03 September 2004
Supreme Court
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CANBANK FINANCIAL SERVICES Vs CUSTODIAN .

Bench: N. SANTOSH HEGDE,S.B. SINHA,A.K. MATHUR
Case number: C.A. No.-000164-000164 / 1994
Diary number: 61706 / 1994
Advocates: JANENDRA LAL & CO. Vs


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CASE NO.: Appeal (civil)  164 of 1994

PETITIONER: Canbank Financial Services Ltd.                          

RESPONDENT: The Custodian & Others                                           

DATE OF JUDGMENT: 03/09/2004

BENCH: N. Santosh Hegde,S.B. Sinha & A.K. Mathur

JUDGMENT: J U D G M E N T With C.A. No. 165 of 1994

S.B. SINHA, J:

BACKGROUND FACTS:

       Andhra Bank (Respondent No. 3) is a nationalized bank.  Andhra  Bank Financial Services Limited (Respondent No. 4) is a company wholly  owned by Andhra Bank.  Canbank Mutual Fund (CBMF) is a subsidiary  company of Canara Bank, another nationalized bank.  The Appellant herein  is also a subsidiary of Canara Bank.  In or about 1989, Canbank Mutual  Fund floated an open ended investment scheme known as CANCIGO on an  assured return of 12.5% p.a. payable half yearly;  the lock in period wherefor  was one year.  A stipulation was also made to the effect that transfers are not  permitted.  Hiten P. Dalal (Respondent No. 2) was a registered stock broker.   Respondent No. 3 at his request applied for CANCIGO units of face value of  Rs. 11 crores.  Similarly, Respondent No. 4 also at the request of  Respondent No. 2 applied for CANCIGO units of face value of Rs. 22  crores.  Indisputably, the payment of application money for purchase of said  CANCIGO units was to be made, out of the monies lying in the bank  account of Respondent No. 2.  The Respondent Nos. 3 and 4 complied with  said request of Respondent No.2.  The CANCIGO  certificates received by  the Respondent Nos. 3 and 4 were handed over to the Respondent No. 2.   The interest accruing from the CANCIGO received by the Respondent Nos.  3 and 4 was also credited to the account of Respondent No. 2.  The said  Respondents did not claim any right, title or interest therein.  There had been  diverse dealings by and between the Appellant herein and the said  Respondent No. 2 in respect of the purchase and sale of shares and securities  of various companies.  A sum of Rs. 25,01,67,129/- was due and payable by  the Respondent No. 2 to the Appellant herein in respect of the said  transactions  as on 6th February, 1992.  Respondent No. 2 offered the  aforementioned CANCIGOs to the Appellant herein as a beneficiary thereof.   The said offer of the Respondent No. 2 was accepted in discharge of his  aforementioned liabilities to the Appellant. The Appellant on 6th February,  1992 paid the balance amount of consideration of the said CANCIGOs, viz.,  a sum of Rs. 7,98,32,871/- by a cheque  dated 11th February, 1992 drawn in  favour of the Respondent no.3 but the same was to be credited in the account  of Respondent No. 2.   

       In or about May, 1992 serious irregularities in security transactions  were discovered whereupon the Reserve Bank of India constituted a  Committee known as ’Jankiraman Committee’ to look into the real nature of  the transactions and to ascertain the true facts.  Investment in CANCIGO by  Respondent No. 3 found place in the report of the said Committee wherein it  was contended that it had made an application dated 28th August, 1991 for  investment in CANCIGOs  on behalf of Respondent No. 2 for 11 crores.    Pending investigation, the Appellant was advised not to part with the two  sets of CANCIGO certificates without the consent of the Reserve Bank of

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India.   

       The President of India promulgated an ordinance known as "The  Special Courts (Trial of Offences Relating to Transactions in Securities)  Ordinance, 1992".  It was repealed and replaced by ’The Special Courts  (Trial of Offences Relating to Transactions in Securities) Act, 1992 ("the  Act"), the Statement of Objects and Reasons wherefor are as under:-

"(1) In the course of the investigations by the  Reserve Bank of India, large scale irregularities  and malpractices were noticed in transactions in  both the Government and other securities, indulged  in by some brokers in collusion with the  employees of various banks and financial  institutions.  The said irregularities and  malpractices led to the diversion of funds from  banks and financial institutions to the individual  accounts of certain brokers.

(2)     To deal with the situation and in  particular to ensure speedy recovery of the huge  amount involved, to punish the guilty and restore  confidence in and maintain the basic integrity and  credibility of the banks and financial institutions  the Special Court (Trial of Offences Relating to  Transactions in Securities) Ordinance, 1992, was  promulgated on the 6th June, 1992.  The Ordinance  provides for the establishment of a Special Court  with a sitting Judge of a High Court for speedy  trial of offences relating to transactions in  securities and disposal of properties attached.  It  also provides for appointment of one or more  custodians for attaching the property of the  offenders with a view to prevent diversion of such  properties by the offenders."

       On or about 6th June, 1992 the Respondent No. 2 was declared to be a  ’notified person’ under the Act.

       In terms of the provisions of the Act, a Special Court was established.   The Special Court was conferred with exclusive jurisdiction in relation to the    matters specified therein as also trial of offences arising thereunder.   

CLAIM OF THE PARTIES BEFORE THE SPECIAL COURT:         Both the Custodian and the Appellant filed applications before the  Special Court which were registered as Misc. Application Nos. 13 of 1993  and 55 of 1993 respectively.

In its application, the Appellant prayed for the following reliefs:

"(a) that it be declared by this Hon’ble Court that: (i)     that the property/ debt in the CANCIGO  covered under the two certificates issued  by Canbank Mutual Fund are the  property of the petitioners; (ii)    that the CANCIGOs covered under the  said two certificates are not within the  purview of the Notification dated 6th June  1992 notifying Respondent No. 2 issued  by Respondent No. 1 under sub-section  (2) of Section 3 of the said Act. (iii)   In the alternative to prayer (ii) above, the  Respondent No. 1 subject to the  directions of this Hon’ble Court is

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entitled to deal with, dispose of and  encash the CANCIGOs under the said  two Certificates, pay the same to the  Petitioners and permit the Petitioners to  appropriate and/ or adjust the net  realization thereof in or towards the  satisfaction of Petitioners dues from the  Responent No. 1;

(b)     Without prejudice to prayer (a) above  and in the alternative, in the event of this  Hon’ble Court coming to the conclusion  that CANCIGOs under the said two  certificates are not the property of the  Petitioners and/ or the Petitioners are not  entitled to encash them, the Respondent  No. 1 and/ or Respondent No. 2 be  ordered and directed to pay to the  Petitioners a sum of Rs. 40,83,32,054/-  as per particulars more particularly  described in Exhibit "F" hereto with  further interest at the rate of 24% per  annum on the principal amount of Rs. 33  crores from the date hereof till payment  and/ or realization; (c)     that pending the hearing and final  disposal of the petition, the Respondent  be directed not to deal with, dispose of  and/ or encash the CANCIGOs covered  under the said two Certificates."

       However, the Custodian, in its application, prayed for the following  reliefs:

"(a)    that Canfina or any other Respondent who  may be in possession of the said CANCIGOS  worth Rs. 33 crores be ordered and directed by this  Hon’ble Court to handover to the Applicant the  said CANCIGOS together with any accrued  interest thereon.

(b)     that the CMF be ordered and directed by this  Hon’ble Court to handover to the Applicant the  accrued interest of Rs. 2,06,43,836/- and all future  sums of interest that may accrue on the said  CANCIGOS worth Rs. 33 crores.

(c)     that pending the hearing and final disposal  of his application CMF be ordered and directed by  this Hon’ble Court to handover to the Applicant  the said accrued interest of Rs. 2,06,43,836/- and  all further sums of interest that may accrue on the  said CANCIGOS worth Rs. 33 crores.

(d)     that pending the hearing and final disposal  of this application the Respondents be directed to  file an affidavit showing how the transactions  relating to the said CANCIGOS are reflected in  their respective books/ accounts."

