Karnataka HC: MMDR Act penalty for “unlawful raising” cannot apply where licensed miner is accused only of illegally removing ore; royalty still payable

The petitioner held mining lease ML-2572 over 15 hectares in Siddapura Village, Sandur Taluk, for extraction of iron ore, effective from 5 January 2008.

In April 2010, permits were issued for transporting 42,384 MT of iron ore, against which royalty was paid in advance; permits covering 21,504 MT were subsequently surrendered.

A later inspection found no stock at the mine head. Relying on official records and the Lokayukta report, the respondents concluded that, out of 75,000 MT raised, 54,120 MT remained unaccounted for and had been unlawfully removed.

Proceedings were initiated under Section 21(5) of the Mines and Minerals (Development and Regulation) Act, 1957 (“MMDR Act”). Earlier demands were quashed for want of reasons and failure to consider the petitioner’s objections; subsequent proceedings were withdrawn.

By order dated 10 October 2023, the Director directed computation and collection of penalty for 54,120 MT at the Indian Bureau of Mines (“IBM”) rates for April 2010. A consequential demand notice dated 2/5 December 2023 demanded ₹13,85,38,423 from the petitioner.

1. Whether Section 21(5) of the MMDR Act could be invoked where the petitioner possessed a valid mining lease, but was alleged to have removed ore from the leased area without valid dispatch permits and payment of royalty?

2. Whether the royalty payable on the unaccounted 54,120 MT of iron ore could be computed by treating the ore as having a grade of 65% Fe and above, thereby attracting the highest average sale value?

3. Whether the impugned order and consequential demand notice were sustainable in law?

The court applied Section 21(5) of the MMDR Act, under which the State may recover minerals raised “without any lawful authority,” or their price if already disposed of, along with rent, royalty or tax.

Section 4(1A) prohibits transportation or storage of minerals otherwise than in accordance with the MMDR Act and the rules, while Section 21(1) provides penal consequences for such contravention.

Section 9 requires payment of royalty on minerals removed or consumed from a leased area, and Section 25(1) permits recovery of sums due to the Government as arrears of land revenue.

Relying on Karnataka Rare Earth v. Senior Geologist, Department of Mines and Geology, (2004) 2 SCC 783, the court held that recovery of the price of minerals under Section 21(5) is compensatory, not penal, and is intended to prevent an unauthorised miner from being placed in a more advantageous position than a lawful miner.

It also applied Common Cause v. Union of India, (2017) 9 SCC 499, which holds that Section 21(5) may apply even to extraction within a mining lease where the extraction exceeds lawful limits or breaches applicable environmental or other legal requirements.

The court accepted that 75,000 MT had been raised and that 54,120 MT was not found at the mine, but distinguished between unlawful raising of minerals and unlawful removal or transportation of minerals already raised under a valid mining lease.

Since the petitioner held a mining lease over the relevant area, the allegation was not that the ore had been extracted without authority; rather, it was that the ore had been removed without valid permits and royalty payment.

Consequently, Section 21(5), which requires minerals to have been raised without lawful authority, could not support recovery of the value of the ore in these proceedings.

The court nevertheless held that royalty was payable on the unaccounted 54,120 MT, comprising 17,608 MT of lumps and 36,512 MT of fines, because the ore had been removed from the leased area without valid dispatch permits.

As to grade, the State’s reliance on the highest Fe 65% and above rate was unsupported. The official IBM records and mahazar referred to the stock as 60–62% grade, and the permits for the surrendered 21,504 MT specified Fe 40–62%; in the absence of contrary material, the missing ore had to be valued on the basis of the 60–62% grade.

The applicable average sale values were therefore ₹1,538 per MT for fines and ₹905 per MT for lumps, with applicable interest.

The petitioner remained liable to pay royalty on the unaccounted 54,120 MT, calculated on the basis of the 60–62% grade and the applicable IBM values of ₹1,538 per MT for fines and ₹905 per MT for lumps, together with interest.

The impugned order dated 10 October 2023 and the consequential demand notice were set aside, subject to the stated observations.

The court expressed no opinion on any possible liability under Section 21(1) for unauthorised transportation and clarified that the State could initiate such proceedings in accordance with law.