Smt. Surasaibalini Debi vs Phanindra Mohan Majumdar

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 158 of 1964

Decision Date: 27 October, 1964

Coram: J.C. Shah, P.B. Gajendragadkar, N. Rajagopala Ayyangar

In this case the Supreme Court of India delivered its judgment on 27 October 1964. The matter was styled Smt. Surasaibalini Debi versus Phanindra Mohan Majumdar and was reported in the 1965 volume of the All India Reporter at page 1364 as well as in the 1965 Supreme Court Reporter at page 861. The bench that heard the appeal comprised Justice J. C. Shah, Chief Justice P. B. Gajendragadkar and Justice N. Rajagopala Ayyangar. The petitioner was Smt. Surasaibalini Debi and the respondent was Phanindra Mohan Majumdar. The factual background concerned a benami arrangement that involved alleged evasion of income‑tax. The plaintiff, who was employed in the Court of Wards in Calcutta, was bound by service rules that prohibited him from engaging in any independent trade or business. Consequently, an arrangement was made with the defendant whereby the defendant was presented to the world as the owner of a boarding house that constituted the suit property, while the plaintiff, as the true owner, occupied the premises in the capacity of manager. The plaintiff subsequently left Calcutta on medical advice and entrusted possession of the boarding house to the defendant with the understanding that the defendant would return possession upon the plaintiff’s return. When the plaintiff came back, the defendant refused to relinquish possession, prompting the plaintiff to institute suit for recovery of possession. The trial court decreed in favour of the plaintiff, a decision that was affirmed by the Calcutta High Court on appeal. The respondent, through his successor in interest, contested the decree before the Supreme Court, arguing that the suit should be dismissed because the plaintiff had admitted that he had avoided payment of income tax by filing a separate return for his salary and by portraying the business income from the boarding house as belonging to the defendant. The respondent maintained that, on that basis, the Court should not aid the plaintiff in obtaining possession of the property.

The Supreme Court, speaking through Chief Justice Gajendragadkar and Justice Shah, held that the parties’ intention at the time of entering into the transaction was not to circumvent or defeat the provisions of the Income‑Tax Act. The Court acknowledged that the plaintiff had indeed benefitted from a lower rate of tax on the business income and that his personal income had escaped taxation, but it ruled that such tax benefit did not render the underlying transaction unlawful. The plaintiff’s claim for a decree of possession did not allege any invalidity of the arrangement by which the defendant was entrusted with possession of the business. Accordingly, the Court concluded that the plaintiff, as the genuine owner of the business, was not barred from enforcing his title against the defendant, because no taint attached to the entrustment given the circumstances of the case. Justice Ayyangar, delivering a separate opinion, observed that although the plaintiff had employed a benami device by purchasing the property in the defendant’s name for the purpose of evading income‑tax provisions, this did not entitle the plaintiff to regain possession on the ground of title. However, the Court noted that the plaintiff’s claim for possession was based on a different footing, one that was independent of the alleged illegal benami transaction, and therefore the claim could not be dismissed on that basis.

In this case, the Court observed that the plaintiff’s claim could not be challenged because the ground of his claim was separate and completely unrelated to the illegal benami purchase, and that this view was consistent with the decision of the Privy Council in Sajan Singh v. Sardara Ali [1960] A.C. 167. The matter was a civil appeal, number 158 of 1964, filed under the appellate jurisdiction of this Court. The appeal was taken by special leave from a judgment and decree dated August 30 and September 2, 1963 issued by the Calcutta High Court, which itself was an appeal from original decision number 125 of 1960. Counsel S. K. Hazara and P. K. Mukherjee appeared for the appellant, while G. S. Chatterjee and S. C. Mazumdar appeared for the respondent. The judgment of P. B. Gajendragadkar C.J. and J. C. Shah J. was delivered by Shah J., and Ayyangar J. delivered a separate judgment. Shah J. noted that the plaintiff, Phanindra Mohan Majumdar, had instituted proceedings in the original suit before the High Court of Calcutta seeking a declaration that he “is the sole proprietor, of and absolutely entitled to a boarding house business carried on in the name and style of International Home at 42, Harrison Road, Calcutta” and also seeking an order for delivery of possession of that business. A single Judge of the High Court had decreed in his favour, and that decree was affirmed on appeal by a Division Bench of the High Court under clause 15 of the Letters Patent. Surasaibalini Debi, a trustee appointed under a deed of settlement dated August 23, 1952 executed by the defendant Prabhendra Mohan Gupta, her father, was impleaded as a party upon the death of the defendant and has appealed to this Court with special leave. According to the plaintiff’s plaint, around the year 1941 he had taken a lease of No. 42, Harrison Road, Calcutta and had started a boarding house business there under the name and style of International Home. He asserted that he conducted the business with his own funds which belonged to him absolutely from its inception, that he personally managed the business and utilised its profits for his own purposes, and that when he started the business he was in the employment of the Court of Wards. By the service rules governing that employment he was not permitted to start or carry on any trade or business of his own, and consequently it was arranged with the defendant Prabhendra Mohan Gupta—hereinafter called “Gupta”—that the latter be held out as the nominal owner of the said business. Pursuant to that arrangement the lease of the premises for the business was taken in Gupta’s name and licences from the police and municipal authorities were also taken in his name. Nevertheless, from the very inception the plaintiff was in possession and management of the business, exercised all rights of ownership over it, was absolutely entitled thereto, and Gupta had never made a claim to title in the business.

