Supreme Court Upholds Extension for Sugar Factory, Prioritizing Economic Factors and Farmer Welfare: Swami Samarth Sugars vs. Loknete Marutrao Ghule Patil (2022) INSC 604 (13 July 2022)

Date of the Judgment: 13 July 2022
Citation: (2022) INSC 604
Judges: Hemant Gupta, J., V. Ramasubramanian, J.
Can a sugar factory’s operational timeline be extended despite delays caused by litigation? This was the core question before the Supreme Court, which recently ruled in favor of Swami Samarth Sugars and Agro Industries Ltd., allowing them an extension to set up their sugar factory. The court emphasized that delays due to litigation should not penalize the entrepreneur, and that the economic benefits for farmers should be a key consideration in such cases. The judgment was authored by Justice Hemant Gupta, with Justice V. Ramasubramanian concurring.

Case Background

The case revolves around a dispute between an existing sugar factory, Loknete Marutrao Ghule Patil Dnyaneshwar Sahakari Sakhar Karkhana Ltd., and a new sugar factory, Swami Samarth Sugars and Agro Industries Ltd. The existing factory challenged the establishment of the new factory, primarily on grounds of violation of distance norms and delays in setting up the new factory. The new factory had received an Industrial Entrepreneur Memorandum (IEM) in 2010, but faced multiple legal challenges and delays.

The existing sugar factory, established in 1974, had a crushing capacity of 1250 M.T. which was later increased to 7000 M.T. per day. It also set up a Distillery Plant, Co-generation Plant and Ethanol Plant. The new factory applied for an IEM on 08.09.2010, which was acknowledged after the Commissioner of Sugar, Maharashtra, certified that the aerial distance between the proposed factory and existing factories was more than 15 kms.

However, the existing factory filed writ petitions challenging the IEM, alleging violations of distance norms and environmental regulations. The High Court initially dismissed these petitions, but the new factory faced further delays due to issues with land acquisition and environmental clearances. The new factory sought extensions of time and a change of location, which were granted by the Central Government. These extensions and change of location were challenged by the existing factory, leading to the present appeals before the Supreme Court.

Timeline

Course of Proceedings

The High Court initially dismissed the writ petitions challenging the IEM in 2014, stating that the aerial distance certificate was valid and that the new factory had to comply with environmental laws. However, the new factory faced further hurdles, including denial of a no-objection certificate and the need to change its location. The Central Government granted extensions and approved the change of location, which were challenged by the existing factory. The High Court ruled against the new factory, stating that the IEM had lapsed due to non-implementation within the stipulated time. The High Court also held that the amended distance regulations would be applicable. The Supreme Court heard the appeals against this decision.

Legal Framework

The case hinges on the interpretation of the Sugarcane (Control) Order, 1966, issued under Section 3 of the Essential Commodities Act, 1955. Key clauses include:

• Clause 6A: Restricts the setting up of new sugar factories within a 15 km radius of existing ones. It also allows State Governments to increase this distance with Central Government approval. The State of Maharashtra increased this to 25 km.
• Clause 6C: Stipulates the time limits for implementing an IEM. Initially, it was two years for taking effective steps and four years for commencing commercial production. These timelines were later amended to three and five years, respectively, with provisions for extensions under certain circumstances.
  
  “The stipulated time for taking effective steps shall be three years and commercial production shall commence within five years with effect from the date of filing the Industrial Entrepreneur Memorandum with the Central Government, failing which the Industrial Entrepreneur Memorandum shall stand de-recognised as far as provisions of this Order are concerned and the performance guarantee shall be forfeited”
• Clause 6D: Deals with the consequences of non-implementation, including the forfeiture of the performance guarantee.
  
  “If an Industrial Entrepreneur Memorandum remains unimplemented within the time specified in clause 6C, the performance guarantee furnished for its implementation shall be forfeited after giving the concerned person a reasonable opportunity of being heard.”
• Explanation 4 to Clause 6A: Defines “effective steps” as purchase of land, placement of orders for machinery, commencement of civil works, and sanction of loans.

The Supreme Court also considered various amendments to the Control Order, particularly those made in 2016 and 2018, which provided for extensions of time due to unforeseen circumstances, including litigation.

Arguments

Arguments by the Existing Sugar Factory:

• The new factory failed to take effective steps or commence production within the stipulated time, leading to automatic de-recognition of the IEM.
• The amended distance rule of 25 km should apply, rendering the new factory ineligible.
• The extensions granted by the Central Government were improper and without proper justification.
• The new factory had not taken any effective steps within the stipulated time and the IEM stood de-recognized before the amendment in the Sugar Control Order.
• The new factory was not prevented by any court order from taking effective steps.

Arguments by the New Sugar Factory:

• The delays were due to litigation initiated by the existing factory, which should be excluded from the calculation of time limits.
• The extensions granted by the Central Government were valid and in accordance with the amended Control Order.
• The distance norms applicable at the time of grant of IEM should apply, not the amended norms.
• The new factory was prevented from taking effective steps due to the pending litigation.
• The new factory was required to change location due to environmental concerns raised by the High Court.

