Gwvalier I. J. Iyyappan and Another vs The Dharmodayam Company

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 565 of 1960

Decision Date: 27 March 1962

Coram: J.L. Kapur, K.C. Das Gupta, Raghubar Dayal

In the matter titled Gwvalier I. J. Iyyappan and Another versus The Dharmodayam Company, decided on 27 March 1962, the Supreme Court of India delivered its opinion authored by Justice J. L. Kapur, with Justices K. C. Das Gupta and Raghubar Dayal forming the bench. The case concerned a charitable company that owned certain land and a chairman of the board of directors who was tasked with erecting a building on that land. During construction it became apparent that the actual cost would exceed the amount the company was prepared to fund. Consequently, the chairman offered to complete the building at his own expense and, upon completion, to hand it over to the company as trust property, with the company’s directors to act as trustees and to manage the property in accordance with the conditions set out in his proposal. The company accepted this offer. However, some members of the company later objected to the arrangement, filed suit and obtained an injunction restraining both the chairman and the company from executing the proposed trust deed. Two days before resigning from his position as chairman and director, the appellant executed a trust deed, appointing himself as the first trustee with authority to appoint additional trustees; the deed stipulated that the trust would pay a rent of rupees eighty‑eight per annum to the company for the land on which the building stood. By this act the appellant established a trust that became a tenant of the company without any transfer of title from the company to the trust. The company subsequently demanded that the appellant surrender the building, and instituted proceedings for possession, damages and mesne profits. The company alleged that the appellant had willfully breached the terms of his original offer, asserting that his only remedy was to recover the sums expended from the company in equity, and that the trust deed was therefore inoperative. The appellant’s defence was that the company was estopped from reclaiming the building after having accepted his offer, which had induced him to invest a substantial sum in constructing the building. He further contended that the trusteeship arrangement, once accepted by the board, could not be set aside, and that his rights derived from the acceptance of his offer and the subsequent execution of the trust deed.

The Court observed that the trusteeship of the disputed property, which the appellant had created and which the Board of Directors had initially accepted, was later cancelled by a resolution of the general body of members. Consequently, the appellant could not deem the respondent company to be a trustee, and he remained entitled to pursue his original purpose by executing a deed of trust. In the Supreme Court, the appellant contended that he had been granted a licence, under which he performed permanent work and incurred expenses, and that, by virtue of section 60(b) of the Indian Easements Act, 1882, such a licence was irrevocable. The Court held that a director of a company also acts as a trustee of the company’s assets and therefore owes fiduciary duties to the company; consequently, a director cannot take any action concerning the company’s assets that would prejudice the company’s rights. Moreover, a person cannot create a trust over land that belongs to another person, nor can he unilaterally create a lease in his own favour over land on which he has erected a super‑structure. Because the terms of the trust deed that were offered and accepted differed fundamentally from the deed executed by the appellant, and because the new trust had been fashioned as a lessee of the company without the company’s consent, the Court concluded that equity could not recognise the new trust as a bar to the respondent’s claim for possession. No equitable defence was available to the appellant. The Court further found that no genuine licence case arose; the licence that may have existed was limited to constructing the building and delivering it to the respondent company as trust property, not to creating an additional trust. Accordingly, the licence could not be described as irrevocable under section 60(b). The Court noted that even a licence of this nature would be deemed revoked pursuant to section 62(f) of the Act when it is granted for a specific purpose that has been achieved, abandoned, or become impracticable. The Court referred to the authorities G. E. By. v. Rurner (1872) L.R. 8 Ch. App. 159, Manzoor Ahmad v. Muhammad Abdul Jamil (1933) 1 L.R. 56 All. 207, and Dominion of India v. B. B. Sohan Lal A. I. R. 1950 E.P. 40 in support of its reasoning.