In this case the plaintiff suffered a serious illness toward the end of 1948 and, on medical advice, left Calcutta temporarily. On or about 8 December 1948 he placed the entire management of his boarding‑house business in the hands of Gupta and delivered all assets to him. He further declared that, upon his return, Gupta would surrender possession, management, all related papers, documents and account books, and would also render a full accounting of receipts and disbursements made during Gupta’s charge. The plaintiff returned to Calcutta in approximately December 1949, occupied one of the rooms in the boarding house, and demanded that Gupta comply with the earlier understanding by handing over possession, management, and all documents, and by providing the agreed accounts. Gupta refused to return possession and management, thereby breaching the trust placed in him, and he also denied the plaintiff any right, title or interest in the premises and the business. In his written statement Gupta contended that the business had been started by him with his own capital, that the premises were held on a lease taken in his name, and that the plaintiff had been appointed merely as his manager or agent. Gupta asserted that he was the true owner of the enterprise, denied that the plaintiff had ever entrusted the management to him on 8 December 1948 or at any other time, and repudiated any agreement that Gupta would return possession or management to the plaintiff. The trial court identified that the only substantial matter on the record concerned the plaintiff’s title to the boarding house known as International Home; a subsidiary claim for accounts against Gupta had been abandoned at trial and therefore required no consideration. After reviewing the evidence, the trial judge concluded that the plaintiff had indeed established International Home using his own funds and that Gupta had been presented to third parties as the apparent owner of the business. In reaching this conclusion the judge relied on several factual circumstances: the plaintiff had previously operated a boarding‑house called “Sunny Lodge” between 1938 and 1941; that earlier business ceased around February 1941 because the landlord obtained a decree of ejectment and forced the plaintiff to vacate; subsequently, on 1 May 1941 the plaintiff secured a tenancy at 42 Harrison Road, and by July of the same year he had commenced International Home, transferring the furniture and utensils from Sunny Lodge to the new establishment.

The trial judge examined the allegation that Gupta had bought the furniture and utensils from the plaintiff for Rs 900 and had started the boarding‑house business for himself. That allegation was rejected because Gupta was consistently described as being in strained financial circumstances and frequently borrowing small sums of money from the plaintiff, who was at all material times gainfully employed. At the outset of the business, a sum of Rs 4,000 was required for purposes such as the deposit with the landlord for rent, the provision of furniture, utensils and other items necessary for the boarding house. The judge observed that a man in Gupta’s impoverished condition could not have raised that amount. The defendant’s two sons, Dwipendrla and Samaren, were themselves boarders in the boarding house and paid the customary charges for the services they received, whereas members of the plaintiff’s family also boarded in the house but were not charged any fees. The plaintiff continued to manage the boarding house exclusively until December 1948 and collected all of the earnings himself. The defendant’s claim that the plaintiff made payments to him during visits to Calcutta was found to be unreliable. Moreover, between 1941 and 1948 there were no letters from the defendant to the plaintiff that supported the defendant’s contention that he was the owner, that he was entitled to the profits of the business, or that he was seeking accounts of the business.

The trial judge noted that in 1941 the defendant was about seventy years old and possessed no means to start a business of his own. The account books of the boarding‑house business, which the plaintiff admitted had been kept, were removed by the defendant and were never produced before the trial court. After December 8 1948, when the plaintiff was away from Calcutta because of illness, the defendant wrote letters that gave the plaintiff detailed information about the business and its progress. From time to time the defendant also wrote letters urging the plaintiff to return to Calcutta and resume management of the enterprise. The trial court observed that the lease of the premises was in Gupta’s name, the licences issued by the police and municipal authorities were also in Gupta’s name, the staff register listed the plaintiff as manager, the plaintiff filed income‑tax returns for the profits of the business in Gupta’s name, and the plaintiff dealt with the authorities as if he were merely the manager and not the owner. In the view of the trial judge, these circumstances indicated that Gupta was only a nominal owner, while the remaining facts pointed to the plaintiff being the sole owner of International Home. The judge concluded that the reason for presenting Gupta as the owner was the existence of service rules that restricted the plaintiff’s ability to conduct a business while employed.

From 1941 to 1944 the plaintiff was employed by the Court of Wards, and the service rules that governed his employment expressly prohibited him from carrying on any business of his own. The appellate Court accepted the view of the Trial Court on this point. In the present appeal, which was granted special leave, the Supreme Court normally refrains from re‑examining the evidence that has already been considered by the lower courts, and it does not reopen concurrent findings of those courts unless exceptional circumstances exist that justify a departure from that principle. Counsel for the appellant did not seriously contest the findings of the lower courts on the first issue. However, counsel argued that even if the evidence showed that the plaintiff was in fact the true owner of the business, his suit must still fail because the plaintiff, in order to evade the Court of Wards’ service rules, had entered into an unlawful agreement with Gupta and had held Gupta out as the owner of the business. It is settled law that a court will not support a claim by a plaintiff who, by his own admission, has committed an act prohibited by law, nor will it assist such a plaintiff in obtaining possession of the business. In addition, counsel submitted that the arrangement of presenting Gupta as a nominal owner was intended to avoid liability for income‑tax and to defeat the provisions of the Income‑Tax Act, and that, on that basis, the agreement under which Gupta was to hold the business as a nominal owner was void. Consequently, the plaintiff could not rely on his own unlawful conduct to claim possession of the business. Neither of these two pleas had been raised before the Trial Court. On appeal, the High Court observed that the purpose of the arrangement that portrayed Gupta as the owner was to circumvent the Court of Wards’ service rules, but it found no evidence that those service rules, which prohibited an employee of the Court of Wards from carrying on a business in his own name, were statutory provisions. The High Court held that merely disregarding the rules did not automatically render the arrangement immoral or illegal, and that the plaintiff’s suit to recover possession of his business was not an attempt to enforce an illegal scheme. The High Court further concluded that evasion of income‑tax was not the purpose or consideration behind the arrangement. The service rules had not been produced as evidence. The Court acknowledged that the service rules did not forbid an employee of the Court of Wards from acting as a manager or agent for another’s business; what the rules prohibited was the employee’s ownership of a business. Accordingly, an arrangement that enabled the conduct of a business in contravention of the rules by depicting a third person as the nominal owner was, in the High Court’s view, not illegal.

