http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 9  

CASE NO.: Appeal (civil)  1682 of 1999

PETITIONER: Hansa Industries  Pvt. Ltd. and others

RESPONDENT: Kidarsons Industries  Pvt. Ltd

DATE OF JUDGMENT: 13/10/2006

BENCH: B.P. SINGH & ALTAMAS KABIR

JUDGMENT: J U D G M E N T  

B.P. SINGH, J.

       This appeal by Special Leave is directed against the  judgment and order of the High Court of Delhi at New Delhi  dated March 25, 1998 in F.A.O (O.S.) No.39 of 1993, whereby  the Division Bench of the High Court dismissed the appeal  preferred by the appellants herein against the order of the learned  Single Judge dismissing their objections to the report of the  Chartered Accountants who had valued the share of Respondent  No.1 \026 Company, and directing the implementation of the  settlement arrived at between the parties on 9th June, 1988. This  Court while granting special leave by its Order dated March 19,  1999 restricted the appeal to two issues only as recorded in the  order of this Court dated August 10, 1998, namely issues  relating:-          "(a) The portion of the Golf Links property which  was in the possession of N.N. Nanda.

(b) Modification of the Division Bench order so  that it is stated that the company shall challenge  the imposition of capital gains tax, if any  provided funds for that purpose are furnished by  the appellants".

       To appreciate the background in which the two  aforesaid  issues arise, it is necessary to refer to the factual background of  the case.  The relevant facts are really not in dispute.  The  Respondent No.1 \026 Company, namely \026 Kidarsons Industries Pvt.  Ltd. is a Private Limited Company closely held by the Nanda  family.  Except for a few shares held by their relatives and friends  the entire shareholding of the Company is that of the members of  the Nanda family.  Appellant No.2 before us is Shri Narendra  Nath Nanda.  His three brothers namely, Mohinder Nath,  Varinder Nath and Rajinder Nath were the respondents in the  High Court alongwith their mother, who is no more.

       The main source of income of Respondent No.1 \026  Company was the commission earned from the agency business  of M/s. Thyssen Sthal Union of Germany (hereinafter referred to  as ’Thyssen’).  Disputes arose between the brothers, and it  appears that appellant No.2 succeeded in getting the agency  exclusively in his name.  M/s. Thyssen served a notice on  Respondent No.1 \026 Company terminating their agency w.e.f. June

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 9  

30, 1988 and thereafter the agency was given to appellant No.1,  namely Hansa Industries Private Limited, a company controlled  by appellant No.2.

       After the termination of the agency of Respondent No.1 \026  Company, the appellants herein filed a petition for winding up of  Respondent No.1 \026 Company alleging that the agency having  been terminated, the main source of income of the Company had  vanished and, therefore, it was just and equitable to wind up the  Company.  On the other hand, the Respondents filed a suit for  declaration and for injunction restraining the appellants from  carrying on the agency business by holding themselves out as the  agent of M/s. Thyssen.

       During the pendency of the proceedings the parties arrived  at a compromise whereby appellant No.2 Narendra Nath Nanda  and his group agreed to transfer their equity shares in Kidarsons  Industries (P) Ltd.  Respondent No.1 \026 Company, constituting  30.14% of the share capital of Respondent No.1 \026 Company, in  favour of the respondents.  The price of the shares was to be paid  in specie by transferring to the appellants 30.14% of the assets of  the Company.  The agency of Thyssen was to be retained by  Narendra Nath Nanda, appellant No.2 and his group.  The  relevant terms of the settlement are the following:-

"2.     That the price of the aforesaid 5654 (later  corrected as 5564) equity shares of  Kidarsons Industries (P) Ltd., will be paid  to Shri Narendra Nath Nanda, and/or his  nominees in specie by Company by  transferring to him 30.14% of the assets of  the Company.  Marginal amount not  exceeding 5 lakhs may be paid by the  company to Shri Narendra Nath Nanda  and/or his nominees as the case may be, in  cash if found necessary.  Similarly Shri  Narendra Nath Nanda may make similar  compensatory equilisation payment to the  company.  Parties by consent can,  however, agree to a larger amount.          6.      That Shri P.N Khanna, Retired Judge is at  present acting as a Mediator.  He will act  as a Commissioner, to separate 30.14% of  the assets of the company to be given to  Shri Narendra Nath Nanda Group as set out  hereinbefore.          10.     Assets of the company will be valued as on  01.07.1988.

