Shri Bhaskar Waman Joshi (Deceased) and Others vs Shri Narayan Rambilas Aggarwal (Deceased) and Others

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

Court: supreme-court

Case Number: Civil Appeal No. 16 of 1955

Decision Date: 3 November 1959

Coram: J.C. Shah, P.B. Gajendragadkar, P.B. Subbarao, K.

In this matter the parties were Shri Bhaskar Waman Joshi (deceased) and others as petitioners and Shri Narayan Rambilas Aggarwal (deceased) and others as respondents. The case was decided by a two-judge bench of the Supreme Court consisting of Justice J. C. Shah and Justice P. B. Gajendragadkar. The judgment was delivered on 3 November 1959 and is reported in the 1960 volume of the All India Reporter at page 301 and in the Supreme Court Reporter (Second Series) at page 117. The dispute centered on the construction of a deed dated 10 September 1931, which was described in the proceedings as a sale deed but contained several clauses that suggested a conditional arrangement between the parties.

The deed recited that the transferors were indebted and, in order to discharge that liability, three immovable properties were conveyed to the transferees in full ownership, with possession also delivered. Clause (1) of the deed provided that if the transferors demanded reconveyance of any or all of the properties within five years, the transferees were obliged to reconvey them at the transferors’ expense for the price specified in the deed. Clause (2) stated that if, within four years and six months, the transferees neither exercised the right of reconveyance nor wished to retain any of the properties, they could recover the consideration paid and return the properties in whatever condition they might be in due to force majeure, government action, or any other reason. Clause (3) warned that failure of the transferors to comply with a request by the transferees to take back the properties would constitute a breach of the reconveyance agreement and render the transferors liable for damages. The deed also expressly declared that the transferors would lose any right to reconveyance after the expiry of the five-year period.

On the same day the deed was executed, the transferors signed a separate agreement whereby they undertook to pay the difference between the net rent that the transferees would recover from the properties and the original price, together with interest at nine per cent per annum, up to the date of reconveyance. The transferors instituted a suit for redemption on 26 August 1943, asserting that the 1931 deed should be treated as a mortgage by conditional sale. The respondents, in contrast, argued that the transaction amounted to an absolute conveyance subject only to a condition that the transferors could repurchase the properties within five years. Evidence presented showed that the price paid for the properties under the deed was grossly inadequate. The Court held that determining whether a document that appears to be a sale is, in substance, a mortgage depends on the intention of the parties, and that intention must be ascertained from the deed itself, the surrounding circumstances, and the conduct of the parties at the time of execution.

The Court explained that the meaning of the deed must be understood by considering the language of the instrument together with the surrounding circumstances. When a transaction is described as a sale coupled with an agreement to reconvey, it does not create a debtor-creditor relationship, nor does it involve the price being charged on the property that has been transferred. Instead, the sale is conditioned upon an obligation to transfer the property back to the original party within a specified time-frame. By contrast, a mortgage by conditional sale does create a debtor-creditor relationship, because the transfer of the property serves as security for a debt. The Court held that oral evidence of the parties’ intention cannot be used to interpret the covenants of the deed. However, evidence may be admitted to explain or even to contradict the recitals of the deed, provided such evidence is distinguished from the actual terms of the document. Evidence concerning the conduct of the parties at the time of the transaction is admissible as it forms part of the surrounding circumstances, but evidence of the parties’ conduct after the transaction is not admissible. In reaching its conclusion, the Court relied on the precedent set in Narasingerji Gyangerji v. Panuganti Parthasarathi and Others, (1924) L.R. 51 I.A. 305. Applying these principles, the Court found that, when the deed dated 10 September 1931 is properly constructed in light of the surrounding facts, the transaction must be regarded as a mortgage that enabled the transferors to redeem the properties. The judgment proceeds to set out the civil appellate jurisdiction for Civil Appeal No. 16 of 1955, noting that the appeal originates from a decree dated 14 February 1952 issued by the former Nagpur High Court in First Appeal No. 10 of 1945, which itself arose from a decree dated 25 September 1944 of the Second Additional District Judge, Amraoti, in Civil Suit No. 11-A of 1943, transferred as Civil Suit No. 5A of 1944. Counsel for the appellants and respondents were listed, and the date of the judgment was recorded as 3 November 1959, delivered by Justice Shah. The Court described the matter as an appeal against the Nagpur High Court’s decree in Civil Appeal No. 10 of 1945, which had reversed the decree of the Second Additional District Judge, Amraoti in Civil Suit No. 5-A of 1944 and directed the trial court to pass a decree for redemption. The appeal concerned the true legal effect of the deed executed on 10 September 1931 by Shri Narayan Rambilas Aggarwal and his sons Sadan Gopal and Murli Dhar in favour of brothers Bhaskar Waman Joshi and Trimbak Waman Joshi. The deed appeared to convey an absolute title to the specified properties. The transferors argued that the deed was intended to constitute a mortgage under a conditional sale, whereas the transferees argued that it was an absolute conveyance subject to a condition of repurchase exercisable within five years of the deed. The trial court had dismissed the suit, holding that the deed represented an absolute conveyance with a condition of repurchase, and the

