M. V. Ramasubbier & Ors Vs.
Manicka Narasimhachari & Ors [1979] INSC 22 (30 January 1979)
SHINGAL, P.N.
SHINGAL, P.N.
KAILASAM, P.S.
CITATION: 1979 AIR 671 1979 SCR (2)1177 1979
SCC (2) 65
ACT:
Trust Act-Ss. 49, 51 and 52-Scope of-Managing
Trustee purchased property for the trust sold it to his son for lesses price
than offered by others-Sale it valid-Duty of trustee.
HEADNOTE:
Plaintiffs and defendants were descendants of
a common ancestor who was the founder of a trust. Defendant no. 1, at the relevant
time, was the managing trustee of the trust. On partition and sale of family
properties a house, which was the suit property, was purchased for the trust.
Soon thereafter defendant no. 1 sold it to his son. Before the sale, however,
the tenant of the house who was a man of substance, offered a much higher price
than what was paid by the son but the defendant sold it to his son.
In the plaintiffs' suit challenging sale of
the trust property to the managing trustee's son for a lesser consideration the
defendant claimed that the property had to be sold because his son who was the
owner of adjacent property raised a dispute claiming easementary rights over
the property.
The suit was decreed by the trial court but
on appeal the High Court held that the consideration was adequate and fair,
that the sale was bona fide and that no ulterior motive could be attributed to
the defendant no 1 in the sale. The High Court, therefore, dismissed the suit.
Allowing appeal,
HELD: (a) The sale had to be viewed with suspicion
The High Court committed an error of law in ignoring important aspects of law
which had direct bearing on the controversy before it. [1181A] (b) It is well
recognised that a person in a fiduciary position like a trustee is not entitled
to make a profit for himself or a member of his family. He is not allowed to
put himself in a position in which a conflict may arise between his duty as a
trustee and his personal interest. [1180E] (c) The control of the trustee's
discretionary power prescribed by s. 49 of the Trusts Act and the prohibition
contained in s. 51 that the trustee may not use or deal with the trust property
for his own profit or for any other purpose unconnected with the trust and the
equally important prohibition in s. 52 that the trustee may not directly or
indirectly buy the trust property on his own account or as an agent for a third
person, cast a heavy responsibility upon him in the matter of discharge of his
duties as trustee. The rule prescribed by these sections cannot be evaded by making
a sale in the name of the trustee's partner or son, for that would, in fact and
substance, indirectly benefit the trustee. [1180F-G] (d) Where a trustee makes
the sale of a property belonging to the trust, without any compelling reason in
favour of his son, without obtaining the 1178 permission of the court
concerned, it is the duty of the court to examine whether the trustee has acted
reasonably and in good faith or whether he has committed a breach of the trust
by benefiting himself from the transaction in an indirect manner. [1180H] (i)
In the instant case defendant no. 1 was the trustee of the property. It was his
duty to be faithful to the trust and execute it with reasonable diligence in
the manner in which an ordinary prudent man of business would conduct his own
affairs. He could not occasion any loss to the trust and it was his duty to
sell the property, if that was so necessary to sell, to the best advantage of
the trust.
[1181D] (ii) The High Court was wrong in
blaming the plaintiffs that they had brought the suit on account of personal
grouse and spite. Assuming that they were so actuated, their action was
eminently for the advantage of the trust created by their ancestor in which
they had a substantial and direct interest. [1181D] (iii) Defendant no. 1 was
not able to explain how the sale was beneficial to the trust. Income by way of
rent which the property was fetching was far more than interest which the sale
proceeds fetched when they were invested in fixed deposits in a Bank. He was therefore
unable to explain how he acted as a man of ordinary prudence in slashing down
the income of the trust by making the sale. [1181G] (iv) When defendant no. 1
sold the trust property to his son at a lesser price than was otherwise
available, he did not act in accordance with law in the discharge of his
fiduciary relationship with the trust. He sold the property to his son in
disregard of his statutory duty which no man of ordinary prudence would have
done. [1182C] (v) Assuming that defendant no. 1 made a gesture of goodwill in
favour of the trust when he allowed the sale of the family property to the
trust, he could not possibly absolve himself from what he did in selling it off
to his son at a lesser price than was offered by another reason.
