GAUTAM NANDLAL KAPASI vs AMBALAL SHIVABHAI MISTRY

C/FA/177/2026 JUDGMENT DATED: 06/03/2026
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/FIRST APPEAL NO. 177 of 2026
With
CIVIL APPLICATION (FOR STAY) NO. 1 of 2025
In R/FIRST APPEAL NO. 177 of 2026
FOR APPROVAL AND SIGNATURE:
HONOURABLE MRS. JUSTICE M. K. THAKKER
==========================================================
Approved for Reporting Yes No
YES
==========================================================
GAUTAM NANDLAL KAPASI
Versus
AMBALAL SHIVABHAI MISTRY & ANR.
==========================================================
Appearance:
MS. SHIVANGI M RANA(7053) for the Appellant(s) No. 1
MR JAIMIL D DOSHI(11097) for the Defendant(s) No. 1,2
==========================================================
CORAM: HONOURABLE MRS. JUSTICE M. K. THAKKER
Date : 06/03/2026
JUDGMENT
1 The present appeal is filed under Section 96 of the
Code of Civil Procedure, 1908, challenging the
judgment and order dated 28.04.2025 passed by the
learned Additional Judge, City Civil Court, Ahmedabad
in Civil Suit No.146 of 2017, whereby the application
filed by the appellant–defendant for leave to defend
the suit below Exhibit 18 came to be rejected and the
application for summons for judgment filed by the
respondent–plaintiff below Exhibit 17 came to be
allowed. Consequently, judgment and decree came
to be passed against the present appellant directing
payment of Rs.60,00,000/- with interest within a
period of 30 days and further providing that, in the
event of failure to pay the said amount, the appellant
shall also pay compensation of Rs.2,00,000/- along
with interest at the rate of 9% per annum. The
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present appellant was the original defendant and the
respondents were the original plaintiffs before the
learned Trial Court and shall hereinafter be referred
to according to their original status. The plaintiff filed
a civil suit for recovery of Rs.60,00,000/-, which was
paid to the defendant as advance booking amount for
Flat Nos.101 and 201 situated in the scheme namely
“Shri Sharan” at 14-A, Mahalaxmi Society, Mahalaxmi
Cross Road, Paldi, Ahmedabad, which shall
hereinafter be referred to as the “suit property”.
2 It is contended in the plaint that the plaintiff had
agreed to purchase Flat No.101 for a sale
consideration of Rs.1,20,00,000/-, Flat No.201 for a
sale consideration of Rs.1,15,00,000/-, as well as a
th
flat situated on the 4 floor for a consideration of
Rs.1,00,00,000/-. Towards advance booking, an
amount of Rs.60,00,000/- was paid qua Flat Nos.101
and 201, i.e., Rs.30,00,000/- each. The said amount
was paid through cheque on 10.09.2015 and receipts
were issued by the defendant acknowledging the said
payment. As per the case of the plaintiff, the sale
deed was executed in respect of the flat situated on
th
the 4 floor for the consideration of Rs.1,00,00,000/-
and possession thereof was also handed over to the
plaintiff. Thereafter, the plaintiff issued a notice
dated 23.11.2016 calling upon the defendant to
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return the amount of Rs.60,00,000/-, contending that
though the flats were booked, due to demonetization
in the year 2016, the plaintiff was not in a position to
purchase the said flats and therefore requested the
defendant to refund the said amount.
2.1 The defendant replied to the said notice on
10.12.2016 and, while not disputing the advance
payment, stated that if the remaining amount was
not paid within the stipulated time, the advance
payment would be treated as forfeited. In that
background, the defendant refused to refund the
advance amount. The plaintiff thereafter issued a
further reply contending that she was a senior
citizen aged more than 80 years and that the
defendant had demanded additional amounts
under different heads, due to which the plaintiff
had decided not to proceed with the purchase of
the suit property. The defendant again replied on
30.12.2016, which was responded to by the
plaintiff on 06.01.2017. Ultimately, the plaintiff
filed the suit under Order XXXVII of the Code of
Civil Procedure along with an application for
injunction under Order XXXIX Rules 1 and 2 of the
Code of Civil Procedure. The defendant was
summoned below Exhibit-10 and thereafter
appeared and filed a pursis below Exhibit-13 along
with the Vakalatnama of the learned advocate. The
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defendant also filed an application below Exhibit-
15 praying that the Civil Suit be treated as a
Regular Civil Suit and, therefore, in the absence of
an application for leave to defend, a written
statement came to be filed below Exhibit-18.
2.2 At the time of passing the judgment, the learned
trial Court considered the averments made in the
written statement wherein the primary contention
raised was that the advance payment was made
for booking of the suit property subject to a
condition that the remaining amount was to be
paid within a period of 30 days, and since the
plaintiff failed to pay the remaining sale
consideration, she was not entitled to the relief
claimed in the plaint. The learned trial Court, after
considering the contentions raised in the plaint as
well as in the written statement along with the
documentary evidence on record, such as the
agreement receipts and bank statements, decreed
the suit in favour of the plaintiff, which is the
subject matter of challenge before this Court.
3 Heard the learned advocate Ms. Shivangi Rana for
the appellant and learned advocate Mr.Jaimil Doshi
for the defendants.
4 It is submitted by the learned advocate Ms. Rana that
the learned Trial Court has committed an error of law
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as well as of fact in rejecting the application seeking
leave to defend below Exhibit-18 and in allowing the
application for summons for judgment below Exhibit-
17. It is further submitted by the learned advocate
Ms. Rana that there existed substantial and bona fide
triable issues, however, the plausible defence raised
by the defendant was not examined or tested during
the course of trial. It is further submitted by the
learned advocate Ms. Rana that the plaintiff has
resorted to a shortcut method for recovering the
alleged amount, inasmuch as the claim for recovery
of Rs.60,00,000/- does not fall within the scope and
ambit of Order XXXVII of the Code of Civil Procedure.
It is contended that the suit is highly disputed and
involves complex questions of fact as well as law,
which cannot be adjudicated in a summary manner.
It is therefore submitted that the learned Trial Court
has misconstrued the provisions of law while passing
the impugned judgment and decree, and hence the
same deserves to be set aside and the present First
Appeal deserves to be allowed.
