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Gauri Industries Vs. State of Karnataka - Court Judgment

LegalCrystal Citation
SubjectProperty
CourtKarnataka High Court
Decided On
Case NumberW.P. No. 26469 of 1981
Judge
Reported inILR1986KAR118
ActsKarnataka Relief Undertakings (Special Provisions) Act, 1977 - Sections 2(2), 3 and 4(1); Constitution of India - Articles 19(1) and 300A ;
AppellantGauri Industries
RespondentState of Karnataka
Appellant AdvocateS.G. Sundaraswamy and ;R.N. Narasimhamurthy, Advs.
Respondent AdvocateN.D. Naidu, HCGP for R1 and 3 and ;G.V. Shantharaju, Adv. for Respondent 2
DispositionPetition allowed
Excerpt:
karnataka relief undertakings (special provisions) act, 1977 (karnataka act no. 24 of 1977) - sections 3 -- scope and object of the act -- provisions aimed at continued running of state industrial undertaking providing relief against unemployment and resisting actions retarding rehabilitation efforts -- section 3 to be read with section 2(2): relationship of employer and employee material to declare undertaking as relief undertaking -- provisions of the act not to be used for a collateral purpose -- imperative to afford bearing before passing notifications.;gauribidanur sahakara sakkare karkhane ltd (2nd respondent) after approval of government leased land, buildings and machinery erected for establishing a distillery to the petitioner-firm as per terms of lease deed. having made.....orderbopanna, j. 1. the petitioners have challenged the validity of the two notifications issued by the government of karnataka under the provisions of the karnataka relief undertakings (special provisions) act, 1977 (for short the act) as also the resultant action taken by the second respondent factory through its managing director seeking to take possession of the distillery leased to them by the said respondent under the lease deed executed in their favour on 3-10-1979. the first notification, dated 4 11-1981. produced as annexure-a in the writ petition, was made under section 3 of the act declaring the second respondent-factory 'with its distillery' as a relief undertaking for a period of two years. the second notification bearing the same date was made under section 4(1)(b) of the.....
Judgment:
ORDER

Bopanna, J.

1. The petitioners have challenged the validity of the two notifications issued by the Government of Karnataka under the provisions of the Karnataka Relief Undertakings (Special Provisions) Act, 1977 (for short the Act) as also the resultant action taken by the second respondent Factory through its Managing Director seeking to take possession of the distillery leased to them by the said respondent under the lease deed executed in their favour on 3-10-1979. The first notification, dated 4 11-1981. produced as Annexure-A in the Writ Petition, was made under Section 3 of the Act declaring the second respondent-Factory 'with its distillery' as a relief undertaking for a period of two years. The second notification bearing the same date was made under Section 4(1)(b) of the Act by which the State Government had directed that the operation of all contracts, assurances of property and agreements, to which the second respondent-Factory with its distillery was a party remained suspended and that all rights, privileges, obligations and liabilities accruing thereunder remained suspended and not be enforceable during the period the earlier notification Annexure-A was in force. This notification is produced as Annexure-B in the Writ Petition. In pursuance of these notifications, the Managing Director of the second respondent-Factory notified the petitioners by his letter dated 4-11-1981 (produced as Annexure-C in the Writ Petition) that the lease between the second respondent and the petitioners under which the petitioners were separately operating and running the distillery which is the subject-matter of dispute in the impugned notifications stood suspended and he was entering the premises of the distillery as the owner thereof on account of the suspension of the lease.

2. It is not in dispute that by virtue of the interim order granted by me on 4-12-1981 and the order of the Supreme Court, dated 11-3-1983, in Civil Appeal Number 3004/1983, the petitioners have been running the distillery on the same terms and conditions as contained in the lease deed dated 3-10-1979 in their favour (produced as Annexure-E in the Writ Petition).

3. The facts of this case, which are not in serious dispute, are as follows :

The second respondent is a Sugar Factory registered under the Karnataka Co-operative Societies Registration Act, 1961, and is now placed in-charge of an Administrator appointed by the State Government, who is impleaded as third respondent in the Writ Petition- This Sugar Factory was set up in the Co-operative sector in about the year 1961 and sometime in 1975 it wanted to establish a distillery for the manufacture of industrial alcohol making use of the molasses which is the usual by-product in any sugar factory. The State Government, being one of the major share-holders in the Sugar Factory, gave its approval for setting up the distillery. Accordingly, a site was chosen by the second respondent on its own property but at a distance of half a kilometre away from the factory premises, buildings were constructed and machinery was ordered. The second respondent appears to have borrowed a sum of rupees twenty-five lakhs from another Co-operative Bank and utilised the same on this project. But even till 1978 the distillery was not commissioned by it presumably it had second thoughts about the feasibility and viability of the project. According to the petitioners, the quantum of the molasses produced by the Sugar Factory was hardly twentyfive per cent of the requirement of the distillery as planned. Considering this aspect as also the burden flowing from borrowed investment, the estimated return and other related aspects, the second respondent appears to have realised that it would not be prudent for it to make any further investment and commission the project by borrowing more. Therefore, in consultation with the State Government, it took a policy decision to lease the land, buildings thereon and the machinery which it had erected till then by calling for open tenders. The first petitioner-firm being the highest bidder offered to pay originally a rent of Rs. 3,05,000-00 per annum besides the licence fee of Rs. 80,000-00 to the State Government which was subsequently enhanced after mutual negotiations to Rs. 4,84,000-00 towards annual lease rent in addition to the stipulated licence fee of Rs. 80,000-00 payable to the State Government. It is not in dispute that these terms were finalised in consultation with the Director of Sugar who is an officer of the State Government and the finalised terms were also approved by the State Government by its letter dated 30-8-1979, which is produced as Annexure-D in the Writ Petition. Thereafter, a registered lease deed was executed between the second respondent as lessor and the first petitioner firm as lessee on 3-10-1979. A copy of the lease deed is produced as Annexure-E in this Petition (plans omitted).

