TaxTMI 
TaxTMI 
2004 (9) TMI 383
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....uest 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 as a beneficiary thereof. The said offer of th....
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....es 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, 1992 notifying Respondent No. 2 issued by Respondent No. 1 under sub-sec....
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....rt. 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 become owners thereof as the respondent No. 2 had no beneficial interest therein, having regard ....
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....th 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 were deposited with them as security or repayment of debts due by the 1st Respondent, the terms of issue woul....
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....ndent 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 Transactions Act') would be of no consequence as the provisions of the Indian Trusts Act, 1882 are not exhaustive. It was ar....
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.... 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 Trustees shall be deemed to have been concluded on the Acceptance Date. On such conclusion of the contract for allotment, the Trustees may deliver....
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....tances 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 enters into any dealings under circumstances in which his own interests are, or may be, adverse to those of such other person and thereby gains for himself a pecuniary advantage,....
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.... 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 such procedure, as may be prescribed. 19. In terms of section 7 inter alia section 82 of the Indian Trusts Act, 1882 stood repealed. The Act: 20. Sections 2(c ), 3 and 4 of Special Courts Act read as under: "2(c....
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....ification, 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 Trustee of the Canbank Mutual Fund. Condition 2(k) defines 'CANCIGO Scheme' to mean the CANCIGO Mutual Fund (CANCIGO) Scheme, 1988 under which CANCIGOs are issued by the Trustee. 'Holder' in terms of Condition 2(r ) to mean a person who has made an....
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....id 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 estopped from raising either a limited or absolute title in them keeping in view of the fact that they had paid a sum of 33 crores of rupees by way of consideration for transfer of interest of the Respondent No. 2 herein in the said CANCIGOs. Effect of section 10 of ....
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....n 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 which the funds had been advanced had failed, the funds were still held on trust for Quistclose Investments, whose beneficial interest was binding on the bank because it had been aware of the basis on which the funds had been transferred. [See Equity & Trusts, 2nd Edition by Alas....
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....operty 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 said principle is not confined to the ingredients of section 82 of the Indian Trusts Act. It also covers cases falling under section 88 thereof. Thus if it be held that the properties were acquired by the respondent Nos. 3 and 4 in their own names in breach of their obligations while acting as an a....
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.... 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 and that object has been accomplished; or when (d)it is against public policy. 45.1 Benami Transactions, however, used to be effected for various purposes - to avoid taxes, to avoid ceiling laws etc. Blank transfers of shares had also posed serious problems as dividends are paid to the registered shareholders and not to the rea....
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....ion 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 the Indian Trusts Act in view of the fact that the respondent Nos. 3 and 4 have applied the money of the respondent No. 2 for allotment of CANCIGO in their own names and applied for allotment of the certificates on behalf of the respondent No. 2 and not on their own behalf. It is, therefore, not a case where the transaction was benami in natur....
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....ing 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 contract that is enough." It was held that illegality being not the source of Milligam's equitable rights as her contribution to the purchase price was the source therefore. In that case, respondent did not have to rely on her own illegality because she was entitled to an equitable share in the property in any event because she had contributed to the purchase pr....
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....on 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 into such a transaction. 52. In other words, the concerned parties, namely, Canbank Mutual Fund, the respondent Nos. 3 and 4 as well as the respondent No. 2 became a party to an arrangement which may be unethical but not illegal. 53. A contract may be unlawful or partly lawful or partly unlawful. If it is lawful, it will be given effect to whereas in case it is wholly unlawful....
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....ording 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 injury to the person or property of another, or the court regards it as immoral or opposed to public policy. In the instant case the object of the contracts entered into between the banks and the notified parties was for the transfer and, subsequently, re-transfer of the securities. The transfer took place on delivery of securities on payment of market price as consideration. The considerati....
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....gulatory 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 notified person to a third party, the order of attachment, if any, must be subject to the said right of the third party. In other words, under all circumstances, the right of a third party must be recognized. It is now well-settled, in view of the decision of this Court in C.B. Gautam v. Union of India [1993] 1 SCC 78, that even where a statute providers for compulsory purchase, the property will not vest....
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....ommitted 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 claimed to have been statutorily attached must be adjudicated by the Special Court only. The claim petition of the Appellant was, thus, maintainable. 61. In V.B. Rangaraj's case (supra), this Court held that shares being movable property, a shareholder has a free right to transfer his shares. Such right can only be taken away by Articles of Association and not otherwise. 62. The stand of the custodian, in this ....
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...., 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, the right acquired by a third party in the attached property prior to attachment does not get extinguished nor does the property vest in the Custodian whether free from encumbrances or otherwise. The ownership of the property remains as it was." 66. The Appellant having paid a consideration of Rs. 33 crores in relation to the CANCIGOs in question had a just right to possess the same to the exclusion of the respondent No. 2 and....