Pandit Chunchun Jha vs Sheikh Ebadat Ali And Another

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 98 of 1953

Decision Date: 14 April 1954

Coram: Vivian Bose, B.K. Mukherjea, Ghulam Hasan

On 14 April 1954 the Supreme Court of India delivered a judgment in the matter of Pandit Chunchun Jha versus Sheikh Ebadat Ali and another. The petitioner was Pandit Chunchun Jha and the respondents were Sheikh Ebadat Ali and the second respondent. The judgment was authored by Justice Vivian Bose and the bench comprised Justice Vivian Bose, Justice B.K. Mukherjea and Justice Ghulam Hasan. The case is reported in 1954 AIR 345 and also appears in the 1955 Supreme Court Reports at page 174. The decision is cited in later authorities identified as D 1963 SC 1906 (7) and D 1992 SC 1236 (11, 15, 18, 21). The substantive statutory provision examined in the case was Section 58(c) of the Transfer of Property Act, 1882, as amended by Act XX of 1929, which deals with the question of whether a document creates a mortgage or effects a sale outright. The author of the report was Vivian Bose, and the bench for the hearing was recorded as Justice Vivian Bose, Justice B.K. Mukherjea, Justice Ghulam Hasan, Justice Ghulam Aiyyar and Justice T.L. Venkatarama.

The headnote of the judgment makes clear that there is no rigid rule for deciding whether a particular transaction constitutes a mortgage by way of a conditional sale or a simple sale with a condition of repurchase; each case must be decided on its own factual matrix. The Court observed that the many decisions of the various High Courts on the same point do not resolve the difficulty because the language of the documents rarely coincides. The decisive factor, according to the Court, is the intention of the parties, which must be inferred from the wording of the document itself after a proper construction of the legal effect of the terms used. When the language of the document is explicit and unambiguous, the Court must give effect to those words and reject any extraneous inquiry into the parties’ subjective thoughts or intentions. However, if the language is ambiguous, the Court may examine the surrounding circumstances to ascertain what the parties intended. In light of the amended Section 58(c), the Court held that when the sale and the agreement to repurchase are set out in separate documents, the transaction cannot be characterized as a mortgage, regardless of whether the documents were executed at the same time. Conversely, the existence of a single document does not automatically convert the transaction into a mortgage or preclude it from being a sale. If the condition of repurchase is incorporated in the very document that effectuates the sale, the Court must interpret the document to determine the parties’ true intention. The judgment referred to several earlier authorities, including Balkishen Das v. Legge (27 I.A. 58), Alderson v. White (44 E.R. 924 at 928), Bhagwan Sahai v. Bhagwan Din (17 I.A. 98 at 102) and Thanda Singh v. Wahid-ud-din (43 I.A. 284 at 293). The proceeding was a civil appeal numbered 98 of 1953, filed by special leave from a judgment and decree dated 27 January 1949 of the Patna High Court. That High Court judgment was itself an appeal from appellate decree No. 690 of 1947 against a decree dated 13 January 1947 of the District Judge, Bagalpur, in Title Appeal No. 161 of 1946, which arose out of the judgment and decree dated 25 July 1946 of the First Additional Subordinate Judge, Bhagalpur, in Title Suit No. 80 of 1945. The judgment concluded with the initials N.C.

Chatterjee, assisted by A. N. Sinha and S. P. Verma, appeared for the appellant, while Murtaza Fazl Ali and Rajinder Narain represented respondent No. I. The order was pronounced on 14 April 1954, and the judgment was delivered by Justice Bose. The matter before the Court was an appeal filed by the plaintiff in a suit seeking redemption of a document that the plaintiff described as a mortgage dated 15 April 1930. The sole issue to be resolved was whether the document represented a mortgage created by a conditional sale, in which case the plaintiff would be entitled to redemption, or whether it constituted an outright sale subject to a covenant of repurchase, in which case the plaintiff would have no right of redemption and would be dismissed.

