Quick answer: In Chandra Kanta Matta v. Smt. Lily Khanna, pronounced on 24 August 2026, the Delhi High Court allowed in part a first appeal against a decree that had ordered a seller to refund Rs. 15,00,000 to a defaulting buyer under a failed Agreement to Sell. Justice Harish Vaidyanathan Shankar held that a sum of Rs. 12,50,000, described in the Agreement to Sell as “Bayana/Earnest Money” and paid at the moment the contract was executed, was genuine earnest money and was validly forfeited by the seller on the buyer’s default — without any need to prove actual loss, because forfeiture of genuine earnest money is a security clause, not a penalty attracting Section 74 of the Indian Contract Act, 1872. A further Rs. 5,00,000 paid five weeks later, however, was ordinary part-payment of the price, fell outside the contract’s forfeiture clause, and had to be refunded. The judgment is a close, well-sourced restatement of the earnest-money doctrine that runs from Fateh Chand v. Balkishan Dass through the Supreme Court’s 2024 and 2025 decisions in Central Bank of India v. Shanmugavelu and K.R. Suresh v. R. Poornima, and it repays study by anyone who drafts, negotiates or litigates an Agreement to Sell.
Key Takeaways
- Genuine earnest money can be forfeited without proving loss. Where a sum is paid at the inception of an Agreement to Sell, described as earnest money, and intended as security for due performance, its forfeiture on the buyer’s default is a contractual consequence — not a penalty — and Section 74 of the Indian Contract Act, 1872 does not require the seller to prove actual damage before retaining it.
- A later instalment is not earnest money merely because the buyer calls the whole payment “advance.” Money paid after the contract is signed, towards the price and not as security for performance, is ordinary part-payment; it can be forfeited only if the contract expressly says so.
- Nomenclature is a factor, not the answer. Courts look at when the money was paid, whether the clause was reciprocal, and whether the agreement itself draws any distinction between the amounts — not merely at the label a receipt uses.
- Kailash Nath Associates does not abolish the earnest-money exception to Section 74. That decision turned on the absence of any breach and of any loss in a public-auction forfeiture; it did not disturb the separate line of authority holding that forfeiture of genuine earnest money is not a penal stipulation at all.
- Precise drafting of the forfeiture clause pays off in litigation. Because Clause 7 in this Agreement to Sell was confined in its terms to the “Bayana/Earnest Money,” the seller could not extend its reach to a later instalment the clause never mentioned.
1. Introduction
Every Agreement to Sell that changes hands in an Indian property transaction carries some version of the same clause: if the buyer defaults, the seller keeps the earnest money; if the seller defaults, the buyer gets it back, often doubled. The clause looks simple until the deal actually collapses and the parties discover that they never agreed, in so many words, on which of the several payments the buyer made was “earnest money” and which was simply an instalment of price paid ahead of schedule. That distinction, deceptively narrow on the page, decides the entire dispute: a seller can generally keep genuine earnest money without proving a rupee of loss, but cannot ordinarily keep an advance payment of price without either an express forfeiture clause covering it or proof of actual damage under Section 74 of the Indian Contract Act, 1872.
Chandra Kanta Matta v. Smt. Lily Khanna, decided by the Delhi High Court on 24 August 2026 in a Regular First Appeal under Section 96 of the Code of Civil Procedure, 1908, illustrates exactly this problem. A buyer paid Rs. 17,50,000 in two tranches under an Agreement to Sell for a second-floor flat in Mukherjee Nagar, Delhi, then failed to pay the balance of over Rs. 1.38 crore within the stipulated period. The seller cancelled the agreement and kept the entire amount. The trial court split the difference, treating only a fraction as forfeitable earnest money and ordering the rest refunded for want of proved loss. The High Court, reviewing the evidence afresh and surveying six decades of Supreme Court authority, reached a more precise answer: the payment made at the point of contract was earnest money in the full legal sense and rightly forfeited; the payment made weeks later was not, and had to go back.
This article works through the facts, the doctrinal architecture the Court applied, and what the decision means for anyone drafting or defending an Agreement to Sell where the deal falls through.