5 Per contra, learned advocate Mr. Jaimil Doshi submits
that the payment of the advance booking amount of
Rs.60,00,000/- is not in dispute and the same is duly
supported by the receipt as well as the bank
statement. It is submitted by the learned advocate
Mr. Doshi that the only contention raised by the
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defendant in defence is that the said amount of
Rs.60,00,000/- was paid towards the booking of two
flats in the suit property and since the plaintiff failed
to pay the remaining sale consideration, the said
booking amount was liable to be forfeited, and
therefore the plaintiff was not entitled to a decree. It
is further submitted by the learned advocate Mr.
Doshi that after the booking of the suit property,
demonetization came into force and thereafter the
defendant started demanding additional money. In
view thereof, the plaintiff decided not to proceed with
the purchase of the two flats which were booked.
5.1 It is also submitted by the learned advocate Mr.
Doshi that the defendant is a builder, whereas the
plaintiff is an elderly person aged about 85 years
who had invested his hard-earned money, and
therefore upon cancellation of the booking the
amount was required to be refunded. It is
therefore submitted by the learned advocate Mr.
Doshi that the learned Trial Court, after
considering all the submissions and the material
on record, has rightly decreed the suit and hence
no interference is warranted in the impugned
judgment and decree. Accordingly, the present
appeal deserves to be dismissed.
6 Considering the submissions made by the learned
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advocates for the respective parties and upon
perusal of the paper-book placed on record by the
learned advocate for the defendant, it emerges that
while trying the suit, the learned Trial Court has not
framed formal issues and has directly decided the
point as to whether the plaintiff is entitled to the
return of the amount paid towards advance booking.
7 In the opinion of this Court, as the controversy
involved in the suit is limited in nature and the
contentions raised by the parties are also confined to
a narrow compass, even in the absence of framing of
issues, the reasons assigned by the learned Trial
Court deserve to be examined. Undisputedly, three
flats were booked by the plaintiff, out of which one
th
flat situated on the 4 floor of the scheme was
purchased. The dispute pertains to the remaining two
flats for which an advance booking amount of
Rs.60,00,000/- was paid and which is now sought to
be recovered by the plaintiff.
8 It is an admitted position that no formal agreement
was executed between the parties. However, at the
time of booking of the flats, the defendant had issued
receipts acknowledging the payments in the
following manner:
“We sell you the first floor apartment at the rate of
Rs.12,000,000/- which included 5 Lacs maintenance
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deposit and 5 Lacs documentation charge. 30 Lacs
booking amount received.
We sell you the second floor apartment at the rate of
1,15,00,000/- which includes 5 Lacs maintenance
deposit and 5 lacs documentation charge. 30 Lacs
booking amount received.
We are ready to sell you the forth floor at the rate of
10,000,000/- which includes 5 Lacs documentation
charge only which must.”
9 The said receipts are duly signed by both the parties,
namely the plaintiff and the defendant. Upon
referring to the aforesaid receipts/writings, the moot
question which arises for consideration before this
Court is whether the amount paid for booking of the
flats can be treated as earnest money or merely as
advance payment, and if the same is considered to
be an advance payment, whether the plaintiff would
be entitled to recover the said amount in the event of
cancellation of the booking.
10 For the purpose of determining the aforesaid issue,
this Court has considered the decision rendered by
the Apex Court in the case of K.R.Suresh vs. R.
Poornima and others, reported in 2025 SCC
OnLine 1014 . The relevant paragraph of the said
decision is reproduced hereinbelow:
“29. At the cost of repetition, we deem it necessary to state that
there existed an explicit forfeiture clause in the ATS, which
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stipulated that the advance money paid would stand forfeited in
the event of default by the buyer in fulfilling the terms of the
contract. Similarly, in case of default on part of the seller, the
advance money was to be doubled and paid back to the buyer.
Pursuant to the aforesaid forfeiture clause, the respondent nos. 1-4
herein forfeited the advance money on account of the default by
the appellant in paying the balance sale consideration of Rs.
35,50,000/- within the stipulated four-month period.
i. Validity of the Forfeiture of Advance Money
a. Difference between Earnest Money and Advance Money
30. At the outset, it is pertinent to distinguish between “advance
money” and “earnest money”. The said terms are often used
interchangeably. The distinction becomes all the more essential,
given that the ATS explicitly refers to the forfeited sum as
“advance money”.
31. Here, we consider it apposite to refer to the meanings of the
said terms. The word “advance” means money in whole or in
part, forming the consideration of an agreement paid before the
same is completely payable. On the other hand, the word
“earnest” stands for a sum of money given for the purpose of
binding a contract, which is forfeited if the contract does not go
off and adjusted in price if the contract goes through. [See: P
Ramanatha Aiyar in “Advanced Law Lexicon”, 7th Edn.]
32. The principles governing the scope of “earnest money” were
succinctly explained in the case of Shree Hanuman Cotton Mills v.
Tata Air Craft Ltd., (1969) 3 SCC 522, reproduced as under:
“21. From a review of the decisions cited above, the
following principles emerge 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
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contract.
(3) It is part of the purchase price when that 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.’”
(Emphasis supplied)
33. In the case of Videocon Properties Ltd. v. Bhalchandra
Laboratories, (2004) 3 SCC 711, while assessing the difference
between “advance” and “earnest”, this Court took the view that
the words used in the agreement alone cannot be determinative of
the true nature of the amount advanced. Instead, the intention of
the parties and the surrounding circumstances serve as more apt
indicators. Further, the Court observed that earnest money fulfils a
dual purpose : first, it operates as part-payment of the purchase
price and; secondly, as security for the performance of the
contractual obligations. Thus, its true character and purpose can
only be canvassed on a close reading of the agreement, and the
relevant contextual factors. The relevant observations are
reproduced hereinbelow:
“14. […] Further, it is not the description by words used in
the agreement only that would be determinative of the
character of the sum but really the intention of parties and
surrounding circumstances as well, that have to be looked
into and what may be called an advance may really be a
deposit or earnest money and what is termed as ‘a deposit
or earnest money’ may ultimately turn out to be really an
advance or part of purchase price. Earnest money or deposit
also, thus, serves two purposes of being part-payment of the
purchase money and security for the performances of the
contract by the party concerned, who paid it.”
