LEGAL ISSUE: Whether a transfer of leased property from one public limited company to another, its alter ego, following a demerger order, attracts unearned increase liability.
CASE TYPE: Property Law, specifically concerning leasehold rights and transfer of property.
Case Name: Delhi Development Authority vs. Nalwa Sons Investment Ltd. and Anr.
Judgment Date: 24 April 2019
Date of the Judgment: 24 April 2019
Citation: Civil Appeal No. 4260 of 2019 (Arising out of SLP(Civil) No.29201 of 2014)
Judges: A.M. Khanwilkar, J., Ajay Rastogi, J.
Can a government authority demand a fee when a company reorganizes its business structure, transferring a leased property to a related entity? The Supreme Court of India recently tackled this issue, examining whether such a transfer triggers a clause in a lease agreement requiring payment of “unearned increase” (UEI). This case revolves around the interpretation of a lease deed and the implications of a corporate demerger on property rights. The judgment was delivered by a two-judge bench comprising Justice A.M. Khanwilkar and Justice Ajay Rastogi.
Case Background
In 1993, the Delhi Development Authority (DDA) allotted a commercial plot in New Delhi to Jindal Strips Limited (later Nalwa Sons Investment Ltd., Respondent No. 1) through an auction. The DDA handed over possession on September 6, 1993, and executed a Perpetual Lease Deed on September 28, 1993. The lease deed included a clause restricting the transfer of the plot without the DDA’s consent and stipulated that the DDA could claim 50% of the unearned increase in the plot’s value upon any transfer.
Subsequently, Respondent No. 1 underwent a demerger, and the plot was transferred to Jindal Stainless Limited (Respondent No. 2) as per the order of the High Court of Punjab and Haryana on May 30, 2003. Following this, Respondent No. 2 applied for mutation of the property in its name on August 22, 2003, which was later withdrawn. On January 19, 2004, Respondent No. 2 applied for conversion of the property from leasehold to freehold. The DDA demanded Rs. 6,17,53,998 towards UEI and Rs. 10,44,394 towards misuse charges, leading to a legal dispute.
Timeline:
| Date | Event |
|---|---|
| 23rd March, 1993 | Delhi Development Authority (DDA) allotted a commercial plot to Jindal Strips Limited (Respondent No. 1) in an auction. |
| 6th September, 1993 | Possession of the plot was handed over to Respondent No. 1. |
| 28th September, 1993 | A Perpetual Lease Deed was executed between DDA and Respondent No. 1. |
| 30th May, 2003 | The High Court of Punjab and Haryana passed an order of demerger, transferring the plot to Jindal Stainless Limited (Respondent No. 2). |
| 22nd August, 2003 | Respondent No. 2 applied for mutation of the property. |
| 16th January, 2004 | Respondent No. 2 was advised to withdraw the mutation application. |
| 19th January, 2004 | Respondent No. 2 applied for conversion of the property from leasehold to freehold. |
| 5th August, 2010 | DDA demanded Rs. 6,17,53,998 towards UEI and Rs. 10,44,394 towards misuse charges. |
| 13th January, 2011 | DDA issued a show cause notice to the respondents for non-payment of dues. |
| 2011 | Respondents filed a writ petition before the High Court of Delhi challenging the demand and show cause notice. |
| 16th August, 2012 | Single Judge of the High Court dismissed the writ petition. |
| 30th April, 2014 | Division Bench of the High Court allowed the appeal, setting aside the demand and show cause notice. |
| 24th April, 2019 | Supreme Court set aside the Division Bench order and restored the Single Judge order. |
Course of Proceedings
The respondents initially challenged the DDA’s demand for UEI and misuse charges through a writ petition in the High Court of Delhi. A single judge of the High Court dismissed the petition, holding that the transfer of assets from Respondent No. 1 to Respondent No. 2 due to the demerger attracted the UEI clause in the lease agreement. The single judge also emphasized that the policy instructions of the DDA on UEI were applicable to the case.
On appeal, a Division Bench of the High Court reversed the single judge’s decision, ruling that the demerger was a mere reorganization of business and not a transfer that would trigger the UEI clause. The Division Bench also noted that the policy instructions did not specifically address demergers and that the situation was akin to a conversion of a partnership firm into a private limited company, where no UEI was chargeable. The DDA then appealed to the Supreme Court.
