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Rajeswari and Co. and ors. Vs. the Union of India and anr. - Court Judgment

LegalCrystal Citation
SubjectCommercial
CourtChennai High Court
Decided On
Case NumberAppeal No. 357 of 1965
Judge
Reported inAIR1973Mad222; [1974]93ITR1(Mad); (1973)1MLJ116
ActsTransfer of Property Act - Sections 53; Income-tax Act - Sections 34; Presidency Towns Insolvency Act - Sections 56; Provincial Insolvency Act - Sections 54; Madras Court-fees and Suits Valuation Act, 1955 - Sections 40
AppellantRajeswari and Co. and ors.
RespondentThe Union of India and anr.
Cases ReferredUnion of India v. Arunachala
Excerpt:
transfer of property act (iv of 1882) section 53--scope--transfer intended to defeat and delay creditors--what is--transfer to stranger to discharge pre-existing debt of transferor without reservation of any benefit to him--transfer valid though it was made to defeat impending execution--preference of one creditor to another will not invalidate transaction where no consideration of insolvency law would arise.;in a case,in which no consideration of the law of bankruptcy or insolvency applies there is nothing to prevent a debtor paying one creditor in full and leaving others unpaid although the result may be that the rest of his assets will be insufficient to provide for the rest of his assets will be insufficient to provide for the payment of the rest of his debts, a security given by a.....1. the only question that arises for determination in this appeal filed by defendants 2 to 13 is whether the sales of the suit properties by the first defendant, which is a public limited company in favor of the second defendant firm of which the partners are defendants 3 to 13, were effected with intent to defeat or delay the union of india and other creditors of the first defendant company. the union of india represented by the commissioner of income-tax, madras laid the suit under section 53 of the transfer of property act on its own behalf and on behalf of other creditors, if any, of the first defendant company for a declaration that the sale deed ex. b-1 dated 27-2-1961 in respect of the plaint mentioned immovable properties and the sale of the movables properties by the first.....
Judgment:
1. The only question that arises for determination in this appeal filed by defendants 2 to 13 is whether the sales of the suit properties by the first defendant, which is a public limited company in favor of the second defendant firm of which the partners are defendants 3 to 13, were effected with intent to defeat or delay the Union of India and other creditors of the first defendant company. The Union of India represented by the Commissioner of Income-tax, Madras laid the suit under Section 53 of the Transfer of Property Act on its own behalf and on behalf of other creditors, if any, of the first defendant company for a declaration that the sale deed Ex. B-1 dated 27-2-1961 in respect of the plaint mentioned immovable properties and the sale of the movables properties by the first defendant company in favor of the second defendant firm were invalid and not operative and not binding on the plaintiff and other creditors of the first defendant company as having been made to defeat the just claims of the plaintiff and other creditors. It was also prayed that the said transfers may be cleared not binding upon the creditors of the first defendant company and that the plaintiff was entitled to recover arrears of income-tax due from the first defendant company from out of the plaint schedule properties. The suit has been decreed by the trial court as prayed for and hence this appeal.

2. The first defendant company was incorporated in the year 1946 with the object of carrying on business of seed crushers oil extractors etc. The first defendant company did not make any profit in the business. In the year 1952, the first defendant company entered into a partnership with the second defendant firm called Rajeswari and Co., and started a factory called Rajapalayam cotton Pressing Factory, in which the second defendant company had 7 out of 16 shares. This partnership was re-constituted in the year 1954. Even as per the re-constituted firm the first defendant company continued to have 7 out of 16 shares. The first defendant company in its own activities, incurred loss, but the partnership earned profits, in which the first defendant company got its share. The first defendant company claimed set off of the profits so earned against the loss incurred in its own business. One Gnanaprakasam, an Income-tax Officer of Virudhunagar who was on the eve of his retirement allowed the set off. But his successor Thirunavukarasu who was examined as P.W. 1 in this case found that the set off was improper and ought not to have been allowed his view being that on account of the loss incurred by the first defendant company it ceased to carry on its business that the loss automatically lapsed and that therefore there was no scope for carrying forward the loss and setting off the loss against the profits earned by the first defendant company in a different venture. On this basis the matter was reopened under Section 34 of the Income-tax Act and a sum of Rs. 28,240-96 was levied as income-tax by order dt./- 4-10-1961, by reopening the assessments of the year 1956-57 to 1959-60. But even before this order was passed the first defendant company sold away all its immovable properties in favor of the second defendant under Ex. B-1 on 27-2-1961 for Rs. 1,30,000 and also sold all its movable properties and good will in favor of the second defendant firm for Rs. 40,000/- on 2-3-1961. It is in these circumstances that this suit was instituted for the reliefs indicated above.

