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Introduction

In a landmark judgment with far-reaching implications for India’s taxation framework, Special Economic Zones (SEZs), and the power sector, the Supreme Court of India has categorically ruled that customs duty cannot be levied on electricity generated within a Special Economic Zone and supplied to the Domestic Tariff Area (DTA).

The ruling came while deciding an appeal filed by Adani Power Limited, which had challenged the continued levy of customs duty on electrical energy generated in its SEZ-based power project and supplied to consumers in the DTA.

At its core, the judgment reinforces a foundational principle of Indian constitutional law: no tax can be imposed or collected without clear authority of law. The Court held that the absence of a statutory charging provision under the Customs Act, 1962 could not be cured through exemption notifications, delegated legislation, or changes in duty rates.

This decision is not merely about one company or one sector. It reasserts constitutional discipline under Articles 14 and 265 of the Constitution of India, strengthens judicial precedent, and provides much-needed clarity for SEZ developers, power generators, policymakers, and tax authorities across the country.

Background of the Dispute

Adani Power’s SEZ-Based Power Project

Adani Power Limited operates a thermal power generation unit located within a Special Economic Zone, a legally notified area established to promote exports, investment, and economic development through fiscal and regulatory incentives.

Electricity generated from this SEZ unit was supplied to the Domestic Tariff Area (DTA), i.e., the rest of India outside the SEZ. Under the SEZ framework, goods supplied from an SEZ to the DTA are treated as “imports” for limited purposes, primarily to determine applicable duties and taxes.

The Government’s Attempt to Levy Customs Duty

Despite the fact that imported electrical energy attracts a nil rate of customs duty, the Union Government issued a series of notifications starting from 2010, attempting to levy customs duty on electricity supplied from SEZs to the DTA on a per-unit basis.

These notifications sought to treat electricity generated within India—but inside an SEZ—as if it were imported goods, thereby making it liable for customs duty.

The First Round: Gujarat High Court’s 2015 Judgment

Adani Power challenged these notifications before the Gujarat High Court. In its landmark judgment dated 15 July 2015, the High Court struck down the levy.

Key Findings of the Gujarat High Court (2015)

The High Court held that:

1. Electricity generated within India cannot be treated as “imported goods”

2. There was no charging event under Section 12 of the Customs Act

3. Delegated legislation under Section 25 (exemption notifications) cannot create a tax where none exists

4. Levying customs duty in this manner violated Article 265 of the Constitution, which mandates that tax must be authorised by law

5. The levy also offended Article 14, as it destroyed parity between imported electricity (nil duty) and domestically generated electricity

This declaration of law was later affirmed by the Supreme Court, thereby giving it binding force.

The Second Round: Continued Levy and the 2019 High Court Judgment

Despite the clear declaration of law in 2015, customs authorities continued to levy and collect duty for later periods, relying on subsequent notifications that revised the rate or structure of duty.

When Adani Power sought refunds and enforcement of the earlier judgment, a coordinate bench of the Gujarat High Court in 2019 denied relief. The High Court reasoned that since the later notifications were not specifically challenged, the benefit of the 2015 ruling could not be extended automatically.

This narrow interpretation led to the present appeal before the Supreme Court.

Issues Before the Supreme Court

The Supreme Court was called upon to decide:

1. Whether customs duty could legally be levied on electricity supplied from an SEZ to the DTA

2. Whether later notifications could revive a levy already declared illegal

3. Whether a citizen must repeatedly challenge successive notifications based on the same invalid legal foundation

4. Whether the 2015 judgment had continuing and binding effect

Supreme Court’s Analysis and Observations

A Bench comprising Justice Aravind Kumar and Justice N.V. Anjaria undertook a detailed constitutional and statutory analysis.

1. Absence of a Charging Event Under the Customs Act

The Court reaffirmed that Section 12 of the Customs Act is the charging provision for customs duty. It applies only when there is import into, or export out of, India.

The Court categorically held:

“Electrical energy generated within India and wheeled into the Domestic Tariff Area is not, in truth, a case of import into India.”

Since electricity was generated domestically, the fundamental taxable event itself was missing.

2. Electricity Is Not “Imported Goods” in This Context

Although the SEZ Act treats supplies from SEZs to the DTA as imports for certain purposes, this legal fiction cannot override constitutional or statutory limits.

The Court clarified that:

1. Legal fictions must be strictly confined to the purpose for which they are created

2. They cannot be expanded to create a tax where the charging provision does not exist

3. Limits of Delegated Legislation Under Section 25

The Union argued that subsequent notifications issued under Section 25 of the Customs Act justified the levy.

The Court rejected this argument outright, holding that:

1. Section 25 only grants power to exempt or modify existing duties

2. It cannot create a new levy

3. Delegated legislation cannot cure the absence of legislative competence

The Court observed that what Parliament itself cannot do directly, cannot be done indirectly through subordinate legislation.

4. Parity Principle Under the SEZ Act

Under Section 30 of the SEZ Act, goods cleared from an SEZ to the DTA are chargeable to duties “as applicable to imported goods”.

