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PETITIONER: UNION OF INDIA

       Vs.

RESPONDENT: RAJESWARI AND CO, & ORS.

DATE OF JUDGMENT15/07/1986

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. MUKHARJI, SABYASACHI (J)

CITATION:  1986 AIR 1748            1986 SCR  (3) 175  1986 SCC  (3) 426        JT 1986   161  1986 SCALE  (2)6

ACT:      Transfer of  Property Act, 1882-s. 53-Applicability of- Proceeds arising  upon transfer  of assets  of  an  assessee company  employed   fully  in  paying  off  some  creditors- Transaction  whether  invalid  and  inoperative-Transfer  in favour of a person not a creditor-validity of.      Constitution of  India,  Art.  136-Questions  of  fact- Whether could be raised before the Court.

HEADNOTE:      A public  limited company,  working at  a loss,  having come to know of the proposal of the Department to reopen its income-tax assessments  for the  previous years, disposed of its assets  to the  respondent firm,  with which  it  had  a partnership business,  and employed  the proceeds  in paying off the debts due to various creditors, with the result that nothing was  left for  paying off  the tax  arrears  of  the company.      A suit  under s.  53 of  the Transfer  of Property Act, 1882 was  instituted by  the Union  of India-appellant for a declaration that  the sale  deed in favour of the respondent firm  was  invalid,  inoperative  and  not  binding  on  the appellant and  other creditors of the transferor company and alleging fraudulent  intent  to  defeat  legitimate  claims, which was  decreed by  the  trial  court.  The  High  Court, however, allowed  the appeal  holding that the appellant had failed to  satisfy the  provisions of  s. 53 inasmuch as the evidence showed  that the  company had utilised the proceeds arising upon  the transfer  of its  assets in paying off all its other  creditors, and  that even if the company had done so in  order to  avoid payment  of its  income tax  dues  no relief could be granted to the appellant.      In this  appeal by  special leave  it was urged for the appellant that  the transfer  was effected  in favour  of  a person who  was not  a creditor,  that the  assets had  been undervalued and  that there  was evidence  to show  that the benefit of the sale proceeds was enjoyed by the directors 176 of the  company, who  were also  partners of  the respondent firm.      Dismissing the appeal, the court,

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^      HELD: It  is open  to a  debtor to  prefer one  or more creditors over  the others  in the payment of his debts, and so long  as he  retains no  benefit in the property the mere circumstance that  some creditors  stand paid  while  others remain unpaid,  does not  attract the  provision of s. 53 of the Transfer of Property Act. [180A-B]      Musahar Sahu and Another v. Hakim Lal and another, L.R. 43 Indian Appeals 104, In re Moroney, [1888] L.R. 21 Ir. 27, 62, Middleton v. Pollock, [1876] 2 Ch.D. 104, 108 and MA PWA MAY and  another v.  S.R.M.M.A.  Chettyar  Firm,  56  Indian Appeals 379, referred to.      In the  instant case,  there was no finding by the High Court in  support of  the contention  that some of the debts discharged were  owed to  persons who were also directors of the company  or that  the consideration which passed for the sale of  the assets  was inadequate  and that the assets had been undervalued.  This Court will not permit such questions of fact to be raised unless there is material evidence which has been ignored by the High Court or the finding reached by the Court is perverse. [180B-C]      It has  been found  by the High Court that the sale was effected  for  the  purpose  of  discharging  genuine  debts payable by  the company  and that  the  sale  proceeds  were really employed for paying off the creditors of the company. Once it  was also  found  that  the  consideration  was  not inadequate, it was immaterial that the transfer was effected in favour of a person who was not a creditor. [180D-E]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 1689 Of 1974      From the  Judgment and Order dated 31st August, 1972 of the Madras High Court in Appeal No. 357 of 1965.      B.B. Ahuja and Ms. A. Subhashini for the Appellant.      A.T.M. Sampath and P.N. Ramalingam for the Respondents.      The Judgment of the Court was delivered by 177      PATHAK, J. This appeal by special leave arises out of a suit instituted  by the  appellant for  a declaration that a sale-deed of  immoveable  properties  and  the  transfer  of moveables belonging  to the  respondent limited  company  in favour of  the respondent  firm are invalid, inoperative and not binding  on the  appellant and  other creditors  of  the respondent limited company.      A suit  was instituted  by  the  Union  of  India,  the appellant before us, alleging that the Krishna Oil Mills and Industries Ltd.,  a public  limited company registered under the Indian  Companies Act,  1913 was carrying on business in the manufacture  and sale  of tin cans and aerated water. It entered into  a partnership in September 1952 with Rajeswari and Co.,  which was  carrying on business in the pressing of cotton bales.  Under the  partnership agreement  Rajeswari & Co. was to install a cotton baling press in the buildings of the Company  and the  business would be carried on under the name Rajapalayam  Cotton Pressing  Factory, with the profits being divided between the Company and Rajeswari & Co. in the ratio of  7 to  9 respectively. This was replaced by another agreement in  1954, but  the business  was carried on in the same name and the profits divided in the same shares. It was alleged that the Company incurred losses in its own business year after  year and from 1954 the only income derived by it flowed from  the  shares  held  by  it  in  the  partnership

