[SC] Property not exempt under SARFAESI Act if merely shown as agricultural land in revenue records

The Supreme Court has recently held in K Sreedhar v Raus Construction Pvt Ltd 2023 SCC OnLine SC 13 that merely because certain properties are shown in revenue records as agricultural lands, they would not be entitled for exemption u/s 31 of the SARFAESI Act. It would be imperative to prove that they were being used for agriculture.

Facts:

• The borrower (Raus Constructions Pvt Ltd) had defaulted on a loan availed from Indian Bank. The security given for the loan included, amongst other properties, a piece of land which as per the revenue records was an agricultural land.

• Upon the default, after following due procedure under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), an auction was conducted and subsequently sale certificate was issued to the auction purchaser (K Sreedhar).

• The borrower approached the Debt Recovery Tribunal (DRT) where its case primarily was that land which is agricultural in nature could not have been auctioned under SARFAESI Act. However, the DRT rejected the borrower's securitization application and held that apart from the revenue records, the borrower did not file any evidence to prove that the agricultural activity was going on in the land mortgaged with the bank. On the other hand, the bank had filed photographs showing no agricultural activities were going on.

• However, the High Court, on a writ petition filed by the borrower, held that agricultural land could not have been auctioned by the bank, in view of section 31(i) of the SARFAESI Act. Separately, the High Court also held that the auction purchaser had not deposited the earnest money deposit (EMD) of 25% and the remainder sale consideration of 75% within the time stipulated in Rule 9 of the 2002 Rules and hence set aside the sale certificate issued to the auction purchaser.

• The auction purchaser, thus aggrieved, moved the Supreme Court.

Held:

• Alternative remedy: The Court held that the High Court ought not have entertained the writ petition in view of the alternative remedy available to the borrower at the Debt Recovery Appellate Tribunal (DRAT). The Court observed that the borrower approached the High Court directly to circumvent the requirement of paying 25% of the debt as a pre-deposit requirement for filing the appeal, and the High Court should not have allowed that to happen.

• Compliance with Rule 9: The Court also held that the High Court had factually erred in setting aside the sale certificate on the ground of non-compliance with Rule 9, and the facts were in line with the statutory provisions.

• Agricultural land - section 31(i): Regarding the primary challenge relating to auction of agricultural land, the Court held that the High Court decision goes against the law laid down by the Supreme Court in two leading decisions - (i) ITC Limited v Blue Coast Hotels Limited (2018) 15 SCC 99, and (ii) Indian Bank v K Pappireddiyar (2018) 18 SCC 252, and held as follows:

  • The question as to whether a land is an agricultural land or not is a question of fact.

  • The borrower has not provided any evidence other than revenue records to prove that the land was an agricultural land. No evidence was shown to actually prove that agricultural activity was indeed taking place on such land. On the other hand, the bank has provided photographs to prove that no agricultural activity was taking place on such land. Thus, merely on the basis of revenue records it cannot be concluded that such land was an agricultural land.

  • Since no security interest could be created in respect of agricultural lands, and yet it was created, it shows that the parties did not treat the same as agricultural land and the borrower offered the land as security on that basis itself.

  • The High Court materially erred in shifting the burden of proof on the secured creditor / bank. The burden of proof was on the borrower as it was claiming the land to be agricultural land and claiming the exemption under section 31(i) of the Act.

  • The Court reiterated the findings in its earlier decisions of Blue Coast Hotels (supra) and K Pappireddiyar (supra) for the above conclusions.

Our analysis:

The protection given to agriculture and agricultural lands spans through various laws, and such protections are intended only for genuine agriculturalists. The above case is also an example of a factual scenario where no agricultural activity was actually carried on the land. The above decision and the two quoted decisions have held that the activity and nature of the land has to be seen at the time of creation of the secured interest - this seems to be a fair answer to the otherwise permutational problem that would arise (whether to see the nature of activities in the past, at the present, or in the future).

For instance, would one see the nature of the activities on such land in the past, present or future. There may be a land on which the agricultural activities have been temporarily suspended for few crop cycles because of lack of funds or some personal circumstances of the borrower and it is due to these situations that the credit was availed from the bank. There could also be another scenario where for a long time the activities were suspended and the secured interest was created. But having availed the loan, the agriculturalist starts the activities once again and by the time the loan default takes place and action under SARFAESI Act is taken, the land has been put to agricultural use for some time. There cannot be a universal rule laid down and it would be better to just leave it to the wisdom and prudence of the court and suffice it to say that this is indeed a 'question of fact'.

*Authored by the Editorial Team, Metalegal Advocates. The views are personal and do not constitute legal opinion. *