REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2070 OF 2020 [Arising out of Special Leave Petition(C)No. 3127 OF 2014]

Food Corporation of India and Another ..... Appellants(s)

                 VERSUS

M/s. V.K. Traders and Others  .....Respondents(s)

WITH

CIVIL APPEAL NO. 2075 OF 2020 [Arising out of Special Leave Petition(C)No. 3273 OF 2014]

WITH CIVIL APPEAL NO. 2071 OF 2020

[Arising out of Special Leave Petition(C)No. 2522 OF 2014]

WITH CIVIL APPEAL NO. 2072 OF 2020

[Arising out of Special Leave Petition(C)No. 3349 OF 2014]

WITH CIVIL APPEAL NO. 2076 OF 2020

[Arising out of Special Leave Petition(C)No. 3405 OF 2014]

WITH CIVIL APPEAL NO. 2073 OF 2020

[Arising out of Special Leave Petition(C)No. 3134 OF 2014]

AND CIVIL APPEAL NO. 2074 OF 2020

[Arising out of Special Leave Petition(C)No. 3125 OF 2014]

JUDGMENT

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Leave granted.

2. These appeals have arisen from an order dated 21.10.2013

passed by a Division Bench of the Punjab and Haryana High Court

whereby a batch of letters­patent appeals filed by the Food

Corporation of India (FCI) challenging a learned Single Judge’s order of

15.03.2012 was dismissed.  3. The primary issue before the High Court was whether or not the

respondents, who had taken over on leasehold basis certain

blacklisted rice mills, were entitled to allocation of paddy for custom

milling.

FACTS:  

4. It was common practice in Punjab for different government

agencies to allocate paddy for custom milling to hundreds of rice mills,

which  in  turn would supply  the rice,  post milling as  per approved

specifications, to the appellant­FCI. Such allocation would take place

through terms of a bipartite agreement and the same took place for

the Kharif Marketing Season of 2004­05 (hereinafter, “KMS”) also.   5. A dispute arose as to the quality of the milled rice stock for the

aforementioned KMS, leading to an investigation by the Central

Bureau of Investigation (CBI). Finding the quality to be defective, the

CBI initiated prosecution against numerous rice millers and

additionally recommended blacklisting of a total of 182 millers for a

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period of three years for ‘Beyond Rejection Limit’ (BRL) rice and five

years for ‘Beyond Prevention of Food Adulteration’ (BPFA) rice. Such

ban was  effectuated  by the  FCI vide  a  Circular  dated  10.10.2012,

relevant extracts of which read as follows:  

“1. The  millers  who have  supplied rice  which was  beyond PFA limits, the ban imposed may continue.  Final decision on the matter may be taken by the CBI court.

2. As regards the millers who stocks were found BRL by the CBI, the proposal  for  limiting the ban to a period of  three (03) Kharif Marketing Seasons (KMS) w.e.f. the date of imposition of ban, has been accepted.

3. In the case of millers whose stocks were in mixed condition though the same was found beyond PFA and were given benefit of doubt by the CBI, the proposal for limiting the ban to a period of Five (05) Kharif Marketing Seasons (KMS) w.e.f. the date of imposition of ban, has been accepted.

4. The proposals at St. No. 2 and 3 above, would be subject to condition that the defaulting millers deposit the loss suffered by the Corporation along with penal interest. In cases where, FCI has already effected recovery from the concerned State Government & its Agencies, the State Government & its Agencies should recover the said amount from the defaulter miller under intimation to FCI.

5. As there is no specific clause in the Custom Milling Agreement/Levy Order for debarring those rice millers who are found supplying sub­standard rice in CMR/Levy, FCI Headquarters will examine the issue and make specific provisions in this regard in the CMR Agreement as well  as advise State Govt. To make such suitable provisions in the Levy Order.  Action on this to be initiated at Headquarters.

6. The cases of  lease or ownership transfer will  be decided on merit of each case by a Committee of Officers consisting of GM(R) Punjab, a representative from Zonal Office (North) and Headquarters after obtaining required verification/report from State Govt. The said committee shall see genuineness of each such transaction, subject to Court decisions, if any regulating such decision.

7. In the matter of pending Court Cases, ED (North)/GM, Punjab may  take suitable  decision on  lifting of the ban  imposed on the

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Millers or otherwise of each case, on merits.”

6. It is relevant to note that before imposing the ban on allocation

of paddy for custom milling and blacklisting the defaulting rice millers,

showcause notices were served and objections duly considered.