In this appeal no party presented any argument disputing the view that the arrangement between the plaintiff and Gupta was primarily intended to circumvent the service rules. The legality of that arrangement was nevertheless challenged on the ground that it was intended or designed to evade the provisions of the Income‑tax Act. The appellant did not include any pleading on that ground, no issue was ever raised, and the claim was not relied upon before the Trial Court. Counsel for the appellants argued that, based on the admissions made by the plaintiff in his evidence, the trial court was bound to dismiss the suit. The plaintiff, while testifying, admitted that he had filed income‑tax returns for the business for the years 1943, 1944, 1945 and 1946, and that an assessment was made in 1947. He further admitted that, after a demand by the Income‑tax Officer, he executed an affidavit stating that he was the manager of the business. He also acknowledged that, when required, he filed a separate personal return for the salary he earned, but that salary was not taxed; instead, tax was assessed on the business income as if it belonged to Gupta. The plaintiff confessed that his purpose in filing the affidavit was to eliminate tax liability on his personal income. By making a false statement, the plaintiff undeniably evaded tax. He earned a salary as an employee of the Court of Wards and, together with other income, his total personal earnings amounted to Rs 1,800 per year. Had the International Home business been disclosed as his own, the combined personal and business income would have been taxable under the Income‑tax Act, 1922. By presenting Gupta as the ostensible owner, the plaintiff avoided tax on his personal earnings and secured a lower tax rate on the business income.

The Court, however, could not agree with the High Court that the sole purpose of presenting Gupta as the owner was to evade income tax. The lower courts had correctly found that the principal purpose of the arrangement was to bypass the service rules that prohibited an employee of the Court of Wards from owning a business. It is true that by commencing the business in the defendant’s name the plaintiff was able to escape tax that would have been payable had the true facts been disclosed. Consequently, the plaintiff may have attracted penalties for failing to reveal the actual ownership and could be prosecuted under the Income‑tax Act or the Indian Penal Code for that conduct. Nevertheless, the Court was unable to hold that, from the outset, the arrangement was intended to create an unlawful scheme. The plaintiff’s case maintained that he acted only as the manager of the business, not as its owner.

In the facts before the Court, the plaintiff had remained in possession of the business as its owner up to December 1948, when he departed from Calcutta after having placed the management of the business in the hands of Gupta. The parties had agreed that Gupta would manage the business only temporarily and that both possession and management would be returned to the plaintiff when he came back to Calcutta and wished to resume control. The Court observed that such an arrangement, being a simple contract for temporary management, was not illegal. The plaintiff’s pleading therefore sought to recover possession of the business that he claimed belonged to him and that he had temporarily entrusted to an agent or trustee. Gupta, on the other hand, denied that he was acting as the plaintiff’s agent or trustee and advanced his own title to the business, asserting that he was not obligated to give the business back. The Court held that once Gupta’s claim of ownership was dismissed, no other defence remained that could be properly raised against the plaintiff’s entitlement to possession. The Court further explained that while it would refuse to aid a party who asked the Court to enforce a transaction that was itself unlawful, it would gladly assist a party who merely sought to enforce a lawful right to property, provided that the plaintiff’s claim did not require the Court to endorse an illegal scheme. Accordingly, the Court noted that the High Court had found no evidence that the arrangement to hold out Gupta as the owner was intended to defraud the public administration, and that the alternative motive suggested by counsel for the appellant had not been proved. Consequently, the Court found it unnecessary to explore the authorities that distinguish between cases in which a plaintiff must rely on a conspiracy to accomplish an illegal or fraudulent purpose in order to claim property, and cases in which the illicit purpose had already been satisfied, leaving the claimant with a title that he now sought to enforce through a plea of detinue, without any taint of illegality. The Court cited the case of A.R.P.L. Palanianna Chettiar v. P.L.A.R. Arunasalam Chettiar to illustrate the former principle, where the Judicial Committee refused to help a plaintiff whose claim required him to admit deception against the public administration. By contrast, the Court referred to Sajan Singh v. Sardara Ali to illustrate the latter principle, where assistance was granted to restore property to a plaintiff even though the title had arisen from an unlawful transaction between the parties.

