Agricultural Land Exemption — Section 31(i) SARFAESI Act
From the plain reading of Section 31(i) of SARFAESI Act, it transpires that Section 31 begins with a non-obstante clause exempting certain classes of properties from the coercive powers of the SARFAESI Act. Section 31(i) explicitly excludes “any security interest created in agricultural land”. The object is twofold:
- To protect agriculturists from losing their primary means of livelihood through summary enforcement of security interests.
- To discourage creditors from accepting agricultural land as a mortgage since recovery cannot be made under SARFAESI without judicial intervention.
This provision is remedial in nature, highlighting that agricultural property, central to livelihood, enjoys special statutory protection.
However, the Courts have analysed the said section in manifold judgments, discussing the legal meaning of the term ‘Agricultural Land’ used in different enactments and the true intent of Section 31(i) of the SARFAESI Act.
It would be trite to refer to Apex Court’s decision in ITC Limited v. Blue Coast Hotels Ltd., AIR 2018 SC 2563; (2018) 4 SCALE 628, which has brought clarity on whether agricultural land can be validly included as security interest for the recovery of secured loans under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). The Court, in the said case, examined the scope of Section 31(i) of the Act, which explicitly excludes any security interest created in agricultural land from the Act’s operation.
The judgment strikes a balance between the rights of secured creditors and the constitutional protection available to agriculturists, while also clarifying how “agricultural land” should be understood for the purposes of financial recovery disputes.
The Blue Coast Hotels Case
In ITC v. Blue Coast Hotels (supra), the debtor had mortgaged parcels of land in Goa, some of which were recorded as “agricultural” in revenue records, to secure loans borrowed for operating a five-star hotel. The debtor later contended that agricultural land could not form part of the mortgage and, hence, could not be sold under SARFAESI.
The Apex Court rejected this contention and clarified:
- Purpose of Land Use Matters: The Court emphasized that the primary determinant of whether land is “agricultural” under Section 31(i) is not merely revenue records but its actual use and intended purpose.
- Commercial Use Overrides Agricultural Tag: Though recorded as agricultural in revenue entries, since the lands were used to run a luxury hotel and contained only minor patches of vegetation (coconut and curry leaf trees), the Court held they were essentially commercial lands.
- Legislative Competence: The debtor argued Section 31(i) was unconstitutional as “land” falls under Entry 18 of the State List. The Court dismissed this argument, relying on Union of India v. Delhi High Court Bar Association (2002) 4 SCC 275, holding that SARFAESI is referable to Entry 45 of List I (Banking), and thus within Parliament’s competence.
Tests for Determining Agricultural Land
The Court drew upon earlier landmark precedents where “agricultural land” had been judicially defined:
- Commissioner of Wealth Tax v. Officer-in-Charge (Court of Wards), Paigah (1976) 3 SCC 864
The Court held that mere revenue entries or potentiality of cultivation do not establish land as agricultural. The decisive test is actual use and the intended purpose of the land. - Kunjukutty Saheb v. State of Kerala (1972) 2 SCC 364
The Court clarified that just because some trees or vegetable patches exist does not automatically render land agricultural. The true test is the purpose for which the land is held. - State of UP v. Nawab Hussain (1977) 2 SCC 806 (distinguishing misuse of entries)
Revenue entries are only prima facie indicators and not conclusive of agricultural character when evidence suggests a different use.
Applying these principles, the Court in Blue Coast concluded that the land mortgaged to ITC was primarily for commercial hotel purposes, not agriculture.
Legislative Competence and Constitutional Perspective
The debtor’s challenge questioning Parliament’s power was firmly rejected. The Court relied on:
- Union of India v. Delhi High Court Bar Association (2002) 4 SCC 275
Banking activities, including recovery of debts, fall within Entry 45 of List I. - State Bank of India v. Santosh Gupta AIR 2017 SC 25
The SARFAESI Act, in pith and substance, relates to banking and debt recovery, not land. - A.S. Krishna v. State of Madras AIR 1957 SC 297
A statute must be viewed in entirety, not dissected into fragments for legislative competence analysis.
Thus, Section 31(i) is not a law on land but an exemption within a banking law, and hence constitutionally valid.
Wider Jurisprudential Impact
The Blue Coast judgment underscores that:
- Agriculture exemptions under special statutes are not determined merely by nomenclature in revenue records.
- Courts will examine real substance — whether the land is genuinely held and used for agriculture.
- Creditors must exercise diligence in taking security over such properties, as enforcement under SARFAESI is barred if genuinely agricultural.
This ruling therefore reinforces substance over form in the classification of land while balancing agrarian protection with banking recovery.