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business. It was alleged that the Company had in fact ceased to carry on its own business, but in computing the income of the  Company   from  the  assessment  year  1956-57  to  the assessment year  1959-60  the  losses  suffered  during  the previous years  from the Company’s own business were allowed to be  carried forward  and set  off against  its  share  of income from  the partnership  Firm. Subsequently the Income- tax authorities decided to reopen the assessment proceedings under s.  34 of  the Indian  Income-tax Act, 1922 and, it is said, this  was communicated  to the Company. The processing of the  case took  time and  the notices  under s.  34  were issued for  the different  assessment years on March 6, 1961 and March  7, 1961.  It  was  alleged  that  meanwhile,  the Company, having  come to  know of the proposed re-opening of its income-tax assessments, began to dispose of its moveable and immoveable assets with a view to defeat the claim of the Union of  India and to place the properties beyond the reach of the  creditors of  the company. The assets of the company were transferred  in favour  of Rajeswari & Co. and the sale proceeds were  employed for  paying off  the  debts  due  to various creditors  who, it  is said, included also the close relations and  friends of  the Directors  of the Company. In the result,  there was  nothing left  for paying off the tax arrears of the Company. 178      The suit  was resisted  by the  Company, which  in  its written statement,  admitted that  it was  working at a loss for some  years and  was obliged  to  replace  its  original business of  seed crushing  and oil  extraction  by  a  more modest  business  activity,  and  in  its  circumstances  it entered into a partnership with Rajeswari & Co. for carrying on the  business of  pressing cotton  bales. It  denied that when disposing  of its  assets it was aware of the intention of the  income-tax authorities to reopen its assessments. It pleaded that  because of  action threatened by the Registrar of Joint  Stock  Companies  in  1959  it  was  compelled  to consider its  position and  to  decide  in  a  General  Body meeting in  June 1960  to  dispose  of  the  assets  of  the company. It  was also  stated that the partnership agreement of 1954  between the  Company and Rajeswari & Co. stipulated that Rajeswari  & Co.,  should have  first preference if the Company proposed  to sell  its assets.  The  right  of  pre- emption was  pressed by  Rajeswari &  Co. and,  therefore, a resolution  was   passed  in   February  1961   at   another Extraordinary Meeting  of the  Company to sell the lands and buildings at  a valuation  to be fixed by expert opinion. It was asserted  that the  assets were  sold to Rajeswari & Co. and the  sale proceeds  were distributed to the creditors so that all the creditors were paid off.      Rajeswari &  Co. also  filed  a  written  statement  in opposition to  the suit  and besides  asserting that  it had installed cotton  bale  presses  in  the  buildings  of  the Company pursuant  to the  partnership agreement between them it denied  any fraudulent intent in purchasing the assets of the Company.  It asserted  that it  acted in  good faith and paid value for the properties.      The trial  court decreed  the suit  on Appril 27, 1965. Rejeswari &  Co. appealed  to the  High Court of Madras, and the High Court allowed the appeal, set aside the trial court decree and  dismissed the  suit.  The  High  Court  held  in substance that  the Union of India had failed to satisfy the provisions of s. 53 of the Transfer of Property Act inasmuch as the  evidence showed  that the  Company had  utilised the sale proceeds  arising upon  the transfer  of its  assets in paying off  all its  other creditors,  and that  even if the

