2012 (4) TMI 788 - HC - Indian Laws

Summary

Issues involved: Conversion of commercial plot from leasehold to freehold, unearned increase demand, ownership transfer between related entities, validity of demand notice.

Issue 1: Conversion of commercial plot from leasehold to freehold and unearned increase demand

The first petitioner applied for the conversion of a commercial plot from leasehold to freehold. The respondent raised a demand for unearned increase and misuse charges, leading to a dispute over the payment. The petitioners argued that there was no effective transfer as the second petitioner was a wholly owned subsidiary of the first petitioner, and thus, unearned increase should not be levied. However, the respondent contended that the transfer of rights to a separate entity attracts the payment of unearned increase. The petitioners further emphasized that the de-merger order had finalized, and no new company was formed, citing a previous court decision to support their stance.

Issue 2: Ownership transfer between related entities and application of corporate veil

The petitioners asserted that both petitioner companies were part of the same group, controlled by the same management, and the second petitioner was almost fully owned by the first petitioner. They argued that there was no effective transfer of ownership, and the corporate veil should be lifted to show that the entities were not separate. The respondent, however, pointed to clauses in the lease deed and instructions, indicating that unearned increase is chargeable in cases where management remains the same despite the formation of a new entity. The respondent relied on a court decision to support the imposition of unearned increase in cases of merger or de-merger.

Issue 3: Validity of demand notice and application of lease agreement clauses

The court considered the clauses in the perpetual lease deed, which prohibited transfer without consent and stipulated the payment of unearned increase in case of transfer. It was emphasized that without mutation of the property in the name of the allottee, conversion from leasehold to freehold could not occur. The court held that the respondent's right to levy unearned increase could not be defeated by de-merger followed by further assignment or transfer without consent. Consequently, the demand notice and the notice were deemed valid, leading to the dismissal of the writ petition with costs.