While the landmark decision in ITC Limited v. Blue Coast Hotels Ltd. (2018) provided foundational clarity on the interpretation of “agricultural land” under Section 31(i), the Supreme Court has continued to refine and affirm these principles in subsequent rulings. This ensures that the exemption is not a blanket shield but a targeted protection for genuine agricultural use, preventing its misuse in commercial disputes. Below, we examine a key post-2018 judgment that builds directly on Blue Coast, reinforcing the evidentiary threshold for invoking the exemption.
Indian Bank vs. K. Pappireddiyar (2018) 18 SCC 235
On agricultural land exemption (Section 31(i)). Echoing ITC, the court held that mere classification in records is insufficient; actual agricultural use at security creation time must be proven. Revenue entries and usage (e.g., industrial) override presumptions. Thr Court summed up thus:
“9 The classification of land in the revenue records as agricultural is not dispositive or conclusive of the question whether the SARFAESI Act does or does not apply. Whether a parcel of land is agricultural must be deduced as a matter of fact from the nature of the land, the use to which it was being put on the date of the creation of the security interest and the purpose for which it was set apart.”
Gulf Oil Corporation Ltd. vs. State of Telangana (2022) SCC OnLine SC 1187
Involved lease terminations but cited ITC on agricultural land definitions under revenue laws. Held that non-agricultural use (e.g., industrial) negates exemptions.
The K. Sreedhar Case: Reinforcing the Burden of Proof and Actual Use
In K. Sreedhar v. Raus Constructions Pvt. Ltd. (2023 SCC OnLine SC 13, decided on January 5, 2023), the Supreme Court addressed a challenge to the auction of secured assets under the SARFAESI Act, where the borrower claimed exemption for one property (Item No. 8) classified as agricultural land in revenue records. The borrower, Raus Constructions Pvt. Ltd., had defaulted on a loan from Indian Bank, leading to SARFAESI proceedings, including possession notices and an e-auction where the highest bidder was issued a sale certificate. The Debts Recovery Tribunal (DRT) upheld the sale, finding no evidence of agricultural activity on the property. However, the Telangana High Court set aside the DRT’s order, holding the property exempt under Section 31(i) based solely on its revenue classification and citing procedural lapses under the Security Interest (Enforcement) Rules, 2002.
The Supreme Court, overturned the High Court’s decision on multiple grounds, with a focused analysis on Section 31(i):
- Actual Use as the Decisive Test: Echoing Blue Coast, the Court reiterated that mere entry as “agricultural land” in revenue records is insufficient to trigger the exemption. The property must be demonstrably used for agriculture or held for such purpose at the time of creating the security interest. Here, no evidence—such as cultivation records, crop yields, or ongoing farming activities—was presented by the borrower, rendering the claim unsubstantiated.
- Burden of Proof on the Borrower: The Court explicitly placed the onus on the borrower to prove the land’s agricultural character and active use, criticizing the High Court for erroneously shifting this burden to the secured creditor (the bank). This aligns with the remedial intent of Section 31(i) to protect bona fide agriculturists, not commercial defaulters disguising assets.
- No Exemption for Mortgaged Commercial Land: Once land is mortgaged as security—implying it was not treated as purely agricultural—it falls outside Section 31(i)’s purview unless proven otherwise. The Court noted that the property’s commercial context (linked to construction loans) further undermined the exemption claim.
This ruling directly references ITC v. Blue Coast Hotels for its object-oriented interpretation of Section 31(i), while distinguishing against “misuse” of revenue entries—a theme drawn from earlier precedents like Commissioner of Wealth Tax v. Officer-in-Charge (Court of Wards), Paigah (1976) 3 SCC 864.
Broader Implications and Consistency Across Jurisprudence
The K. Sreedhar decision solidifies the Blue Coast framework, ensuring judicial scrutiny pierces beyond formal classifications to the “substance over form” principle. It underscores that:
- Creditors can enforce security interests over land tagged as agricultural if no genuine agrarian use is evidenced, promoting efficient debt recovery under Entry 45, List I (Banking).
- Borrowers cannot frustrate proceedings with unsubstantiated claims, balancing constitutional agrarian safeguards (e.g., under Articles 14 and 21) with banking stability, as affirmed in State Bank of India v. Santosh Gupta (AIR 2017 SC 25).
Conclusion
The Supreme Court in ITC v. Blue Coast Hotels & K Sreedhar reaffirmed the protective policy of Section 31(i) of SARFAESI, but cautioned against misuse of “agricultural land” claims by borrowers to frustrate creditors. Through reliance on key precedents like Paigah (1976) and Kunjukutty Saheb (1972), the Court reinforced that the decisive factor is the use and purpose of land, not merely its revenue entries.
The judgments harmonize banking law with agrarian protection, ensuring that while bona fide agriculturalists remain protected, commercial enterprises cannot shield themselves behind the facade of agricultural entry in revenue records.
Written By: Inder Chand Jain
Ph no: 8279945021, Email: [email protected]
