to the distinct corporate personality of a company or its
members is well recognized not only to unravel tax evasion The Commissioner of Income Tax, Madras vs. Sri Meenakshi Mills Ltd. (1967) 1 SCR 934 but
also where protection of public interest is of paramount
importance and the corporate entity is an attempt to evade legal
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 AdvocateGeneral
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
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
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, upand-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
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.
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
Citation;(2016) 4 SCC469
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
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
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 wasPage 4
4
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
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.
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 393Page 7
7
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. petitionerCompany.”
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 nonstatutory
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 407Page 8
8
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 shareholding
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 itsPage 9
9
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 shareholding
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. ItPage 10
10
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 thePage 11
11
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 shareholdingPage 12
12
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
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
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
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.
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 AdvocateGeneral
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
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 622Page 18
18
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, upand-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
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. ArticlePage 20
20
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 613Page 21
21
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 179Page 22
22
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 300Page 23
23
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 subjectPage 24
24
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 thePage 25
25
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 60Page 26
26
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 companyPage 27
27
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 hinPage 28
28
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
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