3. Though the suit is purported to be one under Sec. 53 of the Transfer of Property Act and though the plaintiff, Union of India was given permission to sue on its behalf and on behalf of the creditors of the first defendant company the plaint allegations do not make out necessary averments to bring the case within the scope of Section 53 of the Transfer of Property Act. In para 10 it is alleged that the sale of the assets of the first defendant firm was made mainly with a view to defeat and delay the claims of the plaintiff and to place the properties beyond the reach of the just and lawful creditors of the first defendant company. In para 12, which deals with sale of movables, no doubt there are allegations to the effect that the sale was made with intent to defeat and delay the creditors of the first defendant company and to place the movable properties beyond the reach of the creditors. In para 16 it is alleged that the sales of movable and immovable properties were sham and colourable transactions not intended to convey title to the second defendant firm. It is further alleged that even if it is assumed that they are valid transfers, they have been brought about collusively and fraudulently with a view to deprive the plaintiff and other creditors, if any and to benefit the individual director share holders of the first defendant company. It is in the light of these allegations that the trial Judge has also recorded his finding. In para 40 of his judgment, he has referred to several circumstances and observed that those circumstances "clearly lead anyone to an irresistible conclusion that these transfers of the assets of the first defendant company in favor of the second defendant firm were effected before seeing and anticipating the additional levy of income-tax by the plaintiff and with a view to defeat the claims of the plaintiff." Again in the same paragraph the trial Judge has observed:

"Hence the predominant intention in suddenly effecting a transfer in favor of the second defendant firm was not to discharge the liabilities of the first defendant company but only to keep the assets out of the reach of the plaintiff."

At the concluding portion of that paragraph it is further observed :--

"So the plaintiff have proved by placing clear evidence and by indicating by clear circumstances that the prima facie intention of the first defendant was to defeat and delay the claim of the plaintiff in transferring the immovables under Ex. B.1, and the movables under Ex. B.3, in favor of the second defendant firm."

