State Cannot Arbitrarily Deny Subsidies to 'New Industrial Units' by Retrospectively Applying Expansion Caps: Supreme Court

In a significant ruling reinforcing the accountability of administrative bodies, the Supreme Court has held that the State cannot renege on sanctioned subsidies for a 'New Industrial Unit' by retrospectively categorizing it as a mere 'expansion' of an existing business. The Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan allowed the appeal of IFGL Refractories Ltd., emphasizing that the State must abandon its "colonial conception" of dispensing benefits at absolute discretion and must honor the doctrine of legitimate expectation.

“The State must abandon the colonial conception of itself as a sovereign dispensing benefits at its absolute discretion. Policies formulated and representations made by the State generate legitimate expectations that it will act in accordance with what it proclaims in the public domain.” — Supreme Court of India

The Controversy: 'New Unit' vs. 'Expansion'

The dispute originated from the Industrial Policy of 1989 introduced by the State of Orissa. The appellant's predecessor, Indo Flogates Ltd., established the "MM Plant Unit" for manufacturing specialized refractory products, commencing commercial production in November 1992. The company sought the Capital Investment Subsidy (CIS) and DG Set Subsidy, asserting its status as a "New Industrial Unit."

While state authorities initially recognized the MM Plant as a separate unit and sanctioned subsidies in 2003, they executed a volte-face in 2008. The disbursement was refused on the grounds that the unit was merely an "expansion" and that the company had exhausted subsidy limits under previous policies (1980 and 1986). The Orissa High Court had previously upheld this rejection.

The Functional Test: Defining a New Industrial Unit

The Supreme Court dismantled the State's argument by applying a granular "Functional Test" to Clause 2.7 of the 1989 Policy. Relying on precedents such as Textile Machinery Corpn. Ltd. v. CIT (1977), the Court clarified that a unit does not become an "expansion" simply because it aids an existing business.

The Bench observed:

Physical Separation: The MM Plant was located in different sheds.

Operational Independence: It held a separate industrial license, independent power connection, and distinct manufacturing output.

Viability: It was capable of functioning as a viable entity on its own.

The Court ruled that the caps applicable to "expansion/modernization" could not be retrospectively applied to a genuine "New Industrial Unit" merely because the products could be used as inputs for the existing business.

On Bureaucratic Lethargy and "Colonial Conception"

The judgment delivered a scathing critique of the respondent authorities (OSFC, DIC, and IPICOL), terming the litigation a "fine specimen of bureaucratic lethargy." The Court noted that the authorities had sanctioned the subsidy in 2003 after "due examination," only to withdraw it years later without cogent justification. The Bench remarked that such conduct erodes the credibility of governmental action and discourages entrepreneurship.

Doctrinal Clarity: Legitimate Expectation

The judgment provides an exhaustive exposition on Promissory Estoppel and Legitimate Expectation. Distinguishing the Indian context from English law, the Court reiterated that legitimate expectation in India is grounded in Article 14 (non-arbitrariness).

Reliance: The Appellant had incurred substantial expenditure based on the unequivocal promises in the State's policy and subsequent sanction letters.

Binding Nature: The State was precluded from refusing disbursement as the company’s reliance was not speculative but flowed directly from official communications.

Setting aside the Orissa High Court's judgment, the Supreme Court directed the respondents to disburse the sanctioned amount of Rs. 11,14,750/- along with interest at 9% p.a. from the date of sanction. The payment must be made within three months.

Date of Decision: 06/01/2026