Court quashes Finance Dept order, directs Govt to reconsider petitioner's request.

West Coast Paper Mills Limited Versus Government of Karnataka and others

West Coast Paper Mills Limited Versus Government of Karnataka and others - [2011] 38 VST 249 (Kar) Issues Involved:
1. Entitlement to deferment of payment of tax under the KST and CST Acts.
2. Impact of the reduction in the CST rate on the incentive scheme.
3. Legality of the rejection of the petitioner's request for modification of the Government order.
4. Application of the principles of promissory estoppel and legitimate expectation.

Detailed Analysis:

1. Entitlement to Deferment of Payment of Tax under the KST and CST Acts
The petitioner, a company registered under the Companies Act, 1956, and the Karnataka Sales Tax Act, 1957 (KST Act), sought deferment of tax payments under the KST and CST Acts for its expansion projects (Phase I, II, and III). Initially, the Government of Karnataka provided tax deferment incentives from 1994 to 2006, with a base tax liability of Rs. 4.44 crores per annum. For Phase III, the Government extended the deferment period from 2002 to 2014, subject to specific conditions, including a base tax liability of Rs. 8.84 crores or Rs. 4.44 crores plus the average tax liability of three years prior to the commissioning of Phase III, whichever was higher.

2. Impact of the Reduction in the CST Rate on the Incentive Scheme
With the introduction of the Taxation Laws (Amendment) Act, 2007, the CST rate was progressively reduced, affecting the petitioner's ability to collect and defer taxes. The petitioner argued that the reduction in the CST rate from 4% to eventually nil by 2010 rendered the tax deferment incentive illusory, as the petitioner could no longer retain any amount by way of taxes under the CST Act. This reduction diminished the incentive initially provided, leading to financial hardship for the petitioner.

3. Legality of the Rejection of the Petitioner's Request for Modification of the Government Order
The petitioner requested the Finance Department to modify the base tax liability in light of the reduced CST rate, which was rejected without a hearing. The Finance Department's rejection was based on the premise that there was no promise to modify the incentives if the CST rate changed and that the State Government could not grant an interest-free loan solely due to changes in the CST Act. The court found this rejection to be illegal, as it effectively removed the incentive that prompted the petitioner's investments.

4. Application of the Principles of Promissory Estoppel and Legitimate Expectation
The petitioner relied on several judicial precedents to argue that the Government's promise of incentives should be honored, even if the CST rate changed. The court agreed, noting that the principle of promissory estoppel prevents the Government from reneging on its promises if the petitioner acted on those promises. The court also recognized the doctrine of legitimate expectation, which holds that the petitioner had a reasonable expectation of continued incentives based on the Government's initial promise.

Conclusion
The court allowed the writ petition, quashing the Finance Department's order and directing the State Government to reconsider the petitioner's request in light of the observations made. The court emphasized that the State Government should evolve measures to address the petitioner's financial hardship resulting from the reduced CST rate, ensuring that the initial incentive scheme remains effective and meaningful.