STATE OF RAJASTHAN AND ORS. Vs. GOTAN LIME STONE KHANIJ UDYOG AND ANR.
Supreme Court of India (Division Bench (DB)- Two Judge)
434 of 2016, Judgment Date: Jan 20, 2016
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 434 OF 2016
(ARISING OUT OF SLP (CIVIL) NO.23311 OF 2015)
STATE OF RAJASTHAN & ORS …APPELLANTS
VERSUS
GOTAN LIME STONE KHANJI UDYOG PVT. LTD.
& ANR. ...RESPONDENTS
J U D G M E N T
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 the
transaction in question, an illegal transfer of mining lease was involved?
Whether transformation of partnership into company and transfer of lease
rights to such company, though apparently valid and permitted, has to be
seen with the next transaction of transfer of the entire shareholding to a
third company for a price thereby avoiding declaration of real transaction
of sale of mining lease which was not permissible. Further question is
whether on this basis the State is justified in cancelling 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
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
as follows:
“Whether the 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.”
12. After referring to the decisions of this Court in Bacha F. Guzdar vs.
CIT[1], Heavy Engineering Mazdoor Union vs. State of Bihar[2], Electronics
Corporation of India Limited vs. Secretary, Revenue Department[3], Amit
Products (India) Ltd. vs. Chief Engineer (O&M) Circle[4] and Balwant Raj
Saluja & Anr. vs. Air India Limited & Ors. [5] 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 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 the Company’s operations 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, 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 been dismissed by impugned order dated 14th May,
2015. The Division Bench while affirming the view taken by the learned
Single Judge, inter alia, observed:
“41. 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.
xxxx
43. 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.
xxxxxx
46. It is of common knowledge that the corporate entities frequently
undergoes changes in share-holding 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 share-
holding 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.”
14. When the matter came up for hearing before this Court 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 were granted or rejected.”
15. 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. 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 that it was mere change of form of partnership
business without any transfer for consideration being involved can be taken
as unauthorized transfer of lease which could be declared void.
19. Learned counsel for the appellants submitted that the view of the
High Court that sale of entire shareholding in favour of UTCL by the newly
formed company which had no other assets or business except the mining
lease and appointment of nominees of UTCL as Directors of GLKUPL did not
amount to change of control 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 real transaction to the competent authority. The Court was
required to see the substance and not mere form. The judgments relied upon
only stated the general principle of identity of the company being distinct
from shareholders and directors which was subject to the doctrine of
piercing the veil to discover the real nature of transaction when it was
different from what was apparent. In the present case, it was not a case
of mere transfer of shareholding or change of Directors or even a routine
merger 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 transfer of lease could not be used to benefit a private
operator, who sells its rights in natural resources given to it by the
State, in violation of law. Reliance has been placed on Victorian Granites
(P) Ltd. vs. P. Rama Rao and Ors.[6]. The High Court did not appreciate
the judgment even after noticing it. The controlling power of the lease
has completely been transferred for consideration without this fact being
brought to the knowledge of the competent authority having jurisdiction 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 shareholders
without having regard to the real nature of transaction and the well known
exceptions to this abstract doctrine.
20. Learned counsel for the respondent-writ petitioner supported the view
taken by the High Court. He submitted that there was no transfer of lease
involved in transfer of entire shareholding and change of directors and in
such a situation no permission for transfer was required to be taken.
Transaction of sale of shareholding was independent of transfer of lease to
the newly 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 issue arising for
consideration.
22. In the present case there are two transactions. Viewed separately,
there may be nothing wrong with either or both but if real nature of
transaction is seen, the illegality is patent. In first transaction of
transfer of lease from the firm to the company, with the permission of the
competent authority, only disclosure made while seeking permission for
transfer is of transforming partnership business into a private limited
company with same partners as directors without 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 effect and real substance of the two
transactions. The partnership firm holding lease hold rights has
successfully transferred the said rights to a third party for consideration
in the form of share price which is nothing but price for sale of mining
lease which is not allowed and for which no permission has been granted.
Thus, if these facts were disclosed to the competent authority, permission
for transfer of mining rights for financial consideration could not be
allowed. Mining rights belong 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 corporate veil as an exception to the
distinct corporate personality of a company or its members is well
recognized not only to unravel tax evasion[7] but also where protection of
public interest is of paramount importance and the corporate entity is an
attempt to evade legal obligations and lifting of veil is necessary to
prevent a device to avoid welfare legislation[8]. 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.[9]
24. In State of U.P. vs. Renusagar Power Co.[10] this Court observed:
“66. It is high time to reiterate that in the expanding horizon of modern
jurisprudence, lifting of corporate veil is permissible. Its frontiers are
unlimited. It must, however, depend primarily on the realities of the
situation. The aim of the legislation is to do justice to all the parties.
