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Report No. 70

Chapter 73

Right to Proceeds of Revenue Sale or Acquisition

Section 73 and New Section 74

73.1. Introductory.-

An interesting provision conferring a right on the mortgagee, not in the property but in its proceeds, appears in section 73. Normally, the mortgagee's remedy is against the property. If, however, the property is sold, by a public authority, so that the original property is lost and this loss affects the security, justice requires that the mortgagee ought to have a claim in what is substituted therefore. This principle-known as "substituted security"-finds expression in section 73-though the section does not put the doctrine in the forefront. The section provides-

"73. (1) Where the mortgaged property or any part thereof or any interest therein is sold owing to failure to pay arrears of revenue or other charges of a public nature or rent due in respect of such property, and such failure did not arise from any default of the mortgagee, the mortgagee shall be entitled to claim payment of the mortgage-money in whole or in part, out of any surplus of the sale-proceeds remaining after payment of the arrears and of all charge and deductions directed by law.

(2) Where the mortgaged property or any part thereof or any interest therein is acquired under the Land Acquisition Act, 1894, or any other enactment for the time being in force providing for the compulsory acquisition of immovable property, the mortgagee shall be entitled to claim payment of the mortgage-money in whole or in part, out of the amount due to the mortgagor as compensation.

(3) Such claims prevail against all other claims except those of prior encumbrances, and may be enforced notwithstanding that the principal money on the mortgage has not become due."

73.2. Rules of justice.-

Section 73 enacts a rule which is the counterpart of section 72. Taken as a whole, it formulates an equitable rule well recognised by the Courts.1 Enacting, as it does, a rule consistent with "justice, equity and good conscience",2 it is equally applicable to cases arising before its enactment3 and in areas where the Act is not in force.4

The section creates a cumulative remedy, and is not intended to operate as a bar to any other remedy which the mortgagee may have under the law.5

1. Kundummal v. Kashi Bai, ILR 26 Born 363; PO Rai v. Govind, ILR 6 All 303 (309); Cf. Kadir Moidin v. Nepean, ILR 26 Cal 1 (6) (PC).

2. Gour.

3. Rameshwar Nigh v. Naramdeshwar Prasad Narain Singh, AIR 1940 Pat 627 (629).

4. Kadir Moidin v. Nepean, ILR 26 Cal 16 (PC). Mohd. Sadid v. Harakh Narain, AIR 1936 Pat 583 (584).

5. Shivachidambara v. Kamakshi, AIR 33 Mad 71.

73.2A. Principle.-

Although the rule embodied in the section has been long upheld upon the general grounds of reason and justice, it may be justified from another standpoint.1 As on the re-allotment of property on partition the mortgagee of a co-sharer's interest takes, not what was originally mortgaged, but what he has received as his share.2 So, in the case of a sale of the property, the surplus money may be regarded as the subject of his mortgage in the new form, which it had assumed, and on which will be fastened the same right which he had against the original property.3

1. Ghose.

2. Byjnath v. Ramoodeen, 21 WR 233 (236) (PC), followed in Sharat Chunder v. Hurgobindo, ILR 4 Cal 510; Hem Chunder v. Thakomoni, ILR 20 Cal 533; Joy Shankari v. Bharat Chandra, ILR 26 Cal 434 (440).

3. Barhamdeo v. Tarachand, ILR 41 Cal 654 (PC).

73.2B. Scope.-

Of course, it is assumed that the sale is free of encumbrances. This would appear to be necessarily implied. For, the object of the section is, in the words of Trevelyn and Veverly, JJ., "to relieve the mortgagee of the effects of the injury which he would suffer by the property which was a security for his money being sold, and to give him a right over the residue of the sale-proceeds". It is not intended in any way to enlarge the interests of persons purchasing at a sale for arrears of revenue or rent. If that had been the intention, any subsequent provision of law providing that a sale for arrears of revenue or rent could be got rid of as incumbrance would be unnecessary.

It is, in our opinion, intended to refer to cases where the law has otherwise provided that the effect of a sale "for arrears of revenue or rent should nullify a mortgage."1 And so it was held in an earlier case2 that the section applied only to cases where the mortgagee was deprived of his substantive security by the fact of the sale being free from his incumbrance. Where, therefore, the sale is not held free from it, the mortgagee can, it has been held in some cases, lay no claim to the surplus proceeds, but may enforce his mortgage against the auction-purchaser.