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(Emphasis supplied)
34. In Satish Batra v. Sudhir Rawal, (2013) 1 SCC 345, this Court
emphatically held that it is only the “earnest money”, paid as a
pledge for the due performance of the contract, that can be
forfeited by the seller on account of the buyer's default. In the
same vein, earnest money can also be doubled and paid back to
the buyer if the contract falls through due to the seller's default.
An amount which is in nature of an “advance” or serves as part-
payment of the purchase price cannot be forfeited unless it is a
guarantee for the due performance of the contract. The Court
further held that despite the existence of an outright forfeiture
clause, it shall not apply if the amount stipulated in the contract is
found to be only in the nature of part-payment of the purchase
price. Consequently, the forfeiture of “advance money” as part of
earnest money can only be justified if the terms of the contract are
clear and explicit to that effect. The relevant observations are
reproduced hereinbelow:
“6. […] In Chiranjit Singh v. Har Swarup, [(1926) 23 LW
172 : AIR 1926 PC 1] it has been held that (LW p. 174) the
earnest money is part of the purchase price when the
transaction goes forward and it is forfeited when the
transaction falls through, by reason of the fault or failure of
the purchaser. […]
xx xx xx
10. In DDA v. Grihsthapana Coop. Group Housing Society
Ltd., [1995 Supp (1) SCC 751], this Court following the
judgment of the Privy Council in Har Swarup [(1926) 23 LW
172 : AIR 1926 PC 1] and Shree Hanuman Cotton Mills,
[(1969) 3 SCC 522], held that the forfeiture of the earnest
money was legal. In V. Lakshmanan v. B.R. Mangalagiri,
[1995 Supp (2) SCC 33] this Court held as follows : (SCC p.
36, para 5)
“5. The question then is whether the respondents are
entitled to forfeit the entire amount. It is seen that a specific
covenant under the contract was that the respondents are
entitled to forfeit the money paid under the contract. So
when the contract fell through by the default committed by
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the appellant, as part of the contract, they are entitled to
forfeit the entire amount.”
xx xx xx
15. The law is, therefore, clear that to justify the forfeiture
of advance money being part of “earnest money” the terms
of the contract should be clear and explicit. Earnest money
is paid or given at the time when the contract is entered
into and, as a pledge for its due performance by the
depositor to be forfeited in case of non-performance by the
depositor. There can be converse situation also that if the
seller fails to perform the contract the purchaser can also get
double the amount, if it is so stipulated. It is also the law
that part-payment of purchase price cannot be forfeited
unless it is a guarantee for the due performance of the
contract. In other words, if the payment is made only
towards part-payment of consideration and not intended as
earnest money then the forfeiture clause will not apply.”
(Emphasis supplied)
35. A forfeiture clause identical to the one in the present ATS was
found in the case of Satish Batra (supra). It provided for the
forfeiture of earnest money in case of the purchaser's default, as
well as the payment of double the amount of earnest money in
case of the vendor's default. This Court allowed the forfeiture of
the earnest money, which was held to be security for the due
performance of the contract, by the seller when the transaction fell
through on account of the purchaser's fault. The relevant forfeiture
clause and observations are reproduced hereinbelow:
“5. […] The question whether the seller can retain the
entire amount of earnest money depends upon the terms of
the agreement. The relevant clause of the agreement for sale
dated 29-11-2005 is extracted hereunder for easy reference:
“(e) If the prospective purchaser fails to fulfil the above
condition, the transaction shall stand cancelled and earnest
money will be forfeited. In case I fail to complete the
transaction as stipulated above, the purchaser will get
DOUBLE the amount of the earnest money. In both
conditions, the DEALER will get 4% commission from the
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faulting party.”
The clause, therefore, stipulates that if the purchaser fails to
fulfil the conditions mentioned in the agreement, the
transaction shall stand cancelled and earnest money will be
forfeited. On the other hand, if the seller fails to complete
the transaction, the purchaser would get double the amount
of earnest money. Undisputedly, the purchaser failed to
perform his part of the contract, then the question is
whether the seller can forfeit the entire earnest money.
xx xx xx
17. We are, therefore, of the view that the seller was
justified in forfeiting the amount of Rs. 7,00,000 as per the
relevant clause, since the earnest money was primarily a
security for the due performance of the agreement and,
consequently, the seller is entitled to forfeit the entire
deposit.[…]”
(Emphasis supplied)
36. A three-Judge Bench of this Court, of which one of us (J.B.
Pardiwala, J.) was a part, reiterated the distinction between
“earnest” and “advance” in Central Bank of India v.
Shanmugavelu, (2024) 6 SCC 641, thus stating that “earnest”
differs from “advance money”, though the former can be treated
as part-payment of the sale consideration if the contractual terms
are duly honoured. In other words, earnest money is adjusted
against the total sale consideration if the contract goes through.
The relevant observations are reproduced hereinbelow:
“84. The difference between an earnest or deposit and an
advance part-payment of price is now well established in
law. Earnest is something given by the promisee to the
promisor to mark the conclusiveness of the contract. This is
quite apart from the price. It may also avail as a part-
payment if the contract goes through. But even so it would
not lose its character as earnest, if in fact and in truth it
was intended as mere evidence of the bargain. An advance
is a part to be adjusted at the time of the final payment. If
the promisee defaults to carry out the contract, he loses the
earnest but may recover the part-payment leaving untouched
the promisor's right to recover damages. […]”
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(Emphasis supplied)
37. From the above exposition of law, it becomes amply clear that
the amount of Rs. 20,00,000/- termed as “advance money” in the
ATS, was essentially “earnest money”. In other words, it was in
the nature of a guarantee for the due performance of the contract.
In a fashion akin to earnest money, the said amount was paid at
the very execution of the ATS. It was meant to be adjusted against
the total sale consideration of Rs. 55,50,000/- if the transaction
was carried out, which is evident from the ATS clause that states
the balance sale consideration to be as Rs. 35,50,000/-. Further, it
was liable to be forfeited in the event that the transaction fell
through by reason of the default on part of the purchaser.
Consequently, when the appellant-purchaser failed to comply with
the contractual stipulation of paying the balance sale consideration
within a period of four months from the date of the agreement,
the respondent nos. 1-4 (vendors) were justified in forfeiting the
advance money.
