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2016 (2) TMI 537 - SUPREME COURT OF INDIA

2016 (2) TMI 537 - SUPREME COURT OF INDIA - TMI - Whether an illegal transfer of mining lease was involved - Held that:- The original lessee gave declaration while seeking transfer, that no consideration was received which though apparently correct was actually false as the subsequent transaction of sale of shares was integral part of the first transaction of transfer of lease to private company which soon thereafter became subsidiary of another company. The said real transaction cannot be ignor .....

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sfer of lease in a fair and reasonable manner but following doctrine of public trust.

As already seen, in the present case, the original lessee sought transfer merely by disclosing that the partnership firm was to be transformed into a private limited company with the same partners continuing as directors and there was no direct or indirect consideration involved. It was specifically declared that no pecuniary advantage was being taken in the process which is clearly false. The permi .....

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R. DAVE and ADARSH KUMAR GOEL, JJ. For The Petitoner : Mr. Milind Kumar,Adv. ADARSH KUMAR GOEL, J 1. Leave granted. The State of Rajasthan is aggrieved by the quashing of its order dated 16th December, 2014 whereby it declared its earlier order dated 25th April, 2012 as void and cancelled the mining lease No.45 of 1993. By the said earlier order the aforesaid lease was permitted to be transferred in favour of Respondent No.1. 2. Question for consideration is whether looking at the substance of .....

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ling the lease which the High Court has quashed. 3. FACTS : M/s. Gotan Limestone Khanji Udhyog (GLKU), a partnership firm, held a mining lease for mining limestone at village Dhaappa, Tehsil Merta, District Nagaur in area of 10 sq. km at fixed rent of ₹ 1,42,85,224/- per annum for which third renewal for 30years was granted w.e.f. 8th April, 1994. The said lessee applied for transfer of the lease in favour of respondent No.1 herein, M/s. Gotan Limestone Khanji Udhyog Pvt. Ltd. (GLKUPL) on .....

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in the transfer. The transferee will comply with the rules and regulations. The transfer was allowed on 25th April, 2012 on that basis. After seeking the said permission, the newly formed private limited company instead of operating the mining lease itself sold its entire shareholding to another company allegedly for ₹ 160 crores which is alleged to be the sale price of mining lease. 4. On this development, a show cause notice dated 21st April, 2014 was issued to Respondent No.1 proposing .....

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as secured by a conspiracy and in circumvention of the rules. 5. Respondent No.1 contested the show cause notice. In its reply, it stated that the State Government itself had defended the transfer in its affidavit in reply to the Writ Petition No.404 of 2013 filed by M/s. J.K. Cement Limited (JKCL). There was no bar to the change of Directors and shareholding of a company under the rules. Thus, transfer of shareholding and change of Directors did not amount to transfer of mining lease nor it aff .....

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t an FIR dated 7th August, 2014 was also registered with the Jaipur Main Police Centre on a complaint of one Dr. Kirit Somaiya on the allegation that GLKU had sold the mining lease to UTCL which was not permissible and thereby unlawful gain was acquired in connivance with the mining department and loss was caused to the State. The erstwhile partners of the firm which was original lessee, had in effect transferred the lease in favour of S/Shri K.C. Birla, R. Mehnot and M.B. Agarwal who took over .....

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red by the promoter directors in favour of UTCL in July, 2012, except some shares which were transferred in joint names of UTCL with some private persons who were employees of the said company. Thus, the writ petitioner-Respondent No.1 became wholly owned subsidiary of UTCL. The Directors were replaced by the nominees of the holding company. JKCL had made an application seeking permission of part transfer of the mining lease and its application was rejected on 5th September, 2012 against which W .....

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petitioner in its reply. Change in the pattern of shareholding and directorship of the company was of no consequence for purposes of the Rules. The mining rights are vested in the writ petitioner company as a consequence of order dated 25th April, 2012 and change in pattern in shareholding or directorship did not affect the said rights. Shareholders and directors are not the owners of the assets of the company. Company was a distinct entity and mining lease was owned by the Company. 9. The writ .....

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tition, vide order of the High Court dated 28th January, 2015. The impleaded party supported the order of cancellation inter alia on the ground that one of the conditions in the order dated 25th April, 2012 was that the document of transfer was to be executed within three months which was not done. Further, the transfer of entire shareholding by the newly formed company was indirect way to transfer the lease for consideration by GLKU to UTCL which was not legally permissible. 11. The main issue .....

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r(1969) 1 SCC 765, Electronics Corporation of India Limited vs. Secretary, Revenue Department(1999) 4 SCC 458, Amit Products (India) Ltd. vs. Chief Engineer (O&M) Circle(2005) 7 SCC 393 and Balwant Raj Saluja & Anr. vs. Air India Limited & Ors. (2014) 9 SCC 407 learned Single Judge concluded as follows: In view of the law laid down by the Hon ble Supreme Court in the case of Government Companies, inter-se relationship between holding and subsidiary Companies and fundamental principle .....