The matter before the Court was a civil appeal numbered 565 of 1960, filed against the judgment and decree dated 26 September 1956 of the former Travancore‑Cochin High Court in appeal case number 57 of 1954. The appeal arose from a decree of the District Judge, Trichur, concerning a suit for possession of properties described in schedules A and B, together with claims for damages, mesne profits and interest. The appellant had been defendant No. 1 in his personal capacity and defendant No. 2 as a trustee of a trust, while the respondent was plaintiff No. 10, the successor‑in‑interest to the tenant defendant No. 5. Counsel for the appellants included senior advocates, and counsel for the respondent comprised a team of experienced advocates, who presented arguments before the Court.

The judgment was rendered on 27 March 1962 and was delivered by Justice Kapur. The present matter was an appeal against the decree of the High Court of Travancore‑Cochin, which had modified the decree originally passed by the District Judge of Trichur. In the suit that gave rise to this appeal, the appellant had appeared as defendant No 1 in his personal capacity and as defendant No 2 in the capacity of a trustee of a trust. Defendant No 5 was the tenant occupying the building that formed the subject of the dispute, while defendant No 10 was the successor‑in‑interest to that tenant. The plaintiff in the suit, who later became the respondent in the present appeal, had instituted the original action before the District Judge of Trichur on 31 October 1945. The suit sought recovery of possession of the properties described in Schedules A and B and also claimed damages, mesne profits and interest. The defence asserted that the appellant could not be compelled to surrender possession because of a document marked Exhibit X, which was a deed of trust executed by the appellant, creating a trust and appointing himself as its trustee. The fifth defendant claimed amounts of Rs 20,000 and Rs 1,019 as the value of improvements and extensions he had made to the building. The trial court framed a large number of issues and ultimately issued a decree containing several operative directions. Firstly, the plaintiff was allowed to recover possession of the items listed in Schedules A and B from the defendants who were then in possession, and to receive income from the Schedule B property in accordance with the terms set out in Exhibit II. Secondly, defendants 5 and 10 were authorised to remove, within two months of the decree, the constructions and additions they had made to the Schedule A and B properties, provided that such removal did not cause damage to the plaintiff’s properties. Following that decree, three separate appeals were filed: one by the appellant, a second by defendant 10 and a third by the plaintiff‑respondent. The High Court, on hearing these appeals, altered the trial court’s decree. It held that the only relief the appellant could claim was compensation for the structure he had erected, fixing the amount of compensation at Rs 46,686‑20. The High Court also ordered that the respondent was entitled to recover mesne profits from the appellant at a rate of Rs 88 per annum for the property described in Schedule A and at a rate of Rs 1,500 per annum for the Schedule B buildings until possession was restored. The appellant challenged that modified decree before this Court by way of a special leave appeal. For a clear understanding of the points of dispute, the Court outlined certain factual background. The respondent was a non‑profit sharing company whose primary objective appeared to be the provision of financial assistance to the poor for educational and other charitable purposes. The respondent owned Survey No 465 in the revenue estate of the village of Trichur, situated adjacent to a public road.

In the year 1944‑45 the land in question measured fifty‑five cents in total area. The respondent company had erected structures on the southern portion of the land, and those structures were at that time rented to the Imperial Bank of India, which is presently known as the State Bank of India. In the central part of the land there stood a building that had been leased to the Post Office. The northern part of the land comprised a vacant plot measuring twenty cents, and that portion was identified in the records as Schedule A. The company intended to construct an additional building, and that building was eventually erected on approximately seven or eight cents of the land; the portion on which the new building stood was designated as Schedule B. Consequently, Schedule A represented the entire parcel of land of twenty cents, while Schedule B denoted the specific area of seven or eight cents on which the new construction was located.

In 1942 the appellant was appointed Chairman of the Board of Directors of the respondent company. The Board entrusted the appellant with the responsibility of constructing the building that the company desired to erect on the seven or eight cents taken from Schedule A. At that time the estimated cost of the proposed building was twelve thousand rupees. In addition to the main building, the Board resolved to assign to the appellant the construction of ancillary facilities on Schedule A, namely a latrine, a kitchen, a gate, a compound wall and a partition wall. The cost incurred by the company for these ancillary works amounted to two thousand rupees.

