M/S. Khan Saheb M. Hassanji and Sons vs State Of Madhya Pradesh

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 645/1961

Decision Date: 19 November 1962

Coram: Sinha, C. J.

M/S. Khan Saheb M. Hassanji & Sons filed a petition before the Supreme Court of India against the State of Madhya Pradesh. The judgment was rendered on 19 November 1962. The matter was listed under the Mines and Minerals (Regulation and Development) Act, 1948, section 4, the Mineral Concession Rules, 1949, the Mining Rules of 1913, rule 50, and Article 31(1) of the Constitution of India. The petitioners were the corporate entity M/S. Khan Saheb M. Hassanji & Sons and the respondent was the State of Madhya Pradesh. The core issue concerned a mining lease for coal extraction on 189.76 acres of land and the validity of an agreement that altered the royalty rate. The appellants had obtained an assignment of the original mining lease and subsequently sought to acquire additional adjoining lands, which required the sanction of the State Government. After extensive correspondence and negotiation, the Government consented to grant the required sanction on the condition that the appellants accept a consolidated lease covering the additional area and pay an enhanced royalty. Accordingly, on 11 January 1949 the parties executed an agreement that increased the royalty payable from Rs 5 per ton to Rs 10 per ton. No formal lease deed was executed, but the appellants were permitted by the Government to work the mines from 27 October 1947 to 30 June 1949. During this period they paid Rs 40,865, including interest, as royalty, a payment they made under protest in February‑March 1960. The appellants then instituted suit before the Additional District Judge seeking a declaration that they were not bound by the 11 January 1949 agreement and that they owed no royalty beyond that fixed under the 1923 lease and the lease dated 21 January 1944, together with ancillary reliefs. The trial court dismissed the suit on the Government’s contest. On appeal, the High Court reversed the trial court’s decision, dismissed the suit and awarded costs to the Government.

The Supreme Court held that the 11 January 1949 agreement clearly placed the Governor in the role of lessor. Even assuming that the Mining Rules of 1913 possessed statutory force and were applicable, the Governor, as the grantor of the lease, must be presumed to have decided that the revised terms served the interest of the State; consequently, the revised royalty terms were binding on both parties. The appellants themselves conceded that the Mining Rules were not statutory, leading the Court to conclude that the agreement was not void. The Court observed that the Mineral Concession Rules, 1949, which came into force on 25 October 1949, were not retrospective and therefore could not affect an agreement finalized in January 1949. As no such Rules existed at the time of the agreement, there was no contravention of statutory provisions. Accordingly, the payment made under the contract was enforceable, and the State had not deprived the appellants of any property within the meaning of Article 31(1) of the Constitution.

The Court held that the payment made to the Government was enforceable under the terms of the contract, which had not been invalidated. Consequently, it could not be said that the State had deprived the plaintiffs of any property within the meaning of Article 31 (1) of the Constitution. The judgment concerned a civil appeal numbered 645 of 1961, filed against the judgment and decree dated 20 April 1957 rendered by the Madhya Pradesh High Court in First Appeal number 181 of 1952. The appeal was presented by counsel for the appellant and counsel for the respondent. The judgment was delivered on 19 November 1962 by the Chief Justice. The appeal was pursued on a certificate granted by the High Court of Madhya Pradesh at Jabalpur on 16 April 1958 under Article 133 of the Constitution. It challenged the judgment and decree of that Court in First Appeal number 181 of 1962, which had reversed the decision of the Additional District Judge at Chindwara in Civil Suit number 3‑A of 1951, a suit decided on 25 September 1952. The trial court had decreed in favour of the plaintiffs the payment of Rs 40865 together with interest. To set the stage for the matters in dispute, the Court proceeded to recount the relevant facts of the case.

