Supreme Court clarifies calculation of unearned increase on land transfers in industrial areas: BIADA vs. Amit Kumar (22 October 2019)

Introduction

Date of the Judgment: 22 October 2019

Citation: (2019) INSC 1042

Judges: Hon’ble Mr. Justice Deepak Gupta, Hon’ble Mr. Justice Aniruddha Bose

When land allotted for industrial purposes is transferred, how should the unearned increase in the land’s value be calculated? The Supreme Court of India recently addressed this question, clarifying the rights of the Bihar Industrial Area Development Authority (BIADA) in such transactions. This judgment clarifies whether BIADA is entitled to a share of the increased value when the original allottee transfers the land. The bench comprised Justice Deepak Gupta and Justice Aniruddha Bose.

Case Background

The case revolves around land initially leased by the State of Bihar to M/s. Orient Beverages Ltd. for 99 years at a nominal sum, with restrictions on transfer without the lessor’s consent. The rights of the State were later transferred to BIADA.

M/s. Orient Beverages Ltd. transferred its leasehold rights to M/s. Bharat Coca-Cola Bottling North East Pvt. Ltd. in 1998 for a sum of Rs. 2.02 crores, with a premium of Rs. 17,50,000 paid at the time of transfer. Later, through a scheme of amalgamation approved by the Delhi High Court on 10.09.1999, Bharat Coca-Cola Bottling North East Pvt. Ltd. became part of Hindustan Coca-Cola Bottling South West Pvt. Ltd., which was later renamed Hindustan Coca-Cola Beverages Pvt. Ltd.

A committee was formed by the Government of Bihar to determine the modalities and fees for transferring industrial estates. The committee recommended a fee of 15% of the present market value for land transfers. BIADA initially charged 15% of the circle rate for the land. However, BIADA later decided to assess the 15% market value based on the circle rate and not the transaction value, leading to a fresh demand of Rs. 45,17,318/- against Hindustan Coca-Cola Beverages Pvt. Ltd.

Timeline:

Legal Framework

The judgment refers to specific clauses of the lease deed between the State of Bihar and M/s. Orient Beverages Ltd.

• Clause 4(i):- That the lessee will not assign, mortgage, underlet or part with the possession over the land or any right or interest therein or in respect thereto without the previous consent of the lessor or its nominee. This clause restricts the lessee from transferring the land without prior consent.
• Clause 4(ii):- No change in the lease, proprietorship or partnership, if it is a private limited or unlimited company or a registered or an unregistered firm, shall be recognized without the previous written consent of the lessor or his nominee. This clause mandates prior written consent for any changes in the lease or the entity holding the lease.

These clauses highlight the intent of the original lease to maintain control over the land and its transfer, ensuring that the lessor (initially the State and later BIADA) has a say in any changes in ownership or control.

Arguments

Arguments by BIADA:

• BIADA argued that when land allotted for industrial purposes is transferred for commercial reasons, BIADA should receive a fair share of the unearned increase in the land’s value.
• BIADA contended that the unearned increase should be calculated based on the market value or circle rate of the land at the time of transfer, not just the original allotment price plus development charges.
• BIADA’s counsel, Mr. Gaurav Agrawal, argued that the premium should be charged on the value of the land and not on the value of the transaction.

Arguments by the Respondents:

• The respondents argued that the unearned increase should be calculated based on the value at which BIADA originally allotted the land, plus development charges.
• The respondents contended that the premium should not be charged based on the market value or circle rate, as this would result in an unfair increase in costs.

The core of the dispute is whether BIADA should benefit from the appreciation in land value when it is transferred, or whether the original allottee should retain the entire benefit.

Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the Patna High Court was right in holding that when the allottee of land, allotted for industrial purposes, further transferred the land to some other entity, the Bihar Industrial Area Development Authority (BIADA) was only entitled to recover the unearned increase on the basis of cost of land and development charges and not on the basis of the market value of the land or the circle rate of the land.

Treatment of the Issue by the Court

Authorities

The court did not cite any specific case laws or legal provisions in its reasoning regarding the calculation of unearned increase.

Judgment

Authorities Viewed by the Court:

No authorities were cited by the Court in its reasoning.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that BIADA, as the original owner of the land, should receive a fair share of the unearned increase in its value when the land is transferred for commercial reasons. The court reasoned that the original allottee should not be the sole beneficiary of the appreciation in land value.

The court’s reasoning was primarily based on legal principles and policy considerations rather than the specific facts of the case. The court emphasized the need for BIADA to benefit from the increase in land value, aligning with the broader objective of industrial development.

Logical Reasoning

The Supreme Court rejected the High Court’s view that the unearned increase should be calculated only on the basis of the original allotment value plus development charges. The Court held that the policy of BIADA to fix the cost of land on the basis of the circle rate is valid.

The Court observed that “the land was given to the original allottee at a price fixed by BIADA. When the allottee transfers and gets something more for the land or the market value as reflected in the circle rate is much more than the price at which the land was allotted to the allottee, we see no reason why the allottee should pocket all this unearned increase and BIADA, which was the original owner of the land should be deprived of a reasonable portion of the unearned increase from the value of the land.”

Further, the court stated that “we are not in agreement with the High Court that the unearned increase can be charged only on the basis of the BIADA value plus development charges and in our opinion the policy of the BIADA fixing the cost of the land on the basis of the circle rate applicable is legal and valid.”

The Court also noted that “the premium on the unearned increase is being charged only on the value of the land and not on the value of the transaction.”

Key Takeaways

• BIADA is entitled to a share of the unearned increase when land allotted for industrial purposes is transferred.
• The unearned increase should be calculated based on the market value or circle rate of the land at the time of transfer.
• This decision impacts how industrial land transfers are handled in Bihar and potentially in other states with similar industrial development authorities.
• The judgment clarifies that the original allottee cannot solely benefit from the appreciation in land value.

Directions

The Supreme Court gave the following directions:

• In Civil Appeal No. 8219 of 2019, while the legal question was decided in favor of the appellant, no amount was to be recovered from the respondent due to a previous order of the High Court.
• In Civil Appeal No. 8220 of 2019, BIADA was directed to pay interest at 9% per annum on Rs. 4,25,250/- for the period 10.03.2005 to 14.04.2007. On payment of the interest, the formal lease deed was to be executed by BIADA in favor of the original writ petitioner(s).
• Civil Appeal No. 8222 of 2019 was disposed of in view of the orders passed in the other appeals.
• In Civil Appeal No. 8221 of 2019, the matter was remitted back to the Patna High Court to determine if the original allottee, Sukhdev Paswan, had more than 51% shareholding in M/s. Samras Products Pvt. Ltd. If so, no transfer charges were payable, otherwise, the unearned increase was to be paid as decided by the Supreme Court.

Specific Amendments Analysis

No specific amendments were discussed in this judgment.

Development of Law

The ratio decidendi of this case is that when land allotted for industrial purposes is transferred, the unearned increase should be calculated based on the market value or circle rate of the land at the time of transfer, not just the original allotment price plus development charges. This decision clarifies the position of law regarding the calculation of unearned increase in such cases, moving away from the previous view that only the original allotment value plus development charges should be considered.

Conclusion

In summary, the Supreme Court held that BIADA is entitled to a fair share of the unearned increase in the value of land when it is transferred for commercial reasons. The unearned increase should be calculated based on the market value or circle rate at the time of transfer, not just the original allotment price plus development charges. This decision clarifies the rights of BIADA and ensures that it benefits from the appreciation in land value, aligning with the objectives of industrial development.