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Withdrawal of exemptions to SEZs cannot be treated as a breach of Doctrine of Promissory Estoppel

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Mindtree Limited vs. UOI (Karnataka High Court)

CLR Editorial Notes: As a corollary to the Special Economic Zones Act, 2005 (˜SEZ Act™), section 115JB(6) and section 115-O (6) were inserted to ensure that the SEZs are exempted from paying Minimum Alternate Tax (MAT) on book profits and taxes on distributed profits [Dividend Distribution Tax (“DDT”)]. With reference to the Finance Act, 2011, the exemption granted by section 115JB(6) and 115-O(6) was made inoperative w.e.f. 1.4.2012 and 1.06.2011 respectively.

The Petitioners claimed that they had established SEZs on the basis of the promise made by the Government that SEZs would enjoy an exemption from payment of MAT and DDT and that the amendments by the Finance Act 2011 withdrawing the said exemption was opposed to the Doctrine of Promissory Estoppel and the Doctrine of Legitimate Expectation. The hon’ble High Court dismissed the Petition and held:

“Firstly, it is the settled position of law that every tax exemption should have a sunset clause. As the exemption in s. 115JB(6) & 115-O(6) did not have a sunset clause, the flaw is removed by the impugned amendment. Secondly, the exemption created an inequality between SEZ companies and other companies which is now removed. Thirdly, the exemptions provided to SEZ companies resulted in erosion of tax base. Fourthly, the impugned amendment relates to fiscal policy of the state and any decision in the economic sphere is adhoc and experimental in its nature and the Government is well within it sovereign power to regulate the same. Lastly, the impugned amendments do not transgress any of the fundamental rights of the petitioners guaranteed under the Constitution. The legislature can never be precluded from exercising its legislative power by resort to the Doctrine of Promissory Estoppel. Since it is an equitable doctrine, it must yield when equity so requires. The courts would decline to enforce this doctrine if it results in great hardship to government and would be prejudicial to the public interest.”

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Case File available for download

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Tags: DDTDividend Distribution TaxDoctrine of Legitimate ExpectationDoctrine of Promissory EstoppelEstoppelFinance ActGovernmentMinimum Alternate TaxSection 115-O (6)Section 115JB(6)SEZSpecial Economic ZoneSpecial Economic Zones ActUnited States

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