In this case, the Court observed that the plaintiff sought the return of property from which he had been wrongfully dispossessed by the defendant, even though the plaintiff’s title to that property had arisen from an unlawful transaction between the parties. The Court noted that the parties had not, at the time the transaction—referred to in the High Court as a benami arrangement—was entered into, intended to circumvent or defeat the provisions of the Income‑Tax Act by exploiting the fact that the business was placed in the name of Gupta. While it was acknowledged that the plaintiff had obtained the advantage of a lower tax rate on the business income and that his personal income had escaped taxation, the Court held that this circumstance alone did not render the transaction on which the plaintiff based his claim unlawful. In seeking a decree for possession against the defendant, the plaintiff did not allege any invalidity of the transaction that had entrusted the business to Gupta; he merely asserted his title to the business, the entrustment to Gupta, and the defendant’s refusal to deliver possession when demanded. The findings of both the Trial Court and the High Court established that the plaintiff’s title was proven, that the entrustment of the business when the plaintiff departed Calcutta in 1948 was supported by the evidence, and that Gupta had admittedly refused to surrender possession upon demand. Consequently, the Court concluded that the plaintiff, as the owner of the business, was not impeded from enforcing his title against Gupta, because no taint attached to the entrustment. Accordingly, the appeal was dismissed, and no order as to costs was made in view of the circumstances of the case.

The Court further noted that Justice Ayyangar J. agreed with the order proposed by Justice Shah J., confirming that the appeal failed and should be dismissed, including the order concerning costs. However, Justice Ayyangar J. expressed disagreement with certain findings recorded by his learned brother and indicated that he would shortly state his reasons for the decision. He referred to the facts already set out in the previously pronounced judgment and deemed it unnecessary to repeat them. The principal issue in the suit was whether Phanindra Mohan Majumdar, the respondent and plaintiff in the original suit, had established himself as the proprietor of the boarding house operating under the name “International Home” at 42, Harrison Road, Calcutta. The property stood under a registered conveyance in the name of his father‑in‑law, the defendant Gupta, who also conducted the business. The respondent’s case asserted that he had purchased the property with his own funds and that Gupta was merely a benamidar. The learned Single Judge at trial and the Division Bench on appeal had examined the evidence on this point in detail and had concurrently concluded that Gupta was merely a benamidar for the respondent and that the purchase and operation of the hotel business in Gupta’s name were, in reality, on behalf of the respondent. That finding was not challenged before this Court and therefore required no further examination.

Both the trial judge and the Division Bench delivered an identical finding that Gupta, the defendant, was acting merely as a benamidar for the respondent. They also held that the purchase of the property in Gupta’s name and the operation of the hotel business by Gupta were actually carried out for the respondent’s benefit. Because this finding was not contested before the present Court, the Court saw no need to revisit it further. Accepting that finding, the counsel for the appellant raised two distinct questions for consideration before this Court. The first question concerned the purpose for which the respondent had entered into the benami arrangement, namely to evade the Service Rules of the Court of Wards, where he was employed. No argument on the legal effect of that admission had been presented before the trial judge or any similar submission. The Division Bench, however, was asked to decide whether the respondent could maintain a suit for possession against the defendant when the transaction had been used to circumvent the Service Rules and when that objective had been achieved. The Division Bench rejected that contention, observing that the Service Rules had not been shown to have the force of statute and that, in fact, the Rules themselves were not produced before the Court. Accordingly, the judges held that a breach of, or an attempt to evade, a non‑statutory rule did not automatically render the benami transaction illegal. They further concluded that such a breach would not bar the respondent from recovering the title that he had proved to be his. The appellant’s counsel repeated the same argument before this Court, but the Court agreed that the argument could not succeed in view of the evidence on record and the non‑statutory character of the Rules. A second alleged illegality emerged from the respondent’s testimony and was advanced by the appellant as another purpose for which the property had been purchased in Gupta’s name, a purpose that demanded closer scrutiny. The appellant claimed that it had been established that the benami transfer to Gupta was intended to evade income‑tax liability and that, as a result, the respondent had successfully avoided tax for certain assessment years. The factual background relevant to that claim was that the suit property had been bought and the boarding house business had commenced in 1941. Consequently, from the calendar year 1942 onward and from the assessment years 1943‑44 onward, the respondent, if he were the beneficial owner, would have been liable to income tax on the profits generated by the hotel. During the same period the respondent also drew a salary as an employee of the Court of Wards, which meant that his total income from both sources would have been subject to tax. In respect

During the assessment years 1943 to 1946 the respondent received, in 1947, a notice requiring him to file income‑tax returns on the premise that he was the true owner of the International Home situated at 42 Harrison Road. The respondent replied that the property and the associated business were owned by the defendant, Gupta, and that his own role was limited to that of a manager employed by Gupta. To support this claim before the Income‑Tax Department, he executed two affidavits, one in December 1947 and another in January 1948, both before the Presidency Magistrate of Calcutta, each containing the same representations. During cross‑examination, counsel drew the respondent’s attention to those affidavits and asked him to explain their contents. He said that the Income‑Tax Officer had asked him to file an affidavit and that he initially filed the first affidavit now contained in the file. He then stated that the officer advised him to reject the first affidavit, to prepare a second affidavit, and that the second affidavit was accepted by the department. The second affidavit, dated 31 January 1948, described him as an employee of Gupta, the proprietor of International Home, 42 Harrison Road, Calcutta. He further asserted that he had been working as manager at that premises since July 1941. He added that his monthly salary had varied between Rs 25 and Rs 150 from his first appointment up to the date of the affidavit. He then claimed that his total earnings amounted to only Rs 1,800, which he argued was not taxable, and he requested exemption from income tax, which the department granted. The court asked whether, in 1947 and 1948, his purpose in filing those affidavits was to eliminate his personal income‑tax liability. He answered that his objective in filing the affidavits during those years was precisely to avoid any income‑tax liability that might have arisen against him personally. Relying on the admission, counsel for the appellant argued before the Division Bench that the respondent had acquired the property in the name of the defendant Gupta in order to evade income tax. They further contended that because the respondent had successfully avoided the tax, he should not be allowed to claim title to the suit property or to obtain its possession with the court’s assistance. The Division Bench, however, declined to accept the argument and set out two principal reasons for doing so. First, the defendant had not pleaded the alleged illegality in the written statement, and therefore could not rely on it as a basis to defeat the plaintiff’s suit. Second, the evidence and the admission extracted from the respondent did not demonstrate that the original purpose of the benami purchase was, at its inception, to evade income tax. In other words, the judges found that the prosecution had failed to prove that the respondent’s intention at the time of the purchase was tax evasion.

