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Judgment
Ranjit Singh, J
Whether a person who has entered into an agreement in respect of a property mortgaged and subject to recovery proceedings can claim right to discharge the debt despite objection by the borrower and seek stay of the auction which is ordered? The above issue is raised in the present case as respondents 2 and 3 claim to have entered into an agreement with the appellant borrower and have been permitted to deposit the amount towards the satisfaction of the outstanding dues under the recovery certificate. The Recovery Officer had rejected such a prayer made by respondents 2 and 3. On an appeal filed by respondent Nos. 2 and 3 the Tribunal below has set aside the order of the Recovery Officer and has allowed them to discharge the liability of the borrower. This order passed by the Tribunal below is under challenge in this appeal.
A reference to the facts in short may be necessary to understand the controversy which arises in the present appeal.
After having availed the credit facilities, the appellant could not maintain the financial discipline. It led to the order of recovery passed by the Tribunal below on 26.4.2004. A recovery certificate was issued to the tune of Rs. 22,67,897/- along with pendente lite and future interest @ 10% p.a. w.e.f. 21.9.2001 till the date of recovery of the entire amount besides cost of Rs. 49,650/-.
In the execution proceedings, the Recovery Officer (R.O.) on 10.5.2006, noticed and held that the respondent No. 1 Bank had executed a settlement with the appellant herein for the payment of Rs. 22 lacs as per the RBI guidelines. Upon payment of such sum the property of the borrower, which had been mortgaged with the Bank was to stand discharged. It is stated that upon the payment of the said amount by the appellant the mortgaged property was released vide order dated 15.6.2006.
Thereafter, Mr. Brijmohan Bhadada and Mr. Subhash Bhadada entered into an agreement to sell the said property with respondents 2 and 3 under the impression that upon payment of the compromise amount, the recovery certificate would be closed. Respondents 2 and 3 thus have not become the owner of the said property and only have the agreement to sell in their favour to show.
The orders dated 10.5.2006 and dated 15.6.2006 passed by the R.O. were set aside by DRT on 22.10.2009. This order passed by the DRT was upheld by this Tribunal vide its order dated 10.3.2011. The appellant impugned the said order by filing a Writ Petition (No. 9439/2011) before the Hon'ble Rajasthan High Court at Jodhpur. Since the High Court did not stay the execution proceedings, the R.O. look up and proceeded with the execution petition (No. 56/2004) and put the property to sale by issuing notice of proclamation of sale dated 4.5.2012. The date of auction was fixed as 11.6.2012. At that stage respondents 2 and 3, who otherwise have no locus and are unauthorized third party filed objection before the R.O. on 23.5.2012. They stated in their objection that they had entered into an agreement to sell with the appellant on 16.10.2006 and the sale was to be completed on or before 10.4.2007. Respondents 2 and 3 also claimed to have filed a civil suit for specific performance of the agreement of sell being Suit No. 163/2007. They accordingly prayed that the sale by way of auction be stopped upon the payment of dues by them. It may need a mention here that the Civil Court had passed a temporary injunction on 16.2.2009 to the effect that the suit property would not be alienated by the appellant or its direction but it specifically clarified that the financial institution Bank, RFC may sell/auction the suit property for recovery of their dues.
The R.O. rejected the objection filed by respondents 2 and 3. He was of the view that any action by the appellant for alienation of suit property after service of demand notice was bad and it could not have been done as it would run contrary to Rule 2 of the Schedule II of the Income Tax Act, 1961. While permitting the auction the R.O. also observed that the intended bidder should be made aware about the pendency of the civil suit as well as Writ Petition before the High Court and that the auction sale would be subject to decision by the above Courts.
The auction was held on 11.6.2012 but could not fructify. The R.O. again ordered the auction of the property and fixed the same on 10.7.2012. Aggrieved by the order passed by the R.O. respondents 2 and 3 preferred an appeal before the Tribunal below and the Tribunal vide its order dated 10.7.2012, has held that respondents 2 and 3 have acquired an interest in the subject property pursuant to the sale agreement dated 16.10.2006. The Tribunal has accordingly directed the respondent Bank to appropriate the sum received from respondents 2 and 3 towards the outstanding amount of the appellant to its satisfaction. This according to the appellant is completely contrary to Rule 15 of the Second Schedule to the Income Tax Act and also contrary to law. Upon appropriation of this amount the Tribunal has ordered the auction to stop. It is against this order that the appellant has filed the present appeal.
Notice was issued in the appeal and the respondents have filed reply.