The property underlying the disputed deed originally belonged to Bijai Tanti, who died leaving a widow, Mst. Phaguni, and two sons, Siban Tanti and Chander Tanti. On 25 May 1922, Siban Tanti alone executed a simple mortgage in favour of the second defendant for Rs. 25. Subsequently, on 6 May 1927, Siban Tanti together with Chander Tanti and Mst. Phaguni executed another simple mortgage over the same land in favour of the first defendant for Rs. 250. After these two mortgages, the transaction now under dispute occurred on 15 April 1930, when the same three individuals executed a deed in favour of the first defendant. The deed recorded a consideration of Rs. 634-10-0 to discharge the second mortgage and an additional cash payment of Rs. 65-6-0 to enable the executants to meet expenses incurred in certain commutation proceedings under section 40 of the Bihar Tenancy Act relating to that very land.

The second defendant later sued to enforce his 1922 mortgage but failed to join the subsequent mortgagee, the first defendant, as a party. He obtained a decree against the original mortgagors alone, which he executed in 1940. Acting on that decree, the second defendant purchased the disputed property and took physical possession on 20 March 1943. A few months later, on 19 August 1943, he sold the land to the plaintiff for Rs. 400. Consequently, the plaintiff’s title derived from the second defendant, who had stepped into the shoes of the original mortgagors by virtue of his 1940 decree.

The plaintiff argued that the 15 April 1930 transaction was a mortgage and that, because the later mortgagee had not been joined in the earlier suit, the plaintiff retained the right to redeem the property. The first defendant contended that the 1930 deed was not a mortgage but an absolute sale together with a covenant to repurchase, and that the covenant had become ineffective because no effort was made to exercise it within the stipulated time. Both the trial judge and the lower appellate court concluded that the document was a mortgage and accordingly decreed in favour of the plaintiff. However, on second appeal, the High Court reversed those findings, held that the deed constituted a sale, and dismissed the plaintiff’s claim. The plaintiff now appealed to this Court, raising again the pivotal question of whether the transaction was a mortgage by conditional sale or an outright sale with a condition of repurchase, a question the Court recognised as frequently contentious and the source of extensive litigation.

In this discussion, the Court observed that considerable effort has been devoted in several High Courts to collect and analyse the numerous decisions dealing with whether a transaction constitutes a mortgage or a sale with a condition of repurchase. The Court considered that such an exercise is largely futile because the language used in different documents rarely matches exactly, and when the surrounding facts must be taken into account, the countless variables that arise make it impossible to draw a direct comparison between one case and another. Consequently, each case must be decided on its own factual matrix. Nevertheless, the Court identified certain overarching principles that continue to guide the analysis. The primary principle is that the intention of the parties governs the characterization of the transaction, as stated in Balkishen Das v. Legge (1). The Court emphasized that there is nothing unique about this requirement in mortgage-sale disputes; as with any document that requires interpretation, the parties’ intention must first be gathered from the wording of the instrument itself. When the words employed are explicit and unambiguous, the Court must give effect to those words, and no external investigation into the parties’ subjective thoughts is permitted. In such circumstances, the real issue is not the parties’ personal intent but the legal effect produced by the language they have used. If, however, the language of the instrument is ambiguous, the Court may examine the surrounding circumstances to ascertain the intended meaning. The Court quoted Lord Cranworth in A. Anderson v. White (2), noting that the rule is one of common sense: an absolute conveyance that contains no indication of a debtor-creditor relationship does not automatically become a mortgage simply because the vendor reserves a right of repurchase. The Court further explained that the essential inquiry in every case is to determine, after a fair construction, the true meaning of the instrument. This approach was adopted by the Privy Council in Bhagwan Sahai v. Bhagwan Din (3) and in Jhanda Singh v. Wahid-ud-din (4). The Court also observed the converse principle: where an instrument on its face clearly declares itself to be a mortgage, it cannot be recharacterised as a sale by invoking extraneous or irrelevant considerations, such as those cited in the referenced authorities. Difficulty arises only in borderline cases where the language is uncertain, and such cases constitute the majority of these disputes. Because of the confusion generated by a multitude of conflicting decisions, the Legislature amended section 58(c) of the Transfer of Property Act, though that amendment introduced another layer of conflicting authority. The Court clarified that when the sale and the agreement to repurchase are documented in separate instruments, the transaction cannot be deemed a mortgage, irrespective of whether the documents were executed at the same time. Conversely, the mere existence of a single document does not automatically mean the transaction is a mortgage.

