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CASE NO.: Appeal (civil)  10135 of 2003 Special Leave Petition (civil)  21705 of 2002

PETITIONER: Videocon Properties Ltd.                                                               

RESPONDENT: Dr. Bhalchandra Laboratories & Ors.  

DATE OF JUDGMENT: 19/12/2003

BENCH: Doraiswamy Raju & Arijit Pasayat.

JUDGMENT: J U D G M E N T

D. RAJU, U.

       Leave granted.

       The appellants are the plaintiffs in suit No.2145 of 2000, on the original  side of the High Court of Bombay and the respondents\026defendants are  registered firm of partnership and its partners, respectively.  The plaintiffs are  builders and developers and they have entered into an agreement with the  defendants on 13.5.1994 to sell the landed property owned by the respondents  and a sum of Rs.38 lakhs was said to have been paid by the appellants as  deposit or earnest money on the execution of the agreement, which the  respondents received under the agreement.  Clause 2.3 of the agreement,  insofar as it is relevant for the purpose, reads as hereunder:

"If for any reason the vendors fail to fulfill their  obligation under Clause 2, the purchasers shall have  an option either to fulfill the said obligation themselves  at the cost and expenses of the vendors or to  terminate the agreement, in which event the vendors  shall return to the purchasers the earnest with interest  at 21% per annum\005"

       Clauses 17 and 18 also read as under:

"17. If the vendors fail to make out a marketable title  to this said land agreed to be sold, as herein agreed,  the purchasers shall be entitled to cancel this  agreement.  In the event of cancellation of this  agreement under this clause, the said earnest money  or deposit shall be forthwith returned to the  purchasers by the vendors without any interest, cost  or compensation.

18. If the sale be not completed due to any willful  default on the part of the vendors, the purchasers  shall be entitled (a) to require specific performance by  the vendors of this agreement or (b) to payment by  the vendors of the interest at the rate of 21% per  annum on the said earnest money or deposit and all  costs, charges and expenses incurred and all loss  and damages sustained by the purchasers in addition  to the return by the vendors of the said earnest  money or deposit."

       It is the stand of the appellants that for nearly five years the respondents  did not perform their part of the contract or fulfill their obligations under Clause 2

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of the agreement, in spite of repeated requests and reminders and this  necessitated their issuing a Notice dated 3.3.1999 calling upon the respondents  to fulfill their obligations within 15 days of receipt.  On 15.3.1999, the  respondents appear to have, for the first time, expressed their inability to fulfill the  terms within time and informed the appellants in writing to invoke their right under  Clause 2.3, in the following words:

"Under these circumstances, we sincerely and  earnestly request you to please exercise your other  option of getting all the necessary permissions  yourselves to complete the said transaction at your  earliest.  We hope that you will consider this proposal  sympathetically and take the necessary action as  stated above, looking to our present situation  explained above."

       Thereupon, the appellants seem to have opted to terminate the agreement  as envisaged under Clause 2.3 and by their Notice dated 27.9.1999, while so  terminating, called upon the respondents to return the sum of Rs.38 lakhs along  with interest at the rat e of 21% from 13.5.1994 till payment.  In response thereto,  while disputing the claims of the appellants, the respondents along with their  letter dated 8.1.2000 sent a cheque for Rs.38 lakhs by way of "refund of deposit  or earnest money in full satisfaction of your claim under the agreement or  otherwise.  Your claim for interest is both false and untenable and is denied by  us."  The appellants seem to have been not satisfied since they, according to  their stand, should have been repaid a sum of Rs.74,34,203/- instead of merely  returning the deposit or earnest money and filed the suit No.2145 of 2000, as  noticed above, seeking for several reliefs \026 one among which is as hereunder:

Relief and Prayer: (c) in the plaint:

"That it be declared by this Hon’ble Court that the  amount and interest mentioned in prayer (a) above  and the cost of the suit are validly secured by a  statutory charge on the said land more particularly  described in Exhibit B to the plaint. "

       As per prayer (a), the plaintiffs claimed for a judgment and decree for  Rs.80,15,903/- with further interest at 21% p.a. from the date of suit till payment  or realization and the costs.  In prayer clause (d) of the plaint, the appellants  seem to have also prayed for a declaration that the amount and interest claimed  in prayer (b) towards damages and the costs of the suit are validly secured by a  statutory charge on the said land described in Exhibit B to the plaint.  The  appellants have also chosen to appropriate the sum repaid in a different manner  as per their choice and at their discretion as explained in the plaint.