The horizon 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 Advocate-General for the
State relied on several decisions, some of which have been noted.
68. The veil on corporate personality even though not lifted sometimes, is
becoming more and more transparent in modern company jurisprudence. The
ghost of Salomon case (1897 AC 22) still visits frequently the hounds of
Company Law but the veil has been pierced in many cases. Some of these have
been noted by Justice P.B. Mukharji in the New Jurisprudence (Tagore Law
Lectures, P. 183).”
25. In Delhi Development Authority versus Skiper Construction Company (P)
Ltd.[11], 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
the agent of the subscribers or trustee for them. Nor are the subscribers
as members liable, in any shape or form, except to the extent and in the
manner provided by that Act". Since then, however, the Courts have come to
recognise several exceptions to the said rule. While it is not necessary to
refer to all of them, the one relevant to us is "when the corporate
personality is being blatantly used as a cloak for fraud or improper
conduct". (Gower : Modern Company Law - 4th Edn. (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 more
developed than in the UK. The motto, which was laid down by Sanborn, J. and
cited since then as the law, is that 'when the notion of legal entity is
used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons.
The same can be seen in various European jurisdictions".
[(1990) 53 MLR 338]. Indeed, as far back 1912, another American Professor
L. Maurice Wormser examined the American decisions on the subject 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 conception of corporate entity is employed to defraud
creditors, to evade an existing obligation, to circumvent a statute, to
achieve or perpetuate monopoly, or to protect knavery or crime, the courts
will draw aside the web of entity, will regard the corporate company as an
association of live, up-and-doing, men and women shareholders, and will do
justice between real persons.”
25. In Palmer's Company Law, this topic is discussed in Part-II of Vol-I.
Several situations where the court will disregard 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'
and made an order for specific performance against both the vendor and the
company".
Similar views have been expressed by all the commentators on the Company
Law which we do not think it necessary to refer.”
(underlining is ours)
26. It is thus clear that the doctrine of lifting the veil can be invoked
if the public interest so requires or if there is allegation of violation
of law by using the device of a corporate entity. In the present case, the
corporate entity has been used to conceal 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 (supra), it was observed:-
“4. It is true that a facade of compliance of law has been done by P. Rama
Rao and Magam Inc. for having the transfer of the leasehold interests had
by P. Rama Rao made in favour of the latter. The best of the legal brains
will be available to escape the clutches of law and transactions would be
so shown to be in compliance of semblance of law. In that pursuit, payment
of royalty and permits remained in the name of P. Rama Rao. The court has
to pierce through the process, lift 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 opportunities and resources to augment economic
empowerment. The question is whether the transfer is to subserve the above
common good and constitutional objective? It is true that when the
individuals have been granted lease of mining of the property belonging to
the Government, the object of such transfer was to augment the economic
empowerment of the transferee by himself or by a cooperative society or
partnership composing persons to work out the mines to achieve economic
empowerment. Whether such a transfer 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[12]. Cases of
Arun Kumar Agrawal vs. Union of India[13] (the Vedanta case), BALCO
Employees’ Union vs. Union of India[14] (the BALCO case) and Vodafone
International Holdings B.V. versus Union of India[15] cited by learned
counsel for the 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)[16] 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 right of pre-
emption over shares of CIL. Further challenge was to transfer of ONGC
shareholding in CIL to Vedanta, a private company, as being contrary to
public interest. This Court held that various commercial and technical
aspects have been duly considered by the Government of India and this Court
could not sit in judgment over the commercial and business decisions so
taken. Reference was also made to earlier decision in BALCO case (supra)
laying down that Courts may not ordinarily interfere 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.
30. In Vodafone case (supra)[17] the dispute arose out of claim by the
income tax department to tax capital gain arising out of sale of share
capital of a company called CGP by HEL to Vodafone. Question was whether
income accrued in India. Negativing the claim of the Revenue, it was held
that transaction took place outside territorial jurisdiction of India and
was not taxable. This Court observed that “it is the task of the court to
ascertain the legal nature of the transaction and while doing so it has to
look at the entire transaction as a whole and not to adopt a dissecting
approach.”[18] In so concluding, the court reconciled the apparent
conflicting approach in earlier decisions in Mc. Dowell & Co. vs.
Commercial Tax Officer[19] and Union of India vs. Azadi Bachao Andolan[20]
with reference to English decisions in IRC vs. Westminister[21] and W.T.
Ramsay vs. IRC[22] dealing with the question whether the Court must accept
a transaction on face value or not. Thus, while discerning true nature of
the entire transaction, court has not to merely see the form of the
transaction which is of sale of shares but also the substance which is the
private sale of mining rights avoiding legal bar against transfer of sale
rights circumventing the mandatory consent of the competent authority.
