Chogmal Bhandari & Ors. v. Deputy Commercial Tax Officer- An analysis of the judgement under the purview of Section 52, The Transfer of Property Act, 1882

THIS ARTICLE WAS WRITTEN BY PUNYAM BHUTANI, A STUDENT OF VIVEKANANDA LAW SCHOOL, VIVEKANANDA INSTITUTE OF PROFESSIONAL STUDIES (AFFILIATED TO GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY, DELHI)

Introduction-

Section 53 of Transfer of Property Act, 1882 deals with the requirement of the fraudulent transfer of property in the Union of India. This provision was substituted by Act 20 of 1929, Section 15. Thus, it can be defined under the existing latest provision as follows-

• Every transfer of Immovable Property made with the intent to defeat or delay the creditors of the transferor shall be voidable at the option of any creditor so defeated or delayed. Nothing in this sub-section shall impair the rights of a transferee in good faith and for consideration. Nothing in this sub-section shall affect any law for the time being in force relating to insolvency. A suit instituted by a creditor (which term includes a decree- holder whether he has or has not applied for execution of his decree) to avoid a transfer on the ground that it has been made with intent to defeat or delay the creditors of the transferor shall be instituted on behalf of, or for the benefit of, all the creditors.

• Every transfer of immovable property made without consideration with intent to defraud a subsequent transferee shall be voidable at the option of such transferee. For the purposes of this sub- section, no transfer made without consideration shall be deemed to have been made with intent to defraud by reason only that a subsequent transfer for consideration was made.[1]

Essentials/ Ingredients of the Section-

• Transfer of an Immovable Property
• The transferor owes financial liability to creditors
• The transfer is with intention to defeat or delay creditors
• Such transfer is voidable at the option of the creditors[2]

CASE ANALYSIS

CHOGMAL BHANDARI AND ORS. v. DEPUTY COMMERCIAL TAX OFFICER, II DIVISION, KURNOOL

(AIR 1976 SC 656)

CIVIL APPEAL NO. 1148 OF 1975

Decided on – 04.02.1976

Hon’ble Judges/Decided by– JUSTICE R. S SARKARIA AND JUSTICE S. MURTAZA FAZAL ALI

FACTS OF THE CASE-

• Itikala Kollayya and his brother-in-law Kovvuru Narasimhaiah constituted a partnership firm dealing in food grains. The firm carried on the business in the name and style of “Kovvuru Narasimhaiah and Itikala Kollaya”. The firm, however, stood dissolved in 1963. The firm appears to have been in serious financial difficulties and incurred debts to the tune of about Rs. 70,000. The creditors filed an insolvency petition but the petition was ultimately dismissed because it was held that the firm had no means to discharge the debts.
• Subsequently, the business was started in the name of B.V.S. Rao, son of Bala Seshaiah. After the death of Itikala Kollayya his son Bala Seshaiah and his son B.V.S. Rao carried on joint Hindu family business. In addition to this, B.V.S. Rao applied on May 8, 1966, for a certificate of registration to the sales tax department of the State and was given the same. B.V.S. Rao who was a minor had applied for the certificate through his guardian Bala Seshaiah.
• Thereafter the sales tax department continued to make assessments in the name of B.V.S. Rao, Thus for the years 1966-67, 1967-68 and 1968-69, the provisional assessments were made in the name of B.V.S. Rao, the minor.
• During all the subsequent years the business was run in the name of B.V.S. Rao, the minor grandson of Kollayya. There were also materials on the record to show that B V. S. Rao had informed the sales tax department that the business was in fact carried on by the joint Hindu family and yet no assessment was made in the name of the joint Hindu family until 1971.
• The High Court held that B.V.S. Rao was merely a benamidar for Kollayya who was the real proprietor of the firm and, therefore, the real dealer would be Kollayya and not B.V.S. Rao. The High Court also relied on the circumstance that Kollayya did not appear before the sales tax department in obedience to the notices issued to him and, therefore, the High Court thought it was too late in the day for Kollayya to contend that he was not a dealer within the meaning of the Andhra Pradesh General Sales Tax Act.

