Smt. Surasaibalini Debi Vs. Phanindra
Mohan Majumdar [1964] INSC 240 (27 October 1964)
27/10/1964 SHAH, J.C.
SHAH, J.C.
GAJENDRAGADKAR, P.B. (CJ) AYYANGAR, N.
RAJAGOPALA
CITATION: 1965 AIR 1364 1965 SCR (1) 861
ACT:
Benami transaction-Income-tax evaded-True
owner-Right to recover possession.
HEADNOTE:
The plaintiff (respondent) was employed at
Calcutta in the Court of Wards and the service rules did not permit him to
start or carry on any trade or business of his own. It was therefore arranged
with the defendant that the defendant should be held out to be the owner of a
boarding house the suit property--of which the plaintiff was the true owner,
and the plaintiff was to be in possession as manager.
Plaintiff had to leave Calcutta on medical
advice and he put the defendant in possession on the understanding that on the
plaintiff's return the defendant would hand over possession.
When the defendant refused to so hand over,
plaintiff filed the suit, for recovery of possession. His claim was decreed by
the trial Court and in appeal. , In appeal to the Supreme Court, defendant's
successor in interest contended, that the suit should have been dismissed
because the plaintiff admitted in his evidence, that he escaped payment of
incometax by submitting a separate return for the salary earned by him in
service, and by showing that the business income from the suit property
belonged to the defendant; and that therefore, the Court should not countenance
his, claim and assist him in obtaining possession of the suit property.
HELD (Per Gajendragadkar, C. J. and Shah J.)
: It was not the object of the parties at the time when the transaction was
entered into to circumvent or defeat the provisions of the Income-tax Act. It
is true that the plaintiff obtained benefit of a lower rate of tax for the
business income and his personal income escaped taxation. But it cannot on that
account be held that the transaction on which he founded his claim was
unlawful. In claiming a decree for possession from the defendant, the plaintiff
did not plead any invalidity of the transaction under which possession of the
business was entrusted to the defendant. The plaintiff., as the owner of the
business, was therefore not prevented from enforcing his title against the
defendant there being no taint attached to the entrustment in the circumstances
of the case. [868 D-F, G] Per Ayyangar J.-The plaintiff having adopted the
device of purchasing the property benami in the name of the defendant, for the
purpose, even at the inception, of evading the provisions of the Income-tax
Act, would not be entitled to recover possession of the property on the basis
of his title. But the plaintiff's claim on the footing of possession was not
open to any objection because the basis of his claim was independent and wholly
dissociated from the illegal transaction of the original benami purchase and
fell into line with the decision of the Privy Council in Sajan Singh v. Sardara
Ali [1960] A.C. 167. [876 F; 882 D-E]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 158 of 1964.
Appeal by special leave from the judgment and
decree dated August 30, and September 2, 1963 of the Calcutta High Court in
appeal from Original decision No. 125 of 1960.
862 S. K. Hazara and P. K. Mukherjee, for the
appellant.
G. S. Chatterjee and S. C. Mazumdar, for the
respondent.
The Judgment of P. B. GAJENDRAGADKAR C.J. and
J. C. SHAH J.
was delivered by SHAH J., AYYANGAR J.
delivered a separate Judgment.
Shah J. An action instituted by Phanindra
Mohan Majumdar hereinafter called 'the plaintiff' on the original side of the
High Court of Calcutta for a declaration that he "is the sole proprietor
,of and absolutely entitled to a boarding house business carried on in the name
and style of International Home at 42, Harrison Road, Calcutta and for an order
for delivery of possession of the boarding house business" was decreed by
a single Judge of the High Court, and the decree was confirmed in appeal under
cl. 15 of the Letters Patent by a Division Bench of the High Court.
Surasaibalini Debi a trustee appointed under
a deed of settlement dated August 23, 1952 executed by the defendant Prabhendra
Mohan Gupta her father, was impleaded as a party on' the death of the defendant
has appealed to this Court with special leave.
The case of the plaintiff set out in his
plaint was that in or ,about the year 1941 he took a lease of No. 42, Harrison
Road, ,Calcutta and had started a boarding house business in the premises under
the name and style of International Home, that he conducted the business with
his own funds which belonged. to him absolutely from the date of its inception,
that he was personally managing the business and utilising the profits thereof
for his own purposes, that when he started the business he was in the
employment of the Court of Wards and by the service rules governing the said
employment he was not permitted to start or carry on any trade or business of
his own and on that account it was ,arranged with the defendant Prabhendra
Mohan Gupta--hereinafter called 'Gupta'-that the latter be held out as the
nominal owner of the said business and pursuant to that arrangement the lease
of the premises for the business was taken in the name of Gupta and licences
from the police and the municipal authorities were also taken in the name of
Gupta, that from the very inception he was in possession and management of the
business and exercised all rights of ownership over the same being absolutely
entitled thereto, that Gupta had never made a claim to title in the business,
that towards the end of the year 1948 he-the plaintiffsuffered a serious
illness and was advised to leave Calcutta temporarily, that on or about
December 8, 1948 he entrusted the management 863 of the business of the
boarding house to Gupta with all its assets on the understanding that upon his
return to Calcutta, Gupta would hand over to him possession and management of
the said business and of all papers, documents and books of account relating
thereto and render accounts of the receipts and disbursements during the period
of his management, that in or about December 1949 he returned to Calcutta and
occupied one of the rooms in the boarding house and called upon Gupta to hand
over possession and management of the business, and to return all papers,
documents, books of account relating thereto and to render accounts of the
management of the business by Gupta during his absence but the latter
wrongfully and in breach of the trust and confidence reposed in him refused to
hand over possession and management of the business and moreover wrongfully
denied the plaintiff's right, title and interest in the premises and in the
business.
