LI Network
Published on: October 9, 2023 at 13:38 IST
In a significant ruling, the Supreme Court has emphasized that any loss incurred by a state-owned undertaking or corporation constitutes a loss to the public exchequer. The decision came in a case where a lessee had paid lower land use conversion charges to a state-owned corporation, and the Court directed the lessee to pay according to the prevailing rate for commercial land use.
Background Facts
The State of Karnataka established the Karnataka State Electronics Development Corporation Ltd. (the “Appellant/Lessor”) with the aim of creating an ‘Electronic City’ in Bangalore.
In 2006, the Appellant allotted a plot of land measuring 0.25 acres to Kumaon Entertainment and Hospitalities Pvt. Ltd. (the “Respondent/Lessee”) for a project related to the Information Technology sector. The tentative price set for the allotted land was Rs. 1 Crore per acre.
However, in 2007, the Appellant’s board resolved that the price for the allotment should be Rs. 3.2 Crores per acre. Subsequently, the Respondent sought to change the use of the allotted land from the IT sector to the Hospitality sector. The Letter of Allotment and the Lease Agreement allowed this change upon payment of additional charges at the prevailing rate.
Due to an error by the Appellant’s clerical staff and officers, a demand for a lower land use conversion charge was raised. Later, an audit objection was raised, pointing out that the prevailing rate for land use conversion was higher, resulting in a loss of Rs. 46.25 Lakhs to the Appellant. Additionally, since the land was being used for commercial purposes, the rate was Rs. 4.48 Crores per acre, leading to an additional loss of Rs. 32 Lakhs.
The Respondent was asked to pay Rs. 83.25 Lakhs as land use conversion charges based on the prevailing rate. When the Respondent refused to pay and sought a sale deed, the Appellant issued a Demand Notice.
Supreme Court Verdict
The Supreme Court, in its judgment, emphasized that the Appellant, being a state-owned undertaking, incurs losses that impact the public exchequer. The Court stated that it would not be in the public interest if the balance land use conversion charge was not recovered from the Respondent.
The Court also highlighted that the decision taken by the Appellant’s Board of Directors in its 141st Board Meeting was binding and could not be overridden by the clerical staff or officers. The Respondent could not take advantage of the mistake made in computing conversion charges at a lower rate.
Furthermore, the Court noted that the terms and conditions in the Letter of Allotment and the Lease Agreement clearly stipulated that the tentative rate was subject to change, and the final rate, as determined by the Board, would be binding on the Lessee.
In conclusion, the Supreme Court held the Respondent liable to pay the conversion charge based on the prevailing rate applicable to commercial land use.
The Court also expressed concern about the Division Bench’s failure to exercise its discretion in condoning the delay, which had resulted in financial loss to the Appellant, a public entity.
The decision underscores the importance of upholding agreements and the binding nature of decisions made by state-owned corporations.
