IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No 758 of 1987 For Approval and Signature: Hon'ble MR.JUSTICE R.K.ABICHANDANI and Hon'ble MR.JUSTICE K.A.PUJ ============================================================ 1. Whether Reporters of Local Papers may be allowed : YES to see the judgements? 2. To be referred to the Reporter or not? : YES 3. Whether Their Lordships wish to see the fair copy : NO of the judgement? 4. Whether this case involves a substantial question : NO of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder? 5. Whether it is to be circulated to the Civil Judge? : NO -------------------------------------------------------------- LUCKY STEEL INDUSTRIES Versus STATE OF GUJARAT -------------------------------------------------------------- Appearance: 1. Special Civil Application No. 758 of 1987 MR PC KAVINA for Petitioner MR SUDHIR MEHTA, AGP for Respondents No. 1-5 -------------------------------------------------------------- CORAM : MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE K.A.PUJ Date of decision: 07/03/2002 ORAL JUDGEMENT (Per : MR.JUSTICE R.K.ABICHANDANI for the Court) 1. The petitioner firm seeks a declaration that it is entitled to get the sales tax incentive benefits as per the resolution dated 27th August 1980, at Annexure `A' to the petition, and a direction on the respondents to grant the incentive benefits forthwith to the petitioner. The petitioner also seeks a declaration that the impugned resolution dated 15th January 1987, at Annexure `H' to the petition, is unconstitutional to the extent that it gives effect to the resolution from 15th January 1985, and a direction is sought that the impugned resolution dated 15th January 1987 should be made applicable with effect from 18th March 1982. 2. The grievance of the petitioner is that the respondents have not granted the benefit of deferment of sales tax incentive though promised under the resolution dated 27th August 1980. According to the petitioner, it set up an industry in the backward area of Vartej, relying on the promises held out by the respondent government under various resolutions offering package benefits like cash subsidy, sales tax exemption and sales tax deferment with a view to attract new entrepreneurs for setting up new projects in the notified backward areas. According to the petitioner, it had acted upon such promises and altered its position with a hope and temptation to get the package incentive benefits. The petitioner has invoked doctrine of promissory estoppel against denial of the benefits to the petitioner. 2.1 It is stated that, relying upon the promises held out by the respondents government in their resolution dated 27th August 1980, the partners of the petitioner firm entered into a partnership agreement and formed a partnership with effect from 30th March 1984. Thereafter, the firm obtained a plot of land on rent and started constructing a building thereon. An application was made to the respondent No.4 for getting the petitioner provisionally registered and a provisional registration was granted by the respondent No.4 on 15th December 1983. The petitioner was granted a licence to set up a factory for manufacturing mild steel round bars and CTD bars. It spent a total sum of Rs.15,24,490=00 on the building, plant and machinery and in about 10 months' time, it commenced commercial production with effect from 21-9-1984. Later on, a new partnership deed was executed with changes in the firm with effect from 4th May 1985. On the basis of the resolution, at Annexure `A' to the petition, dated 27th August 1980, the petitioner approached the respondent No.4 with an application to issue eligibility certificate to the petitioner for getting the benefit of deferment of sales tax dues. The respondent No.4, however, by the communication dated 6th February 1985, rejected that application on the ground that the petitioner was not entitled to get the benefit of deferment of sales tax dues since it's industry was covered in the list of industries not eligible to get the benefits under the scheme. According to the petitioner, they approached the respondent No.4 personally to convince him that the petitioner was not a re-rolling mill of steel and steel scrap, but it was a rolling mill manufacturing its products from steel scrap. Since the respondent No.4 did not favourably respond, the present petition was filed on 27th February 1987. 2.2 It is also the case of the petitioner that, in consonance with the resolution of 27th August 1980, the government issued the resolution dated 18th March 1982, at Annexure `C' to the petition, under which the petitioner was entitled to get the benefit of deferment of sales tax. According to the petitioner, the District of Bhavnagar was declared as a growth centre for the purpose of various benefits, including the benefit of deferment of sales tax and Vartej was 12 to 15 KMs from Bhavnagar city. The Port of Alang, near Bhavnagar, was declared to be a Port for ship breaking purposes and foreign vessels are imported for breaking. At that port, scrap received from the breaking of ship is rolled out at various rolling / re-rolling mills, which results in saving huge amounts of foreign exchange that would otherwise have been spent on importing steel to meet the shortfall of steel products in the country. Since the steel scrap was available at Alang, many rolling mills were established at Vartej so that they can get the incentive benefits offered by the State Government. It is stated that, prior to 2nd July 1983, rolling / re-rolling mills were not permitted to be registered as Small Scale Industries by the Central Government. The Development Commissioner, Small Scale Industries, Government of India, however, by letter dated 2nd July 1983 issued necessary instructions to all the States to consider the rolling / re-rolling mills to be eligible for being enrolled under small scale industries in backward areas of the State. Thereafter, the Government started enrolling such rolling mills as small scale industries. The petitioner in this background started to set up a rolling mill industry for manufacture of mild steel round bars and CTD. bars from steel scrap at Vartej. 