The Bank, in its reply has stated that respondents 2 and 3 who have filed objection before the R.O. have no concern with the property in dispute. The Bank would also stated that the director of the appellant company had illegally entered into an agreement to sell despite the fact that the appeal against the order of the R.O. was pending before the Presiding Officer, DRT, Jaipur. As per the Bank, this agreement was illegally entered into only with the intention to deceit the certificate-holder Bank. The Bank has also challenged the competency of Mr. Subhash Bhadada to enter into this agreement as he was not the owner of the property.
In their reply filed respondents 2 and 3 would base their entire claim on the agreement of sale in their favour which was executed by the appellant. Respondents 2 and 3 would take objection to the fact that the appellant has referred them as unauthorized third party. As per their own showing they had entered into this agreement for a consideration of Rs. 131 lacs out of which only Rs. 15 lacs has been paid in advance. As per respondents 2 and 3, since the appellant has failed to perform its obligation to execute sale deed, suit for specific performance possession perpetual injunction was filed on 7.5.2007 against the appellant company. According to respondents 2 and 3 they cannot be considered as unauthorized party. They claim to be having an interest in the entire property as the issue of adjudication of specific performance is pending. As per the said respondents, any action being put into effect for sale of the property runs counter to their interest and they are seriously and prejudicially affected. As per them, it would also create complication and further litigation in the matter whereby third party right would also be created. Respondents 2 and 3 would also point out that a sum of Rs. 27 lacs has been deposited under Rule 15 of the Second Schedule to the Income Tax Act, which was considered to satisfy the amount of Rs. 25,36,542/- stated in the proclamation for sale. As per the said respondents the fact that the High Court had not stayed the execution proceedings has no bearing on the subject matter. Accordingly the said respondents would justify the impugned order passed by the Tribunal below.
I have heard the Counsel for the parties and have gone through the impugned order. The issue which arises in this case is whether respondents 2 and 3 have any right to stall the auction and make a move to deposit the amount due which the appellant owes to the Bank on the basis of agreement to sell. The Tribunal in my view is not justified in holding that the said respondents had acquired interest in the property though they have not fulfilled part of their obligation under the agreement to sell but they were ready to fulfil their obligation and for enforcement of the obligation they have filed a civil suit also. The Tribunal below has also referred to Rule 15 of the Second Schedule to the Income Tax Act, which deals with the adjournment or stoppage of sale. This rule provides that the Tax Recovery Officer may, in his discretion, adjourn any sale hereunder to a specified day and hour, and the officer conducting any such sale may, in his discretion, adjourn the sale, recording this reasons for such adjournment. Sub-rule (2) of Rule 15 of the said Schedule provides that where a sale of immovable property is adjourned under Sub-rule (1) for a longer period than one calendar month, a fresh proclamation of sale under this Schedule shall be made unless the defaulter consents to waive it. Sub-rule (3) of the said rule, says that every sale shall be stopped if, before the lot is knocked down, the arrears and (costs including the costs of the sale) are tendered to the officer conducting the sale, or proof is given to his satisfaction that the amount of such arrears and costs has been paid to the Tax Recovery Officer who ordered the sale.
Rule 15 of the Second Schedule only talks of the adjournment of auction which is fixed and leaves this entirely to the discretion of the Tax Recovery Officer. While considering the prayer of respondents 2 and 3 Tribunal below appears to have lost sight of Rule 16 of the Second Schedule, which talks of private alienation to be void in certain cases. The R.O. was justified in relying upon Rule 16 of the Second Schedule to the Income Tax Act, which lays down that where a notice has been served on a defaulter under Rule 2, the defaulter of his representative-in-interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him except with the permission of the Tax Recovery Officer, nor shall any Civil Court issue any process against such property in execution of a decree for the payment of money. Rule 16(2) further provides that where an attachment has been made under this Schedule, any private transfer or delivery of the property attached or of any interest therein and any payment to the defaulter of any debt dividend or other moneys contrary to such attachment shall be void as against all claim enforceable under the attachment.
That being the position, it is to be seen whether the appellant or anyone on their behalf could have entered into any agreement to sell it is also be seen whether any agreement to sell in itself will create any interest which respondents 2 and 3 can enforce in the manner they intend to do. This agreement to sell was entered into on 16.10.2006. Prior to that recovery proceedings were already in progress. It may be so that there was a settlement between the Bank and the appellant and the mortgaged property was released on 15.6.2006. But, the said orders were set aside on 22.10.2009 and obviously the position on the date of agreement to sell would be that the recovery proceedings were in process. This is same execution petition which was taken up by the Recovery Officer after passing of the order dated 22.10.2009, which was further upheld by this Tribunal on 10.3.2011. Rule 16 of the Second Schedule to the Income Tax Act, therefore, would be attached in this case and will have bearing on this agreement to sell.
