Agricultural Land and the SARFAESI Act: Statutory Exemption, Judicial Tests, and Emerging Jurisprudence

Agricultural Land and the SARFAESI Act: Statutory Exemption, Judicial Tests, and Emerging Jurisprudence

1. Introduction

Section 31(i) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) excludes “any security interest created in agricultural land” from the Act’s ambit. While the textual exemption appears categorical, the practical determination of whether a particular parcel is “agricultural” has spawned intense litigation and divergent factual findings across tribunals and courts. This article critically analyses the developing Indian jurisprudence—particularly the Supreme Court decisions in ITC Ltd. v. Blue Coast Hotels Ltd.[1], Indian Bank v. K. Pappireddiyar[2], and K. Sreedhar v. Raus Constructions (P) Ltd.[3]—and synthesises the principles governing the exemption, the evidentiary burden on parties, and procedural ramifications before the Debts Recovery Tribunal (DRT). Supplementary guidance is drawn from High Court opinions and the broader SARFAESI framework expounded in cases such as Standard Chartered Bank v. V. Noble Kumar[4] and Authorised Officer, Indian Overseas Bank v. Ashok Saw Mill[5].

2. Statutory Framework

2.1 Section 31(i): Text and Purpose

Section 31 enumerates ten situations in which the Act “shall not apply”. Clause (i) carves out “any security interest created in agricultural land”. Parliamentary debates and the Statement of Objects and Reasons reveal a deliberate intent to shield agriculturists’ primary means of livelihood from expedited enforcement mechanisms.[6]

2.2 Interaction with Core Enforcement Provisions

The exemption operates as a jurisdictional bar: if the secured asset qualifies as agricultural land, the creditor cannot initiate measures under Sections 13 and 14, and any step already taken is void ab initio.[7] However, creditors retain ordinary civil and DRT remedies under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) or the Code of Civil Procedure.

3. Judicial Construction of “Agricultural Land”

3.1 Blue Coast Hotels: Functional Use Test

In ITC Ltd. v. Blue Coast Hotels, the Supreme Court overturned a Bombay High Court order that had invalidated an auction sale on the premise that portions of the mortgaged resort comprised agricultural land.[1] The Court held that entries in revenue records are persuasive but not conclusive; instead, the “totality of circumstances”—including actual use, intended use, and parties’ understanding—determines the character of the land. Because the borrower had constructed a five-star hotel and sought conversion, the exemption was unavailable. The ruling introduced a functional use test, shifting focus from nomenclature to economic reality.

3.2 Pappireddiyar: Evidentiary Remand

In Indian Bank v. Pappireddiyar, the High Court had summarily declared SARFAESI proceedings a nullity. The Supreme Court disagreed, emphasising that classification is a question of fact requiring evidence on present use, developmental activities, and statutory conversion permissions.[2] The matter was remitted for a fresh factual enquiry, reaffirming that mere revenue entries cannot oust SARFAESI automatically.

3.3 K. Sreedhar: Burden of Proof and Revenue Records

More recently, the Court in K. Sreedhar upheld an auction under SARFAESI, noting borrowers had produced only revenue records while the creditor adduced photographs negating agricultural activity.[3] The Court treated the DRT’s factual conclusion as binding absent perversity, signalling judicial deference to tribunal findings when supported by cogent evidence.

3.4 High Court Divergence

Earlier High Court pronouncements—e.g., A. Akthar Hussain v. Pappireddiyar[8], D. Ravichandran v. Indian Overseas Bank[9], and Corporation Bank v. State of West Bengal[10]—reflect tension between literal exclusion and purposive liberalisation. While some decisions adopted a broad exemption based on initial classification, others, aligning with Blue Coast, required proof of genuine cultivation and subsistence orientation.

