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Chaluvadi Balaiah Vs. Central Government and the Union of India and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberAppeal No. 188 of 1959, C.M.P. Nos. 3500 of 1960, 8761 of 1962 and W.P. No. 109 of 1962
Judge
Reported inAIR1967AP51
ActsRegistration Act, 1908 - Sections 17 and 49; Code of Civil Procedure (CPC), 1908 - Sections 9 and 96; Constitution of India - Article 226; Madras Revenue Recovery Act - Sections 59
AppellantChaluvadi Balaiah
RespondentCentral Government and the Union of India and ors.
Appellant AdvocateD. Narasaraju and ;N. Subbareddy, Advs.
Respondent AdvocateC. Kondaiah, Standing Counsel for Income-tax Department and ;A. Raghavaiah, Adv.
Excerpt:
.....226 of constitution of india and section 59 of madras revenue recovery act - debt obtained and title deeds deposited - later draft of memorandum prepared recording fact of deposit of title deeds as security for debt - whether memorandum required to be registered for its admissibility in evidence - memorandum merely purported to put on record that mortgage by deposit of title deeds created previous day - memorandum did not contain terms of mortgage itself - held, memorandum not required to be registered and admissible in evidence. - - it further held that the plaintiff failed to show that there is no real debt and that the 'athakam' promissory note was not support by consideration. secondly, he argued that, in any view, even assuming that no valid mortgage under law was created..........rs. 84,142-3-6 alleging that the said sum was due to him on the basis of a mortgage by deposit of title deeds, dated 1-4-53. the said suit was filed on 4-12-53. there was a preliminary decree on 20-1-1954, which was followed by a final decree dated 15-9-1954. the 4th defendant next sought to execute the final decree in the mortgage suit. it is further alleged in the plaint that the debt alleged to be due to the 4th defendant from defendants 1 to 3 is a fictitious one and that the alleged transactions, which were carried on between defendants 1 to 3 and the 4th defendant were also fictitious. the alleged mortgage by deposit of title deeds is a bogus transaction created with a view to screen the properties of defendants 1 to 3 from being proceeded against for recovery of the income tax,.....
Judgment:

Chandrasekhara Sastry, J.

