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State Of Karnataka And Others v. Subhash Rukmayya Guttedar And Others
Factual and Procedural Background
The respondents (contractors) entered into agreements with the Government of Karnataka to carry out public works. Under Clause (35) of the contract schedule, they were responsible for paying royalty on any minor minerals (e.g., stone, sand) extracted from either Government-owned or private quarries for use in those works. Acting pursuant to Rule 19 of the Karnataka Minor Mineral Concessions Rules, 1969, the State demanded royalty payments.
Disputing the Government’s right to levy royalty, the contractors filed multiple writ petitions in the Karnataka High Court. A learned Single Judge—and, on appeal, a Division Bench—accepted the contractors’ position and issued a mandamus restraining the State from collecting royalty. The State obtained special leave to appeal to the Supreme Court under Article 136 of the Constitution, resulting in the present consolidated appeals. Leave was granted, and the matter was decided by this common order.
Legal Issues Presented
- Does the contractual permission granted to contractors to enter Government quarries and remove minor minerals constitute a “lease” (with concomitant royalty liability) or merely a licence/enabling right?
- If it is a lease, are the contractors legally obliged to pay royalty under Clause (35) of the contract schedule and Rule 19 of the Karnataka Minor Mineral Concessions Rules, 1969?
Arguments of the Parties
Appellants (State of Karnataka)
- Clause (35) expressly makes contractors liable for royalty; their bid prices included royalty components.
- The right to enter, extract, and appropriate minerals is, in substance, a mining lease within the meaning of Section 105 of the Transfer of Property Act and Rule 19 of the 1969 Rules.
- The High Court erred in concluding that the absence of a formal lease deed negated royalty liability.
Respondents (Contractors)
- No mining lease was executed in accordance with the 1969 Rules; therefore, the arrangement cannot be treated as a lease.
- The contractors merely enjoyed an enabling right to remove minerals; absent a lease or licence for consideration, royalty is not payable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Nageshwar Bux Roy v. Bengal Coal Co., LR (1930) 58 IA 29 | Possession of mineral land may be manifested through extraction; full physical occupation is unnecessary. | Supports the view that the right to win and remove minerals is a form of possession/enjoyment, reinforcing classification as a lease. |
| Tarkeshwar Sio Thakur Jiu v. Dar Dass Dey & Co., (1979) 3 SCC 106 | A mining lease is a “lease” under Section 105 of the Transfer of Property Act because it transfers a right to enjoy immovable property through mineral extraction. | Relied upon to determine that the contractors’ extraction rights amount to a lease, thereby attracting royalty obligations. |
Court's Reasoning and Analysis
The Supreme Court began with Clause (2) of Schedule “D” and Clause (35) of the contracts, both of which clearly stipulate that unit rates quoted by contractors include royalty. Rule 19 of the 1969 Rules prescribes royalty rates. Read together, these provisions unequivocally require contractors to pay royalty on any minor minerals extracted.
The Court addressed the central contention that no lease existed because a formal lease deed was never executed. By analysing Section 105 of the Transfer of Property Act and the cited precedents, the Court reasoned that the essential element of a lease is a transfer of a right to enjoy immovable property. Permission to enter Government land, extract minerals, and appropriate them satisfies this criterion, even if formalities under the Rules were not observed.
Drawing on Nageshwar Bux Roy and Tarkeshwar Sio Thakur Jiu, the Court held that mineral extraction rights are leases in substance. Consequently, royalty is payable. The High Court erred in focusing on procedural non-compliance with the Rules rather than the contractors’ explicit contractual undertaking.
Holding and Implications
Appeals Allowed – Writ Petitions Dismissed. The Supreme Court set aside the High Court’s judgment and held that the contractors are liable to pay royalty in accordance with their contracts with the State Government.
Implications: The State may recover royalty from the contractors for the minor minerals extracted. The issue of refund where materials are used exclusively for Government work was not argued before the High Court or the Supreme Court and remains open. The ruling reinforces that, in works contracts permitting mineral extraction, contractors can be considered lessees and thus subject to royalty obligations.
Order
1. Leave granted.
2. All the appeals raise common question of law and the High Court also disposed of the matters by a common judgment. These appeals arise from judgment of the Karnataka High Court in the writ appeals. The respondents-contractors entered into contracts with the Government to execute work as per the schedule of the contract provided in the form. They have to excavate the minor minerals either from the Government quarry or from private quarry and use them for the execution of the works. It is one of the requirements in the contract under clause (35) of the schedule that they are liable to pay royalty on the material so removed from Government quarry for the execution of the work. The Government have demanded payment of the royalty. Calling in question the entitlement of the Government under Rule 19 of the Karnataka Minor Minerals Concessions Rules, 1969 for short ‘the Rules’ the respondents filed a bunch of writ petitions and disclaimed their liability to pay the same. The High Court by a learned Single Judge and the Division Bench on appeal accepted their contentions and issued a mandamus not to collect the royalty from the respondents. The question whether they are liable to pay royalty on the value of minerals removed from the government land under any other law was left open. Thus, the State filed these appeals by special leave under Article 136.