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Company had done so in order to avoid payment of its income- tax dues no relief could be granted to the Union of India.      In this  appeal it is urged for the Union of India that the transfer  of assets  was effected  in favour of a person who was  not a  creditor, that  the assets  had been  under- valued and that there was evidence to show 179 that the  benefit of  the sale  proceeds was  enjoyed by the Directors of the Company who were also partners of Rajeswari & Co.      Section 53  of the  Transfer of  Property Act  provides that every  transfer of immoveable property made with intent to defeat  or delay the creditors of the transferor shall be voidable at  the option  of  any  creditor  so  defeated  or delayed. A  long line  of cases has held that the preference by a  debtor of  one creditor  over the  others is  not ipso facto deemed  fraudulent,  and  reference  may  be  made  to Musahar Sahu  and Another  v. Hakim Lal and Another, L.R. 43 Indian Appeals 104 where the Judicial Committee of the Privy Council quoted Palles C.B., who said in In re Moroney [1888] L.R. 21 Ir. 27, 62:           "The right  of the creditors, taken as a whole, is           that all  the property  of the  debtor  should  be           applied in  payment of  demands of them or some of           them, without  any portion of it being parted with           without consideration  or reserved  or retained by           the debtor to their prejudice. Now it follows from           this that  security  given  by  a  debtor  to  one           creditor  upon  a  portion  of  or  upon  all  his           property (although  the effect  of it, or even the           interest of  the debtor  in making  it, may  be to           defeat an  expected execution of another creditor)           is  not   a  fraud  within  the  statute;  because           notwithstanding such  an act,  the entire property           remains available for the creditors or some or one           of them,  and as  the statute  gives no  right  to           rateable distribution,  the right of the creditors           by such act is not invaded or affected."      The Judicial  Committee explained  that  "the  transfer which defeats or delays creditors is not an instrument which prefers one  creditor to  another; but  an instrument  which removes property  from the  creditors to  the benefit of the debtor. The debtor must not retain a benefit for himself. He may pay  one creditor and leave another unpaid: Middleton v. Pollock. [1876]  2 Ch.  D. 104,  108. So soon as it is found that the  transfer here  impeached  was  made  for  adequate consideration in  satisfaction of genuine debts, and without reservation of any benefit to the debtor, it follows that no ground for impeaching it lies in the fact that the plaintiff who also was a creditor was a loser by payment being made to this preferred  creditor-there being in the case no question of bankruptcy."  This proposition  of law was re-affirmed by the Judicial  Committee  subsequently  in  MA  PWA  MAY  and another v. S.R.M.M.A Chettyar Firm, 56 Indian Appeals 379. 180      It seems  clear that  it is  open to a debtor to prefer one or  more creditors over the others in the payment of his debts, and  so long as he retains no benefit in the property the mere  circumstance that  some creditors stand paid while others remain  unpaid does  not attract the provisions of s. 53 of  the Transfer of Property Act. It is not disputed that the debts  satisfied by  payment of  the sale  proceeds  are genuine. A  faint attempt  was made to show that some of the debts  discharged   were  owed  to  persons  who  were  also Directors of  the Company.  There is no findings by the High

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Court in  support of that contention. It was also urged that the consideration  which passed  for the  sale of the assets was inadequate  and that  the assets  had been  undervalued. Here again  there is  no finding  to support the submission. The questions  raised are  questions of fact, and this Court will not  permit such questions to be raised unless there is material evidence  which has  been ignored by the High Court or the finding reached by the Court is perverse.      A point  was sought  to be  made by learned counsel for the appellant  that the  transfer of the assets was effected in favour  of Rajeswari  & Co.  which was  not  one  of  the creditors. It has been found by the High Court that the sale was effected  for  the  purpose  of  discharging  the  debts payable by  the Company.  Once it  is also  found  that  the consideration was  not inadequate  it is  immaterial, as the High Court  has observed,  that the transfer was effected in favour of  a person  who was  not a  creditor. It  has  been clearly found  that the  sale  proceeds  were  employed  for paying off the creditors of the Company.      It appears that in consequence of the impugned transfer effected by  the Company  the appellant  has been  unable to recover a sum of Rs.28,240 assessed as income-tax in October 1961. It  rested its  suit on  s.  53  of  the  Transfer  of Property Act.  Having regard to the findings rendered by the High Court  on the  consideration of  material on the record and upon an interpretation of s. 53 which that provision has uniformly received this appeal cannot be sustained.      The appeal fails and is dismissed with costs. P.S.S.                                     Appeal dismissed. 182