In the appeal, the High Court observed that the time limit for reconveyance prescribed in the deed had already elapsed well before the suit was instituted. Accordingly, the Court concluded that the transaction embodied a mortgage by way of a conditional sale. On this basis, the High Court set aside the decree of the court of first instance, reversed it, and ordered that a decree for redemption be entered. The three properties that formed the subject of the dispute were a house situated outside the Amba Gate in Amravati, identified by Municipal No. 5/98; a chawl located in Amravati, bearing the former municipal numbers 6/857, 6/858 and 6/859; and a house on Dhanraj Lane in Amravati, recorded under the older municipal number 3/459. The deed assigned separate monetary values to each of these immovables: the Amba Gate house was valued at Rs 11,500, the chawl at Rs 26,000, and the Dhanraj Lane house at Rs 2,000. At the time the deed was executed, the transferors owed the Imperial Bank of India a sum of Rs 30,000, while an additional liability of Rs 9,500 was owed to the transferees, their relatives and friends. To meet the total indebtedness of Rs 39,500, the parties executed the deed. Possession of the transferred properties was handed over after the tenants occupying them were called upon to surrender their tenancy to the transferees’ attorney. Subsequently, the transferees erected eight shops within the premises of the Amba Gate house during the years 1940-1941 and carried out further construction work in the courtyard of the chawl. In addition, they disposed of the Dhanraj Lane house by selling it to a person named Suraj Mal Salig Ram.

On 26 August 1943, the transferors served a formal notice upon Bhaskar Waman Joshi and the representatives in interest of Trimbak Waman Joshi, stating their willingness to redeem the mortgage that had been created by the deed dated 10 September 1931. The notice also demanded that the transferees provide a full, true and proper account of the sums claimable under the deed. In response, the aforementioned Joshi parties denied that the transferors possessed any right to redeem the conveyed property, contending that the allegation of treating the sale as a mortgage was a post-hoc invention prompted by the recent abnormal increase in property prices. Following this exchange, on 9 September 1943, the three transferors together with other members of their joint Hindu family instituted suit number 5-A of 1943 in the court of the Additional District Judge, Amravati. The suit was filed against Bhaskar Waman Joshi, the representatives in interest of Trimbak Waman Joshi, and Suraj Mal Salig Ram, seeking a decree of redemption on the ground that the transfer effected by the deed of 10 September 1931 was, in substance, a mortgage by conditional sale. Exhibit D-1, which is the deed itself, recites that the transferors were indebted, required Rs 39,500 to discharge their liability, and owed Rs 2,320 to the transferees, an amount that was set off against the larger sum. The balance of Rs 37,180 was then paid by means of eight cheques drawn on the Imperial Bank of India. The deed further states that the immovable properties described therein were conveyed in full.