14.     Shri Narendra Nath Nanda will continue to  occupy the portion of the property of the  company in which he is at present residing  as deemed owner/owner, and the value of  such portion will be taken into account for  evaluating the assets of the company.  The  value of such part of the property as is  occupied by Shri Narendra Nath Nanda  will be adjusted in the value of his share.

16.     That for the purpose of valuation of share  of Shri Narendra Nath Nanda Group, the  property No.K-72, Udyog Nagar, Rohtak  Road, Delhi will be treated as the property

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 9  

of the company.

19.     This agreement will be filed in the Suit  No.1310 of 1988 and C.P. No.28 of 1988,  and appropriate orders will be passed in the  suit".

       Justice P.N. Khanna acting as the Commissioner allotted  the Golf Links property to the group of appellant No.2 even  though he found that appellant No.2 and his group were entitled  to get assets worth Rs.1.10 crores whereas the value of the  property was Rs.1.82 crores.  However, since further disputes  arose between the parties the matter came up before the Court and  it was agreed by the parties that the valuation of the shares of  Respondent No.1 \026 Company namely, Kidarsons Industries  Private Ltd. and the immovable properties owned by the  Company shall be done, and for this purpose the Court by its  order of August 30, 1990 appointed M/s. V. Shankar Aiyer and  Company as the Chartered  Accountants for valuing the assets of  the Respondent No.1 \026 Company.  They were required to work  out the value of each share after valuing the assets as well as the  liabilities of the Company.  The Court passed an order to this  effect on September 4, 1990.

       The Chartered Accountants gave their report and worked  out the net assets of Respondent No.1 \026 Company at  Rs.1,68,95,570/-.  On that basis the value of each share was  worked out as Rs.916/-.  From this the valuers deducted 20% on  account of provision restricting transfer of the shares of  Respondent No.1 \026 Company.  By this process, the value of each  share was worked out to be Rs.733/-.

Appellant No.2 filed his objections to the report of the  Chartered Accountants which was dismissed by a learned Judge  of the High Court by his Judgment and order dated February 5,  1993.  Objections were raised such as those relating to valuation  of goodwill, valuation of tenancy rights, valuation of Udyog  Nagar plot, deduction from the value of the assets, provision for  capital gains tax liability which may be payable on the  hypothetical transfer of property, the deductions made from the  value of the shares on account of restriction on transfer of the  shares, and the question of allotment of a portion of the Golf  Links property in favour of appellant No.2 Shri Narendra Nath  Nanda in terms of Clause 14 of the settlement between the  parties.  In the instant appeal, we are only concerned with two  issues namely, whether the portion of Golf Links property which  at the time of settlement was occupied by Shri Narendra Nath  Nanda be not allotted to him, and secondly, whether appropriate  directions be given so that the appellants be made liable for  payment of capital gains tax, if any, levied in future which levy  shall be challenged by Respondent No.1 \026 Company, provided  the funds are made available to it by the appellants for the  purpose.   

At the threshold we may observe that the exercise  undertaken by the High Court was with a view to give effect to  the  terms of settlement reached between the parties. It is trite that  the terms of settlement reached between the parties shall  ordinarily not be modified except with the consent of the parties.   In the instant case, it has not been argued by anyone that the  terms of settlement with which we are concerned are either illegal  as being opposed to any statute or that it is hit by impossibility of  performance and, therefore cannot be performed or that the  settlement was not reached bona fide.  Learned counsel appearing

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 9  

on behalf of the appellants submitted that Clause 14 of the  settlement in clear terms provided that appellant No.2 was to  continue to occupy the portion of the Golf Links property of the  Company in which he was residing as deemed owner/owner, and  that the value of such portion shall be taken into account for  evaluating the assets of the Company.  The value of such part of  the property as was occupied by Shri Narendra Nath Nanda was  to be adjusted in the value of his share.  He submitted that the  parties clearly agreed that Shri Narendra Nath Nanda, appellant  No.2 will be allotted the portion of Golf Links property occupied  by him on the date of settlement and that the value of the portion  occupied by him shall be adjusted against the value of his share.   It was submitted before us that in case anything more has to be  paid that will be paid by Shri Narendra Nath Nanda, but the  Respondents cannot insist on the ground of their convenience that  the entire Golf Links property be allotted to them.  The High  Court in its impugned judgment has observed that having regard  to the acrimony between the parties it was practically impossible  for them to live in the same house.  The strained relationship  between the parties was evident from the fact that there had been  instances of violence, and matters reached such a stage that  reports were made to the police.  The High Court also observed  that being leasehold property, sub-division of the property was  not permitted.  It further observed that under the settlement, the  appellants were entitled to 30.14% of the assets of the Company  and only a sum not exceeding 5 lakhs could have been paid by the  Company in cash, if the same was found necessary, and vice- versa.  Having regard to these circumstances the learned Judges  held that the interpretation placed on Clause 14 by the learned  Single Judge was correct and the said property could not in any  manner be given to Shri Narendra Nath Nanda.

