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Auctions under ‘SARFAESI Act’ and the need of fairness?

admin — Tue, 04 Oct 2011 06:21:12 +0000

It may be true that Banks do face numerous difficulties in recovering the dues despite having ‘security’. But, there can not be any difficulty for the Banks in recovering their dues under SARFAESI Act, 2002. It is alleged that even the Debt Recovery Tribunals and Appellate Tribunal do favour Banks and keep on insisting on making substantial payment to the Bank without looking into the merits or demerits in the Appeal filed by the borrower under the Act. According to me, earlier, the High Courts used to discourage the borrowers filing Writ Petitions and Civil Revision Petitions under Article 227 either during the pendency of the Appeal before the Tribunal or before filing the Appeal. The High Courts say that the borrower can avail the alternative remedy before the Debt Recovery Tribunal. In pending cases, there used to be directions for disposal of a particular application or appeal in a prescribed time. But, there will be difficulties in prescribing the time-frame for the DRT or DRAT to dispose of a particular application or Appeal. It is true that some borrowers do approach the Tribunal in order to delay the recovery process and in some cases, there can be genuine grievance and each case should depend upon its own merits. Only with this spirit, the Courts held that the Debt Recovery Tribunals can go into all issues in the Appeal and the Tribunals can even restore the possession of the ‘Secured Asset’ back. In a proceeding like an appeal under section 17 of SARFAESI Act, 2002, if the Debt Recovery Tribunal relies on technicalities, then, the borrower need not even approach the Tribunal seeking justice and that can not be the object or spirit behind SARFAESI Act, 2002. It is complicated for the borrower to pursue his remedy under section 17 of the SARFAESI Act, 2002 and there are issues like:
1. The borrower may be talking to the Bank for settlement even when the Bank proceeds under the provisions of SARFAESI Act, 2002. At this stage, the borrower will be under dilemma as to whether to file an Appeal antagonizing the Bank or the Bank Manager or to pursue the talks of settlement.
2. The borrower will be having a right to object to the demand or the notice issued by the Bank under Section 13 (2) of the Act. But, the borrower may choose not to raise any objections considering his relations with the Bank or Bank Manager and considering settlement talks.
3. Even when it comes to settlement, in many cases, the Bank Manager may orally say something and believing that the borrower may make some deposit and then, the Bank turns around and will say that the entire outstanding is to be cleared.
4.The law prescribes a time limit for filing an appeal pursuant to the notice issued by the Bank under section 13 (4) of the Act. However, in view of the continuous talks, assurances from the Bank or the Manager concerned, the borrower may not choose to exercise his right of Appeal.
5.Though it is now settled that all actions of the Bank pursuant to Section 13 (4) of the Act are appeallable, the borrower may have to explain to the Tribunal as to why there is a delay in filing the Appeal and there can be insistence for filing ‘condonation of delay’ application. It is really illogical in the context that even the ‘Auction Sale’ can be challenged under Section 17.
6. It is often alleged that the Debt Recovery Tribunal insists for ‘substantial deposit’ while granting a temporary stay of Bank’s proceedings. In many cases, this temporary relief ends even without looking at the allegations in the Appeal seriously.
7. The Bank keeps on proceeding under SARFAESI Act, 2002 even when an Appeal is pending. If there is some development during the pendency of the Appeal, the Bank will contend that the original Appeal becomes infructuous. This is illogical. The Debt Recovery Tribunal shall consider all issues pertaining to the Bank’s action when the Appeal is pending. Even where the borrower only challenges the notice under section 13 (4) and if the property is sold pending the Appeal, then, the DRT shall consider setting aside the sale also if it is found that the Sale is illegal. There can’t be any logic in asking the borrower to file an appeal afresh and at the best, the borrower may be asked to file additional affidavit if there are further allegations about the ‘Sale Proceedings’.
Like-wise, there are several issues if the borrower wants to pursue his case against the Bank through an appeal under section 17 of the SARFAESI Act, 2002. There can not be any problem if the Debt Recovery Tribunal takes quick decisions instead of keep-on adjourning the issues. In the recent past, there are several serious allegations against the Bank as to how it conducts the ‘Auction Sale’. In one case, an Appeal is pending before the DRAT and as the Bank is proceeding with the auction, the borrower has mentioned the urgency and wanted to look into the issue on urgent basis as there will be ‘third party interest’ if the auction is proceeded to. While the proceeding is ‘on’, the Bank says that the ‘Auction’ is going-on and then says that the ‘Auction’ is over as there is one ‘bid’ and it is confirmed also. How come this be termed as a fair ‘Auction Sale’. The DRAT should have decided the issue ‘then and there’ instead of keeping the matter pending and adjourning the matter without recording anything on merits and submissions of the parties concerned.
These genuine difficulties of the borrowers and the reality as to how the provisions of SARFAESI Act, 2002 are misused, there is a merit in the argument that the High Court can interfere under Article 226 of the Constitution in ‘SARFAESI proceedings’. Now, the argument will be against the ‘judicial restraint’ in this regard. If the borrower is not genuine, then, he can be handled straight-away and even if the borrower is not genuine on one issue, that can not be a ground for the Bank to be ‘unfair’ to him while using the provisions of SARFAESI Act, 2002.