3. When the resolution dated 27th August 1980 announcing policy of incentive was issued by the Government, rolling or re-rolling mills were not enumerated in the list of industries not eligible to get the benefits. However, by a subsequent resolution dated 7/12th January 1982, the list of ineligible industries came to be amended, as per which, `re-rolling of steel including stainless steel' was added at item 24 of the list. The case of the petitioner is that it was running a rolling mill manufacturing products from steel scrap only and did not fall in entry 24 which referred to re-rolling mill, and not a rolling mill. In the alternative, the petitioner's case is that, since the petitioner was rolling or re-rolling only steel scrap and not `steel' or `stainless steel', it's industry was outside the purview of entry 24 of the ineligibility list. It is pointed out that whenever steel scrap is to be included, it is specifically mentioned, as was done in entry 21 `re-rolling of steel and steel scraps including stainless steel' of the list of ineligible industries annexed to the resolution of 19th August 1983 under which capital investment subsidy scheme was declared. Thus, according to the petitioner, it's industry was not included in the list of industries which were not eligible to get the sales tax incentive benefits. 3.1 According to the petitioner, by the resolution of 15th January 1987, at Annexure `H' to the petition, the industry of `re-rolling of steel including stainless steel' alongwith four other industries were deleted from the list of ineligible industries and those of them which had commenced their commercial production on or after 15th January 1985 were given the benefit of the deferment of sales tax dues. According to the petitioner, since it had commenced production prior to 15th January 1985, the benefit was denied to the petitioner and this amounted to a hostile discrimination against the petitioner based on unreasonable and arbitrary classification for the purpose of giving benefits. According to the petitioner, the resolution at Annexure `H' dated 15-1-1987 does not give any reason or background or object for prescribing cut-off date of 15-1-1985 and the classification between the industries that had commenced production prior to 15-1-1985 and those that were established after 15-1-1985 was not founded on any intelligible differentia. The said resolution is, therefore, challenged to the extent that it fixed 15th January 1985 as the cut-off date. 4. The respondents have not filed any affidavit in reply and have relied upon the material which is already on record. 5. The learned counsel appearing for the petitioner has contended before us that the resolution dated 27th August 1980 held out promises to the entrepreneurs at large to establish new industrial projects in the areas notified and since the petitioner firm established its new industry, it had altered its position to its disadvantage. The industry of the petitioner of rolling steel scrap was not included in the list of ineligible industries till 12th January 1982 and there was no justification forthcoming from the side of the Government to show as to for what reason the said industry was included in the list of ineligible industries. According to the learned counsel, the action of including the industry of re-rolling steel including stainless steel in the list of ineligible industries by the resolution dated 12th January 1982, was arbitrary. It was submitted that a pre-existing benefit can be withdrawn and then restored only if the Government pleads and proves public interest to justify such action. It was submitted that, during the currency of the period of the resolution dated 27th August 1980, the entrepreneurs were lured to establish new industrial projects and the formation of the industry, though occurring at a subsequent point of time, would have its genesis in the offer made under the resolution dated 27th August 1980. The learned counsel referred to the averments made in the petition to show that the petitioner had set up the new industrial project in view of the promises held out by the Government under the said resolution and submitted that since the facts were not controverted by filing any affidavit in reply, there was no reason to doubt the correctness of the averments made in the petition. The learned counsel further argued that the cut-off date of 15th January 1985 fixed under the resolution at Annexure `H' to the petition, had no nexus to the object of rapid industrialization which was sought to be achieved and the fixing of the said date amounted to punishing the efficient industrial management which resulted into quicker production and to reward the tardy and inefficient entrepreneurs who took longer time in commencing their commercial production and yet reaped the benefit of resolution of 15th January 1987. The counsel contended that, in the matter of manufacture of the articles by rolling or re-rolling process, those who will commence production prior to 15th January 1985 and others who have done so after that date, constituted a single class and were equals who were by virtue of specifying the cut-off date of 15th January 1985 being treated unequally. The cut-off date was, therefore, arbitrary and violative of Article 14 of the Constitution. According to him, there was no rationale in fixing 15-1-1985 as the date when production should have commenced. He submitted that the petitioner should not be penalized for being more efficient in commencing the production before others who could commence only after 15th January 1985. It was then argued that the petitioner's industry did not fall in entry 24 of the list of ineligible industries published under the resolution dated 12th January 1982 or similar entry occurring in context of the resolution dated 18th March 1982 by virtue of the list of ineligible industries contained in Table 1 of that resolution, as amended by the resolution dated 15th September 1982 which added more industries to that Table, including `re-rolling of steel including stainless steel' appearing at entry 10 of paragraph 2 of the resolution dated 15th September 1982. This he argued on the basis that the petitioner was not a rolling mill but was a re-rolling mill. Further, that there was no mention of `steel scrap' either in entry 24 of the list of ineligible industries contained in the resolution dated 12-1-1982 or even in entry 10 of the resolution dated 15th September 1982, by which the list of ineligible industries contained in the Table under the resolution dated 18th March 1982, was enlarged. 