Supreme Court Upholds Unearned Increase on Leasehold Property Transfers: DDA vs. Karamdeep Finance (2019)

Introduction

Date of the Judgment: 12 February 2019
Citation: (2019) INSC 123
Judges: Ashok Bhushan, J. and K.M. Joseph, J.

When a property is sold in a government auction, do the new owners inherit all the previous liabilities, including the unearned increase on a leasehold property? The Supreme Court of India recently addressed this complex question in a case involving the Delhi Development Authority (DDA) and an auction purchaser. This judgment clarifies the obligations of auction purchasers regarding unearned increases on leasehold properties. The bench comprised Justices Ashok Bhushan and K.M. Joseph, with the majority opinion authored by Justice Ashok Bhushan.

Case Background

The case revolves around a property originally leased by the Delhi Development Authority (DDA) to Shri Trilochan Singh Rana in 1970. The lease agreement stipulated that if the lessee wanted to sell or transfer the property, they would need the DDA’s consent and would have to pay 50% of the unearned increase in the property’s market value. In 1988, Shri Rana agreed to sell the property to M/s Ocean Construction Industries Pvt. Ltd. However, before the sale could be completed, the Income Tax Department intervened and acquired the property in 1988 under Section 269UD of the Income Tax Act, 1961. The Income Tax Department paid a sum of Rs.17,86,420 to the DDA towards unearned increase. Subsequently, the DDA auctioned the property, and M/s. Karamdeep Finance & Investment (I) Pvt. Ltd. became the highest bidder in 1989 for Rs. 1,08,05,000/-. A sale deed was executed in their favor in 1997. Later, when M/s. Karamdeep Finance applied for conversion of the property from leasehold to freehold, the DDA demanded a further unearned increase of Rs. 1,43,90,348/-, leading to the dispute.

Timeline:

Course of Proceedings

The dispute first went to the Delhi High Court, where a Single Judge ruled in favor of M/s. Karamdeep Finance, setting aside the DDA’s demand for unearned increase and ordering the refund of conversion charges. The DDA then appealed to a Division Bench of the Delhi High Court. The Division Bench partly allowed the DDA’s appeal, setting aside the refund of conversion charges but upholding the decision that the auction purchaser was not liable to pay the unearned increase. Both parties, dissatisfied with the Division Bench’s decision, appealed to the Supreme Court.

Legal Framework

The legal framework of this case is based on the following:

• ✓ Clause (4)(a) of the Perpetual Lease Deed: This clause stipulated that the lessee could not sell, transfer, or assign the property without the lessor’s prior written consent. It also stated that if consent was given, the lessor could claim 50% of the unearned increase in the property’s value. The clause reads:
  
  “(4)(a) The Lessee shall not sell, transfer assign or otherwise part with the possession of the whole or any part of the residential plot except with the previous consent in writing of the Lessor which he shall be entitled to refuse in his absolute direction. Provided that such consent shall not be given for a period of ten years, from the commencement of the Lease unless, in the opinion of the Lessor, exceptional circumstances exist for the grant of such consent. Provided further 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 residential plot at the time of sale, transfer, assignment or parting with the possession, the amount to be recovered being fifty percent of the unearned increase and the decision of the Lessor in respect of the market value shall be final binding.”
• ✓ Section 269UD of the Income Tax Act, 1961: This section allows the appropriate authority to compulsorily acquire properties.
• ✓ Section 269UE of the Income Tax Act, 1961: This section deals with the vesting of property in the Central Government. The amended Section 269UE(1) states:
  
  “269UE. Vesting of property in Central Government. —(1) Where an order under sub-section (1) of section 269UD is made by the appropriate authority in respect of an immovable property referred to in sub-clause (i) of clause (d) of section 269UA, such property shall, on the date of such order, vest in the Central Government in terms of the agreement for transfer referred to in sub-section (1) of section 269UC: Provided that where the appropriate authority, after giving an opportunity of being heard to the transferor, the transferee or other persons interested in the said property, under sub-section (1A) of section 269UD, is of the opinion that any encumbrance on the property or leasehold interest specified in the aforesaid agreement for transfer is so specified with a view to defeat the provisions of this Chapter, it may, by order, declare such encumbrance or leasehold interest to be void and thereupon the aforesaid property shall vest in the Central Government free from such encumbrance or leasehold interest.”
• ✓ Section 3 of the Government Grants Act, 1895: This section states that government grants take effect according to their tenor.
  
  “3. Government grants to take effect according to their tenor. – All provisions, restrictions, conditions and limitations over contained in any such grant or transfer as aforesaid shall be valid and the effect according to their tenor, any rule of law, statute or enactment of the Legislature to the contrary notwithstanding.”
• ✓ Section 111 of the Transfer of Property Act, 1882: This section deals with the determination of a lease, including the doctrine of merger.
  
