09 May 1996
Supreme Court


Case number: C.A. No.-007849-007849 / 1996
Diary number: 16564 / 1995






DATE OF JUDGMENT:       09/05/1996


CITATION:  1996 AIR 1981            1996 SCC  (4) 249  JT 1996 (6)    62        1996 SCALE  (4)327



JUDGMENT:                             WITH                CIVIL APPEAL NO. 7850 OF 1996            (Arising out of SLP(C) Nos. 28081/95) IN THE MATTER OF:- ---------------- H.U.D.A. & Anr. V. Ravinder Nath Sharma                             AND                CIVIL APPEAL NO. 7851 OF 1996            (Arising out of SLP (C) Nos. 3360/96) IN THE MATTER OF:- ---------------- State of Haryana & Ors. V. Shamsher Singh                       J U D G M E N T PATTANAIK, J.      Leave granted.      In these three appeals directed against the judgment of the Punjab and Haryana High Court the common question of law is involved  and as  such are  heard together  and are being disposed of by this common judgment.      The short  question that  arises for  consideration is, where a  land is  allotted and  the  allotee  deposits  some instalments but thereafter intimates the authority about his incapacity to  pay up  the balance  instalments and requests for refund  of the  money paid,  is the  allotting authority entitled to  forfeit the  earnest  money  deposited  by  the allotee or  could be  only entitled  to forfeit  10% of  the total amount  deposited by  the allotee  till the request is made as directed by the High Court?      Haryana   Urban   Development   Authority   issued   an advertisement  inviting   applications  for   allotment   of residential  plots   at  Karnal.  The  price  of  plots  was



different  for   different  size.  In  accordance  with  the advertisement 10%  of the  total price  was required  to  be deposited along  with the  application form as earnest money and where  the plot was a preferential one an extra price of 10% of  the total price was required to be deposited. In the letter of  allotment that  had been  issued  by  the  Estate Officer of  the Haryana  Urban Development  Authority to the allotee. it  was indicated  that if  the allotee  refuses to accept the  allotment then  the  same  may  be  communicated within 30  days from  the date  of allotment  letter failing which the  allotment would  stand cancelled  and the earnest money deposited  shall be forfeited to the authority and the allotee  can   have  no  claim  for  damages.  It  was  also stipulated in  the letter  of  allotment  that  the  balance amount of  the tentative  price indicated  in the  letter of allotment could  be deposited either in lump sum without any interest within  60 days  from the  date  of  issue  of  the allotment  letter  or  on  6  annual  instalments  and  each instalment would  be recoverable  together with  interest at 15% On  receipt of the letter of allotments the allotees who are the  respondents in these appeals accepted the allotment and made  the initial  deposits as  required and  thereafter chose to  deposit the  balance amount in instalment. Each of the allotee  - respondent  did deposit  some instalment  and thereafter intimated  the authority that they will not be in a position  to take  the land  allotted  and  requested  for refund of  the amount.  In some  cases the authority replied that their  prayer for  cancellation of  allotment cannot be acceded  to   and  in  some  other  cases  even  before  any consideration made  by the  authority to  the request of the allotees, the  allotees approached  the High Court. The High Court having  directed the  authority to  refund the balance after deducting  10% of  the amount deposited by each of the allotee, the  Haryana Urban Development Authority as well as the State of Haryana have preferred these appeals.      Mr. Arun  Jaitley, the learned senior counsel appearing for the  appellants contended  that in view of the fact that the allotee  was required  to deposit  10% of  the  purchase price as  earnest money while tile application for allotment was made  and having accepted the allotment in question with the  terms  and  conditions  stipulated  in  the  letter  of allotment, when  the transaction falls through by reasons of default or failure on the part of the allotee, the authority would be  entitled  to  forfeit  the  entire  earnest  money deposited and  not the 10% of the amount deposited till then as directed  by authority  could deduct  10% of  the  amount deposited till  then as  directed by  the  High  Court.  Mr. Jaitley contends  ’earnest’ represents  a guarantee that the contract will be fulfilled and is given to bind the contract and therefore  the same  is forfeited  when the  transaction falls through  on account  of failure  on the  part  of  the purchaser. According  to the  learned counsel in view of the specific clauses  of the  letter of allotment the High Court committed gross  error in  directing forfeit  of only 10% of the amount  deposited. Mr.  Mahabir Singh,  learned  counsel appearing for  the respondent  on the  other hand  contended that the forfeiture of earnest money in terms of clause 4 of the allotment  letter can  be made  if the  allotee does not communicate his  refusal by registered letter within 30 days from the  date  of  allotment  but  once  the  allotment  is accepted  and  thereafter  the  allotee  makes  deposits  on instalments and  opts  out  a  contract  by  expressing  his inability to  take the  land, there  is no  provision in the allotment letter  or under the rules entitling the authority to forfeit  the earnest money. Since the power of forfeiture