Mr. Thiruvenkatachari, appearing for the appellant for the appellants, contested the correctness of the above finding and urged that the sale was effected by the first defendant company in favor of the second defendant firm as the second defendant firm had a right of pre-emption in the immovable properties of the first defendant company, that even before the income-tax department thought of reopening the matter with regard to the set off the Board of Directors had passed a special resolution to dispose of all the properties and that therefore no fraudulent intention could be attributed to the first defendant company in effecting the sales of its properties. Before adverting to this aspect upon which the counsel placed reliance, we shall refer to the evidence on the basis of which the trial Judge has come to the conclusion that the sales were effected fearing that the income-tax department was going to levy income-tax. In August 1960, the first defendant company preferred a revision to the income-tax department with regard to an order of assessment for the year 1959-60. Ex. A.4 is the revision petition filed on behalf of the first defendant company by its auditor Sethuraman, D.W. 1. This auditor was a permanent representative of the first defendant company as well as the second defendant firm in all maters relating to income-tax. In connection with the said revision petition the Income-tax Officer, P.W. 1 had discussion with D.W. 1, the representative of the first defendant company. The evidence of P.W. 1 is that on 17-12-1960, he discussed this matter with D.W. 1 and told him that he was going to reopen the matter and take action under Section 34 of the Income-tax Act. On the side of the plaintiff evidence has been let in to show that after such meeting. D.W. 1 along with the directors of the first defendant company who were also partners of the second defendant firm hatched up a conspiracy, by which the properties of the first defendant company were placed in the name of the second defendant firm that in the event of an order of assessment being made it may become fruitless and not realizable. D.W. 1 admits having met P.W. 1 on 17-12-1960. But he denies that at that time P.W. 1 told him that action under Section 34 of the Income-tax Act was going to be taken. On this aspect, the trial Judge who had occasion to see these witnesses has chosen to place reliance upon the evidence of P.W. 1 and disbelieved D.W. 1. We have gone through the material evidence and we are satisfied that the conclusion of the trial Judge is fully warranted. It is true that P.W. 1 did not record in writing anywhere that he had told D.W. 1 on 17-12-1960 that he was going to take action under Section 34. But soon after that meeting. P.W. 1 had to write to the Commissioner of Income-tax, Madras in connection with the revision petition Ex. A.4. Ex. A.28 dated 22-12-1960 is the letter written in that connection. In that letter P.W. 1 stated that he was enclosing the relevant file for perusal of the Commissioner and further stated that after receipt of the records back action under Section 34 would be taken. After he got back the relevant records, he put up the notes Ex. A.55 on 1-3-1961 directing the office to issue notice under Section 34 to the first defendant company. In pursuance of that direction, the office put up the prescribed notices Ex. A.6 to A.9 which P.W. 1 signed on 7-3-1961. It is contended on behalf of the appellants that neither in Ex. A.28 nor in Ex. A.55 nor in Exs. A.6 to A.9 there is an indication that P.W. 1 had already told D.W. 1 on 17-12-1960 that action under Section 34 of the Income-tax Act would be taken, and that, therefore, the evidence of P.W. 1 in this regard cannot be believed. We are unable to accept this argument. As already pointed out even on 28-12-1960, P.W. 1 informed the Commissioner of Income-tax that action under Sec. 34 would be taken. He could issue notice only after the records were received back from the Commissioner and it was not necessary on his part to state either in Ex. A.55 or Exs. A.6 to A.9 that he had already told D.W. 1 that action under Section 34 of the Income-tax Act would be taken. The question is one of inference to be drawn from the probabilities to the case. Inasmuch as D.W. 1 admittedly had a discussion with P.W. 1 on 17-12-1960 and as P.W. 1 had already noticed that the action of his predecessor in allowing set off was improper and also as D.W. 1 was a permanent representative of the first defendant company in all matters relating to income-tax, it is quite likely that P.W. 1 discussed this matter with D.W. 1 and told him what he felt and what he was going to do with regard to the matter.

