Kedar Nath Motani And Ors. vs Prahlad Rai And Ors.
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: Supreme Court of India
Case Number: Not extracted
Decision Date: 25 September, 1959
Coram: K.C. Das Gupta, M. Hidayatullah
In this case the appeal, accompanied by a certificate granted by the High Court of Patna, was filed against the judgment and decree dated 6 March 1952. That judgment of the High Court had set aside the decree of the Subordinate Judge of Motihari dated 29 March 1946. The original suit had been instituted by the present appellants seeking a declaration of title to approximately 136 bighas of Ryotikasht lands and also seeking possession of those lands, either exclusively or jointly with the defendants. In addition, the appellants claimed mesne profits and interest. The Subordinate Judge had decreed in favour of the appellants on the basis that the defendants were occupying the suit lands as benamidars. The trial judge found that the consideration for acquiring the lands had originated from a predecessor of the plaintiffs, who had obtained the lands in the fictitious names of Prahlad Rai, Gulraj Rai and Nawrang Rai. The trial judge also held that these benamidars were related to Radhumal by marriage and that Radhumal found it convenient to use their names. The respondents accepted these findings before the High Court, but they raised before that Court certain contentions that the trial judge had identified against them. In the plaint, the appellants explained why they had acquired the property in the names of Prahlad Rai, Gulraj Rai and Nawrang Rai, stating that the terms of the lease required that ryoti lands taken in the names of the lessee or his relatives and servants could be resumed by the Bettiah Raj after the lease terminated, and that the benami arrangement was entered into to avoid that contingency. The respondents, therefore, contended before the Court of First Instance that the predecessor of the appellants had caused the lands to be settled by the Bettiah Raj in those fictitious names in order to perpetrate a fraud upon the Bettiah Raj, and that because the fraud had succeeded the plaintiffs‑appellants were not entitled to a judgment. They further contended that after the termination of the appellants’ lease with the Bettiah Raj, the lands were settled or deemed to be settled with the respondents. The High Court accepted both of these grounds. In the Supreme Court the respondents have maintained the same position and have additionally argued that the acquisition of the lands had been achieved by forging the signatures of Prahlad Rai, Gulraj Rai and Nawrang Rai, and therefore the appellants could not obtain a judgment under the maxim ex turpi causa non oritur actio. Nevertheless, the respondents submit that even if the Court were to find that both parties conspired to deceive the Bettiah Raj or were guilty of illegality, the principle potior est conditio
By the judgments of the two lower courts and the admission made by the respondents, the Court held that every question of fact was finally settled and could not be reopened. Consequently, the issue of whether the acquisition had been benami was taken as conclusively decided, and the matter could be examined only in the light of the legal maxims previously quoted and the question of whether any fraud had been intended against the Bettiah Raj, whether such fraud had been carried out, and who was responsible for it. Although the question before the Court seemed narrowly framed, it was necessary to set out the substantial factual background that related to the history of the land acquisitions. On 1 April 1922, the manager of the Court of Wards of the Bettiah Raj granted a lease of the village Bijbania for a period of ten years, corresponding to the period Asin 1327 to Bhado 1336, as shown in Exhibit 7, to Radhumal, who was the karta of the joint family that is now represented by the plaintiffs and by Mahadeo, who is identified as respondent 6. The lease was subsequently renewed on 26 June 1931 for another ten‑year term, covering the period 1337 to 1346. Two specific conditions of that lease are material for the further discussion and are reproduced here for ease of reference. The fourth condition required that no settlement of land with a raiyat or any other tenant could be effected without the manager’s consent; any application for such consent had to state the lessee’s reason for seeking the settlement, describe the portion of land that would remain in the demised property after the settlement, and disclose whether the proposed settlement involved a relative or servant of the lessee. Moreover, the manager was empowered to impose, as a condition of granting consent, a charge of his own assessment on the settlement, described as a salami. The sixteenth condition prohibited the lessee from retaining possession after the lease expired of any raiyati holdings or other interests in the leased property that had been acquired during the lease term, whether by private purchase, auction purchase, mortgage, sub‑lease, surrender or any other mode. Any such interest acquired would vest in the lessor, although the lessee was entitled to receive from the lessor a sum equivalent to any loss suffered by the lessee in acquiring the holding at auction for arrears of rent. That loss would be calculated by deducting from the purchase price the profits the lessee earned from the land after purchase, subject to any general instructions issued by the Board of Revenue, and the manager’s determination of that amount would be final. The Court then proceeded to consider the matters raised in paragraph 6.