Even otherwise, agreement to sell in any view, does not create any right in favour of respondents 2 and 3. They may be seeking enforcement of the same by filing a suit for specific performance, but certainly it cannot be said that they have interest in this property. This is more so when we see that this property belongs to the appellant company and the agreement has been entered into by individuals. They may be directors, but whether they have any authority or power to enter into this agreement is an issue which arise for consideration before the Civil Court where the suit for specific performance is filed. The right of the Bank to recover the amount by putting the property to auction cannot in this manner be hijacked by pressing only an agreement to sell which, in my view, does not create any right. How the said respondents were allowed to become parties objectors in the recovery proceedings would be a bit surprise. Any person just cannot come forward to file an objection unless he shows to have some right in the property in question. If such right is created after the mortgage, then such right has to scum to the mortgage which had been executed.
The issue that the person entering into agreement to sell does not have right was considered to an extent by the Hon'ble Supreme Court in the case of K. Basavarajappa v. Tax Recovery Commissioner, Bangalore & Ors., (1996) 11 SCC 632. The Court in this case has clearly held that the agreement to sell creates no interest in the property. This was also a case where after received of notice under Rule 2 of Schedule II of the Income Tax Act defaulter had entered into an agreement to sell the property with the appellant before the Supreme Court. The appellant before the Supreme Court had also filed a suit for specific performance of the agreement. During the pendency of the suit, the R.O. attached the defaulter's property and after necessary proclamation, put the same to auction sale. The successful bidder became the auction purchaser, but the appellant filed an application under Rule 60 for setting aside the sale. The appellant before the Apex Court annexed a letter from the general power-of-attorney-holder of the defaulter authorizing him to deposit the amount of tax arrears. This application was rejected by the department authority. This order was initially quashed by the single Judge of the High Court in a writ petition filed jointly by the appellant and the general power-of-attorney-holder of the defaulter but the said order was upheld by the Divisional Bench which held that the appellant's application was not maintainable. Against this two SLPs were filed jointly by the appellant and the general power-of-attorney-holder of the defaulter but during the proceedings, at the notice stage the latter withdrew from the contest and the appellant alone pursued the two appeals as the sole appellant. The appellant before the Supreme Court contended that his application, being backed up by the letter of the power-of-attorney-holder of the defaulter authorising him to deposit the tax amount on his behalf was perfectly maintainable. The plea was that he had interest in the property as his suit for specific performance was not only pending on the date of the auction sale but had got decreed by consent on the very next day of moving such application. As per the appellant, once the full claim of the revenue was deposited, it could not insist on such a technicality that the appellant's application was not maintainable qua the auction purchaser. Rejecting this condition and dismissing the appeal the Supreme Court held that the application was moved by the appellant and not by the defaulter or its power-of-attorney-holder. The letter annexed to the application could by no stretch of imagination be considered an application under Rule 60 moved by the defaulter or its power-of-attorney-holder. The Court has observed that the appellant was putting forward his own claim as prospective purchaser of the property. On the date of application he was not armed with any decree granting specific performance of the agreement. The contention of the auction purchaser was accepted that when equities are to be balanced between the two rival claimants, the prospective purchaser of the auctioned property under an agreement to sell on the one hand and the auction purchaser who had purchased the property in the tax recovery proceedings on the other, it has to be seen whether the appellant could claim any legal interest and even a preferential interest in the property which would entitle him to get the auction sale set aside. Rule 16(2) was noticed and was found clearly to have hit the said agreement. The Court fund that by entering into such agreement to sell his property, the defaulter had clearly committed breach of Rule 16(1) and had bypassed the procedure laid down therein for getting permission of the Tax Recovery Officer. The Court ultimately held that the appellant had no locus standi to move the application for getting the auction sale set aside. The Court also noticed that he had no legal interest in the said property on the date of application. As per the Court, it is axiomatic that mere agreement to sell creates no legal interest or right in the property which is the subject matter of the agreement. By mere agreement to sell a person gets no interest in the property put to auction to enable him to apply for setting aside such auction under Rule 60 and especially when his transaction was hit by Rule 16(1) read with Rules 51 and 48. The Court finally held that he could not be said to be having any legal interest to entitle him to move such an application.
Exact is the situation in the present case. Here also respondents 2 and 3 are relying on an agreement to sell. As held by the Hon'ble Supreme Court this agreement to sell does not create any interest in the property in favour of respondents 2 and 3. In the present case also the agreement to sell is clearly hit by Rule 16(1) and (2) of the Second Schedule to the Income Tax Act. In fact the case before the Supreme Court was on much better footing. In case before Apex Court even the suit for specific performance had also been allowed on the basis of consent given by the defaulter. Still, the Hon'ble Supreme Court considered the position on the date when such application was filed. Since the appellant before the Supreme Court had only an agreement to show in its favour was held that auction purchaser had better right. The finding by the Hon'ble Court is that such a person had no locus to move such an application. The law having been clearly laid down the order passed by the Tribunal below obviously cannot be sustained.