The Respondent Nos. 2, 3 and 4 did not claim any interest in the said  CANCIGOS before the Special Court.   

By reason of the impugned judgment, the Special Court allowed the

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application filed by the Custodian and rejected that of the Appellant herein.   Hence these appeals.

JUDGMENT:         Before the learned Special Judge a contention was raised by the   Respondent No.1 to the effect that as the CANCIGOS were allotted in the  names of the Respondent Nos. 3 and 4, Respondent No.2 did not have any  interest therein.  A further contention was, however, raised that as the  Respondent No. 2 was the real owner thereof, he in view of the said  restriction on transfer could not have transferred any interest whatsoever  (whether limited or absolute) in favour of the Appellant.

       The learned Special  Judge noticed that although in its application the  Appellant had made out a case to the effect that the CANCIGOs  worth 33  crores were held by them by way of security but a different stand was taken  before it that they are the absolute owners thereof.  It was held that the  Appellant having claimed that possession of CANCIGOs  were delivered by  the Respondent No. 2 as security, they were not and could not have become  owners thereof as the Respondent No. 2 had no beneficial interest therein,  having regard to the fact that such interest was not admitted by the  Custodian and in that view of the matter the question of passing any right,  title or interest, legal or beneficial, in the CANCIGOS in favour of the  Appellant by the said Respondent would not arise.  Relying on a decision of  this Court in V.B. Rangaraj Vs. V.B. Gopalakrishnan & Ors. [AIR 1992 SC  453: (1992) 1 SCC 160], the learned Judge opined that the said decision is  an authority for the proposition that any transfer contrary to the Articles of  Association or terms of issue would not be valid.  The learned Judge held  that having regard to the fact that the transaction was illegal, the right, title  and interest of CANCIGOs  remained with Respondent No. 2 and, thus,  stood attached in terms of Section 3 of the Act, observing:

"Under Section 3 of the Special Court Act, any  property, movable or immovable, or both,  belonging to any person notified stands attached.   Therefore there is a statutory attachment of  "any  property belonging to the person notified".  The  definition "any property belonging to the person  notified" must necessarily include property in  which a person notified has a beneficial interest.   By virtue of Section 13 of the Special Courts Act,  the provisions of the Special Courts Act prevail  notwithstanding anything to the contrary in any  other law or contract.  Therefore, the Custodian is  making a claim under a statutory provision which  allows him to do so.  That statutory provision  creates no right in favour of third parties, including  the 5th Respondent.  Therefore, merely because the  Custodian claims on the footing of the 1st  Respondent is the beneficial owner does not ipso  facto give a right to the 5th Respondent to claim  that the beneficial interest in these CANCIGO’S is  transferable."

       Analysing the provisions of Section 4(2) of the Benami Transactions  Act and Section 13 of the Act, the learned Judge opined:

"Therefore, so far as the Custodian is concerned,  he can make a claim to any property even though  the same is held benami in some other person.  The  same can’t be done by the 5th Respondent.  The  provisions of the Benami Transactions Act would  squarely apply to the 5th Respondent.  It is the 5th  Respondent who can’t make a claim or bring an  action to enforce any right in respect of the  CANCIGO’s either against 1st or 2nd or 3rd

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Respondent or the Custodian.  Also, by virtue of  Section 4(2) of the Benami Transactions Act the  5th Respondent can’t be allowed to raise a defence  in respect of the CANCIGO’s  even to the extent  of claiming a beneficial interest."

       Repelling the contentions of the Appellant as regard applicability of  Section 58 of the Trusts Act, it was held that the expressions "any interest"  are of  very wide amplitude and  would, thus,  include a beneficial interest.          It was further held:

"It is thus clear that Respondent No.5 could not  have purchased the CANCIGO’s nor could the  beneficial interest in the CANCIGO’s be  transferred to them.  Respondent No.5 have got  thus no right, title or interest in the CANCIGO’s  and cannot be allowed to hold on to them.  This is  particularly so as they have now given up their  claim that these were deposited with them, as and  by way of security.  The claim, if any, of  Respondent No.5, against the 1st Respondent, is a  mere money claim.  The CANCIGO’s remain the  property of Respondent No.1 and stand attached.   They must be handed over by Respondent No.5 to  the Custodian.  It must be mentioned that, even if  the 5th Respondent  had claimed that the  CANCIGO’s were deposited with them as security  for repayment of debts due by the 1st Respondent,  the terms of issue would still have prevented any  interest being created in their favour.   

       It was directed:

"Under these circumstances, Application No.55  of 1993 is made absolute in terms of prayers (a).   Clarified that it is the 5th Respondent who must  hand over the concerned CANCIGO’S to the  Custodian.  Application No.55 of 1993 is also  made absolute in terms of prayer (b).  Prayer (a)  of Application No. 13 of 1993 stands rejected.   So far as prayer (b) of Application No. 13 of  1993 is concerned, the claim of 5th Respondent   being a money claim, the same will have to be  taken up at time of distribution of assets.  As set  out in Judgment dated 22nd July, 1993 in Misc.  Application No. 96 of 1993, the distribution  would have to be in the manner laid down under  Section 11 of the  Special Courts Act.  Therefore  so far as prayer (b) is concerned, this Petition is  adjourned sine die.  Office is directed to put this  Petition on board when the Court is considering  distribution of assets of Respondent No.1."

SUBMISSIONS:         Mr. Rohit Kapadia, learned senior counsel appearing on behalf of the  Appellant would submit that in the facts and circumstances of this case,  Respondent No. 2 having transferred the CANCIGO units in favour of the  Appellant, he had no interest therein warranting attachment under the Act.  It  was urged that the rights of the Custodian are the same as that of the notified  person.  The learned counsel would contend that as Respondent Nos. 3 and 4   claimed no right, title or interest of any nature whatsoever in the  CANCIGOs despite the fact that they were registered in their names, the  Respondent No. 2 must be held to have an interest therein by reason of his

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having made payment therefor and obtained possession thereof.  It was  pointed out that even the custodian contended before the Special Court that  the Respondent No. 2 had a beneficial interest and in that view of the matter  the question of the Custodian’s application seeking to enforce attachment  was not maintainable.

       It was argued that having regard to the provisions contained in Section  58 of the Indian Trusts Act the beneficial interest of Respondent No.2 was  transferable.  The purported bar to the effect that a CANCIGO holder cannot  create ’any interest’ therein or transfer them to a third person would not  apply to transfer of a beneficial interest keeping in view the fact that  restriction on transfer was on the Respondent Nos. 3 and 4 and not on the  beneficial owner.  No interest having been created in the Respondent No. 2  by any act or deed of Respondent Nos. 3 and 4, the beneficial interest  accrued in him by way of operation of law was transferable.  It was  contended that in the event it be held that the Respondent Nos. 3 and 4 could  not validly transfer any interest in favour of the Respondent No. 2, the  question of enforcing attachment would not arise as the legal title thereof  would remain vested in the Respondent Nos. 3 and 4.  In any event such an  absolute restriction on transfer is void under Section 10 of the Transfer of  Property Act and, thus, cannot be acted upon.   

       The learned counsel would contend that findings of the Special Court  to the effect that Respondent No. 2 had an interest therein which could not  have been transferred in terms of Section 6(d) of the Transfer of Property  Act is not correct.  It was urged that the question of repeal of Section 82 of  the Indian Trust Act by reason of The Benami Transactions (Prohibition)  Act, 1988 (for short ’The Benami Transactions Act’) would be of no  consequence as the provisions of the Indian Trusts Act, 1882 are not  exhaustive. It was argued that  Section 82 embodied a principle of equity  underlying creation of a "Resulting Trust" which was held to be applicable  even prior to enactment of the Indian Trusts Act.  Reliance in this  connection has been placed on Mussumat Ameeronnissa Khanum and  Mussumat Parbutty Vs. Mussumat Ashrufoonnisa [(1871) 14 MooIndApp  433].