In the deed the parties stated that ownership and possession of the immovable property had been transferred to the transferees. The deed then set out a series of conditions governing a possible reconveyance of the three houses that formed the estate. The first condition required that, if any of the heirs of the transferors or the transferors themselves demanded reconveyance of one, two or all of the three houses at any time within five years from the date of the deed, the transferees or their heirs would be obliged, at the expense of the transferors, to reconvey the specified house or houses for the prices that were recorded in the deed of sale. The parties further agreed that, to ensure equality of rights, if the transferors or their heirs failed to exercise this right of reconveyance for any of the houses within four and a half years of the deed’s date, and if, for any reason, the transferees or their heirs deemed it inappropriate to retain any or all of the houses thereafter, the transferees or their heirs would be entitled to recover from the transferors or their heirs the amount of consideration that had been paid under the deed, and to return the houses, either all three or any part thereof, in whatever condition they might be at that time. The deed provided that if the transferees or their heirs expressed such a desire and the transferors or their heirs failed to comply, such failure would be deemed a breach of the reconveyance agreement, rendering the transferors and their heirs liable to pay damages. Additionally, the parties agreed that, in the event of a reconveyance, the transferors and their heirs would be required to pay the full price specified in the deed for the estate as it stood at that moment, even if the condition of the property had been altered by any cause, including natural disaster, governmental action, a general decline in market prices or any other reason.

The lower courts differed in their interpretation of the effect of these conditions. The trial judge concluded that the parties intended to effect an absolute sale of the property and that no mortgage relationship existed. The High Court rejected that conclusion and held that the conditions created a mortgage by way of a conditional sale. The Court then referred to clause (c) of section 58 of the Transfer of Property Act, which defines a mortgage by conditional sale as a transaction in which the mortgagor ostensibly sells the mortgaged property on the condition that, upon default of payment of the mortgage money on a specified date, the sale shall become absolute; or on the condition that, upon payment of the mortgage money, the sale shall become void; or on the condition that, upon payment, the buyer shall transfer the property back to the seller. The provision further states that such a transaction shall be deemed a mortgage only if the condition is embodied in the document that effects or purports to effect the sale. The Court noted this definition in order to assess whether the language of the deed and the surrounding circumstances indicated that the parties intended a mortgage rather than an outright sale.

The Court observed that the provision required the condition to be set out in the very document that effected, or purported to effect, the sale. The proviso to this provision had been introduced by Act XX of 1929. Before that amendment, there had been a divergence of case law on whether a condition recorded in a separate deed could be considered when deciding if the principal deed intended a mortgage. The legislature settled this divergence by stating that a transaction could not be treated as a mortgage unless the condition mentioned in the clause was incorporated in the document that effected, or purported to effect, the sale. However, the Court stressed that merely incorporating such a condition in a deed that effects or purports to effect a sale did not inevitably demonstrate that the parties intended a mortgage. The real issue, the Court said, was to determine whether the parties’ intention, as expressed in the language of the deed and read in the context of surrounding circumstances, allowed a transaction that appeared to be a sale to be regarded as a mortgage. While the fact that the condition was embedded in the sale deed must certainly be considered, the importance to be attached to it varied according to the level of formality of the transaction. The definition of a mortgage by conditional sale presupposes the creation of a mortgagor-mortgagee relationship, with the price being charged on the property conveyed. By contrast, a sale that is coupled with an agreement to reconvey does not create a debtor-creditor relationship, nor does it charge a price on the property; instead, the sale remains subject to an obligation to re-transfer the property within a specified period. The distinguishing factor, therefore, is the debtor-creditor relationship and the fact that the transfer serves as security for a debt. The Court noted that the form in which the deed is presented is not decisive. The definition of a mortgage by conditional sale itself assumes an ostensible sale of the property. As the Judicial Committee of the Privy Council had explained in Narasingerji Gyanagerji v. Panuganti Parthasarathi and Others, the mere appearance of a sale with a right of repurchase, even if the conveyance language repeatedly emphasizes an absolute interest or a right of repurchase where time is of the essence, does not control the analysis. Each case required an examination of the true character of the transaction, derived from the deed’s provisions read against the surrounding circumstances. When the language of the deed is plain and unambiguous, the Court held that it must be given its ordinary legal effect in light of the surrounding evidence. If, however, the language is ambiguous, the Court said that the parties’ intention may be discerned from the deed’s content together with any relevant extrinsic evidence that may be admissible.

