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Report No. 70

54.41. Section 58(c) proviso.-

We have yet to deal with the proviso to section 58(c), under which a transaction (of ostensible sale) shall not be deemed to be a mortgage, unless the condition is embodied in the document which effects or purports to effect the sale. The proviso was added in 1929. The result thereof is that an ostensible sale shall not be regarded as a mortgage unless the stipulation for repurchase is contained in the very document which effects the sale. It is well-known that the object of the proviso was to make it certain that a sale does not take the character of a mortgage when, in a separate document, there is a provision for re-transfer.

On this question, there was an acute controversy in India1 before the amendment. Several tests were evolved in the judicial decisions. Many of these decisions were based on a passage in Butler's preface to Coke on littleton. Some of these judicial decisions have lost their relevance after the enactment of the proviso, in so far as they permitted oral evidence or separate documentary evidence to prove that there was a stipulation for re-purchase. The proviso does not, however, mean that where the same document contains a stipulation for re-transfer, the transaction must necessarily be deemed to be a mortgage.

There may be an out and out sale-"ostensible", as the section says-and in the same document, there might be an undertaking to re-transfer. If the question arises whether it is a real sale or a mortgage, the stipulation is not conclusive. Every such case is not necessarily a case of mortgage, notwithstanding the view expressed to the contrary in some commentaries.2 In this sense, the previous judicial decisions still retain some of their utility.

As the provision for re-conveyance is not necessarily conclusive,3 and according to the better opinion, not even a presumptive evidence the question is one of fact. Primarily, it is the intention of the parties at the time of the transaction which must be regarded4 and in determining the existence of such intention, the tests provisions laid down may be helpful, provided the stipulation for retransfer is not contained in a separate document.

1. Kasturi Venkata Subbarao v. Bikkrine Veeraswami, AIR 1946 Mad 456 (457).

2. Mookerjee Law of Transfer of Property, para. 125, referred to by Gour Transfer of Property Act, (1972), Vol. 2, p. 2033, footnote 7.

3. Bishan Lal v. Banwari Lal, AIR 1937 All 724 (726) (Harries, J.).

4. Bishambhar etc., AIR 1923 All 586.

54.42. Case law.-

One would have thought that this position is clear enough. But arguments to the contrary are often expressed. It would appear from the undermentioned cases that1-5 questions arise even now whether a particular document creates or does not create a mortgage by conditional sale. We do not wish to say that any of the judgments gave a wrong decision. However, they show the nature of the arguments addressed-even if unsuccessfully-to the Court. It is desirable that the picture should be more clear than at present.

1. Shyam Lal v. Shyam Narain, AIR 1973 All 234 (235), para. 4.

2. P. Coayya v. A.C. Venkatappa, AIR 1974 AP 232 (234), para. 3.

3. Chodhari Madhaji v. Patel Nagandas, AIR 1973 Guj 190 (191), paras. 6, 7.

4. A.B. Ahharam v. R.M. Parbhatsing, AIR 1974 Guj 19 (22), para. 12.

5. Patel Atmaram v. Patel Babubhai, AIR 1975 Guj 120 (12), para. 4.

54.43. Supreme Court decisions.-

In this connection, we may refer to a few of the Supreme Court decisions relevant to section 58(c). In a case1 reported in 1954, Bose, J., had occasion to consider the question whether the document was a sale or a mortgage by conditional sale. It was stated in the judgment that persons who, after the amendment of 1929, choose to use only one document, may be presumed to have intended a mortgage.