In the recent past, the Madras High Court has passed several judgments coming heavily against the Banks and their action. It is laudable and the Banks and their officers should be taken to task in appropriate cases. The extract of a recent wonderful judgment of Madras High Court in W.P.No.21987 of 2010 & M.P.No. 1 of 2010, reported in CDJ 2011 MHC 5036, emphasizing as to how the ‘Auction process’, is to be fair is as follows:
“18. The course of conduct adopted by the Bank clearly gives an indication that the market rate was deliberately reduced in the subsequent valuation report. The forced/distress value was shown only for the purpose of fixing a lesser amount as reserve price. In case there were no bidders during the second auction, the Authorised Officer in all fairness should have postponed the auction. It is not the case of the Bank that several attempts were made earlier to dispose of the property. Given the location of the property, there would be no difficulty to get higher price as indicated in the earlier valuation report.
19. It is true that the there is no provision akin to that of Order XXI Rule 72 of the Code of Civil Procedure in SARFAESI Act dis-entitling the decree holder from participating in the auction without the express permission of Court. However, in a matter like this, when there were no bidders, the Bank should not have knocked down the property for a paltry sum.
20. The petitioner is still liable to pay the balance amount to the Bank, in spite of losing the property.
21. The Bank is a responsible body. The SARFAESI Act gives wide powers to the Bank to take action to recover the amount and for the purpose of such recovery, to take possession of the property and to sell the same, without reference to Court. Therefore the Bank is expected to conduct the procedure in a bona fide manner. The dealings of the Bank should be fair and transparent. When the amount due from the borrower is more than Rs.4 cores, the attempt of the Bank should be to auction the property for the maximum amount and to adjust it towards the dues and in case of any excess amount after meeting the liability, to refund the same to the borrower. By reducing the market value and the reserve price and by purchasing the property for the alleged distress value by the secured creditor themselves, the public sale has become a mockery.
22. The Authorised Officer is none other than the officer of the Bank. The auction was conducted at the premises of the respondent Bank. Admittedly there were no other bidders. In case the Bank was having an idea to purchase the property, they should have given prior intimation to the borrower. The fact that there is no statutory prohibition against the secured creditor taking part in the auction, will not enable them to purchase the property by re-fixing the market price as well as the reserve price and to purchase the property at such reduced rate. This is absolutely not the intention of the law makers while enacting the SARFAESI Act.
23. In Kerala Financial Corpn. v. Vincent Paul, (2011) 4 SCC 171 the Supreme Court found that there were no rules or guidelines framed by the Kerala Financial Corporation for sale of properties. Therefore, the Supreme Court indicated certain guidelines in the matter of sale of properties owned by the Corporation till such formation of rules, guidelines or orders. The relevant norms are extracted below :-
“(v) In the matter of sale of public property, the dominant consideration is to secure the best price for the property to be sold. This can be achieved only when there is maximum public participation in the process of sale and everybody has an opportunity of making an offer. It becomes a legal obligation on the part of the authority that property be sold in such a manner that it may fetch the best price.
(vi) The essential ingredients of sale are correct valuation report and fixing the reserve price. In case proper valuation has not been made and the reserve price is fixed taking into consideration the inaccurate valuation report, the intending buyers may not come forward treating the property as not worth purchase by them.”
24. In Eureka Forbes Ltd., vs. Allahabad Bank and ors. [2010(6) SCC 193], the Supreme Court while considering the concept of public accountability and performance, indicated that the same would apply to the banks as well. The Supreme Court observed :-
“82. Principle of public accountability is applicable to such officers/officials with all its vigour. Greater the power to decide, higher is the responsibility to be just and fair. The dimensions of administrative law permit judicial intervention in decisions, though of administrative nature, but are ex facie discriminatory. The adverse impact of lack of probity in discharge of public duties can result in varied defects not only in the decision-making process but in the decision as well. Every public officer is accountable for its decision and actions to the public in the larger interest and to the State administration in its governance.”
25. There is no dispute that judicial review is concerned only with the decision making process. Courts and Tribunals are not expected to sit in appeal over the decisions taken by the authorities including banks. However, when a case of grave miscarriage of justice is made out, necessarily, the Court has to come to the rescue of the affected party. The Court of equity is expected to advance justice. When it is made out that substantial injustice has been done to a party, the Court should not shirk its responsibility. Technicality has no say in such matters.
26. The authority given to the Bank to recover the dues without recourse to legal proceedings will not give them the right to snatch away the property from the borrower. The very fact that in spite of the steep rise in land value, the market value was shown at a low rate after a period of about two years itself shows the mala fides in the matter. The subject sale effected by the Authorised Officer of the Bank cannot be treated as a valid public sale. Therefore we are constrained to set aside the sale made in favour of the Bank.
27. The Authorised Officer is directed to issue fresh auction notice and conduct the auction as per statute in a fair and transparent manner, without giving room for complaints.”
Note: the views expressed are my personal.
Author:
V.DURGA RAO, Advocate, Madras High Court.
Email: vdrao_attorney@yahoo.co.in

