Mandatory Pre‑Sale Disclosure and Quantification of Lessor’s Statutory Encumbrances in DRT Auctions: Non‑Compliance Vitiates Sale; Res Judicata Inapplicable Where Earlier Writ Was Withdrawn on Undertaking

Introduction

In Delhi Development Authority v. Corporation Bank, 2025 INSC 1161 (Supreme Court of India, 25 September 2025), the Court confronted a triangular conflict: a State instrumentality (DDA) protecting covenants governing public leasehold land; a secured creditor (Corporation Bank) attempting to recover its dues; and a bona fide auction purchaser who bid in a DRT e‑auction conducted “as is where is.” The case turns on whether, and how, Recovery Officers must take account of a lessor’s statutory and contractual encumbrances—especially DDA’s claim to “unearned increase” and its pre‑emptive purchase right—before auctioning leasehold property. It also addresses whether an earlier writ petition withdrawn on the basis of an undertaking by the Bank bars a subsequent challenge, and what relief is due to an innocent auction purchaser when the sale is vitiated.

The Supreme Court allows DDA’s appeal, quashes the e‑auction and the sale certificate, clarifies the mandatory content of sale proclamations under Rule 53 of the Second Schedule to the Income-tax Act, 1961 (read with Section 29 of the Recovery of Debts and Bankruptcy Act, 1993), rejects the res judicata objection (given the earlier writ’s withdrawal on an undertaking), and orders restitution to the auction purchaser with interest.

Background and Parties

Lessor: Delhi Development Authority (DDA), allotting public leasehold land and administering lease covenants including prior approval for mortgage, unearned increase on transfer, and pre‑emptive purchase right.
Lessee/Borrower: Sarita Vihar Club (Club), allotted Plot No. 25, Facility Centre‑33, Jasola, New Delhi (877.50 sq. m.) on 01.10.2001 for a recreational and sports club, premium approx. Rs. 64.54 lakh; perpetual lease executed on 28.01.2005.
Secured Creditor: Corporation Bank (Bank), extended loan; claimed the Club had mortgaged the leasehold by deposit of title deeds without prior written consent of the Lt. Governor as required by the lease.
Auction Purchaser: M/s Jay Bharat Commercial Enterprises Pvt. Ltd., highest bidder in DRT e‑auction dated 09.11.2012 for Rs. 13.15 crores (reserve price Rs. 8.85 crores), sale confirmed and sale certificate issued in July 2013; possession delivered 17.07.2013.

Key Issues

Whether Recovery Officers conducting sales under the 1993 Act must disclose and settle lessor’s statutory/contractual encumbrances (e.g., DDA’s unearned increase and pre‑emptive right) in the sale proclamation under Rule 53 (Second Schedule to the Income-tax Act) read with Rule 16 of the Income Tax (Certificate Proceedings) Rules, 1962.
Effect of the Bank’s undertaking before the High Court that the auction would be conducted in accordance with the lease terms, and whether the subsequent writ by DDA was barred by res judicata after an earlier writ was withdrawn.
Consequence of the Club’s mortgage without the lessor’s prior written consent prescribed by the lease, and the Bank’s failure to implead DDA before the DRT.
Relief to be granted to a bona fide auction purchaser in an invalidated sale.

Summary of the Judgment

The Supreme Court sets aside:
- Delhi High Court’s order dated 11.08.2014 dismissing DDA’s writ petition (W.P.(C) No. 5005/2014) as barred by principles analogous to res judicata;
- The DRT Recovery Officer’s e‑auction notice dated 27.09.2012 and the e‑auction conducted on 09.11.2012;
- The sale confirmation and sale certificate dated 08.07.2013 and 12.07.2013 respectively.
Holds that the proclamation of sale violated Rule 53 of the Second Schedule to the 1961 Act and Rule 16 of the 1962 Rules (as applied by Section 29 of the 1993 Act) because it failed to disclose/settle DDA’s encumbrances (unearned increase and pre‑emptive right) material to judging the nature and value of the property. “As is where is” could not cure this non‑compliance.
Finds that res judicata does not apply; the earlier writ was withdrawn on the Bank’s undertaking to conduct the auction in accordance with the lease. The auction having been held contrary to the lease and the statutory regime gave DDA a fresh cause of action.
Recognizes the auction purchaser as a bona fide, faultless participant and grants restitutionary relief: directs the Bank to refund the balance sale proceeds in its deposit to the auction purchaser with 9% per annum interest from deposit till repayment, within one month. (The DRT had already released Rs. 12,26,42,478 on 01.12.2014; the Bank must refund the remaining balance with interest.)
Notes the Bank’s lapses: failure to implead DDA in the Section 19 proceeding despite knowledge of the lease; reliance on a mortgage created without the lessor’s prior written consent mandated by the lease; and failure to ensure the proclamation disclosed DDA’s claims notwithstanding an undertaking to the High Court.