Where the mortgagee's rights are not diminished by the revenue sale at all and he has his full right to put the mortgaged property to sale, he has no right to proceed against the surplus sale-proceeds. To accede to the proposition that he can also proceed against the sale-proceeds would mean that by reason of the revenue sale the security held by the mortgagee was increased. This was clearly not the intention of the Legislature. The only reason for section 73 was to protect a mortgagee whose security has, in fact, been diminished.

1. Beni Prasad v. Rewat Lall, ILR 24 Cal 746 (740); Hemchandra v. Tafazzel Hussain, 8 CWN 332.

2. Prem Chand Pal v. Purnima Dasi, ILR 15 Cal 546 (552, 553).

73.3. Mortgagee's fault.-

If the sale was brought about by the mortgagee's own conduct, he cannot then be allowed to take advantage of his own wrong. But otherwise the rule here enunciated is a part of the general principle of substituted security. In a Calcutta case,1 property was sold under a decree on the first mortgage, which had been passed in a suit in which the second mortgagee (whose mortgage had then matured) was impleaded. The first mortgagee afterwards brought suit on the third mortgage which he had on the property.

He, however, did not implead the second mortgagee, and obtained a decree thereon, in execution of which he withdrew the surplus sale-proceeds. The second mortgagee then sued on his mortgage, claiming, inter alia, the surplus sale-proceeds so withdrawn by the first mortgagee. It was held that it should be regarded as a suit to enforce a claim for money charged upon immovable property, falling within Article 132 of the Limitation Act, 1908 and not (as contended for by the appellants), one for money and received under Article 120.

The right of the puisne incumbrancers to follow the surplus sale-proceeds after the decree-holder's claim was satisfied, was recognised by the Court, as an equitable right, not extinguished or discharged by the sale but transferred thereby to the surplus sale-proceeds.

1. Barhamdeo v. Tarachand, ILR 33 Cal 92, affirmed ILR 41 Cal 654 (PC).

73.4. Section not exhaustive case of partition.-

Section 73 is by no means exhaustive.1 The doctrine of substituted security is not confined to the case of acquisition and other situations which are specifically dealt with in section 73. It is well established by several judicial decisions of the Privy Council2 and of the Allahabad,3 Calcutta,4 Madras5 and other High Courts6 that where the subject of a mortgage is an undivided share in property and the joint sharers effect a partition, the security of the mortgagee will attach to the share allotted in severalty to his mortgagor.

1. Rana Sheo Ambar Singh v. Allahabad Bank, Allahabad, AIR 1959 All 179.

2. Md. Afzal Khan v. Abdul Rahman, AIR 1932 PC 235 (Dineshaw Mulla delivered the judgment of the Board).

3. AIR 1938 All 221.

4. Rup Chand v. Madan Mohan, AIR 1960 Cal 351 (355), para. 21.

5. AIR 1948 Mad 1.

6. Amar Singh v. Bhagwan Das, AIR 1933 Lah 771 (772) (Tek Chand, J.) (reviews cases).

73.5. In Mohammad Afzal Khan v. Abdul Rahman, AIR 1932 PC 235, it was held that where one of two or more co-sharers mortgages his undivided share in some of the properties held jointly, the mortgagee takes the security subject to the right of the other co-sharers to enforce a partition, if the mortgage is followed by partition and the mortgaged properties are allotted to a co-sharer or co-sharers other than the mortgagor.

Therefore, if the mortgage is followed by a partition and the mortgaged properties are allotted to a co-sharer or co-sharers other than the mortgagor, then, in the absence of fraud, they take the mortgaged properties. The mortgagee can proceed only against the properties allotted to the mortgagor in substitution for his undivided share.

73.6. In the leading case of Byjnath Lall v. Ramoodeen Chowdhry, LR 11 A 106 (PC), it was held by the Privy Council that the mortgagee would take the subject matter of the pledge in the new form which it had assumed. The doctrine of substituted security was applied.

