TaxTMI 
TaxTMI 
1993 (8) TMI 310
X X X X Extracts X X X X
X X X X Extracts X X X X
....sactions of the petitioners with one Varinder Agro Chemicals Ltd., the petitioners drew three bills of exchange for valuable consideration. These were to cover the value of the goods sold by the petitioners to the said Varinder Agro Chemicals Ltd. By reason of certain negotiations a credit period had been given to the said Varinder Agro Chemicals Ltd. to make payment of the price of the goods. Because of this arrangement, the bills of exchange were drawn with 90 days' period of maturity. Varinder Agro Chemicals Ltd. accepted the bills of exchange. These bills of exchange were discounted with the second respondent. For the purposes of enabling the second respondent to discount these bills of exchange, 10 lakh units of the Unit Trust of India were pledged by the petitioners with the second respondent. At the time of the pledge, the 10 lakh units along with blank transfer forms were handed over to the second respondent. The petitioners have averred that the second respondent participated in the transaction only as financier and that they were not engaged in any manner as share, stock or security broker. There is no denial of this position by the second respondent. 2. By their a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arisen for determination would have been whether or not the four lakh units had been sold to the third respondent or whether it was merely a sub-pledge as indirectly alleged by the second respondent. This would be a question of fact to be determined, if necessary, on evidence. However, on behalf of the petitioners, it has been contended that even if there was a sale, the third respondent would still get no right, title or interest, equitable or legal, in these four lakh units. This is on the footing that the third respondent could only get such title as the second respondent had. It is contended that admittedly the second respondent were mere pledgees. It is contended that as such pledgees they could transfer no better title to the third respondent. This raises a legal question as to whether a person who has purchased shares with blank transfer forms, from a person who had no right or authority to sell the shares, derives any right which would enable him to defeat the claim of the real owner. This question has been argued by the parties on the assumption, for the sake of argument, that there is a sale in favour of the third respondent. The question of fact as to whether or not ther....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the giving of blank transfer forms along with the share certificates amounts to a creation of a mortgage and by so giving a blank transfer form a right or power is given to fill in the name of the transferee and get the name of the transferee entered in the records of the company. It is submitted that this being a mortgage of movables, the principles analogous to Section 69(3) of the Transfer of Property Act would apply and any sale by the second respondent would pass a good title in favour of the third respondent; and (3) reliance is placed upon the proviso to Section 27 of the Sale of Goods Act and it is submitted that the second respondent are "mercantile agents" and "share and stock brokers". It is submitted that as such share and stock brokers the second respondent were in possession of blank transfer forms along with the units. It is submitted that the third respondents have dealt with the second respondent bona fide and in good faith and without having any knowledge that the second respondents did not have any right to transfer the units. It is submitted that even on this basis, the third respondent get a title, legal and equitable, in these units and are entitled to get th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d has not at the time of the contract of sale notice that the seller has no authority to sell." 11. Under Section 172 of the Indian Contract Act, a pledge is defined as a bailment of goods as security for payment of a debt or performance of a promise, the bailor being called the "pawn or" and the bailee being called the "pawnee". 12. Under Section 176 of the Indian Contract Act, if a pawn or makes default in payment of the debt, or performance, at the stipulated time, the pawnee may bring a suit against the pawn or upon the debt or promise, and retain the goods as collateral security, or he may sell the thing pledged on giving the pawn or a reasonable notice of the sale. If the proceeds of such sale are less than the amount due, the pawn or is still liable to pay the balance and if the proceeds of sale are greater than the amount due, the pawnee shall make over the surplus to the pawn or. 13. Under Section 177 of the Indian Contract Act, the pawn or can redeem, even at a subsequent time, before the actual sale. But this must be on payment, in addition, of any expenses which may have been arisen by reason of his default, 14. Under Section 178 of the Indian Contract Act w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntingency did not arise, the bank had no right to deal with the securities. 