38. We consider it apposite at this juncture to take note of the
conditions that make time the essence of a contract. Such
conditions were precisely outlined by this Court in Chand Rani v.
Kamal Rani, (1993) 1 SCC 519, which are reproduced hereunder:
“25. From an analysis of the above case-law it is clear that
in the case of sale of immovable property there is no
presumption as to time being the essence of the contract.
Even if it is not of the essence of the contract the Court
may infer that it is to be performed in a reasonable time if
the conditions are:
1. From the express terms of the contract;
2. from the nature of the property; and
3. from the surrounding circumstances, for example : the
object of making the contract.” (Emphasis supplied)
39. This Court recently reaffirmed the principles for deeming
whether time is of the essence in a contract in Welspun Specialty
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Solutions Ltd. v. ONGC, (2022) 2 SCC 382. It held that the
determination must be made by reading and analysing the contract
in its entirety, taking into account the surrounding circumstances.
An explicit clause stating that time is of the essence is not, by
itself, sufficient. The Court further observed that any provision
allowing extensions under a contract effectively negates such a
clause, thereby indicating that time is not of the essence. The
relevant observations are reproduced hereinbelow:
“34. In order to consider the relevancy of time conditioned
obligations, we may observe some basic principles:
(a) Subject to the nature of contract, general rule is that
promisor is bound to complete the obligation by the date for
completion stated in the contract. [Refer to Percy Bilton Ltd.
v. Greater London Council [Percy Bilton Ltd. v. Greater
London Council, [1982] 1 WLR 794 (HL)]]
(b) That is subject to the exception that the promisee is not
entitled to liquidated damages, if by his act or omissions he
has prevented the promisor from completing the work by the
completion date. [Refer Holme v. Guppy [Holme v. Guppy,
(1838) 3 M & W 387 : 150 ER 1195]]
(c) These general principles may be amended by the express
terms of the contract as stipulated in this case.
35. It is now settled that “whether time is of the essence in
a contract”, has to be culled out from the reading of the
entire contract as well as the surrounding circumstances.
Merely having an explicit clause may not be sufficient to
make time the essence of the contract. As the contract was
spread over a long tenure, the intention of the parties to
provide for extensions surely reinforces the fact that timely
performance was necessary. The fact that such extensions
were granted indicates ONGC's effort to uphold the integrity
of the contract instead of repudiating the same.” (Emphasis
supplied)
40. Having regard to the aforesaid authorities, the intention of the
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parties and the surrounding circumstances in the present case, it
can be sufficiently inferred that the inclusion of the forfeiture
clause in the ATS was intended to bind the contracting parties and
ensure the due performance of the contract. This is particularly
significant given the stipulated four-month period for completing
the sale transaction and the primary object of executing the ATS,
being the urgency of the respondent nos. 1-4 regarding the OTS,
which was known to the appellant, as recorded by the Trial Court.
The findings of the Trial Court, along with the impugned judgment
affirming that time was of the essence, further substantiate the said
intent.
41. Furthermore, the appellant neither sought any extension for
performing his part of the contract nor was any extension of time
granted by the respondent nos. 1-4. On the contrary, within two
months of the stipulated period's expiry, the respondent nos. 1-4
proceeded with a distress sale of the suit property to the
respondent nos. 5-7 (subsequent purchasers), further underscoring
the urgency underlying the contract.
b. Permissible Extent of Forfeiture
42. The issue at hand may be looked at from another angle.
Having reached the aforesaid conclusion that the forfeiture of
advance money by the respondent nos. 1-4 herein was lawful, it
appears fitting to determine whether they were entitled to the
entire amount of Rs. 20,00,000/-.
43. At this juncture, we deem it appropriate to take note of
Section 74 of the Indian Contract Act, 1872 (for short, “the 1872
Act”). Section 74 of the 1872 Act deals with the compensation for
loss or damage caused by a breach of the contract when a
particular sum of liquidated damages or penalty is already set forth
under the terms of the contract. It further provides that such
compensation must be reasonable and it cannot, in any
circumstance, exceed the amount stipulated in the contract. The
same is extracted below:
“74. Compensation for breach of contract where penalty stipulated
for.—When a contract has been broken, if a sum is named in the
contract as the amount to be paid in case of such breach, or if the
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contract contains any other stipulation by way of penalty, the
party complaining of the breach is entitled, whether or not actual
damage or loss is proved to have been caused thereby, to receive
from the party who has broken the contract reasonable
compensation not exceeding the amount so named or, as the case
may be, the penalty stipulated for.
[…]”
44. A conjoint reading of Section 74 of the 1872 Act and the
principles underlying forfeiture clauses was undertaken in the case
of Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49. This
Court held that Section 74 of the 1872 Act will apply to every
covenant involving a penalty, whether it is for a future payment
on breach of the contract or the forfeiture of a sum already paid.
Ergo, a forfeiture clause in a contract would ordinarily fall within
the ambit of the words “any other stipulation by way of penalty”.
Further, it was held that supplying evidence of a loss incurred by
the vendor on account of the breach of contract by the buyer
would be mandatory to justify forfeiture, and only a reasonable
amount, commensurate with such loss, can be forfeited. The
relevant observations are extracted hereinbelow:
“14. […] The words “to be paid” which appear in the first
condition do not qualify the second condition relating to
stipulation by way of penalty. The expression “if the
contract contains any other stipulation by way of penalty”
widens the operation of the section so as to make it
applicable to all stipulations by way of penalty, whether the
stipulation is to pay an amount of money, or is of another
character, as, for example, providing for forfeiture of money
already paid. There is nothing in the expression which
implies that the stipulation must be one for rendering
something after the contract is broken. There is no ground
for holding that the expression ‘contract contains any other
stipulation by way of penalty’ is limited to cases of
stipulation in the nature of an agreement to pay money or
deliver property on breach and does not comprehend
covenants under which amounts paid or property delivered
under the contract, which by the terms of the contract
expressly or by clear implication are liable to be forfeited.
