M/s Lakshmi Energy and Foods Limited vs State of Punjab and others

K. Kannan, J.

I. The subject of lis

The writ petition involves an adjudication of whether there had been entrustment of stocks of paddy by the respondent-Punjab State Civil Supplies Corporation Limited (PUNSUP), arrayed as the 4th respondent, to the petitioner-M/s Lakshmi Energy -& Foods Limited, a rice Milling Company to make it liable for a claim by PUNSUP, for its decision to mill the stocks alleged to have been entrusted at the risk and cost of the petitioner. Respondents 1 to 3 are the State functionaries connected with the Department of Food, Civil Supplies & Consumer Affairs, Punjab and the 5th respondent is the District Manager, PUNSUP, Fatehgarh Sahib. The dispute by the petitioner was that there was no such entrustment to make it liable. Though the issue seems factual, they are grounded on documents and, therefore, the initial plea by the respondent that the case would not merit consideration in a writ petition, I would find to be not justified under the peculiar facts and circumstances. There is also objection that an arbitral process has started subsequent to the institution of the petition and, therefore, the adjudication must cease before this Court. This point will also be considered in the course of the judgment.

II. Essential terms of milling policy in so far as relevant to issue of allotment.

(a) Two modes of entrustment-with and without cash security

The petitioner is said to be a Company which has a large milling capacity of 165 MT at its Rice Mill at Khamanon. The paddy is allotted through four procurement agencies, namely, PUNSUP, MARKFED, Punjab Warehousing Corporation and Punjab Agro. Through a common order of allocation dated 15.10.2009, the petitioner was allotted to all the four procurement agencies equally distributed to total allotment attributable to 2.5 tonne each. There are two modes of allotment of milling policy released by the State, namely, (i) without cash security, and (ii) non-cash security. The allotment is made on the basis of the capacity of the Rice mill and the maximum paddy that could be allotted without cash security irrespective of the capacity of the Rice mill is 8400 MT. The petitioner which had the capacity of 175 MT was, therefore, entitled to be allotted a maximum of 8400 MT through procurement agencies without cash security being taken. The milling policy released by the Government of Punjab, Department of Food, Civil Supplies & Consumer Affairs, Punjab, also makes possible allotment of additional supplies but this would be subject to furnishing of cash security to be taken in the prescribed format. There are norms attached to the cash security also that it should be equivalent to 5% of the total value of the stocks allotted and that the same shall be paid through demand draft drawn in favour of the Department of Food and Supplies.

(b) Manner of allotment and its basis-always founded on contract.

Since the issue in this case relates to an assessment of whether the stocks that had been allotted to the petitioner had not been milled as contracted to be done, it becomes essential to reproduce the relevant terms in the milling policy about the manner of allotment, the method of securing allotted stocks to be milled, the mechanism for enforcement of the claims of the State or its agency for unmilled supply of stocks. Para 2 contains a reference to the fact that paddy to be custom-milled shall always be on contractual basis. The relevant cause as for as it is applicable to this case is as follows:-

...No rice miller will undertake the work of custom milling of any agency under any circumstance unless or until duly allotted for the purpose. In case any miller refuses custom milling work, he will not be allowed to do levy work....

The allotted stocks shall be stored in specified places and the manner of allotment of mandis and storage is spelt out in clause 3 and the same reads as follows:

The purchase centres/mandis shall be linked with the nearest milling centre/storage centre keeping in view the availability of milling capacity at the milling/storage center(s) at which paddy is proposed to be stored/got milled. All the procuring agencies will make necessary arrangements of linking the proposed purchase centres/mandis with the storage points/milling centres in such a way so as to incur bare minimum expenditure on transportation.....