Gupta by his written statement submitted that
the business was started by him with his own funds in premises obtained on
lease by him and that he had appointed the plaintiff as his manager or agent in
respect of the business. He asserted that he was the real owner of the
business, and denied that the management of the business was entrusted to him
by the plaintiff when the latter left Calcutta an account of his illness on
December 8, 1948 or at any time.
He also denied that there was any
understanding that Gupta would hand 'over the management or possession of the
business to the plaintiff as alleged.
On these pleadings the only substantial issue
raised by the Trial Court was about the plaintiff's title to the Boarding House
known as International Home. A subsidiary issue about a claim for accounts of
the business from Gupta was given up at the trial and need not be considered.
On a review of the evidence the Trial Judge
held that the plaintiff had started the business of International Home with his
own funds and that the defendant Gupta was held out as an ostensible owner of
that business. In coming to that conclusion the learned Trial Judge relied upon
the following circumstances. The plaintiff Majumdar was carrying on business as
owner of "Sunny lodge" a boarding house business between the years
1938-41, and that business was closed in or about February 1941 because the
landlord of the premises in which it was conducted obtained a
decree-in-ejectment against the plaintiff and compelled him to 864 vacate the
premises. Thereafter tenancy was obtained of 42, Harrison Road on May 1, 1941
and in July the International Home was started and the furniture and utensils
which were used in the Sunny Lodge were used in the new business. The case of
Gupta that he had purchased the furniture and the utensils from the plaintiff
for a sum of Rs. 900 and had started the business for himself 'Was disbelieved
for the reason that Gupta was always in straitened circumstances and had often
to borrow small surns of money from the plaintiff who was at all material times
gainfully employed. At the commencement of the business, for diverse purposes
such as deposit with the landlord towards rent, provision for furniture,
utensils and other things for the boarding house Rs.' -4,000 were needed and
this Gupta who was in impecunious circumstances could not have procured. The
defendant's sons Dwipendrla and Samaren were boarders in the boarding house and
had to pay charges to the boarding house for service rendered to them, whereas
the members of the plaintiff's family boarded and lived in the boarding house
and no charges were levied from them. The plaintiff was till December 1948 managing
the boarding house ,exclusively and all the earnings were taken by him. The
defendant's story that payments were made to him by the plaintiff when he
visited Calcutta was unreliable. There were between the years 1941 and 1948 no
letters from the defendant to the plaintiff which supported his case. that he
was the owner or that he was claiming -either to receive the profits of the
business or even asking for accounts. The defendant was in the year 1941 a man
of about 70 years of age and he had no means to start a business. The books of
accounts of the business which admittedly were maintained bad been removed by
the defendant and he had failed to produce the same before the Trial Court. The
letters written by the defendant after December 8, 1948 when the plaintiff was
away from Calcutta due to his illness gave detailed information to him about
the business and its progress. From time to time the defendant had written
letters asking the plaintiff to return to Calcutta and take over the management
of the business.
The Trial Court recognised that the lease of
the premises in which the business was carried on stood in the name of Gupta,
that the licences from the police and municipal authorities for conducting the
business were also in the name of Gupta, that in the staff register of the
business the plaintiffs name was shown as manager, ,that the plaintiff
submitted the returns for the purposes of income tax of the profits of the
business in the name of Gupta and he dealt with the authorities as if he was
the manager and not the 865 owner of the business. But these circumstances
were, in the view of the Trial Judge, consistent with Gupta being a nominal
owner of the business, whereas the other circumstances were consistent with the
plaintiff alone being the owner of the business of International Home. In his
view the motive for holding out Gupta as owner was the existence of the service
rules which governed the plaintiff when he was employed with the Court of Wards
between the years 1941 and 1944 and by virtue of which he was not permitted -to
conduct any business of his own. The appellate Court agreed with the view of
the Trial Court.
In this appeal with special leave this Court
normally does not seek to re-appreciate the evidence, and Concurrent findings
of the Courts below are not allowed to be re-opened unless there are special
circumstances justifying a departure from that course. Counsel appearing on
behalf of the appellant has not seriously attempted to challenge the finding of
the Courts below on the first issue. But counsel submitted that assuming that
on the evidence it was established that the real owner of the business was the
plaintiff, his suit must still fail, for the plaintiff had with a view to
circumvent the service rules of the Court of Wards, entered into an unlawful
agreement with Gupta and had held out the latter as owner of the business, it
being settled law that the Court will not countenance the claim of the
plaintiff who was on his own admission guilty of an act prohibited by law and
assist him in obtaining possession of the business. In addition, counsel
submitted that the arrangement for holding out Gupta as a nominal owner was
made between the plaintiff and Gupta to evade liability to pay income-tax and
thereby to defeat the provisions of the.
Income-tax Act and on that account also the
agreement under which the business was to be held by Gupta as a nominal owner
was invalid and the plaintiff was not entitled to claim possession of the
business relying upon his own unlawful conduct.
Before the Trial Court neither of these two
pleas was raised. In appeal the High Court pointed out that the object of the
arrangement whereby Gupta was held out as the owner was to avoid the service
rules of the Court of Wards, but there was no evidence to prove that the
service rules which prohibited an employee of the Court of Wards from carrying
on business belonging to himself were statutory rules. Disregard of the rules
did not therefore necessarily taint the arrangement with immorality or illegality
and that the plaintiff in suing to recover possession of his business was not
seeking to enforce an illegal arrangement. In the view of 866 the High Court
evasion of income-tax was again not the object or the consideration for the
arrangement.