(1) A.S. No. 188/59: This appeal arises out of O.S. No. 19/57 on the file of the Subordinate Judge's Court, Nellore, which was filed by the Union of India, represented by the 1st Additional Income-Tax Officer, Nellore against four defendants for a declaration that the equitable mortgage dated 1-4-1953 executed by defendants 1 to 3 in favour of the 4th defendant in respect of the properties described in the schedule attached to the plaint, is a sham, nominal and void transaction and that the decree obtained thereon in O.S. No. 316 of 1953 is a fraudulent and collusive decree and that the further proceedings in execution of the decree cannot affect the priority of the plaintiff in respect of the income-tax arrears of Rs. 55,298-15-0 for the assessment year 1951-52, the assesses being defendants 1 to 3. The 1st defendant is the father and defendants 2 to 4 are his sons. The plaintiff's case, as disclosed in the plaint, is shortly as follows. The 4th defendant, who is the eldest son of the 1st defendant, got divided from the family in the year 1940 and was ever since carrying on business separately on his own account and in partnership with others. Defendants 1 to 3 were assessed to income-tax at Rs.55,298-15-0 under Section 23(4) of the Income-tax Act for the assessment year 1951-52. The order of assessment is dated 31-3-1953 and it was served on the 1st defendant on 5-8-53. Defendants 1 to 3 filed a Writ petition, W.P. No. 746/53 on 7-9-1953 in the High Court of Madras for the issue of a Writ of Prohibition or other appropriate Writ prohibiting the plaintiff from executing the order or assessment and collecting the tax. They also filed a petition for stay and finally, an order was passed on 19-10-53 directing defendants 1 to 3 to pay the tax in 12 monthly installments of Rs.5,000/- each beginning from 1-12-1953. Again, the assessee filed a further application in the High Court offering to give advance security for the tax and expressing inability to pay the instalments. Thus, the court passed a consent order that all the immovable properties of defendants 1 to 3 will be attached and that the attachment will continue till the disposal of the Writ Petition. The plaintiff was not informed of the existence of any encumbrance over the properties. But the 4th defendant filed O.S. No. 316/53 against defendants 1 to 3 praying for a preliminary mortgage decree for Rs. 84,142-3-6 alleging that the said sum was due to him on the basis of a mortgage by deposit of title deeds, dated 1-4-53. The said suit was filed on 4-12-53. There was a preliminary decree on 20-1-1954, which was followed by a final decree dated 15-9-1954. The 4th defendant next sought to execute the final decree in the mortgage suit. It is further alleged in the plaint that the debt alleged to be due to the 4th defendant from defendants 1 to 3 is a fictitious one and that the alleged transactions, which were carried on between defendants 1 to 3 and the 4th defendant were also fictitious. The alleged mortgage by deposit of title deeds is a bogus transaction created with a view to screen the properties of defendants 1 to 3 from being proceeded against for recovery of the income tax, but there was really no debt owing by defendants 1 to 3 to the 4th defendant. It is further alleged that on the fact of this sham and nominal mortgage, the 4th defendant filed a suit O.S. No. 316/53 in the Subordinate Judge's Court, Nellore and obtained the fraudulent and collusive preliminary decree and final decree for a sum or Rs.84,142-3-6. On these allegations, the plaintiff prayed for the declaration above referred to. Defendants 1 to 3 were ex parte. The 4th defendant filed a written, statement denying the allegations in the plaint. He asserted that the account, between himself and defendants 1 to 3 were settled on 31-3-53 and it was found that a sum of Rs.77,925-7-2 was owing to the 4th defendant. In order to secure the repayment of the money already due, defendants 1 to 3 deposited their title deeds relating to the properties prescribed in the deposit of title deeds under S. 58 of the Transfer of Property Act. On 31-3-53 itself, defendants 1 to 3 executed a promissory note at page 194 of the 4th defendant's account book. On the next day i.e., 1-4-53, defendants 1 to 3 executed a memorandum letter containing the list of title deeds to serve as evidential record of the transaction completed on 31-3-1953. They denied that the decrees in the mortgage suit are fraudulent and collusive. On these pleadings, seven issues were framed of which it is necessary in this appeal to refer to the first two issues:

'(1) Whether the equitable mortgage by defendants 1 to 3 in favour of 4th defendants is a sham and nominal transaction, not supported by consideration got up to defeat the claim of the plaintiff and is invalid in law as contended by the plaintiff? (Amended as per order on I. A. No. 345/1957 dated 7-9-1957)'.

(2) Whether the decree obtained in O.S. No. 316 of 1953 (Sub-Court, Nellore), was collusive and fraudulent one, as alleged by the plaintiff?'

(2) Voluminous evidence was adduced by both parties in the lower Court. After a full discussion of the entire evidence, the lower Court held that it is unable to accept the contention of the plaintiff that there was no real debt and that the entries in the accounts are merely accommodation entries to help defendants 1 to 3 to conceal their income from being assessed. It further held that the plaintiff failed to show that there is no real debt and that the 'athakam' promissory note was not support by consideration. The lower Court was inclined to accept the version of the 4th defendant and held that the 'Anthakam' promissory note, Ex. B. 6 was fully supported by consideration and that the defendants 1 to 3 were due to the 4th defendant the amount for which the said promissory note was executed. Therefore, the plaintiff's case that there was no debt at all due from defendants 1 to 3 to the 4th defendant which formed the consideration for the promissory note and which is also alleged to form the consideration for the mortgage by deposit of title deeds is rejected by the lower Court. But the lower Court earlier in its judgment discussed the question whether the memorandum letter dated 1-4-53 and which is marked as Ex. B. 28 is inadmissible in evidence for want of registration under Section 17 and 49 under the Indian Registration Act. It held that the said memorandum required to be registered and that, as it is not registered, it is inadmissible in evidence and was ineffective to create a valid mortgage. In that view only, the lower Court held, on issue No. 1 that there was no valid equitable mortgage in favour of the 4th defendant. This is what the lower Court stated:

'But in the view I have taken regarding the admissibility of the memorandum Exhbit B. 28, it follows that the alleged mortgage by deposit of title deeds, cannot be enforced. The relief which the plaintiff wants is a declaration that the decree obtained, cannot affect the priority of the plaintiff in respect of the tax arrears of Rs.55,298-15-0. In view of my finding that the mortgage decree is invalid, it follows that the debt due to 4th defendant from defendants 1 to 3 is not a secured debt and as such it cannot affect the priority of the plaintiff.