Illustratively, M/s  Sharma Rice Mills, situated at  Katcha  Firozpur

Road, Mukhtsar, was informed vide registered show cause notice

dated 04/06.12.2007 that 1814 MT of rice delivered by it, was found

as being BRL and BFPA, besides the 588 MT of stock which was yet

untested. The notice pointed out how the delivered stock was inedible

and caused huge financial losses to the appellant. It called upon M/s

Sharma Rice Mills to replace the sub­standard rice, as well as

compensate the appellant. However, the rice mills refused to accept

liability  and  failed to  make any payment  to the  FCI for the losses

caused. 7. The blacklisted rice mills, thus, were not allocated any paddy for

purposes of custom milling in 2011­12. Allegedly with a view to

wriggle out of the ban­period, the mill  owners  leased­out their rice

mills to  other  similar  partnership/proprietorship firms.  Notably,  all

such  lease  deeds were  unregistered.  A reference  to  one  such  lease

deed of 21.09.2011 shows that the rice mill of M/s Sharma Rice Mills

along with land measuring 21 kanal 16 marlas on which it was

situated was leased to another firm, M/s BK Traders. The land,

building, machinery and plant were leased out for an annual

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consideration of Rs  2 lakhs.  Most of the lessees were only  newly

constituted entities. 8. These new lessees consequently applied to the appellant­FCI for

allocation of paddy and asserted that none of them had committed any

default or been blacklisted, and that the disqualification attached to

their lessors  could  not traverse  onto  their lawful  entitlements.  The

FCI, on the other hand, declined to entertain such requests on the

premise that the new lessees had simply stepped into the shoes of the

earlier blacklisted lessors as the lease deeds were nothing but sham

transactions to  circumvent the  ban  imposed by  the  Circular  dated

10.10.2012. 9. The learned Single Judge of the High Court opined that a

defaulting mill ought to be understood as the legal entity which

controlled the mill, which could be the proprietor­owner, Director of

an owning­company or the lessee. He held that the new lessee­firms

were entities separate  from the earlier defaulting owners and could

hence  not  be  held to  have  defaulted in  payment  of  dues  or  made

responsible for  sub­standard milling of  paddy.  Furthermore, it  was

observed that the “proprietor of petitioner­firm has not been shown to

have any connivance with the erstwhile defaulter”. The writ petitions

filed  by  some of the new entities  were, thus,  allowed and the ban

imposed by the FCI on allocation of paddy to these new entities, was

set aside. The Division Bench of the High Court has vide the judgment

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under appeal upheld the aforestated view of the learned Single Judge.

CONTENTIONS OF PARTIES:

10. Shri Gaurab Banerjee, learned senior counsel for FCI contended

that the lease deeds relied upon by the new entities were unregistered

documents,  which  had  no sanctity in the eyes of law.  Making  a

pointed  reference  to the lease  deeds  produced by  the  respondents,

wherein duration of the lease was between 2 to 5 years or even for an

indefinite period, he highlighted that such period exceeded the cut­off

of 1 year for compulsory registration.  He urged that these lease deeds

were nothing but sham transactions and had been executed by the

defaulting  rice  millers  deliberately to  escape  their liability for  FCI’s

losses. Such details have been furnished by the counsel through a

chart which shows how lakhs of rupees were recoverable by the FCI.

It was accordingly argued that what was impermissible in law for the

defaulting rice millers could not be permitted through indirect means

in the name of emasculated new lessees.  11. Per contra, learned counsel for the respondents maintained that

the legality of the lease arrangement had not been disputed by either

parties to the agreement (the lessee and the lessor), and no third party

(including the  FCI)  had  any locus standi to call in question such

binding contract. He submitted that the liability for default of dues or

supply of sub­standard rice was attached only to a rice miller who was

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found responsible after due enquiry and notice. The lease holders had

merely taken over land, building and machinery without any

obligation to discharge previous liabilities of the lessors. Hence, it was

unreasonable for the FCI to coerce the lessees to make payments.  

ANALYSIS:

12. We are of the considered opinion, that no reliance can be placed

upon the lease deeds allegedly executed between the defaulting rice

miller(s) and the respondent(s),  as they do not satisfy the statutory

requirements of Section 17(1)(d) of the Registration Act, 1908. These

Lease­deeds thus cannot be accepted as evidence of valid transfer of

possessory rights. The  plea taken  by the  appellant­FCI, that such

documentation was made only to escape the liability fastened on the

defaulting rice millers, carries some weight, though it is a pure

question of fact. The High Court nevertheless ought to have refrained

from opining on the sufficiency of such lease deeds for recognition of a

new legal entity, and consequential non­transfer of liability to the

lessees.  13. Even in a case where a proprietorship/partnership firm has been

in existence for long  and took over a  mill­in­default only on­word

basis, no right to seek allocation of paddy can be claimed by it unless

the liabilities arising out of the previous bilateral agreement are

satisfied. We are, thus, of the view that the High Court erred gravely in

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setting aside the orders through which the FCI declined to allocate

paddy to the new lessees of the defaulting rice mills.

CONCLUSION:

14. For the reasons aforestated, these  appeals are allowed.   The

orders  passed by  the  learned Single  Judge as  well  as the  Division

Bench of the High Court are set aside. The writ petitions filed by the

respondent­lessees are dismissed, however, with liberty to pay dues

with penalty/interest of the original rice­millers and thereafter on

production of ‘No Dues Certificate’ seek allocation of paddy for custom

milling in accordance with the policy of FCI.  No orders as to costs.    

……………………………..J. (S.A. BOBDE)

CJI

……..……………………..J. (B.R. GAVAI)

…………………………… J. (SURYA KANT)

NEW DELHI

DATED : 06.03.2020

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