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hatsoever. Therefore, on account of the petitioner-Company becoming subsidiary of Ultra Tech Cement Limited, in view of the law laid down by the Hon ble Supreme Court as noticed hereinbefore, it cannot be said that ipso facto the provisions of Rule 15(1) (b) of the Rules have been violated by the lessee i.e. petitioner-Company. 13. Aggrieved by the judgment of the learned Single Judge, the appellant and the impleaded party JKCL filed appeals before the Division Bench of the High Court which have .....

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concessions, permit and lease are the property of the Company and not of its shareholders. The shareholders may keep on changing and the control and management in the 5 (2014) 9 SCC 407 Company may also undergo changes on such transfer of shares, but the assets and properties of the Company including license, permit, concessions and lease continue to belong to the Company and that any acquisition or transfer of such assets will not relate back to the share-holding of the Company or the managemen .....

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ty of opportunities and resources to augment economic empowerment. The principles sought to be developed in Victorian Granites (P) Ltd. (supra) have not been accepted by the Supreme Court in Natural Resources Allocation, In Re, Special Reference No.1 of 2012 ((2012) 10 SCC 1), in which while distinguishing the judgment in 2G Spectrum Case, it was held in paragraph 129 that there is no constitutional mandate in favour of action under Article 14. The Government has repeatedly deviated from the cou .....

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it, and that the entire corporate world moves on such permissible transactions. The shares of the Company are bought and sold every day on the Stock Exchanges, which may result into change in the control of the management of the Company. The changes, however, do not affect the contracts under which the Company has to transact its business, including the acquisition of assets, licenses, permits, concessions and leases. In case the argument of learned Additional Advocate General is accepted, the .....

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r business. We, therefore, reject the submission of learned Additional Advocate General and learned counsel appearing for M/s J.K.Cement Limited that any consequence of the change in the share-holding pattern of the Private Limited Company by which it became a wholly owned subsidiary of Ultra Tech Cement would have required a permission for transfer or that if such proposal was in the making, the change in the personalty of the partnership firm to a Private Limited Company would require previous .....

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ip to the Private Limited Company. 48. We also do not find any case of cheating or fraud in the transfer of mining lease by either the partners of the partnership firm or the Directors of the Private Limited Company, for which the officers of the Mining Department and competent authority could be liable or any criminal action can be taken against them. The competent authority had fully understood and had acted in accordance with the law, on the facts placed before it, in granting consent in writ .....

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take action against its officers for granting permission. The entire action to cancel the lease was actuated with malice in law. An additional affidavit was filed in the writ petition filed by M/s J.K.Cement Limited changing the stand of the Government in triggering action apparently to the benefit of M/s J.K.Cement Limited, instrumental in blocking the expansion of capacity of production of cement by Ultra Tech Cement Limited. 49. Though we find that learned Single Judge has not gone into and r .....

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t on 18th September, 2015 following order was passed: In the meantime, the State shall file an affidavit giving details of the circumstances in which normally an application for transfer of mining lease is granted/ rejected. If there is any policy in this regard, the same will be placed on record and if there is no such policy, the State shall mention as to how many applications for transfer of mining lease were granted/rejected in last two years and shall also give the reasons for which they we .....

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were inducted and on that basis the transfer was declared void. 16. JKCL, respondent No.2, who had also filed independent writ petition before the High Court, has referred to documents which are part of record to submit that in the present case, sale of shares by GLKUPL to UTCL is nothing but sale of the mining lease for consideration of ₹ 160 crores. This consideration is reflected in annual report 2012-2013 of the UTCL in the form of investment in shares of GLKUPL. It has also referred .....

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conditions of transfer. In para 3(iii) of the transfer deed there is a declaration that the transferor has not directly or indirectly been financed. We will refer to these aspects in due course. 17. We have heard learned counsel for the parties at length. 18. As already stated the question for consideration is whether in the given fact situation the transfer of entire shareholding and change of all the directors of a newly formed company to which lease rights were transferred by a declaration th .....

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l of GLKUPL to UTCL or that it was not transfer of mining lease for consideration was clearly erroneous. In view of the fact that transfer of shareholding took place just after the formation of GLKUPL by partnership firm holding the lease on a declaration that no third party was involved nor any direct or indirect consideration was involved, it was clear that formation of GLKUPL itself was a device for transfer of mining lease from GLKU to UTCL for monetary consideration without disclosing the r .....

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rger but use of device to unauthorisedly acquire mining lease by misleading the competent authority by concealing the real transaction. Real transaction is of impermissible sale of the lease which was the only asset of the company. If true facts that lease was to be sold were disclosed, power to permit transfer of lease may not have been exercised. Lease could not be transferred to make profit. Thus, the doctrine of lifting the corporate veil should be invoked. The public power of permitting tra .....

