Earnest Money Forfeiture Invalid If Rules Don't Mandate Penalty for Non-Compliance or Applicant Follows Lease Limit Option: Allahabad High Court - 2025-04-27

Allahabad High Court Quashes Forfeiture of ₹90 Lakhs Earnest Money, Citing Improper Rule Application and Applicant's Compliance with Lease Limit Option

Allahabad, Uttar Pradesh - In a significant ruling concerning mining leases and the forfeiture of earnest money, the Allahabad High Court has quashed orders passed by the District Magistrate, Hamirpur, and the Secretary, Mines and Minerals, U.P., directing the refund of ₹90 lakhs deposited by a construction company. The court held that the forfeiture was without legal authority, misinterpreting the relevant government orders and failing to consider amended rules governing lease limits.

The division bench of Hon'ble Anjani Kumar Mishra , J. and Hon'ble Jayant Banerji , J. delivered the judgment on May 29, 2024, in a writ petition filed by M/S Pragyason Constructions Private Limited against the State of U.P. and others.

Case Background

The petitioner had participated in an e-auction for a mining lease in District Hamirpur, advertised on January 3, 2020. They submitted the highest bid and deposited earnest money of ₹90 lakhs on April 24, 2020. Following acceptance of their bid, the petitioner was asked to submit relevant documents within three days for the issuance of a Letter of Intent (LOI).

Meanwhile, the petitioner also participated in bidding for leases in District Fatehpur, where they were subsequently issued two LOIs on June 18, 2020, based on an advertisement from May 14, 2020.

Crucially, Rule 10(3) of the U.P. Minor Minerals (Concessions) Rules, 1963, as amended by the 47th Amendment Rules (effective October 19, 2019), limits the number of leases granted to one entity in Uttar Pradesh to two, with an aggregate area not exceeding 50 hectares. A subsequent Government Order dated October 9, 2017 (amending a prior GO of August 14, 2017) provided a mechanism: if an applicant exceeds this limit and informs the authorities, they have the right to choose which leases to retain, and the deposit for the remaining areas must be refunded after verification.

Upon receiving the two LOIs for Fatehpur, the petitioner informed the Hamirpur authorities on June 19, 2020, seeking a refund of the Hamirpur earnest money, effectively opting to proceed with the Fatehpur leases as permitted by the rules.

The District Magistrate rejected the refund application on July 16, 2020, citing the petitioner's failure to submit documents within the initial three-day window and claiming significant revenue loss to the state. This order was upheld by the revisional authority (Secretary, Mines and Minerals) on November 20, 2020, leading the petitioner to file the writ petition.

Arguments Presented

For the Petitioner: * The request for refund was valid under the amended Rule 10(3) and the GO dated October 9, 2017, which permits an applicant to opt out of leases exceeding the prescribed limit and mandates a refund upon intimation to the authorities. * The condition in the tender requiring document submission within three days was merely directory , not mandatory , as it lacked a penal clause for non-compliance. Reliance was placed on the Supreme Court judgment in State of Bihar and others v. Bihar Rajya Bhumi Vikas Bank Samiti, (2018) 9 SCC 472 . * The forfeiture clause in the GO dated August 14, 2017 (Clause 17), relied upon by the state, only applies when documents submitted are found to be false, fabricated, or incorrect, not for failure to submit documents. * The state failed to quantify any actual loss suffered.

For the Respondents (State): * The forfeiture was justified because the petitioner failed to submit the required documents within the stipulated three days, despite reminders, causing loss to the state exchequer as the lease could not be offered to others. * They relied on Clause 17 of the GO dated August 14, 2017, and Clause 19 of the tender notice, which mandated document submission within three days.

Court's Analysis and Decision

The High Court carefully considered the arguments and the relevant rules.

The court agreed with the petitioner's interpretation of Clause 17 of the GO dated August 14, 2017, finding that forfeiture under this clause was specifically tied to the submission of false or fabricated documents, a situation not applicable here as no documents were submitted.

Applying the principle from State of Bihar , the bench determined that the requirement to submit documents within three days, as stipulated in the GO dated August 14, 2017, and the tender notice, was indeed directory . This was supported by the absence of a penal consequence for non-compliance within the rule itself and the fact that the authorities issued reminders, indicating the provision was not strictly mandatory to the extent of immediate forfeiture.

Crucially, the court highlighted the amended GO dated October 9, 2017, which modified the August 14, 2017 order. The amended Clause 13(9) explicitly addresses the situation where an applicant is granted more than two leases or leases exceeding 50 hectares. The proviso to this clause grants the applicant the right to choose leases within the permissible limit if they inform the authorities, and mandates the return of deposits for the remaining areas.

The court found that the petitioner, by informing the Hamirpur authorities after obtaining two leases in Fatehpur, had acted in accordance with this beneficial proviso, exercising their right to choose the Fatehpur leases and seek a refund for Hamirpur. The authorities' failure to consider this provision rendered their forfeiture order illegal.

"We are in agreement with the submission of learned counsel for the petitioner that forfeiture of earnest money could be ordered only when, upon the verification, any document or certificate filed by an individual was found false, fabricated or incorrect," the court observed.

Further stating, "There does not appear to be any penal consequence provided for non- compliance of the earlier part of this provision which requires the highest bidder to submit relevant documents within a period of three days from acceptance of his bid. Therefore, in view of the judgment relied upon by the learned counsel for the petitioner, the provision has to be held to be directory and not mandatory."

Regarding the GO dated October 9, 2017, the court cited its relevant portion: "...परन्तु यदि आवेदक स्वयं अपने पक्ष में दो खनन पट्टे या 50 हे० से अधिक के खनन पट्टे हेतु जारी लेटर ऑफ इटेन्ट की सूचना देता है, तो उक्त सीमा के अन्तर्गत कोई भी खनन पट्टा क्षेत्र के चयन का उसे अधिकार होगा तथा शेष क्षेत्रों की जमा धनराशि पुष्टि के उपरान्त यथावत वापस कर दी जायेगी।" (Translation: "...However, if the applicant himself provides information about Letters of Intent issued in his favour for two mining leases or mining leases exceeding 50 hectares, he shall have the right to select any mining lease area within the said limit, and the deposited amount for the remaining areas shall be returned after verification.")

Based on this analysis, the court concluded that the forfeiture was unlawful. The writ petition was allowed, and the impugned orders dated July 16, 2020, and November 20, 2020, were quashed. The respondents were directed to refund the ₹90 lakhs earnest money to the petitioner within four weeks from the date a certified copy of the order is filed.

This judgment underscores the importance of strict adherence to the specific conditions and provisos laid out in rules and government orders, particularly regarding forfeiture clauses, and clarifies the distinction between mandatory and directory requirements based on the presence or absence of penal consequences.