Is your farmland safe from SARFAESI? K. Sreedhar sets the actual-use test for the Section 31(i) exemption

A borrower who pledged a plot recorded as farmland in the revenue records often assumes the bank cannot touch it under the SARFAESI Act, 2002. On 5 January 2023, a two-judge Bench of the Supreme Court of India (Justices M.R. Shah and M.M. Sundresh) told borrowers that assumption is not enough. In K. Sreedhar v M/s Raus Constructions Pvt Ltd, Civil Appeal No. 7402 of 2022, the Court held that the Section 31(i) exemption for agricultural land turns on whether the land was actually in agricultural use when the security interest was created, and that the borrower carries the burden of proving it.

This playbook sets out what the statute says, how a SARFAESI enforcement unfolds step by step, which defences survive after Sreedhar, and what evidence a borrower needs to gather before the 45-day window to approach the Debts Recovery Tribunal closes.

The Statutory Position

Section 31 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the SARFAESI Act) lists the transactions to which the Act does not apply. The list includes liens, security interests in agricultural land, crops and financial assets below Rs 1 lakh. Clause (i) is the one that matters for farmland: the Act does not apply to "any security interest created in agricultural land". The full text of the Act is available on India Code.

The Act itself does not define "agricultural land". The Supreme Court noted in paragraph 8 of Indian Bank v K. Pappireddiyar (2018) 18 SCC 252, quoted in Sreedhar, that "the statutory dictionary in Section 2 does not contain a definition of the expression 'agricultural land'" and that whether a parcel is agricultural "is a question of fact".

The purpose of clause (i) was explained in paragraph 36 of ITC Ltd v Blue Coast Hotels Ltd (2018) 15 SCC 99, which Sreedhar reproduces in full. The exemption is "intended to protect agricultural land held for agricultural purposes by agriculturists from the extraordinary provisions of this Act, which provides for enforcement of security interest without intervention of the Court". Put simply, it protects farmers' livelihood, not a land-use label.

The core enforcement provisions a borrower will meet are summarised below. Each brief is drawn from the Oquilia statute catalogue.

Procedure Step by Step

A SARFAESI enforcement against a secured loan follows a fixed sequence. The Sreedhar facts, in which Indian Bank enforced against 12 items of mortgaged property, show each stage at work.

1. Classification as NPA. The account is classified as a non-performing asset. In Sreedhar, M/s Raus Constructions had availed credit facilities from Indian Bank in 2012 and the account was classified as NPA after defaults.
2. Demand notice under Section 13(2). The bank serves a notice on borrowers, mortgagors and guarantors, giving 60 days to clear the dues.
3. Representation under Section 13(3A). Within the 60-day window the borrower may object. This is the first written opportunity to say, with evidence, that a mortgaged parcel is agricultural land in actual use. The bank must reply with reasons within 15 days.
4. Possession notice under Section 13(4). If dues remain unpaid, the bank takes symbolic or physical possession. In Sreedhar, the consolidated possession notice dated 5 February 2016 covered all 12 items and was published in two leading newspapers, which the Supreme Court held satisfied Rules 8(1) and 8(2) of the Security Interest (Enforcement) Rules, 2002.
5. Section 14 application, if needed. Where the bank needs help to take physical possession, it applies to the Chief Metropolitan Magistrate or District Magistrate, who is expected to dispose of the application within 30 days.
6. Sale notice and e-auction. The first e-auction notice in Sreedhar was dated 28 March 2016; a fresh notice followed and the e-auction was held on 17 February 2017.
7. Deposit by the auction purchaser. Under Rule 9(3), the purchaser pays 25% of the sale price on the same day or not later than the next working day. Under Rule 9(4), the balance is due on or before the 15th day of confirmation of sale, or an extended period agreed in writing, not exceeding three months.
8. Sale certificate and registration. In Sreedhar the sale was confirmed on 8 March 2017, the certificate issued on 23 March 2017 and registered on 7 February 2018.
9. Challenge before the DRT under Section 17. The borrower may file a securitisation application within 45 days of the 13(4) measure. The borrowers in Sreedhar filed SA No. 171 of 2016 before DRT-I, Hyderabad, which dismissed it on 16 May 2019.
10. Appeal to DRAT under Section 18. An appeal lies within 30 days, subject to the pre-deposit set out below. The Sreedhar borrowers skipped this step, and that decision cost them the case.