       Mr. Subramonium Prasad, learned counsel appearing on behalf of the  Respondent No.1, on the other hand, would submit that no implied trust was  created by and between Respondent No. 2, on the one hand, and Respondent  Nos. 3 and 4, on the other, and in that view of the matter, no beneficial  interest could be created in favour of the Respondent No.2.

       In absence of any trust, Mr. Prasad would argue, Section 58 of the  Indian Trusts Act would not apply particularly having regard to the  provisions contained in Section 7 of the Benami Transactions Act whereby  and whereunder Section 82 of the Trusts Act has been repealed and, thus, the  question of there being an implied trust between Respondent No. 2, on the  one hand, and Respondent Nos. 3 and 4 on the other, would not arise.            Having regard to the objects and reasons of the Benami Transactions  Act, Mr. Prasad would submit, the right, title and interest in the CANCIGO  remained in the Respondent Nos. 3 and 4 and furthermore having regard to  the term of issue CANCIGOs s being non-transferable, no title passed on to  the Appellant herein in relation thereto.  Respondent Nos. 3 and 4, it was  contended, were bound by the conditions restricting transfer and in that view  of the matter the purported transfer in favour of the Appellant was void.   

       Section 4 of the Benami Transactions Act prohibits an action by the  beneficiary for recovery of the property and, in that view of the matter, the  Appellant herein could not have filed an application for the Custodian  claiming an interest therein.  But the said provision would not apply in the  case of the Custodian having regard to the fact that he had a duty to attach  the property belonging to a notified person and further in view of the fact  that in terms of Section 13 of the said Act, the provisions thereof had an  overriding effect over any other law for the time being in force as a result

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whereof the provisions of the Act would prevail over the Benami  Transactions Act.  Reliance in support of the said contention has been placed  on Solidaire India Ltd. Vs. Fairgrowth Financial Services Ltd. & Ors. [2001  (2) SCALE 1].

ISSUE:         The primal issue which arises for consideration is as to whether the  Respondent No. 2 had any transferable interest in respect of the securities in  question.

RESTRICTIONS ON TRANSFER :

       The relevant provisions of the CANCIGO Scheme are as under:

"12(a) Only the holder or any person specifically  authorized in this behalf by him and recognized as  such by the Trustee, shall be entitled to deal with  the Cancigos held by the holder thereof.

12(b)   ***     ***     ***

12(c)   A Cancigo-holder may dispose of or encash  Cancigos only by means of encashment slips in the  form prescribed by the Trustee.

12(d)   A Cancigo holder desirous of encashing ten  or more Cancigos held by him shall apply to the  Authorised Office for the purpose in the prescribed  form.  Upon such a request being found in order,  the number of Cancigos desired to be encashed  shall be paid to the holder thereof on signing a  duly stamped receipt for the amount.

13.     The contract for allotment of Cancigo with  an Applicant by the Trustees shall be deemed to  have been concluded on the Acceptance Date.  On  such conclusion of the contract for allotment, the  Trustees may deliver or send to the Applicant an  acknowledgement therefor.  The Trustees shall  thereafter issue to the Applicant one Cancigo  credit sheet representing the Cancigo allotted to  the Applicant, or, if the Applicant so desires and  the Trustees agree, such number of certificates in  such denominations as the Applicant may specify.

Provided that in that event the Trustees may charge  such fee for issuing more than one certificate as  the Trustees may consider appropriate.

19.     Except in the cases hereafter mentioned, no  Cancigo shall be transferable, nor shall any holder  thereof be entitled to create any interest therein,  whether by way of charge or otherwise, or assign  or transfer any part thereof, and the Trustee shall  not be bound to take any notice of any purported  transfer, assignment, charge, encumbrance, trust,  or any other interest sought to be created by the  holder.  Accordingly the Trustee shall recognize  only the holder thereof as having any right title or  interest in the Cancigo held by such holder.

22.     The Trustee shall not be required to  maintain any register of Cancigo holders.

25.     The Trustee shall not be bound by any

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notice or take notice of execution of any trust in  respect of any Cancigos and they shall recognize  only the Cancigo holders in whose name the same  shall have been entered as the holder or holders of  the Cancigos."

       In the Brochure for offer of CANCIGOS, the restriction on transfer of  CANCIGOS was stated in the following terms:

"Transfer of CANCIGO: Transfer of CANCIGO  holding from one person to another person is not  permitted.  However, in deserving cases Trustees  may permit addition of name/s to the existing  CANCIGO holding after duly considering the  same.  However, deletion of name of a CANCIGO  holder is permitted, generally, in the event of his  death and not otherwise."

       It is not in dispute that the CANCIGOS stood in the names of  Respondent No. 3 and Respondent No. 4.

       Note 4 appended to CANCIGO Credit sheet states:

"Cancigo holders cannot create any interest in  Cancigos or transfer them to a third person."

PROVISIONS OF THE RELEVANT STATUTES:

Indian Trusts Act:         Sections 58, 82 (as it then stood), and 88 of the Indian Trusts Act,  1882 read as under: "58. Right to transfer beneficial interest.--The  beneficiary, if competent to contract, may transfer  his interest, but subject to the law for the time  being in force as to the circumstances and extent in  and to which he may dispose of such interest:

82. Transfer to one for consideration paid by  another. \026 Where property is transferred to one  person for a consideration paid or provided by  another person, and it appears that such other  person did not intend to pay or provide such  consideration for the benefit of the transferee, the  transferee must hold the property for the benefit of  the person paying or providing the consideration.

       Nothing in this section shall be deemed to  affect the Code of Civil Procedure, section 317, or  Act NO.XI of 1859 (to improve the law relating to  sales of land for arrears of revenue in the Lower  Provinces under the Bengal Presidency), section  36.  

88.  Advantage gained by fiduciary \026 Where a  trustee, executor, partner, agent, director of a  company, legal advisor, or other person bound in a  fiduciary character to protect the interests of  another person, by availing himself of his  character, gains for himself any pecuniary  advantage, or where any person so bound enters  into any dealings under circumstances in which his

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own interests are, or may be, adverse to those of  such other person and thereby gains for himself a  pecuniary advantage, he must hold for the benefit  of such other person the advantage so gained."

Transfer of Property Act:         Sections 6(d) and 10 of Transfer of Property Act read as under: "6.What may be transferred. \027Property of any  kind may be transferred, except as otherwise  provided by this Act or by any other law for the  time being in force, \027         (a) *** (b) *** (c) *** (d) An interest in property restricted in its  enjoyment to the owner personally cannot be  transferred by him. 10. Condition restraining alienation. \027Where  property is transferred subject to a condition or  limitation absolutely restraining the transferee or  any person claiming under him from parting with  or disposing of his interest in the property, the  condition or limitation is void, except in the case  of a lease where the condition is for the benefit of  the lessor or those claiming under him: provided  that property may be transferred to or for the  benefit of a women (not being a Hindu,  Muhammadan or Buddhist), so that she shall not  have power during her marriage to transfer or  charge the same or her beneficial interest therein."

Sale of Goods Act:         Sections 4, 19 and 20 of Sale of Goods Act read as under: "4. Sale and agreement to sell.\027(1) A contract of  sale of goods is a contract whereby the seller  transfers or agrees to transfer the property in goods  to the buyer for a price. There may be a contract of  sale between one part-owner and another.  (2) A contract of sale may be absolute or  conditional.  (3) Where under a contract of sale the property in  the goods is transferred from the seller to the  buyer, the contract is called a sale, but where the  transfer of the property in the goods is to take  place at a future time or subject to some condition  thereafter to be fulfilled, the contract is called an  agreement to sell. 19. Property passes when intended to pass\027(1)  Where there is a contract for the sale of specific or  ascertained goods the property in them is  transferred to the buyer at such time as the parties  to the contract intend it to be transferred. (2) For the purpose of ascertaining the intention of  the parties regard shall be had to the terms of the  contract, the conduct of the parties and the  circumstances of the case. (3) Unless a different intention appears, the rules  contained in Sections 20 to 24 are rules for  ascertaining the intention of the parties as to the  time at which the property in the goods is to pass  to the buyer. 20. Specific goods in a deliverable state.\027Where  there is an unconditional contract for the sale of  specific goods in a deliverable state, the property  in the goods passes to the buyer when the contract

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is made, and it is immaterial whether the time of  payment of the price or the time of delivery of the  goods, or both, is postponed."

