Shares of Company Are Separate Asset Wholly Distinct From Assets Held by Company: Delhi High Court

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Facts

A Perpetual Lease Agreement was entered into between M/s. Jayna Plastic Works through its proprietor Mr Vir Anil Jain and the Hon’ble President of India acting through the respondent for leasing of the industrial plot. On 30.09.1977, through its proprietor, Jayna Plastic Works applied for conversion of the property to the petitioner company i.e. Vipul Plastic and Allied Industries Pvt. Ltd. The majority shares vested with the family of Shri Krishan Gopal Aggarwal. The shares of the petitioner company increased from 300 to 350 shares wherein some were subscribed by the family members and non-family members. In September 2010, the respondent advertised a scheme for the conversion of leasehold property to freehold property. The petitioner filed an application for conversion of the property from leasehold to freehold and paid the prescribed fee of Rs. 5,28,846/-. The respondent inspected the property as per the procedure adopted for conversion of the plot from leasehold to freehold and found the property to be in order and free from all kinds of misuse. However, the respondents took no steps to finalise the application of the petitioner. The respondent handed over a Demand Letter for payment of Rs.41,72,177/- towards alleged misuse charges and unearned increase. The petitioner filed objections for the same, which were dismissed by the respondent without giving any reason. 

Arguments

The petitioner stated that the transfer took place in 1978 when the family of Mr Krishan Gopal Aggarwal became an owner with the controlling shares to the extent of 83.3% of the shareholding of the petitioner company. Mr Aggarwal and his immediate family remain the holder of 83% of shares and in control of the Company till the date. The counsel further contended that merely because some limited shares were transferred for various reasons does not give a rise to the transfer of land and does not attract the policy of the unearned increase. The action of DDA in charging an unearned increase for every transfer of share from 1978 to 2015 was wholly illegal and unwarranted. The counsel further stressed that the petitioner had applied for conversion from leasehold to freehold on 30.09.2013. The respondent failed to take steps even after completion of all the formalities. 

The counsel for the respondent relied upon Clause 2(c) of the Guidelines of DDA to reiterate that an unearned increase is attracted for subsequent sale of shares. The counsel also stressed that the misuse charges have been levied as per the policy dated 26.03.2010 read with the policy of 2015. The policy was invoked for only six months. The application was completed only in 2016 thus, the policy of 2014 would not have applied to the petitioner. 

Court’s Observation

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Based on the facts of the case, the court observed that the property originally belonged to the petitioner since 1977. In 1978, the subscription of the equity shares was increased from 8 to 300 shares and the majority of shares vested in the family of Sh. Krishan Gopal Aggarwal. The court observed that the respondent’s action was wholly illegal because they had chosen to levy a proportionate unearned increase on the shares that had changed hands after 1978. The management of the company does not change with the said transfer of these minuscule shares. The Court thus found that there was no transfer, sale, assignment or parting of possession of the land by the petitioner after 1978 to attract an unearned increase.

Court’s Decision

The court stated that the transfer of shares of the petitioner company cannot be interpreted as a transfer of the assets of the petitioner company. Shares are separate assets and distinct from the assets of the company. Hence, the transfer of some minuscule percentage of shares of the petitioner company does not result in the attraction of clause 5(a) of the lease dated 02.09.1976 as it does not result in sale, transfer, assignment or parting with possession of the whole or any part of the industrial plot. The question of charging an unearned increase for the sale of shares that took place after 1978 till 2015 is clearly illegal as the clause isn’t attracted. The act of the respondent in charging misuse charges based on some other policy is illegal and arbitrary and is accordingly quashed. The present writ petition was allowed. The Court decided that no unearned increase shall be charged for the transfer of shareholding that may have taken place after 1978.  

Click here to view the judgement.


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