The money trail in the auction of Item No. 8 shows how the Supreme Court read Rule 9 against the High Court's finding of a breach.

Rs 26 lakh plus Rs 45 lakh makes Rs 71 lakh, which is more than 25% of Rs 2,76,10,000 (about Rs 69.03 lakh). The Court therefore held in paragraph 6.3 that Rule 9(3) was complied with, and in paragraph 6.4 that the bank's 8 March 2017 letter operated as the "extended period" contemplated by Rule 9(4).

Borrower Defences Available

Sreedhar narrows the agricultural-land defence but does not abolish it. The grounds below remain open, each with its own evidential and procedural cost.

1. The Section 31(i) exemption, proved on facts. Paragraph 9 of Pappireddiyar, adopted in Sreedhar, says the question "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". A borrower who wants the exemption should assemble proof dated to the mortgage date, not the auction date.

2. Burden of proof sits with the borrower. Paragraph 7.3 of Sreedhar holds that the High Court "materially erred in shifting the burden upon the secured creditor". Revenue records, Pattadar pass-books and title deeds were before the Telangana High Court, but the Supreme Court said these alone were not decisive. The bank, by contrast, had filed photographs showing no farming activity.

3. The mortgage itself counts against the borrower. Following paragraph 49 of Blue Coast Hotels, the Court observed that because no security interest can be created in agricultural land, the act of mortgaging the land "goes to show that the parties did not treat the land as agricultural land". In Blue Coast, only 2,335 sq m of a 1,82,225 sq m hotel site was used to grow vegetables and fruit, and the whole site was held not to be agricultural.

4. Procedural defects in notice or sale. Breaches of Rules 8 and 9 remain a valid ground, but Sreedhar shows they are tested strictly against the text. The High Court's findings on Rules 9(3) and 9(4) were reversed as "just contrary to" the Rules, and a typographical error in possession dates (2015 printed for 2016) was argued by the bank as no breach of Section 13(4).

5. Representation under Section 13(3A). A reasoned objection within the 60-day notice period forces the bank to respond within 15 days and creates a record for the DRT.

6. Statutory appeal, not a writ. Paragraph 6 of Sreedhar holds that the High Court "ought not to have entertained the writ petition under Article 226/227" because an appeal lay to the DRAT. Filing a writ to avoid the pre-deposit is likely to fail.

The deposit and timing rules that decide whether a defence can be heard at all are set out here.

The two DRAT regimes are distinct. A borrower challenging a SARFAESI measure follows the Section 18 scheme, while an appeal against a recovery certificate under the Recovery of Debts and Bankruptcy Act, 1993 follows Sections 20 and 21. Paragraph 6 of Sreedhar records that the borrowers went to the High Court "to circumvent the provision of appeal before the DRAT and the pre-deposit".

Evidence checklist for a Section 31(i) claim. Based on what the DRT-I and the Supreme Court found missing in Sreedhar, a borrower should consider gathering, for the date the mortgage was created:

• crop records or sowing certificates for that season, and procurement receipts for produce sold;
• agricultural electricity connection bills or irrigation records showing continued use;
• dated photographs and any panchnama or inspection report;
• revenue entries (useful as supporting, not conclusive, evidence per paragraph 9 of Pappireddiyar);
• proof that no conversion to non-agricultural use had been sought, since a pending conversion application weighed against the debtor in Blue Coast.

Before deciding to fight or settle, borrowers can model the outstanding liability and the cost of closing it early using the loan foreclosure calculator, or test whether restructuring other debts frees cash using the debt consolidation calculator. If the mortgaged parcel backs a housing loan, the home loan EMI calculator shows the instalment that would need to be serviced to regularise the account.