The Supreme Court emphasised the parity principle:

1. Imported electricity attracts nil customs duty

2. Therefore, electricity supplied from an SEZ to the DTA cannot be subjected to a higher or different duty

Since this statutory position remained unchanged after 2015, the Court found no justification for a different outcome in later years.

5. Binding Nature of the 2015 Declaration of Law

One of the most significant aspects of the judgment is its reaffirmation of judicial discipline and precedent.

The Court held:

“Once a declaration of law is rendered and affirmed by this Court, it acquires binding normative force and governs all transactions resting on the same legal footing.”

The 2019 High Court decision was criticised for narrowing the scope of a coordinate bench’s judgment without referring the matter to a larger bench, which violated settled principles of judicial propriety.

6. No Need to Repeatedly Challenge Identical Illegality

The Supreme Court rejected the argument that Adani Power should have separately challenged every subsequent notification.

It held that:

1. Courts do not function on “technical formalism”

2. A citizen cannot be compelled to repeatedly litigate against the same illegality clothed in different forms

3. Once the foundation of a levy is struck down, all derivative actions fall automatically

7. Colourable Exercise of Power

The Court characterised the impugned notifications as a “colourable exercise of delegated power”, observing that merely altering the rate or timing of the levy does not legitimise an unconstitutional tax.

Constitutional Dimensions of the Judgment

Article 265: Authority of Law

Article 265 of the Constitution mandates:

“No tax shall be levied or collected except by authority of law.”

The Supreme Court reaffirmed that executive convenience or revenue considerations cannot override constitutional mandates.

Article 14: Equality Before Law

The levy was also found to violate Article 14, as it created arbitrary discrimination between:

1. Imported electricity (nil duty)

2. Domestically generated electricity supplied from SEZs

Final Decision and Directions

The Supreme Court:

1. Set aside the 2019 judgment of the Gujarat High Court

2. Allowed the appeal filed by Adani Power Limited

3. Declared that the customs duty levied on electricity supplied from SEZs to the DTA lacked authority of law

4. Directed the Union of India and customs authorities to refund the amounts collected, after verification, without interest

5. Ordered that no further demands be enforced for the period covered by the appeal

Importantly, the Court clarified that:

Its findings are confined to the existing statutory framework and do not prevent Parliament from enacting a future legislative regime, if it so chooses.

Broader Implications of the Judgment

For SEZ Developers and Power Producers

1. Provides long-term tax certainty

2. Prevents retrospective or indirect levies

3. Reinforces investor confidence in SEZ policy

For Tax Administration

1. Reaffirms limits of delegated legislation

2. Emphasises constitutional compliance over revenue considerations

For Constitutional Jurisprudence

1. Strengthens the doctrine of precedent

2. Protects taxpayers from repetitive litigation

3. Upholds the rule of law

Cause Title and Appearances

Case: Adani Power Limited & Anr. v. Union of India & Ors.
Neutral Citation: 2026 INSC 1

For the Appellant:
Senior Advocate P. Chidambaram

For the Respondents:
Raghvendra P. Shankar, Additional Solicitor General

Conclusion

The Supreme Court’s ruling in favour of Adani Power is a landmark affirmation of constitutional tax discipline. By holding that customs duty cannot be levied on electricity supplied from SEZs in the absence of a statutory charging event, the Court has reinforced the supremacy of law over executive action.

More importantly, the judgment sends a clear message: illegal levies cannot be sustained through procedural manoeuvres, altered rates, or repeated notifications. Stability, predictability, and respect for judicial outcomes remain central to India’s constitutional order.

For businesses, policymakers, and legal practitioners alike, this decision stands as a powerful reminder that taxation must always flow from law—not convenience.

Introduction

In real estate transactions, an “Agreement to Sell” (ATS) is often the first step: the vendor promises to sell immovable property to the vendee on specified terms and the vendee promises or shows readiness to pay the balance consideration and complete the formalities (sale deed, registration, delivery of possession). Over decades, Indian courts have developed extensive jurisprudence on when an ATS may be enforced (via a suit for specific performance) and when it may be cancelled, rescinded or determined.

A recurring question is: Can one party simply “unilaterally” terminate an ATS (i.e., one party cancels the agreement) if the contract does not contain a clause permitting such termination? The new Supreme Court ruling answers this in the negative — unilateral termination is invalid if the contract is non-determinable (i.e., it does not itself allow termination) and the vendee can directly move for specific performance without first filing a separate declaratory suit to challenge the termination.

This article explains that ruling, the legal background, its significance, practical implications for property transactions and how parties must approach ATSs going forward.

What is an Agreement to Sell and its legal significance

An Agreement to Sell is a contract under the Indian Contract Act, 1872 and may also be enforced under the Specific Relief Act, 1963 (SRA). While it is not the final sale deed, it is a binding commitment by the parties: the vendor to sell and the vendee to buy, subject to fulfilment of conditions (payment of balance, obtaining approvals etc.).

