INDIAN BANK & ANR. versus K PAPPIREDDIYAR & ANR. on 20 July 2018

INDIAN BANK & ANR.

v.

K PAPPIREDDIYAR & ANR.

(Civil Appeal No. 6641 of 2018)

JULY 20, 2018

[DIPAK MISRA, CJI, A. M. KHANWILKAR ANDDR. D. Y. CHANDRACHUD, JJ.]

Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 - ss. 31(i), 2(zf) – Securityinterest created in agricultural land – Applicability of SARFAESIAct – Held: Classification of land in the revenue records asagricultural is not dispositive or conclusive of the question whetherthe SARFAESI Act does or does not apply – Whether a parcel ofland is agricultural must be deduced as a matter of fact from thenature of the land, the use to which it was being put on the date ofthe creation of the security interest and the purpose for which itwas set apart – On facts, in the absence of a specific finding, theholding of the High Court that the proceedings initiated by the bankunder the SARFAESI Act are nullity as the Act does not apply toagricultural land, thus, security interest in agricultural land cannotbe enforced, set aside – Proceedings remitted back for beingconsidered afresh.

The issue arose whether the High Court was correct inholding that the proceedings initiated by the bank under theSecuritisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 are nullity.

Allowing the appeals, the Court

HELD: 1.1 The expression ‘security interest’, both beforeand after the amendment, excludes what is specified in Section31 of the Securitisation and Reconstruction of Financial Assetsand Enforcement of Security Interest Act 2002. Clause (i) ofSection 31 stipulates that the provisions of the Act will not beapplicable to any security interest created in agricultural land.The statutory dictionary in Section 2 does not contain a definition

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Aof the expression “agricultural land”. Whether a particular pieceof land is agricultural in nature is a question of fact. [Para 8][615-G-H; 616-A]

1.2 The classification of land in the revenue records asagricultural is not dispositive or conclusive of the questionBwhether the SARFAESI Act does or does not apply. Whether aparcel of land is agricultural must be deduced as a matter of factfrom the nature of the land, the use to which it was being put onthe date of the creation of the security interest and the purposefor which it was set apart. [Para 9] [616-G]

1.3 The Division Bench failed to adjudicate on the basicCissue as to whether the land in respect of which the securityinterest was created, was agricultural in nature. The DRT rejectedthe objection of the debtor that the land was agricultural. In appeal,the DRAT reversed that finding. Apart from referring to theposition in law, the impugned judgment of the High Court containsDno discussion of the material which was relied upon by the partiesin support of their respective cases; the Bank urging that theland was not agricultural while the debtor urged that it was. Bothhaving regard to the decision in *Blue Coast Hotels Limited andas explained, the question as to whether the land is agriculturalhas to be determined on the basis of the totality of facts andEcircumstances including the nature and character of the land, theuse to which it was put and the purpose and intent of the partieson the date on which the security interest was created. In theabsence of a specific finding, it would be appropriate and properto set aside the judgment of the High Court and to remit theFproceedings for being considered afresh. The impugned judgmentand order of the High Court is set aside. [Paras 10, 11][616-G-H; 617-A-D]

*ITC Limited v. Blue Coast Hotels Limited (2018) SCCOnline SC 237 – referred to.

GCIVIL APPELLATE JURISDICTION: Civil Appeal No. 6641of 2018.

From the Judgment and Order dated 05.04.2016 of the High Courtof Judicature at Madras in W.P. No. 32208 of 2014

WITH

Civil Appeal No. 6645 of 2018.H

P.S. Narasimha, ASG, Gautam Awasthi, Ayush Choudhary,Devanshu Yadav, B. Karunakaran, S. Gowthaman, Siddharth Dave,Sai Baba, S. Santanam Swaminadhan, Anil Kumar Tandale, Mrs. AarthiRajan, Advs. for the appearing parties.

The Judgment of the Court was delivered by DR. D. Y. CHANDRACHUD, J. 1. The Division Bench of theHigh Court of Judicature at Madras has held that the proceedings initiatedby the appellant under the Securitisation and Reconstruction of FinancialAssets and Enforcement of Security Interest Act 2002 (the SARFAESIAct) are a nullity. The basis of this conclusion is that the Act does notapply to agricultural land. In consequence, the High Court has held thata security interest in agricultural land cannot be enforced.

