New Industrial Units Under IPR 1989: Overall CIS Cap Applies Only to E/M/D; State Bound to Disburse Sanctioned Incentives

Case: IFGL REFRACTORIES LTD v. ORISSA STATE FINANCIAL CORPORATION & ORS.
Citation: 2026 INSC 18 (Supreme Court of India, 06-01-2026)
Bench: J.B. Pardiwala, J. and R. Mahadevan, J.

1. Introduction

The dispute arose from Odisha’s incentive regime under the Industrial Policy of 1989 (often referred to as IPR 1989), which promised capital incentives to catalyse industrialisation. Indo Flogates Limited set up a unit termed “Magneco Metrel Plant” (MM Plant Unit) in Zone ‘C’ after the IPR 1989 effective date (01.12.1989) and sought:

• Capital Investment Subsidy under Clause 5.1 (Zone C: 10% of fixed capital investment, capped at Rs. 10,00,000/-).
• DG Set subsidy under Clause 11.4.4 (15% of DG set cost, capped at Rs. 5,00,000/-, in addition to CIS).

The State authorities (including OSFC as disbursing agency) initially treated MM Plant as a new industrial unit, sanctioned subsidies (Rs. 10,00,000/- CIS and Rs. 1,14,750/- DG set), and repeatedly acknowledged the claim. However, years later, disbursement was rejected on the basis of an executive instruction dated 28.10.1994 and an “overall subsidy limit” theory—also invoking that Indo Flogates and IFGL had already exhausted earlier limits under prior policies.

IFGL Refractories, as successor on amalgamation (01.04.1999), challenged the rejection. The High Court upheld the rejection on a broad “benefit only once” approach. The Supreme Court reversed.

Key parties

• Appellant: IFGL Refractories Ltd. (successor to Indo Flogates via amalgamation).
• Respondents: Orissa State Financial Corporation (OSFC), Director of Industries (DIC), IPICOL, and SLC Sub-Committee.

Key issues before the Supreme Court

• Whether MM Plant was a “new industrial unit” under Clause 2.7, IPR 1989.
• If yes, whether disbursement could be denied due to overall subsidy limits derived from the 28.10.1994 instruction and later policy amendment.
• Whether the State was estopped / bound by legitimate expectation after classification and sanction.

2. Summary of the Judgment

The Supreme Court allowed the appeal, set aside the High Court’s judgment, and directed the respondents to disburse Rs. 11,14,750/- with 9% p.a. interest from the date of sanction of the respective subsidies, within 3 months.

The Court held:

• MM Plant met the definition of a new industrial unit (Clause 2.7) and also satisfied judicial tests distinguishing a new undertaking from an expansion.
• The “overall financial limit” concept (instruction 28.10.1994; amendment 30.10.2008) applies to E/M/D additional subsidy claims, not to fresh subsidies for new units.
• The State’s conduct (classification, sanction, repeated acknowledgements) generated enforceable expectations; refusal to disburse was unfair and arbitrary.

3. Analysis

3.1 Precedents cited

A. What makes a “new” industrial undertaking/unit?

To avoid misuse of incentive regimes by disguising expansions as “new units,” the Court imported a mature body of tax-incentive jurisprudence on “new industrial undertakings,” treating it as conceptually aligned with incentive policies like IPR 1989. The Court particularly relied on:

• Textile Machinery Corpn. Ltd. v. CIT, West Bengal ((1977) 2 SCC 368): laid down that the real test is whether there is “a new and identifiable undertaking separate and distinct from the existing business,” with fresh capital, separate unit identity, and commercially tangible output; expansion of business does not negate “newness.”
• Commissioner of Income-Tax v. Indian Aluminium Co. Ltd. ((1973) 88 ITR 257) and affirmation in CIT v. Indian Aluminium Co. Ltd. ((1977) 4 SCC 598 (1)): recognised that substantial extensions/units can qualify, fact-dependently, if not formed by reconstruction/transfer of old assets in substance.
• Bajaj Tempo Ltd., Bombay v. CIT ((1992) 3 SCC 78): incentive provisions promoting growth warrant liberal interpretation; restriction applies only where the undertaking is “formed by” prohibited modes (focus on formation, not mere use).
• Commissioner of Income-Tax v. Orient Paper Mills Ltd. ((1974) 94 ITR 73) and later endorsement by this Court in Commissioner Of Income-Tax, West Bengal-Ii v. Orient Paper Mills Ltd. ((2015) 17 SCC 305): an ancillary unit producing input does not lose “new undertaking” status merely because output is used internally.
• Gujarat Alkalies and Chemical Ltd. v. CIT (2012 SCC OnLine Guj 1628): dependency on old unit’s utilities/assistance does not by itself defeat a claim, if there is substantial new capital and identifiable unit output.
• CIT v. Sociedade de Fomento Industrial (P) Ltd. (2022 SCC OnLine SC 623): reiterated the “Textile Machinery” tests (fresh capital, separate identifiable unit, not reconstruction; independent commercially tangible output).