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xx xx xx
16. There is no evidence that any loss was suffered by the
plaintiff in consequence of the default by the defendant, save
as to the loss suffered by him by being kept out of
possession of the property. There is no evidence that the
property had depreciated in value since the date of the
contract provided; nor was there evidence that any other
special damage had resulted. The contact provided for
forfeiture of Rs. 25,000 consisting of Rs. 1039 paid as
earnest money and Rs. 24,000 paid as part of the purchase
price. The defendant has conceded that the plaintiff was
entitled to forfeit the amount of Rs. 1000 which was paid as
earnest money. We cannot however agree with the High
Court that 13 percent of the price may be regarded as
reasonable compensation in relation to the value of the
contract as a whole, as that in our opinion is assessed on an
arbitrary assumption. The plaintiff failed to prove the loss
suffered by him in consequence of the breach of the contract
committed by the defendant and we are unable to find any
principle on which compensation equal to ten percent of the
agreed price could be awarded to the plaintiff. […]”
(Emphasis supplied)
45. It is imperative to mention herein that in Fateh Chand (supra),
this Court, while setting “earnest money” apart from a “penalty”,
held that insofar as forfeiture of earnest money is concerned,
Section 74 of the 1872 Act will not apply. The relevant
observations are reproduced hereinbelow:
“7. The Attorney General appearing on behalf of the
defendant has not challenged the plaintiff's right to forfeit
Rs. 1000 which were expressly named and paid as earnest
money. He has, however, contended that the covenant which
gave to the plaintiff the right to forfeit Rs. 24,000 out of the
amount paid by the defendant was a stipulation in the
nature of penalty, and the plaintiff can retain that amount
or part thereof only if he establishes that in consequence of
the breach by the defendant, he suffered loss, and in the
view of the Court the amount or part thereof is reasonable
compensation for that loss. We agree with the Attorney
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General that the amount of Rs. 24,000 was not of the nature
of earnest money. The agreement expressly provided for
payment of Rs. 1000 as earnest money, and that amount
was paid by the defendant. The amount of Rs. 24,000 was
to be paid when vacant possession of the land and building
was delivered, and it was expressly referred to as “out of
the sale price.” If this amount was also to be regarded as
earnest money, there was no reason why the parties would
not have so named it in the agreement of sale. […]”
(Emphasis supplied)
46. To the same effect is the decision of this Court in Maula Bux
v. Union of India, (1969) 2 SCC 554, wherein it was held that
forfeiture of earnest money is not deemed as penal and that
Section 74 of the 1872 Act will only apply where the forfeiture is
in the nature of a penalty. The relevant observations are extracted
hereunder:
“5. Forfeiture of earnest money under a contract for sale of
property — movable or immovable — If the amount is
reasonable, it does not fall within Section 74. That has been
decided in several cases : Chiranjit Singh v. Har Swarup
[Chiranjit Singh v. Har Swarup, 1925 SCC OnLine PC 63 :
(1926) 23 LW 172] ; Roshan Lal v. Delhi Cloth & General
Mills Co. Ltd. [Roshan Lal v. Delhi Cloth & General Mills
Co. Ltd., 1910 SCC OnLine All 98 : ILR (1911) 33 All 166] ;
Mohd. Habib-Ullah v. Mohd. Shafi [Mohd. Habib-Ullah v.
Mohd. Shafi, 1919 SCC OnLine All 87 : ILR (1919) 41 All
324] ; Bishan Chand v. Radha Kishan Das [Bishan Chand v.
Radha Kishan Das, 1897 SCC OnLine All 52 : ILR (1897) 19
All 489 : 1897 AWN 123]. These cases are easily explained,
for forfeiture of reasonable amount paid as earnest money
does not amount to imposing a penalty. But if forfeiture is
of the nature of penalty, Section 74 applies. Where under
the terms of the contract the party in breach has undertaken
to pay a sum of money or to forfeit a sum of money which
he has already paid to the party complaining of a breach of
contract, the undertaking is of the nature of a penalty.”
(Emphasis supplied)
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47. In Shanmugavelu (supra), this Court emphasized upon the
fundamental difference between the forfeiture of “earnest money”
and forfeiture of “any other amount”, wherein the former
constitutes a general forfeiture clause, while the latter qualifies as
a penal clause. A clause for forfeiture of earnest money thus, only
intended as a deterrent to ensure due performance of the
contractual obligations, will not be deemed penal in the ordinary
sense. The relevant observations are reproduced hereunder:
“81. Even otherwise, what is discernible from the
abovereferred decisions of Fateh Chand [Fateh Chand v.
Balkishan Dass, 1963 SCC OnLine SC 49 : AIR 1963 SC
1405], Maula Bux [Maula Bux v. Union of India, (1969) 2
SCC 554] and Satish Batra [Satish Batra v. Sudhir Rawal,
(2013) 1 SCC 345 : (2013) 1 SCC (Civ) 483] is that there lies
a difference between forfeiture of any amount and forfeiture
of earnest money with the former being a penal clause and
the latter a general forfeiture clause. A clause providing for
forfeiture of an amount could fundamentally be in the nature
of a penalty clause or a forfeiture clause in the strict sense
or even both, and the same has to be determined in the
facts of every case keeping in mind the nature of contract
and the nature of consequence envisaged by it.
82. Ordinarily, a forfeiture clause in the strict sense will not
be a penal clause, if its consequence is intended not as a
sanction for breach of obligation but rather as security for
performance of the obligation. This is why Fateh Chand
[Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49 :
AIR 1963 SC 1405] Maula Bux [Maula Bux v. Union of
India, (1969) 2 SCC 554] and Satish Batra [Satish Batra v.
Sudhir Rawal, (2013) 1 SCC 345 : (2013) 1 SCC (Civ) 483]
held that forfeiture of earnest money deposit is not a penal
clause, as the deposit of earnest money is intended to signify
assent of the purchaser to the contract, and its forfeiture is
envisaged as a deterrent to ensure performance of the
obligation.”
(Emphasis supplied)
48. A different view was taken by this Court in Kailash Nath
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Associates v. DDA, (2015) 4 SCC 136, wherein it held that Section
74 of the 1872 Act applies to the forfeiture of earnest money
deposit. It further held that proof of actual damage or loss is a
sine qua non for invoking the said section and thereby, only a
reasonable amount will be permissible for forfeiture upon the
breach of contract. The relevant observations are reproduced
hereinbelow:
“43. […]
xx xx xx
43.2. Reasonable compensation will be fixed on well-known
principles that are applicable to the law of contract, which are to
be found inter alia in Section 73 of the Contract Act.