3. Admittedly, the appellants had granted right to the contractors to extract minor minerals from the quarries owned by the State. Clause (2) of the schedule ‘D’ to the contract provides the liability to pay royalty of mining:
“The unit rates quoted by the contractor are to be considered as inclusive of royalty in respect of various material viz. granite/trap/shahabad stone boulders, metal mand, marum etc. supplied by the contractor for execution of the several items of work irrespective of source whether Government quarry on private quarry from where the materials are obtained by him. The Government shall deduct from the bills payable to the contractor, such royalty payable by him at the rates prescribed in the Government Orders No. PC/22.BAP/69 dated 7-10-1984 and latest amendments thereto or instructions thereon. The rates shall also be inclusive of all other taxes that may exist leviable and payable by him to any authority.”
4. Rule 19 of the Rules provides the rates of royalty as under:
“Rate of Royalty — Royalty shall be leviable on minor minerals quarried from the leased area at the rates specified in the schedule. After the expiry of a period of four years from the commencement of these rules the Government may, by notification in the official Gazette, amend the schedule so as to enhance the rate at which royalty shall be payable in respect of any minor mineral, provided that the rates in respect of any minor mineral shall not be enhanced before the expiry of a period of four years from the date with effect from which the rate in respect of that minor mineral may have been last altered. Provided that the Government may, by notification in the official Gazette, reduce or exempt the royalty payable by a co-operative society as defined in Clause (c) of Section 2 of the Karnataka Cooperative Societies Act, 1959 (Karnataka Act 11 of 1950, all the members of which—
(1) are bonded labourers freed and discharged in accordance with Section 4 of the Bonded Labour System (Abolition) Act 1976; or
(2) belong to Scheduled Castes or Scheduled Tribes as defined in the Constitution of India.”
5. Clause (35) of the schedule to the contract provides:
“All quarry fees, royalties, octroi dues and ground rent for stocking materials, if any, should be paid by the contractor, who will however, be entitled to a refund of such of the charge as are permissible under the rules on obtaining a certificate from the Executive Engineer or other competent authority that the materials were required for use on Government work.
All quarry fees, royalties, octroi duties and ground rent for stocking materials, if any, should be paid by the contractors. No ground rent is leviable for Government land acquired for this project and made available to the contractors for stocking materials and erection of temporary sheds.”
6. A plain reading of these relevant provisions clearly postulates that the contractor is liable to pay royalty for the minor minerals removed or consumed or extracted by a contractor from leased area as per the rates specified in clause (35) of the schedule to the contract or as amended thereto or instructions thereon vis-a-via by Rule 19 of the Rules. In case the contractor used the extracted materials supplied to the contractor for execution of the work of the Government and if the rules permit for grant of refund on a certificate obtained from a competent authority or Executive Engineer or an officer authorised in that behalf, the contractor would become eligible to apply for the grant of refund of the royalty so paid. However, under the contract he has independent right to use in the execution of the work the minor minerals obtained either from the Government quarry or from private quarry. If he uses minor minerals obtained from private quarry, he pays for its value to the owner. Repeatedly we asked the counsel whether the contractors have only works contract to supply labour to which the answer is in the negative. The contention of the respondents which found favour with the High Court is that there is no lease either in terms of the contract or in terms of the rules and therefore it is only an enabling right to the contractor to remove the mines minerals from the Government quarry. No lease deed in terms of the rules was executed. It is not a licence for consideration and therefore they are not liable to pay any royalty. The question, therefore, is whether the grant of the right to extract the minor mineral from Government quarry is a lease or a licence and whether the contractor is liable to pay the royalty in respect of minor mineral extracted from the Government quarry. Section 105 of the Transfer of Property Act defines a lease of immovable property as a transfer of a right to enjoy such property made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. The normal connotation of the term lease is the preservation of the demised estate to be in occupation and enjoyment thereof for a specified period or in perpetuties for consideration; the corpus by user thereof does not disappear and at the expiry of the term or on termination the same is handed over to the lessor subject to the terms of the contract, express or implied. A right to carry on mining operations in the land on surface or sub-soil is to extract the specified quantity of the minerals found therein, to remove and appropriate that mineral. Section 9 of the Mines and Minerals (Regulation & Development) Act, 1957 affords the guidance in this behalf. It says that the holder of a mining lease or agent, etc. is entitled to remove or consume the mineral. It would mean destruction of the estate leased out and appropriation thereof on payment of consideration i.e royalty. Therefore, it is a right to enjoy immovable property within the meaning of Section 105 more so when, as in the instant case, it is coupled with a right to be in occupation or enter into possession for a specified period. Section 3(d) of the Act defines ‘mining operations’ to mean any operation undertaken for the purpose of winning any minerals. It is true that no right, title or interest has been created in the contractor over the mining area. But he has been permitted to remove and use the minor minerals in the execution of the works as its (sic his) right to enjoy immovable property spoken of in Section 105 which means the right to enjoy the property in the manner in which that property can be enjoyed. In Nageshwar Bux Roy v. Bengal Coal Co. LR (1930) 58 IA 29 Lord Macmillan speaking for the Board held that:
“In considering the character and effect of acts of possession in the case of a mineral field, it is necessary to bear in mind the nature of the subject and the possession of which it is susceptible. Owing to the inaccessibility of minerals in the earth, it is not possible to take actual physical possession at once of a whole mineral field: it can be occupied only by extracting the minerals and until the whole minerals are exhausted the physical occupation must necessarily be partial.”
