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PETITIONER: M. V. RAMASUBBIER AND OTHERS

       Vs.

RESPONDENT: MANICKA NARASIMHACHARI AND OTHERS

DATE OF JUDGMENT30/01/1979

BENCH: SHINGAL, P.N. BENCH: SHINGAL, P.N. KAILASAM, P.S.

CITATION:  1979 AIR  671            1979 SCR  (2)1177  1979 SCC  (2)  65

ACT:      Trust Act-Ss.  49, 51  and 52-Scope of-Managing Trustee purchased property  for the  trust sold  it to  his son  for lesses price  than offered  by others-Sale  it valid-Duty of trustee.

HEADNOTE:      Plaintiffs and  defendants were descendants of a common ancestor who was the founder of a trust. Defendant no. 1, at the relevant time, was the managing trustee of the trust. On partition and  sale of  family properties a house, which was the  suit  property,  was  purchased  for  the  trust.  Soon thereafter defendant  no. 1  sold it  to his son. Before the sale, however,  the tenant  of the  house who  was a  man of substance, offered a much higher price than what was paid by the son but the defendant sold it to his son.      In the  plaintiffs’ suit  challenging sale of the trust property  to   the  managing  trustee’s  son  for  a  lesser consideration the defendant claimed that the property had to be sold  because his  son who  was  the  owner  of  adjacent property raised  a dispute  claiming easementary rights over the property.      The suit  was decreed  by the trial court but on appeal the High  Court held that the consideration was adequate and fair, that  the sale  was bona  fide and  that  no  ulterior motive could  be attributed  to the  defendant no  1 in  the sale. The High Court, therefore, dismissed the suit.      Allowing appeal, ^      HELD: (a)  The sale had to be viewed with suspicion The High Court  committed an  error of law in ignoring important aspects of  law which  had direct bearing on the controversy before it. [1181A]      (b) It  is well recognised that a person in a fiduciary position like a trustee is not entitled to make a profit for himself or  a member of his family. He is not allowed to put himself in  a position in which a conflict may arise between his duty as a trustee and his personal interest. [1180E]      (c) The  control of  the trustee’s  discretionary power prescribed by  s. 49  of the  Trusts Act and the prohibition contained in s. 51 that the trustee may not use or deal with the trust  property for  his own  profit or  for  any  other

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purpose unconnected with the trust and the equally important prohibition in  s. 52  that the  trustee may not directly or indirectly buy  the trust  property on his own account or as an agent  for a  third person,  cast a  heavy responsibility upon him  in the  matter  of  discharge  of  his  duties  as trustee. The  rule prescribed  by these  sections cannot  be evaded by making a sale in the name of the trustee’s partner or son,  for that  would, in  fact and substance, indirectly benefit the trustee. [1180F-G]      (d) Where  a trustee  makes  the  sale  of  a  property belonging to  the trust,  without any  compelling reason  in favour of his son, without obtaining the 1178 permission of  the court  concerned, it  is the  duty of the court to  examine whether  the trustee  has acted reasonably and in  good faith  or whether  he has committed a breach of the trust  by benefiting  himself from the transaction in an indirect manner. [1180H]      (i) In the instant case defendant no. 1 was the trustee of the property. It was his duty to be faithful to the trust and execute  it with  reasonable diligence  in the manner in which an  ordinary prudent man of business would conduct his own affairs. He could not occasion any loss to the trust and it was  his duty  to sell  the  property,  if  that  was  so necessary to  sell, to  the best  advantage  of  the  trust. [1181D]      (ii)  The   High    Court  was  wrong  in  blaming  the plaintiffs that  they had  brought the  suit on  account  of personal grouse  and spite.  Assuming that  they    were  so actuated, their  action was  eminently for  the advantage of the trust  created by  their ancestor  in which  they had  a substantial and direct interest. [1181D]      (iii) Defendant  no. 1  was not able to explain how the sale was  beneficial to  the trust.  Income by  way of  rent which the  property was  fetching was far more than interest which the  sale proceeds  fetched when they were invested in fixed deposits in a Bank. He was therefore unable to explain how he acted as  a man of ordinary prudence in slashing down the income of the trust by making the sale. [1181G]      (iv) When  defendant no.  1 sold  the trust property to his son  at a  lesser price than was otherwise available, he did not  act in  accordance with law in the discharge of his fiduciary relationship  with the trust. He sold the property to his  son in  disregard of his statutory duty which no man of ordinary prudence would have done. [1182C]      (v) Assuming  that defendant  no. 1  made a  gesture of goodwill in  favour of the trust when he allowed the sale of the family  property to  the trust,  he could  not  possibly absolve himself  from what  he did  in selling it off to his son at  a lesser  price than  was offered by another reason. [1182F]      (vi) Assuming that there was some difficulty in respect of rights  of easement between the trust and the defendant’s son who  was the  immediate neighbour  of the property, that could have  been a lever in the hands of the trustee to make a bargain  for higher  consideration from  his son  who  was equally interested  in the property. A man of prudence would not have  sold his property for a considerably lesser amount than that  offered to  him by  another person  and agreed to sell it  just because  a co-sharer  was causing  trouble and offering a few lesser price. [1183A-B]