In this case the Court noted that the respondent’s original purpose at the time of the benami purchase was not to evade income tax, but that he later took advantage of the benami arrangement to avoid tax when a notice was served against him about five or six years after the purchase. Counsel for the appellant challenged that reasoning and submitted that the lower court had not approached the issue correctly. The first point raised by the appellant was the proposition that, in the absence of a pleading, a defendant could not rely on the alleged illegality of a transaction to persuade the Court to refuse relief to the plaintiff. The Court found force in that submission. The law on pleading is well settled and has been restated in several decisions of the highest authority. Where a contract or transaction is illegal on its face, no pleading is required; the Court must take judicial notice of the nature of the transaction and fashion its relief according to the circumstances. The present case, however, is not of that type because the contract was not illegal on its face. Even when a contract is not prima facie illegal, if the facts presented in evidence clearly disclose illegality, the Court is bound to take notice of that fact even if the defendant has not pleaded it, as stated by Lindley L.J. in Scott v. Brown. The exposition of the principle by Devlin J. in Edler v. Auerbach, which elaborated the rules formulated by the House of Lords in North‑Western Salt Company Ltd. v. Electrolytic Alkali Company Ltd., does not contradict Lindley L.J.’s statement. In the matter before the Court there is a clear admission by the respondent himself, made in sworn affidavits, that the purpose of the transaction was to evade liability to tax. Those affidavits are before the Court and, in the circumstances, it is evident that the respondent’s object was to evade payment of income tax. The lower court also rejected the plea of illegality on the ground that there was no proof that the respondent’s objective in effecting the benami purchase was not tax evasion. Counsel for the appellant argued that the High Court’s approach to this question was unrealistic and that its finding was incorrect. The Court saw considerable merit in that argument. It observed that the notice of income tax concerning the income from the property and the business was issued to the respondent only in about 1947, several years after the original purchase, which appears to have been an accident. Unless one proceeds on the assumption that the respondent was unaware that income tax was payable on income from the property or the business, the inference is that the benami arrangement was intended from its inception to prevent aggregation of the income with the respondent’s salary and other remuneration, thereby achieving tax avoidance.

In this case, the court observed that if the respondent had known about the tax liability on income from the property and the hotel business, he could only have relied on the premise that the defendant Gupta, who appeared to own the property, would alone be responsible for paying the tax. Consequently, the court found that the purpose of the benami transaction, from its very beginning, was to prevent the aggregation of income arising from the property and the hotel business (1) [1892] 2 Q.B. 724 at 729, (2) (1950] 1 K.B. 359 at 371, (3) [1914] A.C. 461, with the salary and other remuneration that the respondent received from the Court of Wards. The next issue for the court to examine was the effect of a benami arrangement whose object was to evade a revenue law such as the Income Tax Act. Section 23 of the Indian Contract Act provides that the consideration or object of an agreement is lawful unless it is prohibited by law or, if permitted, would defeat the provisions of any law. Applying this provision, the court concluded that an agreement whose object was to defeat the provisions of the Indian Income Tax Act could not be lawful. The court then referred briefly to the decision in Emery v. Emery(1). In that case the husband sued the wife to recover one‑half of certain securities that he had purchased in the wife’s name. The court found that the securities were held by the wife as trustee, with the husband and wife sharing equal beneficial interest. Justice Wynn‑Parry examined why the securities had been placed in the wife’s name and noted the complete absence of any document showing the husband’s beneficial interest. Evidence showed that under United States law, dividends payable to a non‑resident alien were subject to a withholding tax, whereas an American recipient would not be liable for such tax. Because the husband was a non‑resident alien, disclosure of his beneficial interest would have caused the dividend to be taxed, while the wife, being an American citizen, would have avoided the tax. The question before the judge was whether, under those circumstances, the husband could assert his title to the portion of the securities he claimed. The judge dismissed the husband’s claim, holding that because the securities had been placed in the wife’s name to evade the law, the husband, who did not come before the court with clean hands, could not assert his title, and the property should remain where it was. The principal argument raised was that

The Court observed that a breach of a revenue law of a foreign country occupied a different legal position from an attempt to evade a law of the United Kingdom, and that the latter contention was rejected. However, the Court clarified that it would not pursue that issue because the purpose of the scheme under scrutiny was to circumvent the Indian Income Tax Act. The Court stated that an agreement to defraud revenue is manifestly illegal, a proposition that is not in dispute. For the sake of authority, the Court indicated that reference could be made to Milkr v. Karlinski(1) and Alexander v. Rayson(2), as discussed in Cheshire and Fifoot on Contract, fifth edition, page 286. The Court further explained that, for the purpose of deciding whether property may be recovered by asserting a real title, a clear distinction exists between cases in which only an attempt to evade a statute or to commit a fraud has occurred and cases in which the evasion or fraud has actually succeeded and the prohibited objective has been achieved.

