1. The appellants are the plaintiffs who filed a suit on a promissory note, Ex. P-1 dated 23rd August, 1937, executed by the first defendant in favour of one Venkataratnam who is the plaintiffs' father for a sum of Rs. 17, 169-12-3. The transaction has a long antecedent history. The main question to be decided is the effect of the application of Madras Act IV of 1938 to the debt.
2. The story begins in August, 1928, when the first defendant was proposing to buy certain lands in Court auction and he approached Venkataratnam for assistance in financing the purchase. They entered into an agreement Ex. P-2 dated 31st August, 1928, whereby it was settled that, as soon as the sale was confirmed in favour of the first defendant, the first defendant would give a half share of the property to Venkataratnam and Venkataratnam would pay to the first defendant half of the final bid of Rs. 15,050, and the agreement also recites the fact that Venkataratnam has on that day advanced a sum of Rs. 3,762 which was the deposit that the purchaser had to make towards the sale amount. The agreement concludes with the recital that if for any reason the sale should be cancelled both parties to the agreement should share the profit or loss equally.
3. Contemporaneously with this agreement there is a promissory note, Ex. P-6, which recites that the first defendant has borrowed from Venkataratnam a sum of Rs. 3,762 for the purpose of making a deposit in respect of the bid of Rs. 15,050 in the Court auction. On the 12th of September, 1928, the first defendant executed a further promissory note, Ex. P-7, in favour of Venkataratnam. This recites that for the purpose of paying the sale price into Court the borrower has borrowed Rs. 9,738 from Venkataratnam. It is common ground that the balance of the purchase price was made up by the first defendant himself except for an amount of Rs. 50 which is referred to in the final settlement.
4. On the 28th of September, 1928, the first defendant and Venkataratnam entered into an agreement with a third party by name Ramarsu for the sale of the properties purchased in Court auction to Ramarsu for a sum of Rs. 18,000 the sale being subject to the mortgage amounting to Rs. 28,000, which burdened the property. This agreement recites the fact that the first defendant has borrowed Rs. 13,500 from Venkataratnam for the purchase and has executed promissory notes. The prospective purchaser Ramarsu executes a promissory note for Rs. 3,000 in favour of Venkataratnam as an earnest of the purchase price and promises to pay the balance with interest. Ramarsu did not carry out the terms of this agreement. Consequently there was a further agreement between the first defendant and Venkataratnam, Ex. P-3, dated 23rd August, 1931, whereunder they renew the previous arrangement and come to an understanding as to the way in which the money payable by Ramarsu under Ex. P-10, shall be divided between them. On the same date there was a fresh promissory note, Ex. P-8, dated 23rd August, 1931, which renews and consolidates the two original promissory notes, Exs. P-6 and P-7 on which at that date the amount due was Rs. 18, 710-1-6.
5. At or about this time a suit was filed against Ramarsu O.S. No. 37 of 1931 to enforce the agreement to purchase the land. The suit was pending till 1935. Meanwhile, there was a further promissory note, Ex. P-9, dated the 23rd August, 1934, which renews the promissory note of 1931, and there was also a fresh agreement, Ex. P-4, which renews the previous agreement and recites the filing of the suit against Ramarsu and the necessity for the parties to adjust their affairs on the basis of the decision in that suit. In 1935, the suit against Ramarsu was decreed and about the same time there was a decree in favour of the mortgagee in respect of his mortgage over the land to be sold to Ramarsu.
6. On the 23rd August, 1937 the first defendant and Venkataratmam entered into a settlement of their mutual transactions. This settlement recites the previous history of the dealings and states that it has been settled that the amount due from the defendant to Venkataratnam in respect of the promissory note, after adjusting the amount due from Venkataratnam to the defendant in respect of his half share of the sale amount, comes to Rs. 16,324-7-0. To this was added Rs. 69-5-3 which is principal and interest of a further advance of Rs. 25 (being half of Rs. 50 referred to above) made by Venkataratnam at the time of the sale and a sum of Rs. 776 which represents Venkataratnam's half share in the profits of the land less the sum of Rs. 175 which the defendant had paid in connection with the common execution proceedings, the total being Rs. 17,169-12-3. For this amount the first defendant executed the suit promissory note in favour of Venkataratnam.
7. The lower Court has taken the view that though the original transaction is given the form of an unconditional borrowing by the first defendant from Venkataratnam, in substance there is a borrowing only to the extent to which the first defendant's contribution to the joint purchase was financed by an advance from Venkataratnam. The rest of the advances he has treated as Venkataratnam's own contribution to the joint purchase. Having thus ascertained the original amount of the first defendant's liability, he traces it down through the subsequent transactions and scales down the debt accordingly. It is contended for the appellants that this is wrong, that the whole trans action should be regarded as part of a partnership arrangement under which no liability capable of being enforced would subsist until an account was taken of the mutual rights and liabilities of the partners; and on this view it is contended that the debt arose for the first time in 1937 after the accounts were settled and has to be scaled down under Section 9 of Madras Act IV of 1938. In the memorandum of cross objections it is contended for the defendants that although the parties might have split up the sums contributed by Venkataratnam into sums which he contributed to the capital of the joint undertaking and sums which he lent to the first defendant, so that the latter might contribute his share to the joint undertking, this was not the form which the transactions took; and it is contended that throughout all the documents it is made abundantly clear that the parties deliberately chose to treat Venkataratnam as the creditor of the first defendant for the full amount of the two original promissory notes and leave Venkataratnam as the debtor of the joint undertaking to the extent of the contribution which he had agreed to make thereto.