JUDGMENT:

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    CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 1584 of 1969.      Appeal from the Judgment and. Decree dated 20-2-1969 of the Madras High Court in Appeal No. 104 of 1963.      G. L. Sanghi and Vineet Kumar for the Appellants.      Vepa  P.   Sarathy  and   Mrs.  S.  Gopalakrishnan  for Respondent No. 1. 1179      K. Jayaram for Respondents 2-5.      The Judgment of the Court was delivered by      SHINGHAL, J.-This appeal by a certificate of the Madras High Court is directed against its judgment and decree dated February 20, 1969.      One Manikka  Sankaranarayana Iyer, father of defendants 1 and  3 and grandfather of plaintiffs 1 to 5 and defendants 2, 4  and 5 and father-in-law of plaintiff No. 6 constituted an Annadanam Trust and he and his sons executed a registered deed of settlement for that purpose on June 3, 1908. By that document Sankaranarayana  Iyer became  the first trustee for life, and  it was  provided that  after him  the senior-most member would  be the trustee, by turns. Sankaranarayana died and defendant  No. 1  became the  managing  trustee  of  the trust.  There  was  a  suit  for  partition  of  the  family properties including  house No. 48A, and it was settled by a compromise under  which a preliminary decree dated September 12, 1956 was drawn up for the sale of the properties amongst the members  of the  family. Defendant  No. 1  purchased the suit property  for Rs.  21,500/- for  the aforesaid trust on April 19,  1959. A final decree was drawn up on November 29, 1959 in which house No. 48A was shown as the property of the trust. Defendant  No. 1  however  sold  that  property  soon after, to  his son defendant No. 2 on July 14, 1960, for Rs. 25,000/- under  sale deed  Ex. B.  13. Chithambaram Chettiar (P.W. 2),  who was  a tenant  of  that  property  from  1949 onwards, came  to know  of the  intended  sale  and  sent  a registered notice  to defendant  No. 1  on  July  21,  1960, offering to  purchase it  for Rs.  35,000/-. Defendant No. 1 however went  ahead with the sale of the property to his son and  registered   the  sale  deed  on  July  22,  1960.  The plaintiffs thereupon filed the present suit on September 15, 1960, challenging  that sale  and asking for its restoration to the  trust. The defendants resisted the claim in the suit on the  ground that the sale price was fair and adequate and that the  sale had  to be made because of the disputes which had arisen  between the second defendant as the owner of the adjacent house  and the  trust in  regard to the easementary rights of  drainage, light and air etc. The suit was decreed by the  Subordinate Judge  of Madurai on September 10, 1962. The High  Court of Madras however allowed the appeal against that judgment  and decree  and dismissed the suit with costs of both  the courts  holding that  Rs. 25,000/-  was  "quite adequate and  fair" price  for the  suit property  and  that defendant No.  1 acted  with  "perfect  bona  fides  and  no ulterior motive  can be  attributed to him." That is why the plaintiffs have come up in appeal to this Court. 1180      It is  not indispute  before us  that the Indian Trusts Act, 1882,  hereinafter referred  to as  the Act, applied to the trust  in question  and that  it was  necessary for  the plaintiffs to  prove that  defendant No.  1 did not exercise his  discretionary   power  of  selling  the  suit  property "reasonably and  in  good  faith"  and  that  he  indirectly purchased it  for himself, in the name of his son (defendant No. 2), within the meaning of section 49 and 52 of the Act.      There is  some  controversy  on  the  question  whether

