The Supreme Court has held that banks must verify construction before releasing milestone loans, and that a homebuyer cannot be refunded money the lender paid the builder and he never repaid.
New Delhi: The Supreme Court has upheld a finding that a bank was deficient in service for releasing a housing loan to a builder in tranches without proof that it checked how far construction had progressed, while limiting the homebuyer’s refund to the Rs 1.27 crore he paid from his own pocket with 12 per cent simple interest, and awarding him Rs 15 lakh as compensation [Madhu Kudapa (formerly K. Madhusudhan Rao) v. M/s Lodha Healthy Constructions and Developer Private Limited (LHCPL) & Anr.].
A Bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe decided three appeals under Section 23 of the Consumer Protection Act, 1986 against orders of the National Consumer Disputes Redressal Commission (NCDRC) dated 1 July 2022 and 7 December 2022. The judgment was authored by Justice Aradhe.
How the dispute began
In 2009 the builder launched a residential project, “Lodha Bellezza”, at Kukatpally, Hyderabad. On 8 August 2009 the borrower, then a Non-Resident Indian, booked an apartment for Rs 2,30,73,876 and paid Rs 51,11,576 (22 per cent of the price) from his own funds. After an Agreement for Sale on 21 October 2009, Housing Development Finance Corporation Limited (HDFC) sanctioned a Rs 2 crore loan, and a Tripartite Agreement was signed among the borrower, the builder and the bank on 30 January 2010.
Between February 2010 and July 2011 the bank released Rs 1,68,80,531 to the builder in thirteen tranches, so the builder had received about 95 per cent of the price when possession fell due. Possession was not delivered. The borrower filed a consumer complaint before the NCDRC in May 2013 seeking a refund of Rs 2,19,92,107 with interest, rent and compensation. The bank meanwhile recalled the loan in January 2015 and sued the borrower in a commercial court for Rs 2,51,15,774. That suit was dismissed on 10 December 2024 as not maintainable in view of the NCDRC findings, and the bank’s appeal is pending before the High Court.
The NCDRC held the builder liable, rejected its force majeure plea, and ordered a refund of the entire amount deposited with 9 per cent interest. It also found the bank deficient in service because it produced no evidence of verifying construction before disbursal, and directed it to pay Rs 2,00,000. It did not deal with the borrower’s claims for rent and compensation. The builder did not appeal and deposited Rs 4,43,24,510 with the Commission. The borrower appealed over the rent, compensation and interest, and the bank over the finding of deficiency and the refund of the whole sum.
Refund limited to the borrower’s own money
The Court tested the refund on the principle that no one should be enriched at another’s expense, which it traced to Sections 64, 65, 70 and 72 of the Indian Contract Act, 1872 and to earlier decisions of the Court. It called the transaction “triangular”: the builder’s retention of the money was plainly unjust, but the question was to whom it must be returned. The borrower had paid Rs 51,11,576 to the builder and Rs 76,23,150 to the bank towards interest and part payments, a total of Rs 1,27,34,726. The rest was the bank’s money, which he had not repaid.
The Court accepted that under the Tripartite Agreement a disbursal to the builder is deemed a disbursal to the borrower, but held that the fiction has a limited purpose:
“It does not convert borrowed money, which remains unpaid, into the Borrower’s own money.”
Paying the full sum to the borrower while the loan remained outstanding and the bank’s claim was disputed would, the Court held, place in his hands money he had not paid, which “amounts to unjust enrichment, which is impermissible in law”. It therefore held him entitled to Rs 1,27,34,726 in his own right.
Interest fixed at 12 per cent, not 18 per cent
The borrower sought 18 per cent interest, relying on a clause of the Agreement for Sale and the Court’s decision in Rajnesh Sharma v. Business Park Town Planners Ltd. The Court noted that Clause 24 of the Agreement itself fixed 12 per cent per annum where the builder defaults on possession, and that the borrower had himself claimed 12 per cent up to the date of the complaint. It held that 18 per cent cannot be awarded as a uniform rule and that departing from an agreed consequence requires strong reasons. Interest of 12 per cent simple, from the date of each payment, was awarded.