Haji Syed Zahiruddin of Bhopal had obtained a mining lease, exhibited as document P‑2, dated 29 May 1923, covering 189‑76 acres of land in the Chindwara district for the purpose of coal extraction. The appellants acquired an assignment of that lease through document P‑1 dated 4 September 1940. Adjacent to the leased area were additional coal‑bearing lands owned by other parties, and the appellants wished to acquire those neighbouring collieries. Such transfers could not be effected without the approval of the State Government. After extensive correspondence and negotiations, the Government consented to sanction the transfer of the adjoining lands to the appellants on the condition that the appellants would enter into a consolidated lease covering the entire expanded area and would pay an increased royalty rate. Accordingly, the appellants entered into an agreement with the Government on 11 January 1946, exhibited as document P‑3, under which the royalty payable to the Government was raised from Rs 5 per ton to Rs 10 per ton. Although no formal lease deed was executed, the Government permitted the appellants to work the mines from 27 October 1947 to 30 June 1949. For the coal extracted during that period the appellants paid the Government a sum of Rs 40865, which included interest, as royalty. The plaintiffs paid this amount under protest in February‑March 1960. The plaintiffs then instituted the present suit in February 1951, seeking a declaration that they were not bound by the terms of the agreement dated 11 January 1949 and that, consequently, they were not liable to pay the Government any amount exceeding that fixed by the original 1923 lease or by the lease dated 21 January 1944 relating to the lands transferred to them.

The plaintiffs also moved for an injunction against the State of Madhya Pradesh, which was the sole defendant in the suit. In addition, they prayed that the amount of Rs 40865 paid by them under protest be refunded together with interest of Rs 1985 calculated from the date of each payment that formed part of the total Rs 40865. They further claimed interest pendente lite and future interest at a rate of six percent on the decretal amount until the judgment was executed. The plaintiffs argued that the agreement they had entered into was void because it violated rule 50 of the Mining Rules of 1913 and also contravened section 4 of the Mines and Minerals (Regulation and Development) Act of 1948. Moreover, they alleged that the Government had made a representation in the correspondence between the parties that a new policy would be adopted concerning mining leases, including the grant of leases at an enhanced royalty rate. According to the plaintiffs, that representation induced them to enter into the agreement, rendering the agreement unenforceable. The Government contested the suit by contending that the Mineral Rules of 1913 had no binding effect after the Constitution Act of 1935 as regards the provinces, characterising those rules merely as departmental instructions for subordinate officers. It further maintained that the Government was free to negotiate its own terms in respect of fresh leases. In addition, the Government asserted that the Mines and Minerals (Regulation and Development) Act of 1948, read with the rules made thereunder, did not apply to the leases in question because those rules came into force only after the transactions had been completed. The Government also denied that any misrepresentation had been made, although it admitted that it had intended to promulgate fresh rules envisaging revised royalty scales, which ultimately never materialised. Consequently, the Government argued that the plaintiffs had no cause of action for the reliefs claimed. The learned Additional District Judge at Chhindwara delivered a judgment and decree on 25 September 1952, whereby he decreed the suit with costs, holding that the plaintiffs were entitled to the declaration they sought and to the consequential relief of a refund of the amount paid under protest, namely Rs 40865, together with Rs 992/8 as interest at three percent per annum up to the date of the suit, and also interest pendente lite up to the date of realisation at the same three‑percent rate. On appeal by the State of Madhya Pradesh, the High Court set aside the trial court’s judgment and decree, dismissed the suit with costs throughout, and held that the Government was not bound by the 1913 Rules, which had no statutory force, and that the subsequent rules of 1949 made under the 1948 Act did not apply retrospectively to the transaction in question.