2. Case summary and background
The Appellant, Chandra Kanta Matta, owned the second floor of property No. 930, Mukherjee Nagar, Delhi, standing on roughly 160 square yards of land, without roof rights. On 24 April 2012 she entered into an Agreement to Sell with the Respondent, Lily Khanna, for a total sale consideration of Rs. 1,56,00,000. At the time of execution, the Respondent paid Rs. 12,50,000, which the Agreement to Sell itself described as “Bayana/Earnest Money.” The balance of Rs. 1,43,50,000 was to be paid by the end of July 2012. An endorsement on the reverse of the agreement further recorded that the Respondent would pay a further Rs. 10,00,000 by 5 May 2012. In the event, the Respondent paid only Rs. 5,00,000 of that sum, on 31 May 2012, against a separate receipt — bringing the total amount in the Appellant’s hands to Rs. 17,50,000.
Clause 7 of the Agreement to Sell set out the consequences of default in reciprocal terms: if the seller defaulted, the buyer would be entitled to double the earnest money through a court of law; if the buyer defaulted within the stipulated period, “the said Earnest money/Bayana shall be forfeited,” and the seller would be free to resell the property. The Respondent did not pay the balance consideration by the end of July 2012. The Appellant issued a legal notice on 5 September 2012 cancelling the Agreement to Sell and invoking Clause 7 to forfeit the entire Rs. 17,50,000 she had received — both the Rs. 12,50,000 described as earnest money and the subsequent Rs. 5,00,000. The Respondent replied disputing the forfeiture and asserting that her ability to pay the balance had depended on a parallel transaction, brokered through one Mrs. Renu Kalra, for the sale of her own house — an arrangement the Appellant denied any knowledge of.
The Respondent sued for recovery of Rs. 18,50,000 with 18% interest before the Additional District Judge (Tis Hazari Courts, Delhi). The trial court rejected her plea that payment was conditional on the Renu Kalra transaction, finding no evidence to support it, and found no actual loss to the Appellant — the property had, on the Respondent’s case, been resold to a third party without proof of a lower price or other special damage. Rather than treating the entire Rs. 17,50,000 as forfeitable earnest money, it reasoned that only Rs. 2,50,000, paid before the formal execution of the Agreement to Sell, was truly earnest money and could be retained as reasonable compensation under Section 74 of the Indian Contract Act, 1872; the remaining Rs. 15,00,000 was mere part-payment, forfeitable under Section 74 only to the extent of proved loss, and since none had been proved, it ordered a refund of that Rs. 15,00,000 with 6% interest from the date of suit (rising to 12% if unpaid within two months).
The Appellant challenged that finding in the present appeal, contending that the trial court had contradicted its own reasoning: having rejected the Respondent’s only explanation for treating part of the money differently, it had no basis left for splitting the Rs. 12,50,000 the Agreement to Sell itself, in writing, called earnest money. The Respondent defended the trial court’s approach and additionally relied on the Supreme Court’s decision in Kailash Nath Associates v. Delhi Development Authority, (2015) 4 SCC 136, to argue that forfeiture without proof of loss is impermissible in principle.
3. Legal analysis
3.1 What makes a payment “earnest money” — the Shree Hanuman Cotton Mills test
The Court began, correctly, from the proposition that the label a receipt or agreement gives a payment is relevant but not conclusive; the true character of a payment must be gathered from when it was made, what it was for, and the surrounding contractual structure. It applied the five-part test the Supreme Court laid down more than fifty years ago in Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., (1969) 3 SCC 522: earnest money must be paid at the moment the contract is concluded; it must represent a guarantee that the contract will be fulfilled; it forms part of the purchase price if the transaction goes through; it is forfeited if the transaction collapses through the purchaser’s default; and, absent a contrary stipulation, the seller is entitled to forfeit it on the buyer’s default.
Measured against that test, the Rs. 12,50,000 fit every element. It was paid contemporaneously with the execution of the Agreement to Sell on 24 April 2012, not as a later instalment. Clause 7 made its forfeiture the reciprocal consequence of the buyer’s default, mirroring the buyer’s own entitlement to double the amount if the seller defaulted — a structure the Court read as demonstrating that the payment was meant to secure performance, not simply to advance the price. And there was no contemporaneous document, still less any endorsement on the Agreement to Sell itself, distinguishing part of that sum as something other than earnest money. The Respondent’s attempt to carve out Rs. 10,00,000 of it as “really” an advance rested solely on her own later assertion about the Renu Kalra arrangement — an arrangement the trial court itself had already found unproved. Once that foundation collapsed, the Court held, there was no evidentiary basis left for the trial court’s re-characterisation of the payment; a written agreement’s plain recitals govern in the absence of a pleaded and proved case for departing from them, a principle the Court traced to Sections 91 and 92 of the Indian Evidence Act, 1872 (now Sections 94 and 95 of the Bharatiya Sakshya Adhiniyam, 2023) barring oral variation of a written instrument’s terms.