ISSUES BEFORE THE HON’BLE COURT-

• The question as to the nature of the Trust Deed executed by the settlors.
• Whether the Trust Deed was hit by Section 53 of the Transfer of Property Act, 1882.

JUDGEMENT-

ISSUE 1-

• The Apex Court first considered the question as to the nature of the trust deed executed by the settlors. It held that it was not disputed that the trust deed was a registered instrument and came into existence three years before the actual assessments were made in favour of the joint Hindu family.
• Furthermore, it was clearly stipulated in the trust deed that the object of the trust was to discharge the debts of the previous creditors of the settlors who had obtained decrees from the courts. The names of those creditors were mentioned in Schedule A and there was no material before the Court to show that the creditors mentioned in Schedule A were fictitious persons. It was also admitted that in the copy of the trust deed printed in the paper book the names of the creditors were not mentioned but from the certified copy of the original trust deed it appeared that the names were there which constituted of the following persons:

1. Narendrakumar Manoharlal & Co.
2. Devraj Dhanumal
3. Bhubutmal Chandumal
4. Bhubutmal Chandumal
5. Bhubutmal Bhoormal
6. Kesarmal Mancharlal
7. Tarachand Santilal
8. Manrupji Nathumall
9. Pokhraj Kantilal
10. Pratapchand Kundanmal
11. Ambapuram Bachu Pedda Subbiah & Sons
12. Meda Krishnayya
13. Nagalakshmidevamma minor by guardian husband T. Sanjeeva Rao

• The Court held that it was open to the settlors to create a trust for discharging the debts of their creditors and hence, such an object cannot be said to be unlawful.
• The object of the trust was neither forbidden by law, nor did it defeat any legal provision, nor it could be said to be fraudulent ex facie. Hence the view taken by the High Court or the Sales Tax Authorities that the trust executed in favour of the petitioners was fraudulent or unlawful was not accepted.

ISSUE 2-

• The Court also analysed and interpreted, the other question raised by the respondent, relating to the whether the Trust was hit by Section 53 of Transfer of Property Act, 1882.

Section 53 (1)- Every transfer of immovable property made with intent to defeat or delay the creditors of the transferor shall be voidable at the option of any creditor so defeated or delayed.

• Before analysing the ingredients of the section, the facts were admitted in the Court as follows:

(1) That at the time when the trust was executed no assessment order against the joint Hindu family which was managed by one of the executants of the trust had been passed. Thus, there was no real debt due from one of the executants of the trust at the time when the trust was executed;

(2) That the Trust did not have for its object any unlawful purpose;

(3) That the names of the creditors were clearly mentioned in Schedule A of the Trust as also the properties some of which had already been sold to liquidate debts of the settlors ;

(4) That under the Trust the executants did not reserve any advantage or benefit for themselves; and

(5) There was no material in the present case to show that the creditors mentioned in Schedule A had obtained collusive decrees or that they were aware of the debts owed by one of the executants to the Sales Tax Department before the execution of the Trust Deed.

• After considering the facts and circumstances of the appeal, the Court held that the Trust Deed was not executed to defraud the creditors, namely, the Sales Tax Department. Under Section 53 of the Transfer of Property Act, 1882 a person who challenges the validity of the transaction must prove two facts:
• That a document was executed by the settlor; and
• That the said document was executed with clear intention to defraud or delay the creditors.
• How the intention was proved would be a matter which would largely depend on the facts and circumstances of each case. It was well-settled that the mere fact that a debtor chooses to prefer one creditor to the other, either because of the priority of the debt or otherwise, by itself cannot lead to the irresistible inference that the intention was to defeat the other creditors.