4. According to the petitioners, setting up of a distillery with a capacity to produce 9,000 litres of spirit per twenty-four hours required a large capital outlay but the return from such undertaking was restricted on account of the fact that the principal raw-material viz., molasses was a controlled item and the finished product viz., the rectified spirit was also a controlled commodity. The purchasing price of the molasses and the sale price of the rectified spirit both being controlled, in determining the lease rent the yardstick adopted by the parties was not the return on investment but the revenue return, namely, manufacturing costs and profits thereunder were only taken into consideration. As per the audited balance-sheet of the second respondent-factory, for the period 1979-80:

'The second Respondent has capitalised Rs. 15,36,411-30 towards the cost of land and buildings; a sum of Rs. 40,26,456-49 towards the cost of machinery and equipment and a sum of Rs. 46,759-87 towards the cost of distillery spray ponds, the aggregate being Rs. 56,09,627-00 calculating the depreciation on the building at 5% the yearly depreciation would be approximately Rs. 75,000-00 and that on machinery at 10% would be approximately Rs. 4,00,000-00, the aggregate depreciation being Rs. 4,75,000-00.'

Thus, even if the said distillery undertaking belonged to the second Respondent and was run by the second Respondent, the return on its investment without taking into account a sum of rupees sixteen lakhs approximately spent by the first petitioner on new machinery and equipment would be far less than the lease rent of Rs. 4,84,000 00 per annum.

The petitioners took delivery of possession of the demised properties on 30-8-1979 but the actual date of commencement of the lease was 29-1-1970. After taking over the A and B schedule properties under the lease, they had invested nearly 16 lakhs of rupees on their own machinery to make the distillery a viable unit and they had stocks of goods worth more than 7 lakhs of rupees when the impugned notifications were made by the State Government. Further, they had paid the deposit of Rs. 3,16,000-00 as required under the lease and paid rents in advance up to the end of January 1982. They had also paid a sum of Rs. 1,72,355-00 to the various suppliers on the request of the second Respondent in the year 1979 even before the commencement of production. The improvements made by them after the commencement of the lease were additional effluent tanks, two wells, extensive pipelines, additional storage tank, high-tension lines for supply of power, a new plan for the manufacture of silent spirit. There were about 27 permanent employees besides casual employees and their monthly wage bill was about Rs. 25,000-00 per month. In the first year of their operation they suffered a loss of Rs. 2,05,000 00 and in the following year ending 30-1-1981 they made a profit of Rs. 1,25,000-00. They were working the distillery in three shifts achieving the maximum production to make up the loss suffered and recover the heavy investment made by them in the years to follow during the currency of the lease. They had also plans to double the capacity of the distillery and manufacture Indian made foreign liquor which would have in turn increased the employment potential and revenue to the State Government.

5. The petitioners have not rightly challenged either the validity of the provisions of the Act or the notifications in so far as they relate to the second Respondent. They admit its poor financial position, but their case is that the second Respondent had nothing to do with the distillery project which was leased to them under the lease deed, Annexure-D. Moreover, the second Respondent had not employed any person on its own on the distillery project and therefore no question of unemployment or non-employment or relief against unemployment was involved as between the second Respondent and the petitioners. In the backdrop of these fads the petitioners contend that the impugned notifications did not satisfy the conditions prescribed under Sections 3 and 4 of the Act and these conditions, according to them, are :

(a) that the distillery should have been undertaking of the second Respondent-Factory ; and

(b) for the purpose of continued running of the undertaking and preventing unemployment or providing relief against unemployment, against such unemployment it was necessary to take action under Sections 3 and 4 of the Act.

6. According to the petitioners, the distillery was not a running undertaking when it was leased by the second respondent. Even the machinery had not been fully installed on the date of the lease deed. A good part of the machinery arrived at the site after the date of the lease deed and was installed thereafter. Additional machinery was purchased and got installed by the petitioners and it was the petitioners who had employed all the existing workmen in the distillery and they only started the operations of the distillery and were carrying on the same till 4-11-1981. And, therefore, the notifications Annexures A and B are ultravires of the powers of the State Government under the Act in so far as they relate to the distillery. They have further asserted that the distillery would become an undertaking only when it was engaged in production, supply, distribution or control of any goods or the provisions of service in kind but the mere intention or steps for establishing such enterprises would not bring into existence an undertaking. The second respondent having not completed the setting up of the distillery and having not commenced production or supply or distribution of the goods intended to be produced in the distillery and having permitted the petitioners to add their own machinery and equipment to bring into existence a distillery undertaking, at all material times the petitioners and not the second respondent, who had been the owners of the said distillery undertaking. What the second respondent had was a mere right of reversion and thus the distillery was never an undertaking of the second respondent. Though the impugned notifications refer to the second respondent-Factory 'with its distillery' the reference to the word 'distillery' in the said notifications would refer to any other distillery undertaking of the second respondent, if any, and do not and cannot refer to the distillery undertaking of the petitioners. Therefore, the purported action of the respondents to take over the possession and or management of the distillery undertaking of the petitioners was wholly without the authority of law, illegal and without jurisdiction. It amounts to acquisition of the property and dispossession of the petitioners from the same without the authority of law. For the very same reasons, the distillery in question is not a State industrial undertaking within the meaning of the Act and consequently the same is outside the purview of the Act and hence could not have been declared a relief industrial undertaking. The impugned notifications amount to a colourable exercise of powers, mala fide and for a collateral purpose with the sole object of attempting to terminate the registered lease which expires only in the year 1990, thereby affecting the petitioners leasehold rights. Further, there was no nexus between the exercise of purported power and the intent and purpose of the Act. Hence, the impugned notifications are illegal and also violative of the fundamental and other rights of the petitioners guaranteed under Articles 19(1)(g) and 300A of the Constitution and the principles of natural justice since admittedly the petitioners were not afforded a hearing before the said notifications were made.

The petitioners have further asserted that though the State Government was fully aware of the above facts, it had failed to apply its mind to the question whether the private undertaking as the distillery in question run by the petitioners could be included in a notification issued under Section 3 of the Act. The State Government had failed to keep in view that the sugar factory was a different entity from the distillery undertaking run by the petitioners, as obviously the two were not run by the same management, Therefore, the Government had no power to declare the distillery leased to the petitioners as a relief undertaking or to interfere with any contracts in relation to such undertaking.

7. As regards the second requirement for issuing the impugned notifications, the petitioners have averred that :

(a) the preamble to the Act and the provisions of Sections 3 and 4 of the Act make it clear that, it is only for the purpose of enabling the continuance of the sugar factory as a measure of relief against unemployment or non-employment action could be taken under Sections 3 and 4 of the Act, Indisputably, as regards the distillery in question run by the petitioners there was no threat to its continuance at all. It had been running continuously in three shifts from the date of commencement of the lease. All the persons employed by the petitioners were working up to the time of forced closure of the distillery on 4-11-1981 and therefore there was no prospect of unemployment among the workmen calling for relief against their future unemployment. In fact the petitioners could create more employment if they were permitted to implement their further manufacturing programme. Hence, mere use of the words of the Section without satisfying as to whether there was any legal or factual basis for the two notifications in regard to the distillery would not validate the impugned notifications.