The innovativeness of the argument by the new sugar factory lies in its reliance on the principle that delays caused by litigation should not prejudice the party facing the litigation. This argument was crucial in persuading the court to grant extensions.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the period during which writ petitions were pending against the appellant should be excluded, and whether the State/Central Government was justified in doing so.
2. Whether the litigation against the appellant was a sufficient reason to exclude the period spent in litigation and a reasonable ground to extend the IEM.
3. Whether the amended Control Order regarding distance norms would apply, given that the High Court had earlier ruled that the issue of the Aerial Distance Certificate could not be reopened.
4. Whether the IEM lapsed automatically on failure to set up the factory within the specified time, or only after an order under Clause 6D of the Control Order.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court followed South Eastern Coalfields Ltd. v. State of M.P. and Others [(2003) 8 SCC 648]*, holding that the act of the court should not prejudice anyone, and that delays caused by litigation should be excluded.
• The Court followed Beg Raj Singh v. State of U.P. and Others [(2003) 1 SCC 726]*, stating that the rights of the parties are crystallized on the date of commencement of litigation.
• The Court followed Tata Cellular v. Union of India [(1994) 6 SCC 651]*, outlining the principles of judicial review in administrative actions.
• The Court distinguished M/s Ojas Industries (P) Ltd v. M/s Oudh Sugar Mills Ltd [AIR 2007 SC 1619]*, stating that the facts were different and that the judgment was relevant only to examine whether the Control Orders are retrospective or not.
• The Court distinguished Babaji Kondaji Garad v. Nasik Merchants Co-operative Bank Ltd., Nasik and Others [(1984) 2 SCC 50]* and Dhananjaya Reddy v. State of Karnataka [(2001) 4 SCC 9]*, as the extension was granted by the Central Government keeping in view the unforeseen circumstances faced by the appellant.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Principle of Restitution: The court emphasized that the appellant should not suffer due to the act of the court or the litigation initiated by the rival party. The principle of ‘Actus Curiae Neminem Gravabit’ was central to the decision.
• Economic Factors: The court recognized that competition between sugar factories benefits farmers by providing them with better prices and timely payments. The court also considered the recommendations of the Rangarajan Committee, which advocated for market-based approaches and the removal of restrictions that create monopolies.
• Interpretation of Control Order: The court interpreted Clause 6C and 6D of the Control Order to mean that the IEM does not lapse automatically, and that forfeiture of the performance guarantee requires a hearing. The court also held that the amendments to the Control Order were retrospective and should be applied to the present case.
• Fairness and Equity: The court found that the appellant was justified in not proceeding with the project during the pendency of litigation and that the extensions granted by the Central Government were valid.

The court considered alternative interpretations but rejected them because they would penalize the appellant for delays caused by litigation and would not promote competition in the sugar industry. The court’s final decision was based on the principle of fairness and the need to protect the interests of farmers.

The court stated: “The litigation at the behest of rival parties cannot be used against the appellants, more so when they have substantially failed in the first round of lis.”

The court also observed: “The objective and purpose of such amended Control Order is that a sugar mill should commence production by excluding the period spent in the court cases.”

Further, the court noted: “In case of a competition, it is the consumer (farmer) who is the beneficiary. In the present case, the farmers are not getting the advantage of competition which could fetch them timely payment and better services.”

There were no minority opinions in this case.

Key Takeaways

• Delays caused by litigation should not penalize entrepreneurs, especially when the litigation is initiated by rival parties.
• The principle of ‘Actus Curiae Neminem Gravabit’ is crucial in cases where court actions cause delays.
• The economic benefits for farmers should be a key consideration in decisions related to the sugar industry.
• The IEM does not lapse automatically due to time limits; a hearing is required for forfeiture of the performance guarantee.
• Amendments to the Control Order are retrospective and should be applied to existing IEMs.

Directions

The Supreme Court directed that the period spent in the second round of litigation should also be excluded while determining the period during which the plant had to be set up and to commence commercial production.

Development of Law

The ratio decidendi of this case is that delays caused by litigation should not penalize entrepreneurs, and that the economic benefits for farmers should be a key consideration in such cases. This judgment clarifies that the IEM does not lapse automatically due to time limits and that a hearing is required for forfeiture of the performance guarantee. This case also reaffirms the principle that the act of the court should not prejudice anyone. The court has also stated that subsequent amendments to the Control Order are retrospective and should be applied to existing IEMs.

Conclusion

The Supreme Court’s decision in favor of Swami Samarth Sugars and Agro Industries Ltd. highlights the importance of considering the economic benefits for farmers and the principle of fairness when dealing with delays in setting up industrial projects. The court emphasized that litigation should not be used as a tool to stifle competition and that the ultimate beneficiary of a competitive market is the consumer, in this case, the farmer. The judgment provides important clarifications on the interpretation of the Sugarcane (Control) Order, 1966, and sets a precedent for similar cases in the future.