The Court identified the leading authority on this point as the decision of the Privy Council in Petherpermal: Chetty v. Muniandi Servai(3). In that judgment, Lord Atkinson examined the effect of benami conveyances that are motivated by a design to achieve an illegal or fraudulent purpose. Quoting from Mayne’s Hindu Law, seventh edition, page 595, paragraph 466, Lord Atkinson set out the law as follows: “Where a transaction is once made out to be a mere benami it is evident that the benamidar absolutely disappears from the title. His name is simply an alias for that of the person beneficially interested.” The Court emphasized that the fact that A has assumed the name of B in order to cheat X provides no justification for a court to assist or permit B to cheat A. Nevertheless, if A seeks the court’s assistance to restore the estate to his possession or to place title in his own name, it becomes important to consider whether A actually cheated X. If A achieved the cheating by using his alias, the arrangement ceases to be a mere mask and becomes a reality. In such circumstances, the Court may properly refuse to allow A to resume the identity he discarded in order to defraud others.

The Court further noted that if A has not defrauded anyone, there is no reason for the court to punish his intention by transferring his estate to B, whose wrongdoing is even more complex. The Court illustrated that persons have been permitted to recover property they had assigned away where their intent was to defraud creditors who, in fact, suffered no injury. Conversely, where the fraudulent or illegal purpose has been effectuated through a colourable grant, the maxim “In pari delicto potior est conditio possidentis” applies. The Court concluded that, in such cases, the court will not assist either party and will allow the estate to remain where it currently lies. (1) 62 T.L.R. 85. (2) [1930] 1 K.B. 169. (3) [1908] L.R. 35 A. 98.

In this case, the Court observed that subsequent decisions of Indian High Courts and the Privy Council have adhered to the principles articulated by Lord Atkinson in the Petherpermals case, which essentially endorse the dictum “Let the estate lie where it falls.” The Court further noted that English jurisprudence has arrived at the same conclusion when a benami transaction is undertaken to defraud creditors. It explained that English law treats a resulting trust as arising whenever a purchase is made in another person’s name using one’s own money without an intention to confer a beneficial interest, and that this principle aligns closely with the Indian doctrine of benami. The Court cited the decision in Gascoigne v. Gascoigne, where a husband, heavily indebted, leased land in his wife’s name and constructed a house on it with his own funds to shield the property from creditors. The husband later sued his wife for a declaration that she held the property as his trustee. While the husband succeeded in the County Court, the Divisional Court, through Lush J., reversed the decision, holding that the husband had committed fraud on the law to evade statutory provisions and could not obtain equitable relief for his own wrongdoing. The Divisional Court reiterated the principle that the estate should remain where it falls. Counsel for the respondent argued that the English cases, including Emery v. Emery, rest on a unique English presumption of advancement, which does not exist in Indian law, and therefore the effect of benami transactions designed to perpetrate fraud or evade statutes might differ in India. The Court, however, expressed no opinion that this distinction would be material. It affirmed the starting position that the Court presumes an ostensible title to be the true title unless the plaintiff alleging a benami arrangement pleads and proves that the ostensible owner is not the real owner. Consequently, the burden of proof lies with the party asserting a benami transaction. While the source of funds and the manner in which the property is enjoyed are significant factors in establishing a benami case, the mere evidence of the source of purchase money does not, by itself, conclusively prove the existence of a benami arrangement.

In explaining the nature of the defendant’s title, the Court observed that even when a plaintiff used his own money to buy property but registered the title in the name of another person, such as “B”, the surrounding facts and the way the property was used could still show that the transfer was intended as a gift to “B”. In that situation the transaction would not be treated as benami, even though the purchase money did not come from the defendant. The Court then quoted Mayne’s Hindu Law (Eleventh Edn.1) page 876, which stated: “While the source from which the money came is undoubtedly a valuable test, it cannot be considered to be the sole or conclusive criterion. For, the question whether a particular transaction is benami or not, is one of intention and there may be other circumstances to negative the prima facie inference from the fact that the purchase money was supplied by or belonged to another. The position of the parties, their relation to one another, the motives which could govern their actions and their subsequent conduct may well rebut the presumption.” The Court further noted that even when a benami arrangement was proved, the real title would not be upheld if giving effect to it would breach a statutory provision or would constitute a fraud on innocent persons, citing Gur Narayan v. Sheo Lal Singh(1). On that basis, the Court indicated that it appeared at first glance that the respondent, who had purchased the property benami in the name of his father‑in‑law to avoid the provisions of the Indian Income Tax Act, could not rely on his purported title to recover the property. The respondent’s counsel advanced two arguments to avoid this result. First, he contended that the respondent had instituted the suit seeking relief on the ground of his proprietary interest in the land and that, because the pleadings did not expressly allege the illegality of the transaction, the respondent was not barred by that illegality from succeeding. To support this position, counsel relied on the principle articulated by the Court of Appeal in Bowmakers v. Barnet Instruments(1) [1918] L.R. 46 I.A.I. and on the Privy Council decision in Sajan Singh v. Sardara Ali(2). The Court explained that it was unnecessary to recount the full facts of Bowmakers’ case(3); instead, it extracted the head‑note to convey the ratio: “No claim founded on an illegal contract will be enforced by the court but as a general rule a man’s right to possession of his own chattels will be enforced against one who without any claim of right, is detaining them, or has converted them to his own use, even though it may appear from the pleadings, or in the course of the trial, that the chattels in question came into the defendant’s possession by reason of an illegal contract.”

