TaxTMI 
TaxTMI 
2025 (5) TMI 311
X X X X Extracts X X X X
X X X X Extracts X X X X
.... JUDGMENT ............................................................................. 11 C. SUBMISSIONS ON BEHALF OF THE APPELLANT .............................. 15 D. SUBMISSIONS ON BEHALF OF THE RESPONDENT NOS. 1-4 ............................................................................................................ 16 E. SUBMISSIONS ON BEHALF OF THE RESPONDENT NOS. 5-7 ............................................................................................................ 17 F. ANALYSIS ....................................................................................................... 18 i. Validity of the Forfeiture of Advance Money .......................................... 19 a. Difference between Earnest Money and Advance Money ................. 19 b. Permissible Extent of Forfeiture .......................................................... 27 ii. Law on the Alternative Relief of Refund of Earnest Money under Section 22 of the 1963 Act ........................................................................................ 35 G. CONCLUSION .................................................................................................
X X X X Extracts X X X X
X X X X Extracts X X X X
....as duly acknowledged by the defendant no. 1. The said ATS stipulated that the sale transaction shall be completed by payment of the balance sale consideration of Rs. 35,50,000/- within four months from the date of the ATS, pursuant to which the sale deed was to be executed. The contents of the said ATS are extracted hereinbelow: - "ADVANCE SALE AGREEMENT This Advance Sale Agreement is executed on this Twenty fifth day of July, Two Thousand Seven (25-07-2007) -BYSmt. R. Poornima, daughter of Late Rathnamma also wife of Sri M.L. Harsha, aged about 32 years, and Sri Lakshmisha, husband of Smt. R. Poornima, aged about 39 years, and the children of Smt. Poornima and Sri M.L. Harsha, 1) Kum. H.R. Anusha, aged about 7 years, 2) Chi. H. Amogham aged about 3 years, both are minors represented by their mother and natural guardian Smt. R. Poornima, all are residing at House No.588, Postal Colony, Visveshwaranagara Layout, Mysore City- IN FAVOUR OF: Sri K.R. Suresh, aged about 42 years, son of Sri Rudrappa, residing at K. Gollahalli Village, K. Gollahalli Post, Kengeri Hobli, Bangalore South Taluk. Whereas, the property mentioned in the schedule her....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sale deed either to your name or to the name of person as suggested by you. The aforesaid property except you we have not encumbered the same in any manner to whomsoever, also in respect of said property except ourselves there are no any other title holders or successors, if any such dispute arisen in future the same will be solved by us out of our own expenses and for which we have agreed. In the event failure on your part to pay the remaining amount within stipulated period, the advance amount paid by you will be forfeited. In the event failure on our part to execute the sale deed, even though you are ready to pay the balance sale consideration and get registration of sale deed, in such an event we agreed to pay the double amount of the advance which you have paid as compensation. Hence, we have executed this Advance Sale Agreement by affixing our signature. SCHEDULE:- All that part and parcel of the site bearing No.307, 5th Main Road, Kengeri Satellite Town Layout, Kengeri Hobli, Bangalore South Taluk, now comes under Kengeri Town Municipal limits, old Khatha No.129, present khatha No.130, present property No.307, which comes within the limits....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9 of 2008 before the Trial Court, praying for the following: (i) an order directing defendant no. 1 to execute the sale deed in favour of the plaintiff; (ii) deliver the possession of the suit property in favour of the plaintiff and; (iii) a declaration to the effect that the subsequent sale deed dated 15.02.2008 in favour of the defendant nos. 5 and 6 respectively is not binding on the plaintiff. 10. It is the case of the defendant nos. 1-4 that they were in urgent need of the sale consideration money to avail of the One-Time Settlement (for short, "OTS") benefit from the Indian Overseas Bank K.R. Mohalla, Mysore Branch which was time-bound for 3 months, thereby making time the essence of the contract. The defendant nos. 1-4 denied having ever agreed to produce the probate or the original title deeds as contended by the plaintiff. Furthermore, they have contended that owing to the plaintiff's non-performance of the contract, they suffered substantial losses. 