Once the vendee shows readiness and willingness to perform, Indian courts frequently grant relief of specific performance under the SRA, compelling the vendor to execute the sale deed and transfer the property. The relevant sections are Sections 14-18 of the SRA (on specific performance) and Sections 27-31 (on declaratory relief/rescission).

From a practical viewpoint:

1. The ATS gives the vendee rights (e.g., to insist on performance, to seek refund of earnest money and/or damages if conditions are not met).

2. The vendor is obligated to abide by the terms (unless the contract allows a right of termination, or time is of the essence, or there is a default by the vendee).

3. If the vendor refuses to perform, the vendee may file a suit for specific performance (or alternately for refund + damages).

Given this framework, a vendor may sometimes attempt to terminate the ATS unilaterally (for example by issuing a “termination notice” or “cancellation letter”). The key question is: Is such termination legally valid, particularly when the contract itself does not provide a termination clause?

The Supreme Court ruling: Key facts and ratio

Facts of the case

In the case of K. S. Manjunath & Ors. vs. Moora­savirappa @ Muttanna Chennappa Batil (Deceased) by his LRs & Ors. (2025) (hereafter “Manjunath case”), the following facts arose:

1. On 28 April 2000, an ATS was executed for sale of about 354 acres of agricultural land in Basavanakoppa village, Haveri district, Karnataka. The sale consideration was approx. ₹26.95 lakh and an advance of about ₹9.45 lakh (or ₹2 lakh in some reports) had been paid.

2. The vendor later issued a letter in 2003 unilaterally terminating the ATS, citing reasons such as a “status quo order” in a litigation and death of one vendor. Subsequently the land was sold to third parties in 2007.

3. The vendees filed a suit for specific performance. The trial court initially rejected it and granted refund and damages. The High Court reversed, directed sale deed execution in their favour and held subsequent purchasers were not bona fide. On appeal to SC, the judgment of High Court was affirmed.

Ratio (legal principle)

The Supreme Court held:

1. A party cannot unilaterally terminate an ATS that is non-determinable unless the contract itself expressly allows such termination (i.e., is determinable in nature under Section 14 of the SRA).

2. If the contract gives no right to terminate unilaterally (or that right has been waived) and one party still does so, then that termination is in fact a breach by repudiation, and the non-terminating party can directly seek specific performance without first seeking a declaration that the termination was bad in law.

3. Placing the burden on the vendee to first challenge the termination would unfairly allow every suit for specific performance to be frustrated by the vendor raising unilateral termination as a defense. The Court observed that if unilateral termination were permitted simply because the vender says “I cancel”, then the vendee, even after performing his obligations, is forced to fight an extra battle.

4. The burden of approaching the court for a declaration lies primarily with the party who claims there was valid termination/rescission (the terminating party) — though the Court underscored that this is not mandatory in all circumstances.

The Court summarised six key principles:

1. Unilateral termination of an agreement to sell by one party is impermissible in law except where the agreement is itself determinable under Section 14 of the SRA.

2. If such unilateral termination of a non-determinable agreement is allowed as a defence, virtually any suit for specific performance can be frustrated by that device.

3. Where a party claims valid reasons to terminate or rescind, it is more appropriate that the terminating party approaches the court for declaration of such termination, rather than casting the burden on the non-terminating party.

4. That does not mean the non-terminating party must always first sue for declaratory relief—once unilateral termination is shown to be non-bona fide and without contractual basis, the vendee may proceed directly for specific performance.

5. If the contract gives no termination right and unilateral termination is effected, it is a repudiation. The vendee’s suit for specific performance can proceed.

6. In such event, the ATS remains subsisting and enforceable.

Why the ruling matters: Practical significance

Reinforces contractual sanctity

One of the key take-aways is the reinforcement of the principle that contracts must be honoured, especially in property transactions. If the ATS does not provide a termination clause, one cannot simply cancel it at one’s whim. This provides greater certainty and fairness to vendees who rely on the agreement.

Protection for genuine vendees

Often, a vendee pays advance/earnest money and takes steps (obtaining loan, approvals, relocating tenants, etc.). If the vendor later tries to cancel unilaterally without justification, the vendee has clear protection under this judgment: the vendee can proceed for specific performance directly, rather than first fighting a separate declaratory suit.

Prevents misuse of termination as defense

The Court flagged that allowing unilateral termination as a defense would open the flood-gates: every vendor could say “I cancel” and stop the suit, forcing the vendee to first get a declaration. That invites delay, expense and uncertainty. The ruling plugs that gap.

Clarifies when termination may be permissible

The judgment does not say termination can never happen. If the contract is determinable in nature (i.e., contains a clause that the vendor may rescind/terminate or the contract by its nature allows termination), then unilateral termination might be valid under Section 14 of the SRA. Parties and lawyers must examine whether the ATS contains such a clause.

Impact on subsequent purchasers

As the judgment also discusses (see § 19(b) below), if a vendor unilaterally terminates the ATS and sells to a third party, the original vendee may still enforce their rights. A subsequent purchaser may not claim bona fide purchaser protection if they had notice of the ATS or should have made inquiry. Thus the ruling strengthens the original vendee’s position against subsequent transfers.