       The appellants seem to have also filed an application for interim reliefs by  way of Notice of Motion No.1952 of 2000 praying among other things for \026

"(d) that pending the hearing and final disposal of the  suit, the defendants by themselves, their servants and  agents be restrained by an order and injunction of this  Hon’ble Court, from selling, disposing of, alienating,  encumbering or creating any third party rights of any  nature whatsoever or from carrying out any  construction or any other work in any manner  whatsoever, in respect of the suit properties more  particularly described in Exhibit ‘B’ to the plaint."

       After hearing both parties, the learned Single Judge passed the following  order:

"2. Admitted position is that there was an agreement  to sell between the parties, and that an amount of  Rs.38 lakh has been paid as an earnest money.  It is

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also admitted position that the agreement was  terminated by the plaintiff.  It is also admitted position  that in the agreement there is a provision made for  payment of interest at the rate of 21% p.a. on the  amount of earnest money, in case that amount is  required to be refunded in terms of the agreement.   The defendants has refunded the amount of earnest  money, i.e., Rs.38 lakh, but has not paid the amount  of interest.  The controversy involved in the suit is  whether the plaintiff is entitled to claim an amount of  interest on the amount of earnest money that was  refunded by the defendant.

3. Perusal of the agreement shows that there is a  clear duty casts on the defendant to pay interest on  the amount of earnest money, unless it is required to  be refunded.  Therefore, it appears that the plaintiff  has a prime facie case in its favour.

4. So far as prayer for temporary injunction is  concerned, perusal of the provisions of Section 55 of  the Transfer of Property Act shows that buyer is  entitled to a charge on the property as against the  seller to the extent of the seller’s interest in the  property, for the amount of any purchase money paid  and for interest on such amount.

       Therefore, even if it is assumed that the  plaintiff was not justified in appropriating the amount  paid by the defendants towards the interest treating  the earnest money still remaining unpaid, then also as  per the agreement the plaintiff is definitely entitled to  interest on the amount.  In terms of the provisions of  Section 55 of the Transfer of Property Act, even for  the unpaid amount of interest, there is charge on the  property.

       In view of the matter, therefore, in any opinion,  the plaintiff would be entitled to a temporary injunction  restraining the defendants from disposing of the land  during the pendency of the suit."

       Thereupon, the respondents have pursued the matter on appeal before a  Division Bench, challenging the order of the learned Single Judge.  The learned  Judges of the Division Bench by their order under challenge in this appeal, after  adverting to certain factual details, on the scope of Section 55 (6) of the Transfer  of Property Act, expressed its views as hereunder, with particular reference to  the case on hand, by allowing the appeal of respondents herein:

"Now when one looks at the wording of Section 55  (6)(b), a clear distinction is made by the statute  between the purchase money on one hand and  earnest money on the other when it comes to creating  a charge.  As far as purchase money is concerned, a  charge is created for the purchase money as well as  the interest amount thereon, whereas when it comes  to earnest money, in the latter part of Section 55  (6)(b), there is no such specific mention of interest on  the earnest money.  We are concerned with the  question as to whether this section creates a statutory  charge on the property to protect the claim of interest  on the earnest money and a plain reading of the  section shows that it does not make any such  provision.

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This being the position, in our view, the learned Single  Judge was in error in holding that a charge was  available to the respondents under Section 55 (6)(b)  for claiming interest on the earnest money and,  therefore, was in error in granting the injunction.  The  authorities and propositions cited by Mr. Doctor do not  help us in interpreting section 55 (6)(b).  Once the  basis of this claim of charge is disclosed, one cannot  claim injunction to secure the alleged claim for  interest on the earnest money.  We have, therefore, to  interfere with the order passed by the learned Single  Judge and accordingly we set a side the same.   Therefore, there will not be any injunction as prayed  by the respondents.