In a case reported in 1960,2 in which Shah, J., delivered the judgment of the Court, the earlier case of 1954 was not referred to, but it was pointed out that it does not follow that if the condition for re-purchase is incorporated in the deed effecting or purporting to effect a sale, then a mortgage must, of necessity, have been intended. The question is still one of the intention of the parties, interpreted in the light of the surrounding circumstances. That the question is one of intention was reiterated by the Supreme Court in a case reported in 1966.3

1. Chunchun Jha v. Ebadat Ali, AIR 1954 SC 345: (1955) SCR 174.

2. Bhaskar v. Shrinarayan, AIR 1960 SC 301: (1960) 2 SCR 117.

3. P.L. Bapuswami v. N. Pattay Gounder, AIR 1966 SC 902: (1966) 2 SCR 918.

54.44. Patna case as showing need for amendment.-

Some obscurity still seems to persist, particularly on the question whether the fact that the sale deed contains a stipulation for repurchase is presumptive evidence of mortgage. The following extract from a Patna judgment1 shows the need for clarification:-

"But it does not follow that if the condition is incorporated in the deed effecting or purporting to effect a transaction a mortgage transaction must of necessity be deemed to have been intended. But from this a reasonable inference can be drawn2 with respect to the intention of the parties and unless that presumption is displaced by other circumstances by clear cut and in express words and if the condition of section 58(c) of the Transfer of Property Act is fulfilled, then the deed should be construed as a deed of mortgage by conditional sale."

These observations would seem to reflect a view that the stipulation is presumptive evidence of a mortgage. We are, with respect, of the view that the proviso inserted in 1929 did not wish to suggest any such presumption. Otherwise, a buyer can never enter into a stipulation for re-sale without incurring the risk of it being held that the transaction is a mortgage. A presumption, even if rebuttable and discretionary, must create this risk.

1. Janki Devi v. Muria Kuer, AIR 1974 Pat 246 (247) (H.L. Agarwala, J.).

2. Emphasis added.

54.45. Recommendation to revise section 58(c).-

The undermentioned decisions would further show that the matter requires clarification.1-3 In view of this position, we must address ourselves to the question whether the present obscurity should be allowed to continue. So far as the adducing of oral evidence is concerned, the matter is really governed by section 92 of the Evidence Act.

But in regard to a stipulation in writing for repurchase, it may be worthwhile making it clear in section 58(c) that the mere fact that the condition for re-transfer is embodied in the same document is not, by itself, sufficient evidence of the mortgage. We recommend that section 58(c) should be amended on the above lines. We have reached this conclusion after full consideration and after a detailed study of the case law.

1. N. Pattay Gounder v. P.L. Bapuswami, AIR 1961 Mad 276 (279) (reversed on another point in AIR 1966 SC 982).

2. Daitari Delai v. Jagannath, AIR 1968 Ori 65 (66).

3. Debnath v. Bhoju Manilal, AIR 1958 Pat 371 (373).

54.46. The above amendment will not dispense with the need to apply the usual test for determining the intention of the parties, but it will leave the matter elastic. These tests have been referred to more than once in Indian decisions. In an Andhra Pradesh case,1 for example, it was stated that the reported decisions of the Indian Courts have indicated the following tests, though these tests must be taken to be merely illustrative, and not exhaustive. They are, in general-

"1. The existence of relationship of a creditor and debtor between the parties as on the date of the transaction.

2. The period of repayment, a short period being indicative of a sale and a long period of a mortgage. The fact that time was made the essence of the contract to repurchase is not decisive.

3. The continuance of the seller in possession indicates a mortgage.

4. If there is a stipulation for payment of interest, on repayment it indicates a mortgage.

5. A price below the true value indicates a mortgage; a fair market value is strong evidence that the transaction is a sale."

In the Code Napoleon,2 a mortgage is defined "to be a real right over immovables charged with the acquittance of an obligation". Further, "it is, in its nature, indivisible and subsists over all the immovables affected by it, each and every portion of the immovables to which it pertains, into whatever hands they may pass."