The service rules were not tendered in
evidence. It is not disputed however that the service rules did not prohibit an
employee of the Court of Wards from carrying on a business as a manager or
agent of another. What was prohibited was carrying on business as an owner. An
arrangement which facilitated conduct of a business, contrary to the rules, by
holding out a third person as a nominal owner of the -business, was in the view
of the High Court not illegal, and no argument has been advanced before us
challenging that view. But the legality of the arrangement between the
plaintiff and Gupta was challenged on the ground that it was intended or
designed to circumvent the provisions of the Income-tax Act. In support of this
plea, there was no pleading, no issue was raised about it, and this part of the
appellant's case was not even relied upon before the Trial Court. In this
appeal Mr. Hazara for the appellants submitted that on the admissions made by
plaintiff in his evidence the Court was bound to non-suit him. In his evidence
before the Court the plaintiff admitted that he had submitted returns of income
earned in the business for the years 1943, 1944, 1945 and 1946 and assessment
of tax was made in the year 1947 and on demand by the Income-tax Officer he had
filed an affidavit stating that he was a manager of the business. Plaintiff
also admitted that when called upon he had submitted a separate personal return
for the salary earned by him, but that income was not taxed and tax was
assessed on the business income as if it belonged to Gupta. The plaintiff also
admitted that his object in filing the affidavit was to get rid of tax
liability on his personal income.
By the device of making an untrue statement
the plaintiff has undoubtedly evaded tax. The plaintiff was earning salary as
an employee of the-Court of Wards and had presumably some other income which in
the aggregate amounted to Rs. 1,800 per annum. If the business of International
Home was disclosed as belonging to the plaintiff, the aggregate of the personal
and business income was liable to be charged to tax under the Income-tax Act,
1922. By the expedient of holding out the defendant as an ostensible owner of
the business the plaintiff evaded liability for payment of tax on his personal
income and even tax on the business income was charged at a lower rate. But on
that account we are unable to hold, disagreeing with the High Court, that the
object in entering into the arrangement for holding out Gupta as owner of the
business was to evade payment of income-tax.
867 As found by the Courts below the purpose
of the arrangement was to circumvent the service rules. It is true that having
started the business in the name of the defendant, the plaintiff was able to
evade payment of tax, which if the true state of affairs was known, he would
have been liable to pay. The plaintiff might have incurred penalties by failing
to disclose the true state of affairs, he may also be liable for that conduct
to be proceeded against under the provisions of the Income-tax Act or under the
Indian Penal Code. We are, however, unable to hold that from the inception the
object of the arrangement was to enter into an unlawful arrangement.
The plaintiff's case was that he was in
management and possession of the business as owner till December 1948 when he
left Calcutta after entrusting the management of the business to Gupta, subject
to the understanding that the possession and management of the business was to
be restored to the plaintiff when he returned to Calcutta and sought to resume management.
There is nothing illegal in such a contract. The plaintiff's cause of action as
set out in the plaint was that he sought to obtain possession of the business
which belonged to him, and which he had entrusted to his agent or trustee.
Gupta denied that he was an agent or trustee of the plaintiff, and set up title
to the business and claimed that he was not liable to return the business. Once
the plea of Gupta that he was the owner of the business failed, there was no
other defence which could be held out against the plaintiff's claim. It is true
that if the plaintiff seeks the assistance of the Court to effectuate an
unlawful transaction, the Courts will refuse to assist him. Where, however, the
plaintiff is seeking to enforce his title to property and it is not an integral
part of his pleading which her must prove to entitle him to relief that there
was between him and the defendant an unlawful transaction or arrangement which
he seeks to enforce, the plaintiff will be entitled to the assistance of the
Court, even if the initial title of the plaintiff is rooted in an illegal
transaction.
On the finding of the High Court the proved
object for the arrangement to hold out Gupta as owner of the business, is not
shown to be in fraud of the public administration, and the alternative object
suggested by counsel for the appellant is not proved. It is unnecessary
therefore to enter upon a discussion of the authorities which make a
distinction between claims in which a party to an action has to rely essentially
upon a conspiracy to effectuate an illegal or fraudulent purpose, to support
his claim to the property transferred to or held out in the other party's name,
2 Sup./65-12 868 and claims in which the unlawful or unworthy object is
fulfilled, the property is owned by the claimant, and the claimant, seeks the
assistance of the Court not to effectuate his unlawful purpose, but in
substance to enforce his title by a plea in detinue under a transaction which
is not tainted by illegality. A.R.P.L. Palanianna Chettiar v. P.L.A.R.
Arunasalam Chettiar(1) illustrates the former principle. In that case the
Judicial Committee declined to assist the enforcement of a claim in fraud of
the public administration in Malaya, because the plaintiff had of necessity to
disclose before he could obtain a decree for restoration of his property
transferred to the defendant that he had practised deceit on the public
administration.
Sajan Singh v. Sardara Ali (2 ) illustrates
,the other principle. In that case the Court's assistance was given to the
plaintiff to restore to him his property of which he was wrongfully
dispossessed by the defendant, even though title to the property was acquired
by the plaintiff by an unlawful transaction, between the defendant and the
plaintiff.