The claim of the respondents is principally for money  and they will get the amount due to them if they  establish their case in trial.  However, we are also  conscious of the fact that the amount of Rs.38 lakhs  was lying with the appellants from 13.4.1994 till  8.1.2000.  We, therefore, tried to explore on overall  settlement, but that was not possible.  It appears that  due to financial constraints the appellants can  develop the property only when they enter into an  agreement with another developer.  Hence, we would  like to put the appellants to terms and in our view, the  appropriate interim order would be to direct the  appellants to deposit an amount equivalent to interest  at the rate of 10% for the aforesaid period which they  will deposit in this Court as and when they decide to  develop this property.  This order will work as an  interim order till the disposal of the suit."

       Hence, this appeal.

       Though, normally this Court would have been reluctant to entertain this  appeal at this stage, keeping in view the views expressed by the Division Bench  of the High Court on the scope and purport of statutory charge engrafted in  Section 55 (6), and the serious repercussion that may follow not only in this case  but generally as a principle of law, it became necessary for this Court to deal with  the legal issue, leaving otherwise, the parties to work out their ultimate rights  respectively, finally in the pending suit, ensuring of course in the meantime  proper and sufficient safeguards, as would emanate from the statutory charge  envisaged under Section 55 (6) of the Transfer of Property Act.  Though the  learned counsel on either side attempted to make submissions generally on the  disputes between the parties, we indicated to them that they must confine their  claims and submissions to the actual issues that would arise on the interim  orders passed as to the scope and ambit of the statutory charge generally and  for the protection of rights of parties in this case leaving aside other claims and  issues, which are only to be adjudicated in the main suit, which is still pending on  the original side of the High Court.

       The learned senior counsel for the appellants contended that the statutory  charge envisaged under Section 55(6)(b) of the Transfer of Property Act would  enure not only to the amount of any purchase money paid and for interest on  such amount, but also for the earnest money deposit paid and for interest due  thereon besides for the costs awarded to the purchaser to compel specific  performance of the contract or to obtain a decree for its rescission and the contra  view taken by the Division Bench differing from the view taken by the learned  Single Judge is contrary to law and cannot be sustained.  It was also contended  that the omission to specifically specify in the said provision of the Act interest on  earnest money may, at the most, be indicative of the discretion left with the Court  in the matter of the rate of interest permissible on the earnest money deposit and  not to deny the same once and for all.  It was also urged on behalf of the  appellants that on the peculiar terms and conditions of the agreement between

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parties, which in Clause 2.3 specifically provided for the rate of interest with  which the earnest money deposit has to be refunded in case the respondents- vendors fail to fulfill their obligations, the entire sum of earnest money deposit  inclusive of the interest so provided for being repaid would form the subject  matter of the statutory charge envisaged under Section 55(6)(b) of the Transfer  of Property Act.  It was also contended for the appellants that in a matter like the  one on hand where the earnest money deposited is to be part of the sale  consideration agreed to between the parties, the said sum of Rs.38 lacs will not  cease to be purchase money merely because it is referred to also as deposit or  earnest money as well and, therefore, it would fall even within the first limb of  Section 55(6)(b) and satisfy the stipulation expressed as ‘any purchase money  properly paid by the buyer’ and for interest on such amount and consequently,  the order of the learned Single Judge should be restored by setting aside the  order of the learned Judges of the Division Bench.  Per contra, the learned  counsel appearing for the respondents, while adopting the reasoning of the  Division Bench of the High Court, reiterated the stand taken on their behalf  before the High Court to justify the order passed by the Division Bench under  challenge.

