act fairly and transparently,
consistent with the constitutional guarantee against
arbitrariness enshrined in Article 14 of the Constitution of India.
Any curtailment or deprivation of the entitlements of private
citizens or private business must be proportional to a
requirement grounded in public interest. This understanding of
the limits of State power has been recognised and reiterated by
this Court in a consistent line of decisions. As an illustration, we
Special Civil Petition (C) No. 7013 of 2019 Page 119 of 122
would like to extract this Court’s observations in National
Buildings Construction Corporation (supra) :
“The Government and its departments, in administering
the affairs of the country are expected to honour their
statements of policy or intention and treat the citizens
with full personal consideration without any iota of
abuse of discretion. The policy statements cannot be
disregarded unfairly or applied selectively. Unfairness
in the form of unreasonableness is akin to violation of
natural justice.”
(See: The State of Jharkhand and Ors. v.
Brahmputra Metallics Ltd, Ranchi and anr. ,
reported in (2023) 10 SCC 634)
G. CONCLUSION
135. In view of the foregoing and considering the totality of the
circumstances, our conclusion on each issue is as follows:
(i) The MM Plant unit fulfils the definition of a “new industrial
unit” under Clause 2.7 of the industrial policy of 1989. This
is because the fixed capital investment for the MM Plant unit
was made after the effective date of the industrial policy of
1989, i.e., 01.12.1989, and the unit was separately
registered, separately located, independently powered, and
commenced independent commercial production in 1992.
(ii) The MM Plant is not an expansion/modernisation/
diversification of an existing unit as defined under Clause
2.2 of the industrial policy of 1989. The MM Plant unit
constitutes a physically and functionally distinct industrial
Special Civil Petition (C) No. 7013 of 2019 Page 120 of 122
undertaking, meeting the judicial tests as more particularly
discussed above, distinguishing a new unit from an
expanded unit.
(iii) The concept of overall financial limit under the amended
Clause 4.4 as introduced retrospectively vide the instruction
letter dated 28.10.1994 and later the amended notification
dated 30.10.2008 applies only to expansion / modernisation
/ diversification of an existing unit. It has no application to
new industrial units, which are governed by Clause 4.1 and
are entitled to all incentives including fresh subsidy subject
inter alia to the unit wise caps specified in Clause 5.1 and
Clause 11.4.4 of industrial policy of 1989 respectively.
(iv) The appellant company is entitled to the disbursement of
sanctioned subsidies. We have held that a clear and
unequivocal representation was made by the respondent
authorities with respect to sanction and grant of subsidies
by way of various communications particularly the letters
dated 05.11.1998, 10.04.2003, 19.04.2003, 24.03.2007,
and 23.08.2007 respectively as mentioned above, and the
appellant company having legitimate expectation that
sanctioned subsidies would be disbursed, and acting upon
the same set up and continued the production in the MM
Plant unit by incurring substantial expenses pursuant to
such promises and assurances. This reliance on the
promises and assurances of respondents was neither
speculative nor unilateral, but flowed directly from
unequivocal sanction and official communications issued by
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the respondents, rendering the subsequent volte-face not
only unfair but also untenable.
136. In view of the above, the appeal succeeds and is hereby allowed.
Accordingly, the impugned judgment and order of the High Court
is hereby set aside.
137. The respondents are hereby directed to disburse an amount of
Rs. 11,14,750/- along with interest at the rate of 9% p.a. from
the date of sanction of respective subsidies towards the capital
investment and the DG Set for MM Plant unit in favour of the
appellant company within a period of 3 months from the date of
this judgment.
138. Pending applications, if any, shall stand disposed of.
....................................... J.
(J.B. Pardiwala)
....................................... J.
(R. Mahadevan)
New Delhi;
th
6 January, 2026
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