by depositing an agreement of sale, no valid deposit of title deeds can be created

C.C.C.A.No. 301 OF 2007


M/s Bharat Tubes & Tins Printers
A Partnership Firm rep. By its partner Smt. Anita Kedia

The Andhra Pradesh State Financial Corporation Ltd.,
A Govt. Corporation, havings its office at C hirag Ali Lae, Nampally,
Hyderabad being rep. By its Managing Director and Others

Counsel for the Appellant :SRI V.RAMA KRISHNA REDDY    
Counsel for Respondents No. 1 to 4:
Counsel for Respondent NO.4-KONDAPUR VIJAYA KUMAR REDDY          
Counsel for Respondent No.5- A.V.SARNAM  
:JUDGMENT: ( Per the Hon'ble Sri Justice B.Prakash Rao)

        The plaintiff who is unsuccessful, is the appellant in this appeal which
is sought to be filed against the judgment and decree in O.S.No. 177 of 2000,
dated 30-8-2007 on the file of the IX Additional Chief Judge ( Fast Track
Court), City Civil Court, Hyderabad in dismissing the suit filed by him seeking
for declaration as against the document in question namely the alleged deposit
of title deeds dated 24-11-1982 as illegal, void and unenforceable and for a
permanent injunction restraining the
1st defendant-1st respondent namely the Andhra Pradesh State Financial
Corporation Ltd.,  from interfering with possession and enjoyment over the suit
schedule property and for further direction against the defendant No.1 to pay a
sum of Rs.12,00,000/- with interest at 24% per annum from 9-8-1999 till the date
of realization and the costs.
        Heard Sri D. Prakash Reddy, learned Senior Counsel appearing for the
appellant and Sri Challa Sitaramaiah, learned Senior Counsel appearing on behalf
of the respondents.
        The case of the appellant-plaintiff as per the averments contained in the
plaint which has been filed on 23-8-1999 is to the effect that the appellant (
herein after called as the "Plaintiff" ) is a registered partnership firm
constituted on 2-4-1994 for the purpose of manufacturing pipes, tubes, cycle
parts, hospital equipment etc., which has been carrying on business in
LUX-1 Shed, Industrial Estate, Sanathnagar, Hyderabad admeasuring to an extent
of 8319.11 sq. yards  of land together with Industrial Shed in Plinth area of
3126.66 square yards.   The Shed was purchased by the 2nd Defendant and 3rd
defendant under the Sale Deed, dated 28-3-1987 and subsequently partners of the
said firm purchased the said property under two different sale deeds and shown
them as the joint stock property of the firm.  The said property was mortaged
with the  State Bank of  Hyderabad for obtaining working capital loan to a tune
of Rs.2 Crores.  It is the case of the plaintiff that at the time of the
purchase, though sufficient enquiries were made, but nothing has come to their
notice nor disclosed by the defendants. Hence, the plaintiff is a  bona-fide
purchaser.  However, on 14-12-1992 some of the officials of the defendant No.1
came to the premises in the afternoon and stated that the property would be
seized for realization of the goods.  Further, the seizure was effected against
the property without any notice.   It is further pointed out that the defendant
No.1 never visited or inspected the suit premises from 1987 to till 1992.  The
plaintiff had  approached  before this court by filing W.P.No. 16269 of 1992
challenging the said action, where in the counter affidavit filed by defendant
No.1, it is stated that the defendant No.2 had created a mortgage by deposit of
title deeds namely depositing the agreement of sale on 24-11-1982.  Therefore,
the writ petition was disposed of on 23-6-1999 directing the plaintiff to go to
civil Court for appropriate reliefs.  In the said proceeding as per the
direction given by this Court, the plaintiff deposited Rs.12,00,000/-  with
defendant No.1 on 9-8-1999.  It was stated that the alleged agreement of sale
dated 23-11-1982 was preceded by letter dated 23-11-1982.   As such, they have
no objection to defendant No.2 to mortgage with defendant No.1 provided the
balance amount is paid.