Accordingly, my finding on Issue No. 1 is that the mortgage is not proved, Ex. B-28 being inadmissible in evidence and my finding on the 2nd issue is that the mortgage decree in O.S. No. 316 of 1953 is consequently invalid.'

(3) In the result, the lower Court passed a decree as prayed for with costs.

(4) The 4th defendant preferred this appeal to this court. Pending this appeal, Grandhi Sreeramanarayana, a third party, filed C.M. P. No. 3500/60 claiming to be a creditor of defendants 1 to 3 and claiming to have attached the suit properties and praying to be impleaded as party-respondent in the appeal. This petition is not opposed by the learned counsel for the appellant though a formal counter-affidavit was filed in the petition. This petition is accordingly ordered. Mr. A. Raghavaiah, the learned counsel who appears and who filed the petition, has argued the appeal in support of the judgment and decree of the lower Court. The appellant also filed C.M.P. No. 8761/62 to implead Doradla Ramayya Chetty as another party-respondent in the appeal. It appears that pending this appeal the Income-tax Department brought the suit property to sale subject to the result of the appeal pursuant to an order passed by this Court and at that sale, the 2nd respondent in this petition, doradla Ramayya Chetty purchased the suit property. This petition also is not opposed. The 2nd respondent in this petition also is made a party-respondent to this appeal. Mr. G. Venkatarama Sastry appeared for this respondent.

(5) The finding of the lower Court that the plaintiff has not proved that there was no real debt due from defendants 1 to 3 to the 4th defendant and that the entries in the accounts are merely accommodation entries to help defendants 1 to 3 to conceal their income from being assessed is not challenged before us during the hearing of this appeal.

(6) Sri. D. Narasaraju, the learned counsel for the appellant argued firstly that the view of the lower court that Ex. P-28 requires to be registered under the provisions of the Indian Registration Act and that as it is not registered, it could not create a mortgage and is inadmissible in evidence is erroneous. Secondly, he argued that, in any view, even assuming that no valid mortgage under law was created in plaintiff's favour, still as the plaintiff failed to prove that the preliminary an final decrees in the mortgage suit O.S. No. 316/53 on the file of the Subordinate Judge's Court, Nellore were obtained in collusion or fraudulently, the decree is not a nullity as it cannot be said to have been passed without jurisdiction and that the lower court erred in granting a declaration that it is invalid and, therefore, cannot affect the priority claim of the plaintiff. On this point, the argument of the learned counsel is that the court had jurisdiction to entertain the suit, the jurisdiction over the subject-matter of the suit and over the parties to the suit and even assuming that the decree was not in accordance with law, it cannot be declared to be invalid.

(7) The first point of consideration is whether the memorandum, Ex. B-28 dated 1-4-53 requires to be registered under the provisions of the Indian Registration Act. It is clear from the evidence in this case that the accounts between the parties were settled on 31-3-1953 and that an amount of Rs.77,925-7-2 was found to be due to the 4th defendant from defendants 1 to 3. Defendants 1 to 3 executed a promissory note on 31-3-53 acknowledging their liability for the said sum of Rs.77,925-7-2 and promissing to pay the same with interest at 0-8-0 per cent per annum. It is also clear from the evidence in the case that the title deeds were immediately handed over to the 4th defendant as security for the repayment of the debt, which was found due as per the settlement of the accounts and which formed the consideration of the promissory note, Ex. B-6. The Memorandum, Ex. B-12 is dated 1-4-53 and was executed by defendants 1 to 3 on that date. It was addressed to the 4th defendant by defendants 1 to 3. It reads:-

