Supreme Court Upholds Debtor’s Right to Reclaim Property Under Income Tax Act: R.S. Infra-Transmission Ltd. vs. Saurinindubhai Patel (2022)

Introduction

Date of the Judgment: July 11, 2022

Citation: 2022 INSC 602

Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can a debtor lose their right to reclaim their property if a government officer makes a mistake in calculating the amount due? The Supreme Court of India recently addressed this critical question in a case involving the interpretation of Rule 60 of the Second Schedule of the Income Tax Act, 1961. This case highlights the importance of protecting a debtor’s right to reclaim their property, especially when a minor payment shortfall occurs due to an error by the Recovery Officer. The judgment was delivered by a two-judge bench comprising Justice M.R. Shah and Justice B.V. Nagarathna, with Justice M.R. Shah authoring the opinion.

Case Background

The case revolves around a dispute over the sale of properties initially owned by respondents 3 to 5 (original borrowers). IndusInd Bank Ltd. (“the Bank”) initiated recovery proceedings against the borrowers, leading to an auction of their properties. The original borrowers sought to reclaim their properties under Rule 60 of the Second Schedule of the Income Tax Act, 1961. However, a dispute arose over whether they had deposited the full amount required to set aside the sale. The appellant, M/s. R.S. Infra-Transmission Ltd., entered the picture as a subsequent purchaser of the properties from the original borrowers after the sale was initially set aside by the Recovery Officer.

Timeline

Course of Proceedings

The Debt Recovery Tribunal (DRT) initially ruled in favor of the auction purchasers, setting aside the Recovery Officer’s order. However, the Debts Recovery Appellate Tribunal (DRAT) overturned this decision, reinstating the order that had set aside the auction sale. The High Court of Gujarat at Ahmedabad then reversed the DRAT’s order, favoring the auction purchasers. This led to the subsequent purchaser appealing to the Supreme Court.

Legal Framework

The core of this case lies in the interpretation of Rule 60 of the Second Schedule of the Income Tax Act, 1961. This rule allows a judgment debtor to set aside a sale of their property by depositing the amount specified in the sale proclamation, along with a penalty and interest. The relevant portion of Rule 60 states:

“Where immovable property has been sold in execution of a recovery certificate, the defaulter, or any person whose interests are affected by the sale, may, at any time within thirty days from the date of the sale, apply to the Tax Recovery Officer to have the sale set aside on his depositing—
(a) for payment to the purchaser, a sum equal to five per cent of the purchase money, and
(b) for payment to the Tax Recovery Officer, the amount specified in the proclamation of sale as that for the recovery of which the sale was ordered, less any amount which may, since the date of such proclamation of sale, have been received by the Tax Recovery Officer.”

The Supreme Court also considered Rule 53 of the Second Schedule of the Income Tax Act, 1961, which pertains to the proclamation of sale. This rule requires the Tax Recovery Officer to specify the amount for the recovery of which the sale is ordered.

The interplay between these rules is crucial in determining whether the original borrowers had complied with the requirements to set aside the auction.

Arguments

The appellant, M/s. R.S. Infra-Transmission Ltd., argued that they were a bona fide purchaser, having bought the property after the Recovery Officer had set aside the auction sale. They contended that the original borrowers had substantially complied with Rule 60 by depositing the amount specified in the sale proclamation, along with the penalty and interest. The appellant highlighted that the shortfall in payment was due to an error by the Recovery Officer in not specifying the correct amount due in the sale proclamation. They also emphasized that the original borrowers had acted promptly and in good faith by depositing the additional amount as soon as the shortfall was communicated by the Bank.

The respondents, the auction purchasers, argued that the original borrowers had not fully complied with Rule 60, as they had not deposited the entire amount due, including interest from the date of the recovery certificate till the date of deposit. They contended that the sale proclamation clearly stated that the amount due included interest as of 30.06.2006, and it was the responsibility of the borrowers to calculate and deposit the additional interest. They also argued that the borrowers’ conduct was dishonest, as they had initially offered to pay a lesser amount than what was actually due.

The innovativeness of the argument by the appellant lies in emphasizing the Recovery Officer’s responsibility to specify the exact amount due in the sale proclamation and arguing that the judgment debtor should not suffer due to the officer’s mistake.