Between the years 1920 and 1925 the lessee named Radhumal obtained a total of approximately 136 bighas of land that later became the subject of the present dispute. Of this total, about 94 bighas were bought at a Court sale, roughly 7 bighas were acquired through private transactions, and approximately 6 bighas were taken over by abandonment of the earlier tenants. The aggregate of 136 bighas also contained around 27 bighas described in the records as Ghair Mazrua, Patti Kadim and Kabil Lagon. These particular parcels were settled by the authority of the Bettiah Raj in favour of three persons, namely Prahlad Rai, Gulraj Rai and Nawrang Rai. The present respondents comprise Prahlad Rai and the legal representatives of the other two individuals. In the process of settling these lands, Radhumal, who acted as lessee, recommended the three men to the Bettiah Raj and, according to the evidence admitted, caused their signatures to appear on the settlement documents even though the actual signatories were other persons. The purpose of this device, as the Court observed, was to evade the operation of clause 16 of the lease, which required the lessee to forfeit possession after lease expiry, and also to diminish the salami payable to the Bettiah Raj under clause 4, because a stranger paid a lower amount than the lessee, his relatives or servants. The respondents denied these allegations, asserted that the settlement had been made directly by the Bettiah Raj, and maintained that they were not benamidars of Radhumal. Nevertheless, they relied on the factual content presented by the appellants concerning the device used to sidestep clauses 16 and 4, and further alleged that Radhumal had committed an illegal act by forging the signatures of Prahlad Rai, Gulraj Rai and Nawrang Rai on the documents filed with the Bettiah Raj.
Radhumal died on 28 February 1934. After his death, the third appellant, Bala Prasad, was formally adopted, and this adoption received recognition from the Bettiah Raj, resulting in the lease being transferred to Bala Prasad’s name. In 1935 the widow of Radhumal, allegedly at the urging of Mahadeo (respondent 6), repudiated the adoption, and Mahadeo himself began to disavow any interest in the property. Simultaneously the other respondents asserted their own title against the heirs and representatives of Radhumal. It was further alleged that Mahadeo removed all the kabalas and several receipts, handing them over to Prahlad Rai; those documents were subsequently used by the respondents in later proceedings. In 1936 criminal proceedings under section 144 of the Code of Criminal Procedure were instituted, and on 4 June 1936 the Sub‑Divisional Officer issued an order terminating the proceedings in favour of Prahlad Rai’s party. That order was set aside by the District Magistrate of Champaran, and on revision the High Court reversed the District Magistrate’s finding, although the rule itself was discharged. The High Court then suggested that proceedings under section 145 of the Code be started if there was any apprehension of a breach of peace. Such proceedings were indeed commenced and finally concluded on 18 May 1942 with an order against the appellants. Consequently the appellants were compelled to file the present suit, contending that the criminal court decision cast a cloud over their title to the disputed lands.
The Court noted that proceedings were initiated under section 145 of the Code of Criminal Procedure on the ground that there might be a threat to public peace. These proceedings continued until an order dated 18 May 1942 terminated them against the appellants. The appellants explained that they were forced to institute the present suit because, in their view, the criminal‑court decision created uncertainty about their title to the land. The trial court, presided over by the Subordinate Judge, had framed a single principal question for determination. The question read: “Are the defendants farzidars of the plaintiffs in respect of the suit lands?” The Court observed that this issue had already been conclusively decided in favour of the appellants at the trial stage. However, on appeal, the High Court held that, despite the favourable finding, the appellants could not obtain a judgment because the High Court believed they had perpetrated a fraud upon the Bettiah Raj, and such fraud, in its view, disqualified them from relief. The High Court also concluded that after the lease had ended, the answering respondents should be treated as ryoti tenants of the Bettiah Raj, on the basis that rent was being collected from the respondents rather than from the former lessee. One of the learned judges of the High Court based his decision mainly on this tenancy point, while the learned Chief Justice provided reasons for both the fraud allegation and the tenancy determination. The Chief Justice further mentioned that certain illegal acts allegedly committed by Radhumal strengthened the respondents’ position.