8. It seems to us that the correct way of regarding those transactions is that for which the respondents contend. Throughout these documents there is a continued insistence on the fact that the first defendant has borrowed the full amount from the plaintiffs' father, and it is also made clear that the liability of the plaintiffs' father was not to arise until after the completion of the contemplated conveyance of the half share of the property to him. In fact, it appears that the plaintiffs' father was safeguarding himself against any possible default by the first defendant and that he chose to advance the money on the liability of the first defendant without making any provision that the debt should not be recoverable except to the extent of the excess over the creditor's own contribution towards the joint purchase. Looked at in this way it seems to us clear that the advances made to the first defendant were deliberately kept outside the purview of the joint undertaking. No doubt the parties contemplated that the first defendant's liability would eventually be adjusted out of the proceeds of the joint venture. But it is necessary to distinguish between a financial arrangement which is to be discharged out of the proceeds of a joint venture and one which is itself part of the joint undertaking. We are quite clear that it was the intention of the parties that the first defendant should be under an unconditional liability to repay to the plaintiffs' father the amounts in respect of which he executed these promissory notes. The liability therefore arose as soon as the promissory notes were executed and there was nothing to prevent the plaintiffs' father from maintaining suits on the promissory notes without reference to the details of the joint undertaking.
9. It is further contended for the appellants that even assuming that the debts evidenced by the two original promissory notes were unconditional debts due from the first defendant to the plaintiffs' father the adjustments made in 1937 whereby the liability of the plaintiffs' father to pay his share towards the joint purchase was set off against the liability of the first defendant under the consolidated promissory note could not be treated as a payment for the purpose of Section 8 of Madras Act IV of 1938. It is now well settled for the purpose of this Act that when there is an arrangement under which a mortgagee is in possession of the mortgaged property and is liable to account to the mortgagor for the profits of the land in his possession and to adjust the value of those profits against the stipulated rate of interest, the receipt of profits by the mortgagee must be treated as a payment towards the debt by the mortgagor. The learned Advocate-General has, however, contended that whatever be the position when the value of produce is adjusted against a mortgage a mere set-off of another debt cannot be regarded as a payment for the purpose of this Act. We find it difficult to agree with this contention. The learned Advocate-General has sought to reinforce his contention by reference to Sub-section (4) of Section 8 of Madras Act IV of 1938 which saves the creditor from any liability to refund any sum which has been paid to him by reason of the reduction of the debt under that section. But it seems to us preposterous to assume that when a creditor has received any cash more than the amount of the debt as subsequently scaled down he should be in any better position in the matter of liability to refund than he would be if he has received payment by means of an excess adjustment of a debt due by himself to his debtor. The nature of such adjustments is made clear in a recent decision of the Privy Council in Trinidad Lake Asphalt Operating Co. Ltd. v. Commissioners of Income-tax of Trinidad and Tobago (1945) A.G. 1 : 8 F.L.J. 97 where their Lordships were concerned with the interpretation of the word ' transmission.' In dealing with the nature of the adjustment then in question their Lordships quoted the judgment of Mellish, L.J., in In re Harmony and Montague Tin and Copper Mining Co., Spargo's case2 to the following effect:
Nothing is clearer than that if parties account with each other, and sums are stated to be due on the one side, and sums to an equal amount due on the other side of that account, and those accounts are settled by both parties, it is exactly the same thing as if the sums due on both sides had been paid. Indeed, it is a general rule of law, that in every case where a transaction resolves itself into paying money by A to B, and then handing it back again by B to A, if the parties meet together and agree to set one demand against the other, they need not go through the form and ceremony of handing the money backwards and forwards.
10. Their Lordships go on to state:
This statement gives a description of what is often called a settlement in account or a set off, the word not being there used in the technical sense of the statutes of set off. There is actual, not merely notional or constructive payment of the indebtedness on either side.
11. Applying this principle in the present case, when Venkataratnam agreed with the first defendant that his debt to the first defendant in respect of the contribution which he had undertaken to make towards the sale should be adjusted against the promissory note debt due by the first defendant to Venkataratnam, there was in fact a payment of Venkataratnam's debt, to the first defendant and a corresponding payment of a part of the first defendant's debt to Venkataratnam. We consider that such a set off can properly be treated as a payment for the purpose of Section 8 of Madras Act IV of 1938. It is conceded that in this view of the law and the facts, applying Section 8(2) to the transaction, nothing remains due to the plaintiffs.
12. The result therefore is that Appeal No. 260 of 1944 is dismissed with costs. The memorandum of objections is allowed with costs and the plaintiffs' suit will be dismissed. The defendants are entitled to their costs in the trial Court.