Issues Framed by the Supreme Court

The Supreme Court framed the primary issue as:

✓ Whether the debtor’s right to reclaim property under Rule 60 of the Second Schedule of the Income Tax Act, 1961, should be defeated due to a minor shortfall in payment, which was caused by an error in the sale proclamation issued by the Recovery Officer.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court allowed the appeal, setting aside the High Court’s order and restoring the DRAT’s decision. The court held that the original borrowers had substantially complied with Rule 60 and should not be penalized for the Recovery Officer’s mistake.

The Court viewed the authorities as follows:

• Gajadhar Prasad Vs. Babu Bhakta Ratan, (1973) 2 SCC 629: The Supreme Court relied on this case to emphasize the duty of the Recovery Officer to accurately determine and state the amount due in the sale proclamation.
• Hotel Paras Garden, Balapur & Anr. Vs. Central Bank of India, Balapur & Ors., 2015 SCC Online Bom 3398: The Court used this case to support the view that Rule 60 is intended to provide a last opportunity for the debtor to save their property and should be interpreted liberally.
• M/s. National Rice and General Mills, Jagraon and Ors. Vs. Bank of India and Ors., C.W.P. No. 19113 of 2005: This case was used to highlight that the court should consider whether any irregularity has caused substantial injury to the objector while considering compliance of Rule 60.
• Commissioner of Central Excise, New Delhi Vs. Hari Chand Shri Gopal and Ors., (2011) 1 SCC 236 and Excise Commissioner & Ors. Vs. Ajith Kumar and Anr., (2008) 5 SCC 495: These cases were used to support the principle of substantial compliance, which the Court found applicable in this case.

What Weighed in the Mind of the Court?

The Supreme Court’s decision was heavily influenced by the principle that a debtor should not be penalized for the mistakes of a government officer, especially when the debtor had acted in good faith and substantially complied with the law. The court emphasized the importance of protecting the debtor’s right to reclaim their property, which is considered a valuable right. The court also highlighted the legislative intent behind Rule 60, which is to provide a final opportunity for the debtor to save their property.

Logical Reasoning

Key Takeaways

The Supreme Court’s judgment has several practical implications:

• ✓ Debtors should not be penalized for errors made by government officers in sale proclamations.
• ✓ Substantial compliance with Rule 60 is sufficient to reclaim property, especially when the shortfall is due to an error by the Recovery Officer.
• ✓ The right to reclaim property under Rule 60 is a valuable right and should be protected.
• ✓ Recovery Officers must ensure that sale proclamations accurately specify the amount due.

This judgment reinforces the principle that procedural lapses should not defeat the substantive rights of individuals, especially when those lapses are not attributable to the individual. It also underscores the importance of fairness and equity in the application of laws related to debt recovery.

Directions

The Supreme Court directed that:

• The amount deposited by respondent Nos. 1 and 2 (auction purchasers) shall be returned to them along with the interest accrued thereon, if not received by them so far.
• The appellant shall pay a further sum of Rs. 10,00,000/- (Rupees Ten Lakhs) to respondent Nos. 1 and 2 by Demand Draft within a period of four weeks from the date of the judgment.

Development of Law

The ratio decidendi of this case is that a debtor’s right to reclaim property under Rule 60 should not be defeated due to a minor shortfall in payment caused by an error in the sale proclamation issued by the Recovery Officer. This ruling clarifies and reinforces the principle of substantial compliance and protects the debtor’s right to reclaim their property. This case also highlights that the Recovery Officer has a duty to specify the exact amount due in the sale proclamation and that the judgment debtor should not suffer due to the officer’s mistake.

Conclusion

In summary, the Supreme Court’s decision in M/s. R.S. Infra-Transmission Ltd. vs. Saurinindubhai Patel and Ors. underscores the importance of protecting a debtor’s right to reclaim their property. The court held that a minor shortfall in payment, caused by an error in the sale proclamation by the Recovery Officer, should not defeat the debtor’s right to reclaim their property under Rule 60 of the Second Schedule of the Income Tax Act, 1961. This judgment emphasizes the principle of substantial compliance and ensures that debtors are not penalized for the mistakes of government officers.