The Supreme Court of India in Delhi Development Authority v. Corporation Bank & Ors. (Civil Appeal No. 11269 of 2016, decided on 25 September 2025) delivered a landmark judgment that underscores the importance of transparency in property auctions conducted under judicial or quasi-judicial supervision. The Court held that non-disclosure of encumbrances and statutory dues in auction notices invalidates the sale, thereby protecting the rights of innocent auction purchasers.
This case, reported as 2025 INSC 1161, involved a contest between the Delhi Development Authority (DDA), Corporation Bank, and an innocent auction purchaser. At its core lay critical questions about the duties of state instrumentalities, banks, and recovery authorities in ensuring fairness in public auctions, and the rights of third-party purchasers who invest in good faith.
Background of the Case
Allotment and Lease to Sarita Vihar Club
- On 1 October 2001, the Delhi Development Authority (DDA) allotted Plot No. 25, Facility Centre-33 Kalindi Kunj Road, Jasola, New Delhi, measuring 877.50 square metres, to Sarita Vihar Club on a leasehold basis.
- The allotment was for setting up a recreational and sports club.
- The lease deed (executed in January 2005) imposed specific restrictions, notably:
- Mortgage or charge could be created only with the prior written consent of the Lieutenant Governor of Delhi.
- DDA retained the right to recover unearned increase and a pre-emptive right of purchase.
Mortgage and Bank Loan
- The club sought a loan of ₹35 lakh from Corporation Bank, but the bank sanctioned ₹60 lakh.
- Despite DDA granting only a conditional “No Objection” in 2002 (pending execution of lease deed), the property was mortgaged to the bank without obtaining the mandatory consent of the Lieutenant Governor.
- The bank, in 2005, informed DDA about the mortgage, but DDA did not act until 2011.
Default and Auction Proceedings
- The club defaulted on loan repayment.
- Corporation Bank filed recovery proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act) before the Debt Recovery Tribunal (DRT), obtaining a recovery certificate in 2010 for ₹86.46 lakh.
- In 2011, the Recovery Officer initiated auction proceedings. DDA objected, contending that the mortgage itself was illegal.
- Nevertheless, in November 2012, an e-auction was conducted and M/s Jay Bharat Commercial Enterprises Pvt. Ltd. emerged as the highest bidder, offering ₹13.15 crore (against reserve price of ₹8.85 crore).
Legal Challenges
- DDA repeatedly challenged the sale, objecting to the omission of its rights over unearned increase and lease restrictions.
- Delhi High Court dismissed DDA’s writ petition in 2014, holding it barred by principles analogous to res judicata since an earlier writ petition had been withdrawn.
- Aggrieved, DDA appealed to the Supreme Court.
Issues Before the Supreme Court
- Whether the mortgage created in favour of the bank was valid without the consent of the Lieutenant Governor, as mandated under the lease deed.
- Whether the Recovery Officer and the bank were obligated to disclose DDA’s encumbrances, statutory claims, and lease restrictions in the auction notice.
- Whether the auction purchaser, being an innocent third party, could retain the property despite such non-disclosure.
- Whether the principle of res judicata barred DDA from raising these issues again.
- What relief should be granted to the auction purchaser who paid the entire sale consideration in good faith?
Arguments of the Parties
Submissions by DDA
- The mortgage was void since mandatory prior consent of the Lieutenant Governor was not obtained.
- DDA’s statutory rights, including recovery of unearned increase and pre-emptive purchase, were ignored.
- The bank misrepresented facts before the High Court and violated its undertaking that the auction would adhere to the lease terms.
- The sale proclamation was defective as it failed to disclose encumbrances, violating Rule 53 of the Second Schedule to the Income Tax Act, 1961, made applicable under Section 29 of the RDB Act.
Submissions by Corporation Bank
- DDA was aware of the mortgage since 2005, but remained silent until 2011.
- The auction was conducted on an “as is, where is” basis, and DDA could have exercised its pre-emptive right by bidding in the auction.
- A “No Objection” had been granted in 2002, which implied consent.
- The appeal was an abuse of process and barred by estoppel.
Submissions by Auction Purchaser
- As an innocent third party, it relied on official auction notices and invested over ₹13 crore in good faith.
- Rule 53 of the Income Tax Second Schedule mandated full disclosure of encumbrances, which was not complied with.
- DDA’s claims were never quantified in the proclamation of sale, depriving bidders of material knowledge.