of the earnest money has to be found out specifically either from the  letter of  allotment or  from the  rules, if  any, governing  the   allotment  and   since  there  is  no  such provision,  the  High  Court  was  entitled  to  decide  the question on equitable consideration and has rightly directed that the  authority could deduct 10% of the amount deposited and there  is no error of law therein requiring interference by this Court.      In view  of the  rival stand  of the parties, the first question that  arises for consideration is whether under the terms of allotment the allotees were required to deposit any amount as  earnest money  and if  so when that earnest money could be  forfeited by  the authority?  From the material on record  there   is  no   dispute  that  an  application  for allotment,  pursuant   to  the  advertisement  made  by  the authority, has  to be  made with  a deposit  of 10%,  of the tentative price as the earnest money. After consideration of the application  when letter  of allotment  is issued clause (4) thereof  stipulates that an allotee if refuses to accept the allotment  shall  communicate  the  same  by  registered letter within  30 days from the date of allotment letter. If no such refusal is communicated within 30 days then it would not be  open for  the allotee to refuse it later and further the  earnest   money  deposited  by  the  allotee  would  be forfeited to  the authority  and an  allotee  can  claim  no damages. The  allotment letter  further stipulated  that  in case the allotee accepts allotment then letter of acceptance should reach  the authorities  by registered  post  together with an  additional amount as indicated in the letter, which deposit along  with  the  earnest  money  deposited  already should constitute  25% of  the total tentative price. Clause (6) of  the allotment letter also indicates that the balance amount of  the tentative  price of  the plot  could be  paid either in  lump-sum without interest within 50 days from the date of  issue of  the allotment  letter or  in  six  annual instalments the first instalment would fall due after expiry of one year of the date of issue of the letter. Clauses 4, 5 and 6  of the  letter of allotment are extracted hereinbelow in extenso for better appreciation of the point in issue:      ’’(4) In  case you refuse to accept      this    allotment,     you    shall      communicate  your   refusal  by   a      registered letter  within  30  days      from the  date of allotment letter,      failing which  this allotment shall      stand  cancelled  and  the  earnest      money deposited  by  you  shall  be      forfeited to  The authority  &  you      shall have no clang for damages.      (5)  In   case  you   accept   this      allotment,   please    send    your      acceptance   by   registered   post      alongwith an amount of Rs. 34,505/-      within 30  days from  the  date  of      issue  of  this  allotment  letter.      which together  with an  amount  of      Rs. 23020/-  paid by  you alongwith      your application  form  as  earnest      money, will  constitute 25  percent      of the total tentative price.      (6) The  balance  amount  i.e.  Rs.      1,72,575/- of  the above  tentative      price of  the plot  can be  paid in      lump-sum without interest within 60      days from  the date of issue of the



