Union of India Vs. Rajeswari and Co,
& Ors [1986] INSC 130 (15 July 1986)
PATHAK, R.S.
PATHAK, R.S.
MUKHARJI, SABYASACHI (J)
CITATION: 1986 AIR 1748 1986 SCR (3) 175 1986
SCC (3) 426 JT 1986 161 1986 SCALE (2)6
ACT:
Transfer of Property Act, 1882-s. 53-Applicability
of- Proceeds arising upon transfer of assets of an assessee company employed
fully in paying off some creditors- Transaction whether invalid and
inoperative-Transfer in favour of a person not a creditor-validity of.
Constitution of India, Art. 136-Questions of
fact- Whether could be raised before the Court.
HEADNOTE:
A public limited company, working at a loss,
having come to know of the proposal of the Department to reopen its income-tax
assessments for the previous years, disposed of its assets to the respondent
firm, with which it had a partnership business, and employed the proceeds in
paying off the debts due to various creditors, with the result that nothing was
left for paying off the tax arrears of the company.
A suit under s. 53 of the Transfer of
Property Act, 1882 was instituted by the Union of India-appellant for a
declaration that the sale deed in favour of the respondent firm was invalid,
inoperative and not binding on the appellant and other creditors of the
transferor company and alleging fraudulent intent to defeat legitimate claims,
which was decreed by the trial court. The High Court, however, allowed the
appeal holding that the appellant had failed to satisfy the provisions of s. 53
inasmuch as the evidence showed that the company had utilised the proceeds
arising upon the transfer of its assets in paying off all its other creditors,
and that even if the company had done so in order to avoid payment of its
income tax dues no relief could be granted to the appellant.
In this appeal by special leave it was urged
for the appellant that the transfer was effected in favour of a person who was
not a creditor, that the assets had been undervalued and that there was
evidence to show that the benefit of the sale proceeds was enjoyed by the
directors 176 of the company, who were also partners of the respondent firm.
Dismissing the appeal, the court, ^
HELD: It is open to a debtor to prefer one or
more creditors over the others in the payment of his debts, and so long as he
retains no benefit in the property the mere circumstance that some creditors
stand paid while others remain unpaid, does not attract the provision of s. 53
of the Transfer of Property Act. [180A-B] Musahar Sahu and Another v. Hakim Lal
and another, L.R.
43 Indian Appeals 104, In re Moroney, [1888]
L.R. 21 Ir. 27, 62, Middleton v. Pollock, [1876] 2 Ch.D. 104, 108 and MA PWA
MAY and another v. S.R.M.M.A. Chettyar Firm, 56 Indian Appeals 379, referred
to.
In the instant case, there was no finding by
the High Court in support of the contention that some of the debts discharged
were owed to persons who were also directors of the company or that the
consideration which passed for the sale of the assets was inadequate and that
the assets had been undervalued. This Court will not permit such questions of
fact to be raised unless there is material evidence which has been ignored by
the High Court or the finding reached by the Court is perverse. [180B-C] It has
been found by the High Court that the sale was effected for the purpose of
discharging genuine debts payable by the company and that the sale proceeds
were really employed for paying off the creditors of the company.
Once it was also found that the consideration
was not inadequate, it was immaterial that the transfer was effected in favour
of a person who was not a creditor. [180D-E]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1689 Of 1974 From the Judgment and Order dated 31st August, 1972 of the
Madras High Court in Appeal No. 357 of 1965.
B.B. Ahuja and Ms. A. Subhashini for the
Appellant.
A.T.M. Sampath and P.N. Ramalingam for the
Respondents.
The Judgment of the Court was delivered by
177 PATHAK, J. This appeal by special leave arises out of a suit instituted by
the appellant for a declaration that a sale-deed of immoveable properties and
the transfer of moveables belonging to the respondent limited company in favour
of the respondent firm are invalid, inoperative and not binding on the
appellant and other creditors of the respondent limited company.
A suit was instituted by the Union of India,
the appellant before us, alleging that the Krishna Oil Mills and Industries
Ltd., a public limited company registered under the Indian Companies Act, 1913
was carrying on business in the manufacture and sale of tin cans and aerated
water. It entered into a partnership in September 1952 with Rajeswari and Co.,
which was carrying on business in the pressing of cotton bales. Under the
partnership agreement Rajeswari & Co. was to install a cotton baling press
in the buildings of the Company and the business would be carried on under the
name Rajapalayam Cotton Pressing Factory, with the profits being divided
between the Company and Rajeswari & Co. in the ratio of 7 to 9
respectively. This was replaced by another agreement in 1954, but the business
was carried on in the same name and the profits divided in the same shares. It
was alleged that the Company incurred losses in its own business year after
year and from 1954 the only income derived by it flowed from the shares held by
it in the partnership business. It was alleged that the Company had in fact
ceased to carry on its own business, but in computing the income of the Company
from the assessment year 1956-57 to the assessment year 1959-60 the losses
suffered during the previous years from the Company's own business were allowed
to be carried forward and set off against its share of income from the
partnership Firm. Subsequently the Income- tax authorities decided to reopen
the assessment proceedings under s. 34 of the Indian Income-tax Act, 1922 and,
it is said, this was communicated to the Company. The processing of the case
took time and the notices under s. 34 were issued for the different assessment
years on March 6, 1961 and March 7, 1961. It was alleged that meanwhile, the
Company, having come to know of the proposed re-opening of its income-tax
assessments, began to dispose of its moveable and immoveable assets with a view
to defeat the claim of the Union of India and to place the properties beyond
the reach of the creditors of the company. The assets of the company were
transferred in favour of Rajeswari & Co. and the sale proceeds were
employed for paying off the debts due to various creditors who, it is said,
included also the close relations and friends of the Directors of the Company.