43.3. Since Section 74 awards reasonable compensation for damage
or loss caused by a breach of contract, damage or loss caused is a
sine qua non for the applicability of the section.
43.5. The sum spoken of may already be paid or be payable in
future.
43.6. The expression “whether or not actual damage or loss is
proved to have been caused thereby” means that where it is
possible to prove actual damage or loss, such proof is not
dispensed with. It is only in cases where damage or loss is difficult
or impossible to prove that the liquidated amount named in the
contract, if a genuine pre-estimate of damage or loss, can be
awarded.
43.7. Section 74 will apply to cases of forfeiture of earnest money
under a contract. […]”
(Emphasis supplied)
49. This Court expounded on the question of loss in Lakshmanan v.
B.R. Mangalagiri, 1995 Supp (2) SCC 33, holding that when the
contract falls through due to the default on part of the appellant-
purchaser, and the resulting loss suffered by the respondent-
vendors exceeds the amount forfeited under the contract, the
forfeiture cannot, by any measure, be seen as unjustified. The
relevant observations are extracted below:
“5. The question then is whether the respondents are
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entitled to forfeit the entire amount. It is seen that a specific
covenant under the contract was that the respondents are
entitled to forfeit the money paid under the contract. So
when the contract fell through by the default committed by
the appellant, as part of the contract, they are entitled to
forfeit the entire amount. In this case even otherwise, we
find that the respondents had suffered damages, firstly for
one year they were prevented from enjoying the property
and the appellant had cut off 150 fruit-bearing coconut trees
and sugarcane crop was destroyed for levelling the land
apart from cutting down other trees. Pending the appeal, the
respondents sought for and were granted permission by the
court for sale of the property. Pursuant thereto, they sold
the land for which they could not secure even the amount
under contract and the loss they suffered would be around
Rs. 70,000. Under those circumstances, their forfeiting the
sum of Rs. 50,000 cannot be said to be unjustified. The
appeal is accordingly dismissed with costs.”
(Emphasis supplied)
50. We may as well refer to a recent judgment of this Court in
Godrej Projects Development Ltd. v. Anil Karlekar, 2025 SCC
OnLine SC 222, wherein this Court examined one-sided and
unconscionable forfeiture clauses. It was held that a forfeiture
clause, if found to be unfair and unreasonable, cannot be enforced
by this Court. Further, while citing the clause providing for
“forfeiture of earnest money deposit” in Satish Batra (supra), it
held that the said clause could not be said to be one-sided and
accordingly, upheld the same. The relevant observations are
extracted as under:
“26. In the case of Central Inland Water Transport
Corporation Limited v. Brojo Nath Ganguly8, this Court, by
taking recourse to Article 14 of the Constitution of India,
has held that the courts will not enforce an unfair and
unreasonable contract or an unfair and unreasonable clause
in a contract, entered into between Parties who are not
equal in bargaining power. It will be relevant to refer to the
following observations of this Court in the said case:
“89. […] It will also apply where a man has no choice, or
rather no meaningful choice, but to give his assent to a
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contract or to sign on the dotted line in a prescribed or
standard form or to accept a set of rules as part of the
contract, however unfair, unreasonable and unconscionable a
clause in that contract or form or rules may be. This
principle, however, will not apply where the bargaining
power of the contracting parties is equal or almost equal.
This principle may not apply where both parties are
businessmen and the contract is a commercial transaction.”
xx xx xx
33. Insofar as the judgment in the case of Satish Batra
(supra) is concerned, the clause providing for “forfeiture of
earnest money deposit” cannot be said to be one-sided. […]
34. It can thus be seen that in the aforesaid case though the
term in the Agreement provided for forfeiture of the earnest
money in the event the prospective purchaser fails to fulfill
the conditions, it also provided for payment of double the
amount of earnest money by the vendor to the purchaser in
case the vendor fails to complete the transaction. As such,
the said term cannot be said to be one-sided.”
(Emphasis supplied)
51. On a conspectus of the aforementioned authorities, it is evident
that a clause for the forfeiture of earnest money is not penal in the
ordinary sense, rendering Section 74 of the 1872 Act, inapplicable.
In the present case, the stipulated amount under the ATS was in
the nature of an earnest money deposit and thus, Section 74 of the
1872 Act cannot apply to the same. Further, the forfeiture clause
was fair and equitable rather than one-sided and unconscionable,
as it imposed liabilities on both the appellant-purchaser and
respondent-sellers, wherein the seller was obligated to pay twice
the advance amount paid by the buyer in case of his default.
52. Even, for argument's sake, if we have to apply the principle
under Section 74 of the 1872 Act to the present case in line with
Kailash Nath (supra), the forfeiture of the entire amount of
advance money by the respondent nos. 1-4 would still be justified
on the ground that there was breach of contract by the appellant,
which led to financial losses for the respondent nos. 1-4. Such
losses, as specifically pleaded and proved by the evidence led
before the Trial Court, far exceeded the amount forfeited under the
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ATS, a position that was duly noted and accepted by the Trial
Court.
ii. Law on the Alternative Relief of Refund of Earnest Money under
Section 22 of the 1963 Act
53. The High Court denied the relief of refund of advance money
to the appellant herein, having regard of the fact that the appellant
had not sought for an alternative prayer for refund of the advance
sale consideration in the suit as mandated by Section 22(2) of the
1963 Act.
54. Before we proceed to answer the question formulated by us in
para 27, we deem it necessary to examine Section 22 of the 1963
Act. It reads thus:
“22. Power to grant relief for possession, partition, refund of
earnest money, etc.— (1) Notwithstanding anything to the
contrary contained in the Civil Procedure Code, 1908 (5 of
1908), any person suing for the specific performance of a
contract for the transfer of immovable property may, in an
appropriate case, ask for—
(a) possession, or partition and separate possession, of the
property, in addition to such performance; or
(b) any other relief to which he may be entitled, including
the refund of any earnest money or deposit paid or [made
by] him, in case his claim for specific performance is
refused.