3.2 Why genuine earnest money escapes the Section 74 loss requirement
The harder question was whether Section 74 of the Indian Contract Act, 1872 — which entitles a party to “reasonable compensation” on breach, “not exceeding the amount” named as a penalty, “whether or not actual damage or loss is proved to have been caused” — requires a seller to justify retaining earnest money by pointing to actual loss. The trial court had effectively answered yes, following the general rule that a penalty clause caps compensation at a reasonable figure tied to proved loss.
The High Court, tracing the doctrine through Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49, Maula Bux v. Union of India, (1969) 2 SCC 554, Videocon Properties Ltd. v. Bhalchandra Laboratories, (2004) 3 SCC 711, and Satish Batra v. Sudhir Rawal, (2013) 1 SCC 345, drew the distinction running through all of them: forfeiture of a sum that is genuinely earnest money — paid to bind the bargain and secure performance — is not a penalty at all, since its purpose is to guarantee performance rather than to pre-estimate or punish a breach. Section 74 has no work to do where the sum forfeited was never compensation for a hypothetical future breach but consideration paid, from the outset, on the express condition that default would forfeit it. The Court quoted the Supreme Court’s own formulation in the three-judge decision in Central Bank of India v. Shanmugavelu, (2024) 6 SCC 641 — “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” — and its recent reaffirmation in K.R. Suresh v. R. Poornima, 2025 SCC OnLine SC 1014, decided months before this appeal.
On the Respondent’s reliance on Kailash Nath Associates, the Court drew a distinction rather than treating the case as an outlier to be sidestepped. Kailash Nath concerned forfeiture of a deposit made in a public auction before any concluded agreement existed, where the Delhi Development Authority had suffered no loss at all — it had, in fact, realised a higher price on re-auction — and where the Supreme Court found no breach by the bidder in the first place. The Supreme Court’s summary of the law in that case, at paragraph 43 of the report, expressly preserved the proposition that “Section 74 will apply to cases of forfeiture of earnest money under a contract,” while carving out public-auction forfeitures made before any contract exists as a separate category to which Section 74 may not even apply on its plain language. Read this way, Kailash Nath is not authority that every earnest-money forfeiture requires proof of loss; it holds only that forfeiture cannot stand where there was no breach, no loss, and no earnest money paid under a concluded contract — none of which described the case before the Delhi High Court, where the Respondent had admittedly defaulted on a concluded Agreement to Sell.
3.3 The later Rs. 5,00,000 was a different animal
Having upheld forfeiture of the Rs. 12,50,000, the Court reached the opposite conclusion on the Rs. 5,00,000 paid on 31 May 2012. That sum was not paid at the inception of the contract; it was paid five weeks later, against a separate receipt, and the Agreement to Sell contained no clause treating it, or any instalment beyond the initial Rs. 12,50,000, as security for performance. Clause 7, on its own terms, spoke only of the “Earnest money/Bayana” — a term the Agreement to Sell had already defined by reference to the initial payment. The Appellant’s argument that the later sum should also be forfeited “on account of illegality and unlawful withholding of the sale” found no anchor in either the contract’s language or in any evidence of a distinct legal wrong; it was, in substance, an attempt to extend a security clause beyond its own drafted scope. The Court accordingly confined the Respondent’s refund to that Rs. 5,00,000, together with 6% interest from the date of institution of the suit, exactly as the trial court had ordered — but only in respect of that sum, not the Rs. 15,00,000 the trial court had originally directed to be refunded.
4. Practical significance
For drafters of Agreements to Sell, the immediately actionable lesson is that a forfeiture clause protects only what it names. Sellers who want the option to retain later instalments — deposits paid to hold a property while finance is arranged, for instance — need a clause that says so in terms, rather than relying on a court to read a single “earnest money” clause expansively after the fact. Equally, buyers who pay money in stages should insist on documentation that is explicit about which tranche, if any, is intended as security for performance and which is simply an advance against price; the ambiguity in this case arose precisely because the endorsement recording the second payment schedule said nothing about its character.