(b) The power to issue notifications under Sections 4(1)(b) of the Act suspending all contracts, assurances of property etc., is not mechanical or the inevitable consequence on the exercise of power under Section 3 of the Act. The notification under Section 4(1)(b) could be issued only for the specific purpose of the continued running of the undertaking and for relief against unemployment. When there was no threat at all to the continued running of the distillery or any threat of unemployment to the workmen employed therein by reason of the lease of the distillery, any action under Section 4 of the Act was in excess of the powers of the State Government and therefore it was violative of Article 19(1)(g) of the Constitution as the petitioners were deprived of their valuable right to carry on their manufacturing business in the distillery by the impugned notifications. That was also not in the interest of general public and therefore amounted to an unreasonable restriction on their right to carry on their business.

(c) The petitioners have also pressed into service the principles of estoppel in support of their challenge to the impugned notifications since according to them they were led to believe that the lease had the concurrence of the State Government as also the second Respondent and therefore they were entitled to be protected from a conduct resiling from the earlier position which renders nugatory all the covenants of the second Respondent under the lease deed on which they had acted. The lease in question having transferred the interest in the properties of the distillery of the second Respondent to the petitioners, they were entitled to hold, possess and enjoy such interest for the duration of the lease.

8. Though the State Government in terms of the order made by the Supreme Court in Civil Appeal Number 3004 of 1983, dated 21-2-1983, had been directed to file its counter affidavit within two weeks from that date, I do not find the same on record excepting its application I.A. No. II for vacating the interim order. However, the second Respondent has filed a detailed return and if its contentions are upheld, the failure of the State Government to file its return would not in any way prejudice its case.

9. The second respondent has stated, inter alia :

(a) That the averments of the petitioners in paragraph-4 of the Petition that the second respondent had intended in the year 1975 to establish a distillery while making use of the molasses which is the by-product of sugar factory is not substantially correct. But it has admitted that with a view to manufacture industrial alcohol by making use of the molasses it had decided to establish a distillery. However, it was never intended that the distillery should be a separate undertaking, as the sugar factory as also the distillery were and are owned by the second respondent and in the eye of law both of them constituted a single undertaking owned by the second respondent.

(b) That the facts stated by the petitioners in paragraphs 3, 5 and 6 of the Petition leading to the execution of the lease agreement (Annexure D) between the parties are substantially correct.

(c) That when the lease deed came into existence the erection of the plant and machinery relating to the distillery was almost complete and only final touches bad to be given to complete the erection. It had invested a sum of Rs. 85.02 lakhs which included a sum of Rs. 31.10 lakhs paid by way of interest on the capital invested during the construction period. The petitioners' investment to complete the distillery and make it fit for producing industrial alcohol was only marginal when compared to the total investment that had already been made by the second respondent.

(d) That the petitioners' averment that the machinery installed by the second respondent up to the date of execution of the lease was not found to be complete and adequate is absolutely false and therefore the further averment that the petitioners had purchased and had installed further machinery is also absolutely false. The works alleged to have been done by the petitioners were with a view to suit their convenience. The second respondent had never been informed about these additions and therefore it was not in a position to say anything about the investment of rupees sixteen lakhs by the petitioners after they took over the distillery in question under the aforesaid lease.

(e) Regarding the number of workmen working in the distillery, their wage bill and the amounts spent by the petitioners for electricity charges and the profitability or otherwise of the working of the distillery by the petitioners, the plea of the second respondent is one of ignorance and therefore there is no specific denial of those averments. But it is the case of the second respondent that the distillery is owned by it and the petitioners were only lessees having come into possession of the distillery in pursuance of the lease deed, viz., Annexure-D.

(f) That it is (second respondent) facing acute financial crisis, but it is not correct that the said crisis had nothing to do with the distillery as claimed by the petitioners. According to it, having invested a sum of Rs. 85.02 lakhs out of which a sum of Rs. 28.92 lakhs was drawn from the working capital of the factory, withdrawal of funds from the working capital had adversely affected the working of the factory resulting in huge losses. The distillery project was undertaken at a time when the sugar factory had made some profits and unfortunately for it, if suffered huge losses in subsequent years and as such it was forced to withdraw huge sum out of its working capital without completing the distillery project and this had resulted in dislocation of its financial resources and therefore the petitioners were not correct in asserting that the poor financial position of the second respondent had nothing to do with the distillery project. The fact that the second respondent had not employed any person on the distillery project was totally irrelevant for the purpose of adjudicating the issues that arise out of the impugned notifications.

(g) the effect of the impugned notifications issued by the State Government declaring the sugar factory with the distillery to be a relief undertaking and further suspending all contracts to which the second respondent was a party was that the contract of lease between the parties was suspended and therefore the right of the petitioners to be in possession of the distillery was automatically suspended.

(h) Since the Act does not contemplate of giving any opportunity of hearing and in the very nature of things giving of opportunity would have defeated the very purpose of the Act, the petitioners had no right to be heard before the impugned notifications were made.

(i) Regarding the two conditions that should have been satisfied before the provisions of Sections 3 and 4 could be invoked the second respondent has asserted that the distillery was not a separate undertaking ; it was part and parcel of the second respondent-Factory ; the petitioners were only lessees in pursuance of the lease deed between the parties and what was leased to the petitioners was a distillery constructed at the expense of the second respondent and owned by the second respondent. Thus, the distillery being a part of the second respondent's factory, the impugned notifications Annexures A and B applied to the distillery also. As a consequence, the contract of lease between the parties remained suspended and therefore the petitioners had no right to be in possession of the distillery for the period during which the notifications were in force. The contention of the petitioners that the State Government failed to apply its mind to the question whether the distillery which was a private undertaking of the petitioners could be included in the impugned notifications is absolutely false and it is a result of the misconception on the part of the petitioners. The distillery was not a separate undertaking owned and run by the petitioners. At no point of time, the petitioners had become owners of the distillery and at all material times the same continued to be owned by the second respondent and it also formed part of the Sugar Factory owned by this respondent.