4. The activities of the first defendant company after 17-12-1960 are consistent with the case of the plaintiff that it was as a result of the discussion between P.W. 1 and D.W. 1 on 17-12-1960 that steps were taken to effect sales of all the properties of the first defendant company. It is true that the second defendant firm had a right of pre-emption in the immovable properties of the first defendant company. But that right was not insisted upon when the company by a resolution dated 4-6-1960 decided to sell the assets of the first defendant company in public auction with minimum auction price of Rs. 1,51,000 (vide the resolution Ex. B.51.) D.W. 3 is one of the partners of the second defendant firm and also one of the managing directors of the first defendant company. It was at his instance that the second defendant firm appears to have sent the letter Ex. B.8 dated 10-1-1961 making reference to the proposal of the first defendant company to sell away the properties of the company in public auction and drawing attention to the right of pre-emption of the second defendant firm in the properties. The first defendant company was requested to consider that matter and arrange to sell the lands to the second defendant firm. On receipt of this letter, the Board of Directors of the first defendant company resolved on 27-1-1961 to cancel the earlier resolution passed on 4-6-1960 in and by which the properties were proposed to be sold in public auction with a minimum price of Rs. 1,51,000 and further resolved to sell the properties of the first defendant company to the second defendant firm at a reasonable market price to be fixed by an expert valuer and a qualified engineer. In pursuance of this resolution, the first defendant company appointed one Jawahar, as engineer to estimate the value of the properties of the first defendant company. The said engineer gave his report Ex. B.10 dated 21-2-1961 valuing the lands at Rs. 18,775 and the buildings at Rs. 99,636. Certain properties belong in common to the first defendant company and the second defendant firm. The engineer valued those properties at Rs. 39,057/-. In post haste after receipt of this report a general body meeting of the first defendant company was held on 24-1-1961 resolving to sell the lands and buildings inclusive of the first defendant company's share in Rajapalayam Cotton and Pressing factory to the second defendant firm for Rs. 1,30,000/-. It was also resolved to dispose of the assets and share in the properties and goodwill in Rajapalayanm Cotton Pressing Factory for a sum of Rs. 40,000/- in favor of the second defendant firm. This resolution, as already noticed was passed on 24-2-1961. The impugned sale was effected on 27-2-1961 (Ex. B.1) for Rs. 1,30,000/-, and the sale of the movables themselves appears to have been effected on that day, though the receipt Ex. B.3 is dated 2-3-1961. These dates speak for themselves and the only irresistible inference possible in the circumstances is that the matter was rushed through anticipating the reopening of the assessment orders under Section 34. There was no pressure from any creditor for payment of his dues. The claim of the second defendant firm in regard to pre-emption appears to have been made use of as a cloak to push through the transaction. The admission of D.W. 3 is that he met D.W. 1 on 28-12-1960 and that at that time D.W. 1 told him about his meeting P.W. 1 on 17-12-1960 though he denies that at that time D.W. 1 told him about the possible action under Section 34 of the Income-tax Act. The circumstances can lead to only one conclusion, namely, that at the time of that meeting D.W. 1 apprised D.W. 3 the impending dangers with regard to levy of heavy amount of income-tax consequent on the reopening of the matter which P.W. 1 had contemplated. The trial Judge who had occasion to see P. w. 1 and D.W. 1 in the witness box has characterized D.W. 1 as not willing to speak the truth unless his attention was drawn to documentary evidence. We also see no circumstance to doubt the veracity of P.W. 1 who has no axe to grind in this case. All the subsequent events clearly show that the matter was pushed through in indecent haste anticipating an order of assessment of income-tax.

5. In the sale deed Ex. B-1, all the immovable properties are described without giving separate value. But at the end of the document it is stated that the value of agriculture lands is Rupees 31,000/-. The suggestion made on behalf of the plaintiff Union is that this value was given as against the total sale consideration of Rs. 1,30,000/- with a view to see that the value of the building was brought down below Rs. 1 lakh, so that the registration officer would not insist upon the production of a wealth-tax certificate with regard to the buildings; As against this it is contended for the defendants that with effect from the financial year commencing from 1-4-1960 no wealth-tax was chargeable in respect of the net wealth of a company and that therefore, the motive attributed to the first defendant company in mentioning the value of the lands as stated above is not warranted. We have already noticed that the engineer Jawahar assessed the value of the lands only at Rs. 18,795. This value was made on 21-2-1961. It is not the case of the first defendant company that subsequent to that report any additional land was acquired. It is not also the case of the first defendant company that the engineer under-estimated the value of the lands. Consciously or otherwise, the person responsible for effecting the sale appears to have thought that if the value as given by the architect as regards the lands was to be accepted then, the value of the buildings would exceed Rs. 1 lakh and that an occasion may arise for approaching P.W. 1 for issuing a certificate with regard to the buildings. It is with this consciousness that artificial recital is made in the sale deed as regards the value of the agricultural properties which value is not warranted by the evidence on record. This again is a circumstance that goes to show that persons responsible for bringing about the sale wanted to keep P.W. 1 in darkness about the efforts that were being taken to sell away the properties.

