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TMI Blog1972 (8) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 is whether the sales of the suit properties by the first defendant, which is a public limited company, in favour of the second defendant-firm, of which the partners are defendants Nos. 3 to 13, were effected with intent to defeat or delay the Union of India and other creditors of the first defendant-company. The Union of India, represented by the Commissioner of Income-tax, Madras, laid the suit under section 53 of the Transfer of Property Act on its own behalf and on behalf of other creditors, if any, of the first defendant-company for a declaration that the sale deed, exhibit B-1, dated February 27, 1961, in respect of the plaint mentioned immovable properties and the sale of the movables by the first defendant-company in favour of the second defendant-firm were invalid and not operative and not binding on the plaintiff and other creditors of the first defendant-company as having been made to defeat the just claims of the plaintiff and other creditors. It was also prayed that the said transfers may be declared not binding upon the creditors of the first defendant-company and that the plaintiff was entitled to recover arrears of income-tax due from the first defendant-company fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given permission to sue on its behalf and on behalf of the creditors of the first defendant-company, the plaint allegations do not make out necessary averments to bring the case within the scope of section 53 of the Transfer of Property Act. In paragraph 10, it is alleged that the sale of the assets of the first defendant-company in favour of the second defendant-firm was made mainly with a view to defeat and delay the claims of the plaintiff and to place the properties beyond the reach of the just and lawful creditors of the first defendant-company. In paragraph 12, which deals with the sale of movables, no doubt there are allegations to the effect that the sale was made with intent to defeat and delay the creditors of the first defendant-company and to place the movable properties beyond the reach of the creditors. In paragraph 16 it is alleged that the sales of movaable and immovable properties were sham and colourable transactions not intended to convey title to the second defendant-firm. It is further alleged that even if it is assumed that they are valid transfers, they have been brought about collusively and fraudulently with a view to deprive the plaintiff and other credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 is the revision petition filed on behalf of the first defendant-company by its auditor, Sethuraman, D.W. 1. This auditor was a permanent representative of the first defendant-company as well as the second defendant-firm in all matters relating to income-tax. In connection with the said revision petition the Income-tax Officer, P.W. 1, had discussion with D.W. 1, the representative of the first defendant-company. The evidence of P.W. 1 is that on December 17, 1960, he discussed this matter with D.W. 1 and told him that he was going to reopen the matter and take action under section 34 of the Income-tax Act. On the side of the plaintiff, evidence has been let in to show that after such meeting, D.W. 1, along with the directors of the first defendant-company, who were also partners of the second defendant-firm, hatched up a conspiracy, by which the properties of the first defendant-company were placed in the name of the second defendant-firm so that in the event of an order of assessment being made, it may become fruitless and not realisable. D.W. 1 admits having me to P.W. 1 on December 17, 1960. But he denies that at that time P.W. 1 told him that action under section 34 of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is quite likely that P.W. 1 discussed this matter with D.W.1 and told him what he felt and what he was going to do with regard to the matter. The activities of the first defendant-company after December 17, 1960, are consistent with the case of the plaintiff that it was as a result of the discussion between P.W. 1 and D.W. 1 on December 17, 1960, that steps were taken to effect sales of all the properties of the first defendant-company. It is true that the second defendant-firm had a right of pre-emption in the immovable properties of the first defendant-company. But that right was not insisted upon when the company, by a resolution dated June 4, 1960, decided to sell the assets of the first defendant-company in public auction with minimum auction price of Rs. 1,51,009 (vide the resolution, exhibit B-51). D.W. 3 is one of the partners of the second defendant-firm and also one of the managing directors of the first defendant-company. It was at his instance that the second defendant-firm appears to have sent the letter, exhibit B-8, dated January 10, 1961, making a reference to the proposal of the first defendant-company to sell away the properties of the company in public auc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . No. 1 on December 28, 1960, and that at that time D.W. 3 told him about his meeting P.W. 1 on December 17, 1960, though he denies that at that time D.W. 1 told him about the possible action under section 34 of the Income-tax Act. The circumstances can lead to only one conclusion, namely, that at the time of that meeting D.W. 1 apprised D.W. 3 of the impending danger with regard to levy of heavy amount of income-tax consequent on the reopening of the matter which P.W. 1 had contemplated. The trial judge, who had occasion to see P.W. 1 and D.W. 1 in the witness box, has characterised D.W. 1 as not willing to speak the truth unless his attention was drawn to documentary evidence. We also see no circumstance to doubt the veracity of P.W. 1 who has no axe to grind in this case. All the subsequent events clearly show that the matter was pushed through in indecent haste anticipating an order of assessment of income-tax. In the sale deed, exhibit B-1, all the immovable properties are described without giving separate value. But at the end of the document it is stated that the value of agricultural lands is Rs. 31,000. The suggestion made on behalf of the plaintiff-Union is that this va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable to infer that in effecting the sales in question no bad faith could be attributed. It is true that no circumstance of mala fide was present at the time when the directors passed the resolution on April 28, 1960, and when the general body passed the