Using these authorities, the Court assessed MM Plant’s physical and functional separateness: separate sheds, separate industrial licence, separate electricity connection, distinct products, and post-effective-date capital investment—concluding it was not an “expansion” in the Clause 2.2 sense.

B. Promissory estoppel, legitimate expectation, and State accountability

The Court’s discussion is notable for synthesising private-law promissory estoppel and public-law legitimate expectation, while emphasising Indian law’s broader protective stance where citizens and businesses structure their affairs based on State representations. Key citations include:

• Crabb v. Arun DC ([1976] 1 Ch 179): equity prevents insistence on strict legal rights when inequitable given parties’ dealings.
• Combe v. Combe ([1951] 2 K.B. 215): English “shield not sword” constraint noted, but contrasted with Indian development.
• Motilal Padampat Sugar Mills v. State of Uttar Pradesh ((1979) 2 SCC 409): foundational Indian authority—clear promise + reliance/alteration of position binds the State; consideration unnecessary; can found a cause of action.
• Pawan Alloys & Casting (P) Ltd. v. U.P. SEB ((1997) 7 SCC 251): incentive notifications constituted a promise; industries altered position; State instrumentality bound.
• Gujarat State Financial Corporation v. Lotus Hotels Pvt. Ltd . ((1983) 3 SCC 379): statutory corporation can be compelled by mandamus; promissory estoppel applies to State instrumentalities.
• Tata Metals and Strips Ltd. v. State of Gujarat (1991 SCC OnLine Guj 220): incentive withdrawal cannot defeat accrued entitlement where investment was made on State assurances.
• Camma Textile Industries v. State of Orissa (1994 SCC OnLine Ori 207): Orissa HC applied promissory estoppel to sanctioned subsidy reductions; State bound by communicated sanction.
• Prachi Engineering Pvt. Ltd. v. State of Orissa (1998 SCC OnLine Ori 27): characterised IPRs as “a set of promises” enforceable when criteria met; benefits should not be denied by constrictive interpretation.

On legitimate expectation and Article 14 non-arbitrariness, the Court cited:

• R v. North and East Devon Health Authority, ex p Coughlan ([2001] QB 213): substantive legitimate expectation; frustration can be abuse of power.
• Regina (Bibi) vs Newham London Borough Council ([2002] 1 W.L.R. 237): legitimate expectation not limited to “concrete detriment.”
• Regina (Reprotech (Pebsham) Ltd) vs East Sussex County Council ([2003] 1 WLR 348): public law should “stand upon its own two feet,” distinct from private estoppel.
• National Buildings Construction Corporation v. S. Raghunathan ([2003] 1 WLR 348): Government must honour policy statements; selective/unfair application undermines administration.
• Food Corporation of India v. Kamdhenu Cattle Feed Industries ((1993) 1 SCC 71): legitimate expectation is a relevant factor in fair decision-making; ignoring it risks Article 14 arbitrariness.
• NOIDA Entrepreneurs Assn. v. NOIDA ((2011) 6 SCC 508): public power is a trust; arbitrariness contradicts legitimate expectation.
• Monnet Ispat and Energy Ltd. v. Union of India ((2012) 11 SCC 1) and Union of India v. Lt. Col. P. K. Choudhary ((2016) 4 SCC 236): legitimate expectation is not a freestanding right, but denial can be tested under Article 14 when arbitrary/unfair.
• Vitarelli v. Seaton (359 U.S. 535 (1959)): agencies must be held to their own professed standards and procedures.
• The State of Jharkhand and Ors. v. Brahmputra Metallics Ltd, Ranchi and anr. ((2023) 10 SCC 634): cited for the broader Article 14 constraint on arbitrary policy reversals and the need for a business-friendly environment.

3.2 Legal reasoning

A. Classification of MM Plant as a “new industrial unit”

The Court began with the IPR 1989 text:

• Clause 2.7: “New Industrial Unit” means an industrial unit where fixed capital investment is made only on or after the effective date (01.12.1989).
• Clause 2.3: “Fixed Capital Investment” includes land, building, plant and machinery, and permanent equipment.
• Clause 4.1: new industrial units are eligible for all incentives.

Although Clause 2.7 is timing-based, the Court added a safeguard inquiry: whether the unit is genuinely new or merely a disguised expansion—using the judicial tests in Textile Machinery Corpn. Ltd. v. CIT, West Bengal and allied cases.

