Case: State Of Rajasthan  Vs. Gotan Lime Stone Khanij Udyog

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 Rs.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 28th March, 2012. The application dated 28th March, 2012 states that the lessee was a partnership firm and wished to transfer the lease to a private limited company which was mere change of form of its own business by converting itself from a partnership firm into a private limited company. The partners of the firm and Directors of the company were the same and on transfer, no illegal benefit, price or premium was taken from the transferee. The lease was 40 years old and there was no impediment 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 Rs.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 to cancel the transfer order on the ground that contrary to the statement in the application for transfer that the partners of the partnership firm will be Directors of the private limited company, the Directors of the private limited company who were partners of the firm were replaced by new Directors on 6th August, 2012 and the private limited company was listed as subsidiary of Ultra Tech Cement Limited Company (UTCL) with the Bombay Stock Exchange. This development showed that the transfer was 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 affected validity of permission for transfer from GLKU to GLKUPL.6. This stand was held to be unsatisfactory by the competent authority. Accordingly, the order dated 25th April, 2012 was rescinded and declared void vide order dated 16th December, 2014. It was also observed that the department had filed its revised reply before the High Court and according to the said reply, the transfer was in violation of Rule 15 of the Rajasthan Minor Mineral Concession Rules, 1986 (the Rules).7. It appears that 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 as Directors of the Private Limited Company at the instance of UTCL.8. The respondent No.1 filed S.B. Civil Writ Petition No.9669 of 2014 seeking quashing of show cause notice dated 21st April, 2014, the order dated 16th December, 2014 and other consequential orders. It was submitted that the order dated 25th April, 2012 permitting transfer of lease from the partnership firm to the private limited company was in order. After the said transfer, the entire shareholding of the company was transferred 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 Writ Petition No.404 of 2013 was filed. The State Government in its reply defended its order dated 25th April, 2012. After the assembly election in December, 2013, show cause notice dated 21st April, 2014 was issued and a supplementary reply was filed by the State in October, 2014 taking a different stand. It was submitted that the order dated 16th December, 2014 had not dealt with the objection regarding applicability of Rule 72 (treating the lease void) and the judgments relied upon by the writ 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 petition was defended by the State with the plea that change of all the directors and shareholding amounted to transfer of the lease in violation of Rule 15 which was void under Rule 72. Thus, the order dated 16th December, 2014 was valid.10. JKCL, who had applied for transfer of part of mining lease and was aggrieved by rejection of its application moved an application before the High Court for being added as a party to oppose the writ petition and was impleaded as a respondent in the writ petition, 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 framed by learned Single Judge for consideration was asthe action of shareholders of the Company in transferring its shares to Ultra Tech Cement Limited and consequently, the Company becoming wholly owned subsidiary of Ultra Tech Cement Limited amounts to violation of Rule 15(1) (b) of the Rules is the issue which requires consideration.After referring to the decisions of this Court in Bacha F. Guzdar vs. CIT (AIR 1955 SC 74 ), Heavy Engineering Mazdoor Union vs. State of Bihar (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 asview of the law laid down by theSupreme Court in the case of Government Companies, inter-se relationship between holding and subsidiary Companies and fundamental principles regarding distinction between a shareholder and the Company, it is apparent that merely on account of the Company becoming a subsidiary of Ultra Tech Cement Limited on account of certain action of the shareholders of the Company, it cannot be said that the Company is being directly or indirectly financed to a substantial extent or theoperations or undertakings are substantially controlled by Ultra Tech Cement Limited, regarding which there are absolutely no allegations or material whatsoever. Therefore, on account of the petitioner-Company becoming subsidiary of Ultra Tech Cement Limited, inview of the law laid down by theSupreme 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.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 been dismissed by impugned order dated 14th May, 2015. The Division Bench while affirming the view taken by the learned Single Judge, inter alia,The entire corporate business is run through contracts, which may give statutory or non-statutory rights to the Company. A Company may apply and become the owner of the license, permit, concessions and lease under the statutory schemes of various statutes, under which the Company carries out its business. In all such cases, the license, 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 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 management of the Company, which may change on the change in the shareholding of the Company.xxxx43. We do not find any substance in the reliance placed on the judgment of Supreme Court in Victorian Granites (P) Ltd. V/s P.Rama Rao and ors. ((1996) 10 SCC 665 ), in which it was held that the socio-economic justice is the arch of the Constitution and the public resources under Article 39(b) must be distributed to achieve that objective since liberty and meaningful right of life are hedged with availability 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 