In this matter, the Court explained that external evidence may be admitted to demonstrate how the language of a deed relates to the facts existing at the time of the transaction. Oral statements of intention, however, are not permissible for interpreting the covenants contained in the deed. Evidence may be offered, though, to clarify or even to contradict the recitals when those recitals are distinguished from the operative terms of the document. Evidence of conduct that occurred at the same time as the execution of the deed is always admissible as a surrounding circumstance, whereas evidence of conduct that occurred after the parties had acted is not admissible. This principle was articulated in the case reported at (1) (1924) L.R. 51 I.A. 305. Applying these principles, the Court proceeded to ascertain the true nature of the instrument labelled Ex. D-1 by examining its conditions of reconveyance. The first condition required the transferees to reconvey the property to the transferor within five years from the date of the conveyance, at the expense of the transferors and for the price specified in the deed. The second condition provided that if, within four years and six months of the conveyance, the transferors had not exercised their right of reconveyance in respect of any of the three houses, and if the transferees did not wish to retain any or all of the houses, the transferees could demand recovery of the consideration and could return any or all of the houses in whatever condition they might be in. The third condition stipulated that should the transferors refuse to take back the houses after such a request, this refusal would constitute a breach of the reconveyance agreement, rendering the transferors liable to pay damages. The fourth condition stipulated that, upon reconveyance, the transferors would pay the full price set out in the sale deed and would take back the houses in whatever condition they might be, whether that condition resulted from force majeure, governmental action, or any other cause.

From these provisions the Court observed that the transferors possessed under the deed a right to demand reconveyance of the properties within five years from the date of the conveyance. After the lapse of four years and six months, the transferees were afforded the option to demand that the transferors take back any or all of the houses for the prices stipulated in the deed, and that, if this option were exercised, the transferors were bound to accept the properties and to return the price even if the properties had been adversely affected by force majeure or public authority action. The deed, however, did not specify a time limit within which the transferees could exercise this option. Assuming that the option to reconvey the properties for the agreed price was to be exercised by the transferors before the expiry of five years from the deed’s date, the covenant that any damage to the property—even arising from circumstances beyond the transferees’ control—would be borne by the transferors upon reconveyance is strongly indicative of a mortgage. By this covenant, the parties intended that the price paid function as a charge on the property, consistent with a mortgage arrangement.

In this transaction the transferees were given a specific right to require the transferors to “take back” either all or any of the houses and to refund the price that had been paid, which showed that the amount paid was effectively a charge on the property itself. The transferees further secured possession of the properties by directing the tenants to attest allegiance to them; consequently the possession of the transferred property was handed over and the title was entered in the names of the transferees. An explicit covenant in the deed made the five-year period a condition of essential performance, yet, as observed in the earlier Narasingerjis decision, describing the instrument as an absolute sale and treating the repurchase option as a right whose timing is of the essence does not, by itself, determine the real character of the arrangement. The surrounding circumstances at the time of execution supported the interpretation that the instrument recorded as Exhibit D-1 was intended to function as a mortgage. Prior to executing Exhibit D-1, the parties prepared a draft sale deed (Exhibit P-13) which listed only two properties: the Amba Gate house valued at Rs 10,000 and a chawl valued at Rs 25,000. In the final sale deed an additional property, the Dhanraj Lane house, was included and valued at Rs 3,500. The transferors were evidently under financial strain and required an immediate cash infusion of Rs 30,000 to settle their liability to the Imperial Bank; together with other obligations to the transferees, their relatives and friends amounting to Rs 9,500, the total sum demanded was Rs 39,500, which was the consideration for the conveyance of the said properties. On the very day the deed was executed, the three transferors also executed an ancillary agreement (Exhibit D-3). That agreement stated that the sale deed was executed for the purpose of discharging past debts, that cheques were taken from the transferees, and that the transferees were placed in possession of the houses. The transferors then requested that the transferees refrain from registering the deed for at least eight to fifteen days, preferably for two months, because the transferees needed time to arrange payments to the creditors and feared that immediate registration might provoke further claims from other creditors. The transferors further explained that the transferees expected to earn an income of nine per cent per annum from the houses until reconveyance, but after deducting repair and insurance expenses the net profit would be negligible. Accordingly, the transferors had already agreed that the reconveyance clause in the sale deed would become operative only when the transferors or their heirs repaid to the transferees all expenses recorded in the transferees’ accounts and satisfied the nine per cent interest stipulated.