6. Mr. Thiruvenkatachari, appearing for the appellants wanted us to draw the inference that the directors of the first defendant company had no bad faith in executing the sales in question. In support of this argument he placed reliance upon the resolution of the Board of directors passed on 28-4-1960 for selling the properties in public auction. That was followed by a special resolution of the general body on 4-6-1970 to the same effect. The argument was that this step had to be taken by the first defendant company as it found that it could not wipe off its debts without selling its assets. The argument was that from this circumstance it is reasonable to infer that in effecting the sales in question no bad faith could be attributed. It is true that no circumstance of mala fides was present at the time when the directors passed the resolution on 28-4-1960 and when the General Body passed the special resolution on 4-6-1960 for selling the assets of the company in public auction with a minimum auction price of Rupees 1,51,000/-. We have already noticed that the important partners of the second defendant firm were also directors of the first defendant company and they were also parties to these resolutions. At that time, those persons did not think it worth while to put forward the claim for preemption which no doubt the second defendant firm had in the immovable properties. Though the special resolution was passed in June 1960 no action was taken to implement the resolution. D.W. 3 who was one of the directors of the company, when questioned about this matter, gave no explanation. The matter was allowed to lie over without any action being taken. That was presumably because no creditor made a demand for payment of his dues. Therefore, the mere fact that a special resolution had been passed even in June 1960 for selling away the properties in public auction would not by itself take away the infirmities that are attached to the sales in question.

7. The contention urged on behalf of the plaintiff. Union of India is that the properties of the first defendant company were worth nearly about Rs. 3 1/2 lakhs and that the said properties have been sold away for inadequate consideration for Rs. 1,30,000/-. In support of this contention reliance is placed upon Ex. A.59 which is a report submitted by one Sankara Iyer retired Engineer on behalf of the South Indian Bank Ltd., the 14th defendant to whom the second defendant firm applied for a loan after getting a sale of the properties of the first defendant company. In that report, Sankara Iyer estimated the value of the properties at Rs. 3,48,727. Sankara Iyer was not examined though he was available to give evidence. A clerk of the 14th defendant bank gave evidence as P.W. 2. He proved the signature of Sankara Iyer in Ex. A.59 and stated that he accompanied the said engineer when the latter inspected the properties. But he admitted that he did not know on what particulars the engineer assessed the value. There is also nothing to show that he accompanied the engineer at the time of the inspection of the properties. As Sankara Iyer, though available was not called no weight could be attached to Ex. A.59.

8. The defendants relied on Ex. B.10, the report given by the engineer Jawahar. Even that engineer was not called though he was available to give evidence. D.W. 3 admits that at the time of the passing of the special resolution in June 1960, the minimum auction price of Rs. 1,31,000/- was fixed on the basis of the then prevailing market price of the properties. But still we find engineer Jawahar giving the value only at Rs. 1,12,461. We are aware that Ex. B.10 the report of Jawahar was marked by consent. But by that consent it cannot be said that the contents were also accepted as true. D.W. 3 admits that the price of the lands and house has been going up. The properties which were valued at Rs. 1,51,000/- in June 1960 had been sold away only for Rs. 1,30,000 in February 1961. Though we are not in a position to state what would have been the probable market value at the time of the sales in question in February, 1961, we are definitely of the opinion that the properties have been sold for under-value.

9. Out of the sale consideration of Rs. 1,30,000 the sale deed Ex. B.1 recites that the second defendant firm the vendee should pay Rs. 15,191-65 to the 14th defendant in respect of a mortgage and that the balance namely. Rupees 1,14,808-35 was already received in cash for discharging the other debts of the first defendant company thus in all making a sum of Rs. 1,30,000. After this sale that first defendant company has paid off its creditors as seen from the receipts Exs. B.12 to B.48. These receipts cover a sum of Rs. 1,63,773-22. Ex. B.11 is a receipt issued by the 14th defendant for Rs. 15,194-95, which is the amount under taken by the second defendant firm under Ex. B-1. Though the fact of the payment of several creditors is not disputed the fact remains that not one of these creditors made a claim for payment of his dues by issuing the notice in writing. Most of the creditors were either relations or castemen of the directors of the first defendant company.