In the result, there was nothing left for paying off the tax arrears of the
Company.
178 The suit was resisted by the Company,
which in its written statement, admitted that it was working at a loss for some
years and was obliged to replace its original business of seed crushing and oil
extraction by a more modest business activity, and in its circumstances it
entered into a partnership with Rajeswari & Co. for carrying on the
business of pressing cotton bales. It denied that when disposing of its assets
it was aware of the intention of the income-tax authorities to reopen its
assessments. It pleaded that because of action threatened by the Registrar of
Joint Stock Companies in 1959 it was compelled to consider its position and to
decide in a General Body meeting in June 1960 to dispose of the assets of the
company. It was also stated that the partnership agreement of 1954 between the
Company and Rajeswari & Co. stipulated that Rajeswari & Co., should
have first preference if the Company proposed to sell its assets. The right of
pre- emption was pressed by Rajeswari & Co. and, therefore, a resolution
was passed in February 1961 at another Extraordinary Meeting of the Company to
sell the lands and buildings at a valuation to be fixed by expert opinion. It
was asserted that the assets were sold to Rajeswari & Co.
and the sale proceeds were distributed to the
creditors so that all the creditors were paid off.
Rajeswari & Co. also filed a written
statement in opposition to the suit and besides asserting that it had installed
cotton bale presses in the buildings of the Company pursuant to the partnership
agreement between them it denied any fraudulent intent in purchasing the assets
of the Company. It asserted that it acted in good faith and paid value for the
properties.
The trial court decreed the suit on Appril
27, 1965.
Rejeswari & Co. appealed to the High
Court of Madras, and the High Court allowed the appeal, set aside the trial
court decree and dismissed the suit. The High Court held in substance that the
Union of India had failed to satisfy the provisions of s. 53 of the Transfer of
Property Act inasmuch as the evidence showed that the Company had utilised the
sale proceeds arising upon the transfer of its assets in paying off all its
other creditors, and that even if the Company had done so in order to avoid
payment of its income- tax dues no relief could be granted to the Union of
India.
In this appeal it is urged for the Union of
India that the transfer of assets was effected in favour of a person who was
not a creditor, that the assets had been under- valued and that there was
evidence to show 179 that the benefit of the sale proceeds was enjoyed by the
Directors of the Company who were also partners of Rajeswari & Co.
Section 53 of the Transfer of Property Act
provides that every transfer of immoveable 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. A long line of cases has held that the
preference by a debtor of one creditor over the others is not ipso facto deemed
fraudulent, and reference may be made to Musahar Sahu and Another v. Hakim Lal
and Another, L.R. 43 Indian Appeals 104 where the Judicial Committee of the
Privy Council quoted Palles C.B., who said in In re Moroney [1888] L.R. 21 Ir.
27, 62:
"The right of the 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.
Now 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 rateable distribution, the
right of the creditors by such act is not invaded or affected." The
Judicial Committee explained that "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 retain a benefit for himself. He may pay one
creditor and leave another unpaid: Middleton v. Pollock. [1876] 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 for
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." This proposition of law was re-affirmed by the
Judicial Committee subsequently in MA PWA MAY and another v. S.R.M.M.A Chettyar
Firm, 56 Indian Appeals 379.
180 It seems clear that it is open to a
debtor to prefer one or more creditors over the others in the payment of his
debts, and so long as he retains no benefit in the property the mere
circumstance that some creditors stand paid while others remain unpaid does not
attract the provisions of s.
53 of the Transfer of Property Act. It is
not disputed that the debts satisfied by payment of the sale proceeds are
genuine. A faint attempt was made to show that some of the debts discharged
were owed to persons who were also Directors of the Company. There is no
findings by the High Court in support of that contention. It was also urged
that the consideration which passed for the sale of the assets was inadequate
and that the assets had been undervalued.
Here again there is no finding to support the
submission.
The questions raised are questions of fact,
and this Court will not permit such questions to be raised unless there is
material evidence which has been ignored by the High Court or the finding
reached by the Court is perverse.
A point was sought to be made by learned
counsel for the appellant that the transfer of the assets was effected in
favour of Rajeswari & Co. which was not one of the creditors. It has been
found by the High Court that the sale was effected for the purpose of
discharging the debts payable by the Company. Once it is also found that the
consideration was not inadequate it is immaterial, as the High Court has
observed, that the transfer was effected in favour of a person who was not a
creditor. It has been clearly found that the sale proceeds were employed for
paying off the creditors of the Company.
It appears that in consequence of the
impugned transfer effected by the Company the appellant has been unable to
recover a sum of Rs.28,240 assessed as income-tax in October 1961. It rested
its suit on s. 53 of the Transfer of Property Act. Having regard to the
findings rendered by the High Court on the consideration of material on the
record and upon an interpretation of s. 53 which that provision has uniformly
received this appeal cannot be sustained.
The appeal fails and is dismissed with costs.
P.S.S. Appeal dismissed.
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