The Counsel for the respondent however, has referred to a Division Bench judgment of the Karnataka High Court in the case of M/s. Super Sales Corporation & Ors. v. Debts Recovery Tribunal, Bangalore & Ors., W.P. No. 14711/2003 (GM-DRT) decided on 8.10.2012, in support of his contention that the provisions of Section 28(3) of the RDDBFI Act would entitle the respondents to move such an application. One of the issues considered in this case was whether the DRT has the jurisdiction to entertain application filed by respondent under Section 27 of the Act seeking withdrawal of cancellation of the certificate of recovery and return of original documents. The said respondent had entered into MoU with the borrower. In this context the High Court has considered various provisions of the Act and has noticed that two different modes of recovery are stipulated in Sections 25 and 28 of the Act. It is noticed that the recovery of debt is not limited to recovery from the actual debtor to the Bank and Financial Institution but is extended to recovery from other persons who are indebted to the debtor called 'third party debt order' or 'Garnishee orders'. It is accordingly observed that the Act has enlarged the mode of recovery of debt on issuance of certificate of recovery so as to bring within its scope the garnishee or a person due to a debtor of the Bank who is bound by a notice issued by the Recovery Officer. While so observing the Court was dealing with the submission that there is no relationship between the Bank and third party which submission was not accepted.
The Court has also considered as to when would such relationship arise. Apparently it would arise when notice is issued to a third party under Section 28(3) of the Act. While rejecting the contention that the DRT would have no jurisdiction to entertain an application filed by third party seeking relief when there is no privity of contract between the Bank and third party, the High Court hastened to add that a third party has a right to seek remedy before DRT. Only after the issuance of Recovery Certificate against a debtor to the Bank or FI when third part is directed to deposit monies it owes to the debtor of the Bank or FI or when on an understanding/agreement with the debtor, the third party deposits the monies or discharges the debt of the debtor to the Bank or FI or any dispute with the debtor of the Bank or FI cannot seek any remedy before the DRT.
In M/s. Super Sales Corporation (supra), though no notice was issued by the RO to the respondent to pay the amount to the Bank but on account of judicial intervention the respondent made payment to the Bank. These were the peculiar facts of the case which are not seen in the present case. Having perused the judgment I find that the Court has considered the provisions of Sub-section (2) of Section 28 which says that if any amount is due from any person to the defendant, the R.O. may require such person to deduct from the said amount the amount of debt due from the defendant under the Act and such person shall comply with any such requisition and shall pay the sum so deducted to the credit of the R.O. The provision is an enabling provision to effect recovery from those who may not be concerned with the recovery proceedings. This provision in my view, give power to the R.O. for recovery of the amount in case the R.O. finds that some person owes any money to the debtor defaulter who is before the R.O. and in that event the R.O. can issue notice in writing to such person to pay to the R.O. either forthwith upon the money becoming due or being held or within the time specified in the notice so much of the money as is sufficient to pay the amount of debt due. The observation made in the case of Super Sales Corporation (supra) were from the angle of third party right to approach the DRT. The Court did not consider case from the angle of right on the bass of agreement to sell. The view of the Hon'ble Supreme Court in the case K. Basavarajappa was not placed before the Court. In the case before the High Court the person claiming such a right was an educational institution and had entered into an agreement with the default for lease as well. The defaulter therein had permitted the educational institution to put up construction in the said property in order to facilitate running of the educational institution. He had paid refundable advance of Rs. 12 lacs and had paid a substantial sum of money to the Bank under the agreement. He had also been put in possession. He also paid debt as per the order passed by the High Court. That, in my view, was what has weighted with the Court to make any such observation which, in any case, are not applicable and are not attracted to the present case. The High Court in my view, considered the issue from different angle while making such observation about Section 28(3) as apparently the Court was considering the right of the party directed to discharge the liability on behalf of the defaulter and not that somebody has come forward to claim right or title on the basis of any agreement to sale. The observation in this regard recorded by the High Court have been noticed above. Thus the ratio of the law laid down in this case would have no applicability in the present case. In view of the foregoing discussion, I am clear in my mind that the agreement to sell does not create any right in favour of respondents 2 and 3 and they have no locus to move such application or to raise objection before the R.O. The present appeal is accordingly allowed. The order passed by the Tribunal below is set aside. As a consequence thereof, the R.O. shall continue with the recovery proceedings in an expeditious manner. There is no restraint on the R.O. to continue with the recovery proceedings as even the Civil Court did not grant any injunction on this aspect and permitted such proceedings to continue.