2025 (10) TMI 51 - SC - Income Tax

E-auction set aside for failing to disclose competing claim; bank must refund deposit with 9% interest, purchaser restituted

SC held the e-auction, its proclamation, confirmation of sale and sale certificate set aside for failure to disclose a competing claim of unearned ... E-auction conducted by the Recovery Officer, DRT [Debts Recovery Tribunal-I, Delhi] - plight of an Auction Purchaser who entered the field in good faith only to find the ground beneath its feet unstable. duty of the lessee to honour the covenants of the lease, the duty of a bank to exercise due diligence before advancing public money and the duty of an instrumentality of the state, as trustee of public property, to guard against encroachment upon its title Quantify claim on account of unearned increase in relation to the subject plot - Recovery Officer, DRT, directed the DDA to file an affidavit, in respect of rules of calculation of unearned increase as well as details of institutional land/sold/allotted/leases in recent time by the DDA so as to enable it to know the present rates for institutional lease hold property. HELD THAT:- DDA filed an objection before the Recovery Officer on the ground that no permission was granted by it to mortgage subject plot to the Bank. However, the aforesaid objection was rejected on 27.02.2012 by the Recovery Officer. Recovery Officer without directing the DDA to quantify its claim on account of unearned increase in relation to the subject plot and without ascertaining the same, directed, that sale proclamation be issued. An e-auction notice was issued on 27.09.2012. In the said e-auction notice, sale price was fixed at Rs.8.85 crores. However, the fact that DDA has an encumbrance i.e. the claim for an amount of unearned increase in respect of subject plot was not disclosed in the e-auction. The Bank also failed to disclose the terms and conditions of the lease executed between the DDA and the Club, to the Recovery Officer which, it was under an obligation to do so in view of the statement made by it before the High Court, as recorded in the order in DELHI DEVELOPMENT AUTHORITY VERSUS CORPORATION BANK [2012 (11) TMI 1347 - DELHI HIGH COURT] Thus, it is evident that e-auction notice was issued in violation of Rule 53 of the Second Schedule to the 1961 Act as well as Rule 16 of the Rules, 1962. Therefore, no sanctity can be attached to the e-auction sale notice and proclamation of sale dated 27.09.2012 as well as confirmation of sale and sale certificate dated 08.07.2013 and 12.07.2013 respectively issued in favour of the Auction Purchaser. In the facts of the present case, the Auction Purchaser has been caught in the undertow of circumstances, not of its making. Among all the actors in this legal drama, it alone stands innocent. The Auction Purchaser entered the auction in good faith, placed its bid and deposited its hard earned money in the belief that the law clothed the auction with legitimacy. The Auction Purchaser neither breached the covenant nor failed in diligence and did not seek to profit from the illegality. The restitution therefore becomes not merely a legal device but a moral imperative. It is this principle which in the facts of the case must guide the relief to the Auction Purchaser. The Bank having advanced the money of an illegal mortgage and having chosen to auction what it never lawfully possessed, bears the responsibility for the consequences. Conclusion - Impugned order passed by the High Court [2014 (8) TMI 1262 - DELHI HIGH COURT] the e-auction notice as well as the e-auction conducted by the Recovery Officer, DRT the confirmation of sale and sale certificate issued in favour of the Auction Purchaser are quashed and set aside. We direct the bank to refund the entire amount lying in deposit to the Auction Purchaser. The Auction Purchaser has been deprived of the use of its money for a considerable time, the money which would have earned value elsewhere. Therefore, the Auction Purchaser is entitled to interest on the balance amount which is lying in the deposit of the Bank. We, therefore, direct that the balance amount deposited by the Auction Purchaser which is with the bank be returned to the Auction Purchaser with an interest at the rate of 9% per annum within a month to be reckoned from the date of deposit till repayment. ISSUES PRESENTED AND CONSIDERED 1. Whether an auction sale conducted by a Recovery Officer under the Recovery of Debts and Bankruptcy Act, 1993 is vitiated where the proclamation of sale and e-auction notice fail to disclose an encumbrance in the nature of a lessor's statutory claims (including unearned increase and pre-emptive right) arising under the lease terms. 2. Whether the Recovery Officer and the secured creditor were obliged, under the statutory scheme importing provisions/rules applicable to income-tax certificate proceedings, to elicit, quantify and disclose material matters (including encumbrances and amounts affecting reserve price) prior to drawing up the proclamation of sale and fixing the reserve price. 3. Whether a writ petition previously withdrawn in light of an undertaking by the secured creditor that auction would be conducted in accordance with lease terms bars a subsequent challenge to the validity of an auction conducted contrary to that undertaking (application of res judicata / principles analogous to Section 11 CPC). 4. Whether an auction purchaser who bought in good faith at a sale vitiated by failure to disclose material encumbrances is entitled to restitution (refund of amounts paid plus interest) and, if so, on what principles and against whom (secured creditor/bank). ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of auction where proclamation/notice omitted lessor's encumbrance (unearned increase & pre-emptive right) Legal framework: The Recovery of Debts and Bankruptcy Act, 1993 makes applicable, with necessary modifications, provisions of the Second and Third Schedules to the Income-tax Act, 1961 and the Income Tax (Certificate Proceedings) Rules, 1962. Rule equivalent to Rule 53 (Second Schedule) requires a proclamation of sale to specify the property, revenue, amount for recovery and 'any other thing which the [Recovery Officer] considers material for a purchaser to know, in order to judge the nature and value of the property.' Rule equivalent to Rule 16 of the Certificate Proceedings Rules empowers the Recovery Officer to summon persons and examine them and require production of documents relevant to the proclamation. Precedent treatment: The Court relied upon established statutory interpretation of the above provisions and the obligation they impose on a recovery authority to disclose matters material to value and to afford