    allotment letter  or in  six annual      instalment.  The  first  instalment      will fall  due after  the expiry of      one year  of the  date of  issue of      this   letter.   Each   instalments      should be recoverable together with      interest on  the balance  price  of      10%  interest   on  the   remaining      amount. The interest shall however,      accrue from  the date  of offer  of      possession. Interest  @ 18% will be      charged on the delayed payment."      A combined  reading of  the aforesaid  three clauses of letter of  allotment together  with the advertisement issued indicates that the scheme of allotment was that an applicant could make  an application  along with  10% of the tentative price of  the land  as earnest  deposit. On  receipt of  the letter of  allotment he  is required  to indicate either his letter of  acceptance or  letter of  refusal within  30 days from the  date of  the receipt  of the  allotment letter. In case of  acceptance he  would be further required to make an additional deposit  which deposit  together with the earnest money already  deposited would  constitute 25%  of the total tentative price.  If he fails to accept the allotment within 30 days  from the  date of  receipt of  the letter  then the authority was entitled to forfeit the earnest money. Further the balance  amount could  be deposited  in instalment. Thus under the  allotment in  question an allotee was required to deposit 10%  of the  tentative price  of the land as earnest money which  is given  to bind  the contract  and  the  said earnest money  could be forfeited by - the authority in case the allotee  does not  communicate  the  letter  of  refusal within 30  days from  the date  of receipt  of the allotment order.      The next  question that  arises  for  consideration  is that, where  the allotee accepts the allotment and indicates the same  within the  stipulated period and makes additional deposits on  instalment basis  and thereafter  intimates the authority that  he will  not be  in a position to pay up the balance amount  and makes  a request for refund of the money deposited, would  the authority  be justified  in forfeiting the earnest  money which  had been  deposited along with the application form?.  The answer to this question depends upon the basic  concept of ’earnest’. In the case of Shri Hanuman Cotton Mills and Others vs. Tata Air Craft Limited, 1969 (3) SCC 522,  this  Court  laid  down  the  following  regarding ’earnest’:      "(1) It must be given at the moment      at which the contract is concluded.      (2) It  represents a guarantee that      the contract  will be fulfilled or,      in other  words, "earnest" is given      to bind the contract.      (3) It  is  part  of  the  purchase      price  when   the  transaction   is      carried out.      (4)  It   is  forfeited   when  the      transaction falls through by reason      of the  default or  failure of  the      purchaser.      (5) Unless there is anything to the      contrary  in   the  terms   of  the      contract, on  default committed  by      the buyer,  the seller  is entitled      to forfeit the earnest."



    The earnest  money is a part of the purchase price when the transaction  gets through and the same is forfeited when the transaction  falls through  by reason  of the default or failure on the part of the vendee.      Wright, J. in the case of Farr, Smith & Co. vs. Messrs. Ltd. LR  (1928)  1  KBD  397  quotted  the  observations  of Hamilton, J.,  in Summer  and Leivesley vs. John Brown & Co. 25 Times  LR 745  with regard to the meaning of ’earnest’ as thus:      " ’Earnest’......   meant something      given for  the purpose of binding a      contract, something  to be  used to      put pressure on the defaulter if he      failed to  carry out  his part.  If      the contract went through the thing      given in  earnest was  returned  to      the  given,   or,  if   money,  was      deducted from  the  price.  If  the      contract  went   off  through   the      giver’s fault  the thing  given  in      earnest was forfeited."      The law  on the  subject has  been discussed fully in a recent case  of Delhi Development Authority vs. Grishthapana Cooperative Group  Housing Society  Ltd., 1995  Supp(1)  SCC 751.      This being  the legal  position and  the allotee hating accepted the  allotment and  having  made  some  payment  on instalment basis  then made  the request  to  surrender  the land, has  committed default  on his  part and therefore the competent authority  would be  fully justified in forfeiting the earnest  money which  had been deposited and not the 10% of the  amount deposited as held by the High Court. The High Court was  totally in  error in  issuing  the  direction  in question on  the ground  that the  respondents were not in a position to  deliver the  possession  of  the  land  to  the allotee. lt may be stated that in the letter of allotment no period was  stipulated within  which the  possession of  the land was  to be delivered. The land in question was required to be  developed and  then to be delivered and in absence of any period in the letter of allotment, it was required to be delivered’, within  a reasonable  period. In  the facts  and circumstances. It  cannot be said that the reasonability had lapsed particularly  when the  allotees had  not paid up the entire instalment due and merely paid a par thereof.      In the  premises as aforesaid the impugned judgment and direction of  the High  Court in  each of the appeal are set aside and it is held that the appellant would be entitled to forfeit the  earnest money  which had  been deposited  along with  the   application  form  and  on  deducting  the  said ’earnest’ the  balance amount  may be refunded to allotees - respondents who had made application for refund in question. The appeals are allowed to the extent indicated above but in the circumstances there will be no order as to costs .