Can Banks attach Agricultural Land DRT Chandigarh Bench?

Last Updated on May 7, 2020 by Legalseva.net

A security interest is a type of lien or enforceable claim created on collateral, usually to obtain a loan. A security interest is usually provided by the borrower in certain assets, which gives the lender the right to repossess all or part of the property if the borrower fails in making payments. The lender further has the power to sell the repossessed collateral to pay off the loan.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (the SARFAESI Act) is a law that allows banks and other financial institution to auction residential or commercial properties (of Defaulter) to recover loans.

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under section 13 of the SARFAESI Act 2002, the provision states as under-

Notwithstanding anything contained under section 69 and 69A of the Transfer of Property Act 1882 a secured creditor can enforce his interest in case of default by the borrower in repayment of loan without the intervention of court. The borrower who defaults in payment of the loan in a whole or installments, his account is held as a non-performing asset. Non-performing asset means an asset or account of the defaulting borrower which has been classified as a loss asset by a bank or financial institution.

According to section 31(i) of the SARFAESI act, however, The provisions of the act do not apply to security interest created in agricultural land.

This provision has been debated on numerous occasions, and hence it is only appropriate to discuss its application, The courts have applied and interpreted the provision to suit different situations.

The recent 2018, judgement of ITC Limited v. Blue Coast Hotels Ltd. &Ors[1], this very matter was discussed.

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In this case, the Industrial Financial Corporation of India (“creditor”) and the Blue Coast Hotels Ltd. (“debtor”) entered into a corporate loan agreement , which included the creation of a special mortgage usingthe debtor’s hotel property, which included agricultural land on which the debtor intended to develop villas. The debtor however, failed to repay the loan amount and subsequently its account was classified as a non-performing asset (NPA). the debtorignored notices that were issued calling for repayment, which lead to the creditor to issue a notice under section 13(2) of the Act(enforcement of security interest). The debtor in reply presented a rescheduled plan for repaying the loan as provided under section 13(3A) of the Act; however, this plan failed tomaterialise and instead the debtor used various forms of delaying tactics to prolong repayment of the outstanding amount. Thereafter, the creditor took symbolic possession of the property as provided for under section 13(4) of the Act and subsequently proceeded to hold a public auctions, three of the auctions failed to attract any bids, and the fourth one led to the acquisition of the property by ITC Ltd.

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Therefore, the issue before the court was whether an enforcement of security interest can be against an agricultural land despite a statutory bar created by section 31(i) of the Act

TheHigh court in this case, interpreted the law laid down under section 31(i)literally and held that the inclusion of agricultural land for the purpose of creating a security interest cannot be held to be valid. However, the Supreme Court elaborated and interpreted the scope of this section beyond its literal meaning. The intention of Parliament behind this provision was to protect agricultural land, their income and livelihood held by agriculturalists for the purpose of cultivation, hence the exempting such land from the provisions of the Act. However, in the present case, the debtor purchased several pieces of land, some of which were agricultural in nature with the intent of building a five-star hotel. Whilst the land purchased by the debtor directly from the agriculturalists were entered as agricultural lands in the revenue records, the debtor had applied to the revenue authorities for the conversion of the concerned land to non-agricultural land, which is yet pending approval.

In Hari Sagar Educational Trust v Uttaranchal Gramin Bank[2]it was held that Merely because that the land has been entered in the revenue record would not mean that the said land was being used for the purpose of agriculture.

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In addition, whilst no security interest can be created on agricultural lands as explicitly stated under section 31(i) of the Act, and yet a mortgage was created showing that the parties never intended to treat the same as agricultural land. Further no substantial cultivation was taking place on the area rather the debtor had intended to develop villas on the agricultural land.

The debtors further even challenged the validity of Parliament’s legislative competence to enact this provision, as the scope of agricultural land falls within the ambit of the Entry 18 of List II of the Seventh Schedule of the Indian Constitution. However, the Supreme Court negated this contention by citing a precedent laid down in Union of India v. Delhi High Court Bar Association and Ors wherein it was held that this provision of the Act would wall within the scope of Entry 45 List I dealing with banking, which includes recovery of debts due to banks within its scope.