18. On behalf of the petitioners, reliance was also placed upon the authority in the case of Belgaum Pioneer Urban Co-operative Credit Bank Ltd. v. Sripadangalavaru Swamiji, AIR 1962 Mys. 48. In this case, it was held that the pledgee has got only a right to retain possession of the goods pledged till the money borrowed is repaid. It is held that the pledgee is not a transferee of the goods pledged and that the moment that money is repaid, the power is entitled to the return of the goods pledged. In this case, it is held that it is immaterial in whose hands the goods pledged are on the date when the money borrowed is fully discharged. It is held that throughout the entire period of the pledge, the pawn or continues to be the owner of the goods pledged and the juridical possession also continues to be with him. It is held that the pawnee merely retains the physical possession of the goods or in other words, he is merely in custody of the goods. In this case, it is held that even though there may be sub-pledge, once the amounts are repaid the sub-pawnee loses all rights in the property pledged because the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... also placed upon the Division Bench judgment in the case of Abdul Vahed Abdul Karim v. Hasanali Alibhai Ghasia AIR1926Bom338 . This is a case where the facts are almost identical to the present case. In this case, the plaintiff had pledged certain shares as security for repayment of amounts borrowed from the first defendant therein. The share certificates were given to the first defendant along with the blank transfer forms. It would appear that the first defendant gave the shares to his bankers (who were defendant No. 3 in that case). The trial court held that the first defendant was a share broker. The trial court held that since the first defendant was a share broker, and as he was in possession of the blank transfer forms with the share certificates, defendant No. 3 was entitled to think that defendant No. 1 had a right to sell the shares. The trial court held that the plaintiff was estopped from asserting his ownership against the bona fide purchaser for value. Thus, the trial court had accepted the very arguments now advanced on behalf of the third respondent. The Division Bench reversed the judgment of the trial court. The question before the Division Bench and which has be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsp; The fact that he made no attempt to get the dividends from defendant No. 1 certainly tends to throw suspicion on his bona fides, even though his explanation about his not getting himself registered as owner with the company be accepted. If he had lodged the certificates with the company for transfer, the holder would have received notice and would have at once objected to a transfer without his consent. A pledgee of shares, although he may get them transferred to his name, as against his pledgor, would not be entitled to sell them without notice. In my opinion, therefore, there is no estoppel with regard to the Tata Hydro share and one Crescent Mill share, nor is defendant No. 3 protected by Section 108 of the Indian Contract Act, so that a decree should be passed against him for the return of the share certificates with properly executed transfers and in default for payment of their value." 22. This authority is also binding on this court. Thus, it is clear that merely because a registered owner of shares hands over the share certificates and blank transfers signed by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... owner is precluded from denying the sellers authority to sell. In effect, what is claimed is the protection of Section 27 of the Sale of Goods Act. 25. In support of this reliance is placed upon the authority of this court in the case of Fazal D. Allana v. Mangaldas M. Pakvasa, AIR 1922 Bom 303. In this case, the plaintiffs had delivered the share certificates along with blank transfer forms to a broker for sale of the shares. The broker sold the shares to the defendants who was a bona fide purchaser for value without notice. The broker without paying the plaintiffs absconded. The question before the court was whether the plaintiff could follow the shares into the hands of the defendant. Whilst considering this question, on page 308, Justice Kanga notes as follows : "Except where a shareholder is estopped from denying the title of some particular transferee the general rule of English law is that a purchaser of shares acquires no better title than his vendor himself has and that shares in this respect are like other goods and chattels." 26. Thus, the principles that shares are like other goods and that the purchaser gets no better title than what the seller had is r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... proposition as canvassed on behalf of the third respondent, the authority of the Division Bench would prevail over this authority. 27. On behalf of the respondents reliance was also placed upon the case of Maneckji Pestonji Bharucha v. Wadilal Sarabhai and Co., AIR 1926 PC 38. In this case, the first plaintiff therein, who was a broker, had sold certain shares through the second plaintiff who was a sub-broker. In respect of this sale a cheque had been received from the first defendant therein. The first defendant on the basis of the blank transfer and the shares raised monies from the second defendant therein. The second defendant, in turn handed over the shares and the blank transfers to the third defendant therein. The cheque given to the plaintiffs bounced. The question was whether the plaintiffs could follow the shares into the hands of the third defendant. The Privy Council held as follows (at page 40) : "But, further, there seems to their Lordships a good deal of confusion arising from the prominence given to the fact that the full property in shares in a company is only in the registered holder. That is quite true. It is true that what Bharucha had was not the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....respondents reliance was placed on the authority of the Supreme Court in the case of Howrah Trading Co. Ltd. v. CIT [1959]36ITR215(SC) . In this case, the appellants therein had received certain sums as dividends. The shares in respect of which the dividends were received were property of the appellants, but in the books of the company they still stood in the name of the original owner. The appellants had blank transfer forms along with the share certificates with them. It was the case of the appellants that the dividend income for various years should be grossed up and credit for tax deducted at