Legal framework: What the law says

Specific Relief Act, 1963

• Section 14: Deals with non-determinable contracts (contracts not determinable by the parties by notice) and determinable contracts (contracts the parties may terminate by notice). If contract is determinable, one party may serve notice to determine the contract; if non-determinable, specific performance is ordinarily available when the vendee shows readiness and willingness.

• Sections 14-18: Relate to the remedy of specific performance. Key prerequisites: valid contract, performance by plaintiff, readiness & willingness, no bar under Section 20.

• Sections 27-31: Deal with relief by way of declaration, rescission and cancellation of contracts.

In the Manjunath case the Court emphasised the interplay: if contract is non-determinable (i.e., no right of unilateral termination), then termination letter becomes repudiation and vendee can directly rely on Sections 14–18 for specific performance.

Indian Contract Act, 1872

While the SRA provides the specific performance remedy, the Contract Act supplies general contract law principles: offer, acceptance, consideration, capacity, contract enforcement, breach, etc. A termination that is not permitted by the contract may amount to a breach of contract under the Contract Act.

Bona fide purchaser protection – Section 19(b) of SRA

Section 19(b) provides protection to a “transferee for value without notice” of the prior contract. The Manjunath judgment also addresses this: since the vendor attempted a unilateral termination and sold to third parties, the subsequent purchasers sought protection under 19(b). The SC held that since the termination was unilateral and the purchasers had notice (actual or constructive) of the prior ATS, they could not claim protection.

Thus the inter-play: vendor cannot terminate unilaterally and then sell to a third party expecting that the third party will be protected—if the third party knew (or should have known) of the prior ATS, protection fails.

When is unilateral termination valid – the “determinable contract” exception

The ruling makes clear that unilateral termination is valid only in limited circumstances: when the contract itself is determinable by its nature, or contains an express termination or rescission clause. If the ATS says “vendor may terminate by giving X days’ notice” or “time is of the essence, and in event of purchaser default vendor may rescind”, then the contract is determinable and termination is likely valid (subject to other conditions). The Court said: “except in cases where the agreement itself is determinable in nature in terms of Section 14.”

Key features to check in a determinable contract:

1. A clause expressly giving one party (usually the vendor) the option to determine/terminate the agreement (e.g., default clause, time-essence clause, waiver of purchaser rights).

2. A stipulation that time is of the essence and the vendee must complete by a certain date or lose rights.

3. Provisions for “governing in case of default” and “termination by notice” language.

If none of these exist and the ATS is silent or says simply “we agree to sell on terms set out”, then the ATS is non-determinable and the unilateral termination is invalid.

Who bears the burden? Declaration vs direct suit for specific performance

One important procedural clarification: Earlier case-law (for example, I.S. Sikandar (Dead) by LRs v. K. Subramani & Ors. (2013) 15 SCC 27) held that if an ATS has been terminated, a suit for specific performance may not be maintainable unless the vendee also prays for declaration that the termination was void.

However, the 2025 Supreme Court ruling departs from that rigid approach in respect of non-determinable ATSs. The Court observed:

“If a contract itself gives no right to unilaterally terminate the contract … and a party still terminates the contract unilaterally, then that termination would amount to a breach by repudiation and the non-terminating party can directly seek specific performance without first seeking a declaration.”

In other words:

1. If termination was within contractual rights (determinable), then a declaration suit or challenge may be required.

2. But if termination is invalid (non-determinable contract, no right to terminate unilaterally) then the vendee need not first sue for a declaration; he can directly invoke specific performance.

The Court added that burden to show the termination was valid lies with the terminating party (vendor) who raises termination as a defence. “Where a party claims to have valid reasons to terminate … it should ideally approach the court for a declaration.”

Hence, for practitioners: In drafting or litigating ATS disputes, it is critical to examine the nature of the contract (determinable or not) and frame the relief accordingly.

What the vendee (buyer) must do: Readiness and willingness, maintaining eligibility

Even when termination is invalid, the vendee must still satisfy the classic prerequisites for specific performance:

1. Existence of a valid and enforceable contract (ATS).

2. The vendee must have performed or is willing and able to perform his part (payment of balance consideration, meeting conditions, etc.).

3. The vendor must be in default or refusing to perform (not time or other barrier).

4. The relief must be grantable (not barred by Section 20 of SRA or other equitable defence).

In the Manjunath case the original vendees had shown readiness and willingness and the High Court’s decree was affirmed by SC.

It is advisable that the vendee:

1. Keep clear record of advance/earnest payment/part payment.

2. Be ready with bank statements, evidence of willingness (for example, remaining balance amount ready).

3. Ensure no material default (e.g., delay in payment if time is of the essence).

4. Note that the vendor’s unilateral termination letter will likely be seen as repudiation; the vendee must not treat it as final without consultation.

What the vendor (seller) must take care of

From the vendor’s perspective, this judgment means:

1. You cannot assume that issuing a unilateral termination letter ends the ATS unless the contract permits termination.

2. If you believe the ATS is terminable (due to purchaser default or a clause), you must act carefully: comply with clause, give notice, follow contract terms.