BENAMI TRANSACTIONS ACT:

       Sub-Section (1) of Section 3 of the Benami Act provides that no  person shall enter into any benami transaction.  Sub-Section (3) of Section 3  thereof provides that whoever enters into any benami transaction shall be  punishable with imprisonment for a term which may extend to three years or  with fine or with both.  Section 4 provides for a prohibition to the right to  recover property held benami either by way of claim or by way of defence.   Section 5 provides that all properties held benami shall be subject to  acquisition by such authority, in such manner and after following such  procedure, as may be prescribed.

       In terms of Section 7 inter alia Section 82 of the Indian Trusts Act,  1882 stood repealed.   

THE ACT:         Sections 2(c), 3, and 4 of Special Courts Act read as under: "2(c) "securities" includes-- (i) shares, scrips, stocks, bonds, debentures,  debenture stock, units of the Unit Trust of India or  any other mutual fund or other marketable  securities of a like nature in or of any incorporated  company or other body corporate; (ii) Government securities; and (iii) rights or interests in securities; 3. Appointment and functions of Custodian.-- (1) The Central Government may appoint one or  more Custodians as it may deem fit for the  purposes of this Act. (2) The Custodian may, on being satisfied on  information received that any person has been  involved in any offence relating to transactions in  securities after the 1st day of April, 1991 and on  and before  6th June, 1992 notify the name of such  person in the Official Gazette. (3) Notwithstanding anything contained in the  Code and any other law for the time being in force,  on and from the date of notification under sub- section (2), any property, movable or immovable,  or both, belonging to any person notified under  that sub-section shall stand attached  simultaneously with the issue of the notification. (4) The property attached under sub-section (3)  shall be dealt with by the Custodian in such  manner as the Special Court may direct. 4. Contracts entered into fraudulently may be  cancelled.-- (1) If the Custodian is satisfied, after such inquiry  as he may think fit, that any contract or agreement  entered into at any time after the 1st day of April,  1991 and on and before the 6th June, 1992in  relation to any property of the person notified  under sub-section (2) of section 3 has been entered  into fraudulently or to defeat the provisions of this  Act, he may cancel such contract or agreement and  on such cancellation such property shall stand  attached under this Act; Provided that no contract or agreement shall be

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cancelled except after giving to the parties to the  contract or agreement a reasonable opportunity of  being heard. (2) Any person aggrieved by a notification issued  under sub-section (2) of section 3 or any  cancellation made under sub-section (1) of section  4 or any other order made by the Custodian in  exercise of the powers conferred on him under  section 3 or section 4 may file a petition objecting  to the same within thirty days of the assent to the  Special Court (Trial of Offences Relating to  Transactions in Securities)Bill, 1992 by the  President before the Special Court where such  notification, cancellation or order has been issued  before the date of assent to the Special Court (Trial  of Offences Relating to Transactions in Securities)  Bill, 1992 by the President and where such  notification, cancellation or order has been issued  on or after that day, within thirty days of the  issuance of such notification, cancellation or order,  as the case may be; and the Special Court after  hearing the parties, may make such order as it  deems fit.

       The Special Court exercises all jurisdiction, powers and authority as  were exercisable, immediately before such commencement by any Civil  Court in relation to a matter or claim specified therein.   CANBANK MUTUAL FUND (CANCIGO) SCHEME, 1988:

       Canbank Mutual Fund framed a scheme known as CANCIGO  Scheme.  The said Scheme came into force on 22nd April, 1988.  The  provisions of the CANCIGO Scheme are applicable to the issue of units  called CANCIGOS by Canara Bank acting in its capacity as Trustee of the  Canbank Mutual Fund.   

       Condition 2(k) defines ’Cancigo Scheme’ to mean the Cancigo  Mutual Fund (Cancigo) Scheme, 1988 under which Cancigos are issued by  the Trustee.  ’Holder’ in terms of Condition 2(r) to mean a person who has  made an application to the Trustee and to whom not less than five Cancigos  have been issued or any person or persons nominated by the Trustee in this  behalf for the purpose of participating in the Cancigo Scheme.  Condition  No. 5 provides as to the person eligible to apply for the issue of Cancigos.   Condition No. 10 provides that all allotments should be at the discretion of  the Trustee.

IS THE CLOG ON TRANSFER ABSOLUTE?

       The Rules and Regulations framed by the Canbank Mutual Fund in  relation to the issuance of CANCIGO certificates do not have any statutory  backing.  The CANCIGOs had a lock in period of one year which means that  the holder thereof must not encash the securities within the aforementioned  period.  The question as regard the non-transferability of the units will have  to be construed upon reading the scheme in its  entirety and in particular the  Condition No. 22 thereof, in terms whereof  the Trustees were not required  to maintain any register of CANCIGO holders.  In terms of Condition No.  24, the person whose name is shown in a CANCIGO Certificate would be  the only person to be recognized by the Trustees as the holder of such  Cancigo and as having any right, title or interest in or to such securities.  No  Trust created was also to be recognized.

 Condition No. 19 creating a bar on transfer has to be construed in the  aforementioned context.  The bar on transfer created was to have the effect  that the same would not be binding on Canbank Mutual Fund as it was not  bound to take any notice thereof and only the holder shall be recognized as  having the right, title or interest on the CANCIGO.  

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       The expressions contained in Condition No. 19 of CANCIGO Scheme  differ in material particulars from the expressions used in the Brochure in  terms whereof transfer of CANCIGO from one person to another person is  not permitted.  Permission is not a legal restriction.  However, in deserving  cases Trustees may permit addition of names to the existing CANCIGO  holding after duly considering the same.  Permission/Approval  subsequently  granted would validate the grant.  [See Graphite India Ltd. and Another vs.  Durgapur Projects Ltd. and Others \026 (1999) 7 SCC 645]. CANCIGOs   indisputably are valuable securities.  They are otherwise capable of being  transferred in terms of the established business practice, the Sale of Goods  Act or Transfer of Property Act.  No legal bar has been created in transfer of  the said securities.  The scheme, thus, does not and could not have created an  absolute legal bar on transfer of the CANCIGOs so as to invalidate the same.

EFFECT OF THE BAR:

       The Rules and Regulations framed by Canbank Mutual Fund and the  notes appended to the CANCIGO Credit Sheet differ in material particulars.   Rules and Regulations explain as to why an embargo in transfer has been  placed, i.e., not to recognize the Respondent No. 3 for the dividends or for   other liabilities arising out of transfer.  A transfer violating the rules and  regulations would only have the effect of the same being not binding the  Canbank Mutual Fund.  No other legal consequence flows therefrom.  We  have also noticed that the Brochure merely states that the transfer is not  permitted but provisions exist for grant of such permission.  The Appellant  Bank as well as Canbank Mutual Fund are the subsidiaries of the Canara  Bank.   The Appellant cannot be estopped from raising either a limited or  absolute title in them keeping in view of the fact that they had paid a sum of  33 crores of rupees by way of consideration for transfer of interest of the  Respondent No. 2 herein in the said CANCIGOS.

EFFECT OF SECTION 10 OF TRANSFER OF PROPERTY ACT:

       As would appear from the discussions made hereinafter that by reason  of the legal consequences of the relationship of the banker and the customer,  vis-‘-vis, the transaction in question, a beneficial trust has been created.  The  same would, thus, be transferable as otherwise it would be hit by Section 10  of the Transfer of Property Act.  When there exists such a condition; in  terms of Section 10, an absolute restrain is void whereas partial restraint is  not.  Section 10 would not be attracted only when the restriction as to  alienation is only partial.  (See Mohammad Raza and Others Vs. Mt. Abbas  Bandi Bibi, AIR 1932 PC 158).  A stipulation taking away the whole power  of alienation substantially is a question of substance and not of form.   Section 10 limits the application of such stipulation.   