11. Pursuant to this, the defendant nos. 1-4 terminated the ATS and forfeited the advance paid by the plaintiff, going by the express covenant of the ATS. According to the defendants, at no point of time during the valid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uty of the plaintiff to complete the transaction within the specified period. (ii) Secondly, the Trial Court, while examining the issue of the unregistered Will and probate, noted that the defendant no. 1, as the sole legal heir of her mother, became the absolute owner of the suit property upon her mother's demise. The Court also underscored the settled law that a Will need not be registered and lack of such registration does not impute its authenticity, thus making the procurement of probate unnecessary. Additionally, there was nothing on record to indicate that the advocate for the bank insisted for a probate certificate. The plaintiff claimed to have forgotten the name of the said advocate and had no opinion in writing to rely upon. Further, neither the legal advisor nor DW2 (defendant no. 4) was examined on the issue of probate, leading to an adverse inference against the plaintiff. The Court held that in the absence of any recitals in the ATS requiring the defendants to furnish original title deeds to the bank within four months, the plea taken by the plaintiff was false, frivolous, and concocted. (iii) Thirdly, on the issue of readiness and willingness to pe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (i) First, the High Court held that, in the absence of any obligation under the ATS for the defendant no. 1 to furnish probate certificate before executing the sale deed, time was the essence of the contract. Thus, the plaintiff, having failed to pay the balance sale consideration within the stipulated four-month period, committed breach of the conditions specified in the ATS. Further, the Court took note of the fact that it was only after a lapse of three months from the expiry of the stipulated four-month period that the plaintiff issued legal notice dated 18.02.2008 to the defendant no.1 calling upon her to execute the ATS. The relevant observations read as under: "14. [...] There is no recital in the agreement of sale that the defendant No.1 was required to furnish the probate certificate from the competent Court before executing the sale deed in favour of the plaintiff upon receipt of the balance sale consideration. [...] In the absence of requirement for furnishing probate certificate, the contention of the plaintiff that the defendant No.1 failed to perform her part of the contract is not acceptable having regard to the fact that it was well within h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds to pay the balance consideration is not entitled for relief for granting the decree for specific performance under Section 16(c) of the Specific Relief Act, 1963." (iii) Thirdly, the High Court held that the defendant no. 1 failed to prove the termination of the ATS in favour of the plaintiff, as no documentary evidence to substantiate the same was placed on record. However, the defendant nos. 5 and 6 respectively were deemed bona fide purchasers for value, in view of the fact that the sale deed dated 15.02.2008 was executed in their favour only after the expiry of the four-month period in the ATS. Additionally, it is an admitted position of the plaintiff that he had obtained the certified copy of the sale deed executed in favor of the defendants nos. 5 and 6 respectively at the time of filing of the suit. On account of the plaintiff's omission to challenge the said sale deed, the Court held that the suit was not maintainable against the defendant nos. 5 and 6 respectively. The relevant observations read as under: "19. The defendant No.1 in her reply notice dated 15.3.2008 -Ex.P.13 has stated that the sale agreement was terminated on the ground that the plainti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted in view of Section 22 of the Specific Relief Act. Sub-Section 2 of Section 22 of the said Act specifies that no relief under clause (a) or clause (b) of sub-section (1) shall be granted by the court unless it has been specifically claimed. In the absence of such a claim, the plaintiff is held not entitled for refund of earnest money." C. SUBMISSIONS ON BEHALF OF THE APPELLANT 17. Mr. Anand Sanjay M. Nuli, the learned Senior Counsel appearing for the appellant/plaintiff, submitted that the defendant no. 1 failed to obtain the promised probate certificate with respect to the suit property despite multiple requests from the plaintiff. It was further submitted that the defendant no. 4 has specifically admitted that between 18.02.2008 and 20.02.2008, the plaintiff voluntarily offered to pay an additional Rs.10,00,000/- beyond the agreed sale consideration of Rs.55,50,000/-. The learned Senior Counsel contended that the aforesaid admission proved the readiness and willingness of the plaintiff to fulfill his part of the contract. 18. Mr. Nuli submitted that the defendant nos. 1-4, exhibiting mala fide intent, sold the suit property to the defendant nos. 5 and 6 respectively f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the parties with respect to the forfeiture of advance money in the event of the purchaser's default in fulfilling the terms of the agreement. E. SUBMISSIONS ON BEHALF OF THE RESPONDENT NOS. 5-7 23. Mr. Dhawesh Pahuja, the learned Counsel appearing for the respondent nos. 5-7 herein, submitted that the original defendant nos. 5 and 6 fall under the exception carved out by Section 19(b) of the1963 Act, having purchased the suit property in good faith and without notice of the prior ATS in favour of the plaintiff. It was argued that the factum of the prior ATS was suppressed and could not be discovered even on thorough due diligence, considering that the ATS was unregistered. An encumbrance certificate was placed on record to substantiate the same, which did not reveal any prior agreement in relation to the Suit Property. 