Rent claim rejected, Rs 15 lakh awarded
The borrower’s rent claim had grown, in a rejoinder affidavit filed in the Supreme Court, to Rs 38,000 a month from July 2011 to July 2013 and Rs 65,000 a month from August 2013 to October 2022. The Court declined it on five grounds: the Consumer Protection Act has no provision like rent control laws; rent on top of interest would be double compensation for one default; the claim went beyond the pleadings and proof, with no lease deed or rent receipt before the Commission; the borrower had elected the refund remedy under Clause 24; and the claim contradicted his own 2012 letter valuing the flat at about Rs 1,50,000 a month in rent he could have earned.
On the election of remedy it said:
“Having chosen to give up the apartment, he cannot claim, in addition, the rent which he would have saved had he taken possession of it.”
Noting that he had paid about 95 per cent of the price by July 2011 and had been kept out of both the apartment and his money for over fifteen years, the Court awarded a lump sum of Rs 15,00,000 as compensation in full and final satisfaction of all claims against the builder for rent, mental agony, harassment and litigation expenses.
Why the bank was held deficient in service
On the bank, the Court began with the burden of proof. Citing earlier decisions, it said:
“Deficiency is a matter of proof. The burden of proving it lies on the person who alleges it.”
The Court held the borrower had discharged his initial burden. He had repeatedly asked the bank to verify progress, wrote on 24 May 2011 that progress did not justify further payment, yet the last tranche was released in July 2011, and the bank itself reported the building only 90 per cent ready on 30 October 2012. The burden then shifted to the bank, which claimed its engineers had inspected the site before each release but produced no inspection report, led no evidence, and whose witness in the suit stated such reports were not required.
The Court held that paying thirteen tranches matching the stage-wise instalments showed only that the bank “paid what was demanded”, not that it verified the stage of construction as its sanction letter required. The finding of deficiency was held to be a finding of fact, neither perverse nor based on no evidence, and the Rs 2,00,000 compensation was upheld.
The directions
The Court modified the NCDRC order and directed that the Commission shall release to the borrower Rs 1,27,34,726 with 12 per cent interest from the dates of his respective payments, and a further Rs 15,00,000 as compensation within one month, out of the amount deposited by the builder. The remaining amount is to be kept in an interest-bearing account to abide by the outcome of the bank’s appeal.
The Court did not examine the bank’s claim against the borrower under the loan, leaving all contentions of both sides open, and directed the High Court to decide the pending appeal on its own merits without being influenced by the observations made. It also allowed the borrower’s application only to the extent of recording his change of name in the cause title. There was no order as to costs.
Why the judgment matters
The ruling gives homebuyers and lenders a clear division of responsibility in tripartite housing finance. A lender that undertakes to release funds against construction milestones carries a duty to verify the work, and a bank that cannot produce its inspection records risks a finding of deficiency in service once the buyer shows initial proof.
At the same time, it limits what a defaulting builder’s refund can do for a buyer who has repaid only part of his loan. Restitution returns value to the person at whose expense it was received, and the Court refused to let a refund become a windfall while the lender’s money remained unrecovered. The bank’s recovery rights now rest with the High Court.
Case Title: Madhu Kudapa (formerly known as K. Madhusudhan Rao) v. M/s Lodha Healthy Constructions and Developer Private Limited (LHCPL) & Anr.
Case Number: Civil Appeal No. 8994 of 2022, with Civil Appeal Nos. 4622-4623 of 2023
Bench: Justices Pamidighantam Sri Narasimha and Alok Aradhe, Supreme Court of India
Date of Judgment: October 15, 2026
Appearances: Mr. Amit Anand Tiwari, Senior Advocate, for the borrower; Mr. Gaurav Agarwal, Senior Advocate, and Mr. Rahul Kripalani, Advocate, for the builder; Ms. Suhasini Sen, Advocate, for the bank