1. P. Obayya v. A.C. Venkattappa, AIR 1974 AP 232 (235), para. 8 (Krishan Rao, J.).

2. Code Napoleon, Articles 2114 to 2116, cited in Gour Law of Transfer, (1972), Vol. 2, pp. 1977-1978.

54.47. Remedies.-

This disposes of section 58, clause (c). Before we proceed to the next clause of section 58, we would like to make a few observations about the remedies available to a mortgagee. According to Sne11,1 mortgagees have five means of enforcing payment: an action on the covenant for payment; sale; foreclosure; taking possession; and appointing a receiver. The first three remedies secure repayment of the loan, and so put an end to the transaction; the other two are interim measures that leave the mortgage afoot, although in most cases, a mortgagee who takes possession does so only in order to be able to exercise his power of sale effectually.2 Of Course, not all the remedies are available to every mortgagee.

A mortgagee by conditional sale has available to him the rather drastic remedy of foreclosure under section 67. Whether this remedy should be preserved in modem times, is a matter which may require consideration when we discuss that section.3

1. Snell Equity, (1966), p. 437.

2. Snell Equity, (1966), p. 437.

3. Foreclosure to be considered under section 67.

54.48. Section 58(d).-

A usufructuary mortgage is defined m section 58(d). In simplified terms, a usufructuary mortgage is one in which the mortgagor delivers, or agrees to deliver, possession of the mortgaged property to the mortgagee, it being agreed that the rents and profits shall be received by the mortgagee in lieu of interest or principal or partly in lieu of interest or partly in lieu of principal. The characteristics of a usufructuary mortgage may be thus enumerated-

(1) the possession of the mortgaged property is delivered or agreed to be delivered to the mortgagee;

(2) the mortgagee is to appropriate the rents and profits in lieu of interest or of principal or of both;

(3) the mortgagor does not incur any personal liability to repay the money; and

(4) there being no personal liability to pay, there is no 'forfeiture' and, therefore, the remedies by way of foreclosure or sale are not open to the mortgagee.

54.49. Muslim Law.-

This was the form of mortgage most familiar to Muslim law. Early Mohammedan law did not recognise any other kind of security than the "Rahn". A pledge in Mohammedan law, as signified by its name (Rahn), is defined in the Hedaya as "the detention of thing on account of a claim which may be answered by means of that thing, as in the case of debts."1

There is a good deal of discussion in the books as to the necessity of possession for the validity of a pledge, but the weight of authority seems to be in favour of the position that a pledge is not valid unless it is that "until the seisin actually takes place, the pawnor is at full liberty either to adhere to, or recede from the agreement, as the validity of it rests entirely upon the seisin, without which the end and intention of a pledge cannot be answered."2

1. Hamilton's Hedaya, Vol. IV, p. 189, cited in Ghose Law of Mortgage in India, 1902, pp. 67, 68.

2. Hamilton's Hedaya, Vol. IV, p. 190.

54.50. Things incapable of seisin cannot be pledged.-

Possession being thus essential to the validity of a pledge, it follows as a corollary that things of which there could be no delivery of possession according to Mohammedan notions, could not be given in pledge. Thus, an undivided share in any property, whether movable or immovable, could not be lawfully pledged.

54.50A. Delivery of possession.-

Under the Act, delivery of possession is the most important feature of a usufructuary mortgage. The word "delivers" does not necessarily imply immediate delivery. Where the mortgagor is not in a position to give immediate possession, it is sufficient if he gives the right to possession. In Maina Bibi v. Chaudhri Vakil Ahmad, AIR 1925 PC 63 (65), the Privy Council observed:

"The difference between a usufructuary mortgage and an ordinary mortgage is not so much a difference in the kind of security created, as in the method of enjoying it. In each case, the property of the mortgagor is pledged to secure the debt, and when the amount secured is paid, the property pledged must be returned to the owner.

The main difference between a usufructuary mortgage and an ordinary mortgage is that in the former it is part of the initial agreement by which the security is created that the mortgagee shall at once go into possession of the mortgaged property and apply the proceeds he may derive from the use and occupation of it to discharge the mortgaged debt; while in the case of an ordinary mortgage of the usual sort, it is, in general, not the initial intention of the parties that the mortgagee should go into possession of the property pledged immediately or at all-although he is empowered to do so if the interest on the mortgage money be not paid."

The Transfer of Property Act, 1882 Back

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