In the present case as we have already
observed, it was not the object of the parties at the time when the transaction
which is called in the High Court benami was entered into to circumvent or to
defeat the provisions of the Income-tax Act by taking advantage of the fact
that the business stood in the name of Gupta. It is true that -the plaintiff
obtained benefit of a lower rate of tax for the business income and his
personal income escaped taxation. But it cannot on that account be held that
the transaction on which he founded his claim was unlawful. In claiming a
decree for possession from the defendant the plaintiff did not plead any
invalidity of the transaction under which possession of the business was
entrusted to Gupta. He merely pleaded his title to the business, entrustment
thereof to Gupta and refusal on the part of the latter to deliver possession
when demanded. On the findings recorded by the Trial Court as well as by the
High Court the plaintiff's title is proved.
Entrustment of the business when the
plaintiff left Calcutta in 1948 is also established by the evidence, and Gupta
has admittedly refused to deliver possession when demanded. The plaintiff as
the owner of the business was in the circumstances not prevented from enforcing
that title against Gupta, there being no taint attaching to the entrustment.
The appeal therefore fails and is dismissed.
Having regard to the circumstances of the case, we make no order as to costs.
(1) L.R. [1962] A.C. 294.
(2) L.R. [1960] A.C. 167.
869 Ayyangar J. I agree with the order
proposed by my learned brother Shah J. that the appeal fails and should be
dismissed as also in regard to the order for costs. As, however, I am unable to
agree with certain of the findings recorded by my learned brother propose shortly
to state my reasons for the decision.
The facts of the case have all been set out
in the judgment just now pronounced and it is needless for me to repeat them.
The main point in controversy in the suit was as to whether Phanindra Mohan
Majumdar the respondent, who was the plaintiff in the suit out of which this
appeal arises, had established that he was the proprietor of the Boarding House
carried on in the name and style of "International Home" at 42,
Harrison Road, Calcutta. That property admittedly stood under the registered
conveyance in the name of his father-in-law, defendant Gupta and that business
was also conducted by the defendant. The case set up by the respondent was that
the purchase of the property was with his funds and that the defendant-Gupta
was merely a benamidar.
The evidence on this point was examined
elaborately by the learned Single Judge at the trial and by the Division Bench
on appeal and they concurrently found that the defendant Gupta was merely a
benamidar for the respondent and that the purchase of the property in the name
of the defendant and the carrying on of the hotel business by the defendant was
really on behalf of the respondent. That finding was not challenged before this
Court and does not, therefore, require any examination.
Accepting that finding, however, two
questions were raised by the learned Counsel for the appellant. One was that
the purpose for which this benami transaction was entered into by the
respondent was, on his own case, to circumvent the Service Rules of the Court
of Wards of which he was an employee. Though no argument based upon the effect
of this admission was urged before the learned trial Judge, the question
whether the respondent was entitled to maintain the suit for the recovery of
possession from the defendant having regard to this object of the benami
transaction viz., to evade the Service Rules of the Court of Wards and in view
of the circumstance that object had been achieved, was raised before the
Division Bench. The learned Judges, however, rejected the contention by
pointing out that those Rules were not shown to be statutory and, in fact, the
Rules themselves were not before the Court. In those circumstances, they
considered that a breach of the rule or an attempt to evade it would not
necessarily make the transaction unlawful so as to preclude the respondent from
recovering the property title to which he had established.
Learned Counsel 870 for the appellant
repeated this argument before us but I agree that it is not tenable having regard
to the state of the evidence and to the fact that the Rules were not statutory.
There was, however, another illegality which
came out in the course of the evidence of the respondent and which, it was
submitted, was another object for which the property was purchased in the name
of the defendant--Gupta which requires more serious attention. This relates to
the claim of the appellant that it had been established that the object of
putting the property benami in the name of the defendant Gupta was to evade
income-tax and that as a matter of fact, the tax liability for certain of the
years of assessment had thereby been successfully evaded by the respondent.
The evidence in relation to this matter was
this : The suit property was purchased and the Boarding House business was
started in 1941, so that from the calendar year 1942 onwards i.e., from the
assessment years 1943-44 onwards the respondent if the beneficial owner would
have been liable to income tax on the income derived from the hotel business.
During this period the respondent was also
employed in the Court of Wards, so that he would have been liable to income tax
on the aggregate of the incomes he was receiving from these two sources. In
respect of the assessment years 194346 he received in 1947 a notice calling
upon him to submit returns on the basis that he was the real owner of the
International Home, 42, Harrison Road, The respondent then asserted that the
property and the business did not belong to him, but to the defendant Gupta and
that he was merely a manager under Gupta. In connection with this assertion to
the Income-tax department he swore two affidavits one in December 1947 and the
other in January 1948, before the Presidency Magistrate, Calcutta which
contained these representations. In his cross-examination respondent's
attention was drawn to the affidavits and to their contents and his answer was
this :
A. "Then I was charged with the amounts
as I was asked by the Income-tax Officer to file an affidavit. Then I made the
first affidavit which is here in the file. I showed him my first affidavit
whereupon the Income-tax Officer told me something. Pursuant to that I told
him, 'I rejected the first affidavit and made a second affidavit which was
accepted by them'.-(In the second affidavit dated January 31, 1948 he stated:
'I am an employee under Gupta-proprietor of International 'Home, 42, 871
Harrison Road, Calcutta. I have been working there as manager since July 1941
and my monthly salary varied from Rs. 25 to Rs. 150 from my last appointment to
this date).......
Then I stated that my money was not taxable
because it amounted only to Rs. 1,800 and I asked them to exempt me and
accordingly I was exempted from paying the income tax.
