Plea of legitimate expectation is not valid against amendment to Sec 10AA(1) as it was meant to incentivize new industry

While accepting Revenue’s contention that the plea of legitimate expectation is not valid against the amendment to Section 10AA(1) as Section 10AA was meant to incentivize new industry and not to facilitate tax concessions for existing industries, The Calcutta High Court upholds that Explanation to Section 10AA(1) inserted by Finance Act, 2017 is not arbitrary, discriminatory, or violative of Article 14, 19 and 265 of the Constitution.

A Single Judge Bench of Justice Md. Nizamuddin observed that the “principle of legitimate expectation is not applicable to the case of the petitioner and Explanation after Sub-section (1) of Section 10AA of the Income Tax Act, 1961, inserted by amendment with prospective from 1st April 2018, applicable in respect of the assessment year 2018-19 and subsequent years is constitutional and is a valid piece of legislation and is not arbitrary, discriminatory and is not violative of Articles 14, 19 & 265 of the Constitution of India.”

Senior Advocate J.P. Khaitan appeared for the Assessee whereas Advocate Vipul Kunalia appeared for the Revenue.

The brief facts of the case were that Pursuant to the approved scheme of amalgamation, w.e.f., Apr 1, 2016, the Assessee got merged into an entity with a loss-making ineligible unit and claimed deduction under Section 10AA(1) which was rejected by the Revenue by applying Explanation to Section 10AA(1). Before HC, Assessee relied on SC ruling in CIT and Anr. –vs- Yokogawa India Ltd. reported in [2017] 391 ITR 274 (SC) wherein for Section 10A it was held that deduction can be claimed from the total income of the unit, immediately after the stage of determination of profit without affecting inter-unit profit adjustment and set off of brought forward losses. Further submitted that Explanation to Section 10AA(1) allows deduction from total income before giving effect to deduction under Section 10AA i.e., after inter-unit profit adjustment and thereafter setting off the brought forward losses, accordingly, the dictum laid down by SC in Yokogawa India stands nullified.

After considering the submission, the Bench noted that from AY 2018-19, Assessee stands deprived of the deduction which is available under Section 10AA prior to insertion of Explanation since loss from eligible units and brought forward losses to get adjusted with total income.

The Bench stated that the Explanation inserted to Section 10AA(1) denies the benefits otherwise available and is thus, nugatory as the whole purpose of giving tax incentives to eligible units situated in SEZ as per Section 10AA stands defeated and frustrated.

The Bench also stated that the Explanation can clarify the main section but cannot change the substantive provisions to the main Section.

The Bench further expressed by relying on the Supreme Court ruling in S. Sundaram Pillai vs V.R. Pattabiraman, that the Explanation is also arbitrary, and unreasonable since it denies the exemption available as per Section 10AA to eligible units established in SEZ established for the purpose of availing the benefits as per Section 10AA and violates Article 19(1)(g) of the Constitution.

The Bench mentioned that Revenue relied on Sedco Forex International Drill. Inc. vs CIT, (2005) 12 SCC 717 and stated that Explanation to 10AA(1) did not expand the scope of the section or curtail any rights since it is merely clarificatory with only prospective effect.

The Bench expressed that pursuant to the scheme of amalgamation, the Assessee sought to take advantage of its losses to evade tax which is contrary to the object behind Section 10AA.

The Bench further mentioned by relying on CBDT Circular No. 3 of 2008 dated Mar 12, 2008, and contended that the intention of the legislature was very clear and the Assessee can have a non-legitimate expectation of taking undue advantage of Section 10AA to evade tax by utilizing loss-making unit after the merger.

Relying on the Supreme Court ruling in MRF Ltd. vs Assistant Commissioner, (2006) 8 SCC 702 wherein it was held that the legitimate expectation of a person cannot be defeated by arbitrariness, but the test of arbitrariness is based on the facts and circumstances of each case, the Court stated that there was no retrospective curtailment of rights since the Explanation inserted in Section 10AA was to be prospectively applied.

The Court further stated that there was no violation of any legitimate expectation since the legitimate expectation of the Assessee was only with regards to the original unit and not the ineligible loss-making unit pursuant to the scheme of amalgamation.

Hence, based on the legal provisions and submissions, HC holds that the principle of legitimate expectation is not applicable to the Assessee and Explanation to Section 10AA(1) and dismisses the writ petition.

Cause Title: IFGL Refractories Ltd. & Anr. Vs. Union of India & Ors. [WPO 544 of 2019 / 2023-Enterslice-27-HC-Cal-IT]

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