There are also instructions to the effect that no additional security amount shall be got deposited from the miller of a paddy allotted under the ''Cash Security'' head. In respect of the paddy that is allotted and shifted to the miller, the nomenclature of such custody is referred to as a joint custody. The idea is that the exclusive storage within the precincts of the miller shall still be understood as held jointly with the agency that supplies it to enable the agency to shift them out if the miller has not milled the quantity that is contracted and when there is a need to have it milled outside, there is no scope for any obstruction on the part of the miller. Clause 5 relating to the storage of paddy stocks would bring out this fact that the

Paddy procured by the agencies shall be, by and large, stored in the premises of the allotted mills in joint custody as per details given in the subsequent paragraphs on the basis of allotment policy. Bare minimum paddy should be stored in own custody and that too under exceptional circumstances only with the prior approval of the head of the procuring agency concerned. The paddy to be stored in own custody will be stored in own custody will be stored within 8 kilometres of the rice mills allotted to the procuring agencies. Such paddy stocks are to be got milled from the mills allotted to the agencies at the earliest possible so that agencies do not incur avoidable financial expenditure. The responsibility for quality and quantity for the paddy stored in own custody will be of the staff of concerned agency. The paddy stored in the premises of rice mills will be under joint custody of the rice millers and the staff of the concerned agency for which responsibility for quantity and quality will be of the concerned rice millers and the staff of the agencies. The miller will ensure the storage of the paddy stocks of the agencies separately from that of his own purchased paddy stocks by erecting a physical barrier such as a boundary wall or a proper and durable fencing.

The responsibility for the allotment of rice mill that is made to the District Level Committee comprising of all the district heads and any violation or discrepancy in allotment of capacity fixation is required to be brought to the attention of the Director, Food & Supplies, Punjab, for necessary action (clause 6) to ensure that there is equitable and fair distribution of allotments of the paddy procured by the State agencies. I have already referred to also the norms for allotment for storage of paddy and the allotment of additional paddy under the cash security in the rice mills during KMS 2009-10. The data which is relevant and applicable to this case alone is reproduced:-

Sr. No.

Capacity of the rice mill

Maximum paddy to be allotted without cash security

Maximum paddy to be allotted with Cash Security to be taken in the prescribed format.

15

10 MT

8400 MT

Additional 12000 MT with cash

security equivalent to the 5% of the total value of the stocks.

24

175 MT

8400 MT

Additional 210000 MT with

cash security equivalent to the 5% of the total value of the stocks.

(c) Proof of allotment and liability to furnish security To ensure that the norms are properly followed, there is also a mechanism about securing the proof of allotment and the concomitant liability of furnishing security. The relevant clauses are:-

(e) The cash security would be in the shape of demand draft drawn in favour of Managing Director, Pungrain only payable at Chandigarh, even if the paddy relates to any procuring agency. The demand draft would be deposited in the Office of Director, Food and Supplies, Punjab, Sector 17, Chandigarh, and not with any other agency at the district/local level.

(h) The miller would lift the paddy against cash guarantee within seven days from the issuance of release order for the additional paddy, failing which the next eligible rice miller would be considered for allotment of additional paddy.

An allotment and storage cannot be merely on oral basis but the State agencies would enter into contracts in writing with the respective millers indicating the entitlement for allotment and the quantity actually allotted and secure proof through appropriate release orders. The requirement of entering into an agreement is brought through yet another clause which is also reproduced:

j. the allotted rice mils will enter into an agreement with the concerned agency by 01.10.2009 and complete all other formalities in this regard, failing which the allotment shall be liable to be cancelled. Signatory to the agreement must be authorised by the owners/partners/Directors through a legally executed GPA in his favour. However, the overall responsibility would still rest with the owner rice miller. In any case no paddy will be stored with the miller till he executes the agreement and signs the necessary documents. A set of documents will be sent by the concerned DFSC/District Manager to his Head Office. The power of attorney to run a rice mill can be given only to the shareholder or partner of a rice mill and not to any third person who is in no way connected with the rice mill.

This clause is crucial, for, it is this document which establishes the actual allotment to a miller. Admittedly, an agreement had been entered into with the 4th respondent-PUNSUP for allotment of 2100 MT, being the maximum that a miller could be allotted with no cash credit, the same being 1/4th of the total entitlement of the petitioner against PUNSUP. This is reflected in the memorandum issued by the District Controller, Food & Civil Supplies Department, Fatehgarh Sahib (Annexure P-2) assigning to the petitioner an allotment of PUNSUP 2.5 tonnes. The agreement which the petitioner has entered into with the 4th respondent on 02.03.2010 also brings out the follows:

1.

2.

3.

Name of agency

Name of the storage centre

Variety of paddy

PUNSUP allotted milling capacity 2.5 ton (two & half ton)

Khamanon PUNSUP Complex

Variety 201 (80%)

There was an additional allotment of paddy to the petitioner within the limit prescribed under the norms for which cash credit was necessary and it is brought through the communication of the Director, Food Civil Supplies and Consumer Affairs, Punjab (Annexure P-4). It is clear through records that the petitioner had made a deposit of nearly Rs.8 crores for the additional allotments entrusted by the Government.