Court Question : Do I understand that in 1947
and 1948 your object of filing this affidavit was to get rid of the income-tax
liability if possible so far as you are personally concerned ? A : That is
so." On the basis of this clear admission it was urged before the learned
Judges of the Division Bench that the respondent made the purchase in the name
of the defendant--Gupta really to evade income tax which he would have been
liable to pay if the property and business had stood in his own name and that
as he had successfully evaded the payment of income tax and had thus achieved
his unlawful object, the Court would not permit him to assert title to the suit
property and would not lend its aid to enable him to recover possession of his
property. The learned Judges, however, rejected this submission for two reasons:
(1) that the defendant had not pleaded this illegality in the written statement
and was not therefore entitled to urge this as a ground for non-suiting the
plaintiff; (2) That the evidence and the admission I have extracted, did not
establish that the object of the respondent in effecting this purchase benami
in the name of the defendant was, at its inception, to evade income-tax.
In other words, the learned Judges considered
that it had not been proved that at the inception of the purchase the object
was to evade income tax, but that the respondent merely availed himself of the
opportunity afforded by the benami purchase to evade tax when the same was
sought to be livid on him some 5 or 6 years after the date of the original
purchase.
Learned counsel for the appellant challenged
this reasoning and submitted that the learned Judges had not approached the
question correctly.
First as to the point that in the absence of
a pleading the defendant was not entitled to rely on the taint of illegality in
the transaction for persuading the Court to refuse relief to the plaintiff; I
see force in the submission of learned Counsel for the appellant on this
question. The law on this point as to pleading is quite 872 clear and has been
stated in decisions of the highest authority on several occasions and it is
sufficient to summarise the underlying principles. Where a contract or
transaction ex facie is illegal there need be no pleading of the parties
raising the issue of illegality and the Court is bound to take judicial notice
of the nature of the contract or transaction and mould its relief according to
the circumstances. The case before us is, not however, of that type.
Even where the contract is not ex facie legal
"if the facts given in evidence clearly disclose the illegality the Court
is bound to take notice of this fact even if not pleaded by the defendant"
(Per Lindley L.J. in Scott v. Brown(1). The enunciation of the law on this
point by Devlin J. in Edler v. Auerbach (2) though more elaborate and summarising
the principles formulated by the House of Lords in North-Western Salt Company
Ltd. v. Electrolytic Alkali Company Ltd. (3) does not contradict the statement
by Lindley L.J. In the case on hand there is a clear admission by the
respondent himself of the facts on which illegality is sought to be made out.
The affidavits which he swore for. the purpose of evading the liability to tax
are before the Court and in the circumstances I consider that it is clearly
established that the object of the respondent was to evade the payment of
income-tax.
The other ground on which the learned Judges
rejected this plea of illegality was that there was no proof that the object
which the respondent sought to achieve by the benami was not proved to have
been the evasion of income-tax.
Counsel for the appellant contended that the
approach of learned Judges of the High Court to this question was not realistic
and that their finding was not correct.
I see considerable force in this submission
also. It was really an accident that the notice in respect of income-tax as
regards the income from this property and business came to be issued to the
respondent in 1947 or thereabouts.
Unless one proceeded on the assumption that
the respondent was not aware that income-tax was payable on income from
property or business, he could obviously have acted only on the footing that
the defendant Gupta as the apparent owner of the property would alone be made,
liable for the payment of the tax. In these circumstances it appears to me to
be clear that the object of the transaction of benami was even in its inception
to ensure that there was no aggregation of the income from the property and the
hotel business (1) [1892] 2 Q.B. 724 at 729. (2) (1950] 1 K.B. 359, at P. 371. (3)
[1914] A.C. 461.
873 with the salary or other remuneration
which he was getting from the Court of Wards.
The question next to be considered is the
effect of the object of the benami being to evade the provisions of a revenue
law like the Income Tax Act. Now s. 23 of the Indian Contract Act enacts that
the consideration or object of an agreement is lawful "unless it is
forbidden by law or is of such a nature that if permitted, it would defeat the
provisions of any law". On what I have stated earlier, the object of the
agreement being to defeat the provisions: of the Indian Income Tax Act would
certainly not be lawful.
In this connection I might briefly refer to
the decision in Emery v. Emery(1). It was an action by the husband seeking to
recover from the wife one half of certain securities which the husband had
purchased in the name of the wife.
The finding was that the bonds, a moiety of
which was sought to be recovered were held in the name of the wife as trustee
for the wife and husband in equal shares so far as the beneficial interest was
concerned. Wynn-Parry J. considered the evidence as to why the securities were
purchased in the name of the wife -and why there was a complete absence in the
documents of any reference to the husband having any beneficial interest in
those securities. The evidence led before the Court disclosed that under the
law of the United States, where the dividends on the bonds were payable if the
payment was to a non-resident alien the recipient would be liable to a
withholding tax. The husband was a non-resident alien and if his beneficial
interest was disclosed the dividend payable in respect of this investment would
have protanto suffered the deduction of tax, while the wife being an American
would not have been so liable. The question that was raised before the learned
Judge was whether in those circumstances the husband could assert his title to
the moiety of the securities to which he claimed beneficial interest. The
learned Judge dismissed the action holding that as the securities were put in
the name of the wife in order to evade the law the husband who did not come
before the Court with clean hands could not claim his title and that the
property should lie where it was. The main argument raised was that a breach of
a Revenue law of a foreign country stood on a footing different from an attempt
to evade a law of the United Kingdom and this was negatived.
We are not, however, concerned with that
problem, because here what was intended to be circumvented by means of this
device was the Indian Income Tax Act. That (1) [19591] Ch. 410.
874 an agreement to defraud Revenue is
manifestly illegal is beyond dispute but if authority were needed I might refer
to Milkr v. Karlinski(1) and Alexander v. Rayson (2) -(see Cheshire and Fifoot
on Contract, 5th ed. 286).