In this case the Court explained that the presence of a repurchase condition in a single document that otherwise appears to be a sale does not automatically make the transaction a mortgage. The Legislature, by amending section 58(c) of the Transfer of Property Act, deliberately excluded transactions recorded in more than one document from the mortgage category. Consequently, the Court inferred that parties who, after the amendment, deliberately use only one document are presumed not to intend a sale, unless they expressly and clearly state otherwise. If the statutory conditions of section 58(c) are satisfied, the Court held that the deed must be interpreted as a mortgage. The document under consideration, identified as Exhibit A, was therefore examined closely to determine whether its language was ambiguous. For the purpose of construction the Court divided the document into numbered clauses and omitted superfluous wording. The clauses read as follows: (1) “Rs. 634 principal with interest under a registered rehan bond” (simple mortgage) “dated the 6th May, 1927, is justly due ……… by us the executants. Now we further require Rs. 65-6-0 more to meet costs of the suit under section 40.” (Bihar Tenancy Act.); (2) “and at present there is no other way in view rather it seems impossible and difficult to arrange for the money without selling the property let out in rehan” (simple mortgage); (3) “Therefore, we the executants declare … that we sold-and vended the properties, detailed below on condition (given below) for a fair and just price of Rs. 700”; (4) “That we set off Rs. 634-10-0 against the consideration money” (torn) “payable under the aforesaid bond in favour of the said vendee and received Rs. 65-6-0 in cash from the said vendee. In this way the entire consideration money was realised from the said vendee.”; (5) “and we put the said vendee in possession and occupation of the vended property detailed below and made him an absolute proprietor in our places.”; (6) “If we, the executants, shall repay the consideration money to the said vendee within two years ……… the property vended under this deed of conditional sale attached shall come in exclusive possession and occupation of us the executants.”; (7) “If we do not pay the same, the said vendee shall remain in possession and occupation thereof, generation after generation, and he shall appropriate the produce thereof.”; (8) “We, the executants, neither have nor shall have any objection whatsoever in respect of the vended property and the consideration money. Perchance if we do so it shall be deemed null and void in Court.”; and (9) “and we declare also that the vended property is flawless in every way and that if in future any kind of defect whatsoever be found on account of which the said vendee be dispossessed of a portion or the ….” The Court’s first task was to interpret these clauses and determine whether any ambiguity existed. After careful analysis the Court concluded that the language of the deed was not free from difficulty and was indeed ambiguous, because the deed outwardly resembled a sale yet labelled itself a “conditional sale” and contained no clause providing for re-transfer, instead imposing a condition that the executants would recover possession upon repayment within two years.

The deed stated that if the entire property sold under this conditional sale were to be affected by any loss or damage, the executants would become liable to criminal prosecution under the relevant criminal procedure. In addition, the executants agreed to pay the whole consideration amount together with any loss or damage and to add interest calculated at a rate of two rupees per mensem for each hundred rupees from the date the deed was executed until the date of recovery from the executants’ persons and other properties. The executants further undertook that they would not claim the produce of the vended property for the period during which the vendee, or his heirs or representatives, remained in possession of the land. The deed concluded with a statement that the executants had executed the deed of conditional sale for potential future use.

The Court observed that the language used in the deed was difficult to interpret and was ambiguous. Although the deed outwardly appeared to be a sale and even described itself as a “conditional sale,” it lacked a specific clause providing for a reconveyance of title. Clause 6 provided that if the executants paid the money within two years, the property would “come in exclusive possession and occupation of us, the executants.” This clause clearly addressed possession but remained silent on the question of title. The Court inferred that, in the context of the deed, such wording could only mean that, upon payment within the stipulated period, the title would continue to reside with the executants; otherwise, exclusive possession alone would not convey title. The Court noted that silence on title is permissible in a mortgage, where the mortgagor retains legal title and only a reconveyance is unnecessary. By contrast, in an outright sale the title would not return to the original owner without a proper conveyance document.

