Report No. 70

Chapter 105

Exchange

Sections 118 to 121

105.1. Section 118.-

Three specific types of transfer have been dealt with so far. The next to be dealt with is exchange. Section 118, which is not confined to immovable property, reads-

"118. When two persons mutually transfer the ownership of one thing for the ownership of another, neither thing or both things being money only, the transaction is called an 'exchange'.

A transfer of property in completion of an exchange can be made only in manner provided for the transfer of such property by sale."

Exchange is generally kept distinct from sale. The distinction between sale and exchange has its genesis in, and significance for the purpose of, economics. Historically, barter precedes sale.

Speaking from the point of view of economics, the intrinsic value of the property given in exchange, as distinguished from its market value, would vary according to the purpose for which, or the necessity in view of which the exchange was effected.1 Property other than money, in other words, carries an economic value which is not precisely defined as in the case of money. Moreover, a particular goods or house may mean much more to X than to another person Y. In this sense, the market value and value to the transferee may differ from each other.

1. Sumer Bahadur v. Jeet Lal, AIR 1924 All 390 (391) (Lindsay and Kanahiya Lal, JJ.).

105.2. Criticism of section 118.-

In section 118, the phrase "neither thing is money only" does not seem to be very expressive. What the draftsman meant was that of the two things, none should be money, or both should be money only. This idea is obscured because the expression "only" has to be read in both the parts. The present language creates problems where money is a part, but only a part,1 of the consideration for the transfer of a "thing" and the rest of the consideration is in kind.

Literally, the transaction becomes an exchange-e.g., a house exchanged for a house plus a substantial amount of money. In this case, neither thing is "money only" and the test of section 118 is satisfied if taken literally. But that has not been the Judicial construction and would be unrealistic. The expression "only", while appropriate where both the things are money, ceases to be so when read in connection with "neither things". The definition as given in the Act turns out to be too wide in this sense.

1. See para. 105.6, infra.

105.3. Expression "Price".-

The draftsman could have employed the expression "price". It may be noted that section 54 (so far as is material), defines a sale as a transfer for a price. In relation to goods, "price" is defined in section 2(10) of the Sale of Goods Act, 1930, as money consideration for the sale of goods. Incidentally, in this connection, it is to be noted that the definition in section 118 is not confined to immovable property.1 The expression "price" could thus have been made use of. While the Contract Act-now, the Sale of Goods Act2-and the Chapter on sale in the Transfer of Property Act, follow a certain drafting style, the definition of exchange in section 118 is founded on a different legislative source-The New York Civil Code.3

1. CIT. v. Motor & General Stores, AIR 1968 SC 200 (203).

2. See para. 105.4, infra.

3. Statement of Objects and Reasons, dated 10th May, 1877.

105.4. As the Supreme Court observed in a case1 arising under the Income-tax Act-the observations of the Supreme Court take note of section 118 also-

"It is clear therefore that both under the Sale of Goods Act and the Transfer of Property Act, sale is a transfer of property in the goods or of the ownership in immovable property for a money consideration. But, in exchange, there is a reciprocal transfer of interest in the immovable property, the corresponding transfer of interest in the movable property being denoted by the word 'barter'. The difference between a sale and an exchange is this, that the former the price is paid in money, whilst in the latter, it is paid in goods by way of barter (Chitty on Contracts, 22nd Edn., Vol. II, p. 582)."

1. Income-tax Commissioner v. Motor and General Stores Ltd., AIR 1968 SC 200 (203), para. 3 (on appeal from AIR 1965 AP 342).

105.5. Main situations.-

The position will be clearer if the main situations are borne in mind-

(a) neither thing is money;

(b) both are money only;

(c) one is money, but the other is not money;

(d) one is money, but the other is not money only.

The intention, of course, is that (a) and (b) are exchanges, but (c) is not. As regards (d)-consideration partly in money and partly in kind-difficulty arises, as set out above.

105.6. Consideration partly in money.-

The question whether a transaction is a sale or exchange, may be important not only under the Act, sections 55 and 119-but also in regard to the right of pre-emption, and, often in regard to assessment of income-tax. Where the consideration for a transfer of property is partly money and partly other property and the consideration is entire and indivisible, it may be necessary to decide whether the transaction is to be treated as a sale or as an exchange. There is, generally, a right of pre-emption1 only where the transaction is a sale-though, if there is a custom to that effect, pre-emption is allowed even in cases of exchange. Let us examine in brief the case law on the subject.

1. Cf. Agra pre-emption Act (11 of 1922).

105.7. Case law as to part consideration in money.-

In an Allahabad case1 it has been held that the transaction would be an exchange and not a sale (for the purpose of pre-emption), even if the purpose of adding the non-pecuniary portion of the consideration is to defeat the right of pre-emption. A similar view has been taken in later cases of the same High Court.2-3

Thus, A sells property to B for Rs. 2,000 and on the same date, B sells his property to A for Rs. 4,000-the amount being made up of (i) Rs. 2,000 for A's property, (ii) Rs. 1,400 by way of satisfaction of a prior decree against B in favour of A's mother, and (iii) Rs. 600 in cash. In the event of defect of title, A was to receive from B Rs. 2,000, and not his property. It was held that this was an exchange, with a potentiality of sale only in some circumstances.4

1. 1947 All U 592, cited in the Digest.

2. Ram Badan Lal v. Kunwar Singh, AIR 1938 All 229 (231) (Bennet, Ag, C.J. & Ganga Nath, J.).

3. Randhir Singh v. Randhir Singh, AIR 1937 All 665 (Sulaiman, C.J, & Bennet, J.).

4. 1947 All LJ 592.