Bank’s Failure to Disclose Encumbrances of Property in Auction Notice Renders Sale Invalid, Supreme Court Orders Refund
- REEDLAW
- Sep 26
- 4 min read
REEDLAW Legal News Network reports: In a landmark judgment, the Supreme Court of India declared that an auction sale of leasehold property is void when conducted without full disclosure of the lessor’s statutory dues, pre-emptive rights, and mandatory consents. Interpreting Rule 53 of the Second Schedule to the Income Tax Act in conjunction with Section 29 of the Recovery of Debts and Bankruptcy Act, the Court ruled that a bank’s failure to disclose such encumbrances in the auction notice invalidates the sale and mandates a refund to the purchaser.
The Supreme Court Bench of Justice Sanjay Kumar and Justice Alok Aradhe, while adjudicating an Appeal on 25 September 2025, held that an auction sale of leasehold property is void when conducted without disclosing or determining the lessor’s statutory dues, pre-emptive rights, and mandatory consents, as required under Rule 53 of the Second Schedule to the Income Tax Act, read with Section 29 of the Recovery of Debts and Bankruptcy Act. The Court directed that the sale be set aside and ordered a refund of the consideration amount to the auction purchaser.
The Supreme Court examined an appeal challenging the dismissal of a writ petition that sought to set aside the auction sale of a leasehold plot conducted by the Recovery Officer of the Debt Recovery Tribunal. The dispute arose from the lease of a property originally allotted by a public authority to a club for setting up a recreational and sports facility. The lease conditions required prior written consent of the competent authority before any mortgage or charge could be created. Despite this stipulation, the club mortgaged the leasehold plot to a bank without obtaining the mandatory written permission. The bank advanced a larger loan than the provisional no-objection permitted, and later initiated recovery proceedings when the borrower defaulted.
During the recovery proceedings, the Recovery Officer proceeded to auction the property without properly disclosing or determining the statutory dues payable to the lessor, including the unearned increase charge and the lessor’s pre-emptive purchase rights as mandated by the lease deed. The proclamation of sale did not mention these material encumbrances as required under Rule 53 of the Second Schedule to the Income Tax Act, 1961, which applies to sales under the Recovery of Debts and Bankruptcy Act, 1993. The public authority repeatedly objected, asserting that the mortgage itself was invalid for want of prior consent and that its statutory rights were being ignored, but its objections were overruled. The property was eventually sold in an e-auction to a third-party purchaser, who paid the entire consideration and received a sale certificate and possession.
The Supreme Court held that the Recovery Officer failed to comply with the mandatory provisions of the Second Schedule to the Income Tax Act and the 1962 Rules incorporated by Section 29 of the 1993 Act. It found that the omission to notify the public authority’s statutory claims and the lease conditions materially affected the value of the property and vitiated the sale process. The Court observed that the bank was aware of the leasehold character of the property and the lessor’s rights but failed to disclose these facts. It ruled that the auction sale conducted in violation of statutory requirements and in disregard of the lessor’s pre-emptive rights and claims for unearned increase could not be sustained.
Accordingly, the Supreme Court set aside the auction sale and directed restoration of the property to the public authority, while clarifying that the auction purchaser was entitled to a refund of the amounts deposited along with appropriate interest. The decision reaffirmed that when public leasehold property is subject to statutory conditions, any mortgage or sale without strict adherence to those conditions and mandatory statutory safeguards is void and unenforceable.
Mr. C. Mohan Rao, Senior Advocate, with Ms. Deeksha Ladi Kakar, AOR, represented the Appellant.
Mr. Preetesh Kapur, Sr. Advocate with Mr. Arun Aggarwal, AOR, Ms. Anshika Agarwal, Mr. Lovelesh Kukreja, Mr. Bikash Mohanty, Advocates, Ms. Pallavi Sharma, AOR, Mr. Apratim Thakur, Mr. Shashwat Panda and Mr. Aiman Zameer, Advocates, appeared for the Respondent.
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