Recent Tribunal/HC Position

The controlling authority remains the Supreme Court's judgment of 5 January 2023 in K. Sreedhar v M/s Raus Constructions Pvt Ltd, Civil Appeal Nos. 7402 and 7404 of 2022, arising from SLP (Civil) Nos. 14695 and 13508 of 2020. The judgment was authored by Justice M.R. Shah.

What the Telangana High Court had held. By its order of 6 March 2020 in Writ Petition No. 12081 of 2019, the High Court quashed the DRT-I order, the possession notice of 5 February 2016 and the sale notice of 10 January 2017, and set aside the sale of Item No. 8. It treated the remaining parcels as exempt because the revenue records and title deeds described them as agricultural and the bank had not proved conversion to non-agricultural use.

What the Supreme Court held. The Bench reversed on three grounds:

• Maintainability (paragraph 6): a writ under Article 226/227 against a DRT order should not have been entertained when an appeal to the DRAT was available.
• Auction rules (paragraphs 6.2 to 6.4): publication of the possession notice in two leading newspapers satisfied Rules 8(1) and 8(2); the deposits of Rs 26 lakh and Rs 45 lakh met Rule 9(3); and payment of Rs 2,05,10,000 on the 15th day after the bank's letter met Rule 9(4).
• Section 31(i) (paragraphs 7 to 7.3): for Item Nos. 3 and 9 to 12, the borrowers filed nothing beyond revenue records, while the bank produced photographs showing no agricultural activity. The exemption requires actual agricultural use when the security interest was created, and the burden is on the borrower.

The appeals were allowed and the DRT-I order of 16 May 2019 dismissing SA No. 171 of 2016 was restored, with no order as to costs.

How Sreedhar fits the line of authority. The judgment applies two earlier Supreme Court rulings rather than creating a new test.

For borrowers, the practical lesson from all three is the same: the label in the land records opens the argument, but only evidence of farming on the date of the mortgage can win it. Oquilia has also covered a related recovery dispute in Madras High Court rejects auction buyer's Rs 4.14 crore interest claim against Union Bank, and the treatment of disputed sums in MP High Court orders SBI to unfreeze account, keep only disputed sum in FD.

This article is general information drawn from the published judgment and statute, not legal advice. The Oquilia Research Desk does not appear before any court or tribunal; borrowers facing a 13(2) or 13(4) notice should consult an advocate practising before the relevant DRT.

FAQ

Does Section 31(i) of the SARFAESI Act protect all land shown as agricultural in revenue records?

No. In K. Sreedhar (5 January 2023), the Supreme Court followed paragraph 9 of Pappireddiyar (2018) 18 SCC 252, holding that revenue classification is "not dispositive or conclusive". The land must have been actually used for agriculture on the date the security interest was created.

Who has to prove that mortgaged land is agricultural?

The borrower. Paragraph 7.3 of Sreedhar holds that the Telangana High Court erred in shifting the burden onto the bank to prove non-agricultural use. A borrower relying on Section 31(i) must lead evidence of actual farming activity.

Can I go straight to the High Court if the DRT rejects my SARFAESI challenge?

Ordinarily, no. Sreedhar holds that a writ under Article 226/227 against a DRT order should not be entertained where an appeal lies to the DRAT under Section 18, which must be filed within 30 days.

How much must I deposit to appeal a DRT order to the DRAT under SARFAESI?

Under Section 18, the appeal is not entertained unless the borrower deposits 50% of the debt due, being the lower of the creditor's claim and the DRT's determination. The DRAT may reduce this to not less than 25% for reasons recorded in writing.

What is the time limit to challenge a possession notice before the DRT?

A securitisation application under Section 17 must be filed within 45 days of the Section 13(4) measure. A pre-deposit is not mandatory at this stage, though the DRT may direct one.

Does the fact that I mortgaged the land weaken my agricultural-land claim?

Yes. Relying on Blue Coast Hotels (2018) 15 SCC 99, the Court in Sreedhar observed that since no security interest can be created in agricultural land, mortgaging it suggests the parties did not treat it as agricultural.

What can I do after receiving a Section 13(2) notice?

You have 60 days to pay or object. A written representation under Section 13(3A) obliges the bank to reply with reasons within 15 days and is the earliest point to place evidence of agricultural use on record.