At a Board of Directors meeting held on 9 January 1944 the appellant informed the directors that the sum of twelve thousand rupees would be inadequate to complete the building. In April 1944 the appellant submitted a formal proposal to the directors, setting out his willingness to bear the entire cost of constructing the building and to transfer the finished structure to the respondent company as a trust property. The proposal, recorded as Exhibit AB, stated that the estimated expenditure for the building would be approximately thirty thousand rupees, and that the appellant would meet those expenses. The appellant further declared, “I shall entrust this building with the company as my trust property in accordance with the conditions mentioned below, and the company shall take over the above trust property and manage the affairs in accordance with three conditions mentioned below.”

One of the conditions stipulated that the minimum annual income derived from the property be set at one thousand five hundred rupees, and that such income be applied to the education of poor students in accordance with rules to be framed by the company. The appellant also specified the intended name of the trust and concluded the document with the following words: “I shall execute at my own expense a trust deed and sign and give the same to the company, entering therein all the above‑mentioned particulars and conditions. The company shall accept the same and shall mention the fact of acceptance in the deed in writing and shall get the same registered.” On the same day the directors appeared to acknowledge the terms of the proposal.

In this matter the directors of the company passed a resolution stating that they would accept the trust property according to the conditions set out in the applicant’s proposal and that copies of the resolution and the application could be forwarded to the applicant. The company subsequently agreed to receive the trust and returned to the appellant a sum of Rs 7,672‑7‑3 that had earlier been given to him by the respondent company on 30 April 1944. On 2 July 1944 the appellant presented to the Board of Directors a draft of the trust deed, identified as Exhibit IT. The Board approved the draft, declaring that the company had accepted the properties as a trust subject to all the stipulated conditions. The directors, acting as trustees under the authority of the Board, examined the draft and accepted it, authorising four trustees to prepare the final deed and to file it with the Registrar’s Office. The draft trust deed was later ratified at a meeting of the General Body of the Company’s members. On 25 February 1945 another meeting was held during which certain amendments to the trust deed were proposed. Subsequently, on 7 October 1944, certain members of the respondent company instituted a suit before the District Munsif Court of Trichur and obtained an injunction restraining both the appellant and the company from executing the trust deed as contemplated in the draft (Exhibit II). Following the injunction, the appellant resigned as Chairman of the respondent company on 25 May 1945 and also ceased to be a director on 28 May 1945. Two days earlier, on 23 May 1945, the appellant had registered a trust deed concerning the property (Exhibit X). In that deed he claimed to have constructed the building at his own expense at a cost of Rs 75,000 and to have named it “Dharmodayam Company Silver Jubilee Iyyappan Trust Building.” The deed named the appellant as the first trustee with the authority to appoint additional trustees. The estimated annual income of the property was Rs 3,600, of which a rent of Rs 88 per annum was to be paid to the appellant’s company for the compound on which the building stood. The deed also set out how the income would be applied. The registration created a trust over the properties listed in Schedules A and B, making the trust a tenant of the respondent company, although no transfer of title from the respondent company to the trust occurred. The injunction suit filed by some members was dismissed for default on 25 March 1946.