opportunity for examination/quantification before proclamation. (Precedents cited in the judgment are treated as authoritative support for these obligations.) Interpretation and reasoning: The lease conferred on the lessor two material rights - a right to claim unearned increase and a pre-emptive right to purchase - which affect the value and marketability of the property. The secured creditor and the Recovery Officer failed to ensure quantification or disclosure of such encumbrance in the proclamation/e-auction notice, and the Bank did not disclose the lease terms despite prior communications and a recorded undertaking. The Recovery Officer proceeded to fix reserve price and issue proclamation without directing quantification of unearned increase or ensuring material matters were reflected in the notice, contrary to the statutory scheme importing Rule 53 and Rule 16 obligations. Ratio vs. Obiter: Ratio - omission to disclose/quantify lessor's encumbrance in the proclamation of sale under the statutory scheme vitiates the auction and consequent confirmation/sale certificate. Obiter - comments on the duties of secured creditors to draw Recovery Officer's attention to lease terms insofar as they affect proclamation. Conclusions: The e-auction notice, proclamation, confirmation of sale and sale certificate are invalid and liable to be set aside because material encumbrances affecting property value were neither quantified nor disclosed as required by the incorporated rules. Issue 2: Duty of secured creditor and Recovery Officer to elicit and quantify material claims before auction Legal framework: Statutory incorporation of the Second Schedule and relevant Rules imposes an obligation on Recovery Officer to consider and state matters material to the nature and value of property; Rule empowering summoning and examination facilitates quantification before proclamation. Precedent treatment: The Court treated prior authoritative pronouncements as supportive of the principle that the recovery process must not ignore material facts affecting purchaser's assessment and that the Recovery Officer must exercise powers to ascertain such facts. Interpretation and reasoning: Where lease terms vest the lessor with claims (e.g., unearned increase), the Recovery Officer must direct parties to quantify such amounts before fixing reserve price and issuing proclamation. The secured creditor, having knowledge of the lease and having communicated with the lessor, had an obligation to disclose those terms and assist the Recovery Officer; failure to do so frustrated statutory safeguards and misled prospective purchasers. Ratio vs. Obiter: Ratio - Recovery Officer's failure to invoke statutory mechanisms (summons/examination/quantification) and secured creditor's failure to disclose lease encumbrances are procedural defects nullifying the sale. Obiter - suggested best practice duties of parties in recovery proceedings. Conclusions: Both the Recovery Officer and the secured creditor failed in statutory duties; the auction could not be afforded sanctity where such failures occurred. Issue 3: Effect of prior withdrawn writ petition and recorded undertaking on res judicata principles Legal framework: Principles governing res judicata and finality in writ proceedings distinguish between merits decisions and dismissals for laches/withdrawal/alternative remedy; a petition dismissed on merits binds parties, whereas a withdrawal based on an undertaking does not decide merits. Precedent treatment: The Court applied established doctrine that a petition dismissed or withdrawn without adjudication on merits does not preclude a fresh challenge if there is a new cause of action or if the undertaking is breached. Interpretation and reasoning: The earlier writ petition was withdrawn after the secured creditor gave a recorded undertaking that the auction would be held in accordance with lease terms; that petition was not decided on merits. The subsequent auction violated the undertaking/terms, thereby creating a fresh cause of action and permitting the lessor to challenge the auction. Principles analogous to Section 11 CPC (res judicata) were therefore inapplicable to bar the fresh petition. Ratio vs. Obiter: Ratio - a withdrawal premised on an undertaking does not preclude fresh proceedings where the undertaking is not honoured and the auction occurs contrary to lease terms; High Court erred in treating the earlier order as finality. Conclusions: The challenge to the auction was maintainable; the doctrine of res judicata did not preclude the attack on an auction conducted contrary to the recorded undertaking. Issue 4: Entitlement to restitution by auction purchaser who acted in good faith Legal framework: Principles of restitution/unjust enrichment permit courts to restore parties to prior position where a party has been unjustly enriched at the expense of an innocent actor; courts have inherent jurisdiction to order restitution where justice so requires. Precedent treatment: The Court referenced established restitutionary principles recognizing quasi-contractual relief to prevent unjust retention of benefits where sale is illegitimate through no fault of purchaser. Interpretation and reasoning: The auction purchaser acted in good faith, complied with auction terms, and had no role in the defects that vitiated the sale. Equity and law require that an innocent purchaser should not be made to suffer for the secured creditor's and Recovery Officer's failures. The secured creditor, having advanced money on an illegal mortgage and proceeded to auction what it did not lawfully possess, must bear responsibility to refund amounts and compensate for deprivation of use. Ratio vs. Obiter: Ratio - where sale is set aside for failure to disclose material encumbrances and an innocent auction purchaser has paid sums in good faith, the purchaser is entitled to restitution (refund of deposited sums) with interest; obligation of refund lies against the secured creditor holding the amounts. Conclusions: The auction purchaser is entitled to return of the deposit held and to interest for deprivation of use; the secured creditor must refund the balance with prescribed interest rate as determined by the Court (directed at a specified reasonable rate for the period of detention). Final Disposition (as derived from conclusions above) Quashing and setting aside of the e-auction notice, the e-auction, confirmation of sale and sale certificate; refund of amounts deposited by the auction purchaser by the secured creditor together with interest to compensate for period of deprivation, on restitutionary grounds; availability of relief to the lessor to pursue statutory dues in accordance with law after the annulment of the auction.