[1182F] (vi) Assuming that there was some
difficulty in respect of rights of easement between the trust and the
defendant's son who was the immediate neighbour of the property, that could
have been a lever in the hands of the trustee to make a bargain for higher consideration
from his son who was equally interested in the property. A man of prudence
would not have sold his property for a considerably lesser amount than that
offered to him by another person and agreed to sell it just because a co-sharer
was causing trouble and offering a few lesser price. [1183A-B]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1584 of 1969.
Appeal from the Judgment and. Decree dated
20-2-1969 of the Madras High Court in Appeal No. 104 of 1963.
G. L. Sanghi and Vineet Kumar for the Appellants.
Vepa P. Sarathy and Mrs. S. Gopalakrishnan
for Respondent No. 1.
1179 K. Jayaram for Respondents 2-5.
The Judgment of the Court was delivered by
SHINGHAL, J.-This appeal by a certificate of the Madras High Court is directed
against its judgment and decree dated February 20, 1969.
One Manikka Sankaranarayana Iyer, father of
defendants 1 and 3 and grandfather of plaintiffs 1 to 5 and defendants 2, 4 and
5 and father-in-law of plaintiff No. 6 constituted an Annadanam Trust and he
and his sons executed a registered deed of settlement for that purpose on June
3, 1908. By that document Sankaranarayana Iyer became the first trustee for
life, and it was provided that after him the senior-most member would be the
trustee, by turns. Sankaranarayana died and defendant No. 1 became the managing
trustee of the trust. There was a suit for partition of the family properties
including house No. 48A, and it was settled by a compromise under which a
preliminary decree dated September 12, 1956 was drawn up for the sale of the
properties amongst the members of the family. Defendant No. 1 purchased the
suit property for Rs. 21,500/- for the aforesaid trust on April 19, 1959. A
final decree was drawn up on November 29, 1959 in which house No. 48A was shown
as the property of the trust. Defendant No. 1 however sold that property soon
after, to his son defendant No. 2 on July 14, 1960, for Rs. 25,000/- under sale
deed Ex. B. 13. Chithambaram Chettiar (P.W. 2), who was a tenant of that
property from 1949 onwards, came to know of the intended sale and sent a
registered notice to defendant No. 1 on July 21, 1960, offering to purchase it
for Rs. 35,000/-. Defendant No. 1 however went ahead with the sale of the
property to his son and registered the sale deed on July 22, 1960. The
plaintiffs thereupon filed the present suit on September 15, 1960, challenging
that sale and asking for its restoration to the trust. The defendants resisted
the claim in the suit on the ground that the sale price was fair and adequate
and that the sale had to be made because of the disputes which had arisen
between the second defendant as the owner of the adjacent house and the trust
in regard to the easementary rights of drainage, light and air etc. The suit
was decreed by the Subordinate Judge of Madurai on September 10, 1962.
The High Court of Madras however allowed the
appeal against that judgment and decree and dismissed the suit with costs of
both the courts holding that Rs. 25,000/- was "quite adequate and
fair" price for the suit property and that defendant No. 1 acted with
"perfect bona fides and no ulterior motive can be attributed to him."
That is why the plaintiffs have come up in appeal to this Court.
1180 It is not in-dispute before us that the Indian
Trusts Act, 1882, hereinafter referred to as the Act, applied to the trust in
question and that it was necessary for the plaintiffs to prove that defendant
No. 1 did not exercise his discretionary power of selling the suit property
"reasonably and in good faith" and that he indirectly purchased it
for himself, in the name of his son (defendant No. 2), within the meaning of
section 49 and 52 of the Act.
