Last month, Prime Minister Narendra Modi, in a bid to boost the start-up ecosystem, announced a raft of measures including income-tax exemptions for a period of three years beginning April 2016 to 2019. The Supreme Court, in a recent judgment in the case of Kothari Industrial Corporation Ltd, has held that if the government goes back on its promise through a legislative measure, then the doctrine of promissory estoppel (the legal principle that a promise is enforceable by law when the promisor makes a promise to the promisee, who relies on it to her detriment) will not apply because of another doctrine—that there is no estoppel against the statute.
The doctrine that there is no estoppel against the statute is, in all other jurisdictions, invoked only in cases where a promise is held out contrary to the statute. But in India the doctrine is often unjustifiably—and successfully—invoked by both the state and the central governments to wriggle out of the promises in the form of tax/electricity tariff concessions validly held out so as to boost industrialisation.
In several cases in the past, those who had relied on incentive measures and set up industries by investing huge amounts could not successfully challenge the withdrawal or modification of the incentive scheme midway because of the invocation by the government of the doctrine that there is no estoppel against the statute. The challenge in all those cases was that the rights had vested in favour of those who had acted on the government’s promises; and that those rights could not be obliterated by a subsequent modification or withdrawal of the scheme.
The Supreme Court, in the celebrated Motilal Padampat case, had ruled that the doctrine of promissory estoppel is a doctrine of equity to prevent injustice, and that whatever be the nature of the function which the government is discharging, the government is subject to the rule of promissory estoppel. And if the essential ingredients of this rule are satisfied, the government can be compelled to carry out the promise made by it. The court had further ruled that only in two cases can the government resile from its promise: (1) in the case of proven overriding public interest; and (2) even where there is no overriding public interest, if the government wants to change the policy, it can do so by giving reasonable notice and by giving to the promisee a reasonable opportunity of resuming her position, provided it is possible for the promisee to restore status quo ante. If, however, the promisee cannot resume her position, the promise would become final and irrevocable.
Unfortunately, the above dictum has not been followed in many cases by the government, which has sought to justify its withdrawal or modification of the incentive scheme midway on the grounds that the same was done in exercise of the legislative power and, accordingly, there was no estoppel against the statute.
The Supreme Court, in the Kothari case (supra), has ruled, inter alia, that exemption from payment of tax or any concession being a privilege can be withdrawn any time and that there is no estoppel against the statute. The court, however, has failed to draw a distinction between an exemption simplicitor and an incentive scheme—while the former exempts persons or goods from payment of tax, the objective of the latter is to woo investors into acting on the same.
The government has the power to announce as well as withdraw any scheme, including an incentive scheme, in exercise of either executive or legislative power. If the rule of promissory estoppel is applicable to the withdrawal of an incentive scheme in exercise of the executive power which affects vested rights, there is no reason why the applicability of the said principle should be denied merely because the withdrawal has been done in exercise of the legislative power.
What is at stake here is not just the right of the citizens but also the credibility of the government.
In Brandt vs Hickel, the 9th Circuit Court in the US had the following to say about the government while dealing with the issue of collateral estoppel: “To say to these appellants, ‘the joke is on you. You shouldn’t have trusted us’ is hardly worthy of our great Government.” The courts in other countries have held the government to its word, but in India the courts have failed to force the government to honour its promises solemnly made to its citizens. If the government does not act honestly towards its citizens, how can the citizens be expected to be honest in their dealings with the government.
Although Prime Minister Modi is sincere and is unlikely to renege on his promises, the mere possibility that the government can with impunity commit breach of its promises would act as a deterrent to future investors.
The author is advocate, Supreme Court