24. The learned Counsel argued that the defendant nos. 5 and 6 respectively issued a legal notice dated 05.05.2008 against defendant nos. 1-4 soon after receiving objections regarding transfer of Khata from Bruhat Bengaluru Mahanagara Palike (for short, "BBMP"). It was asserted that only in the reply dated 23.05.2008 to the said legal notice that the defen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is completely payable. On the other hand, the word "earnest" stands for a sum of money given for the purpose of binding a contract, which is forfeited if the contract does not go off and adjusted in price if the contract goes through. [See: P Ramanatha Aiyar in "Advanced Law Lexicon", 7th Edn.] 32. The principles governing the scope of "earnest money" were succinctly explained in the case of Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., reported in (1969) 3 SCC 522, reproduced as under: "21. From a review of the decisions cited above, the following principles emerge regarding 'earnest': '(1) It must be given at the moment at which the contract is concluded. (2) It represents a guarantee that the contract will be fulfilled or, in other words, "earnest" is given to bind the contract. (3) It is part of the purchase price when that transaction is carried out. (4) It is forfeited when the transaction falls through by reason of the default or failure of the purchaser. (5) Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest.'" ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rms of the contract are clear and explicit to that effect. The relevant observations are reproduced hereinbelow: "6. [...] In Chiranjit Singh v. Har Swarup [(1926) 23 LW 172 : AIR 1926 PC 1] it has been held that (LW p. 174) the earnest money is part of the purchase price when the transaction goes forward and it is forfeited when the transaction falls through, by reason of the fault or failure of the purchaser. [...] xx xx xx 10. In DDA v. Grihsthapana Coop. Group Housing Society Ltd. [1995 Supp (1) SCC 751], this Court following the judgment of the Privy Council in Har Swarup [(1926) 23 LW 172 : AIR 1926 PC 1] and Shree Hanuman Cotton Mills [(1969) 3 SCC 522], held that the forfeiture of the earnest money was legal. In V. Lakshmanan v. B.R. Mangalagiri [1995 Supp (2) SCC 33] this Court held as follows : (SCC p. 36, para 5) "5. The question then is whether the respondents are entitled to forfeit the entire amount. It is seen that a specific covenant under the contract was that the respondents are entitled to forfeit the money paid under the contract. So when the contract fell through by the default committed by the appellant, as part of the contr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld get double the amount of earnest money. Undisputedly, the purchaser failed to perform his part of the contract, then the question is whether the seller can forfeit the entire earnest money. xx xx xx 17. We are, therefore, of the view that the seller was justified in forfeiting the amount of Rs.7,00,000 as per the relevant clause, since the earnest money was primarily a security for the due performance of the agreement and, consequently, the seller is entitled to forfeit the entire deposit. [...]" (Emphasis supplied) 36. A three-Judge Bench of this Court, of which one of us (J.B. Pardiwala, J.) was a part, reiterated the distinction between "earnest" and "advance" in Central Bank of India v. Shanmugavelu, reported in (2024) 6 SCC 641, thus stating that "earnest" differs from "advance money", though the former can be treated as part-payment of the sale consideration if the contractual terms are duly honoured. In other words, earnest money is adjusted against the total sale consideration if the contract goes through. The relevant observations are reproduced hereinbelow: "84. The difference between an earnest or deposit and an advance part-paym....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the object of making the contract." (Emphasis supplied) 39. This Court recently reaffirmed the principles for deeming whether time is of the essence in a contract in Welspun Specialty Solutions Ltd. v. ONGC, reported in (2022) 2 SCC 382. It held that the determination must be made by reading and analysing the contract in its entirety, taking into account the surrounding circumstances. An explicit clause stating that time is of the essence is not, by itself, sufficient. The Court further observed that any provision allowing extensions under a contract effectively negates such a clause, thereby indicating that time is not of the essence. The relevant observations are reproduced hereinbelow: "34. In order to consider the relevancy of time conditioned obligations, we may observe some basic principles: (a) Subject to the nature of contract, general rule is that promisor is bound to complete the obligation by the date for completion stated in the contract. [Refer to Percy Bilton Ltd. v. Greater London Council [Percy Bilton Ltd. v. Greater London Council, (1982) 1 WLR 794 (HL)] ] (b) That is subject to the exception that the promisee is not entitled ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....titled to the entire amount of Rs.20,00,000/-. 