TRUST WHETHER CREATED:

       Chapter IX of the Indian Trusts Act provides for certain obligations in  the nature of trusts.  A Trust is an obligation annexed to the ownership of  property, and arising out of a confidence reposed in and accepted by the  owner or declared and accepted by him, for the benefit of another, or of  another and the owner.  A trust in terms of Section 4 of the Trust Act may be  created for any lawful purpose.   

       When a real or personal property is purchased in the name of another,  a presumption of resulting trust arises in favour of the person who is proved  to have paid the purchase money as a result whereof  a beneficial interest in  the property results to the true purchaser.  Law relating to trust has not  recognized only a resulting trust but other kinds of trust as well.  When an  express trust is created by reason of an agreement between the parties and  one of them being a beneficiary thereof,  the same would be transferable.   

A beneficial interest in the trust is created in different situations.  (See,  for example, Barclays Bank Vs. Quistclose Investments [1970] AC 567)

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       In Barclays Bank (supra) a company which was substantially indebted  to the bank needed funds in order to pay a dividend on its shares.  Quistclose  Investments advanced the necessary funds on the basis that they were only  to be used for this purpose and they were paid into a separate account at the  bank, which was made aware of the arrangement.  The company went into  liquidation before the dividend had been paid.  If Quistclose Investments  were no more than a creditor of the company, then the funds in the bank  would belong to the company and the bank would be entitled to set off the  credit balance of the account against the substantially greater indebtedness  of the company.  If, on the other hand, the funds were held on trust for  Quistclose Investments, its proprietary interest therein would enjoy priority  over the rights of the bank.  The House of Lords held that arrangements for  the payment of a person’s creditors by a third person give rise to "a  relationship of a fiduciary character or trust, in favour as a primary trust, of  the creditors, and secondarily, if the primary trust fails, of the third person".   Once the primary purpose was fulfilled, the third person would be no more  than an unsecured creditor.  However, there was "no difficulty in  recognizing the co-existence in one transaction of legal and equitable rights  and remedies".  Since the purpose for which the funds had been advanced  had failed, the funds were still held on trust for Quistclose Investments,  whose beneficial interest was binding on the bank because it had been aware  of the basis on which the funds had been transferred." [See  Equity & Trusts, 2nd Edition by Alastair Hudson, page 307]           In that case the common intention of both the parties was that the fund  in question should be held on trust.  The principle in Barclays Bank (supra)  has been applied both where part of the funds advanced had indeed been  used for the specific purpose in question, holding that the creditor was  entitled to recover whatever was left (See Re EVTR (1987) B.C.L.C. 647) as  also where the funds, although advanced for a specific purpose, were paid  not by way of loan but rather in satisfaction of a contractual debt. [See   Carreras Rothmans Ltd. V. Freeman Mathews Treasure Ltd. [(1985) Ch.  207]

       In this case, the Respondent Nos. 3 and 4 acted in consonance of the  confidence reposed upon them.   

       Had Respondent Nos. 3 and 4 not disclosed that the applications for  allotment of CANCIGOs were for the benefit of the 2nd Respondent herein,  Section 88 of the Indian Trusts Act  would have been attracted..

       A transaction which falls within the purview of Section 88 of the  Indian Trusts Act does not fall within the category of benami transaction in  terms of the provisions of the Benami Transactions Act.  (See  P.V. Sankara  Kurup Vs. Leelavathy Nambiar, AIR 1994 SC 2694).    

       The list of persons specified in Section 88 of the Indian Trusts Act is  not exhaustive.  The expression ’other person bound in fiduciary character to  protect the interests of other persons’ includes a large variety of relationship.   The heart and soul of the matter is that wherever as between two persons one  is bound to protect the interests of the other and the former availing of that  relationship makes a pecuniary gain for himself, the provisions of Section 88  would be attracted, irrespective of any designation which is immaterial.  The  said principle would also apply for a banker holding the customer’s money.

       A fiduciary would not be liable for any action if there is no  concealment by him or no advantage taken by him.   

A civilized society furthermore always provides for remedies for  cases of what was been called unjust enrichment or unjust benefit derived  from another which it is against conscience that he should keep.  (See  Fibrosa Spolka v.Akcyjna Vs. Fairbairn Lawson Combe Barbour, Ltd.  (1942) 2 All ER 122)]

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       In Carreras Rothmans Ltd. V. Freeman Mathews Treasure Ltd.  [(1985) Ch. 207 at page 222], it is stated :

"\005.equity fastens on the conscience of the person  who receives from another property transferred for  a specific purpose only and not therefore for the  recipient’s own purposes, so that such person will  not be permitted to treat the property as his own or  to use it for other than the stated purpose."

       The parties to the transactions cannot enter into any benami  transaction so as to get any property transferred in their names for  consideration, i.e., paid by a third party.  A presumption, thus, arises that the  parties never intended that the transaction would be a benami one.  By  reason of the said transaction, a cestui qui trust was created, inasmuch as the  Respondent Nos. 3 and 4 applied for allotment of CANCIGOs on behalf of  the Respondent No. 2 and not on their own behalf.  The trust was created for  a purpose, namely, the benefit arising therefrom would be appropriated by  the Respondent No. 2.  The principle of cestui qui trust is a synonym of a  beneficiary.  The said principle is not confined to the ingredients of Sections  82 of the Indian Trusts Act.  It also covers cases falling under Section 88  thereof. Thus if it be held that the properties were acquired by the  Respondents Nos. 3 and 4 in their own names in breach of their obligations  while acting as an agent of the Respondent No. 2, the case would be covered  under Section 88 of the Indian Trusts Act.  Section 88 of the Trusts Act has  not been repealed by Section 7 of the Benami Transaction Act.  In such a  case the Benami Transactions Act would not operate.   

       A beneficial interest indisputably can be transferred.  For the said  purpose, the only legal requirement will be essence of  a trust.  The right of a  beneficiary to transfer his interest being absolute, the transferee derived  rights, title and interest therein.

       Furthermore, the legal effect of a document cannot be taken away  even if the property is chosen to conceal by a device the legal relation.  [See  Commissioner of Income Tax, Hyderabad Vs. Nawab Mir Barkat Ali Khan  Bahadur, AIR 1975 SC 838 at 845].

       In Hem Chandra Roy Chaudhury Vs. Suradhani Debya Chaudhurani  and Others [AIR 1940 PC 134], it is held:

"\005No doctrine of the law of India has been  indicated to their Lordships which prevents a  beneficiary under a trust from dealing with his  interest by way of mortgage, though it is true  enough that in India such an interest is not  technically regarded as an equitable estate."            Furthermore, the doctrine of resulting trust was applicable in India  even before the Indian Trusts Act came into force.  [See Mussumat  Ameeronnissa Khanum and Mussumat Parbutty (supra)].   We, therefore, are  of the opinion that the Respondent No.2 had a transferable interest in the  CANCIGOS.

ALLOTMENT OF CANCIGO \026 IS IT A TRANSFER?

       The allotment of CANCIGOS is not a transfer as thereby Canbank  Mutual Fund had allowed the shares not as owner thereof.  The Benami  Transactions Act applies when there is a transaction in which the property is  transferred.  If allotment of CANCIGOS is not a transfer of property, the Act  would not apply.   [See Sri Raj Sachdeva Vs. Board of Revenue [AIR 1959  All 595] and The Swadeshi Cotton Mills, Co., Ltd. , In re. [1932 Comp. Cas  411].

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       In Madura Mills Co. Ltd., In re. [1937 Comp. Cas 71], Varadachariar,  J. stated the law thus:

"As we have already observed, it is no doubt true  that in the hands of a shareholder, a share is  property and when a shareholder exchanges his  shares with another it may be possible to regard  the transaction as amounting to a transfer whether  by way of exchange or conveyance: Cf. Coats v.  Inland Revenue Commissioners (1897) 2 Q.B.  423.  But when the company is for the first time  issuing shares, it seems to us that there is no  question of property already possessed by the  company being thereby transferred to the allottee."