Turning to the question of whether a new tenancy had been created by the Bettiah Raj after the expiry of the lease granted to Radhumal, the Court observed that this issue had never been pleaded by the answering respondents. Because the contention required fresh evidence and additional material, the Court found it difficult to accept a proposition that was not part of the pleadings. The respondents maintained that they had originally taken settlement of the lands directly from the Bettiah Raj at the outset, and therefore there was no occasion for a subsequent settlement after the lease terminated. The Court pointed out that the record showed no issuance of new B.H. forms—documents used to record settlements with ryoti tenants—after the lease’s expiry. R. N. Prasad, identified as plaintiff’s witness 3, testified that a certified copy of the B.H. form relating to the original settlement had been provided to the settle for his information, and that no new B.H. forms had ever been produced by the respondents. In light of these two factual observations, the Court concluded, with due respect, that the High Court had erred in constructing a new case for the respondents. It emphasized that an appellate court is not permitted to consider matters that were not raised by any party and to pass judgment on such unpleaded issues.
The Court set aside for further analysis two legal maxims and the issue of alleged fraud against the Bettiah Raj. It observed that the maxim concerning parties being equally at fault, commonly expressed as “in pari delicto,” could not readily be applied in the present circumstances. Neither the appellants nor the respondents had, at any stage, alleged that Prahlad Rai, Gulraj Rai or Nawrang Rai had conspired to perpetrate a fraud on the Bettiah Raj. Consequently, the positions of the two sides were fundamentally opposed. The appellants asserted that Radhumal had proceeded without seeking the consent of those three individuals and had failed to obtain their signatures, whereas the respondents maintained that Radhumal had no involvement in acquiring the lands and had merely recommended them to the Bettiah Raj in his role as lessee. Because neither side demonstrated a conspiracy to defraud a third party or any other illegal conduct, the Court held that the “in pari delicto” principle was inapplicable. The Court further noted that the appellants and the responding parties were not in a state of mutual fault. The respondents presented themselves as innocent purchasers who had obtained the lands independently, while the appellants claimed that the respondents were unaware of the transaction and had not been consulted. In the Court’s view, invoking the maxim in this case was a mistake.The next point for consideration was whether a fraud had been committed against the Bettiah Raj and, if so, whether it had succeeded. The appellants argued that the Bettiah Raj possessed full knowledge that the transaction was a benami arrangement and that a payment, termed salami, of Rs 1,680 had been made, with a waiver only for parcels deemed not worth demanding a salami. According to the appellants’ evidence, the Bettiah Raj had been informed of the benami nature of the deal, and Rai Bahadur Motilal Basu, who served as Assistant Manager of the Bettiah Raj under the Court of Wards, had also been made aware. Witness R.H. Prasad (PW 3) confirmed that Rai Bahadur Motilal Basu was the Assistant Manager of the estate and described him as an experienced officer. Witness Narain Lal (PW 17) testified that, in his presence, Radhumal told Motilal Basu that he was recording settlements in the fictitious names of his relatives. The Court further observed that, in 1936, when the dispute was before the District Magistrate of Champar An, all these facts were presented by both parties in proceedings under sections 144 and 145 of the Code of Criminal Procedure. The District Magistrate, an officer of the Court of Wards, was already aware in 1936 that Radhumal had taken the tenancies in a benami manner. After the lease expired, the Court of Wards chose not to enforce clause 16 despite this knowledge. Accordingly, the Court concluded that the alleged fraud was not consummated, because the party purportedly defrauded—the Bettiah Raj—knew all relevant facts and deliberately elected not to take any action.
The record contains no evidence besides the appellants’ pleading that the salami paid for the lease was improbably low. In contrast, the respondents asserted that they had discharged the salami from their own resources and that the amount was proper. The Court, however, accepted the established finding that Radhumal himself had paid the salami, and this point was not presently disputed. Because the parties’ admissions contradicted each other, the issue remained unresolved and was left open for determination. No question was framed on the sufficiency of the salami, and consequently the court never tried that aspect of the dispute. Since the evidence did not show that any fraud had been carried out, the Court felt that the appellants, who had clearly demonstrated the benami character of the transactions, could not be denied their judgment. Public‑policy considerations supported this view, because where fraud was merely contemplated but not executed, the law should prevent the defendants from inventing a fresh fraud. The Court also noted that the authorities on the subject did not extend the doctrine to deprive a plaintiff of relief when the alleged fraud had not been consummated. Accordingly, the appellants were not to be penalised for the mere existence of a questionable arrangement that had not resulted in an actual loss to the estate.
