State Cannot Levy Collection Charges if No Actual Recovery is Effected by State Machinery.

In brief

The question

1. Whether the State is entitled to levy 10% collection charges when the borrower has deposited the outstanding amount directly with the bank and no actual recovery was effected by State machinery

The court held

the State has no authority to charge collection costs if no recovery was performed by its authorities

It also directed

The High Court allowed the writ petition and quashed the impugned recovery certificate dated 18.03.2008

01Facts

The petitioner, a nationalized bank, initiated recovery proceedings under the SARFAESI Act, 2002, against several borrowers whose accounts became Non-Performing Assets

¶ 3

Following a Debt Recovery Tribunal (DRT) direction to resolve the dispute, the borrowers liquidated the loan directly with the bank in 2005

¶ 4–5

the bank requested the District Magistrate to return the recovery certificate on 17.03.2005

¶ 5

The State authorities refused to return the certificate, claiming recovery processes were already in motion

¶ 6

On 18.03.2008, the Tehsildar issued an impugned recovery citation demanding 10% of the bank's claim as "collection charges," despite the State having made no actual recovery

¶ 7–8

02Issues

i.1. Whether the State is entitled to levy 10% collection charges when the borrower has deposited the outstanding amount directly with the bank and no actual recovery was effected by State machinery

¶ 8–9

ii.2. Whether the Board’s order dated 14.08.2007, prohibiting direct deposits to banks after a recovery certificate is issued, can be applied retrospectively to a loan liquidated in 2005

¶ 11–12

03Law Applied

if a recovery certificate is issued but the defaulter deposits the amount directly or the certificate is withdrawn/cancelled, the State cannot charge costs of recovery

¶ 9–10

constitutional mandate that no tax shall be levied except by authority of law

¶ 13

equitable doctrine of "Unjust Enrichment" (Nemo Debet Locupletari Ex Aliena Jactura), as interpreted by the Supreme Court in Mafatlal Industries Ltd. v. Union of India (1997) and Indian Council for Enviro Legal Action v. Union of India (2011), which prohibits the retention of money against principles of justice and equity

¶ 13–14

Provisions in the judgment · 3 · Linked ones open on LawLens

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Section 13

Revenue Recovery Act, 1890 Section 3 Section 5

04Reasoning

The court reasoned that since the bank’s loan was liquidated in 2005 and several requests for the return of the recovery certificate were made before the State took any coercive action, the State machinery did not actually effect the recovery

¶ 5, 13

Applying the Maharajwa precedent, the court found that without actual recovery by the State, the demand for 10% collection charges is unlawful and arbitrary

¶ 8, 10

The court rejected the State's reliance on the Board's order of 2007, noting it could not operate retrospectively against a 2005 settlement

¶ 12

allowing the State to collect fees for services not rendered would constitute "unjust enrichment" and a "tool of oppression," violating the bank's constitutional rights by taxing them without legal sanction

¶ 13, 15–16