Even assuming that the Benami Transactions Act  as also the bar on  transfer imposed by Canbank Mutual Fund (CBMF) would apply, the  properties would remain vested in Respondent Nos. 3 and 4 and Respondent  No. 2 would have no interest therein which would attract the provisions of  Sub-section (3) of Section 3 of ’the  Act’.  

BENAMI TRANSACTIONS ACT - APPLICABILITY:

       Benami transactions in India were generally recognized by the Courts.   But the same had not been given effect to when the transaction  

(a)     violates the provisions of any law; or  (b)     defeats the rights of innocent transferees for value from the  banamidar without notice; or when (c)     the object of the benami transaction was to defraud the creditors of  the real owner and that object has been accomplished; or when (d)     it is against public policy.

       Benami Transactions, however, used to be effected for various  purposes \026 to avoid taxes, to avoid ceiling laws etc.  Blank transfers of  shares had also posed serious problems as dividends are paid to the  registered shareholders and not to the real shareholders as in the case of  benami holdings of shares, but despite the same the transactions have not  been declared to be invalid in law by any statute including the Benami  Transactions Act.

       ’Benami Transaction’ has been defined in Section 2(a) of the Benami  Transactions Act  to mean any transaction in which property is transferred to  one person for a consideration paid or provided by another person.   ’Transfer’ of property, therefore, is sine qua non for attracting the said  definition.         In a transfer involving benami transaction, three parties are involved.   The benamidar may be a party therein.  In this case, the parties to the  transactions are public sector undertakings being scheduled banks and their  subsidiaries.  A presumption would, thus, arise that they would not  encourage any benami transaction nor would involve themselves therein.  In  a situation of this nature and, in particular, having regard to the fact that a  disclosure was made by the Respondent Nos. 3 and 4 in their applications  for allotment of CANCIGO; that the same were filed on behalf of the  Respondent No. 2 herein, the intention of the parties was not to enter into a  benami transaction.   

        The Benami Transaction Act is not a piece of declaratory or curative  legislation.  It creates substantive rights in favour of benamidars and  destroys substantive rights of real owners who are parties to such  transactions and for whom new liabilities are created by the Act.  A statute  which takes away the rights of a party must be strictly construed. [See R.  Rajagopal Reddy (dead) by L.Rs. and ors. Vs. Padmini Chandrasekharan  (dead) by L.Rs. AIR 1996 SC 238].

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       The evil of benami transaction was sought to be curbed by reason of  the provisions of the Urban Land (Ceiling and Regulation) Act, 1976, the  State Ceiling Laws, Income Tax Act, 1961 as amended by the Taxation  Laws (Amendment) Act, 1975 (See Sections 281 and 281A of the Income  Tax Act), Section 5 of the Gift Tax Act, 1958, Section 34 B of the Wealth  Tax Act and Section 5(1) of the Estate Duty Act (since repealed).  It is only  with that view the Benami Transactions (Prohibition) Act, 1988 prohibiting  the right to recover benami transaction was enacted.  Section 5(1) provided  that all properties held benami shall be subject to acquisition as different  from forfeiture provided for in the Smugglers and Foreign Exchange  Manipulators (Forfeiture of Property) Act, 1976.  But even Section 5 had not  been made workable as no rules under Section 8 of the Act for acquisition of  property held benami were framed.

       A nationalized bank cannot hold somebody else’s property in its  name.   We do not know as to under what circumstances it applied for  allotment of CANCIGOs  in its name on behalf of the Respondent No. 2.   We have also not been informed at the Bar as to whether there exists such a  practice or the same is otherwise permissible.  We in these matters, however,  are not concerned with an ethical question.  We are also not concerned with  the misconduct of any officer of the Bank, criminal or otherwise, in this  behalf.  This Court is only concerned with the validity of the transactions.   We have noticed hereinbefore that in a case of this nature a beneficial  interest is created within the meaning of the provisions of Section 88 of the  Indian Trusts Act in view of the fact that the Respondent Nos. 3 and 4 have  applied the money of the Respondent No. 2 for allotment of CANCIGO  in  their own names and applied for allotment of the certificates on behalf of the  Respondent No. 2 and not on their own behalves.  It is, therefore, not a case  where the transaction was benami in nature.  It does not appear also to be a  case where the parties entered into a transaction with a view to contravene  any law.  It is also not a case where any amount belonging to a bank has  been utilized by a customer.  The Respondent Nos. 3 and 4 have  not  claimed any right, title and interest in CANCIGOS.  In view of the  aforementioned circumstances, provisions of the Benami Transactions Act  would  have no any application whatsoever.                  ROLE OF CUSTODIAN UNDER THE ACT:

       The Custodian has three main functions to perform: (i)     He has the authority to notify a person in the Official Gazette, on  being satisfied on information received that he has been involved  in any offence relating to transactions in securities during the  period 1-4-1991 to 6-6-1992. (ii)    He has the authority to cancel any contract or agreement relating to  the properties of the notified persons which, in his opinion, has  been entered into fraudulently or for the purpose of defeating the  provisions of the Act as specified in Section 4. (iii)   He is required to deal with the properties in the manner as directed  by the Special Court.

       The properties of a notified person do not vest in the Custodian.  He is  not a receiver within the meaning of the provisions of the Code of Civil  Procedure or an Official Receiver or an Official Assignee under the  Insolvency laws.  He is also not an Official Liquidator under the Companies  Act. His  right is same as that of the notified person.  Only when the notified  person had a subsisting right in a property, the same being subject to  statutory attachment, the custodian can approach the special court for an  appropriate direction in relation thereto.  In other words, the custodian is not  permitted to deal with any property which did not belong to the notified  person on the relevant date.

ARE THE TRANSACTIONS ILLEGAL?

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       The Canbank Mutual Fund having regard to the materials on records  must be presumed to have issued the CANCIGOs in the names of the  Respondent Nos. 3 and 4 with full knowledge that they would enure to the  benefit of the Respondent No. 2.  The effect of  grant of CANCIGOs by the  Canbank Mutual Fund despite such knowledge does not strictly fall for our  consideration but the same is relevant to determine the nature of illegality of  the transaction, if any.   It is one thing to say that they could not have done  so having regard to the scheme, but it is another thing to say that the same  was illegal.  The area of law concerning illegality and resulting trust has  undergone some changes in view of a recent decision of the House of Lords  in Tinsley Vs. Milligan reported in 1993 (3) All E.R.65.  In the said case,  Lord Browne-Wilkinson specified the core applicable principles which are  as under:

"1.     Property in chattels and land can pass under  a contract which is illegal and therefore  would have been unenforceable as a  contract. 2.      A plaintiff can at law enforce property rights  so acquired provided that he does not need  to rely on the illegal contract for any  purpose other than providing the basis of his  claim to a property right. 3.      It is irrelevant that the illegality of the  underlying agreement was either pleaded or  emerged in evidence: if the plaintiff has  acquired legal title under the illegal contract  that is enough."

It was held that illegality being not the source of Milligam’s equitable  rights as her contribution to the purchase price was the source therefor.  In  that case, Respondent did not have to rely on her own illegality because she  was entitled to an equitable share in the property in any event because she  had contributed to the purchase price.  The principles evolved in Tinsley  (supra)  apply to the fact of the present case.  The said decision was followed  by this Court in B.O.I. Finance Ltd. Vs. Custodian and Others [(1997) 10  SCC 488].

The Scheme suggests that Canbank Mutual Fund intended to absolve  itself from such responsibilities.