The Court then turned to the question of whether the High Court had correctly dismissed the suit on the ground of the maxim ex turpi causa, which bars relief when the cause of action is founded on an immoral or illegal act. To resolve that issue, the Court first examined the factual matrix upon which the appellants based their contention that the property had been transferred in benami names to evade clause sixteen of the governing lease. The records showed that the application to the Bettiah Raj had been signed in the names of Prahlad Rai and other individuals, but the signatures had actually been affixed by Radhumal or by persons acting under his direction. This arrangement was explained by the close relationship among Radhumal, Prahlad Rai and the other named parties, which the parties claimed rendered it unnecessary to obtain their personal participation in the filing process. The matter had also been brought to the attention of the Assistant Manager of the Court of Wards, creating an opportunity for an inquiry into the authenticity of the signatures and the manner in which they were obtained. While the law recognises that forging another person’s signature without consent is a criminal offence, the Court observed that the parties’ intention was not to create a false signature but rather to file the application using the names of those individuals. Assuming that some illegality had occurred in the procurement of the signatures and in the preparation of the B.H. forms, the Court considered whether that illegality was sufficient to invoke the ex turpi causa defence and to bar the suit altogether. The Court then referred to the longstanding principle articulated by Lord Mansfield in the 1775 decision of Holman v. Johnson, which declares that no court will assist a claim that is founded on an immoral or illegal act. The maxim ex turpi causa, as explained in that authority, bars relief when the plaintiff’s cause of action arises from a wrongful or illicit conduct, unless an exception applies.
In that passage, the Court explained that when a party transgresses a positive law of this country, the Court declares that the plaintiff has no right to receive assistance. The Court said this principle was applied not for the benefit of the defendant but because the Court would not lend its aid to a plaintiff whose cause of action arose from an illegal act. The Court further observed that if the parties were to exchange positions—so that the former defendant became the plaintiff—the latter would gain an advantage, because when both sides are equally at fault, the condition of the defendant is considered more favorable.
The Court noted that there are certain recognised exceptions, sometimes described as “supposed exceptions,” to the strict rule of turpi causa. In the treatise by Salmond and William on Contracts, four such exceptions were listed, and the fourth exception concerned the right of restitutio in integrum when a trustee‑beneficiary relationship is involved. The Court quoted Salmond’s formulation that if A hires B to commit a robbery, A cannot sue B for the proceeds, and similarly, if A places property in B’s hands to execute a fraudulent scheme, A cannot sue B for an account of the profits. However, the Court explained that when B, acting as A’s agent or trustee, receives money from C on A’s account pursuant to an illegal contract between A and C, the situation is different. In that circumstance, A may recover the property from B, even though A could not claim it directly from C, because public policy demands that the rule of turpi causa be set aside in favour of the more compelling principle that agents and trustees must faithfully perform the duties of their offices.
Williston, in his revised edition of the Book on Contracts, discussed the matter and identified particular exceptional cases. He stated that recovery may be allowed to either partner or principal when the illegality involved is of a light or venial character, such that public policy would be more opposed to allowing the defendant to breach his fiduciary duty than to permitting the plaintiff to benefit from the illegal transaction.
The Court further observed that Indian jurisprudence had also recognised exceptions to the turpi causa rule, citing cases such as Palaniyappa Chettiar v. Chockalingam Chettiar and Bhola Nath v. Mul Chand. The respondents, relying on authorities including Farmers’ Mart Limited v. Milne, Alexander v. Rayson, and Berg v. Sadler and Moore, argued that the present case fell within the established rule applied in those precedents. However, the Court indicated that the application of the rule was conditioned by a single requirement: a plaintiff who is barred from success must be unable to sustain an action except on the ground of the illegality he himself committed.
The Court explained that a plaintiff could maintain an action only by relying on the plea that the illegality was committed by the plaintiff himself. In Lord Dunedin’s speech in Farmers' Mart Limited v. Milne [[1915] A.C. 106], three authorities were cited: Simpson v. Bloss [(1816) 7 Taunt. 246; 129 E.R. 99], Fivaz v. Nicholls [(1846) 2 C.B. 501; 135 E.R. 1042] and Taylor v. Chester [(1869) L.R. 4 Q.B. 309]. The first case established the test of whether a demand arising from an illegal transaction could be enforced at law and whether the plaintiff needed any assistance from the illegal transaction to prove his claim. In the second case, Chief Justice Tindal observed that the matter could be decided on the short ground that the plaintiff could not establish his claim as stated on the record without relying upon the illegal agreement originally entered into between himself and the defendant. The third case, according to Justice Mellor, required the true test to be whether the plaintiff could make out his case without using the illegal transaction as the medium or aid, when the plaintiff himself was a party to that transaction.
