The Madras High Court has held that a bank cannot forfeit an auction purchaser’s deposit when a known Income Tax Department attachment was not disclosed in the SARFAESI auction notice. Although the bank’s mortgage had priority over the tax attachment, the failure to disclose the encumbrance invalidated the forfeiture.

The bench of Chief Justice Sushrut Arvind Dharmadhikari and.Justice G.Arul Murugan quashed the forfeiture orders and directed the bank to refund the entire deposited amounts with 9% annual interest from the date of deposit until repayment.

The petitioners had participated in separate e-auctions conducted by the bank and emerged as the highest bidders. In accordance with the auction terms, they deposited 25% of their respective bid amounts.

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In one case, the highest bid was ₹76.50 lakh, against which ₹19.12 lakh was deposited as the 25% amount. The purchasers subsequently discovered, through Encumbrance Certificates, that the Income Tax Department had a subsisting attachment over the secured property.

The purchasers informed the bank about the attachment. However, the bank insisted that the remaining 75% of the sale consideration be paid. Since the tax attachment had not been cleared, the purchasers did not make the balance payment within the prescribed period.

The bank subsequently cancelled the auctions and forfeited the 25% deposits by orders dated 30 July 2025. The purchasers approached the Madras High Court seeking quashing of the forfeiture orders and refund of their deposits.

The central question before the High Court was whether the bank could retain the earnest money when the Income Tax Department’s attachment had not been disclosed in the auction notice.

The purchasers argued that Rule 8(7)(a) of the Security Interest (Enforcement) Rules, 2002 requires the authorised officer to disclose known encumbrances affecting the property in the sale notice. According to them, the bank’s failure to disclose the tax attachment was a material defect that vitiated the auction process and prevented the bank from subsequently forfeiting their deposits.

The bank, on the other hand, argued that the writ petitions were not maintainable because the purchasers had an alternative remedy before the Debts Recovery Tribunal under Section 17 of the SARFAESI Act. It also contended that the sale was conducted on an “as is where is” and “as is what is” basis and that its secured mortgage had priority over the Income Tax Department’s attachment.

The Bench first rejected the objection concerning the availability of an alternative remedy.

It observed that the existence of an alternative remedy is a rule of discretion and not an absolute bar to the exercise of writ jurisdiction under Article 226 of the Constitution.

Since the dispute involved alleged non-compliance with the procedure prescribed under the Security Interest (Enforcement) Rules, the Court held that the writ petitions were maintainable.

On the question of priority, the Court accepted the bank’s position.

Relying upon the Supreme Court’s decisions in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and Connectwell Industries Private Limited v. Union of India, the Bench held that a prior mortgage in favour of a secured creditor takes precedence over Crown debts and that an Income Tax attachment cannot defeat the prior charge of a secured creditor under the SARFAESI Act.

Thus, the Court concluded that Punjab National Bank’s mortgage charge had priority over the Income Tax Department’s attachment.

However, that finding did not resolve the dispute in the bank’s favour.

The Court made an important distinction between the priority of the bank’s security interest and the bank’s obligation to provide a transparent auction notice.

It held that although the bank possessed a priority charge over the property, it remained bound by the statutory requirements governing auction transparency.

Rule 8(7)(a) specifically requires the sale notice to include details of encumbrances known to the secured creditor. The provision requires the authorised officer to disclose the description of the property along with known encumbrances, apart from other material particulars such as the secured debt, reserve price, auction details and earnest money requirements.

The Bench relied heavily on the Division Bench judgment in Jai Logistics v. The Authorized Officer, Syndicate Bank, which had considered the effect of non-disclosure of encumbrances in a SARFAESI auction.

The earlier ruling held that where the applicable rules require disclosure of encumbrances, failure to provide such information can vitiate the auction process. An auction purchaser who declines to proceed because of an undisclosed encumbrance cannot be compelled to pay the balance consideration, nor can the bank simply forfeit the earnest money in such circumstances.

The present Bench applied that principle to the Income Tax attachment.

The Court noted that the bank had fairly admitted that the Income Tax attachment was not disclosed in the sale notices.

According to the Bench, an auction purchaser is entitled to receive a clean and unencumbered title and cannot be compelled to purchase property burdened by undisclosed litigation or tax attachments.

Consequently, although the bank had priority over the Income Tax Department’s charge, the failure to disclose the attachment constituted a serious defect in the auction process.

The Court therefore held that the forfeiture orders dated 30 July 2025 were legally unsustainable and liable to be set aside.

The Court also addressed the question of interest on the amounts deposited.

Relying on the Supreme Court’s decision in Delhi Development Authority v. Corporation Bank and Others, the Bench held that when an e-auction is cancelled or set aside because of procedural defects, the auction purchaser is entitled to a complete refund of the deposited amount along with 9% interest per annum from the date of deposit until repayment.

Accordingly, the High Court directed the bank to refund the entire deposits made by the petitioners, together with 9% annual interest.

Allowing both writ petitions, the Division Bench quashed the forfeiture orders dated 30 July 2025; Directed the bank to refund the entire amounts deposited by the auction purchasers; Ordered payment of 9% interest per annum from the date of deposit until full repayment; and Directed that the repayment be completed within four weeks from receipt of a copy of the order.

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