        The Defendant No.1 has not paid the balance and cost to the said defendant
No.3.   Therefore, on the face of it, according to the plaintiff the alleged
deposit of title deeds does not create a mortgage, since it is unstamped,
unregistered and quite contrary to the provisions of the Stamp Act and
Registration Act and therefore, the 1st defendant Corporation cannot proceed
against the said property under the foot of the said mortgage.  Hence, the suit
for declaration that the said transaction does not amount to a  valid mortgage
and unenforceable and for consequent relief as stated as above.
        Defendant No.1 contested the suit claim and the relief as sought for inter
alia denying the various allegations made in the plaint and further pointed out
the plaint property alleged by Defendants No.2 and 3 and that the financial
assistance provided by Defendant No.1 acquiring the same.  However, the amount
was paid to Defendant No.3 directly, therefore, a formal agreement of sale was
executed by Defendant No.3 in favour of defendant No.2, who in turn confirming
the deposit of sale agreement.  Having regard to the said nature of transaction,
defendant No.1 has charged over the property which is within the knowledge of
defendant No.2 who confirmed the said transaction. Therefore,  the grievance of
the plaintiff could only be against defendant Nos. 2 and 3, but not against the
Defendant No.1. Apparently, the plaintiff and the defendant No.2 are in
collusion and the plaintiff is not a bona fide purchaser.  Since plaintiff
committed default in payment of the loan, defendant No.1 proceeded against the
property by seizing.  The allegation that the defendant No.1-Corporation did not
make any visit cannot be correct, since there was no necessity, having regard to
the fact that the amounts are being paid to a tune of Rs. 29.75 lakhs  till
1987.  It was further pointed out that CBI charged the Director of defendant
No.1 for cheating the financial institution and freezed the accounts of
Defendant No.2., the very fact that defendant No.3 addressed a letter to the
Defendant No.1 on 23-11-1982 shows that the plaintiff is aware of the mortgage
by defendant No.2 in favour of defendant No.1.  In fact, the plaintiff could
have obtained 'No Objection' from both the defendants 1 and 3 prior to his
purchase.  The sale consideration was paid by defendant No.3 by cheque No.
l619359, dated 26-11-1982 drawn on the State Bank of India.  Therefore, in view
of the peculiar circumstances the liability can only be fastened against
defendant No.2 for any loss sustained by the plaintiff and not by defendant
No.1.   Further, it was pointed out that it is due to the action on the part of
the defendant No.3 in delivering the sale directly to defendant No.2, the said
defendant No.3 is answerable and liable to be paid by defendant No.1. therefore,
as against defendant No.1 no cause of action arose and the suit is liable to be
        Defendant No.2 remained absent and set ex-parte.
        Defendant No.3 which is the Andhra Pradesh State Infrastructure
Development Corporation Limited filed separate written statement denying the
allegation and the claim of the plaintiff and reiterated its own activities.
It was pointed out that the defendant No.3 conveyed the title under the
registered sale deed, dated 28-3-1987 in favour of defendant No.2, but the
defendant No.3 is not aware of subsequent purchase made by the plaintiff from
defendant No.2,  the plaintiff did not exercise due diligence prior to his
purchase nor make any proper enquiries.   The plaintiff is having full knowledge
of the subsisting mortgage created by defendant No.2 in favour of defendant No.1
and also defendant No.4.    It was also pointed out that the mortgage of the
property in favour of defendant No.5 by deposit of original sale deed.   The
steps have already taken in this regard for bringing to the notice about the
said mortgage to avoid multiplicity of the proceedings.  Thus the defendant No.3
is no way liable for any cause of the plaintiff.
        Defendant NO.4  filed a separate written statement which is inter alia
reiterating about its providing with the credit facility to defendant No.2 and
creating a Memorandum dated 27-8-1987.  He has filed O.S.No. 488 of 1990  on the
file of the II Senior Civil Judge, City Civil Court, Hyderabad for recovery of
Rs. 68,60,236-32  as against defendant No.2, which was subsequently transferred
to Debt Recovery Tribunal and registered as O.S.No. 475 of 1999.  Therefore, the
liability of the defendant No.4 is quite independent and defendant No.3 is
liable to be paid.