3. If the purchaser is ready and willing and there is no clause for termination, your attempted unilateral termination is likely invalid and you could be forced to execute sale deed under decree.

4. If you sell to a third party after purported termination, you risk the third party being held liable (if they had notice of the ATS) and you may face a suit for specific performance by original vendee.

5. Ensure that any termination or rescission is documented properly and preferably challenged/validated in court rather than simply assumed.

What third-party purchasers must beware of

The judgment also provides important guidance for subsequent purchasers of property where an ATS is in existence:

1. Under Section 19(b) of SRA, a subsequent purchaser may claim protection as a “transferee for value without notice” of the prior contract. But the Court held that if the original vendor attempted unilateral termination, that termination being invalid, the existence of the ATS continues. The subsequent purchaser cannot claim bona fide purchaser protection if they had actual or constructive notice of the ATS.

2. Even if the subsequent purchaser argues ignorance of the earlier ATS, the Court emphasised that when the termination notice itself was unilateral (and disclosed names & addresses of original vendees) the purchaser should have inquired further. Failure to do so may amount to constructive notice.

3. Thus, due diligence is critical: checking land records, verifying existing agreements to sell, asking the vendor for earlier documents, etc. Ignorance of an ATS will not always protect the purchaser if they failed to inquire when circumstances demanded it.

How to structure an ATS (and contractual drafting tips)

Given the risks under the new ruling, the following practical drafting tips emerge:

1. Termination/Rescission Clause: If the parties wish to allow termination, include a clear clause specifying when and how termination may be effected (e.g., purchaser’s default, vendor’s inability, force-majeure, time-essence clause).

2. Time‐essence clause: Specify dates for payment, sale deed execution, delivery of possession. If time is of the essence, then delay may permit termination.

3. Readiness & Willingness clause: Ensure the vendee commits to remaining ready and willing; vendor obtains assurances.

4. Notice of termination: If termination is possible, specify notice period, manner (registered letter, acknowledgment) and any refund/forfeiture mechanism.

5. Refund/forfeiture of earnest money: If vendor terminates, specify whether earnest money will be refunded or forfeited, and whether withdrawal is allowed.

6. Assignment clause: If vendor subsequently sells to a third party, specify how the ATS will be binding on successors and how notice to third parties will be given.

7. Registrability check: Ensure parties know when ATS needs registration (if at all) and any stamp duty/registration formalities.

8. Contingencies and approvals: If sale is subject to approvals (governmental, cooperative society, court orders, tenant relocation), define the condition precedent and timeline.

9. Conflict resolution clause: Provide for arbitration/mediation, jurisdiction, etc.

10. Legal compliance: Consider provisions for RERA (if applicable), land-use change, statutory compliance, etc.

Well‐drafted ATSs reduce litigation risk and clarify parties’ rights in case of disputes. The new ruling emphasises that in absence of termination clause, unilateral termination will not succeed.

Illustrative scenarios : What courts will decide

To better understand how this ruling plays out, consider the following hypothetical scenarios:

Scenario 1: Vendor and Vendee sign an ATS for property, payable in two instalments, with no termination clause. Vendee pays an earnest amount and obtains loan sanction. Vendor later issues a letter unilaterally terminating ATS citing “change of mind”. Vendee sues for specific performance.
– Under Manjunath ruling: ATS is non-determinable; termination invalid; vendee can directly sue for specific performance.
– Vendor cannot rely on termination as defence; must defend on other grounds (vendee default, time not of the essence, contract void).
– If vendee shows readiness & willingness, court likely grant decree for specific performance.

Scenario 2: ATS includes a clause: “If purchaser fails to pay the balance within 90 days, vendor may terminate this agreement by notice in writing.” Vendee fails to pay in time; vendor gives notice and cancels; vendor then sells to third party; vendee sues.
– Here ATS is determinable by contract (termination clause). Vendor’s termination may be valid if conditions met. Vendee may need to challenge termination via declaratory suit or show that vendor mis-applied the clause.
– If third party buys without notice, they may claim bona fide purchaser protection under Section 19(b). The Manjunath ruling does not automatically apply to determinable contracts.

Scenario 3: ATS is silent on termination, time for payment is 100 days but vendor imposes no explicit “time is of essence” clause. Vendee delays but eventually pays with extension; vendor issues cancellation letter saying “we cannot wait further.” Vendee sues.
– Under Manjunath, vendor cannot unilaterally cancel unless contract permitted termination; time-frame alone may not make contract determinable. The vendee may succeed, subject to readiness/willingness; vendor may try to argue delay was material but must prove default.
– Practical risk: vendor may defend on ground of default or delay, so vendee must show they were ready and willing, and vendor’s delay was unreasonably long or vendor waived time.

These scenarios show that the key questions courts will ask: Was ATS determinable? Was termination clause present? Did vendee perform or was ready & willing? Did vendor have basis to terminate? Any genuine default? Notice to third parties? Etc.