source should be given to them. It is in this context that the Supreme Court observed as follows (at page 286) : "The position of a shareholder who gets dividend when his name stands in the register of members of the company causes no difficulty whatever. But transfers of shares are common, and they take place either by a fully executed document such as was contemplated by regulation 18 of Table A of the Indian Companies Act, 1913, or by what are known as 'blank transfers'. In such blank transfers the name of the transferor is entered, and the transfer deed signed by the t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cates along with blank transfer forms being with the pawnee. Thus, the above-mentioned general observations as to the rights of a person holding shares with blank transfer forms does not take the case of the third respondent any further. These general observations can have no application to the point under consideration. The question is not whether the third person has a right to get his name entered in the records of the company or to fill in any blanks. The question before the court today is whether an owner of the shares can follow the shares into the hands even of a bona fide purchaser for value without notice. 32. On behalf of the third respondent reliance was also placed upon the authority in the case of Pranlal Jayanand Thakar v. Vasudev Ramachandra Shelat [1973] 43 Comp Cas 203 (Guj). In this case, a lady executed a registered deed of gift in favour the respondent therein and handed over the share certificates to him. On the death of the lady her heirs claimed the shares. The question before the court was whether by means of the registered deed of gift an equitable right in the shares was created in favour of the respondent or whether the shares formed part of the estate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eals with transfers of actionable claims. In Section 137 of the Transfer of Property Act, it has been mentioned that nothing in the foregoing sections of that chapter, i.e., sections 130 to 136, applies to stocks, shares or debentures. It was contended in this connection on behalf of Pranlal Thakar that according to the Transfer of Property Act, Section 137, shares and stock are actionable claims but the provisions relating to transfer of actionable claims as stated in sections 130 to 136 are not to apply to this particular species of actionable claims. We are unable to accept this contention because it is clear from the provisions of the Companies Act as also from the provisions of the General Clauses Act that so far as shares in a limited company governed by the Indian Companies Act are concerned, they are movable property for the purposes of the Companies Act and they are also goods for the purposes of the Sale of Goods Act." 33. Whilst considering the question of the legal effect of a transfer executed by the transferor and delivered to the transferee but not yet registered by the company, the court considered numerous authorities and held that between the transferor and the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ention to sell and that the original owner had in fact sold the shares. This case also does not deal with the question under consideration. 35. To be noted that in all these above mentioned cases share transfer forms had been signed and delivered for the purposes of sale. Those are completely different situations from the present where admittedly the shares and the transfer forms were delivered only as and by way of pledge. Also the principles enunciated in the above-mentioned cases, would apply on the basis of estoppel. The estoppel being that the owner having executed blank transfer forms for the purpose of a sale and having left them with third parties, misled innocent third parties. Such cases of estoppel cannot arise where the shares have only been pledged. 36. The third respondent also placed reliance upon the authority in the case of Smt. Sumitra Debi Jalan v. Satya Narayan Prahladha, AIR 1065 Cal 355. In this case, the plaintiff had left her shares and blank transfer forms in the office of her father. One of the employees decamped with the shares and the blank transfer forms and sold the same in the market. The plaintiff filed a suit against all the purchasers of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rted from and/ or a contrary principle established because, according to the court, that would knock the very bottom out of the principles upon which the ground of mercantile convenience is based and thereby endanger the security of commercial transactions and destroy the confidence upon which the usual course of trade rests. Thus, it was on the facts of this case that the court held that there was an estoppel, the estoppel being the negligence on the part of the plaintiffs. It is on the grounds of negligence on the part of the plaintiffs, that ultimately the court held that the person who was more innocent should succeed. This is clear from the following observation in para 65 (at page 363) : "In the light of the above discussion, I am clearly of the opinion that the plaintiff was negligent in not exercising her rights diligently in respect of her alleged title to the shares in question and, therefore, estopped from asserting any title in respect thereof." 