(d) Periodical monitoring of stock positions and control through district level meetings.

The milling policy itself declares that the State agency so manages its affairs that it does not retain a large quantity of stocks without appropriate release orders. The idea is that the State shall not allow large stocks to pile up without appropriate entrustment to turn them over to the central pool and ensure that they are properly distributed for the benefit of the public. Periodical meetings are held at the district levels headed by the respective Deputy Commissioners for lifting up purchased paddy stocks and lying in various places, at various godowns within the State. At a meeting held on 06.02.2010 under the chairmanship of Deputy Commissioner, Fatehgarh Sahib, it appears that the issue of stocks which had piled up in various State agencies was assessed and PUNSUP had in its various godowns purchased stocks worth 21969 MT and what had been allotted to various millers and lifted was to the tune of 18,547 MT. As such 8159 MT of paddy was still lying in the mandis for PUNSUP. It appears to have been discussed whether it was feasible to allot this stock of 8159 MT to the petitioner but the petitioner had other commitments as well, having been allotted by the State, stocks from all the agencies from Tarn Taran district and from Muktsar district. With such commitments already in its hand, when the petitioner was requested at the meeting to lift the stock from PUNSUP as additional allotments, the petitioner has expressed his inability to lift the same. It must be noticed that any allotment made additionally ought to conform to usual norms of contracts and it could never be a situation that a State can force an allotment and demand acceptance from a miller merely because its own stock pile had been increasing. What is admitted by the State is that it had received 41637 MT from Tarn Taran/Amritsar and 1700 MT from Muktsar for which cash guarantee had been already provided. A communication from PUNSUP dated 16.12.2010 bears out that 45154 MT had been entrusted with the petitioner and the petitioner also admitted its liability to mill the same and return the stocks. The petitioner also admits that as on 17.02.2011 about 6506 MT of rice was still recoverable from the petitioner for additional stocks allotted.

(e) The notice that spurs the cause of action

When a notice was issued on 11.03.2011 bringing out a demand for an alleged additional allotment from Fatehgarh Sahib of 2353 MT and 16344 MT without bank guarantee, the petitioner has immediately responded to the same pointing out to the milling policy as to how no additional allotment could have been made without appropriate release orders and the alleged entrustment to additional stocks of Fatehgarh Sahib were not made to the petitioner. The cause for the writ petition was when advertisement had been issued and tenders had been called for PUNSUP stating that the additional stocks which had been entrusted to the petitioner had not been milled and claiming that the same would be lifted and milled at risk and cost of the petitioner. This is purported to be for giving effect to a resolution at a joint meeting purported to have been held on 08.04.2011 and brought through a reply dated 22.07.2011 to the notice issued to the petitioner by the 4th respondent. The resolution states that the stocks had been put in joint custody as per proceedings of the Deputy Commissioner in a meeting held on 30.12.2009 and that the stocks should be got milled from other entrusted mills at the risk and cost of the petitioner.

III. The State response in writ petition

Since the petitioner denies that there had been such additional entrustments, the case has to be examined from how the State responds to a situation through its counter filed on behalf of respondents 1 to 3 and how the 4th respondent adduces its proof for such entrustment. Although the State Government initially stated through its counsel that it was not filing its objection, later at the time of argument, a reply was filed through an affidavit of Ms. Harjit Kaur, District Food & Supplies Controller, Fatehgarh Sahib, on behalf of respondents 1 to 3. The State would admit that the petitioner was allotted the quantity of paddy attributable to the milling capacity of 10 MT of paddy from four agencies distributing an allocation attributable to 2.5 MT milling capacity against each one of the State agencies. The learned counsel for the petitioner makes a pointed reference to paragraph 7 of the reply of the State where it had admitted that the allotments under cash credit security were alone the subject of agreement and any additional allotments through release order issued collectively were not under the agreement dated 02.03.2010 executed by the petitioner in favour of the 4th respondent. The State itself does not join issues on whether such additional allotments as claimed by the 4th respondent had indeed been made by the 4th respondent. Significantly, it cannot be that the State will not know of any additional allotments more than the allotments that a miller is entitled to, with or without cash security. Every additional allotment brings a concomitant liability to offer cash security to the State and, therefore, if any additional allotment had in fact been made, it has to be under the express knowledge of the State and the Deputy Commissioner ought to know that such allotments had been made to ensure that the appropriate securities are taken for additional allotments.

