Discretionary forfeiture of earnest money requires assessment of loss and hearing before the extent of forfeiture is fixed.

Rule 58 of the Second Schedule to the Income-tax Act, 1961 is discretionary: the Tax Recovery Officer may forfeit bid money only if satisfied that forfeiture is fit, after defraying sale expenses, and the extent of forfeiture must be linked to actual or assessable loss. The article contrasts this with the more automatic forfeiture regime under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002. It states that forfeiting the entire earnest money deposit without exercising discretion or giving a hearing was unsustainable in full, so the authority must reconsider the nature and extent of forfeiture afresh after hearing the bidder.

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Issues: Whether the entire earnest money deposit could be forfeited automatically on default in payment of the balance consideration, or whether the authority was required to exercise discretion and determine the extent of forfeiture after considering the loss suffered.

Analysis: The dispute arose from forfeiture of the bidder's deposit after failure to pay the balance consideration within time. The Court distinguished the forfeiture regime under Rule 9(5) of the Security Interest (Enforcement) Rules, 2002 from the regime under Rule 58 of the Second Schedule to the Income-tax Act, 1961. It held that Rule 58 uses discretionary language, permitting forfeiture only if the Tax Recovery Officer thinks fit, after defraying the expenses of sale. The Court also relied on the general principle that forfeiture or damages for breach are not to be imposed as an automatic windfall where the governing provision requires assessment of loss, and that reasonable compensation must be linked to actual or assessable loss. Since the respondent forfeited the entire amount without exercising discretion and without giving an opportunity of hearing, the action could not stand in full. The Court, however, did not interfere with the finding that the appellant had failed to establish any COVID-19 impediment to timely payment.

Conclusion: The forfeiture could not be treated as automatic, and the authority was required to decide afresh the nature and extent of forfeiture after hearing the appellant. The appellant succeeded to that extent.

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