Clause 7 was said to reinforce this interpretation because it linked the transferee’s right to remain in possession, to occupy the land and to appropriate its produce “generation after generation” with the condition that the executants fail to pay the consideration within the time prescribed. While the words of conveyance in clause 5 would, if read in isolation, pass an absolute title to the vendee, the Court stressed that the deed must be read as a whole. Moreover, the document was drafted by a justice who was described as ignorant of the law and by a scribe whose knowledge of conveyancing was rudimentary and defective. The lack of precision typical of a practiced hand gave rise to the evident ambiguities, which the Court found unmistakable.

The next issue for the Court was whether the document fell within the ambit of section 58(c) of the Transfer of Property Act. If the deed could not be classified under that provision, it could not be treated as a mortgage by way of a conditional sale. The initial question in that analysis was whether the transaction constituted an “ostensible sale,” meaning a transaction that takes the outward form of a sale while, in substance, it is a mortgage. The Court prepared to examine that question in the subsequent discussion.

In this case the Court explained that the outward appearance of a sale is essential to the concept of a mortgage by conditional sale, because although the transaction is essentially a mortgage, it is presented in the form of a sale and is subject to specified conditions. The deed itself expressly states in clause (5) that the executants intend to sell the property, and therefore, if the transaction were not in substance a mortgage, it would be a genuine sale—an actual transfer rather than merely an ostensible one. Conversely, if the transaction is a mortgage, then the requirement of an “ostensible sale” is satisfied.

The Court then turned to the conditions that are relevant to the present issue, namely those contained in clauses (6) and (7). Both clauses are expressed in ambiguous language, but the Court had previously interpreted clause (6) to mean that, should the money be paid within two years, possession would revert to the executants and the title that already rests with them would continue to remain in their hands. The logical result of such a payment would be that the ostensible sale would be void. Clause (7), although poorly worded, can only be understood to mean that if the money is not paid, the sale would become absolute. These are not the literal words of the clauses, but the Court considered this to be a fair construction of their meaning when the entire document is read as a whole. On that basis the Court held that the provisions fall squarely within the scope of section 58(c) of the Transfer of Property Act.

The Court further observed that when a transaction is set out in a single document and its terms are covered by section 58(c), it must be regarded as a mortgage by conditional sale unless the document contains express words indicating otherwise, or unless, in view of the ambiguity, the surrounding circumstances inevitably lead to the opposite conclusion. The deed does not contain any express language stating that it is not a mortgage, although there is ambiguity, so the Court felt it necessary to examine the matter more closely.

The respondents, who contend that the deed represents a sale and not a mortgage, relied on several circumstances drawn from the deed itself. First, they pointed to clause (5), which declares that the transferee has been made the absolute proprietor in place of the executants, arguing that these words indicate a complete transfer of title. Second, they referred to clause (2), where the executants state that they have no other means of raising the required money except by selling the property. The respondents argued that the term “sale” could not have been used inadvertently because it appears in the same sentence where the word “mortgage” is also used, namely in clause (1). They maintained that whenever a mortgage is intended, the word “mortgage” is employed, and therefore, when the word “sale” is employed, a sale must have been intended. The Court noted that this line of argument possesses only a limited weakness, which would be addressed in the subsequent analysis.

