1980 (2) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Enforceability of the guarantee letter dated December 16, 1967, executed by the 5th defendant.
2. Plaintiff's entitlement to specific performance of the agreement to execute and register a mortgage.
3. Validity of the mortgage executed by the 6th defendant in favor of the bank under Section 281 of the Income Tax Act, 1961.

Detailed Analysis:

1. Enforceability of the Guarantee Letter:
The court evaluated whether the guarantee letter dated December 16, 1967, executed by the 5th defendant was enforceable. The plaintiff bank claimed that the 5th defendant executed the guarantee letter in consideration of the bank agreeing to give further time and forbearing to sue defendants Nos. 1 to 3. However, the court found that the bank had not provided sufficient evidence to establish that the guarantee was supported by consideration. The court noted, "The consideration for the surety's promise does not move from the principal debtor, but from the creditor." The court concluded that the guarantee letter was void and unenforceable as it was not supported by consideration, stating, "The original consideration which proceeded from the bank to the 1st defendant cannot form the consideration for the guarantee."

2. Plaintiff's Entitlement to Specific Performance:
The plaintiff sought specific performance of the agreement dated December 16, 1967, to execute and register a mortgage deed by the 5th defendant. The court held that since the guarantee letter (Ex. A-26) was not supported by consideration, the agreement to execute a mortgage (Ex. A-27) also failed for want of consideration. The court stated, "If Ex. A-26 is not supported by consideration, then Ex. A-27, which proceeds on the basis that the 5th defendant is a guarantor, will also fail for want of consideration." Consequently, the plaintiff was not entitled to any relief against the 5th defendant.

3. Validity of the Mortgage Executed by the 6th Defendant:
The Union of India, represented by the Tax Recovery Officer (TRO), challenged the validity of the mortgage executed by the 6th defendant in favor of the bank, claiming it was void under Section 281 of the Income Tax Act, 1961. The court examined whether the mortgage was executed with the intention to defraud the revenue. It was noted that the 6th defendant had obtained a tax clearance certificate under Section 230A of the Act before executing the mortgage, indicating no intention to defraud the revenue. The court stated, "The certificate given by the ITO prior to the registration of the mortgage deed, Ex. B-11, clearly indicates that the 6th defendant did not intend to defraud the revenue by executing the mortgage deed, Ex. A-28." Furthermore, the court found that the 6th defendant and the bank were not given notice of the proceedings under Ex. B-11, rendering the order invalid. The court concluded, "The court below appears to be right in holding that the appellant was not entitled to claim the mortgage deed, Ex. A-28, to be void."

Conclusion:
The court dismissed both appeals. The guarantee letter and the agreement to execute a mortgage were found unenforceable due to lack of consideration. The mortgage executed by the 6th defendant was upheld as valid, as there was no intention to defraud the revenue, and the parties were not given notice of the proceedings declaring the mortgage void. The requests for leave to appeal to the Supreme Court were also rejected.