7. Para 899 of Vol. 26 of Halsbury's Laws of England, 3rd Edn. reads as under
“A lease may be granted of land or any part thereof (c), and since minerals are a part of the land (d) it follows that a lease can be granted to the surface of the land and the minerals below, or of the surface alone (e), or of the minerals alone (f). It has been said that a contract for the working and getting of minerals, though for convenience called a mining lease, is not in reality a lease at all in the sense in which one speaks of an agricultural lease, and that such a contract, properly considered, is really a sale of a portion of the land at the price payable by instalments, that is, by way of rent or royalty, spread over a number of years (g).”
8. This Court in Tarkeshwar Sio Thakur Jiu v. Dar Dass Dey & Co. (1979) 3 SCC 106, (1979) 3 SCR 18 was to consider the question whether the mining lease is a lease within the meaning of Section 105 of the Transfer of Property Act. Considering the terms and conditions of the lease this Court concluded that a mining lease may not meticulously and strictly satisfy in all cases, all the characteristics of a lease as defined in the Transfer of Property Act. The right to carry on mining operation in land to extract a specified mineral and to remove and appropriate that mineral is a right to enjoy immovable property within the meaning of Section 105 of the Transfer of Property Act. It was held to be a lease. The subject matter in that case was sand mine and the Court held that sand mine can only be enjoyed and occupied by working it as indicated in Section 108 of the Transfer of Property Act which regulates the rights and liabilities of the lessor and lessee of immovable property.
9. The appellants undoubtedly had given permission to the contractors to remove and appropriate the minor minerals from quarries of the State Government under the contract. The contractors entered into contracts with the Government. The Government handed over the quarry to extract minor minerals and to use the same in the works to be executed by the contractor, though the works belong to the Government. It is not the case of the respondents that they are only works contractors to supply the labour and that the Government has to supply the material to execute the works. As per the contract the price per unit quoted by them is inclusive of the royalty payable on minor minerals excavated from Government or private quarry. On the other hand in terms of the contract they are liable to pay royalty. Under those circumstances the contractors having had from the Government permission to enter upon the Government quarries to extract the minor minerals to remove them and to enjoy the same in execution of the contract, they became liable to pay royalty. Their liability to pay royalty arose from the contract. The question whether royalty is a part of the cost component is not the ground raised in the High Court nor argued. We are not concerned therefore, with this question in these appeals. The learned Single Judge of the High Court proceeded on the footing that the rules provided the mode and mechanism to enter into mining lease and since the mining leases were not executed in terms thereof they are not leases under the rules. Therefore, he found that the liability to pay the royalty did not arise. The Division Bench proceeded on the ground that the lease does not attract Section 105 of the Transfer of Property Act. We are unable to agree with the High Court on either ground. It is undoubtedly true that the rules specify the procedure to enter into a mining lease for winning over the minor minerals and terms to be complied with. But the question of liability to pay the royalty for the minerals removed and consumed by a contractor is to be considered in terms of the contract. In the light of the above-extracted rules, terms of the contract and the legal position, we are of the opinion that the respondents-contractors are liable to pay royalty in terms of the contract. It is next contended that the respondents are entitled to refund for the minerals used for the government work as contained in the contract. This question was also not raised before the High Court. Therefore, we do not propose to go into it and the matter is left open. The appeals are accordingly allowed. The writ petitions stand dismissed. The parties will bear their own costs.
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