In this case the Court observed that the agreement and the sale deed were executed on the same day, and that by virtue of that agreement the transferors promised to pay the difference between the net rent to be recovered and interest at nine per cent on the price until the date of reconveyance, with the right of reconveyance becoming enforceable only when that difference—calculated as interest at nine per cent on the price minus the rent recovered after deducting repairs and insurance charges as shown in the transferees’ books of account—had been paid. The Court described this arrangement prima facie as a personal covenant whereby the transferors undertook to pay interest at the rate of nine per cent on the price paid up to the date of reconveyance. The language of the agreement, the Court noted, strongly indicated that the parties treated the transaction recorded in the deed dated September 10, 1931, as a mortgage. The transferees had contended that the covenant required them to erect additional structures on the land at their own expense and to collect rent that might be equivalent to interest at nine per cent on the price paid and on the amounts they spent; however, the Court found that contention unsupported by the deed, because the deed contained no reference to any extra expenditure by the transferees for constructing buildings, and the reference to the transferees’ books in the agreement was solely to bind the transferors to the accounts maintained by the transferees. Counsel for the transferees argued that the agreement was inadmissible in evidence because it had not been registered. The Court examined the document ex facie and held that it did not purport to create, declare, limit or extinguish any right, title or interest in immovable property; rather, it incorporated only a personal covenant, and therefore the plea that the document was wholly inadmissible for lack of registration was difficult to sustain. While the agreement indisputably contains a condition relating to reconveyance that is incorporated in a registered instrument, the Court held that such a condition might not be admissible in the absence of registration if it were intended to evidence an alteration of the reconveyance terms. Nevertheless, the Court concluded that the portion of the agreement evidencing the personal covenant to pay interest at the specified rate was admissible. The Court found it a somewhat singular circumstance that, before the High Court, counsel for the parties were invited to argue whether the document was required by law to be registered, yet the counsel insisted that the document could be admitted without registration and argued the case on that basis. The Court also noted that the adequacy of the price paid could be considered. The trial court had held that the consideration for the properties was not inadequate, but the High Court had opined that the consideration was wholly inadequate. Counsel for the transferees further contended that the monthly rent received from the tenants occupying the properties was Rs 270, and that after deducting Rs 48 for municipal taxes and an amount equal to two months’ rent as properly chargeable for repairs, insurance and collection, a balance of Rs 186 per month remained for the transferees.

The Court observed that after deducting municipal taxes and charges, only Rs. 186 per month remained available to the transferees. When the net rent was capitalised at six per cent, the Court held that the value of the property could not exceed Rs. 30,000. Even if the net rent were capitalised at five per cent, counsel argued that the property’s value might be roughly equal to the amount actually paid. However, the Court noted the absence of clear evidence regarding the exact municipal taxes payable on the houses and whether such taxes were the responsibility of the tenants or the landlord. Dr. Trimbak Joshi, one of the transferees, testified in Suit No. 112 of 1932 that the tax amounted to Rs. 48 at the time of purchase, but he did not specify that this sum was a monthly obligation. Further evidence from the witness Balkrishna, examined by the transferees, indicated that the water tax was paid by the tenants. In their written statement, the transferees presented a detailed income-and-expenditure account covering the years 1931 to 1940. The expenses recorded against income were Rs. 426-11-0 for 1933, Rs. 346-15-6 for 1934, Rs. 542-2-6 for 1935, Rs. 1,666-7-0 for 1936, Rs. 1,160-1-3 for 1937, Rs. 529-2-3 for 1938, Rs. 570-11-3 for 1939, and Rs. 46-2-0 for 1940. The Court noted that if Rs. 48 in municipal tax were payable each month, the tax liability alone would far exceed the total expenses charged against the rent received, demonstrating that the municipal taxes were borne by the tenants rather than the landlords. The High Court, in paragraph 34 of its judgment, had estimated the rental value of the properties at Rs. 245 per month and capitalised this amount at five per cent. The Court found no error in the High Court’s acceptance of a net monthly rent of Rs. 245. Regarding the land measurements, the Court recorded that the Amba Gate house comprised 9,037 square feet of land, the Chawl covered 23,805 square feet, and the Dhanraj Lane house occupied 817 square feet. Although precise evidence of the area covered by the structures was lacking, it was conceded that the structures stood on less than half of the total land area. From the valuation reports, the Court inferred that approximately 5,800 square feet of the Amba Gate house land and about 12,000 square feet of the Chawl land remained open. The Court explained that capitalising rental to value land with structures can provide a reliable estimate of the combined value only when the land is fully developed through erection of structures. When the land is not fully developed, using rent-capitalisation may not yield dependable data for assessing market value, and aggregating the separate values of land and structures may not produce a scientifically accurate overall valuation.