There is some controversy on the question
whether defendant No. 1 made an outright purchase of the suit property for and
on behalf of the trust for Rs. 21,500/- on April 19, 1959, or whether he
intended to purchase it for himself and then decided to pass it on to the
trust, for defendants have led their evidence to show that the property was
allowed to be sold for Rs. 21,500/-, which was less than its market value, as
it was meant for use by the trust and that defendant No. 1 was not acting
honestly when he palmed of the property to his son soon after by the aforesaid
sale deed Ex. B. 13 dated July 14, 1960. The fact however remains that
defendant No. 1 was the trustee of the property, and it was his duty to be
faithful to the trust and to execute it with reasonable diligence in the manner
an ordinary prudent man of business would conduct his own affairs. He could not
therefore occasion any loss to the trust and it was his duty to sell the
property, if at all that was necessary, to best advantage. It has in fact been
well recognised as an inflexible rule that a person in a fiduciary position
like a trustee is not entitled to make a profit for himself or a member of his
family. It can also not be gainsaid that he is not allowed to put himself in
any such position in which a conflict may arise between his duty and personal
interest, and so the control of the trustee's discretionary power prescribed by
section 49 of the Act and the prohibition contained in section 51 that the
trustee may not use or deal with the trust property for his own profit or for
any other purpose unconnected with the trust, and the equally important
prohibition in section 52 that the trustee may not, directly or indirectly, buy
the trust property on his own account or as an agent for a third person, cast a
heavy responsibility upon him in the matter of discharge of his duties as the
trustee. It does not require much argument to proceed to the inevitable further
conclusion that the rule prescribed by the aforesaid sections of the Act cannot
be evaded by making a sale in the name of the trustee's partner or son, for
that would. in fact and substance, indirectly benefit the trustee. Where
therefore a trustee makes the sale of a property belonging to the trust,
without any compelling reason, in favour of his son, without obtaining the
permission of the court concerned, it is the duty of the court, in which the
sale is challenged, to examine whether 1181 the trustee has acted reasonably
and in good faith or whether he has committed a breach of the trust by
benefitting himself from the transaction in an indirect manner. The sale in
question has therefore to be viewed with suspicion and the High Court committed
an error of law in ignoring this important aspect of the law although it had a
direct bearing on the controversy before it.
The High Court in fact proceeded to examine
the case on the assumption that the plaintiffs had instituted the suit not so
much out of a genuine desire to redress any wrong done to the trust, as out of
"ulterior motives and ill-will against the first and second
defendants." This shows that instead of examining the case according to
the criterian mentioned above, the High Court based its decision on an
extraneous consideration and blamed the plaintiffs for raising the suit on
account of "personal grouse" and "personal spite". We have
not been referred to any evidence which could justify the High Court's view
that there was any such grouse or spite. But even if it were assumed for the
sake of argument that the plaintiffs had any such motive for raising the suit,
the fact remains that their action was eminently one for the advantage of the
trust which had been created by their ancestor and in which they had a
substantial and a direct interest.
Some important facts stand out from the
evidence on the record which are directly in point. The suit property belonged
to the family which had created the trust. It was purchased by defendant No. 1,
in his capacity as the trustee of the Annandanam Trust for Rs. 21,500/- on
April 19, 1959, at a family sale. It appears from the statement of defendant
No. 2 that the property was capable of, or could fetch a rent of about Rs.
190/- per mensem, amounting to Rs. 2,280/- per annum. It has also been admitted
that the sum of Rs.
25,000/- was not utilised by the trustee
(defendant No. 1) for purchasing any other better property, but was invested in
fixed deposit with a bank at 3 1/2 per cent interest per annum. That could
yield an income of only Rs. 875/- per annum. The trust therefore lost heavily in
the bargain. What is worse, defendant No. 1 has not been able to explain how
the sale could be said to be beneficial to the trust and how he could possibly
contend that he acted as a man of ordinary prudence in slashing down the income
of the trust by making the sale.