43. At this juncture, we deem it appropriate to take note of Section 74 of the Indian Contract Act, 1872 (for short, "the 1872 Act"). Section 74 of the 1872 Act deals with the compensation for loss or damage caused by a breach of the contract when a particular sum of liquidated damages or penalty is already set forth under the terms of the contract. It further provides that such compensation must be reasonable and it cannot, in any circumstance, exceed the amount stipulated in the contract. The same is extracted below: "74. Compensation for breach of contract where penalty stipulated for.-When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. [...]" 44. A conjoint reading of Section 74 of the 1872 Act and the pri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ff was entitled to forfeit the amount of Rs 1000 which was paid as earnest money. We cannot however agree with the High Court that 13 percent of the price may be regarded as reasonable compensation in relation to the value of the contract as a whole, as that in our opinion is assessed on an arbitrary assumption. The plaintiff failed to prove the loss suffered by him in consequence of the breach of the contract committed by the defendant and we are unable to find any principle on which compensation equal to ten percent of the agreed price could be awarded to the plaintiff. [...]" (Emphasis supplied) 45. It is imperative to mention herein that in Fateh Chand (supra), this Court, while setting "earnest money" apart from a "penalty", held that insofar as forfeiture of earnest money is concerned, Section 74 of the 1872 Act will not apply. The relevant observations are reproduced hereinbelow: "7. The Attorney General appearing on behalf of the defendant has not challenged the plaintiff's right to forfeit Rs 1000 which were expressly named and paid as earnest money. He has, however, contended that the covenant which gave to the plaintiff the right to forfeit Rs 24....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of a penalty." (Emphasis supplied) 47. In Shanmugavelu (supra), this Court emphasized upon the fundamental difference between the forfeiture of "earnest money" and forfeiture of "any other amount", wherein the former constitutes a general forfeiture clause, while the latter qualifies as a penal clause. A clause for forfeiture of earnest money thus, only intended as a deterrent to ensure due performance of the contractual obligations, will not be deemed penal in the ordinary sense. The relevant observations are reproduced hereunder: "81. Even otherwise, what is discernible from the abovereferred decisions of Fateh Chand [Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49 : AIR 1963 SC 1405], Maula Bux [Maula Bux v. Union of India, (1969) 2 SCC 554] and Satish Batra [Satish Batra v. Sudhir Rawal, (2013) 1 SCC 345 : (2013) 1 SCC (Civ) 483] is that there lies a difference between forfeiture of any amount and forfeiture of earnest money with the former being a penal clause and the latter a general forfeiture clause. A clause providing for forfeiture of an amount could fundamentally be in the nature of a penalty clause or a forfeiture clause in the strict sense or....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ied) 49. This Court expounded on the question of loss in Lakshmanan v. B.R. Mangalagiri, reported in 1995 Supp (2) SCC 33, holding that when the contract falls through due to the default on part of the appellant-purchaser, and the resulting loss suffered by the respondent-vendors exceeds the amount forfeited under the contract, the forfeiture cannot, by any measure, be seen as unjustified. The relevant observations are extracted below: "5. The question then is whether the respondents are entitled to forfeit the entire amount. It is seen that a specific covenant under the contract was that the respondents are entitled to forfeit the money paid under the contract. So when the contract fell through by the default committed by the appellant, as part of the contract, they are entitled to forfeit the entire amount. In this case even otherwise, we find that the respondents had suffered damages, firstly for one year they were prevented from enjoying the property and the appellant had cut off 150 fruit-bearing coconut trees and sugarcane crop was destroyed for levelling the land apart from cutting down other trees. Pending the appeal, the respondents sought for and were granted ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e purchaser fails to fulfill the conditions, it also provided for payment of double the amount of earnest money by the vendor to the purchaser in case the vendor fails to complete the transaction. As such, the said term cannot be said to be one-sided." (Emphasis supplied) 51. On a conspectus of the aforementioned authorities, it is evident that a clause for the forfeiture of earnest money is not penal in the ordinary sense, rendering Section 74 of the 1872 Act, inapplicable. In the present case, the stipulated amount under the ATS was in the nature of an earnest money deposit and thus, Section 74 of the 1872 Act cannot apply to the same. Further, the forfeiture clause was fair and equitable rather than one-sided and unconscionable, as it imposed liabilities on both the appellantpurchaser and respondent-sellers, wherein the seller was obligated to pay twice the advance amount paid by the buyer in case of his default. 