5.1 In support of his contentions, the learned counsel relied upon the following decisions : [a] The decision of a Division Bench of this Court in M/s Kothari Oil Products Co. v. State of Gujarat, reported in XXIII (1) GLR 20 was cited for the proposition that, if the Government or any authority on behalf of the Government has made a representation and acting on that representation a party has altered its situation, then, it is not open to the Government to resile from that position and at the instance of the party who has altered its situation to its disadvantage, the Court is entitled to direct the Government or the authority to carry out its promises or its scheme. This decision was rendered in context of the benefits of the scheme announced under the notification dated 22nd December 1977. It was held that since the petitioner had shown that they had spent nearly Rs. 43 lakhs in the setting up of the cotton delinting plant after February 1978 relying on the scheme set out in the two notification of December 22, 1977, it was not permissible to the State authorities to back out of the schemes and to say that the petitioners will not be entitled to the benefits thereof. It was held that the resolution dated 26th September 1979, in so far as it purports to take away the benefits of interest free sales tax loan from the petitioners, was not applicable in their case. [b] The decision of the Supreme Court in commissioner of Income Tax v. M/s Krishna Copper Steel Rolling Mills, reported in AIR 1992 SC 422 was cited for the proposition that the question whether the article produced is the raw material or an article made of iron and steel has to be decided on the basis of the nature of the article and not the kind of mill which turns it out. It was held that if machinery and plant installed in steel mills where the process includes not merely the production of ingots, billets and the like but also the production of bars and rods are eligible for the higher development rebate, it cannot be said the same plant and machinery, when installed in rolling mills which proceed, from the stage of ingots or billets, to manufacture bars and rods, cannot be said to be not eligible for higher rate of development rebate. What is to be examined is not the nature of the mill which yields the article but the nature of the article or thing that is manufactured and to ask the question whether such article or thing can be considered as raw material for manufacture of other article made of the metal or is it itself an article made of the metal. It was held that the mild steel rods, bars or rounds which are manufactured by the assesses are only finished forms of the metal and not articles made of iron and steel, and that they only constitute raw material for putting up articles of iron and steel such as grills or windows by applying to them processes such as cutting or turning. The rod or the wire rods are likewise not products of iron and steel but only certain finished or refined forms of the metal itself. It was noted that pig iron and iron scrap are fed into furnaces to produce ingots, billets and blooms. But both are iron and steel in different form, the letter being referred to as `semi-finished steel'. Likewise, the bars, rods, rounds, wire rods and the like constitute the second stage in which one gets only `finished' forms of iron and steel. [c] The decision of the Supreme Court in State of Madhya Bharat (now the State of Madhya Pradesh) v. Hiralal Ji, reported in AIR 1966 SC 1546 was cited to point out that the Supreme Court held that the bars, flats and plates sold by the assessee were iron and steel exempted under the Notification issued under section 5 of the Madhya Bharat Sales Tax Act, which exempted iron and steel from sales tax. The question that arose before the Supreme Court was whether iron bars, flats and plates converted from scrap iron by re-rolling fell under the exemption or whether they could be taxed as goods prepared from any metal other than gold. The Supreme Court held that, so long as iron and steel continued to be raw materials, they enjoyed the exemption. Scrap iron purchased by respondent was merely re-rolled into bars, flats and plates. The raw material was only re-rolled to give it attractive and acceptable form. Such raw material did not in the process lose their character as iron and steel and the dealer sold `iron and steel' in the shape of bars, flats and plates and the customer purchased `iron and steel' in that shape. The Court, therefore, upheld the conclusion reached by the High Court that the iron and steel was exempted under the Notification. [d] The decision of the Supreme Court in M/s Devi Das Gopal v. State of Punjab, reported in AIR 1967 SC 1895 was cited for the proposition that it is a duty of the Court to strike down without any hesitation any arbitrary power conferred upon the executive by the legislation. [e] The decision of the Supreme Court in Shri Digvijay Cement Co. v. State of Rajasthan, reported in AIR 1997 SC 2609 was cited to point out that the notifications issued by the State of Rajasthan reducing the rate of