Civil Appeal No 2035 of 1987
From the Judgment and order dated 2341987 of the High Court of Punjab and Haryana in CMP No 19 of 1987
SN Kacker and RS Sodhi for the Appellant
Mrs Shyamla Pappu AM Ashri KS Thaper and VK Jain for the Respondents
403 The Judgment of the Court was delivered by A SEN J
The controversy in this appeal by special leave centres s around the words in writing and signed by the parties  added to order XXIII r 3 of the Code of Civil Procedure 1908 by the Code of Civil Procedure Amendment Act 1976 and the precise question is whether when a settlement is arrived at between the parties in appeal before the Court the compromise cannot be given effect to under Order XXIII r 3 of the Code unless the terms of the compromise are embodied in an agreement in writing
First as to the facts
The respondent herein Chatur Bhuj Goel a practising advocate at Chandigarh first lodged a criminal complaint against Colonel Sukhdev Singh father of the appellant under section 420 of the Indian Penal Code 1860 after he had served the respondent with a notice dated July 11 1979 forfeiting the amount of Rs40000 paid by him by way of earnest money alleging that he was in breach of the contract dated June 4 1979 entered into between Colonel Sukhdev Singh acting as guardian of the appellant then a minor and the respondent for the sale of a residential house at 1577 Sector 18D Chandigarh for a consideration of Rs285000
In terms of the agreement the respondent was to pay a further sum of Rs135000 to the appellant s father Colonel Sukhdev Singh by July 10 1979 when the said agreement of sale was to be registered and vacant possession of the house delivered to him and the balance amount of Rs 110000 on or before January 31 1980 when the deed of conveyance was to be executed
The dispute between the parties was that according to Colonel Sukhdev Singh there was failure on the part of the respondent to pay the amount of Rs135000 and get the agreement registered while the respondent alleged that he had already purchased a bank draft in the name of the appellant for Rs135000 on July 7 1979 but the appellant s father did not turn up to receive the same
The respondent met him at his residence at Chandigarh on the morning of July 16 1979 when it was agreed that they would meet in the District Court precincts later in the day for the purpose of registration of the agreement but again the appellant s father did not turn up
Although the learned Additional Chief Judicial Magistrate by order dated October 31 1979 dismissed the complaint holding that the dispute was of a civil nature and no process could issue on the complaint a learned Single Judge of the High Court by his order dated February 11 1980 set aside the order of the learned Additional Chief Judicial Magistrate holding that the facts brought out clearly warranted an inference of dishonest intention on the part of Colonel Sukhdev Singh and accordingly directed 404 him to proceed with the trial according to law
Aggrieved Colonel Sukhdev Singh came up in appeal to this Court by special leave
This Court by its order in Criminal Appeal No 59580 dated September 2 1980 reversed the judgment of the High Court on the ground that the dispute was purely of a civil nature and the criminal 13 process could not have been employed for the purpose of coercing the appellant s guardian Colonel Sukhdev Singh to specifically perform the contract
It was directed that Colonel Sukhdev Singh should return the earnest money of Rs40000 to the respondent on or before October 5 1980 and in the meanwhile the respondent was at liberty to file a suit for specific performance of the contract if so advised
It was observed that the return of the said amount of Rs40000 by Colonel Sukhdev Singh would be without prejudice to the rights and contentions of the parties including the right of the respondent to claim specific performance of the contract if he was in law otherwise so entitled
Pursuant thereto the appellant s guardian Colonel Sukhdev Singh refunded the amount of Rs40000 to the respondent
On October 3 1980 the respondent instituted the suit in the Court of the District Judge Chandigarh out of which this appeal arises for specific performance of the contract and in the alternative claimed Rs250000 by way of damages
Both the learned District Judge as well as a learned Single Judge on a consideration of the evidence came to the conclusion that the breach of contract was on the part of the appellant s guardian Colonel Sukhdev Singh and not on the part of the respondent and accordingly decreed the suit for specific performance
Thereupon the appellant preferred an appeal under cl 10 of the Letters Patent
The hearing of the Letters Patent Appeal commenced before a Division Bench on January 14 1987 and continued for three days