IV. No additional entrustment possible without State''s concurrence

The 4th respondent along with his objections brings certain documents, some of which are admitted and some are denied, which are crucial for the determination of entrustment in this case. Through a communication dated 18.11.2009, the 5th respondentDistrict Manager (PUNSUP) has informed the District, Food & Supplies Controller the details of allotment to the petitioner. The following contents are relevant:

...It is submitted that 2.5 MT milling capacity of M/s Lakshmi Energy and Foods Ltd, Khamano has been allotted to PUNSUP for custom milling vide your office Memo No.6-09/4030, dated 16.10.2009. PUNSUP have to store 2100 MT of paddy against the allotted milling capacity i.e. 2.5 ton in this Rice mill. The following quantity of paddy have/likely to be stored for custom milling in the mill premises of the Rice sheller under joint custody:-

Sr.No. Name of the Mandi

Qty. of paddy likely to be stored

1.

Khamano

12000 ton.

2.

Sanghol

7000 ton.

3.

Ranwan

5000 ton

4.

Raipur Mazri

700 ton

On the perusal of the above storage, it is revealed that PUNSUP would have to store 24700 MT against the allotted capacity of 2100 MT, hence there would be an excess storage of 22600 MT. Your kind honour is requested kindly to direct the party to get the release order of around 25000 MT of surplus PUNSUP paddy stocks under cash and security Head of the Government Policy, as early requested many a times.

This communication makes it clear that if PUNSUP had to make additional allotments for the additional stocks which it had purchased, it ought to secure the concurrence of the District Food & Civil Writ Petition No.14157 of 2011 (O&M) -14 -Supplies Controller. If through this letter, the 5th respondent was seeking for permission, respondents 4 and 5 are bound to produce before Court that such permission had been accorded so that the State would secure additional cash security. How the State had responded to the letter dated 18.11.2009 and how if such entrustment had been made, additional cash security is secured or not, ought to be also a matter of record. We can see that the 5th respondent makes reference to some communications said to have been made on 22.12.2009, two letters on 15.03.2010, 17.06.2010 as if to suggest that 60670 MT had been entrusted totally and still a large quantity had not been milled and returned. The communications brought through R-9, 10, 11 and 12 are denied in the rejoinder to the reply and stated that these documents are forgeries and they were never received by the petitioner. In the face of such express denial of documents which alone form the basis of the so-called entrustment, one would have expected the respondents 4 and 5 to produce proof of such communication and proof of such entrustment. There is no such proof offered and apart from ascertaining that entrustment had been made, nothing is brought before this Court to believe the version of the respondents.

V. Sure pointers to PUNSUP''s false version

I have following grounds to come to conclusion that such additional entrustments could not have been made.

(i) The norms of allotment that provides for furnishing of additional security could not have been breached without obtaining cash security necessary therefor. Admittedly, no such security had been obtained.

(ii) As per the milling capacity and the terms which we have extracted, no additional entrustment could have been made without appropriate release order for the same. No release order is produced before this Court.

(iii) In a case where the petitioner was admittedly allotted additional stocks from Tarn Taran and Muktsar for which cash security had been given and after milling the same when the petitioner was making a demand for refund of excess deposit and when orders were also passed for refund, the State could not have made the refund in the manner demanded without insisting that the additional stocks said to have been supplied from Fatehgarh Sahib, was also to be taken care of and the additional security ought to cover such an additional allotment.

(iv) The State itself has carried out a verification of the stocks lying with the petitioner and said to have issued certificates which are brought through documents P-17 and P-18 which correspond only to the remaining balance that was still to be delivered which was in the range of 6204 MT as on 13.04.2011. The stock position with the petitioner ought to have been more if such additional entrustment had been made.

(v) The communication dated 30.03.2010 from the District Manager (PUNSUP), Fatehgarh Sahib, refers to 47558 quintals of paddy stored at M/s Satwant Open Plinths, Khamano as held in ?own custody of PUNSUP? for getting it custom milled. The tenor of the letter shows that PUNSUP was looking for clearance of space to allow for fresh arrivals after procurement of wheat for the coming season. This document gives lie to the contention that the stocks at M/s Satwan Open Plinths was in joint custody.