The Court relied on the following Judgements-

• Musahar Sahu v. Hakim Lal (1916),where the Privy Council observed as follows :

“The transfer which defeats or delays creditors is not an instrument which prefers one creditor to another, but an instrument which removes property from the creditors to the benefit of the debtor. The debtor must not retain a benefit for himself. He may pay one creditor and leave another unpaid: Middleton v. Pollock (1876). So soon as it is found that the transfer here impeached was made for adequate consideration in satisfaction of genuine debts, and without reservation of any benefit to the debtor, it follows that no ground for impeaching it lies in the fact that the plaintiff, who also was a creditor was a loser by payment being made to this preferred creditor-there being in the case no question of bankruptcy.”

• This decision was endorsed by the Privy Council in Ma Pwa May v. S.R.M.M.A. Chettiar Firm, AIR 1929, where the judicial committee observed as follows :

“A debtor is entitled to prefer a creditor, unless the transaction can be challenged in bankruptcy, and such a preference cannot in itself be impeached as falling within Section 53, Transfer of Property Act, 1882.”

• In courts opinion, the case presented special and peculiar facts, and hence, held that it would not be a fit case in which the Sales Tax Authorities could be allowed to hold that the deed of trust executed by the settlors was hit by Section 53 of the Transfer of Property Act, 1882. It also held that under Section 53 of the Transfer of Property Act if a transfer is made with intent to defeat or delay the creditors it is not void but only voidable. If the transfer is voidable, then the sales tax authorities cannot ignore or disregard it but have to get it set aside through a properly constituted suit after impleading necessary parties and praying for the desired relief.
• In Chutterput Singh v. Maharaj Bahadur (1905), the Privy Council observed as follows:

“No issue was stated in this suit whether the transfers were or were not liable to be set    aside at the instance of Dhunput under Section 53 of the Transfer of Property Act, and no decree has been made for setting them aside. Such an issue could be raised and such a decree could be made only in a suit properly constituted for that purpose and this suit was not so constituted either as to parties or otherwise.”

• To the same effect was the later decision of the Privy Council in Zafrul Hasan v. Farid-Ud-Din (1944), where Lord Thankerton made the following observations:

“Further, under Section 53, the wakfnama would only be voidable at the option of the ‘person defrauded or delayed’, until so avoided the deed remains valid.”

• In the view of the matter, the Court felt that it cannot be said in the particular case that the trust deed executed by the settlors is prima facie fraudulent or a colourable transaction. It would, however, be open to the Sales Tax Authorities to avoid the document by bringing a properly constituted suit, if so advised. The bench also made it clear that any observation regarding the validity of the document that had been made in the case by them would be confined only to the materials that had been placed before them and would not prejudice the merits of either party in a suitable action which may be brought.

• For these particular reasons, the appeal was allowed, the judgment of the High Court was set aside and the notices issued by the respondent against the appellants were subsequently quashed. The Court, however, directed that the sum of Rs. 31,100 which had been deposited by the appellants in the Union Bank, Kurnool, under the directions of the Court, would not be refunded to the appellants before the expiry of three months. Also, taking into consideration the circumstances of the case, no order as to costs were made by the Court.

DECISION HELD-

• It was held that, if a person proves challenges the validity of a transaction under Section 53 of the Transfer of Property Act, 1882, he has to prove that the document in question was executed with clear intention to defraud or delay the creditors.[3]

CONCLUSION-

• Section 53 of the Transfer of Property Act, 1882 clearly states the Rule regarding the Immovable Property. It only applies when it is transferred with a fraudulent intention, but under the rules of equity, justice and good conscience, the principle has been applied to immovable property as well. The section, also provides for the concept of Creditors and subsequently highlighting the law regarding Defeat/Delay Creditors.
• Hence, this landmark judgement provides for the contour/requirement which is to avoid the possibilities of the retention of all the benefits by the debtor.

[1] The Transfer of Property Act, (Act 4 of 1882), s. 52.

[2] Poonam Pradhan, Property Law, (Third Edition), 2017.

[3] Dr. Avtar Singh, The Transfer of Property Act, Universal Law Publishing Co. Pvt. Ltd., 2006.