course of action and the Supreme Court has repeatedly upheld such actions. The judiciary tests such deviations on the limited scope of arbitrariness and fairness under Article 14 and its role is limited to that extent. Essentially, whenever the object of policy is anything but revenue maximization, the executive is seen to adopt methods other than auction.xxxxxx46. It is of common knowledge that the corporate entities frequently undergoes changes in shareholding patterns. The Company Law permits 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 change in the shareholding pattern would amount to cancellation of all such contracts, leading to a complete chaos in the corporate world. The entire object of providing limited liability of shareholders under the Companies Act will be affected by such interpretation of law and in such case, the holding Companies, Public Limited Companies and the wholly owned subsidiaries will have to apply for consent and permission in case of change in the share-holding patterns of the Company, affecting their 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 consent in writing of the competent authority.47. We entirely agree with the reasons assigned by learned Single Judge that no material has been placed on record to suggest that the transfer of the mining lease from the partnership firm to a Private Limited Company was made with a design to ultimately transfer the shares to Ultra Tech Cement Limited. There is no evidence to suggest any such design or attempt at the time when the application was made for transfer of mining lease by the partnership 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 writing before transfer of mining lease from the partnership firm to the Private Limited Company.The State Government in its reply in the Writ Petition No.404/2013 had taken a correct stand in defence of the transfer of mining lease. It appears that with the change of Government, the loyalties changed from one business group to another, and the State Government not only initiated action by issuing show cause notice for declaring the permission for transfer to be null and void, but also proposed to 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 recorded any finding on malice in law, the facts placed before us and the arguments advanced clearly indicate that the entire action was coloured with malice in law. The object and purpose of declaring the permission for transfer to be null and void and cancellation of mining lease was for the purpose of restricting the expansion of business activities of Ultra Tech Cement Limited owned by Birla Group of Companies in the State of Rajasthan.When the matter came up for hearing before this Court on 18th September, 2015 following order wasthe 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 were granted or rejected.Accordingly, an affidavit has been filed by the State of Rajasthan stating that there was no specific policy regarding the granting/rejecting of a transfer of a lease. However, a lease could not be transferred without the consent of the competent authority. In the case of one Shri Abdul Kareem, on death of a lessee, the legal heirs formed a partnership and sought mutation in favour of the partnership firm. It was later learnt that the partners retired and new partners 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 Rs.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 to averments in pleadings/written submissions before the High Court that GLKUPL was incorporated on 26th March, 2012. On 28th March, 2012 application for transfer of lease was made by GLKU. Permission was granted on 25th April, 2012. Transfer deed was executed on 8th August, 2013 but on 23rd July, 2012 itself entire shareholding was transferred to UTCL for Rs.160 crores. Thus, on 8th August, 2013, transferee was UTCL without the consent of the State. This was contrary to rules and standard 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.

Court's reasoning:
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 refusing permission for transfer of lease in a fair and reasonable manner but following doctrine of public trust. This Court has held that the State cannot overlook illegal transfers (2014) 6 SCC 590 (Goa Foundation vs. Union of India) – Para 60).34. The State must have a declared policy for exercise of its power of permitting or refusing transfer of mining leases and such policy should be operated in a transparent manner. However, even in absence of a policy and irrespective of exercise of power in 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 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 permission to transfer the lease in favour of a private limited company was granted on that basis. Thus, it was a case of suppression veri and suggestio falsi. Once it is held that transfer of lease 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 attention of the High Court. Accordingly, our answer to the question framed is that in the facts of the present case, sale of shareholding by GLKUPL to UTCL is a private unauthorized sale of mining lease which being in violation of rules is void. GLKUPL has been formed merely as a device to avoid the legal requirement for transfer of mining lease and to facilitate private benefit to the parties to the transaction, to the detriment of the public.36. Learned single Judge and the Division Bench have gone by only one aspect of law, i.e. the general principle that sale of shares by itself is not sale of assets but this principle is subject to the doctrine of piercing of corporate veil wherever necessary to give effect to the policy of law. In the present case, this principle clearly applies as transfer of shares to cover up the real transaction which is sale of mining lease for consideration without the previous consent of competent authority, as statutorily required. The statutory requirement is sought to be overcome with the plea that it was a transaction merely of transfer of shareholding when on the face of it the transaction is clearly that of sale of the mining lease. In view of the above, the view taken by the High Court cannot be sustained.