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<h1>Court enforces unearned increase & misuse charges conversion commercial plot, despite related entity transfer argument.</h1> <h3>NALWA SONS INVESTMENT LTD. & ANR Versus DELHI DEVELOPMENT AUTHORITY</h3> The court upheld the respondent's demand for unearned increase and misuse charges in the conversion of a commercial plot from leasehold to freehold, ... - 1. ISSUES PRESENTED AND CONSIDERED Whether imposition of unearned increase and misuse charges is leviable upon conversion of leasehold commercial premises to freehold when the leasehold assets are transferred pursuant to a court-approved scheme of arrangement and de-merger from the original lessee to a separately incorporated company that is a near-wholly owned subsidiary. Whether the Perpetual Lease Deed and the Respondent's Instructions (including clause 6(a) of the Lease and clauses 1(a) and 2(d) of the Instructions) permit such transfer without prior consent of the lessor and whether those instruments render 50% of the unearned increase chargeable on such transfer. Whether the corporate veil must be lifted to treat the de-merged/transferred company as the same entity as the original lessee for the purpose of avoiding the levy of unearned increase, or whether the scheme of arrangement/de-merger itself is sufficient to attract the charge. Whether the earlier single-bench decision relied upon by the petitioners (distinguishing transfers by GPA/Will and similar devices) is applicable to a court-approved scheme of arrangement/de-merger and the Instructions that specifically address transfers between related entities. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Levy of unearned increase and misuse charges on de-merger/transfer to a wholly-owned subsidiary Legal framework: The Perpetual Lease Deed (clause 6(a)) restricts sale/transfer/assignment/parting with possession without prior consent and prescribes liability for unearned increase upon transfer; the Respondent's Instructions (clause 2(d)) make 50% of unearned increase chargeable where management of the separately floated company and the original company remains the same. Precedent treatment: A Division Bench decision treats substitution of lessees/assignment as attracting imposition of unearned increase; the petitioners relied on a single-bench decision that distinguished other forms of transfer (e.g., by GPA or Will) but did not consider the Instructions now invoked. Interpretation and reasoning: The Court reads the scheme of arrangement and de-merger as effecting a transfer of assets from the original lessee to the de-merged company. That transfer falls within the scope of clause 2(d) of the Instructions and clause 6(a) of the Lease which prohibit transfer without prior consent and prescribe the 50% unearned increase charge. The Court rejects the argument that the absence of arm's-length sale indicia (market consideration, independent parties) precludes imposition; it holds that practical transfer of proprietary rights via de-merger is sufficient to trigger the levy when the instruments governing the tenancy so provide. Ratio vs. Obiter: Ratio - Transfers effected by de-merger/arrangement which result in assets standing in the name of a separately incorporated entity, even if that entity is a near-wholly owned subsidiary, attract liability for 50% unearned increase under the specific Lease clause and Instructions. Obiter - Observations distinguishing GPA/Will transfers are not relied upon, as the single-bench authority is found distinguishable. Conclusion: Unearned increase and misuse charges as demanded are leviable on the de-merger/transfer and the impugned demand and notice are valid. Issue 2 - Applicability and scope of clause 6(a) of the Perpetual Lease and clauses 1(a) & 2(d) of the Instructions Legal framework: Clause 6(a) of the Lease prohibits sale/transfer/assignment or parting with possession without prior consent and prescribes a 50% unearned increase liability upon such transfer. Clause 1(a) of the Instructions addresses deletion/addition/substitution in constitution for partnership firms or private limited companies; clause 2(d) covers chargeability where management of separately floated company remains the same. Precedent treatment: The Court relies on earlier Division Bench authority upholding imposition where substitution of lessees occurs; the petitioners' reliance on instructions limiting clause 1(a) to smaller entities is considered. Interpretation and reasoning: The Court holds clause 1(a) inapplicable because it pertains to partnership firms or private limited companies, whereas the entities here are public limited companies. Clause 2(d) applies directly to the present facts because the de-merged entity's management remained the same, thereby squarely attracting the 50% levy. Clause 6(a) independently supports the conclusion that any transfer/parting with possession without prior consent invokes the unearned increase obligation. Ratio vs. Obiter: Ratio - Where lease terms and administrative Instructions expressly address transfers to separately floated entities under common management, the 50% unearned increase provision is applicable; clause 1(a) cannot be read to negate clause 2(d) in the context of public limited companies. Obiter - None material beyond the statutory reading of the instruments. Conclusion: The Lease and Instructions together validly support imposition of 50% unearned increase; the tribunal's demand complies with those instruments. Issue 3 - Whether lifting the corporate veil was necessary to uphold the levy Legal framework: Doctrine of lifting corporate veil permits disregarding separate corporate personality where necessary to prevent misuse; alternatively, instruments governing property can operate irrespective of corporate identity if they define transfers broadly. Precedent treatment: Petitioners urged lifting veil; respondent relied on textual operation of Lease and Instructions and earlier decisions treating de-merger/merger as transfers for levy purposes. Interpretation and reasoning: The Court finds that even without lifting the corporate veil, the scheme of arrangement/de-merger demonstrates transfer of assets to the separate company. Because the Instruments expressly address transfers to separately floated companies under same management, there is no need to penetrate corporate personality; the de-merger itself suffices to attract the charge. Ratio vs. Obiter: Ratio - Lifting the corporate veil is unnecessary where the operative documents (Lease, Instructions) and the scheme/order of de-merger plainly evidence a transfer within their scope; the transfer thus triggers the unearned increase liability. Obiter - General observations on corporate veil doctrine are not determinative here. Conclusion: Corporate veil need not be lifted; the de-merger/transfer is within the express ambit of the Lease and Instructions and therefore liable to the levy. Issue 4 - Distinguishability and applicability of prior single-bench authority relied upon by petitioners Legal framework: Judicial precedents distinguishing transfers by instruments like GPA/Will from commercial sale may limit the reach of unearned increase where no effective transfer occurs; however, administrative Instructions can displace such distinctions if they directly address transfers between related entities. Precedent treatment: The Court distinguishes the single-bench decision advanced by petitioners, noting that it did not consider the Instructions relied upon here and addressed different factual matrices (transfers by GPA/Will etc.). The Division Bench authority dealing with substitution/assignment is held more apposite. Interpretation and reasoning: The Court reasons that the single-bench decision is factually distinguishable and does not control because it did not consider the operative Instructions and Lease provisions that specifically apply to de-merger/merger situations. The Division Bench holding and the specific terms of the instruments govern the present dispute. Ratio vs. Obiter: Ratio - A precedent which did not consider the governing administrative Instructions or materially similar facts cannot override the express terms of the Lease and Instructions; where those instruments apply, the single-bench distinction is inapplicable. Obiter - Observations in the earlier decision about transfers by GPA/Will are not binding here. Conclusion: The prior single-bench authority is distinguishable and does not prevent the imposition of the unearned increase in this factual and contractual context. Final Disposition (as applying the above conclusions) The impugned demand and notice for 50% unearned increase and misuse charges are validly issued in view of the Perpetual Lease, the Respondent's Instructions, and the effect of the court-approved de-merger; therefore the writ petition challenging the demand is dismissed (costs awarded by the Court).