Penalty can not be imposed without adjudication by any authority – SC

admin — Tue, 06 Sep 2011 06:49:58 +0000

Kesar Enterprises Ltd.V. State of U.P. & Ors. (SC)- In the present case, before imposing the impugned demand of penalty and interest, there was absolutely no adjudication by any authority as regards the breach committed by the appellant, except the allegation that the appellant had failed to furnish the PD-25 pass certified by the Collector. In our opinion, therefore, the action of the respondents for the recovery of penalty and interest, being violative of principles of natural justice, is null and void.
IN THE SUPREME COURT OF INDIA
CIVIL APPEAL NO.6896 OF 2002
Kesar Enterprises Ltd. — Appellant
Versus
State of U.P. & Ors. — Respondent
Coram: Justice D.K. JAIN and Justice H.L. DATTU
Date of Judgment: JULY 6, 2011.
J U D G M E N T
D.K. JAIN, J.:
1. Challenge in this appeal, by special leave, is to the judgment and order dated 18th January, 1996, delivered by the High Court of Judicature at Allahabad in C.W.P. No.599 of 1994. By the impugned judgment, the High Court has come to the conclusion that although the State Government had no authority to levy Excise duty under Section 28 of the U.P. Excise Act, 1910 (for short “the Act”) on rectified spirit (industrial alcohol) in question but it could impose penalty on the appellant under Rule 633(7) of the Uttar Pradesh Excise Manual, (for short “the Excise Manual”).
2.The background facts, essential for disposal of the instant appeal, in brief, are that on 15th October, 1988, the Excise Commissioner, Uttar Pradesh, issued an order authorising nine distilleries in the State, including M/s Daurala Sugar Works, to export rectified spirit (industrial alcohol), outside India. Since the export consignment was to be routed through the appellant, as handling agent as also the owner of the bonded warehouse at Kandla Port, where the spirit was to be stored before export, the appellant was required to furnish an indemnity bond, in the prescribed form, in favour of the Excise Commissioner as the authorized nominee of the exporter. On 20th December 1988, the appellant executed an indemnity bond in favour of the Governor of Uttar Pradesh in relation to permission for removal by rail 67.77 lac bulk litres of rectified spirit of any strength ranging between 91.68% V/V @ 15.60C to 95% V/V @ 15.60C. One of the conditions in the indemnity bond was that if the said quantity of rectified spirit, after deducting such allowance for dryage and wastage, as may be sanctioned, is not delivered at the warehouse at Kandla, the authorised nominee, the appellant herein, shall indemnify the Governor for any loss of duty, which the Governor may suffer by reason of such non delivery or short delivery, by paying him on demand the duty @ Rs.40/- per alcoholic litre, on spirit not so delivered, after making the allowances aforesaid.
3.On 8th January, 1989, M/s Daurala Sugar Works consigned a rake of 15 tank wagons, loaded with 3,54,413 bulk litres of rectified spirit under PD-25 pass for export against order dated 15th October, 1988. The said consignment was dispatched through the Northern Railway to Kandla Port. However, out of 15 tank wagons only 14 tank wagons reached the Kandla Port. On 16th January, 1989, it was discovered that the 15th tank wagon was lying empty at Gandhi Dham Railway Station.
4.On 2nd October, 1992, a notice was issued by the Excise Commissioner to the appellant alleging that since the pass in form PD-25, issued to the appellant by the concerned Collector in terms of Rule 633 of the Excise Manual had not been received back along with certificate from the Collector for due delivery, they were liable to deposit in the Government Treasury, Excise duty on the rectified spirit @ Rs. 40/- per alcoholic litre, which amounted to `8,71,744/- along with interest at the rate of 18% per annum (Rs. 5,49,199/-).
5.The appellant having failed to deposit the said amount, another notice was issued by the Commissioner requiring them to show cause as to why their name be not black-listed and in future, permission for export may not be granted, on account of default on their part in not depositing Excise duty as demanded earlier.
6.The appellant responded to the said show cause notice by their letter dated 11th February, 1993, in which it was stated that since the reason for non receipt of the said rectified spirit was being investigated, the matter may be deferred till 30th June, 1993. Finally, vide their letter dated 29th April, 1994, the appellant replied to the show cause notice, contesting Excise Commissioner’s claim for payment of Excise duty on account of non-receipt of full quantity of rectified spirit at the Kandla Port. It was pleaded that since the entire rake of 15 tank wagons was handed over to the Railway authorities at Daurala station for its delivery at Kandla Port, it was the responsibility of the Railways to make safe delivery of the goods at the destination and, therefore, the appellant was in no way responsible for the disappearance of rectified spirit contained in one of the tank wagons. It was, thus, urged that no Excise duty was payable by the appellant as the State Government had not suffered any loss of duty by reason of non delivery or short delivery of the rectified spirit.
7.Not being satisfied with the explanation furnished by the appellant, vide letter dated 6th April, 1994, the Excise Commissioner directed the District Excise Officer, Bareilly to issue recovery certificate and take appropriate steps against the appellant for the recovery of Excise duty amounting to `8,71,744/- and interest thereon. By letter dated 22nd June, 1994, the Bank of Baroda, Mandwi Branch, informed the appellant that pursuant to an order dated 22nd June, 1994, issued by the Sub-Divisional Magistrate, their bank account had been attached and a sum of `12,00,000/- had been earmarked from their account for payment of Excise duty.
8.Being aggrieved, the appellant filed a writ petition before the High Court, seeking quashing of notice of demand dated 6th April, 1994. Relying on the decision of a Bench of seven Judges in Synthetics And Chemicals Ltd. & Ors. Vs. State of U.P. & Ors. (1990) 1 SCC 109, wherein it was held that the States are not competent to impose a tax or charge imposts in respect of rectified spirit for industrial purposes, having a strength not less than 95% by volume of ethyl alcohol, the High Court held that though the State of U.P. did not have jurisdiction to levy and demand Excise duty on the rectified spirit (industrial alcohol), which disappeared during transit, but Rule 633 of the Excise Manual empowered the State to impose penalty at the same rate at which the Excise duty was payable for breach of conditions in the Bond. The High Court also held that it could be presumed that the appellant had diverted the rectified spirit into potable alcohol on which penalty and penal interest could be levied and, therefore, it was not a fit case where it should exercise its jurisdiction under Article 226 of the Constitution of India and quash demand notice dated 6th April, 1994. Accordingly, the writ petition was dismissed. Being dissatisfied, the appellant is before us in this appeal.
9.We have heard learned counsel for the parties.
10.Assailing the decision of the High Court, Mr. D.K. Agarwal, learned senior counsel appearing for the appellant, strenuously urged that in light of decision of this Court in Synthetics And Chemicals (supra), which was duly noticed in the impugned judgment, the High Court exceeded its jurisdiction in converting the levy of Excise duty into penalty and interest under Rule 633 of the Excise Manual. It was argued that the High Court misread the Rule inasmuch as Rule 633(7) contemplates recovery of penalty under the bond in order to indemnify the Governor of the State for loss of Excise duty but when admittedly no Excise duty could be levied by the State Excise Commissioner on the entire consignment of rectified spirit, covered under the bond, there was no question of loss of Excise duty on that account, for which the Governor was to be indemnified. It was asserted that in any event imposition of penalty under the said Rule was ex-facie illegal as neither any show-cause notice was issued to the appellant before such levy nor any amount by way of penalty on account of the alleged non-compliance with the conditions of the bond was quantified and communicated to the appellant. It was thus, asserted that since an order under Rule 633, entails serious consequences the elementary principles of natural justice and fair play are required to be observed and consequently, an opportunity of hearing has to be afforded before an order under the said Rule is made, which was admittedly not done in the instant case. In fact, the said Rule was invoked for the first time by the High Court.
11. Mr. Ravi Prakash Mehrotra, learned counsel appearing for the State, on the other hand, supporting the view taken by the High Court, submitted that Rule 633, does not postulate a show-cause notice before levy of penalty or interest because penalty or interest being compensatory in nature because of infringement of condition of an indemnity bond furnished by the appellant to the Collector or the Excise Inspector, the liability under the Bond is absolute. It was argued that since in the present case, admittedly, the discharge certificate in terms of Rule 633 had not been furnished by the appellant within the stipulated time, penalty under the said Rule was clearly exigible.