In the case before the Court, the parties had entered into a contract concerning certain machine tools. The plaintiff argued that his claim should not be forced to rely on the illegal contract, nor should he have to plead its illegality to sustain his title. It was important to note that the illegality raised as a defence to the plaintiff’s claim for damages for conversion related to a breach of an executive order issued under the Defence Regulations, which prescribed a maximum price for the tools. Both the plaintiff and the defendant were found to have had no knowledge of this price restriction, and any mistake on their part was therefore involuntary. The defendant, however, maintained that the parties’ ignorance was irrelevant because the Minister’s order made any breach a criminal offence. The defendant argued that, as a result, the parties were engaged in a criminal conspiracy and that the defendants were therefore entitled to retain the hired machine tools without returning them to the bailor. Justice Du Parcq, delivering the judgment, first quoted the Latin maxim “In pari delicto” that formed the basis of the defence. He clarified that the maxim should not be understood to mean that a person who possesses goods after an illegal transaction is automatically entitled to keep them. Rather, its true meaning is that when the circumstances are such that the Court will refuse to assist either side, the result will be that the party in possession will not be disturbed. He cited Lord Mansfield’s observation that a defendant then obtains an advantage “contrary to the real justice” and “by accident”. Finally, Justice Du Parcq stated that no rule of law or public‑policy consideration compelled the Court to dismiss the plaintiff’s claim, and that doing so would constitute a manifest injustice.

The Court therefore could not accept the proposition that a suit for title could never be dismissed merely because the purpose of the transfer was illegal and that purpose had been achieved. The maxim “ex turpi causa non oritur actio” remains a rule of law, and property transferred under an illegal contract or for an illegal purpose, once that purpose has been accomplished, cannot be reclaimed because the Court will not aid a plaintiff in such circumstances. In other words, the decision in Bowmaker’s case does not contradict the earlier statement by Lord Atkinson in Petherpermal’s case. The Court noted a particular feature of the Bowmaker facts: the plaintiff had delivered the machine tools under three hire‑purchase agreements that were illegal. The defendants sold the tools delivered under two of those agreements and refused to return the third set that remained in their possession. This fact raised the question of whether, after the wrongful sales constituted conversion and thereby terminated the bailment, the plaintiff’s right to immediate possession automatically reverted to him, similar to the situation in an illegal but expired lease. The Court’s observations indicated that the illegality of the original contract did not automatically bar the plaintiff’s claim, and that public‑policy considerations did not demand dismissal of the suit.

In the case under consideration, the plaintiff had supplied a number of machine tools to the defendants pursuant to three separate hire‑purchase agreements, each of which was later found to be illegal. Under two of those agreements the defendants proceeded to sell the delivered tools to third parties and they declined to return the tools that remained in their possession under the third agreement. The claim that was brought before the Court related only to the two agreements in which the defendants had already disposed of the goods. The Court referred to the authority found in Cheshire and Fifoot on the Law of Contract, which explained that the wrongful sale of the tools amounted to an act of conversion that, by its very nature, terminated the bailment relationship that had existed between the parties. Consequently, the plaintiffs were entitled to contend that, unlike the situation in Taylor v Chester where a pledge was still in existence, there was no longer any contract on which the defendants could rely to assert a possessory right over the tools. The Court observed that the right of immediate possession therefore automatically reverted to the plaintiffs. It further noted that, in a manner similar to an illegal but expired lease, the termination of the bailment gave the plaintiffs an independent cause of action based upon their acknowledged ownership of the tools. The fact that the chattels had originally come into the defendants’ possession through an illegal contract was held to be irrelevant, because that contract was now defunct and formed no part of the plaintiff’s cause of action. With the disappearance of the only transaction that could have limited the plaintiffs’ rights, the Court concluded that the plaintiffs could rely solely upon their ownership of the chattels to claim possession.

The Court then turned to the remaining agreement, under which the goods were still retained by the defendants. In this circumstance, the cause of action was identified as the defendants’ refusal to comply with the plaintiff’s demand for the return of the chattels. The Court explained that effective possession of the goods had passed to the defendants by virtue of the hire‑purchase contract, and therefore the only justification for demanding the return of the tools was the defendants’ failure to pay the agreed instalments. Because of this, the plaintiffs were inevitably compelled to refer back to the terms of the contract in order to establish the amount of the instalments, the dates on which they fell due, and the legal consequences of their non‑payment. The Court likened this aspect of the dispute to a lessor’s action to enforce forfeiture of a lease when a condition has been breached. The decision was characterized as difficult because it hinged upon the legal effect of the bailment. The Court observed that if ownership of a chattel, as distinguished from a mere possessory right, were transferred under an illegal contract, such ownership would remain perpetually unrecoverable. In that situation the transferor would possess no title whatsoever, irrespective of the illegality of the transaction. The only avenue for relief available to the transferor would be to seek termination of the illegal contract, a remedy that could be pursued only if the transferor could demonstrate that he was not a participant in the illegal transaction. The Court therefore affirmed the complexity of the legal position and the limitations on the plaintiff’s ability to recover the goods.