No doubt, for the purpose of deciding whether
property could be recovered by the assertion of a real title there is a clear
distinction between cases where only an attempt to evade a statute or to commit
a fraud has taken place and cases where the evasion or the fraud has succeeded
and the impermissible object has beep achieved. The leading decision upon this
point is that of' the Privy, Council in Petherpermal: Chetty, v. Muniandi
Servai(3) where Lord Atkinson dealing with the effect of benami conveyances
which are motivated by the design to achieve an illegal or fraudulent purpose,
quoted from Mayne's Hindu Law (7th ed. p. 595, para 466) the following as
correctly setting out the law :
"Where a transaction is once made out to
be a mere benami it is evident that the benamidar absolutely disappears from
the title. His name is simply an alias for that of the person beneficially
interested. The fact that A has assumed the name of B in order to cheat X can
be no reason whatever why a Court should assist or permit B to cheat A. But if
A requires the help of the Court to get the estate back into his own
possession, or to get the title into his own name, it may be very material to
consider whether A has actually cheated X or not. If he has done so by means of
his alias, then it has ceased to be a mere mask, and has become a reality. It
may be very proper for a Court to say that it will not allow him to resume the
individuality which he has once cast off in order to defraud others. If,
however, he has not defrauded any one, there can be no reason why the Court
should punish his intention by giving his estate away to B, whose roguery is
even more complicated than his own...... For instance, persons have been
allowed to recover property which they had assigned away. . . . where they had
intended to defraud creditors, who, in fact were never injured...... But where
the fraudulent or illegal purpose has actually been effected by means of the
colourable grant, then the maxim applies, 'In pari delicto potior est conditio
possidentis'. The (1) 62 T.L.R. 85.
(3) [1908] L.R. 35 1. A. 98.
(2) [1930] 1 K.B. 169.
875 Court will help neither party. 'Let the
estate lie where it falls'." I might point out that later decisions both
of the Indian High Courts and of the Privy, Council have all proceeded on the
acceptance of the principles which Lord Atkinson formulated in Petherpermals
case. (1) Pausing here, it might be pointed out that exactly the -same
conclusion has been reached by the Courts in England where a benami transaction
was entered into. for the purpose of defrauding creditors. It is hardly
necessary to add that the position in England under which a resulting trust is
deemed to arise when a purchase is made in the name of another with one's own
money and without an intention of conferring on him a beneficial title is
identical with the law as to benami in India. In Gascoigne v. Gascoigne (2 ) a
husband took a lease of lands in his wife's name and built a house upon it with
his own money. The reason why he entered into this type of transaction was that
he was in debt and was desirous of protecting his property from his creditors.
He then brought an action against the wife for a declaration that she held the
property as trustee for him. The husband succeeded in the County Court. On
appeal to the Divisional Court, Lush J. allowing the appeal stated that it was
proved that the plaintiff was guilty of a fraud upon the law to evade and
disappoint the provision of the legislation and he could not come in equity to
be relieved against his own act, though the defence also was dishonest, and in
the circumstances, the Court would say, "Let the estate lie where it
falls".
Learned Counsel for the respondent submitted
that the English decision just now referred to as well as Emery v.
Emery(3) proceeded upon the peculiarity of
the English law in which there is a presumption of an 'advancement but that as
there was no such presumption in India the position would be different where
the Court has to deal with the effect of benami transactions brought about in
order to effectuate a fraud or to evade the provisions of a statute. I do not.
however, think that could make any material
difference. We start with the position that the Court will presume an
ostensible title to be the real title unless a plaintiff who seeks to assert
the contrary pleads and proves that the ostensible owner is not the real owner.
In other words, the onus is on the person who alleges a transaction to be
benami to make (1) [1908] L. R. 35 I.A. 98.
(2) [1918] 1 K.B. 223.
(3) [1959] 1 Ch. 410 876 it out. Of course,
the source of the funds from which the purchase is made coupled with the manner
of its enjoyment would be a very material factor for establishing the case of
benami but the mere proof of the source of the purchase money would not finally
establish the benami nature of the defendant's title. Even where the plaintiff
purchases property with his own funds in the name of 'B' the surrounding
circumstances, the mode of enjoyment might still indicate that it was intended
to be a gift to 'B' and it would then not be a case of benami notwithstanding
that the purchase money did not proceed from the defendant. Therefore as
observed in Mayne's Hindu Law (Eleventh Edn.1) page 876.
"While the source from which the money
came is undoubtedly a valuable test, it cannot be considered to be the sole or
conclusive criterion. For, the question whether a particular transaction is
benami or not, is one of intention and there may be other circumstances to
negative the prima facie inference from the fact that the purchase money was
supplied by or belonged to another.
The position of the parties, their relation
to one another, the motives which could govern their actions and their
subsequent conduct may well rebut the presumption." Even where the benami
is established effect will not be given to the real title if the result of
doing so would be to violate the provisions of a statute or to work a fraud
upon innocent persons -Gur Narayan v. Sheo Lal Singh(1). On this reasoning it
would prima facie appear to follow that the respondent having adopted this
device of purchasing the property benami in the name of his father-in-law for
the purpose of evading the provisions of the Indian Income Tax Act would not be
entitled to recover the property on the basis of his title.