We may observe that before us counsel appearing on  behalf of Shri Narendra Nath Nanda gave up his claim of  allotment of the entire Golf Links property to him and submitted  that he will be satisfied if the portion in his occupation on the  date of settlement is allotted to him.   He has very strongly  asserted that when a settlement had been reached which is  sought to be given effect, the Court cannot re-write the  settlement.   There is no ambiguity in Clause 14 of the  settlement, and there is nothing to indicate that it is unworkable,  however inconvenient it may be to the respondent.  Certainly, it  was not incapable of being implemented and the architects may  have a solution for their problem.  It is submitted that if,  however, the Court comes to the conclusion that Clause 14  cannot be given effect, it being one of the important conditions  of the settlement, the whole agreement becomes un-enforceable  with its concomitant consequences.  It is, therefore, submitted  that in terms of Clause 14 of the settlement the portion of the  Golf Links property which was in occupation of Shri Narendra  Nath Nanda ought to be demarcated and allotted to him and the  value thereof be adjusted against his share.  It is submitted that  in the ultimate analysis the parties will themselves have to find  a solution to their problems, if any, and learn to live peacefully  in the premises. On the other hand, counsel for the respondent  submitted that this was really a case of family settlement and  the learned Judges have taken the broadest view of the matter  with a view to give effect to the settlement reached between the  parties. It is submitted that the over- all intention was to give  respondent No.1 \026 Company to the contesting respondents and  by compensating the appellants who are entitled to their 30.14%  share in specie and the agency business of Thyssen.  If the  dominating intention of the parties has been effected minor  issues like the one raised by the appellants should not defeat the  settlement reached between the parties. It is submitted that a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 9  

little ironing out of creases in family settlements must be  permitted.   It is therefore, submitted that the finding of the High  Court on this aspect of the matter required no interference.          Learned counsel for the respondents has brought to our  notice a decision of the this Court in Kale and others  vs.  Deputy  Director of Consolidation and others : (1976) 3 SCC 119 laying  down the approach of the Court in giving effect to a bona fide  family arrangement entered into between the parties with a view  to resolving disputes once for all.  This Court held that the family  arrangements are governed by special equity peculiar to  themselves and would be enforced if honestly made.  Reference  was made with approval to a passage appearing in Kerr on Fraud  wherein the following pertinent observations appear:-       "The principles which apply to the case of ordinary  compromise between strangers, do not equally apply  to the case of compromises in the nature of family  arrangements. Family arrangements are governed by a  special equity peculiar to themselves, and will be  enforced if honestly made, although they have not  been meant as a compromise, but have proceeded  from an error of all parties, originating in mistake or  ignorance of fact as to what their rights actually are,  or of the points on which their rights actually  depend."  

       Reference was also made to the observations regarding the  essentials of the family settlement and the principles governing  the existence of the same in  Halsbury’s Laws of England,  Volume 17, Third Edition at pp. 215-216 which are as follows :-

"       A family arrangement is an agreement between  members of the same family, intended to be generally  and reasonably for the benefit of the family either by  compromising doubtful or disputed rights or by  preserving the family property or the peace and  security of the family by avoiding litigation or by  saving its honour. The agreement may be implied from a long  course of dealing, but it is more usual to embody or to  effectuate the agreement in a deed to which the term  "family arrangement" is applied. Family arrangements are governed by  principles which are not applicable to dealings  between strangers. The Court, when deciding the  rights of parties under family arrangements or claims  to upset such arrangements, considers what in the  broadest view of the matter is most for the interest of  families, and has regard to considerations which, in  dealing with transactions between persons not  members of the same family, would not be taken into  account. Matters which would be fatal to the validity  of similar transactions between strangers are not  objections to the binding effect of family  arrangements."  