12.The precise question at issue is whether sub-rule (7) of Rule 633 of the Excise Manual postulates the requirement of hearing before steps for recovery of penalty under the said Rule are initiated?
13.Before addressing the issue, it is necessary to bear in mind the fact that in so far as the question of levy of Excise duty on the high strength rectified spirit in 15 tank wagons is concerned, parties are ad-idem that in view of the judgment of this Court in Synthetics And Chemicals (supra), the State was not empowered to levy Excise duty on the said consignment. In the said decision, while interpreting Entry 84 of List I, Entry 8 and 51 of List II and Entry 33 of List III of the Seventh Schedule to the Constitution of India, it was held that the State legislature has no power to enact law levying duty on the spirit, which is not meant for human consumption. It was also held that the State has the power to impose duty only on spirit, which is meant for human consumption under Entry 51 of List II of the Seventh Schedule. In light of the said decision, it is clear that under Section 28 of the Act, the charging Section, an Excise duty or a Countervailing duty, as the case may be, can be imposed by the State on alcoholic liquor only when it reaches the stage of human consumption and not on high strength rectified spirit (industrial alcohol), a Central subject. Therefore, the High Court is correct in law in holding that the State did not have the jurisdiction to levy Excise duty on rectified spirit, loaded in 15 tank wagons.
14.However, Rule 633 of the Excise Manual, which has been pressed into service by the High Court to sustain the demands raised against the appellant, reads as follows :
“633. Any person may export in bond foreign liquor manufactured at a distillery in Uttar Pradesh to any place in India under a pass in form P.D.25 granted as provided in the following rules:
(1) When any person desires to export in bond spirit manufactured at a distillery in Uttar Pradesh, he shall present a written application in form P.D. 58 to the Collector of the district in which the distillery of manufacture is situate.
The application must specify—
(i) the name of the consignor;
(ii) the name of the consignee;
(iii) the description, quantity and strength of the spirit to be exported.
(2) Every application must be accompanied by—
(i) a permit from the Collector, Deputy Commissioner, or other officer specially appointed in this behalf of the district to which the spirits are to be exported authorizing the import of spirit; and
(ii) a duly executed special bond in form P.D. 16 or a reference to a general bond in form P.D. 15.
(3) The pass granted by the Collector of the exporting district or the Excise Inspector to whom the Collector may have delegated his power vide paragraph 58(c) of this Manual, shall be in triplicate in form P.D.-25. One copy of the pass shall be delivered to the exporter, the second forwarded to the Collector, Deputy Commissioner, or *other* officer specially appointed in this behalf of the district to which the spirits are to be taken, and the third retained for record.
*NOTE-This will usually be the officer-in-charge of the bonded warehouse to which the spirit is consigned.
An advance in form P.D. 26 must also be sent by the officer-in-charge direct to the authority granting the import permit who will return the same duly filed in as soon as possible after receipt and verification of the consignment.
Within a reasonable time to be fixed by the Collector of the exporting district and specified in the bond or pass the importer shall produce before the Collector of the exporting district his copy of the pass endorsed with a certificate signed by the Collector, Deputy Commissioner or other officer specially appointed in this behalf, of the importing district certifying the due arrival or otherwise of the spirit at its destination;
(4) On each cask or other vessel containing spirit for export there shall be legibly cut or painted:
(i) the name and mark of the exporting distillery;
(ii) the number of the cask or other vessel and its capacity;
(iii) the nature, quantity and strength of its contents. These particulars shall correspond with those entered in the pass.
(5) On a written application being made to the Collector of the exporting district establishing sufficient cause for the grant of an extension of time, or on the production before him of a certificate from the Collector, Deputy Commissioner, or other officer specially appointed in this behalf, of the district of destination, to the effect that there are good and sufficient reasons for extending the currency of the pass or bond, it shall be competent for the Collector of the exporting district, if he thinks fit, to extend the time specified in the pass or bond for the due arrival of the spirit at its destination.
(6) In the case of spirit exported under special bond the Collector of the exporting district shall discharge the bond on receipt of the pass in form P.D.-25 and certificate mentioned in clause (3), provided that none of the conditions of the bond have been infringed. The duty on consignment issued under a general bond shall be written off on receipt of the pass and certificate mentioned in clause (3), provided that none of the conditions of the bond have been infringed.
(7) If the certificate be not received within the time mentioned in the bond or pass, or if on receipt of the certificate it appears that any of the conditions of the bond have been infringed the Collector of the exporting district or the Excise Inspector who granted the pass shall forthwith take necessary steps to recover from executant or his surety the penalty due under the bond.”
15.It is manifest that the said Rule, made in exercise of the rule-making power of the State under the Act, would apply only in relation to manufacture, import, export and transport of potable liquor, i.e. the liquor which is capable of being consumed by human beings. Precisely for the aforesaid reason, in order to bring appellant’s case within the scope of Rule 633, High Court went on to observe that it could be presumed that rectified spirit in the missing tank wagon was diverted for conversion into potable alcohol. Rule 633 is of regulatory character meant to ensure that the liquor being exported under a bond reaches its destination and is not misused or misutilized in transit. It contemplates that if the bond along with certificate signed by the Collector or other named officers of the importing district, certifying due arrival or otherwise of the liquor at its destination, is not furnished to the Collector of the exporting district, he would be entitled to presume that the liquor has been disposed of otherwise than by export and can proceed to take necessary steps as postulated in sub-rule (7) of Rule 633 of the Excise Manual. The said Rule provides for imposition of penalty, which may be equivalent to the Excise duty, leviable under the charging Section 28 of the Act on potable liquor. Bearing in mind the scope of Rule 633, we may now advert to the moot question, viz. whether the principles of natural justice demand that an opportunity of hearing should be afforded before an order under Rule 633(7) of the Excise Manual is made?
16.Before we deal with the question, it would be necessary to understand and appreciate the concept of natural justice and the principles governing its application.
17.Rules of “natural justice” are not embodied rules. The phrase “natural justice” is also not capable of a precise definition. The underlying principle of natural justice, evolved under the common law, is to check arbitrary exercise of power by the State or its functionaries. Therefore, the principle implies a duty to act fairly i.e. fair play in action. As observed by this Court in A.K. Kraipak & Ors. Vs. Union of India & Ors. (1969) 2 SCC 262 the aim of rules of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice. These rules can operate only in areas not covered by any law validly made. They do not supplant the law but supplement it. (Also see Income Tax Officer & Ors. Vs. M/s Madnani Engineering Works Ltd., Calcutta(1979) 2 SCC 455).
18.In Swadeshi Cotton Mills Vs. Union of India(1981) 1 SCC 664 R.S. Sarkaria, J., speaking for the majority in a three-Judge Bench, lucidly explained the meaning and scope of the concept of “natural justice”. Referring to a catena of decisions, his Lordship observed thus:
“Rules of natural justice are not embodied rules. Being means to an end and not an end in themselves, it is not possible to make an exhaustive catalogue of such rules. But there are two fundamental maxims of natural justice viz. (i) audi alteram partem and (ii) nemo judex in re sua. The audi alteram partem rule has many facets, two of them being (a) notice of the case to be met; and (b) opportunity to explain. This rule cannot be sacrificed at the altar of administrative convenience or celerity. The general principle—as distinguished from an absolute rule of uniform application—seems to be that where a statute does not, in terms, exclude this rule of prior hearing but contemplates a post-decisional hearing amounting to a full review of the original order on merits, then such a statute would be construed as excluding the audi alteram partem rule at the pre-decisional stage. Conversely if the statute conferring the power is silent with regard to the giving of a pre-decisional hearing to the person affected and the administrative decision taken by the authority involves civil consequences of a grave nature, and no full review or appeal on merits against that decision is provided, courts will be extremely reluctant to construe such a statute as excluding the duty of affording even a minimal hearing, shorn of all its formal trappings and dilatory features at the pre-decisional stage, unless, viewed pragmatically, it would paralyse the administrative process or frustrate the need for utmost promptitude. In short, this rule of fair play must not be jettisoned save in very exceptional circumstances where compulsive necessity so demands. The court must make every effort to salvage this cardinal rule to the maximum extent possible, with situational modifications. But, the core of it must, however, remain, namely, that the person affected must have reasonable opportunity of being heard and the hearing must be a genuine hearing and not an empty public relations exercise.”
(Emphasis added)
19.In Canara Bank Vs. V.K. Awasthy (2005) 6 SCC 321 the concept, scope, history of development and significance of principles of natural justice have been discussed in extenso, with reference to earlier cases on the subject. Inter alia, observing that the principles of natural justice are those rules which have been laid down by the courts as being the minimum protection of the rights of the individual against the arbitrary procedure that may be adopted by a judicial, quasi-judicial and administrative authority while making an order affecting those rights, the court said:
“Concept of natural justice has undergone a great deal of change in recent years. Rules of natural justice are not rules embodied always expressly in a statute or in rules framed thereunder. They may be implied from the nature of the duty to be performed under a statute. What particular rule of natural justice should be implied and what its context should be in a given case must depend to a great extent on the fact and circumstances of that case, the framework of the statute under which the enquiry is held.”
20.The question with regard to the requirement of an opportunity of being heard in a particular case, even in the absence of provisions for such hearing, has been considered by this Court in a catena of cases. However, for the sake of brevity, we do not propose to refer to all these decisions. Reference to a recent decision of this Court in Sahara India (Firm), Lucknow Vs. Commissioner of Income Tax, Central-I & Anr. (2008) 14 SCC 151 would suffice. In that case, the question for adjudication was whether in the absence of a provision in the Income Tax Act, 1961, an opportunity of hearing was required to be given to an assessee before an order under Section 142(2-A) of the said Act, directing special audit of his accounts was passed? A Bench of three Judges, speaking through one of us (D.K. Jain, J.), explaining the concept of “natural justice” and the principles governing its application, summed up the legal position as under :
“Thus, it is trite that unless a statutory provision either specifically or by necessary implication excludes the application of principles of natural justice, because in that event the court would not ignore the legislative mandate, the requirement of giving reasonable opportunity of being heard before an order is made, is generally read into the provisions of a statute, particularly when the order has adverse civil consequences for the party affected. The principle will hold good irrespective of whether the power conferred on a statutory body or tribunal is administrative or quasi-judicial.
We may, however, hasten to add that no general rule of universal application can be laid down as to the applicability of the principle audi alteram partem, in addition to the language of the provision. Undoubtedly, there can be exceptions to the said doctrine. Therefore, we refrain from giving an exhaustive catalogue of the cases where the said principle should be applied. The question whether the principle has to be applied or not is to be considered bearing in mind the express language and the basic scheme of the provision conferring the power; the nature of the power conferred and the purpose for which the power is conferred and the final effect of the exercise of that power. It is only upon a consideration of all these matters that the question of application of the said principle can be properly determined.”
21.Having considered the issue, framed in para 12 supra, on the touchstone of the afore-noted legal principles in regard to the applicability of the principles of natural justice, we are of the opinion that keeping in view the nature, scope and consequences of direction under sub-rule (7) of Rule 633 of the Excise Manual, the principles of natural justice demand that a show-cause notice should be issued and an opportunity of hearing should be afforded to the person concerned before an order under the said Rule is made, notwithstanding the fact that the said Rule does not contain any express provision for the affected party being given an opportunity of being heard. Undoubtedly, action under the said Rule is a quasi-judicial function which involves due application of mind to the facts as well as to the requirements of law. Therefore, it is plain that before raising any demand and initiating any step to recover from the executant of the bond any amount by way of penalty, there has to be an adjudication as regards the breach of condition(s) of the bond or the failure to produce the discharge certificate within the time mentioned in the bond on the basis of the explanation as also the material which may be adduced by the person concerned denying the liability to pay such penalty. Moreover, the penalty amount has also to be quantified before proceedings for recovery of the amount so determined are taken. In our view, therefore, if the requirement of an opportunity to show-cause is not read into the said Rule, an action thereunder would be open to challenge as violative of Article 14 of the Constitution of India on the ground that the power conferred on the competent authority under the provision is arbitrary.
22.Thus tested, in the instant case, vide his letter dated 2nd October 1992, the Excise Commissioner called upon the appellant to deposit an amount of `14,20,943/- towards Excise duty and interest on account of default on their part to furnish PD-25 pass duly certified by the competent authority at Kandla Port. The letter /notice does not indicate the exact quantity of rectified spirit on which duty @ `40/- per alcoholic litre has been charged, though the total amount of duty payable is mentioned. Similarly, in the final show-cause notice dated 6th April 1994, threatening action for black listing for future exports on account of non-payment of the aforenoted amount, there is not even a whisper as to how and why rectified spirit in question was being subjected to Excise duty by the State. As stated above, this Court having categorically held in Synthetics And Chemicals (supra) and in catena of subsequent decisions that the State Legislature had no legislative competence to impose Excise duty on rectified spirit (industrial alcohol), the Commissioner of Excise could not demand Excise duty on rectified spirit contained in the tank wagon which, later on, was found to be empty, without returning a finding that the said spirit had been diverted/converted into potable alcoholic liquor fit for human consumption, on which the State was empowered to impose duty. It bears repetition that such a finding could not be recorded by the Commissioner without affording due opportunity to the appellant to explain its stand in this regard for which, the onus lay on them as transporter and the executant of the bond. We may, however, add that in the absence of any reasonable explanation regarding disappearance of rectified spirit, the Commissioner would have reason to presume that the same has been disposed of otherwise than by way of export outside the country, for which purpose it was being transported. We are convinced that in the present case, before imposing the impugned demand of penalty and interest, there was absolutely no adjudication by any authority as regards the breach committed by the appellant, except the allegation that the appellant had failed to furnish the PD-25 pass certified by the Collector. In our opinion, therefore, the action of the respondents for the recovery of penalty and interest, being violative of principles of natural justice, is null and void.
23.In the afore-said premises, we allow the appeal; set aside the impugned demand raised by the Commissioner of Excise vide notice dated 2nd October 1992, as well as the judgment of the High Court, sustaining the demand by invoking Rule 633 of the Excise Manual and remit the matter to the jurisdictional Excise Commissioner to decide the question of levy of Excise duty and/or penalty and interest on the subject consignment of rectified spirit, after affording adequate opportunity of hearing to the appellant.
24.In the facts and circumstances of the case, the parties are left to bear their own costs throughout.