Two points were made by the learned counsel
for the respondent for avoiding this result. In the first place, he submitted
that the respondent had instituted the suit and was seeking relief on the basis
of his proprietary interest in the property and that as he did not, in fact,
plead nor was it necessary for him to plead the illegality of the transaction
in order to sustain his title to the property, he was not precluded by reason
of the illegality established from succeeding in the suit. For this purpose
learned Counsel relied upon the principle laid down by the Court of (1) [1918]
L.R. 46 I.A.I.
877 Appeal in Bowmakers v. Barnet
Instruments(1) and of the Privy Council in Sajan Singh v. Sardara Ali(2). It is
not necessary to narrate the facts of Bowmakers' case(3) in detail and it would
be sufficient to extract the head-note for the purpose of understanding the
ratio of the decision:
"No claim founded on an illegal contract
will be enforced by the court but as a general rule a man's right to possession
of his own chattels will be enforced against one who without any claim of
right, is detaining them, or has converted them to his own use, even though it
may appear from the pleadings, or in the course of the trial, that the chattels
in question came into the defendant's possession by reason of an illegal
contract between himself and the plaintiff, provided that the plaintiff does
not seek, and is not forced, either to found his claim on the illegal contract,
or to plead its illegality in order to support his claim." It is perhaps
not irrelevant to notice that the illegality which was there pleaded as a
defence to the claim for damages for conversion of certain machine tools which
was the property of the plaintiffs was the contravention of an executive order
under the Defence Regulations regarding the maximum price that might be
charged. There was besides a finding that neither the plaintiffs nor the
defendants had any knowledge of the order, so that if they erred' the error was
involuntary. These form the background in which the decision has to be
appreciated. The defendant, however, contended that the ignorance was
immaterial and that as the order of the Minister rendered any violation of its,
provisions criminal the parties must be deemed to have been engaged in a
criminal conspiracy and that the defendants were therefore entitled to retain
the machine tools which were with them on hire without returning them to the
bailor.
Du Parcq L.J. who delivered the judgment of
the Court, after quoting the maxim "In pari delicto" on which the
defence was based, observed:
"The Latin maxim must not be understood
as meaning that where a transaction is vitiated by illegality the person left
in possession of goods after its completion is always and of necessity entitled
to keep them. Its true meaning is that, where the circumstances are such that
the Court will refuse to assist either party, the (1) [1945] 1 K.B. 65.
(2) [1960] A.C. 167.
878 consequence must, in fact, follow that the
party in possession will not be disturbed. As Lord Mansfield said, the
defendant then obtains an advantage 'contrary to the real justice', and, so to
say, 'by accident'," and finally added :
"We are satisfied that no rule of law,
and no considerations of public policy, compel the court to dismiss the
plaintiff's claim in the case before us. and to do so would be, in our opinion,
a manifest injustice." In view of these observations, I am unable to hold
that the decision is authority for the position that a suit for ion on the
basis of title could never be dismissed even if the object for which the
transfer was effected was illegal and that object has been achieved. The maxim
ex turpi causa non oritur actio is still a rule of law and property transferred
under a contract which is illegal or to achieve an illegal object where the
object has, been achieved cannot be recovered for the reasons that the court
will not lend its aid to such a plaintiff. In other words, I do not read the
decision in Bowmaker's case(1) as contradicting what was stated by Lord
Atkinson in Petherpermal's case(2) extracted earlier.
There is one feature regarding the facts in
Bowmaker's(1) case to which attention might be drawn. The plaintiff there had
delivered the machine tools to the defendants under three hire purchase
agreements which were illegal. The defendants had sold the tools delivered
under two of the agreements and refused to redeliver those under the third
which were still in their So far as the claim related to those covered by the
two agreements wherein the defendants had parted with the goods Cheshire &
Fifoot on the Law of Contract* explain the decision thus :
"The significant feature of the wrongful
sales was that they constituted an act of conversion that ipso facto terminated
the bailment. The plaintiffs might therefore argue that, unlike the case of
pledge in Taylor v. Chester which was still in existence at the time of the
action, there was here no longer any existing contract upon which the
defendants could found a possessory right. The right to immediate possession
had automatically revested in the plaintiffs. Could it not thus be said, as in
the case of an illegal but expired lease, that owing to the termination of the
bailment the plaintiffs had an (1) (1945) 1 K. B. 65.
(2) [1908] L.R. 35 1. A. 98.
879 independent cause of action in virtue of
their admitted ownership?........ It was completely irrelevant that the
chattels had originally come into the possession of the defendants by virtue of
the illegal contract. That contract was now defunct. It formed no part of the
cause of action. Thus, with the disappearance of the only transaction that
could restrict their rights, the plaintiffs could base their claim to
possession solely upon their ownership of the chattels." As regards the
other agreement where the goods were still with the defendant the same authors
say:
"In the case of this agreement the cause
of action was the refusal of the defendants to comply with the demand for the
return of the chattels.
Since effective possession had passed to the
defendants by virtue of the contract, the sole justification for this demand
was their failure to pay the agreed installments.
The plaintiffs, therefore, were inevitably
driven back to the contract in order to prove the amounts of the installments,
the dates at which they were due and the agreed effect of their non-payment.
This part of the case would therefore seem to be on as fours with the action by
a lessor to enforce the forfeiture of the lease for condition broken.
This difficult decision turned upon the
effect of a bailment. It would seem, however, that if the ownership of a
chattel, as distinguished from a mere possessory right, were to be transferred
under an illegal contract, it would remain perpetually irrecoverable. In such a
case the transferor would have no title irrespective of the illegal
transaction.
His only mode of obtaining relief would be to
terminate the contract under which he purported to transfer title to the
defendant, and he could not take proceedings for this purpose without showing
that he was particeps criminis." I consider these remarks correctly set
out the difficulties created by the decision and its true ratio.