special resolution on June 4, 1960, for selling the assets of the company in public auction with a minimum auction price of Rs. 1,51,000. We have already noticed that the important partners of the second defendant-firm were also directors of the first defendant company and they were also parties to those resolutions. At that time, those persons did not think it worth while to put forward the claim for pre-emption which no doubt the second defendant-firm had in the immovable properties. Though the special resolution was passed in June, 1960, no action was taken to implement the resolution. D.W. 3, who was one of the directors of the company, when questioned about this matter, gave no explanation. The matter was allowed to lie over without any action being taken. That was presumably because no creditor made a demand for payment of his dues. Therefore, the mere fact that a special resolution had been passed even in June, 1960, fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under-value. Out of the sale consideration of Rs. 1,30,000, the sale deed, exhibit B-1, recites that the second defendant-firm, the vendee, should pay Rs. 15,191.65 to the 14th defendant in respect of a mortgage and that the balance, namely, Rs. 1,14,808.35, was already received in cash for discharging the other debts of the first defendant-company, thus in all making a sum of Rs. 1,30,000. After this sale, the first defendant-company has paid off its creditors as seen from the receipts, exhibits B-12 to B-48. These receipts cover a sum of Rs. 1,63,773.22. Exhibit B-1 is a receipt issued by the 14th defendant for Rs. 15,191.65, which is the amount undertaken by the second defendant-firm under exhibit B-1. Though the fact of the payment of several creditors is not disputed, the fact remains that not one of those creditors made a claim for payment of his dues by issuing the notice in writing. Most of the creditors were either relations or caste-men of the directors of the first defendant-company. On the date of the sales in question, the second defendant-firm had not sufficient means to advance the cash of Rs. 1, 14,808.35. The admission of D. W. 3 is that on February 24, 1961, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue. In reply thereto, the company wrote exhibit B-7, on April 18, 1959, stating, inter alia, that the existing lands and buildings were revalued by a qualified engineer and that the values were arrived at by taking into consideration all the circumstances with regard to the then market value. It was further stated in that letter that a number of industries had since been started and the value of the buildings and lands had gone up very much and that still the appreciation was not shown at the real value as the same has been treated as the secret reserve of the company. The trial judge has adverted to this aspect and commented that the transactions which are impugned were affected by this secret reserve. D. W. 2 was questioned about this in a casual way in cross-examination when he referred to the letter, exhibit B-7, in which reference as to the treatment of the real value as secret reserve was made. The question was not pursued further and it was not elicited how the secret reserve was dealt with at the time of the sales in question. Therefore, we are unable to draw any adverse inference against the first defendant-company or the transferee, the second defendant-firm, merely fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e alienations impugned under section 53 of the Transfer of Property Act. The relevant portion of sub-section (1) of section 53 reads : "53. (1) Every transfer of immovable 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." This part of the sub-section was introduced by the Amending Act of 1929 and prior to that Act, the relevant portion of section 53 read as follows : " Every transfer of immovable property made with intent to defraud prior or subsequent transferees thereof for consideration or co-owners or other persons having an interest in such property or to defeat or delay the creditors of the transferor, is voidable at the option of any person so defrauded or delayed." Thus, it would be seen that the first paragraph of the old section referred both to transfers which were in fraud of other transferees and to transfers made with intent to defeat and delay creditors. These two cases have now been separated, sub-section (1) referring to creditors and sub-section (2) to other transferees. What we are concerned with in the instant case is whether the impugned transfers fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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.) 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. " In Ma Pwa May v. S. R. M. M. A. Chettiar Firm, the validity of a transfer by way of mortgage in favour of a creditor arose for consideration with reference to the provisions of section 53 of the Transfer of Property Act. It is pointed out that the mortgage having been executed for adequate consideration, being partly in discharging of a genuine debt, no benefit being retained by the mortgagor, was not invalid under section 53 of the Transfer of Property Act, as being made to defeat or delay creditors, even though the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other creditors, the transfer would nevertheless be valid and not open to objection under section 53, since it is open to every creditor to try his best to realise his debt from the common debtor. Ordinarily, in the race between the creditors he who lags behind could not complain of him who proceeded fast and succeeded in getting at the property of the debtor. In this case, the transferee, namely, the second defendant-firm, was not a creditor of the first defendant-company. But that does not make any difference, because the sale was effected among other things, for the purpose of discharging all other debts payable by the first defendantcompany. Though it is not a case of alienation in favour of an existing creditor, still in principle it does not make any difference so far as the paintiff-Union is concerned, as the sale was effected for the purpose of discharing other debts and with the deliberate motive of defeating the claim of the Union that may arise as a result of the reopening of the assessment proceedings. Sub-section (1) of section 53 expressly saves the application of the law of insolvency. The object of the law of insolvency is to provide for an equal distribution of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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