2. In 1989, a term loan was granted by the appellant to YelagiriDairy Farm for setting up a dairy farm on a property ad-measuring 6.10acres and bearing survey No. 203/2, 3, 4, 5 & 202/1A situated atPeddakallupalli Village, NH Road, Vaniambadi, Tamil Nadu. By aregistered power of attorney, the first respondent appointed N KArumugham as his attorney and authorised him to sell or mortgage theproperty. Arumugham was the managing partner of the partnership farmand had mortgaged the property in favour of the appellant. The firstrespondent was a guarantor. In 1993, building was constructed andmachines were installed by the borrowers to commence business. Theaccount became a non-performing asset. In 1995, the Bank filed a suitfor recovery. It was transferred to the Debt Recovery Tribunal (DRT-III)at Chennai and renumbered as T.A. No. 93 of 2007. On 11 June 2010,DRT-III allowed the claim of the Bank in the amount ofRs. 31,00,238/- with interest at 9 per cent per annum. A recoverycertificate was issued on 10 February 2011in the amount ofRs. 74,31,233.14/-. On 2 August 2011, the Bank issued a demand noticeunder Section 13(2) for Rs. 85,41,662/-. Overruling an objection that theproperty is agricultural in nature, it took possession on 31 October 2011.The Bank issued a sale notice on 2 April 2012. The sale notice waschallenged in Original Suit No. 74 of 2012, which was dismissed in default.The second respondent was the successful bidder at an auction saleheld on 12 May 2012. He paid a consideration of Rs.1.27 crores. Thesale certificate was issued on 14 June 2012 and was rectified on7 September 2012.

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A3. The sale certificate was challenged in writ proceedings beforethe Madras High Court. The petition was dismissed on 4 April 2013 withliberty to the first respondent to adopt appropriate steps. The firstrespondent thereupon moved DRT-III at Chennai for challenging thesale certificate. The proceeding was dismissed on 17 May 2013. On11 September 2014, an appeal filed by the first respondent was allowedBby the DRAT on the ground that the property which was sold, wasagricultural and was exempt from the provisions of the Act. Both theBank and the auction purchaser filed petitions before the High Court atMadras under Article 226. The High Court dismissed the petitions.It held that since a security interest had been created in agricultural land,Cthe provisions of the SARFAESI Act were not attracted.

4. Aggrieved by the judgment and order of the Madras High Court,the Bank and the auction purchaser instituted proceedings before thisCourt under Article 136 of the Constitution. Leave has been granted.

D5. In support of the appeal, it has been urged on behalf of theappellant that the property which was the subject matter of the mortgagecomprised of dry land and was not exempt from the provisions of theSARFAESI Act. It has been urged that it is asettled position that themere classification of a property in the revenue records as agriculturaldoes not render it agricultural land. Whether a particular parcel of landEis agricultural is a question of fact. In the present case, it has beensubmitted that no agricultural activity was taking place on the date of thecreation of the mortgage and it was classified as dry land in the landacquisition proceedings. The auction purchaser has while supporting thesubmissions of the Bank urged that plots have been carved out of theFland and sold.

6. On the other hand, reliance was placed by learned Counselappearing on behalf of the first respondent on a recent judgment of thisCourt in ITC Limited v Blue Coast Hotels Limited[1], in support ofthe submission, that no security interest could be created in respect ofGagricultural land, having due regard to the provisions of Section31(i).Learned Counsel adverted to the findings which were recorded inthe judgment of the DRAT.

