DELHI HIGH COURT HOLDS THAT TRANSFER OF SHARES IN A LEASEHOLD PROPERTY IS NOT DEEMED TO BE TRANSFER OF ASSETS
The #DelhiHighCourt in the case of Vipul Plastic And Allied Industries Pvt Ltd vs DDA, vide its Judgment dated 26.04.2021 while deciding a conversion of Delhi Development Authority (#DDA) Commercial Property from #leasehold to #freehold held that DDA could not charge unearned increase for transfer of #shares in the company as the said transfer was not deemed to be a transfer of #asset.
In this case, a Perpetual Lease Agreement dated 02.11.1976 was entered into between one M/s Jayna Plastic Works, a proprietorship and Delhi Development Authority (‘Respondent’ or ‘DDA’) for leasing of the Industrial Property. On 30.09.1977, M/s Jayna Plastic Works through its proprietor applied for conversion of the Property from M/s Jayna Plastic Works to Vipul Plastic and Allied Industries Pvt Ltd (‘Petitioner’). In 1985 the number of shares of the Petitioner Company rose from 300 to 350 shares wherein some shares of the Petitioner Company were subscribed by the family members holding majority shares and some were subscribed by non-family members.
In 2010, the Respondent advertised a scheme for conversion of leasehold property to freehold property. On 30.09.2013, the Petitioner filed an Application dated 26.09.2013 for the said conversion and paid the prescribed fees. Subsequently, an additional demand was made by the Respondent, which was duly paid by the Petitioner.
However, the Respondent did not finalize the Application of the Petitioner. As a result, the Petitioner filed a Writ Petition before Delhi High Court numbered as W.P. (C) 9283/2015. The Court directed the Respondent to process the Application dated 26.09.2013 within 6 months but no steps were taken. Consequently, the Petitioner initiated Contempt proceedings against the Respondent.
In Contempt Proceedings, the High Court directed the Respondent to dispose off the Petitioner’s Application dated 26.09.2013 before the next date of hearing. However, the Respondent issued a Demand Letter dated 08.11.2016 whereby it demanded an additional payment towards the misuse charges and unearned increase. Objections were filed by the Petitioner, which was dismissed by the Respondent. Thereafter, the High Court disposed off the Contempt Petition with a liberty to the Petitioner to challenge the Demand Letter dated 08.11.2016.
Therefore, the Petitioner filed the present Writ Petition before the Hon’ble High Court of Delhi challenging the demand of misuse charges and unearned increase. The Petitioner contended that the sale took place in 1978 and the Respondent has illegally and arbitrarily levied unearned increase on each subsequent change of shareholdings, when the asset was not transferred.
The High Court after hearing both the Parties observed and held as follows:
- Clause 5 (a) of the Perpetual Lease Agreement dated 02.11.1976 provides that the Petitioner cannot sell, transfer, assign or otherwise part with the possession of the whole or any part of the industrial plot without prior consent of the Respondent. While providing consent for conversion, the Respondent is entitled to recover a portion of the unearned increase in the value (the difference between the premium paid and the market value) of the industrial plot at the time of sale, transfer, assignment or parting with possession. In the current case, there was no sale or transfer of the Property.
- If the Petitioner Company is to transfer some miniscule portion of its shareholding say 5% or 10% to a third party, it does not result in sale, transfer or assignment or parting with possession of the plot in whole or in part whatsoever. The title holder remains with the Petitioner Company itself. Only some small shares have changed hands after 1978 till 2015. The Respondent has chosen to levy proportionate unearned increase on the shares that have changed hands after 1978. The Court observed that such an act is wholly illegal. It further pointed out that there is clearly no sale, transfer, assignment or parting of possession of the land by the Petitioner after 1978 to attract unearned increase as per Clause 5 (a) of the Perpetual Lease Agreement.
- The Court referred to the Judgments of the Division Bench of the Delhi High Court in the cases of Delhi State Industrial and Infrastructure Development Corporation Ltd. vs M/s K.G. Electronics Private Limited & Anr. [2014 SCC OnLine Del 2309] and Gillette India Ltd. vs. DDA, [2019 (260) DLT 416] whereby it was held that mere transfer of shares does not result in transfer of the land to warrant attraction of unearned increase.
- Transfer of some shares has nothing to do with the assets of the Petitioner Company. Shares are a separate asset and distinct from the assets of the Company. Hence, transfer of some small percentage of shares of the Petitioner Company does not result in attraction of clause 5(a) of the Perpetual Lease Agreement dated 02.09.1976. The Court said that the question of charging unearned increase for the sale of shares that took place after 1978 till 2015 is clearly illegal as said clause is not attracted.
- The Court also discussed the new DDA Policy relating to the misuse charges. According to the Policy the maximum period for levying misuse charges is restricted to 5 years from the date of detection of the misuse. The Petitioner had applied for conversion of the Property to freehold in 2013. The Application was pending when the said Policy came into being i.e. in 2014. The Court did not find any cogent reason as to why this Policy of 2014 has not been adhered to by the Respondent. Therefore, the misuse charges were set aside.
In view of the above discussion, the High Court held that there was no unearned increase and the Petitioner shall not be charged for the same for transfer of shareholding that took place after 1978. The Court further set aside the DDA Demand Letter dated 08.11.2016.
Lakshmi Vishwakarma
Senior Legal Associate
The Indian Lawyer & Allied Services