10. On the date of the sales in question the second defendant firm had not sufficient means to advance the cash of Rs. 1,14,808-35. The admission of D.W. 3 is that on 24-2-1961 there was no cash balance in the hand of the second defendant firm. But he stated that the firm borrowed for the purpose of making up the consideration for Ex. B.1. His version is that he and his brothers paid Rs. 47,000 to the second defendant firm on 25-2-1961, and that D.W. 4 paid a sum of Rs. 30,000. D.W. 4 also being one of the partners of the second defendant firm. No doubt there are entries in the accounts of the second defendant firm (Ex. B.54 to B. 57) in respect of the alleged payments. The suggestion made on behalf of the plaintiff Union is that these are mere book entries without actual payment. But even on 25-2-1961 the second defendant firm applied to the 14th defendant bank for Rs. 1,50,000 and the same was sanctioned on 26-2-1961. It is, therefore pertinently pointed out that if really D. Ws. 3 and 4 had given loans as they claimed to have given, it is unlikely that so soon thereafter the second defendant firm would have been put to the necessity of applying for loan to the Bank. It is unnecessary to go further deep into this matter except to point out that on the date of the sales in question the second defendant firm had no means to advance the large cash.

11. As a part of the transaction relating to the sale of immovable properties of the first defendant company, a sale of all the movables of the first defendant company was also effected in favor of the second defendant firm for Rs. 40,000, as evidenced by Ex. B.3. It is pointed out on behalf of the plaintiff Union that as a part of the scheme hatched upon by those in charge of the affairs of the company and the firm, they tried to see that the claim of the Union of India arising out of assessment of income-tax which those persons had reason to expect to be passed was defeated.

12. It appears that the book values of the lands buildings and machinery of the first defendant company were not properly evaluated and the company on the advice of its auditors appears to have re-valued and made entries according to the revaluation. The Registrar of Companies drew the attention of the first defendant company by his letter Ex. B.5 dated 6-2-1969 and asked the company to state on what basis the machinery was revalued and how the appreciation in the value of the lands and buildings was arrived at the why the said assets were not shown at the real value. In reply thereto the company wrote Ex. B.7 on 18-4-1959 stating inter alia that the existing lands and buildings were revalued by a qualified Engineer and that the values were arrived at by taking into consideration all the circumstances with regard to the then market value. It was further stated in that letter that a number of industries had since been started and the value of the buildings and lands had gone up very much and that still the appreciation was not shown at the real value as the same has been treated as the secret reserve of the company. The trial Judge has adverted to this aspect and commented that the transactions which are impugned were effected by this secret reserve. D.W. 2 was questioned about this in a casual way in cross-examination when he referred to the letter Ex. B.7 in which reference as to the treatment of the real value as secret reserve was made. The question was not pursued further and it was not elicited how the secret reserve was dealt with at the time of the sales in question. Therefore, we are unable to draw any adverse inference against the first defendant company or the transferee the second defendant firm merely from the reference to the secret reserve in Ex. B.7. The position comes to this namely, that it is not proved that under the transactions in question, the transferor, the first defendant company retained any benefit for itself though it may be that some of the directors of the first defendant company may stand to be benefited inasmuch as they also happen to be partners of the second defendant firm. But that by itself is not sufficient to hold that the first defendant company has retained any benefit for itself under the transactions in question.

13. We have already adverted to the recital in the sale deed Ex. B-1 that out of the sale consideration of Rupees 1,30,000, the vendor the first defendant company, had already received a sum of Rs. 1,14,808-35 for the purpose of discharging other debts of the first defendant company. By sale of the moveable and goodwill, the first defendant company got Rs. 40,000. The evidence establishes that all the creditors of the first defendant company were paid off. That fact is borne out by the receipts Exs. B.11 to B.48 to which we have already made reference. The evidence of D.W. 3 shows that all the creditors of the first defendant company were paid off. It was not suggested to him in cross-examination that any creditor remained to be paid.

14. In the above circumstances, what is the inference to be drawn as regards the impugned transaction We have no doubt whatsoever that the impugned sales were effected in a hurried manner anticipating an order of assessment of income-tax, which in the circumstances was likely to be in the region of several thousands. It was with the intention of defeating the possible claim that the transactions in question were concluded. We have no doubt in our mind that the transferee, the second defendant firm was also fully aware of the circumstances. But all the creditors of the first defendant company were paid off and as a matter of fact one of the main objects of sales was to pay off those debts. On the evidence we come to the conclusion that the sales in question were effected to defeat the possible claim of the Union of India, while at the same time the debtor, the first defendant company, has paid off its other debts and did not reserve any benefit for itself. In these circumstances the question is whether the Union of India is entitled to have the alienation's impugned under S. 53 of the Transfer of Property Act.

