'Sunset clause' in exemption notification not a must

Timeless exemption notification have no time limit, and the government can terminate the notification any time

Exemptions granted to special economic zones (SEZs) have attracted attention in recent times because of the disappointment caused to the government in some cases, when the desired result has not been achieved for reasons of varied nature. So, when open-ended (timeless) exemptions given by the government were modified to impose "sunset clause", that is, a time limit was inserted, the affected parties went to the courts on the ground that it was not in the competence of the government to do so, since it went against the doctrine of promissory estoppel. In a most recent case, a company enjoying the benefit of exemption from MAT and tax on dividend distribution was adversely affected by the amendment of the section 115 JB (6) and 115 O (6) of the Income Tax Act, imposing a sunset clause in the Budget of 2011-12, so that the exemption would expire on June 1, 2011. This was challenged in the Karnataka High Court basically on ground of legislative competence of the government to impose a sunset clause in a notification, on the ground that it was against the doctrine of promissory estoppel. The high court in the case of Mind Three Ltd vs Union of India -2013(295)ELT641(Kar) rightly rejected the contention of the SEZ holders and observed that the government is competent to change a notification by imposing a sunset clause and that it does not hurt the doctrine of promissory estoppel. But, the high court made further observation that "it is settled position of law that every tax exemption and incentive shall have a sunset clause. Every fiscal legislation providing for tax exemption must have a life span fixed in the enactment". The judgment also says that not having a sunset clause is a flaw which has been corrected by imposing a sunset clause.

I respectfully disagree with this view of the high court, that every fiscal legislation providing for tax exemption must have a life span fixed in the enactment. Nor is it correct to say that it is a flaw not to have a sunset clause in an exemption notification.

This issue of withdrawing exemptions, with or without time limit attached to them, has been the subject of judicial decisions several times before. Factually speaking, by far, the largest number of exemption notifications - may be more than 90 per cent - is not time-bound, but timeless. Timeless exemption notification means that there is no time limit given, and the government can terminate the notification any time. Usually, it is done at the Budget time every year and scores of notifications are withdrawn. Nobody usually challenges that because it is well accepted judicially that government can withdraw any notification any time if there is no time limit given. Had it not been so, the whole exercise in the Budget every year would be impossible. The above judgment only confirms that view. The real controversy is only about whether government can withdraw the time-bound notifications. There have been several judgments which say it cannot be done as it will hurt the principle of promissory estoppel. This has been held by the following judgments: (i) Hindustan Spinning and Weaving Mills v UOI - 1984(17)ELT281(Bom), (ii) Sri Chakra Tyres v UOI-1987(29)ELT865(Mad) and others. At the same time, there are opposite judgments which say that time-bound notification can be withdrawn. This was a controversy amongst high courts. The Supreme Court, however, finally settled the issue in the case of Kasinka Trading v UOI-1984 (74) ELT782 (SC) holding that even a time-bound notification can be withdrawn if public interest so demands. It held that the doctrine itself is based on equity and, therefore, if equity so demands, that is, if public interest so warrants, a time-bound notification can be changed or withdrawn. This has been further confirmed by the Supreme Court in later judgments in the cases of (i) UOI v Victory Plastic Ltd - 1996 (83) ELT481 (SC), (ii) Shrijee Sales Corporation vs UOI-1997 (89) ELT452 (SC) and (ii) DPF Textiles Ltd v UOI - 1997 (92) ELT28 (SC).

The conclusion is that the government has legislative competence to issue both time-bound and timeless notifications. And the government can withdraw or restrict both types, any time, if the public interest so demands.

The author is member, Central Board of Excise & Customs (retired) Email: smukher2000@yahoo.com