2014 (4) TMI 1272 - HC - Indian Laws

Liability to pay unearned increase - Initiation of action to determine the perpetual lease-deed executed in favour of Jindal Strips Limited - non-satisfaction of demand made - HELD THAT - In the present facts it is obvious that no consideration whatsoever has passed. It is a case of reorganisation of business - the impugned order relies on Clause 2(d) of the Policy for charge of unearned increase to hold that the appellants are covered by the said clause and are hence liable to pay unearned increase. There is no specific Clause of the Policy dealing with a case of de- merger. The facts of the present case are somewhat akin to a situation as stipulated in Clause 1(b) of the said policy, inasmuch as clause 1(b) deals with a situation of conversion of a partnership firm into a private limited company comprising only original partners as Directors/ Subscribers/ShareHolders, namely, mere reorganisation of the business. The Policy specifically provides for no unearned increase to be charged in such a situation - it is clarified that it is not every case of demerger that the unearned increase will not apply. There may be cases where an element of sale is involved. In such a situation the issue would be different. The respondent is not entitled to charge any unearned increase in the facts and circumstances of the present case keeping in mind a meaningful reading of Clause 6(a) of the perpetual lease and the policy for unearned increase. Even in equity no such amount can be claimed by DDA - Appeal is allowed.

Summary

Issues:
Challenge to demand raised by respondent under perpetual lease-deed for unearned increase.

Analysis:
The appellants challenged a demand of Rs. 6,17,53,998 raised by the respondent based on a perpetual lease-deed. The appellants, formerly known as Jindal Strips Limited, underwent a demerger scheme transferring assets to another entity. The respondent demanded unearned increase citing Clause 6 of the lease-deed due to the transfer of leasehold rights. The appellants contended that no sale or consideration was involved, and the management and shareholders were common between the entities.

The Single Judge dismissed the writ petition, upholding the demand based on the demerger scheme and Clause 6(a) of the lease-deed. The appellants argued against the order, emphasizing the absence of a sale or consideration. The respondent relied on the Clause and a previous court judgment.

Examining Clause 6 of the lease-deed, it allows the DDA to impose conditions and recover unearned increase upon transfer of the property. The purpose is to recover part of the lessee's profit. In this case, no consideration passed due to business reorganization, not a sale. The policy cited by the respondent did not apply to demerger situations but rather to new company formations.

The Court found that the respondent was not entitled to charge unearned increase in this reorganization scenario. The judgment cited by the respondent was deemed inapplicable as it involved a different factual background. Consequently, the Court allowed the appeal, setting aside the impugned order and quashing the demand, directing the respondent to take necessary steps for property conversion without charging unearned increase.