TaxTMI 
TaxTMI 
2004 (9) TMI 383
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....red 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 a....
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....o 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: 4. 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, 1....
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....nt 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 application filed by the Custodian and rejected that of the Appellant herein. Hence these appeals. Judgment: 5. 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. 6. The learned Special Judge noticed that although in its application the Appellant had made out a case to the effect that the CANCIGOs worth Rs. 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....
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....r 3rd 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 ....
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....d 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. 9. 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 Tra....
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....d prevail over the Benami Transactions Act. Reliance in support of the said contention has been placed on Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. 2001 (2) SCALE 1. Issue: 13. 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: 14. The relevant provisions of the CANCIGO Scheme are as under: "2(a ) Only the holder or any person specifically authorized in this behalf by him and recognised 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....
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....t 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.-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.-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....
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....e 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.-Where 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 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: 18. 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 su....
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....der section 3 or 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: 21. 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 Tr....
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....9] 7 SCC 645] CANCIGO 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 trasnfer of the CANCIGOs so as to invalidate the same. Effect of the Bar: 25. 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 estoppe....
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....y 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 whic....
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.... is against conscience that he should keep. (see Fibrosa Spolka V. Akeyjna v. Fairbairn Lawson Combe Barbour Ltd. [1942] 2 All ER 122.) 37. In Carreras Rothmans Ltd.'s case (supra) at page 222, it is stated : ". . . 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." 38. 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 ....
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....s 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. . . ." (p. 74) 44. 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 45. 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 benamidar without notice; or when (c) the object of the benami transaction was to defraud the creditors of the real owner an....
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....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. 45.6 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 th....
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....he 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 v. Milligan 1993 (3) All ER 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 ....
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.... any right title or interest as evidently the possession of CANCIGOs were delivered in favour of the respondent No. 2. 50. 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. 51. 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 in....
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....se the appellants are basing 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 i....
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.... 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. 56. 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. 57. 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 : 58. 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....
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.... 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. 60. 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....
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....e 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, ....