Case: Union of India Vs. Moksh Builders and Financers Limited and Others Etc

These two appeals by certificate have been consolidated by an order of this Court dated April 15, 1969. They are directed against a common judgment of the Delhi High Court dated February 14, 1967, in Regular First Appeals Nos.D andD of 1958, by which the judgment and decree of the trial court dated January 13, 1958 have been set aside with costs throughout. As this has resulted in the dismissal of the suit raised by the Union of India, it has filed the present appeals.The facts giving rise to the appeals are quite simple. Harjas Rai Malhotra, defendant No. 3, is the father of Krishan Lal Malhotra, defendant No. 2. The liability of defendant No. 3 tox andx for the assessment year, was fixed Rs. 1, 25, 090/11/in March, 1952. A demand was made for its payment, but he neglected to meet it and a certificate was issued on October 8, 1952 to the Collector of Delhi for its recovery as arrears of land revenue. The Collector was asked to attach house No. 15, Keeling Road and house No. 9, Hailey Road in New Delhi, of defendant No. 3. Both the houses were attached on October 13, 1952. Meanwhile, defendant No. 3 appealed against the order of assessment. The Appellate Assistant Commissioner allowed the appeal on May 12, 1953, set aside the assessment and directed a fresh assessment. The order of fresh assessment was made on November 30, 1953 and the income tax demand was reduced to Rs. 1, 05, 769.13. The assessments for5 and9 were completed on March 28 and 31, 1953, respectively, raising a tax demand for Rs. 1, 94, 738.15. A recovery certificate was issued to the Collector for the same on May 4, 1953 and the house at No. 15, Keeling Road was again attached on August 6, 1953.We are not concerned with the house at No. 9, Hailey Road, for the controversy before u s relates to house No. 15, Keeling Road, hereinafter referred to as the house. That house had been ostensibly purchased by defendant No. 2 in December, 1946 for Rs. 60,. He filed an application objecting to the attachment on the ground that the house belonged to him, but the Collector dismissed the objection holding that the house belonged to defendant No. 3. Defendant No. 2 did not appeal against that order and did not question it by a suit.Thus far, the facts are not in dispute.It was alleged in the plaint that the house was purchased by defendant No. 3, "benami", in the name of his son defendant No. 2, out of his "own funds drawn from his bank account" and that the "full beneficial ownership, right, title and interest in the said property has always belonged and continues to this day to belong to the 3rd defendant." T he plaintiff alleged further that during the pendency of his appeal to the Appellate Assistant Commissioner against the assessment which had been made in March 1952 for8 and the assessment proceedings for5 and, defendant No. 3 "in collusion and conspiracy with the 2nd defendant and certain other persons, and with the view, intent and purpose of defeating and delaying his creditors including the plaintiff, had recourse to diverse ways and means" as detailed in the plaint. He was thus alleged that, in February 1953, defendants Nos. 2 and 3 and five other persons purported to form a limited company known as Moksh Builders and Financiers Ltd., hereinafter referred to as the Company, which was arrayed as defendant No. 1 in the suit, with an authorised capital of Rs. 5, 00, 000/divided into 5000 shares of Rs. 100/each. There were 7 subscribers to the Memorandum and the Articles of Association of the Company and each of them took 10 shares, Soon after the Appellate Assistant Commissioner made his aforesaid order dated May 12, 1953 for fresh assessment of thex liability of defendant No. 3, a sale deed dated May 25, 1953 was brought into existence whereby defendant No. 2 "purported to convey" the house to defendant No. 1 for Rs. 1, 00, 000/of which Rs. 90, 000/were payable in the shape of shares in the Company, Rs. 8, 000/payable to Sunrise .Investors Ltd. and Rs. 2000/in cash. The plaintiff pleaded that "these transactions were all sham, colorable, and effected and entered into with the active aid, instigation and advice of the 3rd defendant and to subserve and carry out the object of placing his property, viz., No. 15, Keeling Road out of the reach of his creditors". It was further urged as follows,"The consideration mentioned in thed of 25th May, 1953 was illusory. In effect and substances the 2nd defendant purported to sell a house to the I st defendant in which company in return was to become a holder of shares of controlling interest, the shares being the alleged price., Except for the legal fiction of the I st defendant Company being juristic person the sale was by the vendor to himself. None of these devices and subterfuges could divest the 3rd, defendant of his ownership of the property in question. The 1st defendant company by its promoters directors and office bearers was fully aware of all the facts of the case, including the true state of the title to the property No. 15, Keeling Road, the highly embarrassed financial circumstances of the 3rd defendant the facts that he owed to the plaintiff" alone taxes to the amount of several lakhs of rupees etc. The 1st defendant is not a purchaser in good faith for consideration of the said property or without notice of the title of the 3rd defendant. On the other hand the sale deed dated 25th May, 1953 to the 1st defendant was executed by the name lender the 2nd defendant at the instance of the true owner of the 3rd defendant with intent to defeat or delay the latters creditors, and is voidable at the option of any of such creditors including the present plaintiff."Defendant No. 1 objected to the attachment of the house for the realisation of the arrears ofx of