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tion to permit and regulate the power to transfer the lease. Law governing relationship between a company and its shareholders inter se has to be applied having regard to reality of a transaction and to effectuate the regulatory provisions dealing with subject. The constitutional principles and the regulatory regime in relation to the mining leases of minerals which vest in the State cannot be defeated by the abstract doctrine of corporate personality being separate from the entire body of share .....

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formed private limited company without any monetary consideration as was correctly declared. In any case, transfer of lease was permissible and only consideration was payment of dead rent/royalty and compliance of procedural formalities. There was nothing inherently illegal in transfer of a lease. He cited instances of takeover and merger of companies with running business including the cases of Vedanta and BALCO to which we will refer later. 21. We have given thoughtful consideration to the iss .....

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ithout there being any financial consideration for the transfer and without there being any third party. There is perhaps nothing wrong in such transfer by itself. In the second transaction, the entire shareholding is transferred for share price and control of mining lease is acquired by the holding company without any apparent price for lease. Technically lease rights are not sold, only shares are sold. No permission for transfer of lease hold rights may be required. Let us now see the combined .....

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to the State and not to the lessee and the lessee has no right to profiteer by trading such rights. In fact the lessee has also not claimed such a right. Lessee can either operate the mine or surrender or transfer only with the permission of the authority as legally required. In the present case, the lessee has achieved indirectly what could not be achieved directly by concealing the real nature of the transaction. Is it legally permissible, is the question. 23. The principle of lifting the cor .....

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d Rubber Industry Ltd., Bhavnagar vs. Associated Rubber Industry Ltd., Bhavnagar. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc. (1986) 1 SCC 264 (LIC vs. Escorts Ltd.) which refers to Palmer s Co .....

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of the doctrine of lifting of corporate veil is expanding……… 67. In the aforesaid view of the matter we are of the opinion that the corporate veil should be lifted and Hindalco and Renusagar be treated as one concern and Renusagar s power plant must be treated as the own source of generation of Hindalco and should be liable to duty on that basis. In the premises the consumption of such energy by Hindalco will fall under Section 3(1)(c) of the Act. The learned Additional Advo .....

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Authority versus Skiper Construction Company (P) Ltd. (1996) 4 SCC 622, it was observed : 24. Lifting the corporate veil : In Aron Salomon v. Salomon & Company Limited (1897) AC 22, the House of Lords had observed, "the company is at law a different person altogether from the subscriber...; and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands received the profits, the company is not in law .....

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1979) at P. 137). Pennington (Company Law - 5th Edn. 1985 at P. 53) also states that "where the protection of public interests is of paramount importance or where the company has been formed to evade obligations imposed by the law", the court will disregard the corporate veil. A Professor of Law, S. Ottolenghi in his article "From Peeping Behind the Corporate Veil, to Ignoring it Completely" says "the concept of 'piercing the veil' in the United States is much mo .....

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bject in a brilliantly written article "Piercing the veil of corporate entity" (published in (1912) 12 CLR 496) and summarised their central holding in the following words : The various classes of cases where the concept of corporate entity should be ignored and and veil drawn aside have now been briefly reviewed. What general rule, if any, can be laid down ? The nearest approximation to generalization which the present state of the authorities would warrant is this: When the conceptio .....

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the corporate veil are set out. It would be sufficient for our purposes to quote the eighth exception. It runs : "The courts have further shown themselves willing to 'lifting the veil' where the device of incorporation is used for some illegal or improper purpose.... Where a vendor of land sought to avoid the action for specific performance by transferring the land in breach of contract to a company he had formed for the purpose, the court treated the company as a mere 'sham' .....

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the real transaction of transfer of mining lease to a third party for consideration without statutory consent by terming it as two separate transactions - the first of transforming a partnership into a company and the second of sale of entire shareholding to another company. The real transaction is sale of mining lease which is not legally permitted. Thus, the doctrine of lifting the veil has to be applied to give effect to law which is sought to be circumvented. 27. In Victorian Granites (supr .....

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ft the veil and reach the genesis and effect. Article 39(b) of the Constitution envisages that the State shall, in particular, direct its policies towards securing that the ownership and control of the material resources of the community are so distributed as best to subserve the common good. Socio-economic justice is the arch of the Constitution. The public resources are distributed to achieve that objective since liberty and meaningful right of life are hedged with availability of opportunitie .....

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nsfer could be made a subterfuge to circumvent the constitutional philosophy and thereby the constitutional objective be sabotaged in that behalf? Answer would be obviously in the negative………... 28. It is also well settled that mining rights are vested in the State and the lessee is strictly bound by the terms of the lease (2013) 6 SCC 476 (Orissa Mining Corpn. Ltd. vs. Ministry of Environment and Forest) - Para 58; (1981) 2 SCC 205 (State of Tamil Nadu vs. M/s Hind Stone) - .....