       Though initially no interim orders were passed after the respondents  entered their appearance and the matter was being adjourned from time to time  an apprehended alienation of the property and an attempt to further encumber  the same to the prejudice of the appellants was highlighted and when the  counsel, after instructions from the respondents, expressed his client’s inability to  furnish any security to the satisfaction of the learned Trial Judge or give any  undertaking not to alienate or encumber, by an order dated 31.10.2003 the  respondents were directed to maintain the status quo and an interim order that  they shall not alienate the property, pending further orders, was also made.  The  learned counsel for the respondents, in addition to responding to the contentions  on behalf of the appellants, also submitted that if for any reason this Court is not  inclined to agree with the stand of the respondents, their right to sell the property  should not be completely freezed and appropriate liberties may be granted to  alienate the same, with the leave of the learned Trial Judge and subject to  sufficient safeguards being made to protect the claims and interest of the  appellants in the suit.

       We have carefully considered the submissions of the learned counsel  appearing on either side.  It would be necessary to set out the relevant portions  of Section 55 to the extent necessary for appreciating the contentions of the  parties on either side. "55.  Rights and Liabilities of buyer and seller. \027  In the absence of a contract to the contrary, the buyer  and seller of immovable property respectively are  subject to the liabilities, and have the rights,  mentioned in the rules next following, or such of them  as are applicable to the property sold:      \005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005 \005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005\005 \005

(6) The buyer is entitled--   

(a)  where the ownership of the property has passed  to him, to the benefit of any improvement in, or  increase in value of, the property, and to the rents and  profits thereof; (b) unless he has improperly declined to accept  delivery of the property, to a charge on the property,  as against the seller and all persons claiming under  him,* * * to the extent of the seller’s interest in the  property, for the amount of any purchase-money  properly paid by the buyer in anticipation of the  delivery and for interest on such amount; and, when  the properly declines to accept the delivery, also for

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the earnest (if any) and for the costs (if any) awarded  to him of a suit to compel specific performance of the  contract or to obtain a decree for its rescission."           The buyer’s charge engrafted in clause (b) of paragraph 6 of Section 55 of  the Transfer of Property Act would extend and enure to the purchase-money or  earnest money paid before the title passes and property has been delivered by  the purchaser to the seller, on the seller’s interest in the property unless the  purchaser has improperly declined to accept delivery of property or when he  properly declines to accept delivery \026 including for the interest on purchase  money and costs awarded to the purchaser of a suit to compel specific  performance of the contract or to obtain a decree for its rescission.   The principle  underlying the above provision is a trite principle of justice, equity and good  conscience.  The charge would last until the conveyance is executed by the  seller and possession is also given to the purchaser and ceases only thereafter.   The charge will not be lost by merely accepting delivery of possession alone.   This charge is a statutory charge in favour of a buyer and is different from  contractual charge to which the buyer may become entitled to under the terms of  the contract, and in substance a converse to the charge created in favour of the  seller under Section 55(4)(b).  Consequently, the buyer is entitled to enforce the  said charge against the property and for that purpose trace the property even in  the hands of third parties and even when the property is converted into another  form by proceeding against the substituted security, since none claiming under  the seller including a third party purchaser can take advantage of any plea based  even on want of notice of the charge.  The said statutory charge gets attracted  and attaches to the property for the benefit of the buyer the moment he pays any  part of the purchase money and is only lost in case of purchaser’s own default or  his improper refusal to accept delivery.  So far as payment of interest is  concerned, the section specifically envisages payment of interest upon the  purchase-money/price prepaid, though not so specifically on the earnest money  deposit, apparently for the reason that an amount paid as earnest money  simplicitor, as mere security for due performance does not become repayable till  the contract or agreement got terminated and it is shown that the purchaser has  not failed to carry out his part of the contract, and the termination was brought  about not due to his fault, the claim of the purchaser for refund of earnest money  deposit will not arise for being asserted.