What practitioners should watch out for

Given this ruling, lawyers, legal advisers, property consultants should pay attention to:

• Vendor’s termination letter/notice: If unilateral, a warning sign that vendee may have rights despite vendor’s claim of cancellation.

• Due diligence by purchasers: Upcoming buyers must check whether an ATS exists, whether any termination was genuine, whether the vendor has authority to transfer, and whether they are protected under Section 19(b).

• Drafting ATSs carefully: Avoid ambiguous “termination” language; clarify rights and obligations.

• Readiness & willingness evidence: Vendee must keep documentary proof (bank loans, payment receipts, correspondence, approvals).

• Time is of essence clauses: If parties intend time to be of essence, clearly draft it; avoid leaving to future dispute over default.

• Notice to third parties: If vendor wants to sell to third parties, ensure that existing ATSs are disclosed or extinguished by proper surrender/waiver, to avoid later enforcement.

• Registration and stamp duty: Even if ATS is unregistered, Indian courts have held certain effects. But registration may improve enforceability and transparency.

• Equitable defences and limitation: Vendor may still defend based on purchaser’s default, illegality, lack of capacity, misrepresentation or limitation, so vendeur’s suit is not automatic.

• Subsequent purchaser’s risk: Buying property after vendor issued cancellation is risky — the court emphasised that noticing a termination letter pointing to unilateral cancellation should trigger inquiry; failure may mean no bona fide purchaser protection.

Limitations and cautions: Not a blanket rule

While the Manjunath ruling is powerful, it is important to appreciate its boundaries:

1. It is explicitly restricted to non-determinable agreements to sell (i.e., ATSs without clause permitting termination). If the ATS is determinable, old jurisprudence applies and a declaration suit may still be necessary.

2. The vendee still has to show readiness & willingness; termination alone does not guarantee decree. If the vendee himself is in breach, vendor may justify termination and defend suit.

3. Though unilateral termination is invalid per this ruling, there may be other legally valid ways to rescind ATS (e.g., purchaser default, mutual cancellation, frustration, illegality). Vendor must look into these.

4. The ruling applies to the facts of the Indian Supreme Court; local High Court jurisprudence and facts may vary. Lawyers should examine whether earlier case-law on determinable/non-determinable ATS remains relevant in their jurisdiction.

5. Third-party purchasers may still be protected under Section 19(b) if they satisfy criteria (value, good faith, no notice) and did their due diligence. The ruling strengthens the standard of due diligence but does not eliminate bona fide purchaser protection altogether.

6. The ruling does not elaborate on every type of transaction (for example, development agreements, sale of flats under RERA, share transfers) – the specific nature of the contract may influence analysis (whether it is truly an ATS, conditions precedent, etc.).

Practical checklist for clients and advisors

For the Vendee (buyer under ATS):

1. Verify the ATS: date, parties, consideration, advance/earnest money, payment schedule, conditions (approvals, possession, etc.).

2. Check whether the ATS contains a termination clause or a “time is of essence” clause.

   1. If yes → contract may be determinable → termination may be valid → you may need to challenge termination via declaratory suit, show vendor mis-applied clause.

   2. If no → contract likely non-determinable → termination likely invalid → you may proceed for specific performance.

3. Maintain evidence of your performance or readiness: advance payment, loan sanction, approvals, etc.

4. If the vendor issues a termination/cancellation notice, do not assume it ends your rights — preserve position, consult lawyer.

5. If vendor sells to someone else, examine whether you were given notice, whether the third‐party purchaser had notice of the ATS, whether you can claim specific performance.

6. Act with stated timelines: do not sit on rights; limitation periods may apply for suit for specific performance (generally three years from breach/default).

7. Document communications: termination letters, vendor’s reasons, your correspondence of readiness & willingness.

For the Vendor (seller under ATS):

1. Before executing ATS, consider whether you may need flexibility; if yes, include termination clause and “time is of essence” provision.

2. If you believe purchaser is defaulting (delay in payment, failure of condition), follow the ATS clause for termination (give notice, wait for period, document purchaser’s default).

3. Avoid issuing a letter saying “Cancellation by change of mind / we cannot wait”. Such termination may be held invalid.

4. If you sell to a third party after attempted termination, ensure you address the prior ATS: either get release from vendee, refund earnest money, knockout original ATS by consent or ensure purchaser is bona fide and no notice of prior ATS.

5. Keep records of attempts to execute sale deed, possession, payment of balance, so you can show you were ready to perform.

6. If you intend to terminate but contract silent, consult legal advice: you risk suit for specific performance.

7. If there is tenant relocation, litigation or cooperative society approval pending (i.e., condition precedent), clearly document it — failure to do so may be held as vendor’s inability, not purchaser’s fault.

For Subsequent Purchaser (third-party buyer):

1. Before purchasing property, conduct thorough due diligence:

   1. Search land records for earlier ATS/agreements to sell, encumbrance certificate, registered/unregistered instruments.

   2. Check whether the vendor had issued any termination letter; if yes, examine whether termination was valid or merely unilateral.