Factual Matrix in Brief

01.10.2001: DDA allotment; lease conditions include prior written consent of Lt. Governor for mortgage; unearned increase and pre‑emptive right (lease deed clauses 5 and 6).
22.02.2002: DDA issues NOC only to apply for a loan; expressly states mortgage permission would be issued only after execution/registration of the lease deed.
28.01.2005: Perpetual lease executed. The Bank informs DDA on 09.03.2005 that the Club mortgaged the plot by deposit of the registered lease deed; DDA raises no immediate objection.
27.08.2010: DRT allows the Bank’s Section 19 application for Rs. 86,46,790.37; Recovery Officer initiates sale process.
24.02.2011: DDA objects, asserting no mortgage permission was granted; mortgage is illegal; claims its statutory dues.
27.09.2012: Recovery Officer issues e‑auction notice (reserve Rs. 8.85 crores); no quantified disclosure of DDA’s unearned increase or pre‑emptive rights.
05.11.2012: In DDA’s writ (W.P.(C) 6972/2012), the Bank undertakes that the auction shall be subject to the lease terms; writ withdrawn.
09.11.2012 and 12/17.07.2013: Auction held; highest bid Rs. 13.15 crores; sale confirmed; sale certificate issued; possession handed over.
01.12.2014: During pendency of this appeal, DRT releases Rs. 12.26 crores to the auction purchaser.

Legal Framework

Section 29, Recovery of Debts and Bankruptcy Act, 1993: Applies the Second and Third Schedules to the Income‑tax Act, 1961 and the Income Tax (Certificate Proceedings) Rules, 1962 to DRT recoveries.
Second Schedule, Rule 53 (Income‑tax Act): Proclamation must state time and place of sale and specify, as fairly and accurately as possible: (a) property; (b) revenue assessed; (c) amount to recover; and (d) any other thing the Recovery Officer considers material for a purchaser to know to judge the nature and value of the property.
Income Tax (Certificate Proceedings) Rules, 1962, Rule 16: Recovery Officer may summon and examine persons and require document production regarding matters relevant to the proclamation.
Lease Deed Clauses: Prior written consent of the Lt. Governor for mortgage (clause 5(b)); DDA’s right to recover unearned increase and pre‑emptive purchase right (clause 6).

Precedents Cited and Their Influence

Daryao v. State Of U.P. (Constitution Bench): Established the application of res judicata principles to writ proceedings—binding if decided on merits; not a bar if earlier dismissal was for laches or availability of alternate remedy. The Court uses Daryao (as summarized in Gulabchand) to hold that a writ withdrawn on an undertaking does not bar a subsequent writ where a fresh cause of action arises from breach of that undertaking.
Gulabchand Chhotalal Parikh v. State of Gujarat (Constitution Bench): Reiterates the Daryao propositions. The Court quotes para 53 to emphasize when writ res judicata applies and when it does not.
Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. (House of Lords): Recognized unjust enrichment and restitution as a general category of legal relief distinct from contract and tort. The Court relies on Fibrosa to articulate the moral and legal imperative of restitution when a party is unjustly enriched.
Nagpur Golden Transport Co. v. Nath Traders (Two-Judge Bench): Approved the restitutionary principle in Indian law; the Court cites it to justify making the innocent auction purchaser whole when the sale is vitiated.

Legal Reasoning

1) Mandatory content of DRT sale proclamations for leasehold properties

The Court’s central holding is that Section 29 of the 1993 Act imports Rule 53 of the Second Schedule to the Income‑tax Act and Rule 16 of the 1962 Rules into DRT sales. Under Rule 53(d), the Recovery Officer must disclose “any other thing… material for a purchaser to know, in order to judge the nature and value of the property.” For leasehold properties like DDA plots, “material” includes:

Existence and nature of the lessor’s encumbrances (unearned increase obligations on transfer, pre‑emptive purchase rights, prior‑consent‑to‑mortgage covenants);
Quantification of such dues or, at a minimum, a clear mechanism and specific figures that allow bidders to account for them in price; and
Any lease conditions that limit or condition transfer or mortgage and therefore affect value and transferability.

