Priority industry incentive protection prevents arbitrary denial of sales tax exemption after reliance and investment

Priority industries under the Industrial Policy Resolution, 1996 were treated as a distinct incentive category, and the connected notification was read to cover all such units, whether small, medium or large, under entry 43A. A unit that had obtained an eligibility certificate, been initially recognised by the authorities, and already availed the exemption could not later be excluded by a narrower administrative reading inconsistent with the policy. The resulting denial of sales tax exemption was held arbitrary and contrary to the incentive framework, and the State action was found violative of Article 14 because the unit had altered its position in reliance on the promised benefit.

---

---

Issues: Whether a priority industry established under the Industrial Policy Resolution, 1996 was entitled to sales tax exemption under entry 43A of the Finance Department notification dated 26 July 1996, and whether the denial of such exemption was arbitrary.

Analysis: The Industrial Policy Resolution, 1996 treated priority industries as a distinct category based on their nature and status, not on their size alone. The policy and the connected notification showed that all priority industries, whether small, medium or large, were covered by entry 43A. The industry had been granted an eligibility certificate, the departmental authorities had initially recognised its entitlement, and the unit had already availed exemption for a period. In these circumstances, the subsequent stand that the unit fell outside the notification was held to be inconsistent with the policy framework and unreasonable. The Court also applied the principle that State action contrary to a duly issued incentive scheme, particularly after the unit had acted on the representation and invested substantially, is arbitrary.

Conclusion: The petitioner was entitled to sales tax exemption under the Industrial Policy Resolution, 1996, and the contrary administrative action was held invalid and violative of Article 14 of the Constitution of India.

Final Conclusion: The writ petition succeeded and the impugned action was quashed, with the petitioner's entitlement to the sales tax incentive recognised in accordance with the policy.

Ratio Decidendi: Where a State incentive policy and the implementing notification cover all priority industries within the relevant entry, the taxing authority cannot exclude a duly certified unit by reclassifying it contrary to the policy, especially after the unit has altered its position on the basis of the promised exemption.

---