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defendant No.  1 made  an  outright  purchase  of  the  suit property for  and on behalf of the trust for Rs. 21,500/- on April 19,  1959, or  whether he  intended to purchase it for himself and  then decided  to pass  it on  to the trust, for defendants have led their evidence to show that the property was allowed to be sold for Rs. 21,500/-, which was less than its market  value, as  it was meant for use by the trust and that defendant  No. 1 was not acting honestly when he palmed of the  property to his son soon after by the aforesaid sale deed Ex. B. 13 dated July 14, 1960. The fact however remains that defendant No. 1 was the trustee of the property, and it was his  duty to  be faithful to the trust and to execute it with reasonable  diligence in the manner an ordinary prudent man of  business would conduct his own affairs. He could not therefore occasion any loss to the trust and it was his duty to sell  the property, if at all that was necessary, to best advantage. It  has  in  fact  been  well  recognised  as  an inflexible rule that a person in a fiduciary position like a trustee is  not entitled  to make  a profit for himself or a member of his family. It can also not be gainsaid that he is not allowed  to put  himself in any such position in which a conflict may  arise between  his duty and personal interest, and so  the control  of the  trustee’s  discretionary  power prescribed by  section 49  of the  Act and  the  prohibition contained in section 51 that the trustee may not use or deal with the  trust property for his own profit or for any other purpose  unconnected   with  the   trust,  and  the  equally important prohibition  in section  52 that  the trustee  may not, directly  or indirectly,  buy the trust property on his own account  or as an agent for a third person, cast a heavy responsibility upon  him in  the matter  of discharge of his duties as  the trustee. It does not require much argument to proceed to  the inevitable  further conclusion that the rule prescribed by  the aforesaid  sections of  the Act cannot be evaded by making a sale in the name of the trustee’s partner or son,  for that  would. in  fact and substance, indirectly benefit the  trustee. Where  therefore a  trustee makes  the sale of  a property  belonging to  the  trust,  without  any compelling reason,  in favour  of his son, without obtaining the permission of the court concerned, it is the duty of the court, in which the sale is challenged, to examine whether 1181 the trustee  has acted  reasonably  and  in  good  faith  or whether  he   has  committed   a  breach  of  the  trust  by benefitting himself  from the  transaction  in  an  indirect manner. The sale in question has therefore to be viewed with suspicion and  the High  Court committed  an error of law in ignoring this  important aspect of the law although it had a direct bearing on the controversy before it.      The High Court in fact proceeded to examine the case on the assumption  that the  plaintiffs had instituted the suit not so  much out  of a  genuine desire  to redress any wrong done to  the trust, as out of "ulterior motives and ill-will against the  first and  second defendants."  This shows that instead of  examining the  case according  to the  criterian mentioned above,  the High  Court based  its decision  on an extraneous  consideration  and  blamed  the  plaintiffs  for raising  the  suit  on  account  of  "personal  grouse"  and "personal spite".  We have not been referred to any evidence which could justify the High Court’s view that there was any such grouse  or spite.  But even  if it were assumed for the sake of argument that the plaintiffs had any such motive for raising the  suit, the  fact remains  that their  action was eminently one  for the advantage of the trust which had been created  by   their  ancestor   and  in  which  they  had  a