52. Even, for argument's sake, if we have to apply the principle under Section 74 of the 1872 Act to the present case in line with Kailash Nath (supra), the forfeiture of the entire amount of advance money by the respondent nos. 1-4 would still be justifi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... refunding of earnest money or deposit cannot be granted unless specifically claimed. Further such a plea cannot be considered in a second appeal, particularly when the issue of execution of the agreement has been held as not having been proved. Refund of amounts paid may also be ordered when specific performance has been refused on the ground of unexplained delay by the plaintiff in approaching the Court. It is also open to a plaintiff to give up his prayer for specific performance at the hearing, or before the hearing, and ask for return of the earnest money or deposit. Where a clause entitling forfeiture of earnest money is contained in the agreement, it would not be refundable to the plaintiff who has failed to perform his part of the contract. Forfeiture of earnest money should not be allowed where the vendor has not suffered any loss, but has actually gained, viz., on account of frustration of contract. Where the value of land had considerably increased after the sale agreement, the Court, while refusing a decree for specific performance, ordered a refund of the earnest amount on the ground that the plaintiff did not suffer any loss, but had gained due to th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the proviso appended to Sub-section (2) of Section 22 of the 1963, which mandates the Court to allow an amendment of the plaint at any stage of the proceeding to include a claim for such relief under Clause (a) or (b) of Section 22(1), renders the provision directory in nature. The Court opined that Section 22(2) is qualified by the phrase "in an appropriate case", referring to situations where such relief does not necessarily flow from a decree for specific performance of a sale agreement. Accordingly, if such relief under Clause (a) or (b) of Section 22(1) appears as a necessary implication of the decree for specific performance, a specific prayer for claiming such relief would not be required. In light of these principles, this Court held that the relief of possession was inherently included in a decree for specific performance and need not be specifically pleaded. Furthermore, it reiterated that the words "at any stage of the proceeding" have a wide amplitude, encompassing both the appellate stage and execution proceedings. The relevant observations are reproduced hereinbelow : "22. The Bombay High Court in a judgment reported as Lotu Bandu Sonavane v. Pundalik Nimba K....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al consequences follow under subsection (2) of Section 22. [...] xx xx xx 29. To examine whether a provision is directory or mandatory, one of the tests is that the court is required to ascertain the real intention of the legislature by carefully attending to the whole scheme of the statute. Keeping in view the scheme of the statute, we find that Section 22(2) of the Act is only directory and thus, the decree-holder cannot be non-suited for the reason that such relief was not granted in the decree for specific relief. 30. The defendant in terms of the agreement is bound to handover possession of the land agreed to be sold. The expression "at any stage of proceeding" is wide enough to allow the plaintiffs to seek relief of possession even at the appellate stage or in execution even if such prayer was required to be claimed. This Court in Babu Lal has explained the circumstances where relief of possession may be necessary such as in a suit for partition or in a case of separate possession where the property conveyed is a joint property. In the suit for specific performance, the possession is inherent in such suit, therefore, we find that the decree-holders ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....judgment in Desh Raj (supra) has been relied upon by the learned counsel appearing for the appellant herein. However, it is difficult to understand how this judgment furthers their case. On the contrary, this judgment clearly contradicts their position, stating in unequivocal terms that, in the absence of a prayer for the relief of refund of earnest money, such relief cannot be granted by this Court. 60. Another judgment which has been relied upon by the learned counsel for the appellant in reference to the issue of refund of earnest money, is the case of Kamal Kumar v. Premlata Joshi, reported in (2019) 3 SCC 704. Notably, the ruling in this case also stands contrary to the arguments advanced by the appellant on account of the fact that the relief of refund of earnest money was denied therein. The relevant observations are extracted hereunder: "9. In the case at hand, we find that the two courts below have gone into these questions in the light of pleadings and evidence and recorded a categorical finding against the plaintiff holding that the plaintiff was neither ready nor willing to perform his part of the contract and, therefore, he was not entitled to claim the rel....