(j) On the plea that there was no threat of un-employment or non-employment in so far as the distillery was concerned and therefore the State Government could not take any action under Sections 3 and 4 of the Act, the second respondent has stated that on account of acute financial crisis it was unable to carry on the manufacture of sugar and at the relevant point of time it was not even in a position to pay wages to its workmen and thus the wages were in arrears for a period of four months. Consequently, the workmen were agitating for the payment of wages ; further on account of the paucity of funds it was not in a position to commence crushing operations well in time during 1981-82 season with the result, interests of the farmers who had grown sugar in the area of the operation of the Sugar Factory was in jeopardy. Thus, there was an immediate threat to the continuous running of the factory and to the employment of nearly 700 employees and as such it was well within the competence of the State Government to issue the notifications under Sections 3 and 4 of the Act. One of the reasons for its economic sickness was the distillery project because as against the total investment of Rs. 85.02 lakhs, its income by way of rent under the lease deed was very meagre. It should have got a return of Rs. 28.76 lakhs from the distillery if it were not to incur any losses on account of this undertaking. As against this estimated return of Rs. 28.76 lakhs, it was only receiving by way of rent Rs. 4,85 lakhs and as such it had incurred a loss of Rs. 24 lakhs per annum on account of the lease of the distillery to the petitioners. The sugar industry being a controlled industry, 65% of the sugar produced by it goes to the central pool at a price fixed by the Central Government and sugar industry in general in India was facing acute financial crises and the sugar producers have been agitating about the price fixed by the Central Government from the year 1964-65 onwards before this Court as also before the Supreme Court. Therefore, it could hardly afford to lose nearly twenty-four lakhs of rupees per annum on account of the lease of the distillery. Having regard to these circumstances, the contract between the parties is an onerous contract the continuance of which would have permanently impaired the financial position of the sugar factory. That being so, it was well within the competence of the State Government to suspend such a contract and as such the issue of the notification under Section 4 of the Act was legal and valid.

(k) The petitioners having not challenged the vires of the Act, me action of the State Government under Sections 3 and 4 of the Act is unassailable. In the event of the second Respondent being able to recover from the 'economic sickness', it would cease to be a sick undertaking and then it would be open to the petitioners to resume production of alcohol in the distillery. But for the second Respondent to recover from the financial sickness it is essential that the onerous contract of lease between the parties should be suspended temporarily so that it could take steps to work the distillery to the best advantage as otherwise the very purpose of declaring the second Respondent as a sick undertaking would be defeated.

(l) The rights of the petitioners under Articles 19(1)(g) and 300A of the Constitution were not violated since the deprivation of the petitioners' rights was in pursuance of a law enacted by the legislature and therefore the petitioners' contention is untenable. Further, there had been no violation of the rule of law and the rules of natural justice by the issuance of the impugned notifications since the Act does not provide for giving an opportunity to the petitioners. What had been done was only to suspend the onerous contract so that the second respondent may ''wriggle out' of the financial mess partly attributable to heavy investment that it had made in the distillery and the meagre income flowing from such onerous contract.

(m) The petitioners could not also rely on the provisions of Transfer of Property Act since the impugned notifications provide for suspension of contracts and in the absence of any challenge to the provisions of the Act it was open to the State Government to suspend the lease. Once it gets suspended the right of the petitioners to be in possession of the distillery as lessees is also automatically suspended.

(n) The principles of estoppel are also not available to the petitioners since the action now taken is only for a period of two years, that too, to subserve the larger interest of reviving the Sugar Factory which has to cater to the needs of thousands of sugarcane growers in the reserved area of the Factory and further to subserve the national economy by producing sugar which is an essential commodity as also to provide continued employment to nearly 700 workmen in the Factory.

(o) Though the petitioners are the lessees of the properties under the lease deed, the lease in question is a contract and the language of Section 4 of the Act does not impose any limitation on the power of the Government to suspend a contract in the nature of a lease. The Act, being a welfare legislation for taking over sick industry to ward off unemployment of its workmen, had to be construed liberally and therefore the notifications should be made applicable to the contract of lease which is an onerous contract.

10. On these pleadings of the petitioners and the second respondent and the arguments advanced by the Learned Counsel for the petitioners, by the Learned Advocate-General and the Learned Counsel for the second respondent, the following points arise for consideration in this Petition :

(i) What is the scope and the object of the Act ?

(ii) Do the impugned notifications apply to the distillery which is the leasehold right of the petitioners ?

(iii) Alternatively, did the distillery form part and parcel of the industrial undertaking of the second Respondent on the date of the impugned notifications ?

(iv) Are the impugned notifications vitiated by lack of application of mind on the part of the State Government ?

(v) Is it necessary that the distillery should also be a relief undertaking for the application of Sections 3 and 4 of the Act ?

(vi) Was the second Respondent justified in taking over the distillery without affording a hearing to the petitioners ?

(vii) Whether the action of the second and third Respondents is hit by the principles of promissory estoppel as alleged by the petitioners ?

(viii) Whether the impugned notifications are violative of Articles 14, 19(1)(g) and 300A of the Constitution ?

My answers to the above points are as follows :

PointNo. (i)

-- Asfound in Para-11 below ;

PointNo. (ii)

- No ;

PointNo. (iii)

-- No ;

PointNo. (iv)

-- Yes ;

PointNo. (v)

-- Doesnot require investigation ;

PointNo. (vi)

-- No ;

PointNo. (vii)

-- Doesnot require investigation ;

PointNo. (viii)

-- Yes.

11. Point No. (i) :-- The Act as could be seen from its Preamble was put on the statute book for making temporary provisions in respect of industrial undertakings the running of which was considered essential as a. measure of preventing or providing relief against unemployment and to enable the State Government to make special provisions in respect of industrial relations and other matters in relation to industrial undertakings the running of which is considered essential as a measure of preventing or providing relief against unemployment. The statement of objects and reasons which accompanied the Bill No. 15/1977 placed before the Assembly reads as :

'There are a number of sick undertakings, some of which have even remained closed for a considerable length of time resulting in loss of production, unemployment and hardship to employees, etc. It is necessary to revive these units, gear up production and provide employment.

