Promissory Estoppel in Tax Laws

One of the impending problems that confront taxpayers in their relationship with the Tax Department revolves around the credibility of the promises made by the Department while cajoling the public to pay taxes. Often the Department resolves on the idea of not penalizing if returns were filed voluntarily. Often, taxpayers try to resolve with the Department on condition that penalty will not be levied and prosecution will not lie. However, the common mistake that the taxpayers make is the belief that is imbibed in their minds, of what they think, that charging of interest is mandatory. Thus it can be well concluded that penalty depends on the facts and the interpretation of law leaving an ample scope of well founded discretion. Promissory Estoppel is the well propounded theory of law that explains the position of these hapless taxpayers subjected to the caprice of governmental laws. [1]

Estoppel is a principle of law that is not so difficult to define or place. Essentially it embodies the general principle that if one says or does something, and another person take at the word, or at the face value, and relies on what has been said or done, the person originally having done or said so, cannot later change the mind and renounce from the position. The person in context will be prevented and ‘estopped’ from doing so. There are a different branches of estoppel but each shares the underlying role restricting one person’s freedom ‘to go back’ on a belief or assumption he induced in another person.

The Doctrine of Promissory Estoppel is an equitable doctrine. This principle is commonly invoked in common law in case of breach of contract or against a Government. The principle of estoppel in India is a rule of evidence incorporated in Section 115 of The Indian Evidence Act, 1872. The section reads as follows:

“When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe such a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing.”

The doctrine of promissory estoppel is an equitable doctrine. Like all equitable remedies, it is discretionary, in contrast to the common law absolute right like right to damages for breach of contract. The doctrine has been variously called ‘promissory estoppel’, ‘equitable estoppel’, ‘quasi estoppel’ and ‘new estoppel’. It is a principle evolved by equity to avoid injustice and though commonly named ‘promissory estoppel’, it is neither in the realm of contract nor in the realm of estoppel. This rule is applied by the Courts of Equity in England, as estoppel is a rule of equity. In India, however, as the rule of estoppel is a rule of evidence, the ingredients of section 115 of the Indian Evidence Act, 1872, must be satisfied for the application of the doctrine. The doctrine of promissory estoppel does not fall within the scope of section 115 as the section talks about representations made as to existing facts whereas promissory estoppel deals with future promises. The application of the doctrine would negate the constitutional provision, as under Article 299, which affords exemption from personal liability of the person making the promise or assurance.

Hence, as the doctrine is a principle of equity, the courts have taken a prerogative to lay emphasis on equity and justice and have explained the doctrine of promissory estoppel in India. The ingredients for the application of the doctrine are:

• That there was a representation or promise in regard to something to be done in the future,

• That the representation or promise was intended to affect the legal relationship of the parties and to be acted upon accordingly.

• That it is, one on which, the other side has, in fact, acted to its prejudice.

The concept of promissory estoppel was developed when Lord Denning J heard the case of Central London Properties v High Trees House Ltd. In 1937, Central London properties, granted a long lease of a block of flats, in London to high trees at an annual of 2500 pounds. When the Second World War broke out, High Trees had trouble letting out the flats in the block and so the landlord agreed in 1940 to reduce the annual rent to 1250 pound. By the end of the war, the flats were fully let and the landlord’s receiver brought proceedings to claim the balance of the full rent for the last two quarters of 1945. Lord Denning held that the balance was payable but only because the landlord’s concessionary reduction in the rent had been expressed just to cover the war years. If the receiver had been trying to claim the balance for the war years, such a claim would have failed because Denning J. regarded the landlord’s concession as effective despite the absence of any consideration. He also observed that the time had come to recognize that a promise made with the intention to be bound should be enforced, regardless of the absence of consideration. For Denning J, these developments went beyond estoppel and constituted a full blown assault on the need for consideration.

It should also not be forgotten that High Trees is in many ways a weak precedent. The case is so influential and well known that it is often forgotten that there are certain instances which need to be categorized while establishing the doctrine of promissory estoppel, which shall now be elucidated in the following paragraphs.

First there must be a clear and unambiguous promise or representation, that the creditor will not insist on his strict legal rights, satisfying an equivalent test of certainty as is required for contractual obligations. [2] The requirement is not surprising, it is unacceptable to deprive a party of a legal right unless, judged objectively this was the only plausible interpretation of his words or conduct. More important is the requirement that the promise must relate to the existing legal rights a significant limitation because it means that there must be an existing legal relationship between the parties. Promissory estoppel cannot take place of consideration when a contract is being formed for the first time between the parties only when the existing contractual rights are being varied. Denning J. did not emphasize this restriction in High Trees, but it has been applied nevertheless ever since.

Secondly, the debtor must have relied on the promise or representation so contested. Reliance is a slippery concept, which could mean anything from altering one’s conduct solely because of the promise, to merely trusting that the creditor meant what he said. In some forms of estoppel, detrimental action in reliance is required but the test in promissory estoppel does not seem to be so strict. If it were, promissory estoppel would rather be very useful.