Sajan Singh's case(1) was concerned with the
right of the plaintiff who was a lorry driver who could not, under the then
existing regulations of Malaya, obtain a lorry. The defendant, (1) [1960] A.C.
167.
880 on the other hand, was one who was
qualified to purchase a lorry and accordingly an arrangement was entered into
between the plaintiff and the defendant under which a lorry was to be acquired
by the plaintiff to be registered in the name of the defendant with a permit in
his own name but the intention being that it should belong to the plaintiff and
to be used by him on his own account. The result was that the lorry belonged to
the plaintiff but was operated in the name of the defendant. After the parties
fell out and correspondence was passing between them, the defendant, one day,
entered the plaintiff's house when the latter was absent and took away the
lorry which he refused to return claiming that it belonged to him. The
plaintiff then brought the suit out of which the appeal before the Privy
Council arose, for a declaration that he was the owner and for return of the lorry
and for damages etc. The claim, thus, before the Court was in retinue and Lord
Denning who spoke for the Board emphasised this aspect observing :
"In detinue their Lordships think he
succeeded. Although the transaction between the plaintiff and the defendant was
illegal, nevertheless it was fully executed and carried out: and on that
account it was effective to pass the property in the lorry to the
plaintiff....... Me plaintiff had actual possession of the lorry at the moment
when the defendant seized it. Despite the illegality of the contract, the
property had passed to him by the sale and delivery of the lorry.
When he commenced this action, he had the
right to immediate possession. Their Lordships think that in these,
circumstances he had a claim in detinue." It would thus be seen that
besides the claim based on his title to the lorry, the plaintiff had also
established that while the chattel was in his possession, the defendant had
unlawfully taken it away, without his consent. Insofar as his claim was based
on this deprivation of possession, it was really an independent cause of action
wholly separated from the original purchase of the lorry which was to
circumvent the law, and as to this claim in detinue there was no question of
its being tainted with any illegality.
Besides this, Lord Denning himself pointed
out that there were many cases which showed that where a transfer of property
was effected in order to achieve an illegal purpose and that purpose was
achieved, the plaintiff was disabled from recovering the property for the
reason that the Court will not assist him in that endeavour.
881 Pausing here, I need only add that there
is no question here of the legislation whose avoidance or contravention stamps
the transaction as illegal being one enacted for the protection of persons like
the plaintiff. Such was the case of Amar Singh v. Kulubya(1) where the
principle explained in Kearley v. Thomson (2) by Fry L.J.
"In these cases of oppressor and
oppressed, or of a class protected by statute, the one may recover from the
other, notwithstanding that both have been parties to the illegal
contract." as an exception to the rule in pari delicto potior est canditio
possidentis was applied.
Two questions thus arise which have to be
separately considered: (1) If nothing more had happened in this case than that
the respondent had purchased the property benami in the name of the
defendant-Gupta can the respondent lay claim to possession of the suit property
based upon the fact that the purchase money came from him notwithstanding the
illegal and unlawful purpose which he sought to accomplish by that transaction
and which he succeeded in achieving; (2) Whether the respondent can rest his
claim to recover possession of the property on a title wholly independent of
the benami purchase which is tainted with illegality. The answer to the first
question would depend upon whether he can assert title to the property, decors
the illegal object which he achieved by purchasing the property benami in the
name of the defendant-Gupta. Prima facie the answer would appear to be in the
negative on the principle laid down by Lord Atkinson Petherpermal v.
Muniandi(3) already cited. Learned Counsel for the respondent, however,
submitted that under the Indian law though the onus of establishing that a
transaction is benami is on the person who so asserts it and that unless this
is strictly made out the ostensible title would prevail, but when once the
plaintiff establishes that the consideration proceeded from him, the onus shifts
to the defendant to establish that the transaction was not benami and that a
beneficial interest was intended to pass to him.
I do not consider it necessary to finally
decide this point on which turns the question as to whether the respondent is
entitled to succeed on the basis of his title notwithstanding the illegality
attending the transaction, though it must be pointed out that if the object
which the parties have in view (1) [1963] 3 W.L.R. 513. (3) [1908] I-R. 35 1.
A. 98.
(2) 24 Q.B.D. 742.
882 cannot be carried out unless a real title
passed to the defendant the presumption arising out of the consideration
proceeding from the plaintiff would be over-borne. I say it is not necessary to
pronounce upon this difficult question because in the present' case the
respondent's claim to possession is based not merely on the basis of his title
emerging from the source of purchase money for the acquisition of property but
also on an alternative ground and this is the second of the grounds on which
the respondent rested his claim to recover possession, and that was as follows.
While the respondent himself was in phvsical
Possession of the property he had to leave Calcutta on medical advice in or
about December 8, 1948 and at that date he put the defendant Gupta into
possession on the understanding that on the respondent's return to Calcutta the
defendant would hand over to the plaintiff possession of the premises and the
management of the business. The respondent further stated that he returned to Calcutta in or about December, 1949 and occupied one of the rooms of the suit property and
made demands on the defendant to hand over possession and management which he
failed to do. This case of the respondent has been concurrently found to be
true by both the Courts. It would be seen that the basis of the respondent's
claim to possession is independent of and wholly dissociated from the illegal
transaction of the original benami purchase and falls into line with Sajan
Singh's case(1). Not being tainted with illegality, the respondent's claim on
this footing is not open to objection and as it has been upheld by both the
Courts I agree that the appeal should stand dismissed and also to the order for
costs proposed by my learned brother.
Appeal dismissed.
(1) [1960] A. C. 167.
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