   3. Ask vendor for copies of prior ATS, termination notices, correspondence with earlier vendee.

   4. If you find a termination letter referencing the ATS and names of vendees, treat it as red flag for “constructive notice”.

2. If you still proceed, try to purchase with clear title, ensure vendor gives covenant of no earlier claims, ask for release/wavier from earlier vendees if possible.

3. Note: If a court later holds the termination invalid, you may find yourself liable to perform the ATS, execute sale deed in favour of original vendee, and may lose your purchase.

Conclusion

The Supreme Court’s recent ruling in the Manjunath case marks a landmark clarification for property law in India: when an Agreement to Sell is non-determinable, a vendor cannot unilaterally terminate it simply by issuing a letter; such action would amount to repudiation, and the vendee may proceed directly for specific performance without first seeking a declaration.

This decision underscores several themes: the sanctity of contracts, protection for genuine vendees, the importance of fair dealing and the duty of subsequent purchasers to undertake proper enquiry. It also underscores the need for careful drafting of ATSs and the practical discipline required by practitioners advising clients in real estate transactions.

In effect: If you’re entering an ATS, check the termination clause (or absence thereof) carefully. If you’re a buyer whose vendor tries to cancel unilaterally, don’t assume termination is valid — seek advice. If you’re buying property from someone who has claimed to cancel an ATS, do your due diligence.

For legal professionals and property advisers, the ruling offers both a powerful tool for enforcing rights of vendees and a caution for vendors or buyers who may neglect contractual formalities. As with all legal matters, each case will turn on its facts — readiness & willingness, contract terms, vendor’s ability to perform, time-essence, etc. But the broad new principle is clear: unilateral termination without contractual basis will not easily stand.

Introduction

The Indian judicial system has long recognized the importance of balancing strict enforcement of law with equitable relief for parties who amicably resolve their disputes. One of the latest and significant rulings in this direction comes from the Supreme Court of India, where the Court has held that a conviction under Section 138 of the Negotiable Instruments Act, 1881 (NI Act) cannot be sustained if the parties have reached a lawful settlement and the complainant has received the agreed amount.

This judgment is not only a relief for accused persons in cheque bounce cases but also a milestone in strengthening the principle of restorative justice. By prioritizing settlement over prolonged litigation, the Supreme Court has reinforced the idea that the law should not become a tool for unnecessary punishment when the dispute has already been resolved in good faith.

Understanding Section 138 of the NI Act

Before analyzing the ruling, it is essential to understand what Section 138 of the NI Act entails.

Meaning of Section 138

Section 138 deals with the offence of dishonour of cheques due to insufficiency of funds or if it exceeds the arrangement made with the bank. The provision was inserted into the NI Act in 1988 to address growing concerns about the credibility of negotiable instruments in commercial transactions.

In simple terms, if a cheque bounces, the drawer of the cheque can be prosecuted under Section 138, provided certain conditions are met.

Conditions for Offence under Section 138

For a conviction to take place, the following must be satisfied:

1. Cheque issued for a legally enforceable debt or liability.

2. Presentation of cheque within its validity period (generally 3 months from the date of issue).

3. Cheque returned unpaid due to insufficiency of funds or exceeding the arrangement.

4. Notice of demand issued by the payee within 30 days of receiving dishonour memo.

5. Failure of drawer to pay the cheque amount within 15 days of receiving notice.

If these conditions are met, the accused can be tried and, if found guilty, convicted with imprisonment of up to two years, a fine up to twice the cheque amount, or both.

The Objective Behind Section 138

Section 138 was introduced to promote trust in commercial dealings and ensure that cheques retain their status as a credible substitute for cash. The primary aim is to enhance the sanctity of banking transactions and discourage wilful defaults.

However, over the years, courts have also recognized that cheque bounce cases often stem from financial disputes, and rigid punishment may not always serve justice. Instead, settlements and compensatory relief to complainants are often more meaningful than penal action.

Compounding of Offences under NI Act

A critical development in cheque dishonour cases is the recognition that they are compoundable offences.

What is Compounding?

Compounding means the settlement of a dispute between the complainant and the accused where the complainant agrees to withdraw the charges after receiving compensation or settlement. Unlike serious criminal offences, cheque bounce cases are essentially civil disputes with criminal consequences.

The Supreme Court has consistently emphasized the need for compounding such offences to reduce the burden of litigation and promote amicable resolution.

Key Judicial Precedents on Compounding

1. Damodar S. Prabhu v. Sayed Babalal H. (2010)

   • The Supreme Court laid down guidelines for compounding of offences under Section 138, introducing graded costs for delayed settlements to discourage misuse.

2. M/s Meters and Instruments Pvt. Ltd. v. Kanchan Mehta (2017)

   • The Court observed that the object of Section 138 is primarily compensatory, and punishment is secondary. Therefore, trial courts should encourage settlement at the earliest opportunity.

3. Recent Supreme Court Ruling (2024–25)

   • The latest decision has further clarified that once a settlement deed is signed and the complainant acknowledges receipt of payment, sustaining a conviction would defeat the very purpose of compounding.