       The further aspect that requires to be noticed is as to the nature and  character of earnest money deposit and in that context the distinguishing  features, which help to delineate the differences, if any.  The matter is not, at any  rate, res integra.   In (Kunwar) Chiranjit Singh vs. Har Swarup [AIR 1926 P.C.  1], it was held that the earnest money is part of the purchase price when the  transaction goes forward and it is forfeited when the transaction falls through, by  reasons of the fault or failure of the purchaser.  This statement of law had the  approval of this Court in Maula Bux vs. Union of India [AIR 1970 SC 1955].   Further, it is not the description by words used in the agreement only that would  be determinative of the character of the sum but really the intention of parties and  surrounding circumstances as well, that have to be looked into and what may be  called an advance may really be a deposit or earnest money and what is termed  as ‘a deposit or earnest money’ may ultimately turn out to be really an advance  or part of purchase price.  Earnest money or deposit also, thus, serves two  purposes of being part payment of the purchase money and security for the  performances of the contract by the party concerned, who paid it.

       Coming to the facts of the case, it is seen from the agreement dated  13.5.1994 entered into between parties \026 particularly Clause 1, which specifies  more than one enumerated categories of payment to be made by the purchaser  in the manner and at stages indicated therein, as consideration for the ultimate  sale to be made and completed.  The further fact that the sum of Rs. 38 lakhs  had to be paid on the date of execution of the agreement itself, with the other  remaining categories of sums being stipulated for payment at different and  subsequent stages as well as execution of the sale deed by the Vendors taken  together with the contents of the stipulation made in Clause 2.3, providing for the  return of it, if for any reason the Vendors fail to fulfill their obligations under  Clause 2, strongly supports and strengthens the claim of the appellants that  the

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intention of the parties in the case on hand is in effect to treat the sum of Rs.38  lakhs to be part of the prepaid purchase-money and not pure and simple earnest  money deposit of the restricted sense and tenor, wholly unrelated to the  purchase price as such in any manner.  The mention made in the agreement or  description of the same otherwise as "deposit or earnest money" and not merely  as earnest money, inevitably leads to the inescapable conclusion that the same  has to and was really meant to serve both purposes as envisaged in the decision  noticed supra.  In substance, it is, therefore, really a deposit or payment of  advance as well and for that matter actually part payment of purchase price, only.   In the teeth of the further fact situation that the sale could not be completed by  execution of the sale deed in this case only due to lapses and inabilities on the  part of the respondents \026 irrespective of bonafides or otherwise involved in such  delay and lapses, the amount of rupees 38 lakhs becomes refundable by the  Vendors to the purchasers as of the prepaid purchase price deposited with the  Vendors.  Consequently, the sum of rupees 38 lakhs to be refunded would attract  the first limb or part of Section 55(6)(b) of the Transfer of Property Act itself and  therefore necessarily, as held by the learned Single Judge, the defendants prima  facie became liable to refund the same with interest due thereon, in terms of  Clause 2.3 of the agreement.  Therefore, the statutory charge envisaged therein  would get attracted to and encompass the whole of the sum of rupees 38 lakhs  and the interest due thereon.  In the light of the above, in our view, the learned  Single Judge on the original side was right in passing the order dated 23.10.2001  and the order of the Division Bench, taking a contrary view in the order under  challenge, is contrary to law and the reasons assigned therefor cannot be  countenanced.  Hence, the same is hereby set aside and the order of the learned  Single Judge shall stand restored and to be in force pending disposal of the suit.

       The question relating to manner of appropriation, attempted to be argued  before us, is really a matter, which has to be, properly speaking canvassed and  got adjudicated in the suit only and we express no opinion on the same.

       So far as the submission made that the injunction granted should not  completely foreclose the liberties of the respondents, if an appropriate offer  comes to sell the property after seeking directions of the judge on the original  side, we leave liberties with the parties as and when necessary to approach the  court before which the suit is pending for any such permission and the court after  hearing the plaintiffs as well on any such request may consider the request in this  regard on the defendants/respondents sufficiently securing and safeguarding the  interests of the plaintiff by depositing in court to the credit of the suit so much of  the sale consideration, as would be necessary to meet the claims of the plaintiffs  before granting any such permission so that  the amount so deposited may abide  by the ultimate decision in the suit, to satisfy the decree that may be passed.

       The appeal is accordingly allowed as indicated above.  No costs.