15. The relevant portion of subsection(1) of S. 53 reads :--

"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."

This part of the sub-section was introduced by the amending Act of 1929 and prior to that Act the relevant portion of Section 53 read as follows :

"Every transfer of immovable property made with intent to defraud prior or subsequent transferees thereof for consideration or co-owners or other persons having an interest in such property or to defeat or delay the creditors of the transferor, is voidable at the option of any person so defrauded or delayed."

Thus, it would be seen that the first paragraph of the old section referred both to transfers which were in fraud of other transferees and to transfers made with intent to defeat and delay creditors. These two cases have now been separated sub-section(1) referring to creditors and sub-section(2) to other transferees. What we are concerned with in the instant case in whether the impugned transfers fall within the scope of sub-section(1) of S. 53. As we have already pointed out both on the basis of the allegations in the plaint and the evidence the conclusion to which the trial Judge has rightly come is that the sales were effected with a view to defeat the anticipated claim of the Union by way of income-tax. But the debtor the first defendant company has satisfied the claims of the other creditors by parting away with all its properties leaving nothing for the Union to recover the tax which would be subsequently assessed. In other words, the debtor has preferred to pay off all other creditors with the intention of defeating an anticipated claim of the Union. The question is, can such a transaction be said to be one made with intent to defeat or delay the creditors of the transferor? The answer could only be obviously in the negative. Dealing with the case of preference of a creditor by a debtor with intent to defeat another creditor the Judicial Committee in Mushar Sahu v. Hakimlal 43 Ind App 104 = (AIR 1915 PC 115) observed at p. 106--

"As a matter of law their Lordships take it to be clear that in a case in which no consideration of the law of bankruptcy or insolvency applies there is nothing to prevent a debtor paying one creditor in full and leaving others unpaid although the result may be that the rest of his assets will be insufficient to provide for the payment of the rest of his debts. The law is in their Lordships' opinion, rightly stated by Palles C.B. in In re Moreney 1888 LR 21 Ir. 27, 62, where he says. 'The right of creditors, taken as a whole, is that all the property of the debtor should be applied in payment of demands of them or some of them, without any portion of it being parted with without consideration or reserved or retained by the debtor to their prejudice. It follows from this that security given by a debtor to one creditor upon a portion of or upon all his property (although the effect of it, or even the interest of the debtor in making it may be to defeat an expected execution of another creditor) is not a fraud within the statute; because notwithstanding such an act, the entire property remains available for the creditors or some or one of them and as the statute gives no right to ratable distribution, the right of the creditors by such act is not invaded or affected,"

Again at p. 107, it is observed :

"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 be creditor and leave another unpaid. Middleton v. Pollock 1976-2 Ch D 104, 108. 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 of 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."

In Ma Pwa May v. S. R. M. M. A. Chettiar Firm, 56 Ind App 379 = (AIR 1929 PC 279) the validity of a transfer by way of mortgage in favor of a creditor arose for consideration with reference to the provisions of Section 53 of the Transfer of Property Act. It is pointed out that the mortgage having been executed for adequate consideration being partly in discharge of a genuine debt, no benefit being retained by the mortgagor, was not invalid under Section 53 of the Transfer of Property Act as being made to defeat or delay creditors, even though the mortgagor, who was heavily indebted thereby preferred the mortgagee over other creditors.

16. In Mina Kumari Bibi v. Bijoy Singh Dudhuria, 44 Ind App 72 = (AIR 1916 PC 238) the debtor effected sale of his property a day prior to the attachment in execution of a money decree. The decree-holder hereof became the purchaser in execution. The prior purchaser at private sale sued for possession. The decree-holder purchaser resisted the suit contending that the private sale was invalid under Section 53 of the Transfer of Property Act. Sir Lawrence Jenkins, delivering the judgment of the Board, observed--

"A debtor for all that is contained in Section 53 of the Transfer of Property Act. may pay his debts in any order he pleases and prefer any creditor he chooses."

