Karnataka High Court Directs Refund Of ₹15.41 Lakh Deducted From Iron Ore Auction Proceeds, Awards 8% Interest

The Karnataka High Court has directed the State government to refund ₹15.41 lakh deducted from the refund due to an iron ore auction purchaser after the auction failed because the ore was not available at the site.

The Court also awarded interest at 8% per annum on the amount of ₹2.89 crore deposited by the purchaser, holding that the State cannot retain money without providing the corresponding consideration.

A Division Bench comprising Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha held that the fact that the deducted amounts had been forwarded to the Income Tax and Commercial Tax Departments could not be a ground to deny the refund to the person who had made the payment.

The Court observed that once the auction transaction did not materialise and the State accepted the purchaser's entitlement to a refund, continued retention of the money without compensation would attract the principles of restitution and unjust enrichment. The Court said:

"Continued retention of money without corresponding consideration and without compensating the auction purchaser for being deprived of his dues, would result in the State retaining a benefit to which it was not entitled and would attract the principle of restitution and unjust enrichment".

The case concerned an auction conducted by the Department of Mines and Geology (DMG) in August 2006 for the sale of approximately 20,000 metric tonnes of old iron ore dumps in Doddabyaladakere village, Chitradurga district.

Shashi Kumar was declared the highest bidder for ₹2.46 crore and subsequently deposited the balance bid amount, royalty and taxes, taking the total payment to ₹2,89,05,436.

However, the purchaser was not permitted to lift the ore. Inspection reports submitted by the mining authorities in 2013 recorded that the auctioned quantity of iron ore was not available at the site. The purchaser subsequently pursued legal proceedings seeking a refund of the amount deposited.

Following directions issued by the High Court in earlier proceedings, the DMG recommended a refund of ₹2,89,05,436. The State government also accorded concurrence for the refund.

Further, the Department of Law, Justice and Human Rights opined in June 2024 that the purchaser was entitled to a refund of the entire amount, including royalty and taxes, along with interest at the admissible bank rate from the respective dates of deposit.

However, by an order dated March 29, 2025, the DMG directed a refund of ₹2,73,64,000 after deducting ₹5,57,436 towards income tax and ₹9,84,000 towards Value Added Tax (VAT).

The department contended that the tax amounts had been remitted through demand drafts directly to the respective tax authorities and had never been credited to the DMG's account. It submitted that steps had been initiated to obtain refunds from those authorities.

The petitioner, N.S. Ganesh, appearing as the General Power of Attorney holder of the deceased auction purchaser's mother, challenged the deductions, arguing that no sale or transfer of goods had taken place and, consequently, no taxable event had occurred. He also sought interest at 18% per annum on the deposited amount.

The State opposed the claim for interest, contending that the issue had been addressed in earlier proceedings and that the relevant endorsements had attained finality.

Rejecting the State's justification for withholding the tax components, the Court observed that the amounts had been paid because they formed part of the demand raised pursuant to the auction transaction. It held that inter-departmental remittance or adjustment could not prejudice the purchaser's right to receive the refund.

"..Once the transaction itself did not fructify and the respondents accepted that the auction purchaser was entitled to refund of the entire amount, inter-departmental remittance or adjustment cannot be a ground to deny refund to the person who had made the payment. Therefore, there remained no justification for the State to retain the amount paid pursuant to such transaction..", the Court said.

The Bench further relied on the Supreme Court's decision in Dr. Poornima Advani v. Government of NCT of Delhi, which recognised that interest is compensatory in nature and that a person deprived of money legitimately due to them is entitled to compensation for that deprivation. The Court reiterated that interest is not a penalty but a normal accretion on capital.

The Court also noted that the State's Law Department had expressly recommended payment of interest, referring to a similar refund granted in another case. It held that the purchaser was entitled to compensation for the prolonged retention of his money despite not receiving the iron ore for which the payment had been made.

Accordingly, the High Court partly allowed the petition and set aside the March 29, 2025 order to the extent that it withheld ₹15,41,436 towards income tax and VAT.

It directed the State authorities to refund the amount, leaving it open to them to seek reimbursement or adjustment from the respective tax departments in accordance with law.

The Court awarded interest at 8% per annum on ₹2,89,05,436 from July 31, 2023, the date of the order in the earlier writ petition, until March 31, 2025.

From April 1, 2025, interest at the same rate will be payable on ₹8 lakh that remained unreleased under the government's payment processing system and the withheld ₹15,41,436 until their actual payment.

The respondents were directed to pay the amounts along with accrued interest within eight weeks.

For Petitioner: Advocate Anuparna Bordoloi

For State: Additional Government Advocate Niloufer Akbar