Amendments to the Enemy Property Act, 1968

admin — Thu, 21 Oct 2010 06:19:58 +0000

The Union Cabinet today approved the proposal of Ministry of Home Affairs to introduce the Enemy Property (Amendment and Validation) Second Bill, 2010 to make amendments to the Enemy Property Act, 1968. The amendments, among other things, provide for the following :

• The enemy property shall continue to vest in the Custodian till it is divested by the Central Government;

• The enemy property could be divested only to the owner or his lawful heir;

• If the enemy property was divested from the Custodian before 2nd July, 2010, it shall stand transferred to and vest or continue to vest in the Custodian. If, however, the enemy property was divested from the Custodian by a valid order made under section 18 prior to 2nd July, 2010 or where the property had been returned to the owner or his lawful heir by an order of the court; and if the lawful heir is a citizen of India by birth, such enemy property will continue to remain with such person;

• The transfer of any enemy property shall not include any transfer or any claim of transfer made through oral will or oral gift or if it has been done without the permission of the competent authority;

• No court shall order divestment from the Custodian or direct the Central Government to divest enemy property;

• The Central Government is authorized to direct the Custodian to sell or dispose of enemy properties in such manner as may be prescribed;

• To amend the Public Premises (Eviction of Unauthorised Occupants) Act, 1971 to declare the Custodian, Deputy Custodian and Assistant Custodian of Enemy Properties as Estate Officer in respect of the enemy properties;

The amendments will have retrospective effect.

Details of Title deeds of the properties in Maharashtra to be online soon

admin — Fri, 13 Aug 2010 07:28:16 +0000

Registration and Stamps department across Maharashtra plans to put the details and records of the title deeds and documents of all the registered commercial and residential properties, now online, for the convenience of the citizens. The State Chief information Commissioner ( SIC ) has recently directed an order to the department for putting up details of all the registered documents on department’s website, mentioning individual details like, name, date of registration, no. of registered documents and status of various documents.

In the case if the order non complied , an applicant can approach the SIC and he shall get a compensation for the same, accordingly the Public Information Officer ( PIO ) shall be penalised for the non compliance.

For a redevelopment, approval of 70% tenants is binding upon the other members,

admin — Wed, 11 Aug 2010 07:28:37 +0000

In a recent ruling, the Bombay High Court has stated that the issue of minority of tenants can not be an obstacle for redeveloping a property if minimum 70% of the tenants are ready for the same.

The judgement came against a matter of a redevelopment in Dadar where 17 members were opposing the redevelopment of an old Parsi chawl. Based on the writ petition filed by the group of dissenting members, Justice D.B.Bhosale granted the permission to BMC to forcibly evict the families with the police help in case of any opposition from the others against the redevelopment.

It is important to note that as per the section 103B of Maharashtra Housing and Area Development Act, 1976, with the guidelines for redevelopment of old Municipal Properties by the Municipal Tenants Co-Operative Housing Societies on the land owned by the Corporation under regulation -33( 7 ) of the Development Central Regulations for Greater Bombay, 1991, it is necessary that more than 70% of the eligible existing Municipal tenants should give written consent to redevelop the property under the scheme with a formation of a co- operative society / association and an initiative proposal for the redevelopment.

The court has held that once 70% or more occupants /tenants give their consent for redevelopment by forming a co-operative body and if the scheme is approved by the corporation, it is binding to all other occupants. As per the guidelines, the tenants / occupants with separate stand, have no choice but to follow the norms. Being in minority ( about 30% or less than that ) the only choice for them remains is, to give up their tenancy rights and quit from the scheme.

Recent Development in Service Tax and VAT in Real Estate

admin — Thu, 10 Jun 2010 08:44:32 +0000

By Kantilal Jain, FCA

In the budget for 2010 both Central and State Governments have made certain amendments to levy tax on sale of immovable property under construction to enhance their revenue and to overcome certain judicial pronouncements. An attempt is made to discuss the implications of the above amendments on the real estate transactions as to how the general public will be affected by way of additional cost on account of the above mentioned amendments.

SERVICE TAX

By the Finance Act, 2010 the Government has amended the definition of Commercial or Industrial Construction Service [Section 65 (25b) read with Section 65 (105) (zzq)] and construction of Residential Complex [Section 65 (30a) read with Section 65 (zzzh)].

The scope of these categories is expanded to cover sale of flats/units under construction. Builders/developers are now liable to service tax if any payment towards sale consideration is received before the grant of completion certificate by the competent authorities for such flats/units. This amendment overrides the Gauhati High Court’s decision in the case of Magus Construction Private Limited v/s UOI [2008 11 STR 225].

Therefore, if a builder/developer receives the entire sale consideration for flats/units after issue of completion certificate, the same is not liable to service tax.

There is an abetement of 75% of the sale value. Thus, the tax will be levied on 25% of the sale value of flat at the rate of 10.3%. For example if the agreement value of a flat sold under construction is Rs. 50,00,000/- then service tax @ 10.3% is payable on Rs. 12,50,000/- which works out to 1,28,750/-. Thus, there will be an additional burden of 2.6% on the agreement value of flat. The amendment will be effective from the date to be notified by the Central Government.

….Contd. 2.

: 2 :

VAT

The Maharashtra Government in the state budget has also introduced a new composition scheme on sale of under construction property along with land or interest in land @ 1% of the agreement value. The scheme is effective from 1st April, 2010 but the notification in respect of the same about the manner in which the tax is to collected by the builder/developer has not yet come. There is no set off for inputs.

It may be noted that already a composition scheme @ 5% is in operation which is effective from 20th June, 2006 i.e. the date on which the transfer of property under construction was brought within the ambit of VAT.

It may further be noted that the levy of tax on property under construction itself is challenged by Maharashtra Chamber of Housing Industry (MCHI) an association of builders by a writ petition in Bombay High Court (being Tax writ petition No. 2022 of 2007). The major issue involved in the writ petition is the competency of the State Legislature to enact the definition of Works Contract in the manner which suggests its applicability to the builders/ developers, in addition to the contractors. The definition talks about transfer of property in goods in the execution of works contract including the building, construction, ……. . The Government is competent to levy tax on construction (sale of goods involved in construction). Article 366 read with Article 246 (2) of the Constitution has authorised it to do so. But power to levy tax on building; i.e. Sale of flats is unimaginable. It appears that prima facie the Hon’ble High Court is convinced about this position and ordered for an interim relief for the members of the Association. The Hon’ble High Court has directed that the members of the MCHI should not be treated as ‘dealers’ liable to tax under the MVAT Act, 2002 in respect of sale of flats on ownership basis under the Maharashtra Ownership Flats Act, 1963 (MOFA Act), provided such members of MCHI submit the data and documents as mentioned in the Court Order. Thus, such members of MCHI have been absolved from registration and also from assessments till the disposal of the petition. However, the developers who are not members of the Association are not protected by the Court Order.

….Contd. 3.