In Thaher Unnissa v. Sherfunnissa, Panchapakesa

Ayyar, J. had to consider the effect of Section 53, in an execution proceeding filed by a decree-holder in the course of which a claim was put in on the ground of an alleged transfer. The learned Judge pointed out that Section 53 would come into operation only when a suit is instituted by a creditor for avoiding a transfer by the debtor. In the course of the discussion, he observed--

"Section 53 will apply only when the transfer is made with intent to defeat and delay the creditors of the transferor, and not one single known creditor and that one the executing decree-holder."

In Mohideen v. Md. Mustappa. AIR 1930 Mad 665. Anantakrishna Iyer, J. has elaborately dealt with the principles applicable to a case arising under Section 53. The learned Judge has pointed out that if the transfer is for valuable consideration and is made with the full intention that the title in the property should pass to the transferee, and if no benefit be intended to be retained by the transferor the transfer would be valid as against an attaching creditor even though the object of the transfer might have been to defeat an impending execution. If the transfer is for cash and is made to a stranger who had knowledge of the intention of the transfer to convert the immovable property into money and to defeat the creditors of the transferor, then the transfer would be invalid. If the transfer is in favor of an existing creditor, to whom the transferor already owed money, then even though the transferee and notice that the effect of the transfer would be to remove the property from the reach of the creditors the transfer would nevertheless be valid and not open to objection under Section 53, since it is open to every creditor to try his best to realize his debt from the common debtor. Ordinarily in the race between the creditors he who lags behind could not complain of him who proceeded fast and succeeded in getting at the property of the debtor. In this case, the transferee, namely, the second defendant firm was not a creditor of the first defendant company. But that does not make any difference, because the sale was effected among other things for the purpose of discharging all other debts payable by the first defendant company. Though it s not a case of alienation in favor of an existing creditor still in principle it does not make any difference so far as the plaintiff Union is concerned, as the sale was effected for the purpose of discharging other debts and with the deliberate motive of defeating the claim of the Union that may arise as a result of the reopening of the assessment proceedings. Sub-section(1) of S. 53 expressly saves the application of the law of insolvency. The object of the law of insolvency is to provide for an equal distribution of assets among the creditors, and the provisions are therefore more stringent. A preference to one creditor which would be valid under Section 53 of the Transfer of Property Act would, if the debtor were adjudged insolvent within three months be deemed fraudulent under Section 56 of the Presidency Towns Insolvency Act or Sec. 54 of the Provincial Insolvency Act. Similarly, a voluntary transfer may be set aside under those Acts if the transferor is adjudged insolvent within two years, although it may not offend against Section 53 of the Transfer of Property Act. A transfer by debtor of all his property to a particular creditor is not necessarily voidable under Section 53 even though under the insolvency law it may operate as a fraudulent transfer or a fraudulent preference. The cases of fraudulent preference falling under the Insolvency Acts must be distinguished from those falling under Section 53 of the Transfer of Property Act.

For the foregoing reasons we are of the opinion, that Union of India the plaintiff in the case is not entitled to any relief under Section 53 of the Transfer of Property Act. In the result the decree of the trial Court is set aside and the suit shall stand dismissed. In the circumstances of this case we direct the parties to bear their respective costs in both the Courts.

17. This appeal is admitted subject to the determination of the question as to the correct amount of court-fee payable. In the trial Court, the plaintiff valued the suit under Sec. 40 of the Madras Court-fees and Suits Valuation Act. 1955, and paid court-fee accordingly as if this is a suit for cancellation of the sale deeds in question. But subsequently the provision of law was changed as Section 25(d) but the amount of court-fee was not changed. In appeal, the appeal memorandum has been valued under Section 50 which deals with payment of court-fee in suits not otherwise provided for. That such a suit falls under Section 50 was decided by this Court in Union of India v. Arunachala, 1960-1 Mad LJ 137. We hold that the court-fee paid on the appeal memorandum is correct. But this does not however, affect our direction already given above namely, that the parties shall bear their own costs in both the Courts.

18. Ordered accordingly.


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