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he respondent have no application to the present case once real transaction is found to be different from the apparent transactions. In fact, the principle of law laid down in Vodafone case (supra) that the court can look to the real transaction goes against the respondent . 29. In Vedanta case (supra) (2013) 7 SCC 1 - Para 1 approval granted by the Government of India for acquisition of majority stake in Cairn Energy Ltd. (CIL) was challenged and a direction was sought for the ONGC to exercise .....

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with economic decisions and wisdom of economic policies of the State in exercise of its power of judicial review. These judgments are in the context of situations where highest public authorities had applied their mind to all the facts in which case the Court was not inclined to interfere. Such is not the position in the present case. No public authority, in the present case, was even conscious that mining lease was being transferred to UTCL and at what price or for what benefit to the public. 3 .....

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tion and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. Para 64In so concluding, the court reconciled the apparent conflicting approach in earlier decisions in Mc. Dowell & Co. vs. Commercial Tax Officer(1985) 3 SCC 230 and Union of India vs. Azadi Bachao Andolan(2004) 10 SCC 1 with reference to English decisions in IRC vs. Westminister1936 AC 1 and W.T. Ramsay vs. IRC1982 AC 300 dealing with the question whether the Court must acce .....

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can be operated strictly within the statutory framework. There is nothing to rebut the allegation that receipt of ₹ 160 crores styled as investment in shares is nothing but sale price of the lease. No precedent has been shown permitting such a private sale of a mining lease for consideration without any corresponding benefit to the public. 31. In the recent past, there have been serious allegations of illegalities and deficiencies in the regulatory regime of mining leases. As noted by thi .....

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e into by us in our order dated 04th January, 2016 in Civil Appeal Nos. 4845-4846 of 2015 titled Sulekhan Singh & Co. vs. State of U.P. Since, the mining rights vest in the State, the State has to regulate transfer of such rights in the best interest of the people. No lessee can trade mining rights by adopting a device of forming a private limited company and transfer of entire shareholding only with a view to sell the mining rights for private profit as has happened in the present case. We .....

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mining rights vest in State and are regulated consistent with the doctrine of public trust. The rules prohibit transfer of mining lease for consideration without the previous consent of competent authority in writing R.15. Transfer of Mining Lease.- (1) The lessee shall not without the previous consent in writing of the competent authority- (a) assign, sublet, mortgage or in any other manner transfer the mining lease or any right, title or interest therein, or (b) enter into or make any arrange .....

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er till the completion of construction work. Provided further that such permission shall be given by ME/AME after obtaining registered consent of the lessee and also on the condition that the crusher owner shall use masonary stone produced from the concerned lease area only. Provided also that wherever required, permission of Revenue and other Departments may also be taken before issuing such permission. (1A) Every application for transfer of Mining Lease shall be accompanied by a fee of [Rs.500 .....

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there are any dues outstanding against the transferor or transferee. Provided further also that where the mortgagee is a State Institution or a bank or a State corporation, it shall not be necessary for the lessee to obtain the previous consent of the competent authority or previous sanction of the State Government. However, the lessee shall inform the competent authority about any mortgage in favour of any State institution, Bank or State Corporation within a period of 3 months from the date o .....

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ed and communicated in writing to the lessee. (4) Where on an application for transfer of mining lease under this rule the competent authority has given consent for such lease, a transfer lease deed in Form No.15 or a form as near thereto as possible, shall be executed within three months of the date of the consent, or within such period as the competent authority may allow in this behalf. R.72. Mining operations to be under lease or licence.- No mining lease, quarry license, shortterm-permit or .....

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al transaction cannot be ignored to find out the substance. 33. Thus, acquisition of mining lease contrary to rules is void. Requirement of previous consent cannot be ignored nor taken to be formality subject only to pay dead rent or agreeing to follow same terms. The lessee privately and unauthorisedly cannot sell its rights for consideration and profiteer from rights which belong to State. There is no warrant for any contrary assumption. The State has to exercise its power of granting or refus .....

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the past, transfer of lease for private benefit without corresponding benefit to the public or the State exchequer is not permitted. After all, minerals vest in the State and the State has to exercise its power to deal with them as per doctrine of public trust. Thus, in the present case, the State was certainly entitled to exercise its jurisdiction to cancel lease transferred in violation of rules. 35. As already seen, in the present case, the original lessee sought transfer merely by disclosing .....

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e is not permissible without permission of the competent authority, the competent authority was entitled to have full disclosure of facts for taking a decision in the matter so that a private person does not benefit at the expense of public property. The original lessee did not disclose that the real purpose was not merely to change its partnership business into a private limited company as claimed but to privately transfer the lease by sale to a third party. This aspect has also escaped the att .....

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