        Defendant No.5 filed its written statement reiterating about the mortgage
in its favour by obtaining loan of Rs.2 Crores and pleaded total lack of
knowledge of other transaction including the seizure of the property by the
defendant No.1.
        On the aforesaid allegations contain in the respective pleadings the Court
below framed the following issues.
i) Whether the plaintiff is entitled for a declaration that the Memorandum of
deposit of title deeds dated 24-11-1982 is void, illegal and unenforceable and
does not create any mortgage?
ii) Whether the plaintiff is entitled for a declaration in the alternative that
the defendants 2 and 3 are alone to pay the amounts due to the 1st defendant
without effecting their title, possession and enjoyment of the plaintiff over
suit property?
iii) Whether the plaintiff is entitled for permanent injunction, restraining the
1st defendant from interfering with the peaceful possession and enjoyment of
plaintiff over suit property?
iv) Whether the plaintiff is entitled for rs. 12,00,000/- together with interest
at 24% per annum from 9-8-1999.
v) To what relief?
Additional issues: -
1) Whether there is a cause o faction for the suit?
2) Whether the plaintiff is entitled to seek any relief against the 3rd

Subsequently, the parties went into trial and the plaintiff examined PW-1, the
G.P.A. Holder of the firm and marked Exs. A-1 to A-16.  The defendants examined
DW-1 and DW-2 the officials of the defendant No.1 Corporation and marked Exs. B-
1 to B-21.
        On a consideration of the evidence and material on record, the Court below
dismissed the suit inter alia holding that the plaintiff is not entitle for
declaration as sought for, nor for permanent injunction.  Hence, this appeal.
        Learned counsel appearing for the appellant by taking us through the
entire evidence and material on record contended that, having regard to the very
nature of transaction which is incomplete and not complying to the provisions of
the Stamp Act and Indian Registration act and thus  there being no valid and
legal mortgage, the defendant No.1 cannot enforce the same.  Therefore, the
relief as sought for is perfectly sustainable, which the court below did not
properly consider from proper perspective.
        Learned counsel appearing on behalf of the respondents submitted that
dehors the absence of Stamp or Registration, there is a valid charge created
under the law which can be enforced by the defendant No.1 and therefore, the
Court below was right in rejecting the suit and thus, there are no merits in the
submissions advanced by the learned counsel for the appellant.
        On these and other submissions made across the Bar in detail from both the
counsel and on a perusal of the material, the point, which arises for
consideration is:-
"Whether under the facts and circumstances the transaction in question
constitutes a  valid and enforceable mortgage?"
        On behalf of the plaintiff, PW-1 one of the partners was examined who has
given entire narration of events and stated that the property was purchased on
13-4-1987 by the plaintiff from the defendant No.2, who in turn purchased the
same on
28-3-1987.   However, the plaintiff was not aware of any suh encumbrances or
charges whatsoever in nature, nor it was disclosed to them and not stated in the
sale deed dated 28-3-1987.  Further, there was no inspection by the Corporation
from 1987  till 1992.  It is only in the writ proceedings filed in this Court
from the counter affidavit the alleged deed of mortgage by deposit of agreement
of sale by defendant No.2  in respect of the property came to its notice.  But
the same is not a valid one since admittedly, the said mortgage transaction is
stamped or registered. There is no serious dispute on behalf of defendant No.1
with regard to the fact that there is no such mortgage stamped and registered.