- The sale was illegal, and the only equitable relief was a refund with interest.
Supreme Court’s Analysis
1. Validity of Mortgage
The Court noted that Clause 5(b) of the lease deed required prior written consent of the Lieutenant Governor for creating any mortgage. Since no such consent was obtained, the mortgage in favour of the bank was illegal.
2. Non-Disclosure of Encumbrances
- Under Rule 53 of the Second Schedule to the Income Tax Act, 1961, a sale proclamation must fairly specify all encumbrances and material facts.
- The Recovery Officer failed to ascertain DDA’s claim of unearned increase.
- The bank, too, despite knowledge of DDA’s rights, did not disclose them in the proclamation.
Hence, the auction notice was defective and invalid.
3. Applicability of Res Judicata
- The High Court had dismissed DDA’s earlier writ petition (2012) as withdrawn, not on merits.
- Withdrawal in view of the bank’s undertaking gave DDA a fresh cause of action when that undertaking was violated.
- Thus, res judicata did not bar DDA’s subsequent petition.
4. Position of Auction Purchaser
- The Court emphasised that the auction purchaser was an innocent party caught in a web of illegality not of its making.
- Citing Fibrosa Spolka Akcyjna v. Fairbairn Lawson (1943 AC 32) and Nagpur Golden Transport Co. v. Nath Traders (2012), it reiterated the doctrine of restitution: no person should suffer loss due to the fault of others.
- The purchaser was entitled to a refund with interest.
5. Responsibility of Bank
The bank, having advanced money on an illegal mortgage and auctioned property without lawful authority, bore the ultimate responsibility.
The Court directed the bank to refund the entire deposit with interest to the auction purchaser.
Supreme Court’s Decision
In its judgment dated 25 September 2025, the Supreme Court held:
- The e-auction notice (27.09.2012), auction sale (09.11.2012), confirmation of sale (08.07.2013), and sale certificate (12.07.2013) were quashed and set aside.
- The bank was directed to refund the entire amount deposited by the auction purchaser along with 9% interest per annum, calculated from the date of deposit till repayment.
- The auction purchaser, being innocent, should not suffer due to lapses of the bank and the Recovery Officer.
Significance of the Judgment
- Protection of Auction Purchasers: The ruling strengthens legal protections for bona fide purchasers in judicial sales, ensuring that they are not penalised for lapses in disclosure by authorities or creditors.
- Reinforcement of Transparency: By mandating strict compliance with Rule 53 of the Income Tax Second Schedule, the Court reinforced the importance of full disclosure of encumbrances in maintaining fairness and preventing unjust enrichment.
- Accountability of Banks: The judgment places accountability squarely on banks and financial institutions, requiring them to exercise due diligence before sanctioning loans and conducting auctions.
- Clarification on Res Judicata: The Court clarified that withdrawal of a writ petition based on undertakings does not preclude fresh proceedings if the undertaking is later violated.
- Broader Impact on Public Property Management: Since DDA is an instrumentality of the State, the ruling emphasises that public authorities must safeguard statutory rights like recovery of unearned increase, preventing encroachments on public property.
Comparative Judicial Precedents
The Court relied upon and distinguished several precedents:
- Daryao v. State of U.P. (1962) – established that res judicata applies to writ proceedings.
- Gulabchand Chhotalal v. State of Gujarat (1965) – extended res judicata principles to civil and writ proceedings.
- Nagpur Golden Transport Co. v. Nath Traders (2012) – recognised restitution as a moral imperative.
- Fibrosa Spolka (1943, House of Lords) – foundational case on unjust enrichment.
These cases collectively informed the Court’s reasoning in balancing competing interests.
Conclusion
The Supreme Court’s decision in Delhi Development Authority v. Corporation Bank & Ors. reaffirms the principle that property auctions must be conducted with utmost transparency and fairness. By cancelling the sale and ordering a refund to the innocent purchaser, the Court struck a balance between safeguarding public authority rights and ensuring justice to individuals who invest in good faith.
This judgment sets a strong precedent for future disputes involving auction sales, encumbrances, and the role of financial institutions. It underscores that non-disclosure is not a mere technical irregularity but a fatal defect that vitiates the entire auction process.
Ultimately, the decision resonates with the broader principle of equity: no one should unjustly enrich themselves at the cost of another, and innocent parties should not suffer due to the negligence or misconduct of others.
Important Link
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