Consent of competent authority is not a formality and transfer without
consent is void. The minerals vest in the State and mining lease can be
operated strictly within the statutory framework. There is nothing to
rebut the allegation that receipt of Rs.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 this Court in Goa Foundation (supra), the Government of India
appointed a former Judge of this Court, Justice M.B. Shah to go into
various aspects of illegal mining, including grant and transfer of leases.
It is a matter of public knowledge that in the wake of reports submitted by
Justice Shah, the policy framework and statutory provisions have undergone
changes at various levels. Changes suggested include the mode and manner of
grant and renewal of lease rights. A facet of this aspect has been gone
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 may note that
under Section 12A(6) added by the Mines and Minerals (Development and
Regulation) Amendment Act, 2015, it has been provided that transfer of
mineral concessions can be allowed only if such concessions are granted
through auction.
32. In these circumstances, the plea of the writ petitioner that the
lessee has a vested right to transfer the lease subject merely to
compliance of formalities cannot be accepted as correct. The submission is
contrary to scheme of law. As already observed 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[23]. 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 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
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[24].
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.
37. Accordingly, this appeal is allowed and the judgment of the High
Court is set aside. We, however, direct the State of Rajasthan to frame
and notify its policy in the matter wit hin one month from the receipt of a
copy of this order. The State of Rajasthan may within one month thereafter
pass an appropriate order in respect of the mining lease in question in the
light of the policy so framed. Till such a decision is taken, status quo
may be maintained.
……..…………………………….J.
[ANIL R. DAVE]
.….………………………………..J.
[ ADARSH KUMAR GOEL ]
NEW DELHI
JANUARY 20, 2016
-----------------------
[1] AIR 1955 SC 74
[2] (1969) 1 SCC 765
[3] (1999) 4 SCC 458
[4] (2005) 7 SCC 393
[5] (2014) 9 SCC 407
[6] (1996) 10 SCC 665
[7] (1967) 1 SCR 934 – The Commissioner of Income Tax, Madras vs. Sri
Meenakshi Mills Ltd.
[8] (1985) 4 SCC 114 – Workmen Employed in Associated Rubber Industry
Ltd., Bhavnagar vs. Associated Rubber Industry Ltd., Bhavnagar
[9] (1986) 1 SCC 264 (LIC vs. Escorts Ltd.) which refers to
Palmer’s Company Law (23rd Ed.) and Pennington Company Law (4th Ed.)
followed in New Horizons Ltd. vs. UOI (1995) 1 SCC 478
[10] (1988) 4 SCC 59
[11] (1996) 4 SCC 622
[12] (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) – Para 37; (2012) 11 SCC 1 ( Monnet Ispat & Energy Ltd.
vs. Union of India) – Para 41; (1976) 4 SCC 108 (Amritlal Nathubhai Shah
vs. Union Govt. of India); (2013) 7 SCC 571 (Geomin Minerals & Marketing
Ltd. vs. State of Orissa)
[13] (2013) 7 SCC 1
[14] (2002) 2 SCC 333
[15] (2012) 6 SCC 613
[16] (2013) 7 SCC 1 – Para 1
[17] (2012) 6 SCC 613 – Para 179
[18] Para 64
[19] (1985) 3 SCC 230
[20] (2004) 10 SCC 1
[21] 1936 AC 1
[22] 1982 AC 300
[23] “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 arrangement, contract or understanding
whereby the lessee will or may be directly or indirectly financed to a
substantial extent by, or under which the lessee's operations or
undertakings will or may be substantially controlled by any person or body
of person other than lessee.
Provided that the lessee of masonary stone may, with the prior
permission of concerned ME/AME and subject to such conditions as he may
specify therein, allow any Government contractor to install and operate
stone gitti crusher 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.5000/- for Marble, Sand Stone & granite and Rs. 2000/- for other
minerals] and shall be submitted to the Mining Engineer / Assistant Mining
Engineer. (1AA) The Government may subject to the condition specified in
rule 11(2) transfer whole area of the lease to a person on payment to the
Government transfer premium [equal to existing dead rent;]
Provided that the lease has remained in force for at least two years
from the date of grant.
Provided further that such transfer shall not be made if 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 of mortgage or assignment.
(2) An application for transfer of mining lease 17 shall be disposed
of by competent authority:[xxx]
Provided that transfer of mining lease, granted to the category of
persons mentioned in sub-rule (3) of rule 7 shall be made only to a person
belonging to any of the categories mentioned in the clause of the said sub-
rule.
(3) Transfer of mining lease shall not be considered as a matter of
right and the Government may refuse for such transfer for the reasons to be
recorded 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 any other permit shall be
granted otherwise than in accordance with the provisions of these rules and
if granted shall be deemed to be null and void.”
[24] (2014) 6 SCC 590 (Goa Foundation vs. Union of India) – Para 60
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