Karnataka government must pay 8% interest after auctioned iron ore was found missing and buyer’s money remained unpaid

In a 2006 auction, Shashi Kumar was declared the highest bidder for iron-ore dumps and paid an aggregate of ₹2,89,05,436, including the bid amount, royalty, income tax and VAT.

Departmental inspections later found that the auctioned ore was not present at the site, and Kumar was not permitted to lift it.

Following earlier proceedings and a direction to consider his refund representation, the State accepted his entitlement to a refund.

The Deputy Director’s order dated 29 March 2025 nevertheless refunded ₹2,73,64,000 while withholding ₹15,41,436 paid as income tax and VAT. After Kumar’s death, his GPA holder brought this petition seeking the withheld sum and interest.

Whether the respondents could withhold the income-tax and VAT amounts from the refund when the auction transaction had not been completed and the ore had not been delivered

Whether the petitioner was entitled to interest on the amounts retained by the State and, if so, at what rate and for what period

The Court applied the principles of restitution and unjust enrichment: where the State retains money without right, and the transaction giving rise to the payment has not proceeded, the payer may be entitled to repayment with interest as compensation for being deprived of the use of that money.

Relying principally on Dr. Poornima Advani v. Government of NCT (Civil Appeal No. 2643 of 2025, 2025 INSC 262), the Court treated interest as compensatory—not penal—and as the normal accretion on capital.

It also relied on Union of India v. Tata Chemicals Ltd., (2014) 6 SCC 335, for the principle that an obligation to refund money received and retained without right carries with it an obligation to pay interest.

The Court considered the Law Department’s recommendation of interest at the admissible bank rate.

The petition was brought under Articles 226 and 227 of the Constitution.

The auction purchaser had paid the demanded amounts but received none of the ore; the respondents’ own reports recorded that the auctioned quantity was unavailable.

The State had also accepted that the full amount was refundable. The fact that the tax components had been forwarded to separate departments did not justify withholding them from the person who had paid them; inter-departmental remittance could not prejudice the purchaser’s refund claim.

Applying the restitution principles in Dr. Poornima Advani, the Court held that prolonged retention warranted compensatory interest.

It awarded interest at 8% per annum, taking account of the circumstances and the Law Department’s recognition of an entitlement to interest.

The order dated 29 March 2025 was set aside insofar as it withheld ₹15,41,436, and Respondents 1 and 3 were directed to refund that balance, with liberty to recover or adjust the amounts from the relevant tax departments in accordance with law.

The petitioner was awarded interest at 8% per annum on ₹2,89,05,436 from 31 July 2023 to 31 March 2025.

From 1 April 2025, interest at 8% per annum was ordered on ₹8,00,000 and ₹15,41,436 until actual payment; credit from 31 March 2025 was limited to amounts actually paid to the petitioner on that date.

Payment of the amounts and accrued interest was directed within eight weeks.