On January 16 1987 the appellant s counsel had not concluded and there fore the hearing was adjourned to January 28 1987
On that date after the appellant s counsel had addressed the Court for a while the parties took time to explore the possibility of a settlement
At the resumed hearing later in the day the appellant s father Colonel Sukhdev Singh made a statement to the effect I make an offer that I shall personally pay Rs225000 to the respondent Chatur Bhuj Goel by way of full and final settlement of the dispute between him and the appellant
The said amount shall be paid by a bank draft in Court on 17387
In the event of failure on my part to pay the 405 amount as stipulated on that date the Letters Patent Appeal No 734 of 1983 shall stand dismissed and the appellant shall have no right to file an appeal against the decision to the Supreme Court
 The above statement was duly endorsed by Shri VK Sharma learned counsel appearing for the appellant and stated B The appellant makes an offer that in full and final settlement of the dispute between the parties the appellant Gurpreet Singh in his personal capacity or through his father Colonel Sukhdev Singh shall pay Rs225000 to the respondent on 17387 by a bank draft payable at Chandigarh if the respondent agrees to the Letters Patent Appeal No 734 of 1983 being allowed and that in the event of non payment of the amount on the stipulated date the said appeal shall stand dismissed and the appellant shall have no right to file an appeal in the Supreme Court
 The respondent Chatur Bhuj Goel who as already stated is a practising advocate was respondent by Shri Bhagirath Dass a senior advocate practising at Chandigarh
Apparently the respondent on mature deliberation made the following statement in the presence of his counsel I accept the offer made by Colonel Sukhdev Singh and Shri VK Sharma counsel for the appellant Gurpreet Singh  Thereupon the learned Judges adjourned the appeal to March 17 1987 ie the date on which the payment of Rs225000 was to be made
The aforesaid statements form part of the proceedings of the Court
Admittedly the compromise was not reduced in writing and signed by the parties
Taking advantage of this fact the respondent on February 9 1987 made an application by which he tried to resile from the compromise stating on 28th January 1987 the offer of compromise was made by the appellant which was recorded
The statement of the respondent was also recorded
The respondent however did not sign the statement
That the statement was made by the respondent without thinking of the repercussions of his statement
He was influenced by the stand which was 406 adopted by his Senior Advocate Shri Bhagirath Dass
If the statement recorded by the Court which has not been signed by the respondent is given effect to the respondent would suffer a tremendous loss
 On the adjourned date ie March 17 1987 the learned Judges directed that in view of the fact that the respondent was not prepared to abide by the proposed compromise the appeal would now be heard and decided on merits with a further direction that it be placed before another Bench
Hence this appeal by special leave
In support of the appeal Shri SN Kacker learned counsel for the appellant contends that the requirements of order XXIII r 3 of the Code are mandatory and the claim in the suit for specific performance having been settled by a lawful compromise within the meaning of r 3 the learned Judges were not justified in directing that the appeal be placed before another bench for decision on merits
The learned counsel submits that order XXIII r 3 of the Code is in two parts
According to him the words in writing and signed by the parties  qualify the words any lawful agreement or compromise  appearing in the first part and these words cannot obviously be read into the second part at all
It is urged that the first part of order XXIII r 3 of the Code refers to an adjustment on settlement of the claim in suit by a lawful agreement or compromise outside the Court meaning thereby that where the parties make a statement before the Court that the dispute between them has been settled on certain terms and the statements so made form part of the proceedings of the Court there is no legal requirement to have an agreement in writing embodying the terms of the compromise
For a proper appreciation of the contentions advanced it is necessary to set out the Statement of objects and Reasons which is in these terms Cl
77 Sub cliii
It is provided that an agreement or compromise under rule 3 should be in writing and signed by the parties
This is with a view to avoiding the setting up of oral agreements or compromises to delay the progress of the suit
The words lawful agreement or compromise  in rule 3 have given rise to a conflict in the matter of interpreta 407 tion