       This Court held that courts have leaned in favour of  upholding a family arrangement instead of disturbing the same on  technical or trivial grounds.  Where the courts find that the family  arrangement suffers from a legal lacuna or a formal defect the  rule of estoppel is pressed into service and is applied to shut out  plea of the person who being a party to family arrangement seeks  to unsettle a settled dispute and claims to revoke the family  arrangement under which he has himself enjoyed some material  benefits.  The principles were concretized and succinctly reduced  to the following propositions :-

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 9  

"(1) The family settlement must be a bona fide one so  as to resolve family disputes and rival claims by a fair  and equitable division or allotment of properties  between the various members of the family; (2) The said settlement must be voluntary and should  not be induced by fraud, coercion or undue influence; (3) The family arrangement may be even oral in  which case no registration is necessary; (4) It is well settled that registration would be  necessary only if the terms of the family arrangement  are reduced into writing. Here also, a distinction  should be made between a document containing the  terms and recitals of a family arrangement made  under the document and a mere memorandum  prepared after the family arrangement had already  been made either for the purpose of the record or for  information of the Court for making necessary  mutation. In such a case the memorandum itself does  not create or extinguish any rights in immoveable  properties and therefore does not fall within the  mischief of Section 17(2) (sic) (Section 17(1)(b)?) of  the Registration Act and is, therefore, not  compulsorily registrable; (5) The members who may be parties to the family  arrangement must have some antecedent title, claim or  interest even a possible claim in the property which is  acknowledged by the parties to the settlement. Even if  one of the parties to the settlement has no title but  under the arrangement the other party relinquishes all  its claims or titles in favour of such a person and  acknowledges him to be the sole owner, then the  antecedent title must be assumed and the family  arrangement will be upheld, and the Courts will find  no difficulty in giving assent to the same; (6) Even if bona fide disputes, present or possible,  which may not involve legal claims are settled by a  bona fide family arrangement which is fair and  equitable the family arrangement is final and binding  on the parties to the settlement."

               The aforesaid judgment of this Court refers to many other  decisions to which we need not advert in this case but some of  those decisions do take the view that a compromise or family  arrangement is based on the assumption that there is an  antecedent title of some sort in the parties and the agreement  acknowledges and defines what that title is, each party  relinquishing all claims to property other than that falling to his  share and recognising the right of the others, as they had  previously asserted it, to the portions allotted to them  respectively. That explains why no conveyance is required in  these cases to pass the title from the one in whom it resides to the  person receiving it under the family arrangement. It is assumed  that the title claimed by the person receiving the property under  the arrangement had always resided in him or her so far as the  property falling to his or her share is concerned and therefore no  conveyance is necessary. We have made the above observations only because it has  some relevance to the second issue which arises for our  consideration in this appeal.  It is true that the High Court has taken note of the  practicalities of the situation and has proceeded on the basis that  the appellants and the respondents cannot peacefully live in the  same premises.  The High Court has, therefore, not favoured  allotment of a portion of the house in favour of appellant No.2  and has approved the allotment of the house to the respondents

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 9  

who owned the majority shares in the respondent No.1 \026  Company.  This was done with a view to ensure that the parties  live separately but in peace and harmony.  We cannot find fault  with the concern shown by the High Court, but the problem  which arises in the instant case is that the High Court was not  considering a matter in which it could have exercised its  discretion to make allotment one way or the other as in a case of  family partition.  The decree of the Court is based upon a  settlement reached between the parties.  Even at the time when  the settlement was reached the parties were well aware of the  strained relationship which existed and the unfortunate events  that occurred between the branch of appellant No.2 and the  remaining members of the family.  Despite this, it was agreed by  all of them that the portion in occupation of appellant No.2 shall  be allotted to him and the value thereof adjusted against his share.   The respondents cannot now be heard to say that it would be  inconvenient for them to reside with appellant No.2 and his  family members in the same house, though in separate portions.   The question as to how the parties will manage their affairs is a  matter with which they only are primarily concerned and the  Court cannot advise them in the matter.  It may be that the  architects may provide a solution for their problems, or it may be  that in view of the circumstances one party may agree to sell its  share or buy the share of the other party with a view to purchase  peace, if that becomes necessary.  These are matters in which the  Court may have nothing to say.  

Clause 14 of the settlement being unambiguous, clear and  categoric, it must be given effect because one cannot term the  said Clause 14 as vitiated by fraud, or illegal being in breach of  any statutory provision, or against public policy, or hit by the  principle of impossibility of performance.   The settlement was  made bona fide by the parties to resolve all their disputes and all  facts were known to the parties when they reached the settlement.   With their eyes open and fully aware of their experiences of the  past, they agreed to share the Golf Links property.  The relevant  clause in the settlement is not vitiated by any consideration which  may impel the court not to give effect to that clause in the  settlement.  The question of practical inconvenience should have  concerned the respondents when they entered into the settlement.   They cannot at the stage of implementation of the settlement  avoid a covenant in the settlement solemnly incorporated with  their consent on the pretext of practical inconvenience of living in  the same house, albeit in separate portions, in the unfortunate  background of bickerings and acrimony.  This issue must,  therefore, be decided in favour of the appellants.                      The next question is whether the judgment of the High  Court could be suitably modified to provide for challenge by  respondent -Company to any order that may be passed in future  by the tax authority imposing capital gains tax on the hypothetical  transfers made under the settlement. We find from the judgment  of the High Court that the matter was discussed at length and the  Court was of the view, prima facie, that the transfers may attract  capital gains tax.  There was, therefore, justification for deduction  of the anticipated capital gains tax liability from the total value of  assets.

