Supreme Court Directs Seller Who Concealed Bank Encumbrance In Agreement To Sell To Refund; Says Buyer Not At Fault For Not Seeking Original Deed

The Supreme Court on Monday (December 15) observed that the fraudulent suppression of encumbrances on the property in an agreement to sell constitutes a valid ground for refund of advance payment.

Holding thus, a bench of Justices Vikram Nath and Sandeep Mehta ruled in favour of the property purchaser, whom the seller had misled by suppressing the existence of a pending loan on the suit property at the time of entering into the agreement to sell, and such liability not being disclosed in the agreement.

The appeal arises from a dispute over a contract for the sale of land. The respondent (seller) entered into an agreement to sell approximately 77 acres and 26 cents of land to the appellant (buyer) for ₹4,45,00,000. The appellant paid ₹50,00,000 as part of the advance under the agreement dated 10 September 2008.

The appellant later discovered that the land was subject to an equitable mortgage to Federal Bank, which was not disclosed despite an explicit term in the agreement that the property was free of encumbrances. Acting on assurances, the appellant paid further sums and issued a large post-dated cheque of ₹3,55,00,000 to the respondent. The post-dated cheque ultimately dishonoured due to insufficient funds.

In 2010, the appellant filed a suit for refund of the advance (₹55,00,000) with interest, asserting he was induced to enter into the contract by fraudulent concealment of the mortgage by the respondent.

The trial court ruled in the plaintiff-purchaser's favour, directing the refund of the advance payment.  The respondent's claim for set-off was rejected as unsustainable and barred by limitation. However, the High Court reversed the trial court's decision, holding that the plaintiff acted despite knowledge of the encumbrance, and he had never inspected the original title deeds. Challenging this,  the plaintiff appealed to the Supreme Court.

Opposing the plaintiff's appeal, the Respondent-seller argued that the Appellant-plaintiff was aware of the pending loan on the suit property much before the date of agreement to sell.

However, the Court found contradiction in the Respondent's statement as no reply was made by the Respondent to the Appellant's notice to the Respondent specifically asking about the concealment of the mortgage. Only in a proceeding of set-off initiated by the Respondent against the Appellant, he had stated that the plaintiff-appellant was aware of the encumbrance on the suit schedule property from the inception.

The Court found the Respondent's statement about the prior knowledge of the encumbrance on the suit property in a set-off proceeding to be a mere afterthought, devised solely to defeat the Appellant's legitimate claim for refund.

“the fact that before instituting the suit, the plaintiff-appellant sent a notice to the defendant-respondent specifically mentioning about the concealment of the mortgage, to which the defendant-respondent chose not to furnish any reply, clearly establishes that the case projected in the setoff, that the plaintiff-appellant was aware of the encumbrance on the suit schedule property from the inception, was nothing but an afterthought, devised solely to defeat the plaintiff-appellant's legitimate claim for refund.”, the court said.

The Court found the High Court's decision to be erroneous for disbelieving the testimony of the Appellant-plaintiff regarding his inability to examine the title deeds, as he was told by the defendant that it would be available for examination after the execution of the sale deed.

“There was nothing unnatural in the explanation offered by the plaintiff-appellant that he relied on the assurance of the defendant-respondent that the original title deeds would be handed over at the time of execution of the sale deed. It may be noted that the advance amount paid by the plaintiff-appellant was around 10% of the total sale consideration and thus, it cannot be said, unexceptionally, that the plaintiff-appellant would not have entered into the agreement without having a look at the original title deeds.

It is a common practice for landowners to keep original title deeds in the bank lockers for security purposes. Hence, the explanation offered by the plaintiff-appellant for not insisting on the inspection of the original title deeds, at the time of entering into the agreement, was reasonable and justified.”, the court said.

It further pointed out that the seller's subsequent reduction of the sale consideration by Rs 35 lakh indicated concealment of the encumbrance.

“we are of the firm opinion that the trial Court committed no error whatsoever in decreeing the suit filed by the plaintiff-appellant. The impugned judgment rendered by the High Court does not stand to scrutiny and is, thus, hereby set aside, and the judgment of the trial Court is restored.”, the court held.

Accordingly, the appeal was allowed.

Cause Title: MOIDEENKUTTY VERSUS ABRAHAM GEORGE

Citation : 2025 LiveLaw (SC) 1207

Click here to download judgment

Appearance:

For Appellant(s) : Mr. Raghenth Basant, Sr. Adv. Ms. Roopali Lakhotia, Adv. Ms. Kaushitaki Sharma, Adv. Mr. Adithya S Nair, Adv. Ms. Sonakshi Malhan, AOR

For Respondent(s) :Mr. V. Chitambaresh, Sr. Adv. Mr. John Mathew, AOR