The Court observed that when a mortgage is effected by a conditional sale, the transaction must conform to the pattern prescribed by section 58(c) of the Transfer of Property Act. Section 58(c) requires an ostensible sale, and an ostensible sale must display all outward indications that a genuine sale has taken place. The issue can arise only when the word ‘sale’ appears, because a sale inevitably carries with it a transfer of title. The phrase ‘absolute proprietor’ adds no further meaning, since the essential result of any sale is that the vendee becomes the absolute proprietor of the sold property. The Court therefore held that the relevant question was not whether the language attempted to create an absolute proprietor, which section 58(c) already mandates. Instead, the issue was whether the sale was merely ostensible and whether it was subject to specific conditions. Counsel for the respondents pointed to clause three, which described the price as ‘fair and just’, and cited lower court findings that the consideration was not inadequate. He further argued that no interest was charged, the transferee had been placed in possession, was not required to account for usufruct, and that repayment was limited to a two-year term. The Court, however, highlighted a significant fact that Rs. 65-6-0 had been borrowed to enable the executants to pursue commutation proceedings under section 40 of the Bihar Tenancy Act. These proceedings sought to substitute cash rent for rent in kind for the very property described in clause one. The borrowing and the purpose of the proceedings were admitted before the Court, and the lower courts found that the commutation matters related directly to that land. The High Court Judges dismissed this point, stating there was no evidence that the commutation proceedings, which began in 1929, continued after the execution of the deed. The Court identified a mistake in that reasoning because the rental schedule entry presented to the judges omitted the date inadvertently. Mr N. C. Chatterjee then produced a certified copy of the revenue record that supplied the missing date, showing the proceedings continued until 18 February 1931. Thus the proceedings lasted for about ten months after the deed, a fact the Court considered crucial to its analysis. The Court reasoned that a vendor would scarcely borrow money merely to keep revenue proceedings alive, since such proceedings would no longer benefit the seller and would instead advantage the transferee. Another point supporting the appellant was that the surrounding circumstances indicated an existing debtor-creditor relationship between the parties at the date of the transaction. The majority of the consideration was applied to satisfy the mortgage dated 6 May, reinforcing the inference of a creditor-debtor arrangement.

In the year 1927, the Court examined the deed in question and observed that it was drafted in the manner of a mortgage by conditional sale governed by section 58(c) of the Transfer of Property Act. In the absence of any clear evidence to the contrary, the Court inferred that the parties intended for the debtor-creditor relationship to continue beyond the execution of the deed. The Court addressed the argument raised by the respondents concerning the adequacy of the consideration and the lack of an interest component. It explained that the transferee was to obtain possession of the property and, consequently, to receive its produce, and that the wording of the deed indicated that the transferee was not required to render an account of that produce. The Court pointed to clause 9 of the deed, specifically sub-clause (b), which provided that if the transferee’s possession were disturbed, the executants would, among other things, pay the transferee the entire consideration along with interest calculated at two per cent per month from the date of the deed, and that the transferee would not be required to account for the usufruct. Although the same clause could be read in another way, the Court noted that the presence of such severe provisions, together with the threat of criminal prosecution contained in sub-clause (a), demonstrated that the transferee sought to obtain more than a modest recovery from the rural parties involved and would not have consented to account for the profits. The transferee expressly characterized the transaction as an outright sale. In view of these circumstances, the Court concluded that there was no necessity to maintain the usual safety margin between the debt and the value of the property that is typical in ordinary mortgage arrangements. After considering all the material, the Court held that the deed constituted a mortgage by conditional sale within the meaning of section 58(c) of the Transfer of Property Act and allowed the appeal. Consequently, the decree of the High Court was set aside and the decree of the lower appellate Court was restored, except as to costs. The original owners had lost the property, which was valued at more than Rs 10,000 in the special leave petition. The second defendant had ousted the original owners by obtaining a mortgage decree for Rs 130 on a mortgage of merely Rs 25 and had purchased the property at the auction, after which he sold it to the plaintiff for Rs 400. The plaintiff therefore acquired a property that, according to his own evidence, was worth over Rs 10,000 for a payment of only Rs 400. The first defendant had expended merely Rs 250 together with Rs 65-6-0, totalling Rs 315-6-0, while the consideration stipulated in the disputed deed was only Rs 700, indicating that both parties were acting as speculators. The Court directed that each party bear its own costs, and the appeal was allowed.