The causes tor sickness of these industries are mainly erosion of capital as a result of continuous losses, inadequate working capital because of the Commercial Banks and creditors choking up assistance for fear of dilution of security, poor liquidity, pressure from creditors for settlement of claims and the labour unrest like strikes, lay off, etc. The State Government have in consultation with the concerned financial institutions and commercial banks been taking active interest in rehabilitating most of such units: for example, Mysore Electro-Chemical Works Limited, Karnataka Steel and Wire Products Ltd., Tanfort Tyres Ltd., Sree Shankara Textile Mills, Mysore Tools Limited etc. In the case of Mysore Electro-Chemical Works Limited, the Industrial Reconstruction Corporation of India Limited, Calcutta (a Government of India Organisation) are the chief promoters for its rehabilitation. In all these cases, the State Government as also the financing institutions and Commercial Banks have reasons to apprehend that any effort to rehabilitate the undertakings by providing the required additional financial assistance might not have the desired result (successful rehabilitation) as any move by creditors for liquidation of the Company (by filing a liquidation petition in the High Court) might retard and nullify the entire efforts. It is, therefore, necessary to have an enactment which would enable the State Government to give relief to the unit declared as 'Relief Undertaking' against creditors and labour pressure'.

The object of the Act as could be seen from the Preamble is to make certain temporary provisions for keeping an industry going if it is considered essential for preventing or providing relief against unemployment. This is further made clear by the declaration of 'Relief Undertaking' under Section 3 of the Act. Section 3 reads as follows :

'Declaration of relief undertaking -- The State Government may, if it is satisfied that it is necessary or expedient so to do in the public interest with a view to enable the continued running of State industrial undertaking as a measure of providing relief against unemployment, declare, by notification, that any State industrial undertaking shall on and from such date and for such period as may be specified in the notification be a relief undertaking :

Provided that the period so specified shall not exceed in the first instance two years but may by a like notification be extended from time to time by any period not exceeding one year at a time so, however, that the aggregate shall not be more than ten years.'

On a combined reading of the statement of objects and reasons, the Preamble and Sections of the Act, it is clear that the object of the Act is to make certain special provisions in public interest with a view to enable the continued running of any relief undertaking which is also a State Industrial Undertaking as a measure of providing relief against unemployment in that undertaking and against action by creditors who might retard and nullify the efforts of rehabilitation by the State Government. These special provisions are found in Sections 4, 5, 6 and 7 of the Act. We are concerned in this case with the notification under Section 4(1)(b) of the Act which reads as under :

'Whereas in Government Notification No. RDC 112 COF 81(1) dated 4th November, 1981, the State Industrial Undertaking Gowribidanur Sahakara Sakkare Karkhane Niyamit, Gowribidanur, with its distillery has been declared to be a relief undertaking.

Now, therefore, in exercise of the powers conferred by Clause (b) of Sub-section (1) of Section 4 of the Karnataka Relief Undertakings (Special Provisions) Act, 1977, (Karnataka Act 24 of 1977) the Government of Karnataka hereby direct that in relation to the said relief undertaking the operation of all the contracts, assurances of property, agreements, settlements, awards standing orders and other instruments in force except the contracts, assurances of properly, agreements, settlements, awards, standing orders and other instruments with or connected with the State Government and the Central Government, to which Gowribidanur Sahakara Sakkare Karkhane Niyamit, Gowribidanur with its distillery is a party or which are applicable to Gowribidanur Sahakara Sakkare Karkhane Niyamit, Gowribidanur with its distillery immediately before 4th November 1981 shall, during the period the said notification is in force, remain suspended and that all the rights, privileges, obligations and liabilities accruing or arising thereunder before the said date shall remain suspended and shall not be enforceable.'

(Underlining by me)

12. Point No. (ii) :--It is common ground that the second respondent is a relief undertaking being a Slate Industrial Undertaking as defined under Section 2(4) of the Act. Therefore, the impugned notification under Section 4(1)(b) of the Act applies to the second respondent in so far it relates to the suspension of the operation of or any of the contracts, assurances of property, agreements, settlements, awards, standing orders and other instruments in force to which the second respondent was a party or which might be applicable to the second respondent immediately before the date on which the second respondent was declared to be a relief undertaking or that any of the rights, privileges, obligations and liabilities accruing or arising thereunder before the said date shall remain suspended or shall be enforceable with such modifications and in such manner as may be prescribed in the impugned notification and the said notification will have overriding effect notwithstanding anything to the contrary contained in any other law, agreement or instrument or decree or order of any Court, Tribunal, Officer or other authority. The second respondent is a party to the lease deed in favour of the petitioners. But the impugned notification Annexure-B suspends all the contracts between the second respondent 'with its distillery' with other parties except those excluded under the said notification. It therefore follows that the impugned notifications would be applicable to the distillery also if it is a relief undertaking as defined under Section 2(3)(4) of the Act and declared as such under Section 3 of the Act. No doubt the State Government had included the distillery in the declaration made by it under Section 3 of the Act, under Annexure-A and also in the impugned notification Annexure-B under Section 4(1)(b) of the Act. But, then the question for consideration is whether regard being had to the purpose and object of the Act, the distillery could also be brought under the purview of the impugned declaration and the notification. The parties are at issue on this point.

13. On the pleadings of the parties there could be absolutely no controversy that the second Respondent is a relief undertaking the running of which is essential for providing employment to over 700 workmen in its factory but the distillery leased to the petitioners which employs about 27 workmen is not faced with any problem calling for relief against unemployment of the workmen employed in it. Therefore, was it necessary to include the distillery also within the ambit of the impugned notifications with a view to enable the continued running of Sugar Factory as a measure of providing relief against unemployment to the workmen employed therein?

14. The only points made out by the Learned Advocate-General and the Learned Government Pleader for the State Government and the second Respondent in this regard are that :

(i) The distillery is part of the second Respondent-Sugar Factory and only its right to management was given to the petitioners under the lease deed ;

(ii) The distillery need not be a relief undertaking for the purpose of Section 4(1)(b) of the Act ;

(iii) One of the reasons for the economic sickness of the second Respondent was that the distillery project was set up by it by borrowing money from various financial institutions and also by diverting the working capital to the extent of rupees twenty-eight lakhs and as against its total investment of Rs. 85.02 lakhs, the income to the second Respondent by way of rent was very meagre.

