Tracing the Trajectory: Evolution and Interpretation of Actionable Claims

The concept of actionable claims to the tax professionals in this decade is the same as the concept of works contract was to the tax professionals of the 1970s. Unclear, uncharted and mysterious. In this article, an attempt has been made to navigate these shady lanes from a tax professional's perspective.

Let’s understand the definition first, which is provided in the Transfer of Property Act, 1882. The definition being;

“actionable claim” means a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accuring, conditional or contingent.

As apparent from the bare reading, an actionable claim has two limbs, viz. [1] claim to a debt, which is presently being left for some other time and [2] a beneficial interest in movable property, which is discussed below.

If we churn out the relevant part of the definition then it reads as “…any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accuring, conditional or contingent.”

 So, effectively, an actionable claim;

• Is a claim: - As per the dictionary meaning, claim means to ask for something of value because the claimant thinks it belongs to them.
• To any beneficial interest: - For constituting an actionable claim, an interest in a property should not be coupled with any liability or obligation that the assignor is bound to fulfil [1].
• In movable property: - The term movable property is defined under Section 2(36) of the General Clauses Act, 1897, to mean property of every description, other than immovable property.

Judicially, the term property, as defined by the Supreme Court [2]is understood as including corporeal as well as incorporeal property. Debts, contracts and other choses-in-action are said to be chattels, no less than furniture or stock-in-trade. Similarly, patents, copyrights and other rights in rem, which are not rights over land, are also included within the meaning of movable property.

Moreover, the Supreme Court in Vodafone International Holdings BV. Versus Union of India & Anr. - 2012 (1) TMI 52 - Supreme Court has held that contractual rights such as a right to vote, controlling interest, etc., are only contractual rights and not proprietary rights.

To conclude, a beneficial interest in movable property includes rights in any corporeal or incorporeal property. Such rights should be proprietary rights and not merely contractual.

• Not in the possession of the claimant: - An Actionable claim includes rights to things of which the claimant has no actual possession or enjoyment, but are gained upon enforcement by law. These rights were designated 'choses in action' since they could only be recovered or realised by action.
• Such beneficial interest may be existent, accruing, conditional, or contingent.

On a combined reading, it transpires that to constitute an actionable claim, the following should exist;

• An underlying movable property;
• A proprietary right to such property. Such right could be conditional, existent, accruing or contingent;
• Such a right must not carry an obligation;
• The subject property must not be in possession of the claimant, otherwise it would constitute a claim.

Based on the above legal principles, over some time, the court has held that the below qualify as a beneficial interest in movable property, hence, an actionable claim;

• Assignment of benefits of the contract of sale of goods [3]
• Right to the benefit of a contract [4].
• Transfer of rent arrears is an actionable claim [5]
• Right to recover insurance money or a partner's right to sue for an account of a dissolved partnership, or a decretal debt, or a right to recover the insurance money, or the right to claim the benefit of a contract not coupled with any liability [6].
• A right to the credit in a provident fund account [7]

Further, in cases wherein contractual rights, which may qualify as an actionable claim, are created for the first time under a contract, the creation of rights at the first instance cannot be construed as a transfer of an actionable claim.[8].Hence, for being ousted from GST, the property must qualify as an actionable claim in the transferor’s hands on the date of transfer.

Hopefully, the Supreme Court, in the course of dealing with recent online gaming controversy under GST, sheds some light on the controversy as to [1] what constitutes an actionable claim and [2] if and when its transfer would be ousted from GST. Till then, sayonara, back to the shadowy and mysterious tax lanes!

(Authored by CA Pooja Jajwani, can be reached at [email protected])

[1] See  Jaffer Meher Ali Versus Budge-Budge Jute Mills Co. - 1906 (5) TMI 1 - CALCUTTA HIGH COURT

[2] See Vikas Sales Corporation

[3] Nathu Gangaram Versus Hansraj Morarji - 1906 (11) TMI 1 - BOMBAY HIGH COURT

[4] MC. Dowell and Co., Ltd. Versus s. District Registrar, Visakhapatnam - 2000 (3) TMI 1129 - ANDHRA PRADESH HIGH COURT-LB

[5] Rameshwar Narain Singh Versus R Knath Koeri - 1922 (3) TMI 8 - PATNA HIGH COURT.

[6] UNION OF INDIA Versus SRI SARADA MILLS LTD. - 1972 (9) TMI 145 - Supreme Court

[7] Official Trustee Versus L. Chippendale - 1943 (2) TMI 11 - Calcutta High Court

[8] See Commercial Tax Officer & Others Versus State Bank of India & Another - 2016 (11) TMI 416 - Supreme Court