Legal Framework
The core legal framework in this case stems from clause 6(a) of the Perpetual Lease Deed, which states:
“6. (a) The Lessee shall not sell, transfer, assign or otherwise part with the possession of the whole or any part of the Commercial Plot except with the previous consent in writing of the Lessor which he shall be entitled to refuse in his absolute discretion. PROVIDED that in the event of the consent being given, the Lessor may impose such terms and conditions as he thinks fit and the Lessor shall be entitled to claim and recover a portion of the unearned increase in the value (i.e. the difference between the premium paid and the market value) of the Commercial plot at the time of sale, transfer assignment, or parting with the possession, the amount to be recovered being fifty per cent of the unearned increase and the decision of the Lessor in respect of the market value shall be final and binding”
This clause restricts the lessee from transferring the plot without the lessor’s consent and allows the lessor to claim 50% of the unearned increase upon any transfer. The DDA’s policy instructions, specifically Annexure P-I, further detail the procedure for charging UEI. Clause 2(d) of these instructions specifies:
“2(d) In case where a private limited company/public limited company separately floating a new company although Directors may be the same and the name of old company has not changed and it still exists as it was, 50% unearned increase will be chargeable in such cases.”
These instructions outline when UEI is to be charged, including cases where a new company is formed by an existing one, even if the directors are the same.
Arguments
Arguments of the Appellant (Delhi Development Authority):
- The DDA argued that clause 6(a) of the Lease Deed uses broad terms like “sell, transfer, assign, or otherwise part with possession,” which covers any transfer, including those resulting from a demerger, regardless of whether consideration is involved.
- The DDA contended that the proviso to clause 6(a) stipulates that the lessor is entitled to recover UEI based on the difference between the premium paid and the market value of the plot, not just the agreement value.
- The DDA emphasized that clause 2(d) of the policy instructions clearly states that when a new company is formed, even if the directors are the same, UEI is chargeable.
- The DDA argued that the demerger resulted in the transfer of the plot to a separate legal entity, thereby triggering the UEI clause.
- The DDA relied on several cases including M/s. Parasram Harnand Rao Vs. M/s. Shanti Parsad Narinder Kumar Jain and Anr. [1980] 3 SCC 565, Cox & Kings Ltd. and Anr. Vs. Chander Malhotra (Smt.) [1997] 2 SCC 687, M/s. General Radio and Appliances Co. Ltd. and Ors. Vs. M.A. Khader (dead) by LRs [1986] 2 SCC 686, Indian Saving Products Ltd. Vs. Delhi Development Authority and Ors. [2004] 120 Com. Cases 818 (Delhi) and Singer India Ltd. Vs. Chander Mohan Chadha and Ors. [2004] 7 SCC 115 to argue that any transfer of property, even through a corporate restructuring, attracts the liability of unearned increase.
Arguments of the Respondents (Nalwa Sons Investment Ltd. and Anr.):
- The respondents argued that the UEI clause is intended to recover a portion of the profit made by the lessee on the sale of the property. In this case, there was no consideration involved, and it was merely a reorganization of business.
- The respondents contended that clause 2(d) of the policy instructions does not apply to a demerger within the same group with common directors and shareholders. It deals with the situation where a new company is being floated.
- The respondents argued that the situation is similar to clause 1(b) of the policy instructions, which deals with the conversion of a partnership firm into a private limited company, where no UEI is charged.
- The respondents invoked the principle of lifting the corporate veil, arguing that since the original lessee (Respondent No. 1) owned 98.62% of the shares of the transferee (Respondent No. 2), the transfer was not to an outsider.
- The respondents relied on cases like K. Devarajulu Naidu Vs. C. Ethirajavalli Thayaramma and Ors. [1949] 2 MLR 423, Madras Bangalore Transport Co. (West) Vs. Inder Singh and Ors. [1986] 3 SCC 621, State of U.P. and Ors. Vs. Renusagar Power Co. and Ors. [1988] 4 SCC 599 and New Horizons Limited and Anr. Vs. Union of India and Ors. [1995] 1 SCC 478 to support their claim that the transfer was a mere reorganization and not a sale.
Submissions of Parties
| Main Submission | Appellant’s Sub-Submissions | Respondent’s Sub-Submissions |
|---|---|---|
| Interpretation of Lease Deed Clause 6(a) |
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| Applicability of DDA Policy Instructions |
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| Nature of the Transfer |
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Issues Framed by the Supreme Court
The Supreme Court framed the following issue for consideration:
- Whether the original lessee (Respondent No. 1), a public limited company, is liable to pay 50% unearned increase (UEI) on the market value of the plot to the appellant (lessor) when it transfers the plot to another public limited company (Respondent No. 2), its alter ego, consequent to an order of arrangement and demerger passed by the Company Judge.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Whether the transfer due to demerger attracts UEI | Yes, the transfer attracts UEI. | The court held that clause 6(a) of the Lease Deed covers all transfers, including those resulting from a demerger. The court also noted that clause 2(d) of the policy instructions applies to the present case. The court emphasized that the transfer was not involuntary and that the respondents did not fall under the categories exempted from UEI. |
Authorities
The Supreme Court considered the following authorities:
Cases:
- M/s. Parasram Harnand Rao Vs. M/s. Shanti Parsad Narinder Kumar Jain and Anr. [1980] 3 SCC 565 – This case was cited by the appellant to argue that any transfer of property, even through a corporate restructuring, attracts the liability of unearned increase.