'Sir

We write to put on record that to secure the repayment of the money of Rs.77,925-7-2 (rupees seventy seven thousand, nine hundred and twenty five, annas seven and pies two only) already due to you from our firm of Messrs. Chaluvadi Venkatasubbayya Chetty and Gopalam (new accounts) Stonehousepet. Nellore on account of each transaction between yourself and our said firm upto the 31st day of March 1953, as per your ledger account along with our Anthakam Promissory note therein at L.F. 193-194, of your ledger and the money that may hereafter become due, we have deposited with you as agreed upon orally the title Deeds in Nellore at your place of business with intention to create an equitable mortgage in respect of the properties enumerated in the said Title Deeds on 31-3-1953, to secure all the moneys including interest that may be found due and payable by our firm to you on account of the said transactions.'Then the list of title deeds follows:

(8) It is argued by the learned counsel for the appellant that this document merely records the transaction that was completed on the previous day viz., 31-3-53 and that this memorandum itself does not purport to create any mortgage over immoveable property. Therefore, it does not require to be registered under Section 17 of the Indian Registration Act It follows that it is admissible in evidence, only to prove that there was a mortgage by the deposit of title deeds, which was created even on the previous day. In support of this argument, reliance is placed upon the decision of the Supreme Court in Rachpal Mahraj v. Bhagwandas Daruka, : [1950]1SCR548 . The memorandum, which is the subject-matter of discussion in this case appears to have been merely copied from the memorandum which was considered in the case before the Supreme Court. The evidence in this case discloses that the Advocate virtually copied it from the document which was considered by the Supreme Court. In the case before the Supreme Court, the accounts between the parties in that case were examined on 23-10-1936 and a large sum was found due to the respondents who demanded payment. The appellant thereupon brought and gave certain documents, being title deeds relating to immoveable properties belonging to his family, for the purpose of being held as security for the amounts then due and to become due on further dealings. A draft of the memorandum was thereafter prepared which the appellant took with him to be shown to his lawyer and he returned in the after noon and signed and delivered it to the respondents. It is clear from those facts that in that case, initially the amount due was ascertained and to secure the repayment of the money already due, the title deeds were deposited and thereafter a draft of the memorandum was prepared recording this fact of the deposit of the title deeds as security for the debt. It was approved by the lawyer and was signed by the parties and delivered to the creditor the same day. No doubt, as pointed by the Supreme Court, the time factor is not decisive. The crucial question, as pointed out by the Supreme Court, is: Did the parties intend to reduce their bargain regarding the deposit of the title deed to the form of a document? If so, the document requires registration. If on the other hand, its proper construction and the surrounding circumstances lead to the conclusion that the parties did not intend to do so, then, there being no express bargain, the contract to create the mortgage arises by implication of the law from the deposit itself with the requisite intention, and the document, being merely evidential, does not require registration. As the document in that case purported only to record the transaction which had been concluded and under which the rights and liabilities had been orally agree dupon, the Supreme Court held that that document did not require registration and a valid mortgage was created by the deposit of the title deeds. The Supreme Court noticed that, no doubt, the memorandum in that case was taken by the respondent to show that the title deeds were deposited with them as security for the moneys advanced by them and to obviate a possible plea that the deeds were left with them for other purposes, as indeed was contended by the appellant in his written statement. Still the Supreme Court expressed the view that it is far from in tending to reduce the bargain to writing and make the document the basis of the rights and liabilities of the parties. The language of the memorandum and that facts of the case before the Supreme Court and the language of the memorandum in the present case and the relevant facts are almost identical and it is not possible to distinguish the case before the Supreme Court from the case before us. This decision of the Supreme Court was cited before the lower Court also. The lower Court stated that it was inclined to agree with the contention of the Counsel for the plaintiff viz. that the parties intended to reduce their bargain regarding the deposit of the title deeds to the form of a document and that it was clear from the conduct of the parties that they intended the transaction to be completed only after taking the memorandum and not without it and that, therefore, the memorandum constitutes the bargain regarding the security and that it must be deemed to create the mortgage. We are unable to agree with this view of the lower court. Neither the evidence in this case nor the other facts established nor the language of the document warrant such a conclusion. It is clear to us that the mortgage by the deposit of the title deeds was granted on 31-3-53 itself when the title deeds were handed over to the 4th defendant. The memorandum merely purports to put on record that a mortgage by the deposit of the title deeds was created the previous day and next it gives a list of the title deeds that were deposited. It does not contain the terms of the mortgage itself. It does not say that the mortgage was created by the document itself. As we have already observed, it is not possible to distinguish the facts of this case from the case decided by the Supreme Court. It would follow that there was a valid mortgage created on 31-3-53 itself and that the memorandum dated 1-4-53 does not require to be registered and is admissible in evidence. The execution of the promissory note accompanied by the deposit of the title deeds and the execution of this memorandum do not form part of the same transaction. The memorandum merely recorded what had happened the previous day. But Mr. A. Raghavaiah, the learned counsel for one of the respondents placed strong reliance upon the decision of the Privy Council in Hari Shankar v. Kedar Nath, AIR 1939 PC 167. The facts of that case are entirely different from the facts of the present case. As the Privy Council pointed out, the creditors in that case insisted on the execution by the debtors of a memorandum of agreement evidencing the deposit of the title deeds and embodying the terms and conditions of the loan. The document itself states:-