One view is that agreements which are voidable under section 19A of the Contract Act are not excluded
While this stand is taken by the High Courts of Allahabad Calcutta
Madras and Kerala a contrary view has been expressed by the High Courts of Bombay and Nagpur
An Explanation has therefore been added to the rule to clarify the position
A proviso has been added to clarify that no adjournment should ordinarily be granted where a decision is necessary as to whether an adjustment or satisfaction has or has not been arrived at In view of the words so far as it relates to the suit  in rule 3 a question arises whether decree which refers to the terms of a compromise in respect of matters beyond the scope of the suit is executable or whether the terms of the decree relating to the matters outside the suit can be enforced only by a separate suit
The amendment seeks to clarify the position
 The provision contained in order XXIII r 3 of the Code as amended provides Where it is proved to the satisfaction of the Court that a suit has been adjusted wholly or in part by any lawful agreement or compromise in writing and signed by the parties or where the defendant satisfies the plaintiff in respect of the whole or any part of the subject matter of the suit the Court shall order such agreement compromise or satisfaction to be recorded and shall pass a decree in accordance therewith so far as it relates to the parties to the suit whether or not the subject matter of the agreement compromise or satisfaction is the same as the subject matter of the suit Provided that where it is alleged by one party and denied by the other that an adjustment or satisfaction has been arrived at the Court shall decide the question but no adjournment shall be granted for the purpose of deciding the question unless the Court for reasons to be recorded thinks fit to grant such adjournment
Explanation
An agreement or compromise which is void or voidable under the 9 of 408 1872 shall not be deemed to be lawful within the meaning of this rule
 According to the grammatical construction the word or  makes the two conditions disjunctive
At first blush the argument of the learned counsel appears to be plausible but that is of no avail
In our opinion the present case clearly falls within the first part and not the second
We find no justification to confine the applicability of the first part of order XXIII r 3 of the Code to a compromise effected out of Court
Under the rule prior to the amendment the agreement com promising the suit could be written or oral and necessarily the Court had to enquire whether or not such compromise had been effected
It was open to the Court to decide the matter by taking evidence in the usual way or upon affidavits
The whole object of the amendment by adding the words in writing and signed by the parties  is to prevent false and frivolous pleas that a suit had been adjusted wholly or in part by any lawful agreement or compromise with a view to protract or delay the proceedings in the suit
Under r 3 as it now stands when a claim in suit has been adjusted wholly or in part by any lawful agreement or compromise the compromise must be in writing and signed by the parties and there must be a completed agreement between them
To constitute an adjustment the agreement or compromise must itself be capable of being embodied in a decree
When the parties enter into a compromise during the hearing of a suit or appeal there is no reason why the requirement that the compromise should be reduced in writing in the form of an instrument signed by the parties should be dispensed with
The Court must therefore insist upon the parties to reduce the terms into writing
In our considered opinion the view to the contrary expressed by the High Court in Manohar Lal  Anr
vs Surjan Singh  Anr 1983 Punj
LJ 402 that the first part relates to a lawful agreement or compromise arrived at by the parties out of Court does not seem to be correct
Sandhawalia CJ speaking for himself and Tewatia J observes that the word or  makes the two parts disjunctive and they visualise two distinct and separate classes of compromise
According to the learned Judges the first part relates to a lawful agreement or compromise arrived at by the parties out of Court while the second is applicable where the defendant satisfies the plaintiff in respect of the whole or any part of the subject matter of the suit
Such a restricted construction is not warranted by the language used in r 3
The word 409 satisfies  denotes satisfaction of the claim of the plaintiff wholly or in part and for this there need not be an agreement in writing signed by the parties
It is open to the defendant to prove such satisfaction by the production of a receipt or payment through bank or otherwise