Elaborating this point they have submitted that in the ordinary course it should have got a return of Rs. 28.76 lakhs from the distillery project if it were not to incur any loss on account of this project. Thus, the lease between the parties amounted to an onerous contract, the continuance of which would permanently impair the financial position of the second Respondent and its employment potential and therefore it was within the competence of the State Government to suspend such a contract by the notification under Section 4 of the Act after declaring the distillery as a relief undertaking.

15. There could be DO doubt that the distillery was a part of the undertaking of the second Respondent prior to the lease deed Annexure-E. But, under the lease deed the interest in the property of the distillery, namely, properties mentioned in Schedules A and B to the lease deed, were transferred to the petitioners for a consideration, A brief reference to the terms of the lease deed at this stage would be helpful for a proper appreciation of the contentions of the rival Counsel on these points.

(a) Under Clause-1 what was leased to the petitioners was the building more particularly described in the A schedule and the machinery more particularly described in the B Schedule to the lease deed.

(b) The lease was to come into effect on the date the second respondent delivered possession of the distillery after making it ready for production of industrial alcohol in all respects and after duly working for a period of seven days on a trial basis to verify the production capacity of the distillery at nine thousand litres of rectified spirit in twenty-four hours, and 10 per cent of denatured spirit in terms of the guarantee furnished by the suppliers of the machinery. This was made a condition precedent for the commencement of the lease.

(c) Under Clause 4 the petitioners were entitled to use the A and B schedule properties for manufacturing rectified spirit, denatured and other spirits, arrack, Indian Made Foreign Liquors and any other products including medicinal preparations after obtaining the necessary licences.

(d) They were also entitled to make such alterations or additions in the demised premises and were permitted to erect new machinery or make such appropriate alterations as they thought fit with prior consent of the second respondent.

(e) The second respondent had also agreed to sell all the molasses produced by its factory at the price or prices fixed by the State or Central Governments or at a price to be mutually agreed upon which would be not less than the rate prevailing at the market at the relevant point of time.

(f) The parties had further mutually covenanted that the second respondent would provide necessary electrical energy for running the distillery on payment of actual cost for the energy consumed by the petitioners.

(g) It was open to the petitioners to make alternative arrangements for the supply of electrical energy in the event of the second respondent's failure to provide the same.

(h) The second respondent had covenanted to arrange for a continued supply of water for the efficient running of the distillery by the petitioners and for the said purpose it had agreed to deliver three borewell points with submersible pumps with necessary pipeline to the petitioners. In the event of the failure of anyone of the borewell points the second respondent had agreed to provide an alternative or additional borewell for the use of the petitioners.

(i) The petitioners had agreed to indemnify the second respondent for any damage caused to the distillery occasioned by gross negligence or carelessness in the running of (he distillery.

The other clauses of the lease deed are like any other covenants found in a lease of this type providing for proper maintenance and upkeep of the lease buildings, insurance of buildings etc. But, two important clauses which require to be noticed in the context of the challenge to the impugned notifications are Clauses 17 and 22.

(j) Under Clause-17 it was open to the petitioners to erect new constructions or to installed additional machinery but on surrendering the possession of the leased properties the second respondent had a right of pre emption to the newly constructed building and the newly added machinery at the value shown in the books of accounts of the petitioners for the aforesaid buildings or machinery. It is not seriously disputed that the petitioners had installed additional machinery costing about Rupees sixteen lakhs.

(k) Under Clause-22, the second Respondent had covenanted that despite the nationalisation of the sugar industry or the takeover of the second Respondent-Factory by the Government the lease in question would nevertheless be continued till it expired by efflux of time after ten years.

16. On these undisputed facts, it cannot be contended that the distillery was part and parcel of the Sugar Factory of the second Respondent though second Respondent was its lessor. Further, these recitals in the lease deed and the pleadings of the parties clearly make out that there was no functional integrality between the Sugar Factory and the distillery on the date of declaration or at any time after the creation of the lease as there was no ;

(a) unity of management ; (b) unity of finance ;
(c) unity of product ; and (d) unity of labour.

(See : Associated Cement Companies Limited v. Their Workmen, 1960 (1) LLJ 1)

Therefore, the first contention of the Learned Advocate-General and the Learned Counsel for the second respondent fails.

17. The second contention need not detain me for long since it needed consideration if only the distillery had formed part of the second respondent undertaking.

18. Now coming to the third contention, assuming that the lease in question amounts to an onerous contract, could it be suspended by declaring the distillery also as a relief undertaking under Section 3 of the Act and by a notification under Section 4(1)(b) of the Act The Sugar industry being a controlled industry and sugar being an essential commodity, the running of the second respondent - Factory is absolutely essential in public interest. But such running under the Act must be as a measure of preventing of providing relief against unemployment of workmen of the second respondent-Factory or action by creditors by way of liquidation of the second respondent etc.

As could be seen from the averments made by the petitioners in para-5 of the Petition, the lease amount was fixed by taking into consideration all aspects of the matter and with the approval of the State Government. The distillery was in operation only for a period of nearly two years whereas the second respondent went into commercial production in the year 1966. The investment of the Second respondent in the distillery is only minimal when compared to its total investment of rupees eight crores in the sugar factory (this figure was given by the Learned Counsel for the second respondent in the course of his arguments). Further, the distillery had been running profitably after the initial teething troubles and there was no threat of unemployment to its workmen. Therefore, could it be contended that the lease in question was an onerous contract which had resulted in heavy losses to the second respondent and by suspending the lease the second respondent could keep the sugar factory running for preventing the unemployment of about 700 workmen who are faced with the threat of losing their jobs?

19. That the lease in question is an onerous contract is belied by the letter of the Director of Sugar, dated 8-8-1979 to the State Government which was produced by the petitioners before the Supreme Court in Special Leave Petition (Civil) Number 3402 of 1982 filed by them against the order of the Division Bench of this Court. This letter was produced before me with a memo dated 20-4-1983 to the effect that its contents were not disputed by the respondents before the Supreme Court. No objection was taken by the respondents for the production of this letter nor its contents disputed by them. The text of this letter will have to be reproduced in extenso to prove two important points on which there is controversy. These points are :

(a) Whether the second Respondent had invested Rs. 85.02 lakhs in the distillery?

(b) Whether the lease amount was too meagre to justify the investment of the second Respondent?

The letter of the Director of Sugar, dated 8-8-1979, reads as under :

'As desired by Government I have bad detailed discussion with the representative of the lessee and the Chairman and Vice-Chairman as well as the Managing Director of Gauribidanur SSK Ltd. After protracted discussions the lessee agreed to increase the lease amount so as to cover interest on investment.