The further fact that stands out from the
evidence on the record is that when Chithambaram Chettiar (P.W. 2), who was a
tenant in the suit property from 1949 onwards, learnt about the intended sale,
1182 he sent a notice to defendants Nos. 1 and 3 offering to purchase it for
Rs. 35,000/-. That notice was issued on July 21, 1960. The receipt of the
notice has been admitted by defendant No. 1 in his statement in the trial
court, and he has further admitted that Chithambaram Chettiar offered to purchase
the property for Rs. 35,000/- and that he sold it to his son for Rs. 25,000/-
without even informing him that he had received the offer of Rs. 35,000/-.
Defendant No. 1 in fact proceeded to register the sale deed of the property in
favour of his son, the second defendant, on July 22, 1960. It is therefore
quite clear that he did not care to act in accordance with the law in the
discharge of his fiduciary relationship with the trust and executed the sale
deed in his son's favour in disregard of his statutory duty, for no man of
ordinary prudence would possibly have sold his property for Rs. 25,000/- when
he had an offer of Rs.
35,000/-. That offer could not be said to be
from a man of no substance because Chithambaram Chettiar (P.W. 2) who made it, was
known to the defendants and he has stated that he was a man of means and was
worth rupees four lakhs. It may be that the son-in-law of plaintiff No. 2 was
employed in his shop, but that could not detract from the basic fact that a
much higher offer had been made by a man of substance.
Instead of examining the appeal with due
regard to the above mentioned evidence, the High Court was obsessed by a
consideration of the evidence which had been led for the purpose of showing
that while defendant No. 1 had purchased the property for himself on April 19,
1959, for Rs. 21,500/- , he gave up that advantage in favour of the trust. The
evidence on the point is not unequivocal, for it may well be that defendant No.
1 did not want to obtain a sale deed in his own name for other reasons, but
even if it were assumed that he made a gesture of goodwill in favour of the
trust on April 19, 1959, he could not possibly absolve himself from what he did
in selling it off, after it had become the property of the trust, to his own
son a few months thereafter for Rs. 25,000/- when he had a genuine offer of Rs.
35,000/-.
Another consideration which prevailed with
the High Court in setting aside the finding of fact of the trial court was
that, according to it, the evidence on the record showed that some difficulties
had cropped up after the property had been purchased as his son, defendant No.
2, began to "give trouble" and that he resolved that trouble on the
advice of his family lawyer Shri V. Rajagopala Iyengar (D. W. 3) by selling the
property to his son. This view was obviously incorrect, for even it were
assumed that there was some 1183 difficulty in respect of some common rights of
easement, that could well have been a lever in the hands of the trustee to make
a bargain for Rs. 35,000/- or more with his son who was equally interested in
those easementary rights.
A man of prudence would not have sold his
property for a considerably lesser amount than that offered to him by another
person and agreed to sell it just because a co- sharer in the easementary right
was causing trouble and was offering a far lesser price.
We have gone through the statement of V.
Rajagopala Iyengar (D.W. 3) on whose advice defendant No. 1 claims to have sold
the property for Rs. 25,000/-. He has admitted in his statement that he had not
even seen the suit property, and he knew nothing about the so called trouble in
regard to the easementary rights between defendant No. 1 and his son.
On the other hand, we find that he was
indebted to the family of defendants Nos. 1 and 2 and he did not even care to
ascertain what rent the suit property was fetching when he advised its sale for
Rs. 25,000/- to the son of defendant No. 1. The High Court therefore did not
even read the evidence correctly while placing reliance on his testimony.
For the reasons mentioned above, we have no
doubt that the High Court did not examine the controversy in its proper legal
perspective and with due regard to the salient facts which had been established
by the evidence on the record and it was not therefore justified in setting
aside the finding of the trial court.
The appeal is allowed. The impugned judgment
and decree of the High Court are set aside and the decree of the trial court is
restored with costs throughout.
P.B.R. Appeal allowed.
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