The Supreme Court’s Latest Ruling: Conviction Invalid After Settlement

Facts of the Case

1. An accused was convicted under Section 138 NI Act for dishonour of a cheque.

2. During the pendency of the case, the complainant and accused signed a compromise deed.

3. The complainant confirmed receipt of the full settlement amount and agreed not to pursue the matter further.

4. Despite this, the High Court refused to alter the conviction order.

5. The accused approached the Supreme Court.

Supreme Court’s Decision

The Supreme Court set aside the conviction and ruled:

1. Once a settlement is reached, and the complainant confirms full satisfaction of claim, continuing with the conviction is legally unsustainable.

2. The object of Section 138 is to compensate the complainant, not to unnecessarily punish the accused.

3. Insisting on maintaining conviction despite compromise would defeat the purpose of law and burden the criminal justice system.

This ruling has reaffirmed that the judiciary places a premium on restorative justice and reconciliation rather than rigid punishment.

Why This Ruling Matters

1. Promotes Settlement Over Litigation

The decision strengthens the principle that financial disputes are best resolved through settlement rather than prolonged litigation, saving both judicial time and parties’ resources.

2. Reduces Burden on Courts

Cheque bounce cases form a significant portion of pending criminal cases in India. Encouraging settlement and quashing of convictions after compromise will reduce the backlog of cases.

3. Protects Rights of Accused

Once the complainant has received compensation, continuing punishment would amount to double jeopardy for the accused. This ruling ensures fairness.

4. Aligns with Global Practices

Many jurisdictions treat cheque dishonour primarily as a civil wrong rather than a criminal offence. This ruling aligns India’s approach with modern global standards of dispute resolution.

Practical Implications for Stakeholders

For Complainants (Payees)

1. Assurance that they will get quick compensation if they opt for settlement.

2. Saves them from the hassle of lengthy court proceedings.

3. Provides flexibility in negotiating terms with the accused.

For Accused (Drawer of Cheque)

1. Offers a way to avoid the stigma of conviction after making good on the debt.

2. Encourages them to settle disputes proactively.

3. Prevents unnecessary incarceration or fines once the liability is discharged.

For the Judiciary

1. Eases the burden on courts by reducing cheque bounce litigation.

2. Encourages use of alternative dispute resolution mechanisms.

3. Reinforces focus on justice rather than punishment.

Legal Analysis of the Ruling

A. Balancing Punitive and Compensatory Objectives

The Supreme Court has made it clear that while Section 138 carries criminal consequences, its real objective is compensatory justice. Once that is achieved through settlement, punitive measures become redundant.

B. Role of Article 142 of the Constitution

In several similar cases, the Supreme Court has invoked its powers under Article 142 to do “complete justice” by quashing convictions after settlements. This latest ruling is another example of using constitutional powers to ensure equity.

C. Impact on Precedents

The ruling strengthens earlier decisions like Damodar S. Prabhu and Kanchan Mehta, but goes a step further by clarifying that even after conviction, a compromise deed can nullify the punishment.

Criticism and Concerns

While the ruling has been largely welcomed, certain concerns have been raised:

1. Possibility of Misuse

   • Some fear that accused persons may delay settlement until after conviction to avoid penalty costs.

2. Weakened Deterrence

   • Critics argue that leniency may embolden habitual offenders who use settlements to escape punishment.

3. Unequal Bargaining Power

   • In some cases, financially stronger accused may pressure complainants into settlements.

However, these concerns can be addressed through judicial safeguards such as ensuring voluntariness of compromise and imposing costs for delayed settlements.

Comparative Perspective: How Other Countries Handle Cheque Dishonour

• United States: Treated largely as a civil issue; criminal liability arises only in fraud cases.

• United Kingdom: Primarily a civil wrong; dishonour leads to civil suits for recovery.

• Singapore & UAE: Maintain strict criminal liability but also encourage settlement.

India’s approach, with compounding and settlement-driven relief, now represents a balanced middle ground.

Case Law Compilation: Supporting Settlements in Cheque Bounce Cases

1. Damodar S. Prabhu v. Sayed Babalal H. (2010) – Guidelines for compounding.

2. Kanchan Mehta Case (2017) – Settlement encouraged at all stages.

3. Kaushalya Devi Massand v. Roopkishore Khore (2011) – Emphasized compensatory nature of law.

4. Latest Supreme Court Ruling (2025) – Conviction unsustainable after settlement.

Together, these cases form a progressive jurisprudence that prioritizes reconciliation.

Conclusion

The Supreme Court’s ruling that conviction under Section 138 NI Act becomes invalid after settlement marks an important step in making the justice system more pragmatic and fair. It recognizes that the real grievance in cheque bounce cases is financial loss, which can be effectively remedied through compensation rather than punishment.

By prioritizing settlement, the Court has reinforced the principle that the law must evolve to serve justice rather than become an instrument of hardship. This ruling not only relieves accused persons from unnecessary punishment but also ensures that complainants are compensated efficiently.

As India continues to grapple with a massive backlog of cases, such progressive rulings pave the way for a more restorative, efficient, and humane justice system.