On 13 August 1945 the respondent company demanded that the appellant bind over the building to the company. It is recorded that on 22 August 1945, during a holiday period, the appellant inducted the

The plaintiff, after setting out the background facts, alleged that the appellant, who had acted as an agent of the respondent company, had breached his duties and therefore had lost any right to the building described in Schedule B. The plaintiff contended that the appellant had willfully violated the terms of his offer, and consequently his only entitlement was to recover money from the company to the extent that equity might allow, rendering the trust deed (Exhibit X) inoperative. The respondent, for its part, declared that it was prepared to pay whatever sum the court might determine the appellant was entitled to receive. In response, the appellant argued that his offer, dated 2 1944, to construct the building and to make the company the trustee of the property had been accepted by the board of directors, and that this acceptance terminated any earlier relationship between the appellant and the respondent and could not be reopened. He further maintained that the respondent was estopped from laying claim to the building after having accepted that offer, especially since the appellant had expended a substantial amount of money on the construction. The appellant pointed out that the trusteeship agreement later was cancelled by a resolution of the general body of members, which meant that the respondent could no longer be regarded as trustee, and that he was therefore entitled to give effect to his original intention by executing the deed of trust (Exhibit X). He asserted that the deed of trust was perfectly valid, noting that the rental value of the site listed in Schedule A was not even ten rupees per year, that he had not become a tenant, and that the term “verumpattom” had been used merely for lack of a better expression. The trust, he said, had undertaken the liability to pay the respondent company eighty‑eight rupees a year, and on these grounds the respondent was not entitled to any relief. The appellant further relied on the contention that he had been granted a licence, under which he had performed permanent work and incurred expenses, and therefore, pursuant to section 60(b) of the Indian Easements Act, 1882, the licence was irrevocable. The trial court, however, had not raised any plea concerning the licence or its irrevocability; the pleadings before that court focused solely on the validity of the trust deed (Exhibit X), and the trial court’s judgment did not address the question of licence irrevocability.

In the trial court the issue of a licence or its purported irrevocability was never raised; the only matter pleaded concerned the validity of the trust deed identified as Exhibit X. Consequently, the trial judge did not consider any question relating to the licence. When the appellant filed his appeal before the High Court, the relevant grounds of appeal were numbered nine through thirteen. The ninth ground asserted that the first defendant’s claim for a lease should have been upheld and, alternatively, that section 60 of the Indian Easements Act ought to have been applied. The tenth ground contended that a payment of Rs 88‑ was a reasonable amount of compensation. Grounds eleven to thirteen dealt with matters concerning the trust. Thus, for the first time in the appellate pleadings, the appellant introduced section 60 as an alternative basis of defence. During the hearing before the High Court the appellant abandoned his earlier reliance on the lease argument, instead insisting on the irrevocability of the licence and maintaining that the trust deed (Exhibit X) was a valid instrument.

The Court observed that a party cannot alter his case at the appellate stage; the appellant’s position in the trial court was confined to the content of paragraph II of the written statement, where the question of estoppel was raised. There the appellant pleaded that the respondent company was estopped from asserting any right to the building after having accepted the appellant’s offer, an offer on which the appellant had incurred substantial expenditure. At that stage no plea of a licence was advanced. The Court therefore noted that it was not within its jurisdiction to speculate on how the parties might have fared had the licence issue been expressly pleaded in the trial court, but it was clear that the licence plea was absent from the original proceedings and consequently was never adjudicated. The appellant, who acted as a director of the company, could not now repudiate the well‑settled principle that directors, by virtue of their position, also function as trustees of the company’s assets—a principle repeatedly affirmed in case law and scholarly works such as Palmer’s Company Law. Accordingly, when the appellant made the offer to create a trust, he was not merely acting as an agent of the company; he was simultaneously a trustee of its assets and therefore owed fiduciary duties to the respondent.