: 3 :

It seems that to divert the attention of the public from the court matter, the Government has introduced new composition scheme @ 1% on the agreement value of the transfer of flat/unit under construction without providing any deduction for land etc.

There is an impression in the mind of people that this is a new amendment and only under construction flats/units sold after 1st April, 2010 are chargeable to VAT @ 1%. This is not so, the amendment regarding tax on flat/unit under construction is effective from 20th June, 2006. In this budget the Government has come out with new composition scheme of 1% of agreement value without any deduction for land against earlier composition scheme of 5%.

Though the new composition scheme is effective for the flat/units registered on or after 1st April, 2010 the notification in respect of the same regarding procedural aspect has not yet come. In the absence of the notification the builders are in a dilemma as to how and in what manner the tax is to be collected as the full sale price is not collected at the time of executing agreement for flat/unit which is under construction.

Thus in the hands of purchaser the overall cost of the flat/unit is going to increase by about 3.6% of the agreement value by way of Service Tax and VAT. In the given example of Rs. 50,00,000/- value of flat, the additional cost by way of Service Tax will be Rs. 1,28,750/- and by way of VAT will be Rs. 50,000/- making it a total of Rs. 1,78,750/-.

It is pertinent to note that the above cost can be avoided if a ready flat is purchased after builder obtains completion certificate.

High Court thwarts petition against Vile Parle skywalk

admin — Mon, 28 Dec 2009 09:59:33 +0000

The Bombay High Court has recently rejected the petition filed by Vileparle Vyapari and Residents Association to oppose construction of skywalk at D.J.Road, Vile Parle-W. The Division Bench, consisting of Honourable Judges Ranjana Desai and Mridula Bhatkar, observed that, “Skyway is a new concept. We are of the opinion that it takes time for the people to get used to the new ways and methods”.

The Vileparle Vyapari and Residents Association had filed a petition opposing the construction of skywalk at Vile Parle-W on various grounds such as the D.J.Road – where the skywalk is being constructed – is 40 to 50 feet wide with 7 feet wide footpath on both sides and that the hawkers have also been removed from the walking area. It was also contended by the Association that major trimming of 27 evergreen monsoon trees would prove disastrous environmentally and that the overpriced skywalk is unjustified economically. The Association had further contended that the construction of the skywalk would reduce the width of the road making it hazardous for the fire engines and buses to enter the said road. The Association, in a nutshell, contended that the Vile Parle-W skywalk is not needed for the said reasons and especially without having conducted any survey.

However, the High Court upheld the arguments made by the learned counsel appearing for the Mumbai Metropolitan Region Development Authority (MMRDA) who argued that the skywalk is being constructed only after conducting proper survey. The learned Counsel also submitted that the locality is crowded with ten educational institutions which run in multiple shifts and 80% of the students are local who use the road and require clear roadways. It was further submitted by the Counsel that the cost of the skywalk is based on the technical norms and no public money is being wasted and that majority of local people have registered positive opinion about the construction of the skywalk in the visitor’s book kept at the site.

The High Court, after hearing arguments of both sides, opined that, “The construction of the skywalk being a policy decision of the State and other public bodies, there is not much scope and propriety to interfere with it. We are not inclined to hold that the policy decision is incorrect or flawed”. The Court further observed that D.J. Road is near the railway station and that the city like Mumbai and suburbs, especially like Vile Parle, are overpopulated. Heavy traffic, crowding of the shops and people is an unending process in this metro city and to meet these challenges, it is incumbent on the State and the public bodies to chalk out such policy. The survey report carried out, on the basis of which the construction of the skywalk was approved, was also placed before the High Court. “The skywalk is an alternative and good substitute for the footpath and so it may solve the problem of crowding on the road and of the pedestrians and also the traffic to certain extent. The State while designing and implementing any policy has to consider not only the present state of affairs but also the possibilities in the future. Sky way is a new concept. We are of the opinion that it takes time for the people to get used to the new ways and methods”, so concluded the High Court.

Multiple Registration of Property Documents

admin — Mon, 14 Dec 2009 09:19:19 +0000

By SR Agarwal, Advocate

Every now and then cases are coming to light, wherein Banks and Housing Finance Companies, referred to herein as the Financial Institutions, have been defrauded and cheated by availing of the finance or the housing loans on the basis of Agreements for Sale or the Deeds of Assignment relating to the same property and between the same parties registered at different points of time at the different offices of Sub-Registrars in Navi-Mumbai.

Though there may be a couple of cases of human failure, but the root cause is the system of registering the property documents in Navi-Mumbai in any of the offices of Sub-Registrar located at CBD Belapur, Vashi, Kopar-Khairane, Airoli and even at Thane.

In terms of Section 28 of the Registration Act, 1908, every document, to be registered under Section 17 of the said Act, has to be presented for registration in the office of Sub-Registrar within whose sub-district the whole or some portion of the property to which such document relates is situate. In terms of Section 5 of the said Act, the State Government has to form registration districts and sub-districts and to prescribe the limits of such districts and sub-districts for the purposes of the registration of the documents and in terms of Section 7 of the said Act, the State Government has to establish in every district an office to be styled the office of the Registrar and in every sub-district an office or offices to be styled the office of the Sub-Registrar or the offices of Joint Sub-Registrars.

In the year 2005, the State Government issued a Notification dated 31.10.2005 under Section 5 of the said Act, whereby the State Government formed two districts as Thane(Urban) and Thane(Rural) out of the revenue district of Thane and a major portion of Navi-Mumbai forms part of Thane(Urban) registration district. As per this Notification, the Government established two offices of Registrars one at Thane known as Thane-1 and another at Kalyan known as Kalyan-1 for Thane(Urban) and one office at Bhiwandi known as Bhiwandi-1 in Thane(Rural) for the purposes of registration of the documents. However, by another Notification of the same data under Section 7 of the said Act, Government established 13 offices of Joint Sub-Registrars for Thane(Urban) and one office for Thane(Rural) treating Thane(Urban) and Thane (Rural) as registration sub-districts. Out of 15 offices of Registrars and Joint Sub-Registrars for Thane (Urban) as many as 5 offices of Joint Sub-Registrars have been established in the various nodes in Navi-Mumbai alone.

These 13 offices of Joint Sub-Registrars for Thane (Urban) have been established by the State Government, presumably, on the understanding of the provisions of Section 7 of the Act that more than one office may be established even for one sub-district, which does not seem to be the legislative intention of the said provision, if read in conjunction with the provisions of Section 28 of the said Act and keeping in view the letter and spirit of these provisions, only one office of Sub-Registrar is meant for every registration sub-district.

