1992 (3) TMI 163 - SC - VAT / Sales Tax

Sales tax refund scheme unconstitutional; promissory estoppel cannot enforce ultra vires promises diverting lawful tax revenue to manufacturers

SC held that the State's sales tax refund scheme, promising refund of tax lawfully levied and collected, was unconstitutional and contrary to public ... Scope and ambit of Promissory estoppel - government to honour its commitments of refunding sales tax - announcement of policy by the Government to refund sales tax - High Court exercising jurisdiction under Letters Patent and setting aside order of the learned single Judge directing refund of sales tax and inter-state sales tax, as if the Government of a State could agree expressly or impliedly to refund sales tax realised by a manufacturer. HELD THAT:- Promissory Estoppel being on extension of principle of equity, the basic purpose of which is to promote justice founded on fairness and relieve a promisee of any injustice perpetrated due to promisor’s going back on its promise, is incapable of being enforced in a court of law if the promise which furnishes the cause of action or the agreement, express or implied, giving rise to binding contract is statutorily prohibited or is against public policy. The appellant was never intimated that the Government had changed its policy in respect of refund of sales tax at any point prior to filing of the counter affidavit in the High Court. Even the letter dated 16th June, 1969, did not mention that the concessions would be available as provided in the new policy. In Poumami Oil Mills etc. v. State of Kerala, [1986 (12) TMI 37 - SUPREME COURT] the Government was not permitted to go back on its earlier promise of wider exemption from sales tax in pursuance of which the industries had been set up on principle of promissory estoppel and the Notification issued after one year curtailing exemption was held to apply to industries set up thereafter. Even a legislature, much less a government, cannot enact a law or issue an order or agree to refund the tax realised by it from people in exercise of its sovereign powers, except when the levy or realisation is contrary to a law validly enacted. A promise or agreement to refund tax which is due under the Act and realised in accordance with law would be a fraud on the Constitution and breach of faith of the people. Taxes like sales tax are paid even by a poor man irrespective of his savings with a sense of participation in growth of national economy and development of the State. Its utilization by way of refund not to the payer but to a private person, a manufacturer, as an inducement to set up its unit in the State would be breach of trust of the people amounting to deception under law. Refund of tax is made in consequence of excess payment of it or its realisation illegally or contrary to the provisions of law. A provision or agreement to refund tax due or realised in accordance with law cannot be comprehended. No law can be made to refund tax to a manufacturer realised under a statute. It would be invalid and ultra vires. The Punjab Sales Tax Act provided for refund of sales tax and grant of exemption in circumstances specified in Sections 12 and 30 respectively. Neither empowered the Government to refund sales tax realised by a manufacturer on sales of its finished product. Refund could be allowed if tax paid was in excess of amount due. An agreement or even a notification or order permitting refund of sales tax which was due shall be contrary to the statute. To illustrate it the appellant claimed refund of sales tax paid by it to the State Government on sale made by it of its finished products. But the tax paid is not an amount spent by the appellant but realised on sale by it. What is deposited under this head is tax which is otherwise due under provisions of the Act. Return or refund of it or its equivalent, irrespective of form is repayment or refund of sales tax. This would be contrary to Constitution. Any agreement for such refund being contrary to public policy was void under Section 23 of the Contract Act. The constitutional requirements of levy of tax being for the welfare of the society and not for a specific individual the agreement or promise made by the government was in contravention of public purpose thus violative of public policy. No legal relationship could have arisen by operation of promissory estoppel as it was contrary both to the Constitution and the law. Realisation of tax through State mechanism for sake of paying it to private person directly or indirectly is impermissible under constitutional scheme. The law does not permit it nor equity can countenance it. The scheme of refund of sales tax was thus incapable of being enforced in a court of law. Fallacy of such constitutionally inhibited policy, sacrificing public interest resulting in illegal private enrichment is exposed by claim of refund for nearly Rs. 2 crores, for a period of three years, only, when total investment in establishing the unit was Rs.1.5 crores. Levy of tax to raise revenue for promoting economic growth of the State reduced itself in enhancing the profit margin of the manufacturer and the sales tax stood converted into income of the appellant. Such contrivance of law even though bona fide is legally unenforceable. In the result this appeal fails and is dismissed. Issues Involved:1. Promissory estoppel and its applicability.2. Government's commitment to refund sales tax.3. Validity of the Government's promise under constitutional and statutory provisions.4. Legal effect of the Government's brochure and subsequent actions.5. Public policy and legality of refunding sales tax to a private manufacturer.Issue-wise Detailed Analysis:1. Promissory Estoppel and Its Applicability:The primary issue revolves around the principle of promissory estoppel, which was elaborated in cases like Union of India v. Indo Afghan Agencies and crystallized in Motilal Padampat Sugar Mills v. State of U.P. Promissory estoppel arises when a promise made by the government or its officials, within their authority, is acted upon by the promisee, altering their position based on the promise. The court examined whether the Government of Punjab made a promise to refund sales tax to the appellant and if the appellant altered its position based on that promise.2. Government's Commitment to Refund Sales Tax:The facts established that the Government of Punjab announced a policy in December 1966 to refund sales tax as an incentive for setting up large-scale industries. The appellant acted on this promise, purchasing land and machinery, and setting up a Vanaspati manufacturing unit. The learned Single Judge found these facts sufficient to direct the government to honor its commitment based on promissory estoppel. However, the Division Bench set aside this order, arguing that the scope of equitable estoppel is limited and cannot bind the government if the promise was made beyond the officials' authority.3. Validity of the Government's Promise Under Constitutional and Statutory Provisions:The court examined whether the promise to refund sales tax was legally enforceable. It was argued that taxation is a sovereign power exercised by the state to raise revenue, and any promise to refund tax realized lawfully would be against public policy and the Constitution. The court held that refunding sales tax to a private manufacturer would be a breach of public trust and contrary to Articles 265 and 266 of the Constitution of India. The promise, therefore, was deemed unenforceable.4. Legal Effect of the Government's Brochure and Subsequent Actions:The brochure issued by the Government of Punjab in December 1966 declared incentives, including sales tax refunds, for setting up industries. The appellant relied on this brochure and subsequent assurances from government officials. The court noted that the government functions through its officials, and their bona fide actions in line with government policy should bind the government unless proven unauthorized. However, the Division Bench found that the brochure and subsequent actions were unauthorized and beyond the officials' scope of authority.5. Public Policy and Legality of Refunding Sales Tax to a Private Manufacturer:The court emphasized that exemption from tax to encourage industrialization is different from refunding tax. Exemptions are allowed for valid reasons and benefit both the manufacturer and the consumer. In contrast, refunding tax realized lawfully would be contrary to public policy and the Constitution. The court concluded that any agreement to refund sales tax realized under the law would be void under Section 23 of the Contract Act and unenforceable in a court of law.Conclusion:The appeal was dismissed, with the court holding that the promise of refunding sales tax was contrary to public policy and the Constitution. The principle of promissory estoppel could not be enforced as it would result in illegal private enrichment at the expense of public interest. The Government's promise to refund sales tax was deemed unenforceable, and the appellant's claim was rejected.