(2) The investment in the Distillery is as under :

(i) land and buildings 12,90,360-96(ii) Plant & Machinery 37,37,823-53--------------50,28,184-49--------------3. The Management agreed to treat the entire investment at Rs. 50 lakhs for the purpose of calculating interest. Out of this amount of Rs. 50 lakhs, Rs. 25 lakhs have been borrowed by the Society as medium term loans from the D. C. C. Bank at 12 1/2% interest per annum. The balance of Rs. 25 lakhs had, at that time, been invested by the society out of its own resources But they had also borrowed more than this amount for their working capital. As such, it was agreed by both the sides that on this amount, interest should be calculated at the D.C.C. Bank rate of 14 1/2% per annum. The lessees have to pay to the society in cash Rs. 8 lakhs as against the earlier agreement to pay Rs. 6 lakhs. For the purpose of calculating interest therefore this amount has been deducted out of investment of Rs. 75 lakhs borrowed at 14 1/2 % per cent. On the balance amount annual interest works out as under :

(i) Interest at 12 1/2% on Rs. 25,00,600.00

3,12,500

(ii) Interest at 14 1/2% on Rs.17,00,000.00

2,46,500

5,59,000

4. The lessees have agreed to pay the licence fee of Rs. 75,000/- per annum which, irrespective of whether the Distillery is working or not, the owners had to pay. This amount has to be deducted out of the lease amount payable by the lessees. The net amount payable on the basis of interest, on investment minus cash amount of Rs. 8,00,000/- as indicated above will therefore work out to Rs. 4,84,000/-.

5. In their earlier proposal, the lease amount had been agreed to at Rs. 3,05,000-/. The net increase now agreed to will therefore be Rs. 1,79,000/-.

(6) But the lessee's representatives insisted that the lease period should be 10 years and not 5 years. They agreed for the increased amount of lease on the condition that the lease period will be 10 years. They were basically not inclined for any lower period on the ground that the initial 2 to 3 years would be needed for consolidating and setting up their own business activities.'

This letter was written by the Director of Sugar at an undisputed point of time and was followed by the lease deed on 3-10-1979. The Preamble to the lease deed reads as follows :

' .... The Executive Committee of the LESSOR Society had resolved to lease out the Distillery with the buildings and the Board of Management of the LESSOR Society had ratified this resolution of the Executive Committee. Wide publicity was given to this resolution of the LESSOR and offers were invited from persons seriously interested in this behalf including one from the LESSEE herein. The Executive Committee of the LESSOR, by a resolution had accepted the offer of the LESSEE and this was ratified by the Board of Management of the LESSOR. After all these facts were brought to the notice of the State Government of Karnataka, further negotiations took place between the LESSOR and the LESSEE in the presence of the Director of Sugar and ultimately the State Government gave its concurrence for grant of a lease to the LESSEE by the LESSOR, by its letter No. RDC 2 COF 79 dated 30-8-1979 addressed to the Director of Sugar and Additional Registrar of Co-operative Societies, Bangalore. The Director of Sugar and Additional Registrar of Co-operative Societies in the Slate of Karnataka, has also given his concurrence in this behalf.'

From these recitals in the letter to the Government and the Preamble to the lease deed there could be no doubt that the lease rent of Rs. 4,84,000-00 was fixed on the basis of an investment of Rs. 50,00,000-00 and that the lease in question is an onerous contract as pleaded by the second respondent is an afterthought to meet the challenge to the impugned notifications. Therefore, the main contentions to sustain the impugned notifications fail. In my view, in the absence of any proper nexus between the object of the Act and the running of the distillery, the declaration made under Section 3 of the Act is bad in law in so far it relates to the petitioners' distillery though the petitioners had only a leasehold interest in the said distillery. On the pleadings of the parties it appears to me that the distillery was included In the impugned notifications not for the purpose of running the Sugar Factory for providing relief against unemployment of about 700 workmen employed in the second respondent-Factory, but for the purpose of getting rid of the alleged onerous contract as pleaded by the second respondent in its counter. It is a well-settled proposition that a public authority by contract cannot fetter the exercise of its discretion. That principle is attracted when an attempt is made by contract to fetter in advance the future exercise of the statutory powers otherwise than by the valid exercise of a statutory power. The Supreme Court had occasion to consider this aspect of the matter in Indian Aluminium Company v. Kerala State Electricity Board : [1976]1SCR70 . But the case before me does not attract the above principle. What is sought to be done is to suspend the lease in question by declaring the distillery as a relief undertaking and thereafter takeover the same under the guise of providing relief against un-employment of the workmen of the second respondent-Factory. The provisions of the Act, as rightly contended by the Learned Counsel for the petitioners, cannot be used for a collateral purpose and it is well-settled that what cannot be done directly cannot be done indirectly by declaring the distillery as a sick industry and thereby prevent its running to the detriment of the petitioner's interest in the property conveyed to them under the lease deed. Further, the undertaking which become a relief undertaking must be with reference to the employer and the workmen of that undertaking.

Under Section 2(2) of the Act, industry has been defined as follows :

' 'industry' means any business, trades undertaking, manufacture or calling of employers and includes any calling, service, employment, handicraft or industrial occupation or avocation of workmen and the word 'industrials' shall be construed accordingly.'

Therefore, the definition of the words 'industrial undertaking' should be read with the definition of the word 'industry' under Section 2(2) of the Act and thus read the relationship of employer and employee would be material for declaring an undertaking as a relief undertaking. The prevention of unemployment, the maintenance of industrial relations and other matters are essentially matters pertaining to the second respondent and its workmen and therefore the second respondent admittedly being not the employer of the workmen engaged in the distillery, though it was the lessor of the distillery, the distillery could not have been declared as a relief undertaking all because the second respondent was the lessor of the distillery and had parted only with its leasehold rights to the petitioners.

