India: Bombay High Court Upholds Power Of State Government To Charge Transfer Premia

Last Updated: 29 May 2018
Article by Sudip Mullick, Abhiraj Gandhi and Chirag Shah

Most Read Contributor in India, July 2019

Background

The Government of Maharashtra owns large tracts of land in this city which it has leased to various individuals and institutions. The Maharashtra Land Revenue Code, 1966 ("Code") was enacted to govern matters relating to land and land revenue in the State of Maharashtra. Section 295 of the Code deals with disposal of lands or foreshore (i.e. the land between the water and the developed lands) vested with the State Government.

The Government levied "unearned income" (i.e. the difference between the price that would be realised by the lessee and price at which the land was allotted to the lessee) as a premium on transfer of Government leases. Unearned income was governed by various administrative orders issued by the State Government. Recovery of such unearned income was challenged in multiple cases. With a view to crystallise the powers of the Government to recover a share of the unearned income in the event of transfer of the government leases and to regularise the previous transactions of transfer or assignment of leases, the State Government amended the Section 295 of the Code on 22 August 2016 by inserting a proviso to the said Section 295 of the Code ("2016 Amendment").

The 2016 Amendment imposed an obligation on the lessee to seek prior permission of the Collector for transfer and assignment of leases and payment of premium on account of unearned income and transfer fees. This included cases where the leases did not have restrictions on transfer. The amendment further imposed a penalty for failure to obtain such permission. The proviso to Section 295 was made effective retrospectively from the date of the commencement of the Code i.e. from 1 August 1967.

Pursuant to the 2016 Amendment, the Collector sought to recover unearned income in respect of transactions relating to government lands which were concluded even prior to such amendment coming into force. Being aggrieved by such demands and the retrospective effect of the 2016 Amendment, Hindustan Unilever Limited, Gilder Buildcon Realtors Private Limited and Mangla Hospitality Limited and Arvind Properties Pvt Ltd. filed Writ Petitions in the Hon'ble Bombay High Court inter alia challenging the constitutional validity of the 2016 Amendment and for quashing of the impugned demand notices issued by the Collector.

Case of the Petitioners:

  • The 2016 Amendment has no application to the Petitioners' transactions, as they were concluded prior to the 2016 Amendment and furthermore when the transactions were concluded, the lease deeds did not place any restriction on the assignment of leasehold rights.
  • The Code was amended in 2015 by inserting Section 37A which placed restrictions on sale, transfer, redevelopment, change of use etc of government lands in certain notified areas and revenue regions including Mumbai City, without obtaining prior permission of the Collector and payment of unearned income and transfer premium. However, the proviso to Section 37A(2) clarified that in the event of discrepancies between the terms of the lease deed executed prior to 3 March 2015 and the orders issued under Section 37A of the Code, the terms of the lease deed would prevail. Thus, even if Section 37A was made applicable, the Petitioners would not be required to pay unearned income as the lease deeds did not place any restriction on transfer and the Petitioners could take benefit of the proviso to Section 37A(2). However, by introducing the 2016 Amendment, unrestricted powers were sought to be conferred on the State to recover unearned income and transfer fees in the event of sale, transfer, redevelopment etc of government lands despite the presence of the proviso to Section 37A(2) of the Code and hence the 2016 amendment should be declared unconstitutional.
  • The 2016 Amendment was unconstitutional, as a statute cannot be made to operate retrospectively so as to create or impose any new obligation or liability or take away a vested right.

Case of the State Government

  • State Legislature is legally competent to enact a law by giving it a retrospective effect and also vary the rights of the parties under a pre-existing contract.
  • Constitutional validity can be challenged only on the grounds of (i) lack of legislative competence and (ii) inconsistency with Part III of the Constitution and the Petitioners have failed to satisfy these grounds in challenging the validity of the 2016 Amendment.

Findings of the Bombay High Court

  • The impugned demand notices issued under the 2016 Amendment for levying transfer premium in the present cases were quashed by the Hon'ble Bombay High Court principally on the ground that the 2016 Amendment would not be applicable to assignment of leases or grants which have been effected prior to insertion of the 2016 Amendment in the Code i.e. prior to 22 August 2016 as there was neither any restriction on transfer or assignment under such leases nor was there any condition under such leases to take prior permission of the government or payment of unearned income for transfer or assignment of the leases.
  • The Division Bench observed that the impugned demands could also not be justified in view of the proviso under Section 37A(2) of the Code, as firstly the transfers of leases or grants in the present cases had been concluded prior to 3 March 2015 i.e. prior to Section 37A coming into force and secondly there were clear inconsistencies in the terms of the lease deed and the provisions of section 37A of the Code as regards the restrictions on transfer due to which the proviso to section 37A(2) would prevail.
  • The Court further observed that proviso to Section 37A(2) would be applicable to all leases or grants executed prior to Section 37A being inserted in the Code i.e. on or before 3 March 2015 and thus if such leases did not require obtaining prior permission of the Collector or payment of transfer premium then the government cannot recover unearned income in such cases.
  • While upholding the constitutional validity of the 2016 Amendment, the Court also observed that if the State takes recourse to the 2016 Amendment for imposing restriction on transfer of leases or grants, on the ground that the conditions stipulated in 2016 Amendment stand inserted in the lease or grant, then such recourse cannot override the statutory proviso to section 37A(2), as that would render section 37A futile. The Government cannot by backdoor method apply the 2016 Amendment in cases where the leases or grants executed prior to 3 March 2015 contained terms and conditions which are inconsistent with section 37A, as that would render the proviso to section 37A redundant. The court has through the above interpretation reconciled the provision of section 37A and the 2016 Amendment and accordingly rejected the contention of the Petitioners that 2016 Amendment is inconsistent with the proviso to section 37A(2).
  • The Hon'ble High Court held that the 2016 Amendment did not violate the constitutional mandate as enshrined in Part III of the Constitution of India much less Article 300A thereof. The Hon'ble High Court further held that people do not have vested right of trading with government land and cannot insist that government land should be allotted to them on terms and conditions determined by them. It is also not excepted of the State to allow public lands to be dealt with by the lessees further during subsistence of the lease or grant. Unless any provision was made in the statute, the Government could not have insisted on sharing the gains from transfer of the government lands, hence the 2016 Amendment was justified. Furthermore, by a statutory intervention, if the terms and conditions of a contract is altered and from a prior date, it does not mean that the contract itself is brought to an end.

Comments:

  • The judgment puts to rest the controversy concerning the constitutional validity of the 2016 Amendment to Section 295 of the Code and also lays down necessary guidelines on harmonious interpretation of two sections of the Code which appeared to be inconsistent with each other. It now crystallises the right of the State Government to regulate the transfer of government leases or grants by levy of unearned income and transfer charges as a statutory right which was otherwise exercised by the Government under various administrative orders.
  • However, the judgment is silent on which of the aforesaid two provisions would govern leases or grants executed after 3 March 2015 containing terms and conditions inconsistent with Section 37A(2) of the Code.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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