  “111. Determination of lease.—A lease of immovable property determines— *** (d) in case the interests of the lessee and the lessor in the whole of the property become vested at the same time in one person in the same right; ***”

Arguments

Arguments by the Delhi Development Authority (DDA):

• ✓ The DDA contended that the property was originally a leasehold property, and the auction was for the leasehold rights only.
• ✓ The DDA argued that the liability to pay unearned increase applies to all transfers, not just voluntary ones.
• ✓ The DDA asserted that the auction purchaser, being the highest bidder, was liable to pay the unearned increase.
• ✓ The DDA emphasized that the deposit of conversion charges by the writ petitioner indicated their understanding that they had purchased only leasehold rights.
• ✓ The DDA argued that the principle of merger is inapplicable as the Income Tax Department was not acting in the capacity of a lessor.

Arguments by M/s. Karamdeep Finance & Investment (I) Pvt. Ltd.:

• ✓ M/s. Karamdeep Finance argued that the auction notice did not specify that the unearned increase was to be paid by the auction purchaser.
• ✓ They contended that the unearned increase had already been paid by the Income Tax Department when the property was acquired.
• ✓ M/s. Karamdeep Finance submitted that the sale deed conveyed absolute rights to the property, not just leasehold rights.
• ✓ They claimed that the leasehold rights merged with the lessor’s rights when the Income Tax Department acquired the property, so they should not be liable for conversion charges.
• ✓ The auction purchaser deposited the conversion charges under a bona fide mistake and sought a refund.
• ✓ They argued that Clauses 1 and 2 of the Sale Deed indicated absolute ownership, while Clause 3, which referred to the previous agreement, was incompatible and should not override the earlier clauses.

Submissions Table:

Issues Framed by the Supreme Court:

The Supreme Court framed the following issues for consideration:

1. ✓ Whether the writ petitioner was liable to pay the unearned increase in the value of the property to the DDA?
2. ✓ Whether the writ petitioner was entitled to get a refund of the conversion charges deposited by it?

Treatment of the Issue by the Court:

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

• ✓ Sahebzada Mohammad Kamgarh Shah Vs. Jagdish Chandra Deo Dhabal Deb and Others, AIR 1960 SC 953: This case was cited for the principles of construction of documents, emphasizing the importance of ascertaining the intention of the parties from the words used. The Court noted that in cases of ambiguity, all parts of the document must be examined to ascertain the parties’ true intent.
• ✓ Radha Sundar Dutta Vs. Mohd. Jahadur Rahim & Ors., AIR 1959 SC 24: This case was referred to for the principle that if two constructions of a document are possible, the one that gives effect to all clauses should be adopted. It also highlighted that if there is a conflict between earlier and later clauses, the earlier clause prevails.
• ✓ S.N. Ranade Vs. Union of India and Another, AIR 1964 SC 24: This case was used to establish that a government grant should be construed to include all rights, title, and interest of the grantor unless there is a contrary provision.
• ✓ T. Lakshmipathi and Others Vs. P. Nithyananda Reddy and Others, (2003) 5 SCC 150: This case was discussed in relation to the doctrine of merger under Section 111(d) of the Transfer of Property Act, 1882. The court clarified that merger occurs when the interests of the lessee and lessor vest in one person at the same time, in the same right, and in the whole property.
• ✓ Pramod Kumar Jaiswal and Others Vs. Bibi Husn Bano and Others, (2005) 5 SCC 492: This case also dealt with the doctrine of merger and was cited to reinforce the principles laid down in T. Lakshmipathi.
• ✓ M/s. Bansal Contractors (India) Ltd. & Anr. Vs. Union of India and Others, 76 (1998) DLT 805: This case from the Delhi High Court was cited by the writ petitioner, but the Supreme Court distinguished it based on different facts and the absence of a clause similar to Clause 3 in the sale deed in the present case.

Legal Provisions:

• ✓ Clause (4)(a) of the Perpetual Lease Deed: This clause outlined the conditions for transfer of the leasehold property, including the payment of unearned increase.
• ✓ Section 269UD of the Income Tax Act, 1961: This provision allows for the compulsory acquisition of property by the appropriate authority.
• ✓ Section 269UE of the Income Tax Act, 1961: This section deals with the vesting of property in the Central Government and was amended to include the phrase “in terms of the agreement for transfer.”
• ✓ Section 3 of the Government Grants Act, 1895: This section specifies that government grants take effect according to their tenor.
• ✓ Section 111(d) of the Transfer of Property Act, 1882: This section outlines the conditions for the determination of a lease, including the doctrine of merger.

Authority Table:

Judgment

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

How each authority was viewed by the Court?