In coming to this conclusion, the Supreme Court placed reliance on the judgment of Commissioner of Wealth Tax, Andhra Pradesh v. Officer-in-Charge (Court of Wards) Paigah[3], where the Supreme Court interpreted definition of the term ‘Agricultural Land’ with respect to the provisions of the Wealth Tax Act, 1957. It was observed by the Supreme Court that, the determination of the character of land, the purpose for which it is meant or set apart and can be used, is a matter which ought to be determined on the facts of each particular case, the Supreme Court went on to hold that:

“What is really required to be shown is the connection with an agricultural purpose and user and not the mere possibility of user of land, by some possible future owner or possessor, for an agricultural purpose. It is not the mere potentiality, which will only affect its valuation as part of “assets”, but its actual condition and intended user which has to be seen for purposes of exemption from wealth-tax. One of the objects of the exemption seemed to be to encourage cultivation or actual utilisation of land for agricultural purposes. If there is neither anything in its condition, nor anything in evidence to indicate the intention of its owners or possessors, so as to connect it with an agricultural purpose, the land could not be “agricultural land” for the purposes of earning an exemption under the Act. Entries in revenue records are, however, good prima facie evidence.” (Emphasis Supplied)

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Applying this test, the Supreme Court observed that having regard to the character of the land and the purpose for which it is set apart, the land in question is not agricultural land, and further observed that the High Court mis-directed itself in holding the land as an agricultural land merely because it stood as such in the revenue entries, even though the application made for such conversion was pending.

Another 2018 judgement of the case Indian Bank and Ors v K. Pappireddiyar and Ors[4]. had similar rationale to the previous mentioned case.

In this case, a term loan was granted by the Appellant to Dairy Farm for setting up a dairy farm on a property. The Bank filed a suit for recovery. It was transferred to the Debt Recovery Tribunal who allowed the claim of the Bank. The Bank issued a sale notice which was challenged in Original Suit, which was dismissed in default. The sale certificate was challenged in writ proceedings before the High Court which was dismissed with liberty to the first Respondent to adopt appropriate steps. The first Respondent thereupon moved DRT who dismissed the proceedings. An appeal filed by the first Respondent was allowed by the DRAT on the ground that the property which was sold, was agricultural and was exempt from the provisions of the Act. The High Court dismissed the petitions.

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The court therefore, by allowing the appeal held the following

(i) The classification of land in the revenue records as agricultural is not dispositive or conclusive of the question whether the SARFAESI Act does or does not apply. Whether a parcel of land was agricultural must be deduced as a matter of fact from the nature of the land, the use to which it was being put on the date of the creation of the security interest and the purpose for which it was set apart.

(ii) The High Court had failed to adjudicate on the basic issue as to whether the land in respect of which the security interest was created, was agricultural in nature. The DRT rejected the objection of the debtor that the land was agricultural. In appeal, the DRAT reversed that finding. Apart from referring to the position in law, the impugned judgment of the High Court contains no discussion of the material which was relied upon by the parties in support of their respective cases; the Bank urging that the land was not agricultural while the debtor urged that it was. In the absence of a specific finding, it would be appropriate and proper to set aside the judgment of the High Court and to remit the proceedings for being considered afresh.

In the case of Eshwar Purshottam v Authorized officer[5], however the bankers fail to provide a bona fide dispute and the fact that the petitoners have not been carrying out agricultural operations, thus the cour had allowed the writ petition filed by the petitioners who have claimed disagreement with attachment of their agricultural property for a secured interest

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Thus from the above mentioned cases it is clear that the purpose of suchexemption of agricultural land is to protect poor farmers and their livelihood and to prevent bans from exploiting sucha vulnerable section of society, however many have disguised such property and have acquired loans and used such land to secure interest and avoid liability, therefore to prevent such misuse the courts have interpreted agricultural land to only include those lands used for agricultural purposes and merely registering such land as agricultural land does not exempt in from being used as enforcement of secured interest.