In this case the Court observed that the appellant, by virtue of his position as a director, also acted as a trustee of the company’s assets and therefore owed fiduciary duties to the respondent. Consequently the appellant was prohibited from taking any action concerning the company’s assets that might prejudice the company’s rights. The appellant had proposed to erect a building on land that belonged to the respondent and was identified as Schedule A, with the building itself listed as Schedule B. He further proposed that the super‑structure would constitute trust property, meaning that the erected building would be held in trust. The Court noted that the appellant did not have authority to create a trust over land that belonged to the company, nor could he, by a unilateral act, grant himself a lease over the land described in Schedule A. The Court referred to the authority (1) (1872) L.R. 8 Ch. App. 149, 152 in this regard. Accordingly, when a complaint was lodged alleging that the appellant had acted unilaterally to deprive the company of a right, the complaint was not entirely unfounded, even though the company might also bear some responsibility. The Court then turned to the factual matrix concerning the construction contract. The appellant had been instructed to build the structure for an estimated cost of Rs 12,000. Later it became apparent that the actual cost would exceed this estimate, a situation that the company was presumably unwilling to fund. The building had already been started, though it was not yet completed. At that juncture the appellant renewed his offer, which the respondent accepted, to complete the construction and then deliver the completed building to the respondent as trust property, with the directors of the company serving as the trustees. This transaction was limited to the terms set out in Exhibit AB and Exhibit 11. The Court acknowledged that certain members of the company later expressed unwillingness to adhere to the original arrangement and sought modifications. Nevertheless, the Court held that the appellant could not disregard his earlier offer and unilaterally create an entirely new trust, as he had done. Any right the appellant might have had could only arise from Exhibit 11, which the appellant himself had abandoned. The Court rejected the appellant’s contention that, because the company had accepted his offer but later failed to honor the agreement, he was entitled to appropriate the land in Schedule A by converting it into a trust tenancy, thereby dispossessing the company of its interest. In the Court’s view, there were no equitable considerations in the appellant’s favour that could be invoked as a defence to the respondent’s suit. The Court further observed that no licence arose from the arrangement, and even if a licence were alleged, it related solely to the construction and delivery of the building as trust property, not to the creation of a new trust over the land.

In this case the Court observed that the licence, assuming it was a licence, had been granted solely for the purpose of constructing a building and delivering that building to the respondent company as trust property. The Court noted that no licence had been given to create a different kind of trust, which the appellant attempted to establish. Accordingly the Court held that it could not be said that an irrevocable licence under section 60(b) of the Act existed. The Court further explained that even a licence of the type described would be deemed revoked under section 62(f) of the Act where the licence was granted for a specific purpose and that purpose had either been achieved, abandoned, or become impracticable. The Court found that, in the present circumstances, the purpose for which the licence had been granted was either abandoned or had become impracticable because of the appellant’s own actions.

Having reached that conclusion, the Court considered the authorities cited by the appellant and found them to be of little assistance. The appellant had relied on the decision in Manzoor Ahmad v. Muhammad Abdul Jamil, reported in 1933 I.L.R. 56 All. 207, which concerned a licence that became irrevocable under section 60(b) of the Easements Act and was held not to be revocable even on payment of compensation. The Court also referred to the decision in Dominion of India v. B. B. Sohan Lal, reported in 1950 A.I.R. E.P. 40, 47. In that case it was observed that the terms of a licence must always be examined and the appropriate law applied to those terms. The Court further noted that, as observed by Das, C. J., a licence could be irrevocable under section 60 only when it was coupled with a transfer of property, whereas under English law a licence could become irrevocable when coupled with a grant or an interest of a profit nature. The Court emphasized that, regardless of whether irrevocability arose under English law or under the Indian statute, it would yield to any special agreement between the parties.

The Court concluded that it was unnecessary to delve further into those cases because the original offer made by the appellant and the acceptance of that offer by the respondent company had not been complied with, and the appellant was not proceeding on an entirely new basis. The Court held that the offer and the acceptance of the terms of the trust deed were wholly different from the trust subsequently executed by the appellant, which had been constituted as a lessee of the company without the company’s agreement. Consequently, the Court found that equity could not permit the new trust to operate as a bar to the respondent’s claim for possession. The Court observed that the appellant had suffered no loss, as the amount he had expended had been returned to him. Accordingly, the Court affirmed that the judgment of the High Court was correct and dismissed the appeal with costs, ordering the appeal to be dismissed.