'We hand you herewith title deeds relating to (certain specified property) ........ this please hold as security against advances made to us.'

It is quite clear from a perusal of that document that it was not merely a record of a past transaction, but the mortgage itself was sought to be created by that document which also recited 'that the documents were handed to you herewith.' This decision was referred to by the Supreme Court in : [1950]1SCR548 , and was distinguished. It was pointed out that, in the case before the Privy Council, the document was a formal document stating the essential terms of the transaction 'hereby agreed' and referred to the moneys 'hereby secured' and it also conferred an express power of sale on the mortgage.

(9) It may be mentioned that it was not specifically pleaded that the promissory note and the deposit of the title deeds and the execution of the memorandum formed part of the same transaction, and there was also no issue on the point.

(10) It follows that the view of the lower Court on Issue No. 1 that there was no valid mortgage by the deposit of title deeds is erroneous. It further follows that the view of the lower court that, as Ex. B-28 is inadmissible in evidence, the mortgage decree is consequently invalid is also erroneous and has to be set aside.

(11) In any view, the decree of the lower court cannot be upheld. In the absence of fraud or collusion as pleaded by the plaintiff, the lower court could not declare the decree invalid so as to give priority for the claim of the Income-tax Department over the mortgage decree. Even assuming that the memorandum, Ex. B-28 requires to be registered and that there was no valid mortgage created by that memorandum still the Court had jurisdiction to entertain the suit; it had jurisdiction over the parties before it and it had jurisdiction over the subject-matter. The judgment and decrees, preliminary and final, have become final, not having been appealed against and in the absence of fraud and collusion, they are binding as between the parties to the same. Merely because the memorandum required to be registered, assuming it to be so under law, the lower Court cannot declare and decree passed upon that memorandum to be invalid. In Krishnaji Kondo v. Narayan Anant, AIR 1942 Bom 132, a Division Bench of the Bombay High Court had to consider the validity of a decree passed on an award, which was required to be registered, but was not registered. The learned Judges held that if such a decree were based upon an award which though compulsorily registrable under Section 17(1)(b) is unregistered and therefore inadmissible in evidence, it can be impeached in a proper proceeding, such as an appeal, review or revision and that, if it has not been set aside or challenged in a proper proceeding, it cannot be treated as nullity but would be binding on the parties. The learned Judges further pointed out that, at any rate, a stranger to the proceedings cannot challenge its validity or underrate its effect on the ground that the decree was founded upon an award which ought not to have been admitted in evidence. In Ittyavira Mathai v. Varkey Varkey, : [1964]1SCR495 , the Supreme Court held that where a Court having jurisdiction over the subject-matter and the party passes a decree, it cannot be treated as a nullity and ignored in subsequent litigation even if the suit was one barred by time. It was pointed out that, if the suit was barred by time. It was pointed that, if the suit was barred by time and yet, the Court decreed it, the Court would be committing an illegality and therefore the aggrieved party would be entitled to have the decree set aside by preferring an appeal against it, but that it is well settled that a court having jurisdiction over the subject-matter of the suit and over the parties thereto, though bound to decide right may decide wrong; and that even though it decided wrong it would not be doing something which it had no jurisdiction to do and that it had the jurisdiction over the subject-matter and it had the jurisdiction over the party and therefore, merely because it made an error in deciding a vital issue in the suit, it cannot be said that it has acted beyond it jurisdiction. It was further pointed out that Courts have jurisdiction to decide right or to decide wrong and even though they decide wrong, the decrees rendered by them cannot be treated as nullities. Applying the principle pointed out in those two decisions, we hold that, even assuming that the memorandum, Ex. B-28 required to be registered and that there was no valid mortgage by the deposit of the title deeds in favour of the 4th defendant, since the decrees have become final, the lower court erred in declaring the decree a nullity merely because the memorandum required to be registered.