       Before us learned counsel for the respondent did not want  to join issue on this question and left it to us to pass an  appropriate order.  Learned counsel for the appellants argued  before us that no capital gains tax is payable in the instant case  because the transfers are by virtue of an order of the Court and,  therefore, Sections 100 to 104 of the Companies Act are attracted.   There is in reality no transfer or sale that may attract capital gains

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 9  

tax, in view of the pre-existing right and title of the parties which  gets crystalised under a family arrangement.    He further  submitted that so far as respondent - Company is concerned it  does not get any consideration and, therefore, there is no question  of any capital gains tax liability so far as respondent \026 Company  is concerned.  In any event even if the capital gains tax liability is  imposed that will be the liability of the appellants herein, and  they will be obliged to discharge that liability in accordance with  law.  Learned counsel for the appellant made a clear and  categoric statement before us that if any liability arises out of the  valuation of the assets or capital gains relating to properties  covered by the settlement, the appellants shall be liable to  discharge that liability.  The appellants are willing to execute an  undertaking to this effect and to creating a charge on the assets  which may fall to their share for discharge of such tax liability, if  any, imposed.  It was submitted that there was no need to deduct  this amount from the value of the assets of the Company and this  Court may direct that in case such a liability arises in future and  any demand is raised against respondent \026 Company of capital  gains tax, the appellants shall be liable to discharge that liability.   Respondent No.1 shall be entitled to challenge the tax demand, if  any, for which necessary funds will be made available by the  appellants.  All this has been stated on the assumption that on a  future date there is a demand of capital gains tax by the tax  authority on the alleged transfers made under the settlement.  

       We are of the view that since no demand of capital  gains  tax has been made so far, if any such demand is made in future in  respect of the transfer of assets under the settlement for which   20% has been deducted by the Chartered Accountants, the  respondent \026 Company shall challenge the demand provided the  appellants shall place at its disposal necessary funds for the  purpose. In any event the liability under the head "capital gains",  if any, shall be that of the appellants who shall furnish an  undertaking to this effect accepting their liability, and create a  charge over the aforesaid assets to secure payment of capital  gains tax, if any, imposed in future.  Subject to this being done,  there shall be no deduction from the value of the assets of the  company of the anticipated liability of capital gains.

       We, therefore, allow this appeal to the extent indicated  below:-  

a)       that the judgment and order of the High Court is  modified to the extent that appellant No.2, namely \026  Shri Narendra Nath Nanda shall be allotted the  portion of the Golf Links house which was in his  occupation on the date of settlement, and the value  thereof shall be adjusted against his share.    If  something remains to be paid even after adjustment,  the appellants shall pay such amount within a period  of two months from the date of the order of the High  Court.   

b)      That no deduction shall be made from the value of  the assets of the anticipated capital gains tax liability  on the hypothetical sale under the settlement.  In  case a demand of capital gains tax is made by the tax  authority in future against respondent \026 Company,  the aforesaid Company shall be entitled to challenge  the imposition of such tax subject to appellant No.2  providing sufficient funds to the respondent \026  Company for this purpose.  In any event, the capital  gains tax, if found payable, shall be the liability of  the appellants to be discharged by them.  They shall

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 9  

furnish an undertaking before the High Court  accepting such liability, and shall execute a  document creating a charge on the assets allocated to  them under the settlement to discharge capital gains  tax liability, if found payable.                The matter is remitted to the High Court for giving effect to  the aforesaid modifications which may involve directing the  Chartered Accountants to make a re-calculation on the basis of  the directions contained in this judgment, and apportion the assets  accordingly. This appeal is allowed to the extent indicated above.   Parties to bear their own costs.  

WITH CIVIL APPEAL NO.1705 OF 1999

Hansa Industries  Pvt. Ltd. and others                   \005Appellants Versus Kidarsons Industries  Pvt. Ltd.                        \005Respondent

J U D G M E N T  

B.P. SINGH, J.          In view of the judgment passed by us today in Civil Appeal  No. 1682 of 1999 it is not necessary to pass any order in this  appeal.  The appeal stands disposed of.