(2) No relief under clause (a) or clause (b) of sub-section (1)
shall be granted by the court unless it has been specifically
claimed:
Provident that where the plaintiff has not claimed any such
relief in the plaint, the court shall, at any stage of the
proceeding, allow him to amend the plaint on such terms as
may be just for including a claim for such relief.
(3) The power of the court to grant relief under clause (b) of
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sub-section (1) shall be without prejudice to its powers to
award compensation under section 21.”
55. Sir Frederick Pollock, 3rd Baronet, in Pollock & Mulla : The
Indian Contract and Specific Relief Acts, 16th Edn., has discussed
the object and scope of Section 22 of the 1963 Act and the
alternative relief of refund of earnest money deposit, as follows:
“[s 22.6.2] Refund of Earnest Money or Deposit
[…] The relief of refunding of earnest money or deposit
cannot be granted unless specifically claimed. Further such a
plea cannot be considered in a second appeal, particularly
when the issue of execution of the agreement has been held
as not having been proved.
Refund of amounts paid may also be ordered when specific
performance has been refused on the ground of unexplained
delay by the plaintiff in approaching the Court. It is also
open to a plaintiff to give up his prayer for specific
performance at the hearing, or before the hearing, and ask
for return of the earnest money or deposit.
Where a clause entitling forfeiture of earnest money is
contained in the agreement, it would not be refundable to
the plaintiff who has failed to perform his part of the
contract. Forfeiture of earnest money should not be allowed
where the vendor has not suffered any loss, but has actually
gained, viz., on account of frustration of contract. Where the
value of land had considerably increased after the sale
agreement, the Court, while refusing a decree for specific
performance, ordered a refund of the earnest amount on the
ground that the plaintiff did not suffer any loss, but had
gained due to the default of the plaintiff.
xx xx xx
[s 22.7] Pleadings and Amendment to Pleadings
Section 22 enacts a rule of pleading. It enables the plaintiff
to ask for possession in the suit for specific performance and
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empowers the Court to provide, in the decree itself, that
upon payment by the plaintiff of the consideration money
within the given time, the defendant should execute the
deed and put the plaintiff in possession. If the said relief is
not claimed in the plaint, the Court shall permit the plaintiff
at any stage of the proceedings, including execution
proceedings, to amend the plaint on such terms as it deems
proper. The purpose is to avoid multiplicity of suits. This
provision overrides the provisions of Order VI, Rule 17 of
CPC, 1908. Omission to seek alternative relief is not a
ground to reject the plaint.
A plaintiff may amend the plaint to include a claim for
refund to advance money paid to the defendant. The
amendment may be made at any stage of the proceeding,
including the appellate stage. The option vests with the
plaintiff to claim alternative relief, and unless he claims such
a relief, the Court is not empowered to grant it.”
(Emphasis supplied)
56. The expression “at any stage of the proceeding” has been
judicially interpreted to include the appellate stage as well, as
affirmed by a catena of High Court decisions. This interpretation
entails that that an amendment of the plaint to incorporate a
prayer for the alternative relief of refund of earnest money may be
sought even during the first appeal from the original decree passed
in a suit for specific performance. The non-obstante clause attached
to Section 22(1) of the 1963 Act grants it an overriding effect,
thereby excluding the operation of the Civil Procedure Code, 1908.
Further, the use of the word “shall” in the proviso to Section
22(2) imposes a mandate upon the court to allow the amendment
of plaint, as sought by the party, at any stage. [See : Sahida Bibi
v. Sk. Golam Muhammad, 1982 SCC OnLine Cal 59; Tarit Bhowmik
v. Mukul Day, 2014 SCC OnLine Cal 5361]
57. In Manickam v. Vasantha, 2022 SCC OnLine SC 2096, this
Court was dealing with the question of whether the executing court
could deliver possession in execution of a decree where no specific
prayer for possession had been made in a suit for specific
performance. It held that the proviso appended to Sub-section (2)
of Section 22 of the 1963, which mandates the Court to allow an
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amendment of the plaint at any stage of the proceeding to include
a claim for such relief under Clause (a) or (b) of Section 22(1),
renders the provision directory in nature. The Court opined that
Section 22(2) is qualified by the phrase “in an appropriate case”,
referring to situations where such relief does not necessarily flow
from a decree for specific performance of a sale agreement.
Accordingly, if such relief under Clause (a) or (b) of Section 22(1)
appears as a necessary implication of the decree for specific
performance, a specific prayer for claiming such relief would not
be required. In light of these principles, this Court held that the
relief of possession was inherently included in a decree for specific
performance and need not be specifically pleaded. Furthermore, it
reiterated that the words “at any stage of the proceeding” have a
wide amplitude, encompassing both the appellate stage and
execution proceedings. The relevant observations are reproduced
hereinbelow:
“22. The Bombay High Court in a judgment reported as
Lotu Bandu Sonavane v. Pundalik Nimba Koli held that relief
of possession is to be claimed “in an appropriate case”. It
means a case in which the relief does not necessarily flow
from the decree for specific performance of the agreement of
sale. If such a relief is ancillary to and necessarily flows
from a decree for specific performance, then it is not
necessary to specifically seek such a relief and the bar of S.
22(2) would not be attracted. If the defendant is in
possession of the property agreed to be sold and the decree
directs a specific performance of the agreement of sale, the
defendant is bound to execute the sale deed as per the
decree and to put the plaintiff in possession of the property
as contemplated by S. 55(1)(f) of the Transfer of Property
Act. In such a case it is not necessary to specifically claim
the relief of possession in the suit.
xx xx xx
9. The term “proceeding” is a very wide and comprehensive
term and it includes execution proceeding also. The
expression “at any stage of the proceeding” gives widest
permission to the Court to allow amendment at any stage of
the proceeding including execution of the decree. The
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amendment can be allowed even in an appeal arising out of
the order passed by the executing Court rejecting the prayer
for permission. The proviso recognises the well settled
position that the Court passing a decree for specific
performance retains control over the subject matter as long
as anything remains to be done in the case.”
xx xx xx
26. The matter can be examined from another angle as well.
Section 22(2) of the Act, though is worded in negative
language, “no relief under clause (a) or clause (b) of sub-
section (1) shall be granted by the court unless it has been
specifically claimed”, but the proviso takes out the
mandatory nature from the substantive provision of sub-
section (2) when the plaintiff is allowed to amend the plaint
on such terms as may be just for including the plaint for
such relief “at any stage of the proceeding”. “At any stage
of the proceeding” would include the proceeding in suit or
in appeal and also in execution. The proviso to sub-section
(2) of Section 22 of the Act contemplates that the Court
shall, at any stage of the proceedings, allow the plaintiff to
amend the plaint on such terms as may be just for including
a claim for such relief. The said proviso makes the provision
directory as no penal consequences follow under sub-section
(2) of Section 22. […]
xx xx xx
29. To examine whether a provision is directory or
mandatory, one of the tests is that the court is required to
ascertain the real intention of the legislature by carefully
attending to the whole scheme of the statute. Keeping in
view the scheme of the statute, we find that Section 22(2) of
the Act is only directory and thus, the decree-holder cannot
be non-suited for the reason that such relief was not granted
in the decree for specific relief.
