No Legal Basis for Forfeiture of Security Deposit After Cancellation of Letter of Intent: Allahabad High Court - 2024-05-29

Allahabad High Court: State Cannot Forfeit Security Deposit Without Legal Provision After Letter of Intent Cancellation

Allahabad, – In a significant ruling for businesses engaged in mineral concessions, the Allahabad High Court has quashed an order by the District Magistrate of Ghaziabad, which forfeited the security deposit and first installment of royalty of M/S Deep Builders. The court, comprising Justice Anjani Kumar Mishra and Justice Jayant Banerji , held that there was no legal basis under the Uttar Pradesh Minor Minerals (Concession) Rules for such forfeiture after the cancellation of a Letter of Intent (LOI).

The case arose from a writ petition (Writ-C No. 33710 of 2021) filed by M/S Deep Builders against the State of Uttar Pradesh and other respondents, challenging the District Magistrate's order dated 28.08.2021. This order forfeited the security deposit and first installment paid by the petitioner following the issuance of an LOI for a mining lease of ordinary sand in Ghaziabad.

Background of the Case

M/S Deep Builders had emerged as the highest bidder for a mining lease of ordinary sand in Village Pachayra, Ghaziabad, in 2017. A Letter of Intent was issued on October 31, 2017, and the petitioner deposited 25% of the bid amount as security along with the first royalty installment. However, this LOI was subsequently cancelled on January 28, 2019. Despite the cancellation, no refund of the deposited amounts was issued. It was only during the pendency of a previous writ petition seeking this refund that the District Magistrate passed the impugned forfeiture order.

Petitioner's Arguments

Represented by Shri Syed Mohd. Fazal, the petitioner argued that the forfeiture order was legally untenable. Counsel emphasized that neither the U.P. Minor Minerals (Concession) Rules of 2017 (43rd and 44th Amendments) in force when the LOI was issued and cancelled, nor the 47th Amendment Rules of 2019 (cited in the forfeiture order) provided for forfeiture of security deposit and royalty upon cancellation of an LOI.

The petitioner’s counsel drew attention to Rule 29 of the 43rd Amendment Rules, which allows forfeiture only when a lease deed is not executed within three months due to the lease holder's fault – a situation not applicable in this case as no lease deed was ever executed. They argued that the forfeiture power, if any, should have been exercised at the time of LOI cancellation, not subsequently.

State's Stance and Court's Observation

The learned Standing Counsel for the State attempted to justify the order based on Rule 34(5) of the 47th Amendment Rules of 2019, citing non-compliance. However, crucially, they could not point to any provision within Rule 34(5), or elsewhere in the rules, that granted the State the power to forfeit the security deposit or first installment under the circumstances.

The High Court, after careful examination of the 2017 and 2019 Rules, concurred with the petitioner. The bench noted,

> "Upon a consideration of the submissions made and upon a careful scrutiny of the U.P. Minor Minerals (Concession) Rules, 2017 and 2019, we are unable to discern any power of forfeiture."

Decision and Implications

Consequently, the Court allowed the writ petition, quashing the forfeiture order dated 28.08.2021. It directed the respondents to refund the security deposit and first royalty installment within three weeks from the judgment date (May 29, 2024). Recognizing the delay, the Court also mandated a simple interest of 9% per annum on the refund amount, calculated from the LOI cancellation date (January 28, 2019) until actual payment, citing the precedent set in Dharmendra Kumar Singh vs. State of U.P. (AIR 2020 SC 5360) regarding interest in similar situations.

This judgment underscores the principle that state actions must be firmly rooted in law and that forfeiture of deposited amounts requires explicit legal authorization. It provides significant relief to M/S Deep Builders and sets a precedent against arbitrary forfeiture of deposits in similar cases within Uttar Pradesh. The ruling reinforces the importance of adherence to established rules and procedures in administrative actions, particularly those involving financial implications for businesses.