In this case the Court noted that the earlier remarks accurately described the difficulties created by the decision and identified its true ratio. The matter arose from Sajan Singh’s case(1), which concerned a plaintiff who worked as a lorry driver and, because of the regulations then in force in Malaya, could not obtain a lorry in his own name. The defendant, cited as [1960] A.C. 167, was a person who satisfied the legal qualifications to purchase a lorry. Consequently the parties entered into an arrangement whereby the plaintiff would acquire a lorry, but the vehicle would be registered in the defendant’s name and the permit would be issued in the defendant’s name, although the intention was that the lorry would actually belong to the plaintiff and be used by him for his own business. Under that scheme the lorry was owned by the plaintiff but was operated in the defendant’s name. After the parties fell out and exchanged correspondence, the defendant one day entered the plaintiff’s house while the plaintiff was absent, removed the lorry and refused to return it, claiming that it was his property. The plaintiff then instituted suit seeking a declaration of ownership, the return of the lorry and damages, and the appeal of that suit eventually reached the Privy Council.

Lord Denning, speaking for the Board, emphasized the claim in detinue. He observed: “In detinue their Lordships think he succeeded. Although the transaction between the plaintiff and the defendant was illegal, nevertheless it was fully executed and carried out: and on that account it was effective to pass the property in the lorry to the plaintiff… The plaintiff had actual possession of the lorry at the moment when the defendant seized it. Despite the illegality of the contract, the property had passed to him by the sale and delivery of the lorry. When he commenced this action, he had the right to immediate possession. Their Lordships think that in these circumstances he had a claim in detinue.” From this statement it follows that, besides the claim based on his asserted title, the plaintiff also proved that while the lorry was in his possession the defendant had unlawfully taken it away without his consent. That deprivation of possession constituted an independent cause of action, separate from the original purchase that was designed to evade the law, and the detinue claim was not tainted by illegality. Lord Denning further referred to many cases showing that when a transfer of property is effected to achieve an illegal purpose and that purpose is achieved, the plaintiff is barred from recovering the property because the Court will not assist in that endeavour. The present case, however, does not raise that barrier.

The Court observed that the legislation which makes avoidance or contravention of its provisions render a transaction illegal is one that is enacted for the protection of persons such as the plaintiff. The Court referred to the decision in Amar Singh v. Kulubya(1), where the principle explained in Kearley v. Thomson(2) by Fry L.J. was quoted: “In these cases of oppressor and oppressed, or of a class protected by statute, the one may recover from the other, notwithstanding that both have been parties to the illegal contract.” The Court noted that this principle operates as an exception to the rule in pari delicto, potior est canditio possidentis. Consequently the Court identified two questions that required separate consideration. The first question was whether, if the sole fact was that the respondent had purchased the property benami in the name of the defendant‑Gupta, the respondent could claim possession of the suit property on the basis that the purchase money came from him, despite the illegal and unlawful purpose which he sought to achieve by that transaction and which he succeeded in accomplishing. The second question was whether the respondent could rest his claim to recover possession on a title that was wholly independent of the benami purchase which is tainted with illegality. The Court explained that the answer to the first question depended on whether the respondent could assert title to the property that carried the illegal object he achieved by purchasing the property benami in the name of the defendant‑Gupta. On a preliminary view, the Court indicated that the answer appeared to be negative, relying on the principle laid down by Lord Atkin‑son in Petherpermal v. Muniandi(3) which had been previously cited. The respondent’s counsel, however, submitted that under Indian law the burden of establishing that a transaction is benami rests on the party who asserts it, and that unless that burden is strictly discharged, the ostensible title should prevail. Once the plaintiff establishes that the consideration proceeded from him, the Court said, the burden shifts to the defendant to prove that the transaction was not benami and that a beneficial interest was intended to pass to him. The Court stated that it was not necessary to finally decide this point, which turned on whether the respondent could succeed on the basis of his title notwithstanding the illegality attending the transaction. The Court added that if the object which the parties had in view could not be carried out unless a real title passed to the defendant, the presumption arising from the consideration proceeding from the plaintiff would be displaced. The Court concluded that it was unnecessary to pronounce on this difficult question because, in the present case, the respondent’s claim to possession was not based solely on the title derived from the source of the purchase money for the acquisition of the property. The respondent also relied on an alternative ground, which constituted the second basis on which he sought to recover possession.

In this matter the respondent explained that while he was physically in possession of the property he was advised by a medical practitioner to leave Calcutta. He left the city around 8 December 1948 and, on that date, placed the defendant, Gupta, in possession of the premises. The respondent did so on the understanding that, when he returned to Calcutta, Gupta would return possession of the premises and the management of the business to the plaintiff. The respondent further stated that he came back to Calcutta in about December 1949. Upon his return he occupied one of the rooms in the suit property and repeatedly demanded that the defendant hand over both possession and management of the business. The defendant did not comply with those demands. Both courts that had examined the case found the respondent’s account to be true. The court observed that the respondent’s claim to possession was wholly separate from the illegal benami transaction that gave rise to the original dispute. The court noted that the claim was consistent with the principle set out in Sajan Singh’s case (1960) A.C. 167. Because the claim was not contaminated by illegality, it was not open to any objection. As both courts had upheld the respondent’s right, the appellate court agreed that the appeal should be dismissed and that the order for costs proposed by the learned brother should stand. Accordingly, the appeal was dismissed.