73.7. Mortgage of specific item.-

On the question whether a mortgage of a specific item of property creates, on partition, any right in favour of the mortgagee in the property allotted to the mortgaging co-sharer, the position seems to be this. If the item mortgaged is allotted to some other co-sharer and an item other than the mortgaged one is allotted to the mortgagor co-sharer, then the other co-sharer takes the item allotted to him (in the absence of fraud) free from the mortgage, and the mortgagee can recover only against the item allotted to mortgagor in substitution of the item mortgaged.1

The substituted security is that fraction of the share allotted to the mortgagor as bears the same proportion to the share as the mortgaged property bears to the entire joint property.2

1. Issaku v. Seetharamraju, AIR 1948 Mad 1 (3) (FB).

2. Hakimlal v. Ramlal, (1907) 6 Cal LJ 46 (Ashu Mookerji, J.), cited in AIR 1948 Mad 1 (3) footnote 3.

73.8. Case law.-

A Madras case1 illustrates the position. The mortgage in that case was of some specific item of family property, executed by one of the co-shares. On a subsequent partition, these items fell to the share of another co-sharer. It was held that the mortgage was not binding on such items.

Though what was directly decided was that the mortgagee was not entitled to proceed against the properties allotted to the other co-sharers, yet the decision is really based on the rule that the mortgagee is entitled to proceed against, and only against, the substituted property which falls to the share of the mortgagor at the partition. The other part of the rule, namely, that he was not entitled to proceed against the property originally mortgaged, was only a corollary to this part of the rule.2

A similar view has been taken in Nagpur,3 Lahore,4 and Patna.5

It is well established that the mortgagee's right in such a case is not a mere personal right, but amount to a charge. It would be like a security, though it would not amount to a mortgage. The charge (in this case originating in the agreement) is conferred by the law.

1. Muthiah Rain v. Appalaraju, 1911 ILR 34 Mad 175.

2. See discussion in Issaku v. Seetharamraju, AIR 1948 Mad 1 (4), para. 10 (FB).

3. Liladhar v. Shivaji, AIR 1936 Nag 126.

4. Moti Lal v. Vadhawa Singh, AIR 1934 Lah 660.

5. Ganga Prasad v. Dilsaran Singh, AIR 1937 Pat 345.

73.9. Recommendation as to partition.-

Since the situation of partition is a frequently recurring situation in India, it seems to be desirable to insert in the Act a specific provision on the subject, so that the law might be self-contained as far as possible. Accordingly, we recommend that a provision analogous to section 73(2) to deal with the above situation should be inserted as section 74 (old section 74 was repealed in 1929). The suggested new section can draw upon the material contained in present section 73(2)-of course, after making the necessary modification.

One question of substance that would require consideration is whether the right to be created in the mortgagee should be fully equated to a mortgage, or whether it should be regarded as a charge, so that the bona fide transferee of the item for value without notice would be protected against such a charge. The latter seems to be an equitable course and is also in conformity with the judicial trend.1-3

1. AIR 1938 All 221 (225).

2. AIR 1930 Nag 139 (142).

3. AIR 1953 Cal 453 (456).

73.10. Recommendation.-

Our recommendation is briefly as follows:-

(a) Where the mortgagor, being the owner of an undivided share in immovable property, mortgages an undivided share, then, after partition, the mortgagee shall have a share on all immovable property allotted at the partition to the mortgagor.

(b) Where the mortgagor, being the owner of an undivided share in immovable property, mortgages a specific item of immovable property, then, after' partition, the mortgagee shall have a charge on that fraction of the share allotted to the mortgagor as bears to the share of the same proportion as the specific property mortgaged bears to the entire joint property.

73.11. Section 73-charges.-

By its terms, section 73 applies the doctrine to mortgaged property, which is sold to recover arrears of revenue or other charges of public nature and to compulsory acquisition of such property.1 The doctrine has, however, a wider operation. In Union of India v. Official Liquidator, EMT Ltd., Eluru, AIR 1960 AP 555, for example, this doctrine was applied to a charge, in winding up proceedings. In that case, by a decree a charge was created on thirteen buses belonging to a company. The company thereafter went into liquidation. The Official Liquidator sold four of the buses. It was held that after the sale of the buses, the charge was enforceable against the sale proceeds.

1. Raja Sharada Narain Singh & Co. v. U.P. Oil Industries Ltd., AIR 1964 All 558.

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