1(2018) SCC OnLine SC 237

7. Section 31(i) of the SARFAESI Act stipulates thus :

“31. Provisions of this Act not to apply in certain cases.- The provisions of this Act shall not apply to…

(i) any security interest created in agricultural land;”

The expression ‘security interest’ was defined, prior to itsamendment, in Section 2(zf) as follows :

“2(zf) “security interest” means right, title and interest of anykind whatsoever upon property, created in favour of any securedcreditor and includes any mortgage, charge, hypothecation,assignment other than those specified in section 31;”

Clause (zf) was substituted with effect from 1 September 2016by Act 44 of 2016. At present, the expression is defined as follows :

“‘(zf) “security interest” means right, title or interest of any kind,other than those specified in section 31, upon property created infavour of any secured creditor and includes—

(i) any mortgage, charge, hypothecation, assignment or any right,title or interest of any kind, on tangible asset, retained by the securedcreditor as an owner of the property, given on hire or financiallease or conditional sale or under any other contract which securesthe obligation to pay any unpaid portion of the purchase price ofthe asset or an obligation incurred or credit provided to enable theborrower to acquire the tangible asset; or

(ii) such right, title or interest in any intangible asset or assignmentor licence of such intangible asset which secures the obligation topay any unpaid portion of the purchase price of the intangibleasset or the obligation incurred or any credit provided to enablethe borrower to acquire the intangible asset or licence of intangibleasset;’.”

8. The expression ‘security interest’, both before and after theamendment, excludes what is specified in Section 31. Clause (i) of Section31 stipulates that the provisions of the Act will not be applicable to anysecurity interest created in agricultural land. The statutory dictionary inSection 2 does not contain a definition of the expression “agricultural A

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Aland”. Whether a particular piece of land is agricultural in nature is aquestion of fact. In the decision of this Court in Blue Coast HotelsLimited (supra), a security interest was created in respect of severalparcels of land which were meant to be a part of a single unit, forestablishing a hotel in Goa. Some of the parcels were purchased by thedebtor from agriculturists and were entered as agricultural lands in theBrevenue records. The debtor had applied to the revenue authority for theconversion of the land to non-agricultural use, but the applications werepending. This Court held that the fact that the debtor had created asecurity interest was indicative of the position that the parties did nottreat the land as agricultural land. The undisputed position was that theChotel was located on1,82,225 square meters of land of which 2,335 squaremetres were used for growing vegetables and fruits for captiveconsumption. In this background, the two-judge Bench of this Courtheld that :

“49. The mortgage is thus intended to cover the entire property ofDthe Goa Hotel. Prima facie, apart from the fact that the partiesthemselves understood that the lands in question are notagricultural, it also appears that having regard to the use to whichthey are put and the purpose of such use, they are indeed notagricultural.”

EThe Court further held that:

“57…having regard to the character of the land and the purposefor which it is set apart, we are of the view that the land in questionis not an agricultural land. The High Court mis-directed itself inholding that the land was an agricultural land merely because itFstood as such in the revenue entries, even though the applicationmade for such conversation lies pending till date.”

9. The classification of land in the revenue records as agriculturalis not dispositive or conclusive of the question whether the SARFAESIAct does or does not apply. Whether a parcel of land is agriculturalGmust be deduced as a matter of fact from the nature of the land, the useto which it was being put on the date of the creation of the securityinterest and the purpose for which it was set apart.

10. The Division Bench of the Madras High Court has failed toadjudicate on the basic issue as to whether the land in respect of which H

the security interest was created, was agricultural in nature. The DRTrejected the objection of the debtor that the land was agricultural. Inappeal, the DRAT reversed that finding. Apart from referring to theposition in law, the impugned judgment of the High Court contains nodiscussion of the material which was relied upon by the parties in supportof their respective cases; the Bank urging that the land was notagricultural while the debtor urged that it was. Both having regard to thetwo-judge Bench decision in Blue Coast Hotels Limited and asexplained above, the question as to whether the land is agricultural hasto be determined on the basis of the totality of facts and circumstancesincluding the nature and character of the land, the use to which it wasput and the purpose and intent of the parties on the date on which thesecurity interest was created. In the absence of a specific finding, weare of the view that it would be appropriate and proper to set aside thejudgment of the High Court and to remit the proceedings for beingconsidered afresh.

11. We accordingly allow the appeals and set aside the impugnedjudgment and order of the High Court dated 5 April 2016. The writpetition filed by the auction purchaser (writ petition No. 26633 of 2014)and the writ petition filed by the Bank (writ petition No.32208 of 2014)are restored to the High Court. We request the High Court to endeavouran expeditious disposal.

12. In the circumstances of the case, there shall be no order as tocosts.

Nidhi Jain

Appeals allowed.

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