The understanding of the State Government of the said provision and specifying the whole area of Thane (Urban) registration district as registration sub-district and establishing a number of offices, styled as the offices of Joint Sub-Registrars, with the concurrent jurisdiction, is the main reason for the multiple registration of the property documents pertaining to the same properties and between the same parties in different offices of Sub-Registrars. The areas of various nodes of Navi-Mumbai are well specified by CIDCO, designated as the Development Authority for the area, as well as Navi Mumbai Municipal Corporation and, therefore, if the areas of registration sub-districts is curtailed and restricted to coincide with the area of each node or a group of localities, a property document from a particular node or area could only be registered by the office of Jopint Sub-Registrar located in that area itself, specified as the sub-district in terms of Section 28 of the said Act, and this multiplicity of registration of the property documents may be put to an end. The similar position is prevailing in other districts of Maharashtra such as Mumbai, Pune, Nagpur, Nashik and so on. The misuse of this system by vested interest is anybody’s guess.

Other alternative could be that no document should be allowed to be registered without attaching a non-encumbrance certificate to be issued by the office of Sub-Registrar, as the system is now computerized and all the offices of Sub-Registrars in a particular registration district may be inter-connected online. It is learnt that in Tamil Nadu and some other southern states NEC are issued by the offices of Sub-Registrars and the same system may be followed in the State of Maharashtra.

For avoiding the fraud case because of this system lacunae, the matter stands referred to Reserve Bank of India, the Apex Regulatory Authority of our country, to take up the issue with the State Government to do away with the concurrent jurisdiction of the offices of Joint Sub-Registrars, as permitted by the said Notification under Section 7 of the said Act.

Foreign nationals can keep 100% of Post-Tax Salaries

admin — Mon, 14 Dec 2009 08:18:39 +0000

Foreign nationals working in India can now take their entire post-tax salaries home, following a change in rules to this effect by the Reserve Bank of India (RBI). This will benefit sectors such as aviation, telecom and infrastructure, which employ a large number of expats, making it easier for them to attract talent from abroad. Earlier, expats could take only 75% of their salaries abroad.

The central bank has changed the regulations under the Foreign Exchange Management Act (FEMA) in this regard. The decision will give flexibility to companies in structuring the salary packages of expats without bothering about forex laws. Indian citizens employed by foreign companies abroad but on deputation to India will also benefit from this move.

Non-compliance towards the Indian tax laws, however, will lead to penal provisions of Indian tax laws and exchange control laws.

The entire salary of expat employees is taxable in India, according to the current tax provisions. This move may insulate expats from exchange rate fluctuations and provide more liquidity to them.

Auction of Non-Existent Flats

admin — Fri, 04 Dec 2009 09:13:46 +0000

By SR Agarwal, Advocate

Whenever loans are granted by the banks and housing finance companies, hereinafter referred to as the financial institutions, the flats and the apartments are mortgaged to them, mostly, by way of equitable mortgage and in a very few cases by registered mortgage because of the facts and circumstances of those cases.

The borrowers, who avail of such loans, have to execute the loan documents for creating the security in favour of the financial institutions and the formats of these loan documents are more or less on the similar pattern, containing various terms and conditions and other obligations to be discharged by the borrowers. Such terms and conditions, inter-alia, provide, that the borrower shall not transfer, assign, alienate, merge, amalgamate, exchange his right, title and interest in the said mortgaged property or deal with the same in any manner whatsoever, so long the security stands with the financial institutions, without the prior written permission of the lending financial institutions. In addition to these loan documents to be executed by the borrowers, mortgage NOCs are obtained from the housing co-operative societies, as these being the legal owners of the properties, by the financial institutions, wherein the housing societies, inter-alia, undertake not to permit the owner/borrower of the flat/apartment to sell, transfer, assign, exchange or alienate his right, title and interest therein in any manner whatsoever, without the prior written permission of the financial institutions, to whom such NOCs are issued.

In cases of loans for the purchase of the flats in resale and subsequent sales, it is, usually, found that the buildings are quite old and they go for redevelopment by way of reconstruction of the properties. Such redevelopment of the properties is quite attractive to the builders, particularly, when it pertains to the properties declared as ‘slum properties’ because of the enhanced FSI to the extent of 4. Sometimes societies also enter into agreements with the builders for the redevelopment of the old properties on the compliance of the formalities prescribed for this purpose. Such formalities include individual agreements between the existing owners of the flats/apartments with the builders and a common agreement by the society and the builders for the redevelopment of the property. When such documentation takes place, the terms and conditions and the obligations signed by the borrowers with the societies to the financial institutions, who have advanced loans for the purchase of the individual flats/ apartments demand that the individual owners and the society should obtain prior written permission from the lending financial institutions before handing over the property to the builders for demolition and redevelopment, so that the lending financial institutions may take steps to secure their interest by obtaining a substituted security or in any other manner, including the repayment of the outstanding dues; but it seldom happens and the documentation is completed, properties are handed over to the builders and demolished and the lending financial institutions are not at all aware of these developments as a result of the collusion between the office bearers and a few members of the societies and the builders.

Recently it happened in the case known as Gulmohar CHS Ltd., at Goregaon (West), Mumbai, wherein the building was declared as ‘slum property’ and redevelopment of the same was handed over to the builders, who razed it to the ground. One of the flats in the existing building was mortgaged to the Bank of India and the borrower was in default. The Bank of India invited the bids for the auction of the mortgaged flat and in consideration of the highest bid, to give the symbolic possession of the same. When the bidders came to know of the reality, they backed out. Now this loan is on the books of the Bank of India as a non-performing asset, but without the existence of secured asset to enable the bank to proceed as per the provisions of SARFAESI Act. Thus the Bank has been left with no alternative, except to proceed against the defaulter, and the guarantors, if any, before the DRT or the Ordinary Civil Court, as the case may be, which will be a long drawn process..

The question arises when a nexus among the members of the societies, the builders and others to get the benefit of much higher FSI is well-known and such cases are happening every now and then, what precautions are being taken by the financial institutions to safeguard their security. In some cases, it has been observed that the offices of such lending institutions are at a distance of a stone’s throw and buildings are being demolished for redevelopment and these institutions are totally indifferent or mute spectator inasmuch as that they do not initiate any legal action to stop such destruction of their secured assets by obtaining suitable orders from the court of competent jurisdiction. If such timely action is initiated by the financial institutions, a message will spread and all the parties involved will come around and settle with the lending financial institutions to safeguard their interest either by way of a substituted security or repayment of their outstanding dues to enable them to avoid such hurdles to fulfill their designs. This objective may be achieved if a mechanism is developed or established by the financial institutions to conduct the inspection of their secured assets, particularly in resale cases, at least once in a year to ascertain the existence and status of the property and such a vigilance on their part will go a long way in the prevention of flouting the terms and conditions and the obligations by the borrowers and the societies.