       Does by such contract the holder of a unit is debarred from  transferring a valuable security?  The answer to that question must be  rendered in the negative.  A transfer can be held to be invalid provided it is  forbidden in law.  It is one thing to say that the founders of the Scheme  would not recognize any transfer so as to make it liable to pay dividend to a  person other than the person in whose name a unit is held but it is another  thing to say that it is not legally transferable.  In this case, the Court is not  concerned with the question whether in the facts and circumstances of this  case the Appellant should have accepted the units of face value of Rs. 33  crores  and adjusted a sum of Rs. 25,01,67,129/- followed by issuance of a  cheque of Rs. 7,98,32,871/-, but with the question as to whether such a  transaction was legally impermissible.  The case at hand poses a peculiar  problem.  Respondent Nos. 3 and 4 applied for allotment of CANCIGOs  in  their name under the instructions of Respondent No. 2.  Respondent Nos. 3  and 4 were not to invest their own money.  The consideration paid towards  the allotment of the units was paid from the account of the Respondent No.  2.  Even the dividends paid to them at the first instance were credited in the  account of the Respondent No. 2.  Respondent Nos. 3 and 4 had never  claimed any right, title or interest in the said securities.  Respondent No. 4 in  its affidavit dated 26th July, 1993 had categorically stated:

"I say and submit that Respondents No. 4 are  neither necessary nor proper parties to the petition  inasmuch as Respondents No. 4 have no claim

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whatsoever in the subject securities."

       A similar statement had been made by Respondent No. 3.  Respondent  Nos. 3 and 4 did not claim any right, title or interest as evidently the  possession of CANCIGOS were delivered in favour of the Respondent No.  2.   

       Even the Benami Transactions Act while prohibiting benami  transactions does not provide that by reason of such a transaction no title  whatsoever would pass or the property would vest in the State as for  acquisition of benami property recourse to Section 5 of the Act has to be  resorted to.  In absence of any proceedings taken and a binding order passed  in terms of Section 5 of the Benami Transactions Act, only Section 4 of the  Act would apply.   

       Respondent Nos. 3 and 4 by reason of the said transaction held  themselves to be the trustees of Respondent No. 2 in relation to the securities  in question.  They applied for allotment for the benefit of Respondent No. 2.   They never enforced any claim in relation to the said securities in a court of  law and, in fact, disclaimed any right, title or interest therein.  Possession of  the securities which are movable properties has been handed over to them.   No statutory provision has been brought to our notice forbidding such  transfer.  The Respondent Nos. 3 and 4, therefore, were not statutorily  prevented from entering into such a transaction.

In other words, the concerned parties, namely, Canbank Mutual Fund,  the Respondent Nos. 3 and 4 as well as the Respondent No. 2 became a party  to an arrangement which may be unethical but not illegal.

       A contract may be unlawful or partly lawful or partly unlawful.  If it is  lawful, it will be given effect to whereas in case it is wholly unlawful being  opposed to the public policy, it would not be.  In case a transaction is partly  lawful and partly unlawful, if they are severable, the lawful part shall be  given effect to.  [See B.O.I. Finance Ltd. (supra)].

       The said decision is also an authority for the proposition that the  position of the custodian is same as that of the notified person himself.  If by  any law the Respondent No. 2 was not precluded from transferring the  shares held by him, the transfer  thereof in favour of the Appellants was  legal.  The transaction took place on 6.2.1992, i.e., much prior to 6.6.1992  when Respondent No. 2 became a notified person.  If on or after 6.2.1992,  Respondent No. 2 had no interest in the CANCIGOs, the same could not  have been the subject matter of attachment of the custody.  The custodian  could attach the property only when the right, title and interest thereto  remain on the Respondent No. 2 and not otherwise.

       In B.O.I. Finance Ltd. (supra) the question which fell for  consideration of this Court was as to whether ready-forward or buy-back  transactions are valid.  In that case the nature of transaction was not in  dispute.  The transaction consisted of two interconnected legs, namely, the  first or the ready leg, consisting of purchase or sale of certain securities at a  specified price and the second or forward leg, consisting of the sale or  purchase of the same or similar securities at a later date at a price determined  on the first date.  It was held that the first leg of the transaction was not  illegal whereas the second leg of the transaction was contrary to the  provisions of the Securities Contracts (Regulation) Act, 1956. In the said  decision, non-compliance of the direction issued by the Reserve Bank also  came up for consideration and this Court in no uncertain terms held that  whereas non-compliance thereof may result in prosecution but would not  result in invalidation of any contract entered into  by the bank with a third  party.

       It was opined : "60. In the present case the appellants are basing

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their claim by relying not on the terms of the  ready-forward contract, but on the payment of  market price against delivery of the securities. The  claim to title is independent of the ready-forward  agreement. 61. There can be little doubt that the appellants,  when they paid the market price and took delivery  of the securities had become owners of the same.  According to Section 5 of the Transfer of Property  Act, 1882, "transfer of property" inter alia means  an act by which a person conveys property to  another person. Section 6 of this Act deals with  what property may be transferred. What is relevant  in Section 6(h) according to which no transfer can  be made (1) insofar as it is opposed to the nature of  the interest affected thereby, or (2) for an unlawful  object, or consideration within the meaning of  Section 23 of the Indian Contract Act, or (3) to a  person legally disqualified to be transferee.  According to Section 23 of the Contract Act the  consideration or object of an agreement will be  unlawful if it is forbidden by law; or is of such a  nature that, if permitted, it would defeat the  provisions of any law, or is fraudulent, or involves  or implies injury to the person or property of  another, or the court regards it as immoral or  opposed to public policy, In the instant case the  object of the contracts entered into between the  banks and the notified parties was for the transfer  and, subsequently, re-transfer of the securities. The  transfer took place on delivery of securities on  payment of market price as consideration. The  consideration for the transfer of the securities, in  the ready leg, was the payment of market price. 62. The validity of the transfer of the securities has  to depend on the provisions of the Transfer of  Property Act and the Sale of Goods Act relating to  transfer and not to the validity of the agreement  preceding the transfer. Like any other moveable  goods the securities could validly be purchased on  delivery against payment of price as per Sections  4, 19 and 20 of the Sale of Goods Act. The price  paid, while taking delivery, was the consideration  for the transfer of the securities. When the transfer  of title has taken place the agreement between the  parties preceding this cannot invalidate the  transfer\005"  

       This decision applies in all fours to the fact of the present case.

       Right, title and interest in a movable property can pass by delivery of  possession and upon paying of the considerations in view of the provisions  of the Sale of Goods Act.  Passing up of a title in favour of the transferee  would not be illegal, unless it is forbidden by law.  For the said purpose, the  transaction must attract the wrath of Section 23 of the Indian Contract Act  and not otherwise.  Section 3 of the Act does not contemplate extinction of  right of a third party.  For getting the transaction invalidated in law, only  Section 4 of the Act can be taken recourse to.   

       The constitutional validity of the Act came up for consideration before  this Court in Harshad Shantilal Mehta Vs. Custodian and Others [(1998) 5  SCC 1].  The vires of the said statute was upheld, inter alia,  on the ground  that by reason thereof the right, title and interest in a property belonging to  Respondent No. 3 is not affected.  The interest of the Appellant, thus, was  not affected by the said Act or by the Benami Transactions Act.  Extinction

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in right, title and interest in a property must be caused  as a result of  operation of law and not otherwise.  Creation of title by an act of parties is   subject to law.  Once a title vests in a person he cannot be divested   therefrom except by reason of or in accordance with a  statute and not  otherwise.  An admission does not create a title; the  logical corollary  whereof would be that an admission of a party would not lead to  relinquishment of his right therein, if he has otherwise acquired a title in the  property.           Title in a property connotes a bundle of rights.  Subject to prohibitory  or regulatory statute, such rights are capable of being transferred.  Apart  from the provisions of Benami Transactions Act, no other provision  operating in the field which would negate the claim of the Appellant was  pointed out.  As discussed hereinbefore, the Benami Transactions Act will  have no application in the instant case.    

It is also not a case where a transfer has been made by a company  beyond its articles.   Appellant has not acted ultra vires its articles.   Furthermore, it is one thing to say that a transfer is made contrary to Articles  but it would not be correct to contend that the same was prohibited by terms  of issue.   