37. In my view, in the present case, no estoppel by negligence can possibly arise. This authority, therefore, does not assist the third respondent. Even presuming that the above mentioned authority supported the thir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he context of shares and blank transfer forms being executed and handed over with intention or authority to sell. In such cases, the latter part of Section 27 or the proviso to Section 27 would directly apply. In my view, with great respect to the learned judge, the strict duty sought to be cast on owners of shares in this case, if applied to all cases, would seriously hamper the raising of finances by a party. It is well known that monies are raised by pledging shares. Whilst it is not necessary that blank transfer forms be deposited for purposes of creating a pledge, most financial institutions insist on the share certificates with blank transfer forms being deposited. If the ratio of this judgment is to be applied to bailment and pledges then, in my opinion, it would be regrettable, it would knock the bottom out of the principles of trust and confidence in commercial transactions whereunder the shares and blank transfers are deposited for raising finances. 38. The second submission on behalf of the third respondent is that delivering blank transfer forms along with the share certificates amounts to creation of a mortgage of movables. It is submitted that it being a mortgage o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....basis of the proviso to Section 27 of the Indian Sale of Goods Act. In this behalf, it is urged that the second respondents are shares and stock brokers. It has been urged that it is not at all necessary that the petitioners should have dealt with them as such shares and stock brokers. It is urged that it is sufficient that the second respondent being a mercantile agent was in possession of the blank transfer forms along with the share certificates and has dealt with the shares. It is urged that this being the normal business of the second respondent and it being admitted that the shares along with the blank transfer forms were in the possession of the second respondent with the consent of the petitioners, a sale made by the second respondent in the ordinary course of their business is valid as if expressly authorised by the petitioners. It is urged that this is because the third respondent paid for and obtained the units in good faith and without any notice that the second respondent had no authority to sell. It is urged that there was nothing to indicate to. the third respondent that the second respondent did not have authority to sell. In this behalf, it has also been urged that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er in the present case, the proviso to Section 27 of the Sale of Goods Act applies. It must be seen that before the proviso can apply, it must be shown that the goods have been left with a "mercantile agent" as such, i.e., as an agent for the purposes of sale. Thus, to take simple example, if a person leaves his sofa set for repairs in a furniture dealer's store and the furniture dealer sells off the sofa, the owner of the sofa can follow the same into the hands of the third party. The sofa had never been left for the purposes of sale. It had not been entrusted to an agent for sale. Another example would be where a furnished house is let to an auctioneer and he sells off the furniture. In such cases the proviso could never apply. The same principle would apply when goods are pledged. This even though the goods may be pledged in favour of a party who is otherwise a mercantile agent. This is so because, for the proviso to apply, the possession must be possession of a mercantile agent as such. From the definition of mercantile agent under Section 2(9) of the Sale of Goods Act, it is clear that before a person can be said to be a mercantile agent, in respect of the concerned goods,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Calcutta High Court in Sumitra Debi's case, AIR1965Cal355 , that transactions in shares take place on the basis of blank transfer forms and that such a view would affect the entire trade and would be a negation of established practice. It is submitted that there is no way in which a bona fide purchaser for value could find out whether the broker had authority to sell or had no authority to sell. This has been dealt with in para 34 above. As set out above the observations relied upon, can only apply in the context of shares having been left for sale or actually having been sold. Persons buying shares are in a much better position to ascertain the authority to sell than in cases of many other movables. This is so because the name and address of the owner of shares is available on the share certificates. Of course in practice nobody contacts the owner to ascertain whether or not he had authorised sale. But that does not change the legal position. In cases of many movables, e.g., pens, books, bags, furniture, etc., the list could run on endlessly, most of which would be sold in the open market or even on roads, there would be no way that a purchaser could find out if the seller h....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the petitioners had offered to repay. It is submitted that the second respondent were not in a position to return all the units as they had parted with four lakh units. It is submitted that it is only by this order that the second respondent will be in a position to deliver all the units. It is submitted that the petitioners are, therefore, not bound to pay interest from July 7, 1992, onwards. It was also submitted that in the event of the court coming to the conclusion that interest is payable, then it cannot be at a rate higher than the contractual rate which is 15 per cent. On the other hand Mr. Joshi for the custodian points out that the Supreme Court in Lallan Prasad's case,: [1967]2SCR233 , itself, has laid down that if less pledged goods are available then the pawnee will have to give credit for the value of the goods not available and the pawn or can redeem the balance. Mr. Joshi also points out that the amounts were due on June 21, 1992. He points out that on that date the second respondent were not notified. He points out that payment has not been tendered on that date. He submits that even thereafter no attempt has been made to redeem what was available. He points ....