30. The defendant in terms of the agreement is bound to
handover possession of the land agreed to be sold. The
expression “at any stage of proceeding” is wide enough to
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allow the plaintiffs to seek relief of possession even at the
appellate stage or in execution even if such prayer was
required to be claimed. This Court in Babu Lal has explained
the circumstances where relief of possession may be
necessary such as in a suit for partition or in a case of
separate possession where the property conveyed is a joint
property. In the suit for specific performance, the possession
is inherent in such suit, therefore, we find that the decree-
holders are in fact entitled to possession in pursuance of the
sale deed executed in their favor.”
(Emphasis supplied)
58. It is thus a settled position of law that the plaint may be
amended at any stage of the proceedings to enable the plaintiff to
seek an alternative relief, including that of refund of earnest
money, and the courts have been vested with wide judicial
discretion to permit such amendments. However, under Section 22
of the 1963 Act, the courts cannot grant such relief suo moto,
since the inclusion of the prayer clause remains a sine qua non for
the grant of such a relief. In other words, when an “appropriate
case” exists for seeking the said relief under this provision, it must
be specifically sought either in the original plaint or by way of an
amendment. This has been emphatically held by this Court in Desh
Raj v. Rohtash Singh, (2023) 3 SCC 714. The relevant observations
are reproduced hereunder:
“35. On a plain reading of the above-reproduced provision,
we have no reason to doubt that the plaintiff in his suit for
specific performance of a contact is not only entitled to seek
specific performance of the contract for the transfer of
immovable property but he can also seek alternative relief(s)
including the refund of any earnest money, provided that
such a relief has been specifically incorporated in the plaint.
The court, however, has been vested with wide judicial
discretion to permit the plaintiff to amend the plaint even at
a later stage of the proceedings and seek the alternative
relief of refund of the earnest money. The litmus test
appears to be that unless a plaintiff specifically seeks the
refund of the earnest money at the time of filing of the suit
or by way of amendment, no such relief can be granted to
him. The prayer clause is a sine qua non for grant of decree
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of refund of earnest money.
36. Applying these principles to the facts of the case in
hand, we find that the respondent has neither prayed for the
relief of refund of earnest money in the original plaint nor
he sought any amendment at a subsequent stage. In the
absence of such a prayer, it is difficult to accept that the
courts would suo motu grant the refund of earnest money
irrespective of the fact as to whether Section 22(2) of the
SRA Act is to be construed directory or mandatory in
nature.”
(Emphasis supplied)
11 Having considered the aforesaid judgment, wherein
it has been held that in order to assess the distinction
between advance payment and earnest money, the
words used in the agreement, the intention of the
parties, and the surrounding circumstances are
required to be taken into consideration, it emerges
that in the present case there is no formal agreement
executed between the parties. However, even if the
aforesaid writings/receipts are construed as an
agreement, it appears that a sum of Rs.30 Lakh each
was paid towards the booking amount for two flats.
Except for recording the payment of the said amount,
there is no stipulation with regard to any time period,
nor does it reflect any specific condition pertaining to
forfeiture of the said amount.
12 Undoubtedly, earnest money serves a dual purpose,
namely: (i) it operates as a part payment of the
purchase price; and (ii) it acts as a security for the
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due performance of the contractual obligations.
However, on a close reading of the aforesaid
writings/receipts, it does not appear that the parties
intended the said payment to operate as a security
for the performance of any contractual obligation. If
the intention of the parties was to treat the amount
as earnest money, then in the event the contract
failed due to the default of the seller, the purchaser
would ordinarily be entitled to claim double the
amount, whereas if the contract failed due to the
default of the purchaser, the amount could be liable
to forfeiture. However, an amount which is in the
nature of advance payment or part payment of the
purchase price cannot be forfeited unless it is
specifically stipulated as a guarantee for the due
performance of the contract. Even in the presence of
an explicit forfeiture clause, such clause would not be
enforceable if the amount stipulated under the
contract is found to be merely in the nature of part
payment of the purchase price rather than earnest
money.
13 As discussed hereinabove, due to the impact of
demonetization and the change in circumstances,
coupled with the fact that the defendant demanded a
higher amount, the plaintiff decided not to proceed
with the purchase of the flats which were earlier
booked. However, in the absence of any intention
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C/FA/177/2026 JUDGMENT DATED: 06/03/2026
reflected in the writing produced below Mark 4/3 to
bind the contracting parties or to secure the due
performance of the contract, this Court is of the
opinion that the defendant is not entitled to forfeit
the advance booking amount.
14 It was also submitted by both the parties during the
course of hearing that the flats in question were
subsequently sold to other purchasers and that the
defendant has already received the consideration for
the said flats. In that background as well, no valid
claim can be raised by the defendant for retaining
the aforesaid amount. Therefore, this Court finds that
the learned Court below has not committed any error
in decreeing the suit in favour of the plaintiff.
15 In view of the aforesaid circumstances, the present
appeal, being devoid of merits both on facts as well
as in law, deserves to be dismissed.
16 Resultantly, the present appeal stands dismissed.
The judgment and order dated 28.04.2025 passed by
the learned Additional Judge, City Civil Court,
Ahmedabad in Civil Suit No.146 of 2017 is hereby
confirmed. The Civil Application also stands disposed
of accordingly.
(M. K. THAKKER,J)
M.M.MIRZA
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