Supreme Court of India
F.C.I vs M/S V. K Traders And Ors., Etc.Etc. on 6 March, 2020Author: Hon’Ble The Justice

Bench: Hon’Ble The Justice, B.R. Gavai, Surya Kant



[Arising out of Special Leave Petition(C)No. 3127 OF 2014]

Food Corporation of India and Another ….. Appellants(s)
M/s. V.K. Traders and Others …..Respondents(s)

[Arising out of Special Leave Petition(C)No. 3273 OF 2014]
[Arising out of Special Leave Petition(C)No. 2522 OF 2014]
[Arising out of Special Leave Petition(C)No. 3349 OF 2014]
[Arising out of Special Leave Petition(C)No. 3405 OF 2014]
[Arising out of Special Leave Petition(C)No. 3134 OF 2014]
Signature Not Verified
[Arising out of Special Leave Petition(C)No. 3125 OF 2014]
Digitally signed by
Date: 2020.03.06
17:05:48 IST


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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



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
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

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

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.


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.


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

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.


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.
DATED : 06.03.2020

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