4. Determinative Criteria: Towards a Coherent Test

  1. Revenue Classification: Starting point, not decisive.[1]
  2. Actual Use at Creation of Security: Evidence of cultivation, plantations, or allied activities at the time of mortgage is critical.[8]
  3. Subsequent Use & Conversion: Post-mortgage change may corroborate earlier intention; yet Akthar Hussain suggests exemption depends on status at creation.[8]
  4. Parties’ Contemporaneous Intent: Loan documentation, undertakings, or applications for conversion are probative (Rahiya P.[11]).
  5. Physical Features: Presence of buildings, industrial installations, or absence of basic agricultural operations weakens exemption claims (Sreedhar[3]).

5. Procedural Implications Before DRTs

5.1 Jurisdiction and Scope of Review

The Supreme Court in Ashok Saw Mill affirmed that DRTs possess plenary powers under Section 17 to examine all measures taken by secured creditors, including the threshold applicability of SARFAESI.[5] Borrowers must, therefore, raise the agricultural land defence primarily before the DRT; writ jurisdiction under Article 226 is reserved for exceptional cases, as reiterated in Kamla Rice & General Mills v. District Magistrate.[12]

5.2 Burden and Standard of Proof

Post-Blue Coast, borrowers bear the initial burden to adduce prima facie evidence of agricultural use; once discharged, creditors must refute with contrary material. DRTs may appoint commissioners for on-site verification (Hotel Seagate[13]), though courts caution against fishing expeditions.

5.3 Effect of Invalid Invocation

If the asset is held agricultural, all SARFAESI steps—including possession under Section 13(4) or magistrate assistance under Section 14—are void. However, creditors may pivot to RDB Act recovery, illustrating the Act’s complementary—not exclusive—nature (Noble Kumar[4]).

6. Policy Considerations and Critique

  • Credit Flow versus Agrarian Protection: A literal exemption risks incentivising borrowers to cloak commercial property as “agricultural”; conversely, a narrow reading may imperil genuine farmers.
  • Evidentiary Ambiguity: Absence of a statutory definition creates litigation cost and uncertainty; legislative clarification or delegated rule-making could standardise criteria.
  • Forum Efficiency: Reliance on DRT fact-finding aligns with SARFAESI’s objective of speedy recovery yet may strain tribunal capacities. Specialized agricultural benches or expert commissioners could enhance accuracy.

7. Conclusion

Indian courts have transitioned from a formalistic to a functional approach in construing Section 31(i). The prevailing doctrine, crystallised in Blue Coast and followed in Pappireddiyar and Sreedhar, mandates an evidence-based enquiry into actual land use, thereby preventing both creditor overreach and borrower opportunism. While the jurisprudence affords workable guidelines, statutory refinement could further harmonise agrarian protection with the SARFAESI Act’s mandate of expeditious asset recovery.

Footnotes

  1. ITC Ltd. v. Blue Coast Hotels Ltd. (2018) 15 SCC 99.
  2. Indian Bank v. K. Pappireddiyar (2018) 18 SCC 252.
  3. K. Sreedhar v. Raus Constructions (P) Ltd. (2023) 11 SCC 169.
  4. Standard Chartered Bank v. V. Noble Kumar (2013) 9 SCC 620.
  5. Authorised Officer, Indian Overseas Bank v. Ashok Saw Mill (2009) 8 SCC 366.
  6. Statement of Objects and Reasons, SARFAESI Bill, 2002; see also Akthar Hussain v. Pappireddiyar, 2016 SCC OnLine Mad 1838.
  7. Section 13(2)–(4) & Section 14, SARFAESI Act 2002.
  8. A. Akthar Hussain v. K. Pappireddiyar 2016 SCC OnLine Mad 1838.
  9. D. Ravichandran v. Indian Overseas Bank 2006 SCC OnLine Mad 102.
  10. Corporation Bank v. State of West Bengal 2018 SCC OnLine Cal 1639.
  11. Rahiya P. v. South Indian Bank 2022 SCC OnLine Ker 8393.
  12. M/s Kamla Rice and General Mills v. District Magistrate, Karnal 2024 PHHC [unreported].
  13. Hotel Seagate v. J.M. Financial ARC, DRT Order (2017).