(12) No other point is argued before us.

(13) In the result, the appeal is allowed, the judgment and decree of the Court below are set aside and the plaintiff's suit is dismissed. The appellant will have the costs of the appeal from the plaintiff-1st respondent. The parties will bear their own costs in the lower Court.

(14) W.P. No. 109 of 1962:- This is a petition under Art. 226 of the Constitution of India filed by one Grandhi Srimannarayana, praying to issue a Writ of Certiorari or any other suitable Writ or order and call for the records in Rc. B. 5-1-13245 on the file of the Tahsildar, Nellore and to quash the sale held by the Tahsildar, Nellore and confirmed by the Revenue Divisional Officer, Nellore by his order, dated 13-8-1960 in Rc. No. 3464/E/60 and to pass such other orders as this Honourable Court may deem fit.

(15) Respondents 1 to 3 were assessed to income-tax for the assessment year 1951-52. The Income-tax Department sought to realise the income-tax by the attachment and sale of the properties belonging to respondents 1 to 3 under the provisions of the Madras Revenue Recovery Act. Pending Appeal No. 188/59 in this Court, it was ordered that the properties may be brought to sale subject to the result of the appeal. Thereafter, Doradla Ramaiah Chetty became the highest bidder and the sale was knocked down in his favour on 8-5-50. The petitioner in this writ petition holds a decree against respondents 1 to 3, and in execution of that decree, attached the properties. At the sale the amount fetched was Rs.21,300. It appears that the arrears of income-tax at that time were reduced to Rs.17,000. The petitioner filed an application before the Revenue Divisional Officer, Nellore praying to set aside sale held on 8-5-60. The grounds on which the sale was sought to be set aside were: (1) the sale was held on Sunday and it was not held at 11 A.M., (2) the sale was held in one lot and not itemwar; (3) there was no proper publication, etc.; (4) the sale was not held subject to the result of the appeal pending in the High Court; and (5) the sale was held subject to the mortgage decree in O.S. No. 316/53 on the file of the Subordinate Judge's Court, Nellore as otherwise it would have fetched a very huge price. These objections were considered by the Revenue Divisional Officer on their merits and he dismissed the petition. Hence, the petitioner filed this Writ Petition.

(16) Under S. 59 of the Madras Revenue Recovery Act, the petitioner could have filed a suit instead of invoking the jurisdiction of this Court under Art. 226 of the Constitution. Even otherwise, we re not satisfied that there are sufficient grounds for exercising our jurisdiction under Art. 226 of the Constitution. We do not find any error of jurisdiction when the Tahsildar held the sale and when the Revenue Divisional Officer, dismissed the petition for setting aside the sale. From the order of the Revenue Divisional Offcer, it appears that the Tahsildar had clearly mentioned in the sale notice that the sale was subject to the result of the appeal (Appeal No. 188/59) pending in the High Court. We are satisfied that no case is made out for interference under Art. 226 of the Constitution.

(17) The Writ Petition fails and is dismissed; but in the circumstances, without costs.

EJ/K.S.B.

(18) Appeal allowed.

(19) Writ Petition dismissed.


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