Karnataka High Court quashes State's ₹482 crore penalty on Adani's ACC Limited for mining in Kalaburagi

The Karnataka High Court has quashed a ₹482.69 crore penalty imposed by the Karnataka Department of Mines and Geology (DMG) against Adani- controlled ACC Limited for mining operations in Kalaburagi [ACC Ltd v. Union of India].

A Bench of Chief Justice Vibhu Bakhru and Justice KS Hemalekha quashed the penalty imposed by the State on the ground that it frustrated the legislative intent of an amendment of the Mines and Mineral (Development and Regulation) Act, 1957.

The 2015 amendment had extended the term of mining leases obtained prior to 2015.

"As noted above, a mining lease has been executed in favour of ACC. Its term has been extended by virtue of the MMDR Act. Although the execution of a supplementary lease deed may be relevant for good order, failing to do so does not deprive ACC of the right to carry on mining during the period of the lease as statutorily extended by virtue of Section 8A(5) of the MMDR Act," the Court said.

The Court also rejected the State's challenge to a Central government revisional authority's decision which held that use of notional formula by the State to calculate the royalty payable by ACC cannot be justified.

ACC was engaged in the manufacture of cement and extracted limestone, a raw material needed to manufacture cement, from mines in Ingalgi and Ravoor villages in Kalaburagi district. The mining lease was initially obtained in 1963.

The State imposed a penalty of ₹482 crores on the basis that ACC was extracting mineral illegally after the expiration of the lease in 2023. Since the mining activities continued without a supplementary lease deed, the DMG imposed the penalty.

ACC then approached the High Court. The State also separately filed a petition challenging the revisional authority's decision in favour of ACC regarding computation of royalty.

The Court upheld ACC's submission that its lease had been extended under Section 8A(5) of the MMDR Act that granted extension up to a period ending on March 31, 2030. It held that the legislative intent of extending the lease upto 2030 would be lost if it had to be accompanied by supplementary deeds. The Court rejected the argument that the lack of a supplementary lease deed deprived ACC the right to continue mining when the extension had been granted by way of the MMDR Act's 2015 amendment.

The State had not granted the supplementary lease deed on the basis that ACC had not cleared arrears on royalty payable to the State on the extraction of limestone. It contended that since ACC carried on mining activities after the expiration of the lease, it would compute royalty based on a notional consumption-based formula calculated by the State and not based on the weight of the limestone extracted which ACC had furnished record of.

However, ACC contended that it is liable to pay royalty on the ore actually raised and consumed and not on a notional basis. It did not dispute that the royalty is to be paid on the basis of the mineral consumed.

The Court said that in the present case, the mine is a captive mine and the mineral raised is for captive use in the cement plant. Therefore, royalty is payable on the mineral actually consumed. The issue only concerned the assessment of the quantity consumed.

In this regard, the Court noted that the revisional authority held that there was no irregularity in measuring the quantity of limestone transported from the mining lease to the cement manufacturing plant and readings of a beltometer installed by ACC to weigh the same were frequently provided.

The Court upheld the revisional authority's order while holding that there was no challenge to the accuracy of weighment data provided by ACC.

Since the National Council for Cement and Building Materials had submitted a report on ACC's consumption, the State could not reject the report and justify a royalty demand based on a notional formula.

Hence, it set aside the penalty imposed by the State.

ACC had also contended while challenging the royalty demand before the revisional authority, it was blocked from accessing an Integrated Lease Management System (ILMS) Portal from November 2023. The portal allowed ACC to make royalty payments and download e-permits for transporting limestone from the mining area to its cement plant.

The Court directed the State and DMG to allow ACC full access to the ILMS portal.

It also directed the State to refund an amount of ₹125 crore that ACC had deposited pursuant to an interim order passed by the Court earlier.

The Court rejected the State's challenge to the revisional authority's order regarding the royalty payment and directed the authorities to execute a supplementary lease deed in favour of ACC.

Senior Advocate KN Phaneendra and Advocate Vaishali Hegde appeared for ACC.

Central Government Standing Counsel Vinay Venugopal appeared for the Union of India.

Additional Advocate General Reuben Jacob along with Government Advocate KS Harish appeared for the State.

[Read Judgment]