Rule 16 empowers the Recovery Officer to summon relevant persons (like DDA) and call for documents to ascertain these matters before issuing the proclamation and fixing reserve price (Rule 18 of the Second Schedule). The Recovery Officer in this case proceeded without directing DDA to quantify unearned increase and without incorporating it into the proclamation. This non‑compliance vitiated the proclamation and, consequently, the sale, sale confirmation and sale certificate.

2) “As is where is” is not a shield against statutory non‑compliance

The Bank’s argument that the auction was on an “as is where is” basis fails. Disclaimers cannot overcome mandatory statutory duties. “As is where is” pertains to the physical condition and possession of the property; it does not license the Recovery Officer to omit material legal encumbrances from the proclamation nor does it shift to bidders the risk of undisclosed statutory dues or lessor’s pre‑emptive rights that directly affect title, transferability, and price.

3) Effect of lease covenants and absent mortgage permission

The lease expressly required prior written consent of the Lt. Governor before creating any mortgage or charge. The DDA’s 22.02.2002 communication was only an NOC to apply for a loan; it did not grant mortgage permission (which was to follow only after execution/registration of the lease deed). The Bank nevertheless proceeded on the basis of a mortgage by deposit of the registered lease deed and then sought to enforce that security without ensuring compliance with the lease covenants. While the Court’s dispositive ground is the Rule 53/Rule 16 violation, the context underscores the Bank’s due diligence lapses and foreshadows that a mortgage in breach of lease covenants may be unenforceable vis‑à‑vis the lessor.

4) Failure to implead DDA and to honor the undertaking

The Bank was aware the property was DDA leasehold with covenants and DDA’s pre‑emptive and unearned increase rights, yet it did not implead DDA in the Section 19 proceedings. Later, before the High Court, the Bank undertook that the auction would be conducted subject to the lease terms. That undertaking was the premise for DDA withdrawing the earlier writ. The subsequent auction ignored these terms and omitted the encumbrances from the proclamation. This breach of the undertaking provided DDA a fresh cause of action; consequently, res judicata did not bar the later writ.

5) Res judicata in writ proceedings

Applying Daryao/Gulabchand, the Court clarifies:

A writ decision on merits binds; a writ dismissed for laches or alternate remedy does not bar a later Article 32 petition.
A writ withdrawn on an undertaking does not operate as res judicata for subsequent proceedings when the undertaking is not honored and a fresh cause of action emerges.
Here, the High Court erred by invoking principles analogous to Section 11 CPC without examining the per se illegal conduct of the auction vis‑à‑vis Rule 53/Rule 16 and the lease terms.

6) Restitution and the protection of bona fide auction purchasers

Informed by Fibrosa and Nagpur Golden, the Court emphasizes that restitution is both a legal and moral imperative where an innocent party has parted with money in reliance on a sale later found invalid. Among all actors, the auction purchaser “alone stands innocent.” The appropriate remedy is to restore it to the pre‑sale position by refunding the sale price still lying with the Bank, together with interest at 9% per annum from the dates of deposit until repayment (within one month). The Court stops short of awarding the 15% interest the purchaser sought, calibrating relief to ensure fairness without unduly penalizing the Bank beyond the principal and reasonable interest.

Impact and Implications

For Recovery Officers and DRTs

Rule 53 compliance is substantive: Sale proclamations must fairly and accurately disclose and, where applicable, quantify lessor’s statutory dues (unearned increase) and encumbrances that materially affect value and title.
Rule 16 must be actively used: Summon lessors (e.g., DDA, NOIDA, CIDCO, HUDA/HSVP, etc.), obtain lease documents, compute unearned increase as per policy, and reflect it in the proclamation and reserve price.
Proclamations that omit material legal encumbrances risk being set aside ab initio, even after confirmation and possession.

For Banks and Financial Institutions

Prior consent to mortgage is not a formality: When the lease requires prior written consent, obtain it before taking security; otherwise, the security may be infirm and unenforceable against the lessor.
Implead the lessor: In Section 19 RDDB proceedings (and analogously under SARFAESI), join the lessor when enforcing against leasehold property subject to lessor’s rights.
Undertakings bind: Commitments given to courts (e.g., to follow lease terms in auctions) must be scrupulously honored; breach can unravel sale processes and expose banks to restitutionary liability.
“As is where is” is no panacea: Do not rely on boilerplate disclaimers to cover legal non‑compliance; ensure disclosures are complete and accurate.