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substantial and a direct interest.      Some important facts stand out from the evidence on the record which  are  directly  in  point.  The  suit  property belonged to  the family  which had created the trust. It was purchased by defendant No. 1, in his capacity as the trustee of the  Annandanam Trust for Rs. 21,500/- on April 19, 1959, at a family sale. It appears from the statement of defendant No. 2  that the  property was  capable of,  or could fetch a rent of about Rs. 190/- per mensem, amounting to Rs. 2,280/- per annum.  It has  also been  admitted that  the sum of Rs. 25,000/- was  not utilised  by the trustee (defendant No. 1) for purchasing  any other  better property, but was invested in fixed  deposit with a bank at 3 1/2 per cent interest per annum. That  could yield  an income  of only  Rs. 875/-  per annum. The trust therefore lost heavily in the bargain. What is worse,  defendant No.  1 has not been able to explain how the sale could be said to be beneficial to the trust and how he could possibly contend that he acted as a man of ordinary prudence in  slashing down the income of the trust by making the sale.      The further  fact that  stands out from the evidence on the record  is that when Chithambaram Chettiar (P.W. 2), who was a  tenant in the suit property from 1949 onwards, learnt about the intended sale, 1182 he sent  a notice  to defendants  Nos. 1  and 3  offering to purchase it for Rs. 35,000/-. That notice was issued on July 21, 1960.  The receipt  of the  notice has  been admitted by defendant No.  1 in his statement in the trial court, and he has further  admitted that  Chithambaram Chettiar offered to purchase the  property for  Rs. 35,000/- and that he sold it to his  son for Rs. 25,000/- without even informing him that he had  received the  offer of Rs. 35,000/-. Defendant No. 1 in fact  proceeded to register the sale deed of the property in favour  of his  son, the  second defendant,  on July  22, 1960. It  is therefore  quite clear  that he did not care to act in  accordance with  the law  in the  discharge  of  his fiduciary relationship  with the trust and executed the sale deed in his son’s favour in disregard of his statutory duty, for no man of ordinary prudence would possibly have sold his property for  Rs. 25,000/-  when he  had  an  offer  of  Rs. 35,000/-. That  offer could  not be said to be from a man of no substance because Chithambaram Chettiar (P.W. 2) who made it, was  known to  the defendants  and he has stated that he was a  man of  means and was worth rupees four lakhs. It may be that  the son-in-law  of plaintiff  No. 2 was employed in his shop,  but that  could not  detract from  the basic fact that a  much  higher  offer  had  been  made  by  a  man  of substance.      Instead of  examining the appeal with due regard to the above mentioned  evidence, the  High Court was obsessed by a consideration of  the evidence  which had  been led  for the purpose of  showing that while defendant No. 1 had purchased the property for himself on April 19, 1959, for Rs. 21,500/- , he  gave up  that advantage  in favour  of the  trust. The evidence on the point is not unequivocal, for it may well be that defendant  No. 1  did not want to obtain a sale deed in his own  name for other reasons, but even if it were assumed that he made a gesture of goodwill in favour of the trust on April 19,  1959, he  could not possibly absolve himself from what he  did in  selling it  off, after  it had  become  the property  of  the  trust,  to  his  own  son  a  few  months thereafter for  Rs. 25,000/-  when he had a genuine offer of Rs. 35,000/-.      Another consideration  which prevailed  with  the  High

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Court in  setting aside  the finding  of fact  of the  trial court was  that, according to it, the evidence on the record showed that  some difficulties  had  cropped  up  after  the property had  been purchased  as his  son, defendant  No. 2, began to "give trouble" and that he resolved that trouble on the advice  of his  family lawyer Shri V. Rajagopala Iyengar (D. W.  3) by selling the property to his son. This view was obviously incorrect, for even it were assumed that there was some 1183 difficulty in  respect of  some common  rights of  easement, that could  well have  been a  lever in  the  hands  of  the trustee to  make a bargain for Rs. 35,000/- or more with his son who  was equally interested in those easementary rights. A man  of prudence  would not  have sold  his property for a considerably lesser  amount than  that  offered  to  him  by another person  and agreed  to sell  it just  because a  co- sharer in  the easementary right was causing trouble and was offering a far lesser price.      We have  gone through  the statement  of V.  Rajagopala Iyengar (D.W.  3) on  whose advice defendant No. 1 claims to have sold  the property for Rs. 25,000/-. He has admitted in his statement  that he  had not even seen the suit property, and he knew nothing about the so called trouble in regard to the easementary  rights between defendant No. 1 and his son. On the  other hand,  we find  that he  was indebted  to  the family of  defendants Nos.  1 and 2 and he did not even care to ascertain  what rent  the suit property was fetching when he advised its sale for Rs. 25,000/- to the son of defendant No. 1.  The High  Court therefore  did  not  even  read  the evidence correctly while placing reliance on his testimony.      For the  reasons mentioned above, we have no doubt that the High Court did not examine the controversy in its proper legal perspective  and with  due regard to the salient facts which had been established by the evidence on the record and it was  not therefore justified in setting aside the finding of the trial court.      The appeal is allowed. The impugned judgment and decree of the  High Court are set aside and the decree of the trial court is restored with costs throughout. P.B.R.                                       Appeal allowed. 1184