(vi) The minutes of the meeting held on 04.09.2010 at Jalandhar and 13.09.2010 at Moga, and still later on 22.09.2010 at head office Patiala Division does not make mention of any additional allotment to the petitioner or of any complaint that the petitioner had not milled and delivered the stocks. Significantly, at the meeting held on 22.09.2010, the District Manager, Fatehgarh Sahib, has only informed that 15216 MT of paddy was lying ?in own custody at Khamano?, out of which 7600 MT was lying in Tehsil Complex for which district administration had issued a notice for lifting the said paddy. This resolution is the last nail in the coffin, as it were, to prove that there could have been no such entrustment, and the stocks at Khamano and at the Tehsil Complex were in the own custody of the 5th respondent.

The action of the respondents 4 and 5 making up a false case of entrustment and threatening the petitioner with further action for milling the stocks under risk and cost of the petitioner is a diabolic fraud. The State functionary cannot conduct its actions with such brazen falsity in Court. There is an attempt to conceal what was true. The production of documents which are false or at least not proved to be true when there were definite denials of the alleged communications under R-7, R-9 to R-11 is an attempt to mislead the Court, and the contention that the alleged communication to the District Food & Supplies Controller under R-6 and 8 were themselves fabricated for the purpose of the case are too serious to be left un-refuted by the respondents 4 and 5, if their contention were true. The conduct of respondents 4 and 5 leave much to be decided. It is seen from the records that the petitioner had sought for production of the minutes of the meeting and when the attempt was thwarted by a plea of privilege, the petitioner appears to have got the same copies under RTI from some other divisions. The minutes of the meeting produced and the letter issued by the District Manager (PUNSUP) under P-35 clearly show that there was no joint entrustment. On the other hand, the stocks held in Tehsil Complex and Khamano were in ?own custody? of PUNSUP. The respondents have filed deliberately a false written statement to mislead the Court. There is an application filed by the petitioner in CM No.14325 of 2011, seeking for rejection of the written statement as not having been properly verified and also bringing the respondents to give a verification that they had seen the documents on the basis of official records. I do not think any such order is necessary since the verification is done in the manner which is required by law but even the apprehension that the respondents 4 and 5 would try to disown their own statements on the ground that they had not verified the documents may not be sufficient since the officials can only file the statement on the basis of records and matters in respect of which they had direct knowledge. I would assume everything on what is stated in the written statement ought to include also the facts brought through records.

The attempt of respondents 4 and 5 by invoking the arbitral process itself is suspect. After the initiation of the proceedings, respondents 4 and 5 have initiated steps for arbitration and when an application was filed in CM No.12619 of 2011 to stay the arbitration process, I had already dismissed the application on 15.09.2011 and held that it will be open to the petitioner to contest the arbitrability of the issue before the Arbitrator. Now I find, on the decision that I have taken in the writ petition that there would survive nothing for arbitration, since the subject of alleged additional entrustment of stocks itself is not the subject of agreement between the petitioner and the 4th respondent. An arbitral agreement between the petitioner and the respondents refers only to the non-cash security portion of the allotment of PUNSUP to the petitioner. The dispute arising from the so-called entrustment of additional stocks does not form part of the agreement at all, as stated so in the written statement filed by the State. The reference to arbitral dispute now raised by respondents 4 and 5 purports to contain a reference to the liability of the petitioner for the entire value of the stocks stated to be somewhere in the range of Rs.35 crores. The stocks are still with the respondents in own custody but an attempt is made to appear as though that the stocks are in joint custody. Even the issue of arbitration could have been only with reference to the additional cost that may have to be incurred or the delay that it had entailed but the value of the stock in the hands of the respondent could never be a subject of liability for return by the petitioner. The manner of making the reference to arbitration itself is also a big fraud by the respondents. I find that not merely the notice that is impugned in the writ petition is bad, the persistence in manufacturing documents before Court and making a reference to arbitration with the claim which was patently unfair is a deliberate attempt to derail the course of justice.

The writ petition is allowed with cost of Rs.5 lakhs awarded against respondents 4 and 5.