• ✓ Sahebzada Mohammad Kamgarh Shah Vs. Jagdish Chandra Deo Dhabal Deb and Others [AIR 1960 SC 953]*: The Court used this case to emphasize the importance of construing documents based on the intention of the parties and examining all parts of the document in case of ambiguity.
• ✓ Radha Sundar Dutta Vs. Mohd. Jahadur Rahim & Ors. [AIR 1959 SC 24]*: The Court applied the principle that earlier clauses of a document prevail over later clauses if there is a conflict, but harmoniously construed all the clauses.
• ✓ S.N. Ranade Vs. Union of India and Another [AIR 1964 SC 24]*: This case was used to support the principle that a government grant should include all rights of the grantor unless explicitly stated otherwise.
• ✓ T. Lakshmipathi and Others Vs. P. Nithyananda Reddy and Others [(2003) 5 SCC 150]*: The Court discussed the doctrine of merger as explained in this case, but ultimately did not apply it due to the nature of the government grant.
• ✓ Pramod Kumar Jaiswal and Others Vs. Bibi Husn Bano and Others [(2005) 5 SCC 492]*: The Court referred to this case to reinforce the principles of merger.
• ✓ M/s. Bansal Contractors (India) Ltd. & Anr. Vs. Union of India and Others [76 (1998) DLT 805]*: The Court distinguished this case based on its specific facts and the absence of a clause similar to Clause 3 in the sale deed of the present case.

What weighed in the mind of the Court?

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

• ✓ Auction Notice: The auction notice clearly stated that the property was being auctioned as a “leasehold residential plot,” which indicated that only leasehold rights were being transferred.
• ✓ Sale Deed Interpretation: The Court harmoniously interpreted all clauses of the sale deed, particularly Clause 3, which referred to the original agreement between the previous lessee and M/s. Ocean Construction Industries, thus clarifying that only leasehold rights were conveyed.
• ✓ Statutory Provisions: The amended Section 269UE(1) of the Income Tax Act, 1961, which states that the property vests in the Central Government “in terms of the agreement for transfer,” was also a key factor.
• ✓ Unearned Increase Payment: The fact that the Income Tax Department had already paid the unearned increase to the DDA when the property was acquired under Section 269UD of the Income Tax Act, 1961 weighed in the mind of the Court.
• ✓ Government Grant: The Court noted that the present case is a government grant, and the grant should be construed to include all rights, title, and interest of the grantor, unless there is a contrary provision.

Sentiment Analysis Table:

Fact:Law Ratio Table:

Logical Reasoning:

The Court rejected the argument that the leasehold rights merged with the lessor’s rights when the Income Tax Department acquired the property, stating that the principle of merger was not relevant in the context of a government grant. The Court also rejected the argument that Clause 3 of the Sale Deed should be ignored. The Court emphasized that all clauses of the Sale Deed should be read together to understand the intention of the grantor.

The Supreme Court upheld the Division Bench’s decision that the auction purchaser was not liable to pay the unearned increase. However, the Court also upheld the Division Bench’s decision that the auction purchaser was not entitled to a refund of the conversion charges.

The Court stated, “When the auction was made on the market value of the property, we are of the view that there was no question of claim of unearned increase by the DDA.”

The Court further clarified, “We, thus, find that on true construction of Sale Deed, it is clear that all rights, titles and interests were not conveyed to the petitioner in the leasehold residential plot, when we read Clauses 1, 2 and 3 together.”

Regarding the principle of merger, the Court stated, “But herein issue being Government grant, the principle of merger may not be of much relevance.”

Practical Implications

This judgment has several practical implications:

• ✓ Clarity on Auction Purchases: The judgment clarifies that auction purchasers of leasehold properties are not automatically liable for unearned increases if the auction is based on the market value and the unearned increase has already been paid.
• ✓ Importance of Auction Notices: The judgment emphasizes the importance of auction notices in determining the nature of rights being transferred. The auction notice should clearly specify whether the property is being sold as leasehold or freehold.
• ✓ Interpretation of Sale Deeds: Sale deeds must be read holistically, and all clauses should be considered to understand the intention of the parties. Conflicting clauses should be harmoniously construed.
• ✓ Government Grants: The judgment highlights that government grants are to be construed according to their tenor, and the principle of merger may not be applicable in such cases.
• ✓ Due Diligence: Auction purchasers should conduct thorough due diligence to understand the nature of the property and any outstanding liabilities.

Conclusion

The Supreme Court’s judgment in DDA vs. Karamdeep Finance provides significant clarity on the obligations of auction purchasers of leasehold properties. The Court held that if the auction was based on the market value and the unearned increase had already been paid, the auction purchaser is not liable to pay it again. However, the Court also clarified that the sale deed must be read as a whole, and if the auction was for leasehold rights, the purchaser is not entitled to a refund of conversion charges. The judgment emphasizes the importance of the auction notice, the interpretation of sale deeds, and the nature of government grants in determining the rights and liabilities of auction purchasers. This case serves as a crucial precedent for future disputes involving leasehold property transfers and government auctions.