The Court observed that the 1949 Rules made under the 1948 Act could not be applied to the transaction because those Rules possessed no retrospective effect. It also noted that the High Court had found no misrepresentation by the Government and that the plaintiffs had entered into the agreement with the intent of commencing mining operations to profit from the high coal market, doing so knowingly and without any vitiating influence. The appellants subsequently applied to the High Court and obtained the required certificate, bringing the dispute before the Supreme Court. Before the Supreme Court, counsel for the appellants argued vigorously that the 1913 Rules were imperative in nature, carried statutory force, and bound the State Government, so that any lease or agreement violating those Rules would be void. The appellants further contended that the Government was not entitled to recover the higher royalty rate from the plaintiffs and that the plaintiffs’ suit was well‑founded in law. Conversely, counsel for the respondent maintained that those Rules had been promulgated by the Governor‑General in Council with the sanction of the Secretary of State for India in Council, and therefore functioned only as departmental instructions binding Government officials, not as obligations upon the Government itself. In the Court’s opinion, the respondent’s contention was well‑founded. Rule 1, which reads, “No licence to prospect for minerals or lease of mines and minerals can be granted by any Local Government otherwise than in accordance with these rules, except with the previous sanction of the Secretary of State for India in Council, or with that of the Governor‑General in Council under any general or special authority which he may have received in this behalf from the Secretary of State in Council,” makes clear that the Government may depart from the general rule only with prior sanction from the rule‑making authorities. The general principle required officials to follow the Rules when granting licences or leases, but an exception could be made if authorized in advance. This legal position remained until the Government of India Act 1935 came into force, after which the Secretary of State and Governor‑General were replaced by the Governor effective 1 April 1937. From that date, the Governor alone acquired the power to grant such exceptions. In the present case, the agreement dated 11 January 1949 (Exhibit P. 3) shows that the Governor acted as the lessor, indicating that the applicable authority for any exception lay with the Governor.

In the case before the Court, the Rules were regarded as having statutory force and were applicable to the dispute. Because the Governor had acted as the grantor of the lease, the Court presumed that the Governor had decided that the revised terms were in the interest of the State, and consequently the revised lease terms were binding on both parties. At the outset, counsel for the appellants asserted with great vigor that the Rules of 1913 were statutory, but he was unable to identify any statutory source for those Rules. Eventually, he conceded that the Rules were not statutory. On that basis, the Court held that there was no merit in the contention that the agreement dated January 11, 1949 (Exhibit P‑3) was void.

The Court then examined an alternative ground of attack founded on the provisions of the 1948 Act and the Rules made under that Act. The Act had come into force on September 8, 1948, and under section 5 of the Act the Mineral Concession Rules, 1949, were promulgated. Those Rules did not become effective until October 25, 1949, and they were not intended to have retrospective operation. Section 4 of the Act stipulated that no mining lease could be granted after the commencement of the Act except in accordance with the Rules made under the Act. Accordingly, any mining lease granted on or after October 25, 1949 would have to comply with those Rules. However, the agreement in dispute resulted from negotiations that spanned several years and was finalized in January 1949. The appellants, with the Government’s permission, carried out mining operations on the terms insisted upon by the Government, and during the period for which royalty was realized from the appellants, the Rules did not yet exist and therefore could not have been violated. For this reason, the Court was not concerned with the effect of the Rules that were promulgated in 1949 and took effect on October 25, 1949, and it saw no need to consider what the legal position would have been had the agreement been examined under those Rules after that date.

The only other ground raised against the enforceability of the agreement was an alleged misrepresentation by the Government that it would increase the royalty rate uniformly, and that the appellants entered into the agreement based on that belief. The Court found this ground difficult to appreciate. The agreement was not challenged on the basis of undue influence or coercion by the grantor in imposing more onerous terms. As the High Court observed, the appellants were eager to acquire the additional area and to work the coal mines, and they did so on terms that were mutually agreed between the parties.

In this case the Court noted that the plaintiffs had made no allegation of a mutual mistake that could have invalidated the agreement. The Court also observed that the mere fact that the draft amendment to the Mining Rules, which had been published for public comment on 12 July 1947 (see Exhibit D13), had not been finalized did not give rise to any cause of action against the State. The plaintiffs, with full awareness and after a thorough discussion between themselves and the Government, had willingly entered into the agreement on the terms presented. Although those terms could be described as more onerous than the terms granted to other lessees, the Court held that such a difference did not vitiate the contract between the parties.

The appellants had attempted to raise a constitutional argument, contending that the conditions imposed by the State amounted to deprivation of property without lawful authority. The Court found this contention to be wholly without merit because the State had not taken away any property from the appellants. The amount that the appellants had paid to the Government was enforceable under the terms of the contract, which the Court had already found to be valid and not vitiated.

Even assuming that the Constitution applied to the transaction, the Court concluded that the apparently harsh bargain struck by the State could not be attacked under Article 31(1) of the Constitution. Since every ground of attack raised in support of the appeal failed, the Court directed that the appeal be dismissed with costs and entered an order dismissing the appeal.