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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

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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

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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

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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

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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.

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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. CIT1, Heavy Engineering Mazdoor Union vs. State of  Bihar2, Electronics Corporation of India Limited vs. Secretary,  

Revenue  Department3,  Amit  Products  (India)  Ltd.  vs.  Chief  

Engineer (O&M) Circle4 and  Balwant Raj Saluja & Anr. vs. Air  

1  AIR 1955 SC 74 2  (1969) 1 SCC 765 3  (1999) 4 SCC 458 4  (2005) 7 SCC 393

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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  

5  (2014) 9 SCC 407

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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

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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

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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

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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

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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

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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.

6  (1996) 10 SCC 665

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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

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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 evasion7 but  also  where  protection  of  public  interest  is  of  paramount  importance and the corporate entity is an attempt to evade legal  

7  (1967) 1 SCR 934 – The Commissioner of Income Tax, Madras vs. Sri Meenakshi Mills Ltd.

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obligations and lifting of veil is necessary to prevent a device  to  avoid  welfare  legislation8.   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  

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

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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  

11  (1996) 4 SCC 622

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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

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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

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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  lease12.  Cases of Arun Kumar Agrawal vs. Union of India13 (the  Vedanta case), BALCO Employees’ Union vs. Union of India14 (the  BALCO  case)  and  Vodafone  International  Holdings  B.V.  versus  Union of India15 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  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

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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.  

16  (2013) 7 SCC 1 – Para 1 17  (2012) 6 SCC 613 – Para 179

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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 Officer19 and Union of India vs. Azadi Bachao Andolan20 with  reference  to  English  decisions  in  IRC  vs.  Westminister21 and  W.T. Ramsay vs. IRC22 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  

18  Para 64 19  (1985) 3 SCC 230 20  (2004) 10 SCC 1 21  1936 AC 1 22  1982 AC 300

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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

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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  writing23.   The  

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

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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  transfers24.   

34. The State must have a declared policy for exercise of its  

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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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

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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

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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