20. Point No. (iii) :--In the light of the above discussion on Point Nos. (i) and (ii), this point must be held in favour of the petitioners, that is to say, the distillery did not form part of the Sugar Factory and therefore it follows that the third respondent was not justified in taking over the distillery which he purported to do under Annexure-C filed in the Writ Petition. The petitioners were also entitled to be protected against such action in the light of the decision of the Supreme Court in Lallu Yeshwant Singh v. Rao Jagdish Singh and Others.3 The Supreme Court ruled in that case :

'In Midnapur Zamindary Co. Ltd. v. Naresh Narayan Rao, 51 Ind App 293 = at p. 299 = (AIR 1924 PC 144 at p. 147) the Privy Council observed :

'In India persons arc not permitted to take forcible possession ; they must obtain such possession as they are entitled to through a Court.'In K. K Verma v. Naraindas C. Malkani : AIR1954Bom358 , Chagla, C.J. slated that the law in India was essentially different from the law in England. He observed :

'Under the Indian law the possession of a tenant who has ceased to be a tenant is protected by law. Although he may not have a right to continue in possession after the termination of the tenancy his possession is juridical and that possession is protected by statute. Under Section 9 of the Specific Relief Act a tenant who has ceased to be a tenant may sue for possession against his landlord if the landlord deprives him of possession otherwise than in due course of law, but a trespasser who has been thrown cut of possession cannot go to Court under Section 9 and claim possession against the true owner.'In Yar Mohammad v. Lakshmi Das : AIR1959All1 , the Full Bench of the Allahabad High Court observed :

'No question of title either of the plaintiff or of the defendant can be raised or gone into in that case (under Section 9 of the Specific Relief Act). The plaintiff will be entitled to succeed without proving any title on which he can fall back upon and the defendant cannot succeed even though he may be in a position to establish the best of all titles. The restoration of possession in such a suit is, however, always subject to a regular title suit and (he person who has the real title or even the better title cannot, therefore, be prejudiced in any way by a decree in such a suit. It will always be open to him to establish his title in a regular suit and to recover back possession.' The High Court further observed :

'Law respects possession even if there is no title to support it. It will not permit any person to take the law in his own hands and to dispossess a person in actual possession without having recourse to a Court. No person can be allowed to become a judge in his own cause. As observed by Edge, C.J., in Wall Ahmad Khan v. Ayodhaya Kundu, (1891) ILR 13 All 537 at page 556 ;

'The object of the section was to drive the person who wanted to eject a person into the proper Court and to prevent them from going with a high hand and ejecting such persons.'XX XX XX XX XX 'In our opinion, the law on this point has been correctly stated by the Privy Council, by Chagla, C.J., and by the Full Bench of the Allahabad High Court, in the cases cited above.'

21. Point No. (iv) :-- My discussion on Point Nos. (i) to (iii) disposes of this point also. The impugned notifications- Annexures A and B - do not affect the operation of the petitioners' distillery as they are without jurisdiction and in excess of the powers of the State Government under Sections 3 and 4 of the Act.

22. Point No. (v) :-- The impugned notifications are also bad in another respect, that is, they are violative of the principles of natural justice since the petitioners were admittedly not heard before the same were issued. There could be no doubt in the light of the decision of the Supreme Court in Swadeshi Cotton Mills v. Union of India : [1981]2SCR533 the petitioners should have been heard before the impugned notifications were issued.

23. The provisions of the Act [The Karnataka Relief Undertakings (Special Provisions) Act, 1977] are complementary to those of the Central Act, namely, the Industries (Development and Regulation) Act, 1951. (See D. S. Patel & Co. v. Gujarat State Textile Corporation Ltd. & Ors. 41 Company cases 1098 followed by the Full Beach of the Calcutta High Court in Pushraj Puranmull & Anr. v. N. Roy & Ors., 1978 Calcutta 215). The relevant part of Section 18AA of the Central Act, reads as under :

'Power to takeover industrial undertakings without investigation under certain circumstances.--18AA-(1)Without prejudice to any other provision of this Act, if, from the documentary or other evidence in its possession, the Central Government is satisfied, in relation to an industrial undertaking, that --

(a) the persons in charge of such industrial undertaking have, by reckless investments or creation of incumbrances on the assets of the industrial undertaking, or by diversion of funds, brought about a situation which is likely to affect the production of articles manufactured or produced in the industrial undertaking, and that immediate action is necessary to prevent such a situation ; or

(b) it has been closed for a period of not less than three months (whether by reason of the voluntary winding up of the company owning the industrial undertaking or for any other reason) and such closure is prejudicial to the concerned scheduled industry and that the financial condition of the company owning the industrial undertaking and the condition of the plant and machinery of such undertaking are such that it is possible to restart the undertaking and such re-starting is necessary in the interests of the general public, it may, by a notified order, authorise any person or body of persons (hereafter referred to as the 'authorized person' to takeover the management of the whole or any part of the industrial undertaking or to exercise in respect of the whole or any part of the undertaking such functions of control as may be specified in the order.'

(underlining by me)

24. The Supreme Court ruled in the aforesaid decision after a detailed discussion of its earlier cases on the point as follows :

'In sum, for all the reasons aforesaid, we are of the view that it is not reasonably possible to construe Section 18-AA(1) as universally excluding, either expressly or by inevitable intendment, the application of the audi alteram partem rule of natural justice at the pre-takeover stage, regardless of the facts and circumstances of the particular case. In the circumstances of the instant case, in order to ensure fairplay in action it was imperative for the Government to comply substantially with this fundamental rule of prior hearing before passing the impugned order, We, therefore, accept (he twofold proposition posed and propounded by Shri Nariman.'

On the facts of this case, there were no complaints about the working of the distillery, its profitability or threat of employment to its workmen. The 700 workmen of the Sugar Factory have also not sought to come on record to keep their jobs over which the second respondent professes to be oversolicitous. Indeed, the only legitimate grievance of the State Government is that the lease amount was not commensurate with the investment made by them in the distillery. That was a matter for negotiation and revision of the lease amount and not for taking over the distillery even without a semblance of hearing Therefore, the impugned notifications are violative of the principles of natural justice.

25. Point No. (vi) :--This point does not arise for consideration since the impugned notifications are bad in law for the reasons stated in my discussion on Point Nos. (i) to (v).

26. Point No. (vii) :--My answer is in the affirmative for the reasons given on Point Nos. (i) to (iii).

27. Point No. (viii):--The impugned notifications are violative of Article 19(1)(g) of the Constitution for the reasons stated in paragraphs 14 to 20 above.

28. In the result, this petition is allowed, the impugned notifications and the letter are quashed. Further, the respondents 1 to 3 are directed not to interfere with the petitioners' possession and enjoyment of the distillery in question under the lease deed Annexure-E.


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