For litigators acting for a seller facing a refund suit after forfeiture, the case is a useful checklist: was the disputed sum paid at the time the contract was concluded rather than afterwards; does the contract’s own language describe it as earnest money or its local equivalent (bayana, token money, security deposit); is the forfeiture clause reciprocal rather than one-sided; and is there any contemporaneous document suggesting a different characterisation? Counsel for a defaulting buyer resisting forfeiture should look for the gaps this Respondent could not fill — an instalment paid after execution, silence in the contract about its character, or a forfeiture clause drafted narrowly enough to exclude it.
More generally, the judgment is a reminder that Kailash Nath Associates has not displaced the earnest-money exception to Section 74, notwithstanding that it is frequently cited, as it was here, for the broader proposition that all forfeiture requires proof of loss. It should be read for what it actually decided — a public-auction deposit forfeited without any breach or loss — rather than as a universal solvent for every forfeiture clause a seller invokes. And for parties structuring high-value residential transactions where payment is staggered over several months before the sale deed, the case underscores the value of a payment schedule that assigns a specific legal character to each tranche, rather than leaving that characterisation to be litigated years after the transaction has fallen through.
5. Conclusion
Chandra Kanta Matta v. Smt. Lily Khanna does not announce a new rule; it applies, with unusual care, a body of Supreme Court authority that has been developing since Fateh Chand v. Balkishan Dass in 1963 and was most recently restated in 2024 and 2025. Its value lies in showing how that doctrine actually operates when a single transaction produces more than one payment with different legal characters: the first tranche, paid at the moment of contract and expressly labelled as security for performance, was earnest money and rightly forfeited without proof of loss; the second, paid later without any comparable label or contractual anchor, was ordinary part-payment and had to be returned. For a jurisdiction where agreements to sell routinely involve payments in instalments over months, that distinction — and the discipline it demands of both drafters and litigators — is likely to recur far more often than any single case citation might suggest.
Citations
Case discussed
- Chandra Kanta Matta v. Smt. Lily Khanna, RFA 85/2014, Delhi High Court (Harish Vaidyanathan Shankar, J.), judgment reserved 7 July 2026, pronounced 24 August 2026. Not yet reported. Source: https://indiankanoon.org/doc/112987007/ (accessed 31 August 2026).
Supreme Court authority relied on in the judgment
- Shree Hanuman Cotton Mills v. Tata Air Craft Ltd., (1969) 3 SCC 522.
- Fateh Chand v. Balkishan Dass, 1963 SCC OnLine SC 49.
- Maula Bux v. Union of India, (1969) 2 SCC 554.
- Videocon Properties Ltd. v. Bhalchandra Laboratories and Others, (2004) 3 SCC 711.
- Satish Batra v. Sudhir Rawal, (2013) 1 SCC 345.
- Kailash Nath Associates v. Delhi Development Authority and Another, (2015) 4 SCC 136.
- Central Bank of India v. Shanmugavelu, (2024) 6 SCC 641.
- K.R. Suresh v. R. Poornima and Others, 2025 SCC OnLine SC 1014.
- Santosh Hazari v. Purushottam Tiwari (Dead) by LRs, (2001) 3 SCC 179 (on the scope of a first appeal under Section 96, CPC).
- Malluru Mallappa (Dead) by LRs v. Kuruvathappa and Others, (2020) 4 SCC 313 (on the scope of a first appeal under Section 96, CPC).
Legislation
- Indian Contract Act, 1872 — Section 74 (compensation for breach of contract where penalty stipulated); Section 73 (compensation for loss or damage caused by breach).
- Code of Civil Procedure, 1908 — Section 96 (appeal from original decree); Order XLI Rule 31 (contents of appellate judgment).
- Indian Evidence Act, 1872 — Sections 91 and 92 (exclusion of oral evidence to vary the terms of a written document); now Sections 94 and 95 of the Bharatiya Sakshya Adhiniyam, 2023.
- Transfer of Property Act, 1882 (governing the underlying transaction generally).
- Specific Relief Act, 1963 (referenced generally in the parties’ Agreement to Sell as the remedy for the seller’s default).
This article is not legal advice and does not create an attorney–client relationship. Readers should verify the certified copy of the judgment and any subsequent clarificatory orders before relying on it, and consult a qualified advocate on the facts of their matter.