ATTACHMENT :

       Attachment under sub-Section (3) of Section 3 of the Act is subject to  an encumbrance, if any.  Even if a limited right is transferred by a notified  person to a third party, the order of attachment, if any, must be subject to the  said right of the third party.  In other words, under all circumstances, the  right of a third party must be recognized.  It is now well-settled,  in view of   the decision of this Court in C.B. Gautam vs. Union of India & Others  [(1993) 1 SCC 78], that even where a statute providres for compulsory  purchase, the property will not vest in the Government free from all  encumbrances but would vest subject to the encumbrances.    In C.B. Gautam (supra), this Court held:

"36\005Reading down is not permissible in such a  manner as would fly in the face of the express  terms of the statutory provisions.  In view of the  express provision in Section 269-UE that the  property purchased would vest in the Central  Government "free from all encumbrances"  (emphasis supplied) it is not possible to read down  the section as submitted by learned Attorney  General.  In the result the expression "free from all  encumbrances" in sub-section (1) of Section 269- UE is struck down and sub-section (1) of Section  269-UE must be read without the expression "free  from all encumbrances" with the result the  property in question would vest in the Central  Government subject to such encumbrances and  leasehold interests as are subsisting thereon except  for such of them as are agreed to be discharged by  the vendor before the sale is completed\005"

       In V.B. Rangaraj (supra), whereupon reliance has been placed by the  learned counsel for the Respondents, transfer was contrary to the Articles of  the Company.  This Court therein had no occasion to consider the effect of a  transaction which is contrary to the terms of issue.  The said Act provides for  certain statutory consequences which must be kept within the four corners  thereof.  The Learned Special Judge, therefore,  erred in asking unto itself a  wrong question that the statutory provisions create no right in the third party  including the Appellant herein.  The question which should have been posed  was : Had any right, title or interest of Respondent No. 2 existed on the  notified date in the said CANCIGOS authorizing the Custodian to act in

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terms of Section 3?  The answer to that question must be rendered in the  negative.  It is no doubt true that Section 13 of the said Act provides for a  non-obstante clause but before the said clause is resorted to, it must be  shown that there exists a provision inconsistent with the provision in any  other Act.  In any event, if Respondent Nos. 3 and 4 could transfer or  relinquish its right in favour of Respondent No. 2 who in turn could transfer  the same to the Appellant, provisions of the said Act would not entitle the  custodian to claim a property which ceased to be the property of the  Respondent No. 2.  Here again, the learned Special Judge committed an  error in holding that by reason of Section 4(2) of the Benami Transactions  Act, the Appellant is forbidden from raising a defence in respect of the  CANCIGOs although such a bar would not apply in the case of the  Custodian.

       The Appellant, in our opinion, had also the requisite locus to maintain  its application before the Special Court with a view to show that it having an  interest in the CANCIGOs, the same is beyond the purview of purported  automatic attachment under Section 3(3) of the Act and consequently neither  the custodian derived any right to deal therewith nor the special court could  issue any direction in relation thereto.  In any event having regard to the  provision contained in Section 9A of the Act, all claims relating to the  properties which are claimed to have been statutorily attached must be  adjudicated by the Special Court only.  The claim petition of the Appellant  was, thus, maintainable.            In V.B. Rangaraj (supra), this Court held that shares being movable  property, a shareholder has a free right to transfer his shares.  Such right can  only be taken away by Articles of Association and not otherwise.

       The stand of the custodian, in this behalf, is inconsistent and self- contradictory.  If by reason of the embargo placed on transfer of any  CANCIGO, the right remains vested in the Respondent Nos. 3 and 4, the  question of the same being subject to attachment would not arise.  However,  if, according to the custodian, right, title and interest in the CANCIGOS  vested in the Respondent No. 2, he being a third party can transfer his  interest, as he was not bound by the rules for allotment.  On the one hand, it  is contended that the Respondent Nos. 3 and 4 were bound by the conditions  imposed by Canbank Mutual Fund and on the other a contention was  raised  that they  were benamidars.  Both cannot stand together.  Similarly, a  contention has been raised that the condition contained in Note No. 4 of the  Credit Sheet is an absolute restraint on alienation, but at the same time it is  contended that even the third party cannot transfer his interest (if he has any)  in favour of another although a transfer can be given effect to after the  expiry of the lock-in period.  

       Furthermore, in a case of this nature, the Respondent No. 2 did not  hold any personal interest which would come within the purview of Section  6(d) of the Act.  An interest in the CANCIGOS was not created in the  Respondent No. 2 for enjoyment in his personal capacity.  Section 6(d) of  the Transfer of Property Act would apply when a transfer is in violation of  such stipulation which would defeat the object thereof.  The learned Special  Judge, therefore, committed an error in invoking Section 6(d) of the Transfer  of Property Act.

       In Nallajerla Krishnayya Vs. Vuppala Raghavulu [AIR 1958 AP 658},  it is stated:

"5\005If, on a construction  of the relevant terms of  the instrument, the Court comes to the conclusion  that rights were created against the property, the  matter is taken out of the purview of Section 6(d)  of the Transfer of Property Act."

       In Harshad Shantilal Mehta (supra), this Court held:

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"18. The last question can be answered first. As  stated above, Section 3(3) clearly provides that the  properties attached are properties which belong to  the person notified. The words "belong to" have a  reference only to the right, title and interest of the  notified person in that property. If in the property  "belonging to" a notified person, another person  has a share or interest, that share or interest is not  extinguished. Of course, if the interest of the  notified person in the property is not a severable  interest, the entire property may be attached. But  the proceeds from which distribution will be made  under Section 11(2) can only be the proceeds in  relation to the right, title and interest of the notified  person in that property. The interest of a third party  in the attached property cannot be sold or  distributed to discharge the liabilities of the  notified person. This would also be the position  when the property is already mortgaged or pledged  on the date of attachment to a bank or to any third  party. This, however, is subject to the right of the  Custodian under Section 4 to set aside the  transaction of mortgage or pledge. Unless the  Custodian exercises his power under Section 4, the  right acquired by a third party in the attached  property prior to attachment does not get  extinguished nor does the property vest in the  Custodian whether free from encumbrances or  otherwise. The ownership of the property remains  as it was.

The Appellant having paid a consideration of Rs. 33 crores in relation  to the CANCIGOS in question had a just right to possess the same to the  exclusion of the Respondent No. 2 and in that view of the matter too the  Special Court could not have directed the Appellant to hand over the same to  the Custodian.  The said direction is unsustainable in law.

SECTION 13 OF THE ACT:

       In Solidaire India Ltd.(supra), the Custodian initiated proceedings  before the Special Court for recovery of an amount of loan of Rs. 1 crore  due to the Respondent No. 1 from the Appellant therein.  The suit was  decreed and only during pendency of appeal, the Appellant became sick.   The question which arose for consideration was as to whether in view of the  Sick Industrial Companies (Special Provisions) Act, 1985, no proceeding  could have been initiated or continued under the said Act.  Referring to  Section 13 of the Act, this Court held that the provisions of the said Act  would prevail over the provisions of the Sick Industrial Companies (Special  Provisions) Act, 1985.

       We are here not concerned with the right of a party to take recourse to  a remedy but are concerned with a right of a party to possess the property  over which it has a lawful title.  In such a situation, Benami Transactions  Act will have no application in allocation of shares as the same would not  come within the purview of transaction relating to a transfer of property.   Transfer of CANCIGO in favour of the Appellant was, thus, valid and  legal  as by reason of the transfer of possession of the CANCIGOS by Respondent  No. 2 in favour of the Appellant, a valid right has been created therein, the  same could not have been attached in terms of Section 3(3) of the said Act.   

       The Custodian thought it expedient not to invoke the provisions of  Sub-section (2) of Section 4 of the said Act.  He was at liberty to do so.     Even now he is free to do so, if so advised.

CONCLUSION:

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       For the reasons aforementioned, the impugned judgment cannot be  sustained which is set aside accordingly.  These appeals are allowed.  In the  facts and circumstances of this case, however, there shall be no order as to  costs.