defendant No. 3. The Additional Collector allowed the objection by a summary inquiry, and the Chief Commissioner dismissed the appeal on April 1, 1954. Both those officers, according t o the plaintiff, proceeded on "prima facie considerations" and left the parties to seek their redress in the civil court.With these specific averments the, plaintiff raised its suit seeking leave to sue on behalf and for the benefit of itself and the other creditors, if any, of defendant No 3. It prayed for a declaration that (i) the sale deed dated May 25, 1953 was void as against the plaintiff and all other creditors of defendant No. 3, and (ii) the house is and continued to be owned by defendant No. 3. In the alternative, the plaintiff prayed for a declaration that the shares allotted to defendant No. 2 belonged to defendant No. 3. It also prayed for a declaration that it was entitled to proceed against the "properties which may be declared to be of 3rd defendants" by attachment and sale to realise the tax arrears due from him. A prayer was made for setting aside the orders of the Additional Collector and the Chief Commissioner on the objection petition of defendant No. 2.Defendant No. 3 did not appear to contest the suit in spite of personal service and the trial court made an order on April 15, 1955 to proceed against him. Separate written statements were filed by the Company and defendant No. 2The Company took the plea, inter alia, that it had been genuinely and properly formed and that it was a bona fide purchaser for value and the "transaction was quite real and genuine". It denied that the sale deed dated May 25, 1953, was executed at the instance of defendant No. 3 , or that it was intended to defeat or delay his creditors. P was pleaded that defendant No. 2 was the rightful owner of the house which he had rightfully purchased with "his own money (Rupees 10, 000/by cheque No. 32920 dated 14.11.1946 on the New Bank of India Ltd., New Delhi drawn by his mother K. Rani and Rs. 50, 000/paid in cash before. The Company also pleaded that the transaction of sale in its favour was without notice of any body elses claim and was binding.      Defendant No. 2 filed a short written statement stating that he was the owner of the house having purchased it with "his own money". He pleaded that he h ad paid Rs. 10, 000/by cheque on New Bank of India Ltd., New Delhi, and Rs. 50, 000/were paid before the Sub Registrar. He pleaded further that he had no knowledge of the Collectors order and that his order , if any, was. As regards the Company, defendant No. 2 pleaded that it was a real and genuine Company and that out of his shares worth Rs. 90, 000/he had sold shares worth Rs. 74, 000/The trial court found that the house was purchased "benami" in the name of defendant No. 2, by defendant No. 3 with his own money and that the sale of the house to the Company by defendant No. 2, was "sham and was effected in order to defeat or to delay the creditor of defendant No. 3 and that defendant No. 1 had no real existence." The trial court therefore granted a decree declaring that the sale deed dated May 25, 1953 was void as against the plaintiff and all other creditors, if any, of defendant No. 3 and that the House" is and continues to be owned by the 3rd defendant and that the plaintiff is entitled to p roceed against the said properties by way of attachment and sale to realise the tax arrears due from him." The trial court set aside the orders dated October 9, 1953 of the Additional Collector on the objection petition of defendant No. 2 and of the Chief Commissioner dated April 1, 1954.As the High Court has set aside the judgment and decree of the trial court, the present appeals have been filed by the plaintiff as aforesaid. We shall refer to the findings of the High Court as and when necessary.The main point in controversy was whether the house was purchased by defendant No. 3 benami in the name of defendant No. 2? This was the subject matter of issue No. 1 in the trial court.

Court's reasoning:
No appeal, or other remedy was sought against .that order. The Appellate Assistant Commissioner however allowed the appeal of defendant No. 3 against the assessment ofx andordered a fresh attachment by his order dated May 12, 1953. In the meantime, the Company was incorporated in February, 1953. The assessment of income tax for the years5 and9 was completed in March 1953 raising the tax demand to Rs. 1, 94, 735.15, and a recovery certificate was issued on May 4, 1953. It was in these circumstances that defendant No. 2, who had failed to obtain an order for the release of the house as aforesaid, hastened to sell it to the Company on May 25, 1953. As has been stated, a fresh recovery certificate was issued to the Collector on May 4, 1953 and the house was again attached on August 6, 1953. These facts speak for themselves and are quite sufficient to justify the trial courts finding that sale of the house to the Company was a sham transaction and arose out of the anxiety to save the house some how from sale for realisation of the. The Company was in fact dominated by defendant No. 2 and his close relations and did not even pay the sale price in cash. It is also significant that the shares of the other relations were insignificant. Moreover the Company could not lead evidence to show that it was able to transact any substantial business whatsoever. We have therefore no reason to disagree with the trial courts finding that the Company was formed just to transfer the ho use to it in an effort to save it from attachment and sale for realisation of thex arrears of defendant No. 3. The finding of the trial court on the issue is quite correct and the High Court committed a serious error of law in not examining this aspect of the matter at all even though it had a great bearing on the controversy.