INDIAN PERSPECTIVE

Indian courts have recognized that the principle has been evolved by equity to avoid injustice. The object is to interpose equity shorn of its form to mitigate the rigour of strict law. [3] In India, there are two stages in the evolution of the application of this doctrine; pre-Anglo Afghan case and post- Anglo Afghan case. Prior to this case, the position was that promissory estoppel did not apply against the Government. However, in Union of India v. Anglo Afghan Agencies the Supreme Court held that the Government was estopped by its promise. [4] While deciding on the case, the Supreme Court opined that

‘We are unable to accede to the contention that executive necessity releases the Government from honouring its solemn promises relying on which citizens have acted to their detriment. Under our jurisprudence, the Government is not exempt from the liability to carry out the representation made by it as to its future conduct and it cannot on some undefined ground of necessity or expediency fail to carry out the promise solemnly made by it, nor claim to be the judge of its own obligation to the citizen on an ex-parte appraisement of the circumstances in which the obligation has arisen.”

There are essential characteristics that need to be satisfied to make a promise binding on the Government. First and fore mostly, the State makes the promise within the ambit of law. Secondly, there should be an intention to enter into a legal relationship, and thirdly, the other party must do an act in furtherance of that promise or is forbidden to do anything. However it should be noted that the doctrine of promissory estoppel does not apply to statutes. In other words, it can be elucidated that a person who makes a statement as to the existence of the provisions of a statute is not estopped, subsequently, from contending that the statutory provision is different from what he has previously stated. It can so happen that the person may not represent the true status of a statute or law, but the other person who relies on such a representation is at liberty to find out the position of law on the subject so contended. So a person cannot take recourse to the defense of estoppel to plead that a false representation has been made regarding the provisions of a statute or law. The principles of estoppel cannot in any circumstances override the provisions of a statute. [5]

If a law requires a certain tax to be collected by the Government, any assurances by the Government that the taxes would not be collected would not make it binding on the part of the Government when it chooses to collect tax. The conditions that have been laid down to substantiate the same, derives if certain conditions are effectuated. Primarily, in cases of estoppel, the parties must bilaterally agree to contract irrespective of statutory provisions of the applicable Act. Secondly, the agreement must be explicitly prohibited by the Act. Also the provision has to be for the public interest and not restricted to a group or member of a certain class. Also precaution should be taken that the agreement of the parties should not have been merged into an order of the court which by the conduct of the parties had been dissuaded from performing its statutory obligations. [6]

It is an elementary rule in a republic to be equal in the eyes of law. . Everyone is subjected to the law as fully and completely as any other and the Government is no exception. Not always have been the doctrine of promissory estoppel been revoked on the basis of unconstitutionality. The doctrine of promissory estoppel has also been used against the Government in certain cases, and the defense of executive necessity has been necessarily revoked by the court in many of the occasions. Not always has the Government been absolved from the liability to carry out the representation made by it to its future conduct, on some undefined and undisclosed grounds of necessity or expediency. There has been cases where the Government has been denied immunity from the applicability of the rule of promissory estoppel and repudiate a promise made by it. [7]

The one case which proves to be a trendsetter where the doctrine of promissory estoppel has been used proactively against the Government is the case of Motilal Padampat Sugar Mills v. State of U.P. In this case the Supreme Court applied this doctrine to the executive action of the State Government and also denied to the State the doctrine of executive necessity as a valid defense in the above case. It opined while giving the judgement that the Government cannot claim immunity from the doctrine of promissory estoppel. [8] The court also said that it is not necessary that there should be some pre-existing contractual relationship between the parties. The promise is intended to create legal relations and affect a legal relationship which will arise in future. The Government should exhibit a high standard of rectitude while dealing with citizens. The doctrine would be displaced only if the Government shows that having regard to the facts as they have transpired, it would be inequitable to hold the Government or public authority to the promise or representation made by it. [9] Quite similar in the lines was the case of State of Rajasthan v. Mahavir Oil Mills, [10] where a new industry was supposed to be set up on the promise of an incentive scheme from the Government. The Government did not eventually accede to the promise later on. It was contested in the court, and the court held in its judgement that the State Government was bound by its promise held out in such situation. However, it does not preclude the State Government from withdrawing the scheme prospectively. It could withdraw the scheme even during its continuance, if public interest so requires. Quite surprisingly, it opened the option of revoking a promise prospectively thereby sowing the germs of subsequent contest over the doctrine of promissory estoppel in tax laws involving the Government. In continuance, there was a case in the year Further, in the year 1971, in the case of Century Spinning and Manufacturing Co. v. Ulhasnagar Municipality, [11] where once again the Supreme Court held that in instances, where the private party had acted upon the representation of a public authority, it could be enforced against the authority on the grounds of equity in appropriate cases even though the representation did not result in a contract owing to the lack of proper form.