Applying those tests, the Court treated as decisive: post-1989 investment; separate licence; separate electricity connection; separate sheds (MM Plant in sheds 19 and 22, not Indo Flogates’ sheds 7 and 8); substantial new fixed capital; distinct products; and independent viability.

B. Why the “overall subsidy limit” theory failed for a new unit

The respondents relied on:

• an executive instruction dated 28.10.1994 issued under Clause 20.1; and
• a later amendment notification dated 30.10.2008 inserting/clarifying Clause 4.4 retrospectively to cap claims to overall limits across IPRs.

The Court’s key interpretive move was to read the “overall financial limit” language as addressing “additional subsidy” claims by an existing unit (i.e., E/M/D cases), not fresh subsidies for a new unit. This was anchored in:

• the language of the 30.10.2008 amendment (“claim for additional subsidy” and differential computation), and
• the amendment’s own heading: “Provisions for sanction of Capital Investment Subsidy (CIS) and exemption of sale Tax under Expansion / Modernization / Diversification (E / M / D) Programme with retrospective effect.”

Accordingly, a new unit’s entitlement remained governed by Clause 4.1 (eligibility) and the unit-wise caps in Clause 5.1 and Clause 11.4.4—rather than any cross-policy “overall” exhaustion theory.

C. Administrative fairness and reasons

The Court criticised the respondents’ “afterthought” positions and stressed that incentive processing must be objective and reasoned. A notable doctrinal thread is the Court’s insistence that “non-application of mind has no space in matters concerning policy decisions,” and that the State must not operate in a manner that frustrates policy objectives through bureaucratic delay.

D. Estoppel / expectation after classification and sanction

Independently of pure eligibility interpretation, the Court found the State’s conduct legally disabling:

• MM Plant was treated as “new” (05.11.1998).
• Subsidies were sanctioned (10.04.2003 and 19.04.2003).
• The State repeatedly acknowledged processing and recommended release (24.03.2007 and 23.08.2007).

The Court held that, in such circumstances, the State could not “volte-face” without overriding public interest justification consistent with Article 14. The successor (IFGL) could claim the benefits as a consequence of amalgamation, since the scheme transferred “all rights… including subsidies” to the successor.

3.3 Impact

• Clear demarcation: The judgment decisively separates (i) incentives for new industrial units under Clause 4.1 and 2.7 from (ii) E/M/D additional subsidy regimes where “only once” and “overall limit/differential” concepts may operate. This constrains administrative practice that collapses all incentives into a single “one-time per company” logic.
• Executive instructions cannot rewrite entitlement for new units: Even where operational instructions exist, they cannot be stretched beyond their domain (E/M/D) to curtail a new unit’s statutorily/policy-created entitlement, especially after sanction.
• Sanction creates high-threshold accountability: Post-sanction refusals are likely to attract judicial correction, including interest, where rejection rests on belated reinterpretations or administrative lapses.
• Investor confidence and Article 14: The decision strengthens the constitutional expectation that State industrial promises will be applied fairly and consistently; bureaucratic delay and arbitrary reversals are framed as anti-investment and constitutionally suspect.

4. Complex concepts simplified

• IPR 1989 / Industrial Policy: A government incentive framework offering subsidies/tax concessions to induce industries to set up/expand.
• Fixed capital investment: Long-term investment in land, buildings, machinery, and permanent equipment—used to compute capital subsidy.
• New industrial unit (Clause 2.7): A unit where fixed capital is invested after the policy’s start date. The Court also checks that it is genuinely a separate, identifiable unit (not a disguised expansion).
• Expansion/Modernisation/Diversification (Clause 2.2): Additional investment (over a threshold) into an existing unit that increases capacity/output. Under Clause 4.4, specific incentives for E/M/D are “only once.”
• Promissory estoppel: If the State makes a clear promise intending reliance, and the beneficiary acts on it (alters position), the State can be stopped from going back where it would be inequitable—especially in Indian law after Motilal Padampat Sugar Mills v. State of Uttar Pradesh.
• Legitimate expectation: If State conduct/policy creates a reasonable expectation of a benefit, ignoring it without fair reasons can be arbitrary under Article 14 (fairness/non-arbitrariness).

5. Conclusion

This judgment reasserts that incentive policies are not discretionary largesse once eligibility is met and sanctions are issued. It sets a precise rule for Odisha’s IPR 1989: the cross-policy “overall limit/differential” mechanism is an E/M/D control, not a device to deny fresh incentives to a genuinely new unit. Equally, it constitutionalises administrative fidelity—where the State has classified a unit as new, sanctioned incentives, and repeatedly acknowledged disbursement, it cannot later deny payment through belated reinterpretations or bureaucratic inertia. The direction to pay interest underscores that delay and denial of sanctioned incentives has compensable consequences.