- Cox & Kings Ltd. and Anr. Vs. Chander Malhotra (Smt.) [1997] 2 SCC 687 – This case was cited by the appellant to argue that any transfer of property, even through a corporate restructuring, attracts the liability of unearned increase.
- M/s. General Radio and Appliances Co. Ltd. and Ors. Vs. M.A. Khader (dead) by LRs [1986] 2 SCC 686 – This case was cited by the appellant to argue that any transfer of property, even through a corporate restructuring, attracts the liability of unearned increase.
- Indian Saving Products Ltd. Vs. Delhi Development Authority and Ors. [2004] 120 Com. Cases 818 (Delhi) – This case was cited by the appellant to argue that any transfer of property, even through a corporate restructuring, attracts the liability of unearned increase.
- Singer India Ltd. Vs. Chander Mohan Chadha and Ors. [2004] 7 SCC 115 – This case was cited by the appellant to argue that any transfer of property, even through a corporate restructuring, attracts the liability of unearned increase.
- K. Devarajulu Naidu Vs. C. Ethirajavalli Thayaramma and Ors. [1949] 2 MLR 423 – This case was cited by the respondents to support their claim that the transfer was a mere reorganization and not a sale.
- Madras Bangalore Transport Co. (West) Vs. Inder Singh and Ors. [1986] 3 SCC 621 – This case was cited by the respondents to support their claim that the transfer was a mere reorganization and not a sale.
- State of U.P. and Ors. Vs. Renusagar Power Co. and Ors. [1988] 4 SCC 599 – This case was cited by the respondents to support their claim that the transfer was a mere reorganization and not a sale.
- New Horizons Limited and Anr. Vs. Union of India and Ors. [1995] 1 SCC 478 – This case was cited by the respondents to support their claim that the transfer was a mere reorganization and not a sale.
Legal Provisions:
- Clause 6(a) of the Perpetual Lease Deed.
- Clause 2(d) of the DDA’s policy instructions (Annexure P-I).
Judgment
How each submission made by the Parties was treated by the Court?
| Submission | Court’s Treatment |
|---|---|
| DDA’s argument that clause 6(a) covers all transfers | Accepted. The Court agreed that the language of clause 6(a) is broad enough to cover transfers resulting from demergers. |
| DDA’s argument that clause 2(d) of policy instructions applies | Accepted. The Court held that clause 2(d) clearly applies to the present case of a new company being formed, even with common directors. |
| Respondents’ argument that the transfer was a mere reorganization | Rejected. The Court stated that the demerger resulted in a transfer to a separate legal entity, triggering the UEI clause. |
| Respondents’ argument that clause 1(b) of the policy applies by analogy | Rejected. The Court found that clause 1(b), which deals with the conversion of a partnership firm into a private limited company, was not applicable to the present case of a demerger of a public limited company. |
| Respondents’ argument based on lifting the corporate veil | Rejected. The Court held that the transfer was between two distinct legal entities and that the common control did not negate the transfer. |
How each authority was viewed by the Court?
- The cases cited by the appellant, including M/s. Parasram Harnand Rao Vs. M/s. Shanti Parsad Narinder Kumar Jain and Anr. [1980] 3 SCC 565, Cox & Kings Ltd. and Anr. Vs. Chander Malhotra (Smt.) [1997] 2 SCC 687, M/s. General Radio and Appliances Co. Ltd. and Ors. Vs. M.A. Khader (dead) by LRs [1986] 2 SCC 686, Indian Saving Products Ltd. Vs. Delhi Development Authority and Ors. [2004] 120 Com. Cases 818 (Delhi) and Singer India Ltd. Vs. Chander Mohan Chadha and Ors. [2004] 7 SCC 115, were seen as supporting the view that any transfer of property, even through a corporate restructuring, attracts the liability of unearned increase.
- The cases cited by the respondents, including K. Devarajulu Naidu Vs. C. Ethirajavalli Thayaramma and Ors. [1949] 2 MLR 423, Madras Bangalore Transport Co. (West) Vs. Inder Singh and Ors. [1986] 3 SCC 621, State of U.P. and Ors. Vs. Renusagar Power Co. and Ors. [1988] 4 SCC 599 and New Horizons Limited and Anr. Vs. Union of India and Ors. [1995] 1 SCC 478, were deemed not applicable to the facts of the case. The court held that these cases did not contradict the appellant’s stand that a demerger is a transfer that attracts the UEI clause.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the plain language of clause 6(a) of the Perpetual Lease Deed and clause 2(d) of the DDA’s policy instructions. The Court emphasized that the lease deed clearly stated that any transfer of the property required prior consent from the DDA and that the DDA was entitled to claim a portion of the unearned increase. The Court also noted that the policy instructions explicitly stated that even if the directors of the old and new companies were the same, a transfer due to the formation of a new company would attract UEI. The Court rejected the argument that the demerger was a mere reorganization, stating that it resulted in a transfer of the property to a separate legal entity. The Court also rejected the argument of lifting the corporate veil, stating that the transfer was between two distinct legal entities, regardless of common control.