For Public Development Authorities/Lessors

Timely engagement: When notified of recovery proceedings, quantify unearned increase and other dues promptly and communicate them clearly.
Assert pre‑emptive rights: Make any pre‑emptive purchase intention explicit and within timelines once valuations are established.
Maintain transparent policies: Publish current formulas and rates for unearned increase to reduce disputes in recovery contexts.

For Auction Purchasers

Enhanced due diligence: Verify lease conditions, mortgage permissions, and lessor dues directly with the lessor; insist that the proclamation reflects quantified dues.
Expectation of protection: Courts will protect bona fide purchasers through restitution if statutory non‑compliance vitiates the sale; however, title security still depends on lawful conduct of the auction.

Complex Concepts Simplified

Unearned increase: The increase in land value since the original allotment/premium. On transfer of a DDA leasehold interest, a portion of this increase (as per policy) is payable to DDA. It is a material encumbrance affecting price and transferability.
Pre‑emptive right: A contractual right allowing DDA to purchase the leasehold interest at a specified valuation before it is transferred to a third party.
Rule 53 (Second Schedule, Income‑tax Act): Sets out mandatory contents of a sale proclamation in recovery proceedings, including “any other thing… material” for buyers to judge nature and value—covering legal encumbrances and dues.
Rule 16 (Income Tax (Certificate Proceedings) Rules, 1962): Empowers the Recovery Officer to summon persons and documents relevant to the proclamation—used to obtain and settle encumbrances before fixing reserve price and conducting the sale.
Section 29, RDDB Act: Incorporates the recovery machinery and rules from the Income‑tax Act for DRT recoveries, making Rule 53 and Rule 16 applicable to bank debt recoveries.
“As is where is”: A condition indicating sale in existing physical state without warranties; it does not excuse the seller/Recovery Officer from disclosing legal encumbrances required by law.
Res judicata in writs (Daryao/Gulabchand): A writ judgment on merits binds and bars re‑litigation of the same matter; a writ withdrawn on an undertaking does not bar a later action if a new cause arises from breach of the undertaking.
Restitution/unjust enrichment: A doctrine requiring a party unjustly enriched at another’s expense to restore that benefit; routinely used to make innocent purchasers whole when sales are voided.

Doctrinal Contributions and Clarifications

Mandatory disclosure and quantification: Recovery Officers must disclose and, wherever feasible, quantify lessor’s statutory dues and encumbrances affecting leasehold property in the proclamation; failure vitiates the auction.
Substance over disclaimer: “As is where is” terms cannot sanitize non‑compliance with Rule 53/Rule 16 or contemplation of lease covenants.
Undertakings create fresh causes: Withdrawal of a writ on an undertaking does not insulate later illegality; breach revives the right to litigate.
Protection of bona fide purchasers via restitution: Where sales fail for procedural illegality, courts will restore the purchaser’s money with reasonable interest, while placing the consequences on the party responsible for the illegality (here, the Bank).

Conclusion

This decision establishes a clear procedural and substantive standard for DRT auctions of leasehold properties: pre‑sale proclamations must transparently disclose and, wherever possible, quantify lessor’s statutory dues (like unearned increase) and contractual constraints (like pre‑emptive rights and mortgage‑consent clauses). Rule 53 and Rule 16 are not perfunctory—they are the backbone of a fair auction process. Disclaimers cannot displace mandatory disclosures; nor can undertakings to courts be taken lightly.

By setting aside the auction and sale certificate for non‑compliance, the Supreme Court safeguards the integrity of public auctions and the sanctity of lease covenants on public land, while simultaneously protecting bona fide purchasers through restitution. The ruling imposes a practical compliance roadmap for Recovery Officers and banks and clarifies that res judicata will not obstruct litigation where an earlier writ was withdrawn on an undertaking that is later breached.

Key takeaways: disclose and quantify encumbrances; honor lease covenants and court undertakings; implead lessors; and protect innocent purchasers through restitution when the legal process falters. This judgment will significantly influence how DRTs, banks, and bidders approach the sale of leasehold properties across jurisdictions, leading to more diligent, transparent, and legally robust recoveries.