The satisfaction of the claim could also be established by tendering of evidence
It is for the Court to decide the question upon taking evidence or by affidavits as to whether there has in fact been such satisfaction of the claim and pass a decree in accordance with order XXIII r 3 of the Code
In any event the present case clearly does not come within the ambit of the second part of order XXIII r 3 of the Code
Under the terms of the proposed compromise the appellant was required to pay Rs225000 by a bank draft on March 17 1987 but the fact remains that the respondent before the due date resiled from the proposed compromise saying that it was detrimental to his interest
That being so the appellant could only fall back on the first part
But in the absence of an agreement in writing the learned Judges had no other alternative but to direct that the appeal be listed for hearing on merits
In the result the appeal must fail and is dismissed
The High Court is directed to hear and decide the appeal on merits
There shall be no order as to costs
NPV Appeal dismissed


Summary:
 The assessee contended in the gift tax assessment proceedings that the 480 shares in the English Company acquired as gift were not quoted in the stock exchange that their value be determined on the average break up value indicated by the balance sheets of the Company as on 3131964 and 3131965 and that in view of the decision of the General Body of the Company dated 4101961 to increase its share capital by issue of additional shares the value of the shares constituting the subject matter of the gifts which were transferred ex right would stand depreciated
The Gift Tax officer valued the shares on the basis of the breakup value yielded by and deducible from the balance sheet as on 3131964
The Appellate Assistant Commissioner dismissed the assessee s appeal
In the further appeal before the Income tax Appellate Tribunal the Tribunal relying on the ratio laid down in the English Case Lynall and another vs Inland Revenue Commissioner valued the shares at Rs450 each said to represent the break up value on the basis of the balance sheet of 3131963 holding that it could not take into consideration any other document except the published information which was the aforesaid balance sheet
The Tribunal stated a case and referred the matter to the High Court for its opinion
The High Court held that since the only information which was available on the date of the gifts was in the form of the balance sheet as of March 31 1963 the Tribunal was right in taking the same into consideration for the purpose of arriving at the value of the shares by the break up  method
342 In the appeal to this Court it was contended on behalf of the Revenue that the principle of valuation relied upon by the High Court was erroneous and that the case was covered by the decisions of this Court in Commissioner of Wealth Tax Assam vs Mahadeo Jalan  Ors and Commissioner of Gift Tax Bombay vs Smt
Kusumben 
Mahadevia On behalf of the assessee it was urged that in view of the consensus between the parties as to the basis of valuation it was not now open to the Revenue to urge the application of an altogether different principle
Disposing of the appeal  HELD1
The correct principle of valuation applicable to a given case is a question of law
The parties can agree upon a principle permissible and recognised by law
If two or more alternative principles arc equally valid and available it might be permissible for the parties to agree upon one of the alternative modes of valuation in preference to another
346G H In the instant case the Revenue cannot be precluded from urging the correct legal position
347A 2
When the shares in a public limited company are not quoted on the stock exchange
Or are in a private limited company the proper method of valuation to be adopted would be the profit earning method346B C Commissioner of Gift Tax Bombay vs Smt
Kusumben D Mahadevia  relied upon
Commissioner of Wealth Tax Assam vs Mahadeo Jalan 
 Ors
 and Williams J in Mc
Cathie vs Federal Commissioner of Taxation   referred to
In the instant case the view of the High Court as to the principle of valuation in determining the value of the kinds of shares concerned cannot be held to be correct
As a logical consequence the Tribunal would have to go through over again the exercise of determination of the value of the shares adopting the correct principle
But having regard to the fact that the matter is already two and a half decades old and that the magnitude of the mechanism for the re fixation of the value of the gifts by adopting the somewhat intricate process inherent in the 343 profit method of valuation and the difference in the quantum of tax that might result in do not bear a reasonable or senible proportion the valuation is left undisturbed347A D