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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 ..... t-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 from out of the plaint schedule properties. The suit has been decreed by the trial court is prayed for, and hence this appeal. The first defendant-company was incorporated in the year 1946 with the object of carrying on the business of seed crushers, oil extractors, etc. The first defendant-company did not make any profit in the business. In the year 1952, the first defendant-company entered into a partnership with the second defendant-firm, called Rajeswari & Co., arinstarted a factory called Rajapalayam Cotton Pressing Factory, in which the first defendant company had 7 out of 16 shares. The partnership was re-constituted in the year 1954. Even as per the re-constituted firm, the first defendant-company continued to have 7 out of 16 shares. The first def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace 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 creditors, if any, and to benefit the individual director shareholders of the first defendant-company. It is in the light of these allegations that the trial judge has also recorded his finding. In paragraph 40 of his judgment, he has referred to several circumstances and observed that those circumstances " clearly lead anyone to an irresistible conclusion that these transfers of the assets of the first defendant-company in favour of the second defendant-firm were effected foreseeing and anticipating the additional levy of income-tax by the plaintiff and with a view to defeat the claims of the plaintiff ". Again, in the same paragraph, the trial judge has observed : " Hence, the predominant intention in suddenly effecting a transfer in favour of the second defend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Income-tax Act was going to be taken. On this aspect, the trial judge, who had occasion to see these witnesses, has chosen to place reliance upon the evidence of P.W. 1 and disbelieved D.W. 1. We have gone through the material evidence and we are satisfied that the conclusion of the trial judge is fully warranted. It is true that P.W. 1 did not record in writing anywhere that he had told D.W. 1 on December 17, 1960, that he was going to take action under section 34. But, soon after that meeting, P.W. 1 had to write to the Commissioner of Income-tax, Madras, in connection with the revision petition, exhibit A-4. Exhibit A-28 dated December 22, 1960, is the letter written in that connection. In that letter, P.W. 1 stated that he was enclosing the relevant file for p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 auction and drawing attention to the right of pre-emption of the second defendant-firm in the properties. The first defendant-company was requested to consider that matter and arrange to sell the lands to the second defendant-firm. On receipt of this letter, the board of directors of the first defendant-company resolved on January 27, 1961, to cancel the earlier resolution passed on June 4, 1960, in and by which the properties were proposed to be sold in public auction with a minimum price of Rs. 1,51,000 and further resolved to sell the properties of the first defendant-company to the second defendant-firm at a reasonable market price to be fixed by an expert valuer and a qualified engineer. In pursuance of this resolution, the first defendant-company appointed one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 value was given as against the total sale consideration of Rs. 1,30,000 with a view to see that the value of the buildings was brought down below Rs. 1 lakh, so that the registration officer would not insist upon the production of a wealth-tax certificate with regard to the buildings. As against this, it is contended for the defendants that, with effect from the financial year commencing from April 1, 1960, no wealth-tax was chargeable in respect of the net wealth of a company and that, therefore, the motive attributed to the first defendant-company in mentioning the value of the lands as stated above is not warranted. We have already noticed that the engineer, Jawahar, assessed the value of the lands only at Rs. 18,775. This value was made on February 21, 1961. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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, for selling away the properties in public auction would not by itself take away the infirmities that are attached to the sales in question. The contention urged on behalf of the plaintiff, Union of India, is that the properties of the first defendant-company were worth nearly about Rs. 3 1/2 lakhs and that the said properties have been sold away for inadequate consideration for Rs. 1,30,000. In support of this contention, reliance is placed upon exhibit A-59, which is a report submitted by one Sankara Iyer, a retired engineer, on behalf of the South Indian Bank Ltd., the 14th defendant, to whom the second defendant-firm applied for a loan after getting a sale of the properties of the first defendant-company. In that report, Sankara Iyer estimated the value of the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted, 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, there was no cash balance in the hands of the second defendant-firm. But he stated that the firm borrowed for the purpose of making up the consideration for exhibit B-1. His version is that he and his brothers paid Rs. 47,000 to the second defendant-firm on February 25, 1961, and that D. W. 4 paid a sum of Rs. 30,600, D. W. 4 also being one of the partners of the second defendant-firm. No doubt, there are entries in the accounts of the second defendant-firm (exhibits B-54 to B-57) in respect of the alleged payments. The suggestion made on behalf of the plaintiff-Union is that these are mere book entries without actual payment. But even on February 25, 1961, the second defendant-firm applied to the 14th defendant-bank for Rs. 1,50,000 and the same was sanctioned on Februa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 from the reference to the secret reserve in exhibit B-7. The position comes to this, namely, that it is not proved that under the transactions in question, the transferor, the first defendant-company, retained any benefit for itself, though it may be that some of the directors of the first defendant-company may stand to be benefited inasmuch as they also happen to be partners of the second defendant-firm. But that by itself is not sufficient to hold that the transferor, the first defendant-company, has retained any benefit for itself under the transactions in question. We have already adverted to the recital in the sale deed, exhibit B-1, that out of the sale consideration of Rs. 1,30,000, the vendor, the first defendant-company, had already received a sum of Rs. 1,14,808.35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 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 within the scope of sub-section (1) of section 53. As we have already pointed out, both on the basis of the allegations in the plaint and the evidence, the conclusion to which the trial judge has rightly come, is that the sales were effected with a view to defeat the anticipated claim of the Union by way of income-tax. But the debtor, the first defendant-company, has satisfied the claims of the other creditors, by parting away with all its properties leaving nothing for the Union to recover the tax which would be subsequently assessed. In other words the debtor has preferred to pay off all other creditors with the intention of defeating an anticipated claim of the Union. The question is, can such a transaction be said to be one made with intent to defeat or delay the creditors o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose 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 mortgagor, who was heavily indebted, thereby preferred the mortgagee over other creditors. In Mina Kumari Bibi v. Bijoy Singh Dudhuria, the debtor effected sale of his property a day prior to the attachment in execution of a money decree. The decree-holder hereof became the purchaser in execution. The prior purchaser at private sale sued for possession. The decree-holder, purchaser, resisted the suit contending that the private sale was invalid under section 53 of the Transfer of Property Act. Sir Lawrence Jenkins, delivering the judgment of the Board, observed : "A debtor, for all that is contained in section 53 of the Transfer of Property Act, may pay his debts in any order he pleases and perfer any creditor he chooses. In Thaher Unnisa Begum v. Sherfunnissa Begum, Panchapakesa A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiff-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 assets among the creditors, and the provisions are, therefore, more stringent. A preference to one creditor which would be valid under section 53 of the Transfer of Property Act would, if the debtor were adjudged insolvent within three months, be deemed fraudulent under section 56 of the Presidency Towns Insolvency Act or section 54 of the Provincial Insolvency Act. Similarly, a voluntary transfer may be set aside under those Acts if the transferor is adjudged insolvent within two years, although it may not offend against section 53 of the Transfer of Property Act. A transfer by a debtor of all his property to a particular creditor is not necessarily voidable under section 53, even though under the insolvency law it may operate as a fraudulent transfer or a fraudulent preference. The case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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