The Court noted that estimating the value of land together with a structure by valuing the land and the structure separately does not yield a scientifically accurate combined value, although such a method may provide a rough estimate when the land is relatively valuable and the structures are old and of comparatively small worth and no other reliable data are available. The valuation reports identified as Exhibits D-52 and D-53 were prepared by a valuer to determine the market value of the Chawl and the Amba Gate house respectively. According to Exhibit D-52, the valuer initially placed the value of the super-structure of the Chawl at thirty-one thousand seven hundred eight rupees, but then applied a deduction of twenty per cent purportedly “as per the Superintending Engineer’s letter dated 21 August 1931”, without explaining the basis for that deduction. The valuer subsequently deducted another twenty per cent as depreciation on the cost of the building, thereby arriving at a final super-structure value of twenty thousand two hundred ninety-three rupees. The Court observed that this sequence demonstrated a deliberate attempt to reduce the super-structure value by at least one unjustified twenty per cent deduction. Even assuming the reduced figure of twenty thousand two hundred ninety-three rupees to be correct, the total value of the Chawl together with its land would considerably exceed twenty-six thousand rupees. The valuer had assessed the land at four annas per square foot, but the record contained no reliable evidence to support that rate. In the case of the Amba Gate house, the valuer placed the super-structure value at eighteen thousand five hundred fifty-six rupees and then applied a twenty per cent reduction “with effect from 22 August 1931” in accordance with the Superintending Engineer’s letter dated 21 August 1931, followed by a further twenty-five per cent depreciation charge on the building, resulting in a net figure of eleven thousand one hundred thirty-four rupees, to which the land value at four annas per square foot was added. The Court held that the evidence did not justify assuming the land was worth only four annas per square foot, especially because, as the High Court had pointed out, the sale deeds identified as Exhibits P-9 and P-21 showed that land prices fluctuated between one rupee and two rupees four annas per square foot. Even if the lower of those rates were applied, the computed value of the Chawl at the Amba Gate house would still far exceed the price reflected in the sale deed. Concerning the house in Dhanraj Lane, the draft sale deed valued it at three thousand five hundred rupees while the final sale deed recorded a value of two thousand rupees, and no explanation was offered for this discrepancy. The Court found substance in the argument advanced by counsel for the transferors that a valuation of two thousand rupees for a house comprising a ground floor and two stories was artificial. The evidence further disclosed that the house was let out for a monthly rent of twenty rupees, and that capitalising this rent at five per cent, on the assumption that the land had been fully developed by construction, would produce a price more than double the amount set in the deed.

The Court observed that, at the time of the construction, the land had been fully developed and its market price exceeded by more than twice the amount recorded in the deed. This disparity demonstrated that the valuation reflected in the deed did not correspond to the actual worth of the property when it was transferred. The Court further noted that the house situated on the premises was deliberately and clearly incorporated into the deed. This was done to achieve a total declared value of Rs. 39,500, which the transferors required to meet their pressing financial needs. Counsel for the transferees attempted to rely on evidence of the transferors’ subsequent conduct, arguing that such conduct indicated the transaction should be characterised as a sale. However, the Court reiterated that that evidence was inadmissible, as it had already been excluded in the earlier consideration of the matter. In the Court’s assessment, the High Court had correctly held that the document marked as Exhibit D-1 represented a mortgage rather than a sale of the property. Accordingly, the appeal was found to lack merit and was dismissed, with the appellant ordered to bear the costs of the proceedings. The final order thereby dismissed the appeal in its entirety and confirmed the lower court’s decision as previously stated.