tax on inter-State sale of cement and making differentiation between the rate of tax of the intra-State sales and inter-State sales of cement, had the effect of creating a preference for cement manufactured and sold in Rajasthan and disadvantage for the sale of cement manufactured and sold in other State i.e. Gujarat, and thus, had the direct and immediate adverse effect on the free flow of trade and were, therefore, void being contrary to the scheme of the constitutional provisions contained in Chapter XIII of the Constitution. [f] The decision of the Supreme Court in State of Bihar v. M/s Suprabhat Steel Ltd., reported in AIR 1999 SC 303 was cited to point out that, in a case where the State Government had introduced the new industrial policy dealing with the facility of sales tax exemption on purchase of raw materials, it was held that in view of the clear and unambiguous language of sub-clause (b) of clause 10.4 of the policy which provided that the old industrial units whose investment on plant and machinery did not exceed Rs.15 crores on 1-4-1993 would be entitled to the said facility of sales tax exemption on the purchase of raw material for a period of seven years from 1-4-1993, it could not be accepted that even said sub-clause (b) would be applicable only to those industrial units which would come into production from 1-4-1993 to 31-3-1998. [g] Reliance on decision of the Supreme Court in Commissioner of Sales Tax v. Industrial Coal Enterprises, reported in AIR 1999 SC 1324 was placed for the proposition that the provisions of exemption clause should not be, so strictly construed, as would defeat the very purpose and object of grant of exemption. It was observed by the Supreme Court that the object of granting exemption from payment of sales tax has always been for encouraging capital investment and establishment of industrial units for the purpose of increasing production of goods and promoting the development of industry in the State. The industrial unit fulfilled the relevant conditions at the time when it applied for exemption as its capital investment did not exceed Rs.3 lakhs. It was observed that neither the section nor the notification contained any condition that if the capital investment of the unit exceeds Rs.3 lakhs after the grant of exemption, such exemption would cease to operate. The respondent had shifted the unit to its own premises which made it much more convenient and easy for it to carry on the production, and the bonafides of the respondent had never been questioned. [h] The decision of the Supreme Court in State of Rajasthan v. M/s Mahaveer Oil Industries, reported in AIR 1999 SC 2302 on which heavy reliance was placed on behalf of the petitioner was referred in context of Notifications issued by the State of Rajasthan withdrawing the benefit of incentive scheme from oil extracting and manufacturing industries on 7-5-1990 and then restoring the benefit of exemption from central sales tax on 26-7-1991, as a result of which the new industrial units established after 7-5-1990 and before 26-7-1991 alone were not entitled to the benefits of the incentive scheme of the Central Sales Tax Act in respect of inter-State sale of their goods. Of the two, notification dated 7th May 1990, one was issued under the Rajasthan Sales Tax Act, 1954 and the other under the Central Sales Tax, and they amended notification dated 23rd May 1987 by which incentive scheme was notified, and as a result of such amendment, oil extracting or manufacturing industry was added in the list of ineligible industries, thus withdrawing the benefits of incentive scheme from oil extracting and manufacturing industries both in respect of Rajasthan Sales Tax, as also the Central Sales Tax. The Supreme Court noted that the notification of 7-5-1990 issued by the Central Sales Tax Act withdrawing the benefit of the scheme from oil extraction and manufacturing industries in respect of inter-State sales effected by them was already quashed by the Supreme Court by its judgement dated 23rd February 1995 in State of Rajasthan and another v. Gopal Oil Mills (Civil Appeal No. 5738 of 1994) and in view thereof since the respondent had started commercial production on 17th February 1991, during the subsistence of the said scheme, they were entitled to the benefit of the said scheme pertaining to exemption from Central Sales Tax from the date of starting of commercial production. It was contended before the Supreme Court that the judgement in Gopal Oil Mills (supra) should not be applied to them in so far as it upheld the validity of notification of 7-5-1990 withdrawing the benefit of incentive scheme under the Central Sales Tax Act, and that the Court did not consider the validity or otherwise of the notification of 7-5-1990 issued under the Rajasthan Sales Tax Act, on merits. In context of the notification of 7-5-1990 under the Rajasthan Sales Tax Act, no subsequent notification had been issued to restore the benefit of the scheme to oil extraction industries. It was therefore held that the ratio in Gopal Mills's case on the basis of which the notification of 7-5-1990 under the Central Sales Tax Act was set aside, was was not available while considering the notification of 7-5-1990 under the Rajasthan Sales Tax Act. After reviewing the precedents on the issue, the Supreme Court held that : "Public interest requires that the State be held bound by the promise held out by it in such a situation. But this does not preclude the State from withdrawing the benefit prospectively even during the period of the scheme, if public interest so requires. Even in a case where a party has acted on the promise, if there is any supervening public interest which requires that the benefit be withdrawn or the scheme be modified, that supervening public interest would prevail over any promissory estoppel". On facts, it was noted that the respondents could commence commercial production only in February 1991 long after the benefit