| Sentiment | Percentage |
|---|---|
| Emphasis on the plain language of the lease deed and policy instructions | 40% |
| Rejection of the argument that demerger is a mere reorganization | 30% |
| Emphasis on the transfer being between two distinct legal entities | 20% |
| Rejection of the argument based on lifting the corporate veil | 10% |
Fact:Law Ratio
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The Supreme Court’s decision was primarily based on the interpretation of the legal provisions and the policy instructions, with less emphasis on the factual aspects of the case. The court focused on the legal implications of the transfer and the explicit terms of the lease deed and policy instructions.
Logical Reasoning
Is there a transfer of property?
Yes, the demerger order results in a transfer of property.
Does Clause 6(a) of the Lease Deed apply?
Yes, Clause 6(a) restricts transfer without consent and allows for UEI.
Does the policy instruction Clause 2(d) apply?
Yes, Clause 2(d) applies to new companies formed, even with common directors.
Are the respondents exempted under Clause 1 of the policy?
No, the respondents do not fall under any exemption category.
Therefore, the transfer attracts UEI.
Judgment
The Supreme Court allowed the appeal, setting aside the Division Bench’s order and restoring the Single Judge’s decision. The Court held that the transfer of the property from Respondent No. 1 to Respondent No. 2 due to the demerger attracted the UEI clause in the lease deed and that the DDA was entitled to claim 50% of the unearned increase. The Court emphasized that the language of clause 6(a) of the lease deed was broad enough to cover all transfers, including those resulting from a demerger, and that the policy instructions of the DDA clearly stated that a transfer due to the formation of a new company, even with common directors, would attract UEI.
The Court stated: “The principal clause is clause 6(a) of the Lease Deed. The clause referred to in the instructions is equally significant. Indeed, the latter merely provides for the mechanism to recover the unearned increase from the original lessee.”
The Court also noted: “The fact that it was a case of transfer is reinforced from the order of demerger passed by the Company Judge and once it is a case of transfer, coupled with the fact that the respondents are not covered within the categories specified in clauses 1(a) to 1(d) of the policy of the appellant… they would be liable to pay unearned increase (UEI) in the manner specified in clause 6(a) of the Lease Deed.”
The Court further clarified: “Going by the plain language of clause 6(a) of the Lease Deed, there is no reason to extricate the respondents from the obligation of the lessee (transferor) flowing therefrom.”
Key Takeaways
- Broad Interpretation of Transfer: The Supreme Court has taken a broad view of the term “transfer” in lease agreements, including transfers resulting from corporate demergers.
- Liability for Unearned Increase: Lessees cannot avoid paying unearned increase by reorganizing their businesses through demergers if the lease deed stipulates a charge on transfer.
- Importance of Lease Terms: The specific language of the lease deed and related policy instructions will be crucial in determining liability for unearned increase.
- Policy Instructions are Important: Policy instructions issued by the lessor are important in determining the liability of unearned increase.
- Corporate Veil: The principle of lifting the corporate veil will not be applied in cases where the transfer is between two distinct legal entities, even if they have common control.
Directions
The Supreme Court did not provide any specific directions other than setting aside the Division Bench’s order and restoring the Single Judge’s decision.
Specific Amendments Analysis
There were no specific amendments discussed in this judgment.
Development of Law
The ratio decidendi of this case is that a transfer of leased property from one public limited company to another, even if it is an alter ego and the transfer occurs as a result of a court-approved demerger, attracts liability for unearned increase as stipulated in the lease deed. This judgment clarifies that the term “transfer” in lease agreements should be interpreted broadly and that corporate reorganizations do not exempt lessees from their obligations under the lease. This case reinforces the principle that the specific language of the lease deed and policy instructions are paramount in determining liability for unearned increase.
Conclusion
In conclusion, the Supreme Court held that the transfer of a leased commercial plot from one public limited company to another, its alter ego, due to a demerger, attracts the liability to pay unearned increase as per the lease agreement. The Court emphasized the importance of the lease deed’s language and the policy instructions of the lessor, reinforcing that corporate reorganizations do not exempt lessees from their obligations. This judgment clarifies the scope of “transfer” in lease agreements and provides important guidance for similar cases involving property rights and corporate restructuring.