In Alexander v. Rayson [[1936] 1 K.B. 169], the Court of Appeal held that a locus poenitentiae existed but that the plaintiff’s repentance had to occur before the fraud or illegality was carried out. More recently, the Court of Appeal in Bowmakers Ltd. v. Barnet Instruments, Ltd. [[1945] 1 K.B. 65] reviewed the law and declared that not every illegality entitled the Court to refuse a judgment to the plaintiff. Lord Justice Du Parcq stated that, as a general rule, a person’s right to possess his own chattels would be enforced against one who detains them without any claim of right, even if the chattels came into the defendant’s possession through an illegal contract, provided the plaintiff does not have to base his claim on that illegal contract or plead its illegality to support his claim. The Court noted that Professor Hamson had criticised this position in the 1949 Cambridge Law Journal, 249, and had limited its application to the clearest cases. Justice Pritchard also examined the issue in Bigos v. Bousted [[1951] 1 All. E.R. 92], referring to all the authorities. The Court concluded that the correct legal approach is to determine whether the illegality is so fundamental to the matter that the plaintiff cannot bring his action without relying on the illegal transaction he entered into; if the illegality is trivial or venial, public policy requires that the defendant not be allowed to profit from the plaintiff’s illegal conduct.
When the plaintiff did not have to base his case on the illegal contract, public policy required that the defendant could not profit from that circumstance. Nevertheless, the court insisted on a strict examination of the plaintiff’s conduct, refusing to permit him to evade the illegality by employing subterfuge or by mis‑stating material facts. The court further held that if the issue was clear, the illegality did not need to be pleaded or proved as part of the cause of action, and the plaintiff had withdrawn his claim before the illegal purpose could be accomplished, then, unless the misconduct was of such a shocking character as to outrage the conscience of the court, the defendant’s plea should not succeed.
The court observed that benami transactions are common in India and have long been recognised as arrangements in which the benamidar holds property in trust for the real owner. In the present matter, the purpose of the benami scheme was merely to prevent the Bettiah Raj from resuming the land when the lease, granted in favour of Radhumal, expired; the Raj could have exercised that power if it had so desired. The information concerning the benami arrangement was not concealed from the Raj, and despite having that knowledge the Raj took no steps against Radhumal or the benamidars. The plaintiffs withdrew their claim by asserting their true title and facts before the Raj had any occasion to act. Consequently, although a fraudulent intent existed, the fraud was never carried out because it could have been effected only at the end of the lease term, and the lessee’s right of repentance (locus poenitentiae) was exercised well before the lease concluded. The court further characterized the illegality as trivial, noting that the signatures of Prahlad Rai and others on the relevant documents were obtained on the basis of close friendship and the assumption that the signatories would not object to the application made on their behalf or to the signing of the B. H. forms in their names. The appellants were not required to prove this factual circumstance as part of their cause of action, and, according to the respondents, the signatures were asserted to be genuine and not forged. In establishing the benami nature of the transaction, the essential element was the source of the money, which had been proved, and it was also shown that Prahlad Rai and the others were merely farzidars. The court held that proof of the signatures was unnecessary, and that the plaintiffs could successfully demonstrate the benami character of the transaction without relying on the additional allegation that the signatures were affixed without the signatories’ knowledge.
The Court thought that, on the facts of the present dispute, the strict application of the maxim “ex turpi causa non oritur actio” could not be entertained, and that the exceptional situation previously mentioned was, in fact, applicable. Accordingly, the Court concluded that the appellants had successfully demonstrated that the properties in question were acquired through benami arrangements, a point that was not contested at this stage. The Court further observed that the revelation that the signatures of Prahlad Rai and the other individuals on certain related documents were not, in fact, their own signatures did not deprive the plaintiffs‑appellants of their entitlement to a decree. The Court noted that the High Court had failed to consider the recognised exceptions to the rule embodied in the maxim and had proceeded on the assumption that any illegality or fraud automatically disqualified a plaintiff from obtaining a judgment, a position that the Court held to be contrary to law. In light of this reasoning, the Court held that the appellants were rightfully entitled to a decree in their favour and that the High Court’s refusal to grant such relief was erroneous. Consequently, the Court set aside both the judgment and the decree issued by the High Court of Patna and restored the judgment and decree of the Subordinate Judge of Motihari. Considering the circumstances, the Court decided that no order regarding costs of this appeal would be made. The appeal was therefore allowed.