2025 (3) TMI 1404 - HC - SEBI

Authority must reassess full forfeiture of earnest money under Second Schedule rules, provide hearing and reasoned decision within eight weeks

Dolphin Suppliers Pvt. Ltd. Versus Union of India & Another

Calcutta HC held the e-auction and related steps were governed by the Second Schedule rules but the authority forfeited the entire earnest money deposit ... Setting aside of the cancellation of sale of landed properties in pursuance of e-auction initiated by SEBI upon acceptance of the remaining consideration money and/or appropriate writ for refund of earnest money was dismissed HELD THAT:- Proceeding whereby e-auction of the properties, confirmation and cancellation of the auction sale was taken in accordance with relevant provisions of the Rules contained in the Second Schedule of Income Tax Act with necessary modifications. Rule 58 of the Second Schedule of Income Tax Act and the provision contained in Order XXI Rule 86 of the Civil Procedure Code has extended a discretion upon the tax recovery officer/authorities to decide whether to forfeit the EMD or not and if so to what extent. The facts and circumstances obtaining in the case at hand, no such discretion was exercised by the respondent and the respondent proceeded to forfeit the entire deposit amount in a manner as if it was automatic. Needless to say, no opportunity of hearing was afforded to the appellants. The entire EMD was directed to be forfeited without taking into consideration the loss and damage suffered by the respondent owing to the default on the part of the appellants in making the payment of balance consideration money. In course of hearing of the instant appeal, the appellants never endeavored to challenge the finding of learned Single Judge whereby learned Single Judge disbelieved the case of the appellant to the effect that he was prevented by the intervention of COVID-19 in making payment of the balance consideration money within time specified in the contract. We, therefore, have no justification to interfere with such finding of learned Single Judge. Accordingly, we uphold the same. Set aside the impugned judgment and order so far as it relates to the rejection of the prayer of the appellant for return of EMD. The respondent shall proceed to determine the nature and extent of forfeiture of the EMD amount afresh. In doing so, the respondent shall provide sufficient opportunity of being heard to the appellant. The respondent is at liberty to hear any other parties and consult any document as it deems necessary. The respondent shall take a decision in this regard within 8 weeks from date and communicate its decision to the party it heard forthwith thereafter. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment were:1. Whether the respondent, SEBI, was justified in forfeiting the entire earnest money deposit (EMD) paid by the appellant due to default in payment of the remaining consideration money within the stipulated time.2. Whether the provisions of Section 73 and Section 74 of the Indian Contract Act, 1872, which require quantification of actual loss or damage for forfeiture, apply to the forfeiture of EMD under the e-auction terms.3. Whether Rule 9(5) of the SARFAESI Rules, which mandates forfeiture of deposits in case of default, overrides the provisions of the Indian Contract Act regarding compensation for breach of contract.4. Whether the respondent exercised discretion appropriately in forfeiting the entire EMD without quantifying the actual loss incurred.ISSUE-WISE DETAILED ANALYSIS1. Justification for Forfeiture of EMDRelevant legal framework and precedents: The appellant relied on precedents such as Kailash Nath Associates v. Delhi Development Authority, which emphasized that forfeiture should be limited to the actual loss incurred. The respondent relied on the Supreme Court decision in Authorized Officer, Central Bank of India v. Shanmugavelu, which upheld forfeiture under SARFAESI Rules without quantifying loss.Court's interpretation and reasoning: The court recognized that Rule 9(5) of the SARFAESI Rules mandates forfeiture in case of default, which is a special provision overriding the general principles under the Indian Contract Act.Key evidence and findings: The appellant defaulted in paying the remaining 75% of the consideration money, leading to SEBI's decision to forfeit the EMD.Application of law to facts: The court noted that the forfeiture was based on the specific terms of the e-auction and the SARFAESI Rules, which do not require quantification of loss.Treatment of competing arguments: The appellant argued that forfeiture without quantifying loss was arbitrary, while the respondent maintained that the terms of the e-auction allowed for such forfeiture.Conclusions: The court concluded that the forfeiture was justified under the SARFAESI Rules, but the respondent should have exercised discretion in determining the extent of forfeiture.2. Applicability of Sections 73 and 74 of the Indian Contract ActRelevant legal framework and precedents: Sections 73 and 74 of the Indian Contract Act require quantification of actual loss for compensation in breach of contract cases.Court's interpretation and reasoning: The court held that these sections do not apply to forfeiture under the SARFAESI Rules, as the latter is a special enactment with overriding provisions.Key evidence and findings: The court relied on the precedent set in Shanmugavelu, which excluded the applicability of Sections 73 and 74 in SARFAESI proceedings.Application of law to facts: The court found that the SARFAESI Rules take precedence over the Indian Contract Act in this context.Treatment of competing arguments: The appellant's reliance on the Indian Contract Act was dismissed in light of the special provisions of the SARFAESI Rules.Conclusions: The court affirmed that the SARFAESI Rules govern the forfeiture process, excluding the need for quantifying actual loss under the Indian Contract Act.3. Discretion in ForfeitureRelevant legal framework and precedents: Rule 58 of the Second Schedule of the Income Tax Act allows discretion in forfeiture, contrasting with the mandatory forfeiture under Rule 9(5) of the SARFAESI Rules.Court's interpretation and reasoning: The court noted that the respondent failed to exercise discretion, treating forfeiture as automatic.Key evidence and findings: The respondent did not consider the actual loss or provide an opportunity for the appellant to be heard before forfeiting the EMD.Application of law to facts: The court emphasized the need for discretion and due process in forfeiture decisions.Treatment of competing arguments: The appellant's argument for discretion in forfeiture was supported by the court's finding that the respondent acted without due consideration.Conclusions: The court set aside the forfeiture decision and directed the respondent to reassess the forfeiture, providing the appellant an opportunity to be heard.SIGNIFICANT HOLDINGSThe court established the following core principles:1. Rule 9(5) of the SARFAESI Rules mandates forfeiture in case of default, overriding the general principles of the Indian Contract Act.2. Discretion must be exercised in determining the extent of forfeiture, and the affected party must be given an opportunity to be heard.3. The respondent's failure to exercise discretion and provide due process led to the setting aside of the forfeiture decision.Final determinations on each issue:- The court upheld the applicability of the SARFAESI Rules for forfeiture but required the respondent to reassess the forfeiture with due discretion and process.- The appeal was disposed of with directions for the respondent to determine the extent of forfeiture afresh, considering the appellant's submissions.