However, it has been pointed out by the defendant No.1 that the said agreement
by defendant No.3 in favour of defendant No.2, dated 24-11-1992 which was marked
as Ex.B-14 was deposited by the defendant No.1 and the same was confirmed by  
him.  Defendant No.3 had issued a 'No Objection Certificate' on
26-11-1982 and the defendant No.2 acknowledged the receipt of the amounts on 2-
12-1982.  Defendant No.2 has created a charge on the property on 24-11-1982
under  Ex.B-15 with the Registrar of Company for the money advanced by defendant
No.1. Therefore, it is this act whereby the  Corporation gets its charge in due
conformity with Section 125 of the Companies Act r/w Rule 6 and Form 8 of
Appended-1.    And the charge created under section 125 of the Companies Act can
be treated as knowledge to every one and especially to a person seeking to
acquire the property who shall be deemed to have a notice as per under Section
126 of the Companies Act. Therefore, there is a due enforceable and valid charge
and accordingly, defendant No.1 Corporation is rightly proceeding with the same.
That apart, the plaintiff was aware of the said mortgage and therefore cannot
claim to be a bona fide purchaser nor entitled to any indulgence either under
law or facts, but is equally bound by it.
        Coming to the first aspect of the question on the alleged mortgage not
having been stamped or registered and thus there is no valid mortgage which can
be enforced by the Corporation, there is no dispute on the facts.  Admittedly,
there is no stamp nor registration. The question is, whether such a transaction
would amount to a valid mortgage and can be enforced.  On this issue learned
counsel on either side referred to a decision of the Apex Court in Syndicate
Bank vs. Estate Officer & Manager, APIIC Limited1  where considering the
provisions of sections 58,54,100, 5 and 6 of Transfer of Property Act, in
similar circumstances and on same questions whether a mortgagor having
incomplete or inchoate title ( having allotment letter, licence as to use of
land, and possession thereof without any sale deed having been executed or
registered) in mortgaged property, to the knowledge of mortgagee - validity and
enforceability - wherein, it was held as under;
( 28) THE requisites of an equitable mortgage are : (i) a debt; (ii) a deposit
of title deeds; and (iii) an intention that the deeds shall be security for the
debt. The existence of the first and third ingredients of the said requisites is
not in dispute. The territorial restrictions contained in the said provision
also does not stand as a bar in creating such a mortgage. The principal
question, which, therefore, requires consideration is as to whether for
satisfying the requirements of Section 58 (f) of the Transfer of Property Act,
it was necessary to deposit documents showing complete title or good title and
whether all the documents of title to the property were required to be
deposited. A' fortiori the question which would arise for consideration is as to
whether in all such cases, the property should have been acquired by reason of a
registered document.
( 29 ) EACH case will have to be considered on its own facts. A jurisprudential
title to a property may not be a title of an owner. A title which is subordinate
to an owner and which need not be created by reason of a registered deed of
conveyance may at times create title. The title which is created in a person may
be a limited one, although conferment of full title may be governed upon
fulfilment of certain conditions. Whether all such conditions have been
fulfilled or not would essentially be a question of fact in each case. In this
case a right appears to have been conferred on the allottee by issuance of a
valid letter of allotment coupled with possession as also licence to make
construction and run a factory thereon, together with a right to take advances
from banks and financial institutions; subject, of course, to its fulfilment of
condition may confer a title upon it in terms of section 58 (f) of the Transfer
of Property Act, but the question would be whether such a right is assignable.
( 39 ) THERE cannot be any doubt whatsoever that in absence of a registered deed
of sale, the title to the land does not pass, but then what would not be
conveyed is the title of the estate and not the allotment and possession itself.
( 40 ) IT would, therefore, appear that there is no clear authority on the
question as to whether in absence of any title deed in terms whereof the
mortgagee obtained title by reason of a registered deed can be a subject-matter
of mortgage. Section 58 of the Transfer of Property Act does not speak of
mortgage of an owner's interest. If any interest in property can be created by
reason of a transaction or otherwise which does not require registration, in our
opinion, it may not be necessary to have a full title before such a mortgage is
created by deposit of title deeds. A person may acquire title to a property
irrespective of the nature thereof by several modes e. g. a lease of land which
does not require registration; (ii) by partition of a joint family property by
way of family settlement, which does not require registration.
( 41 ) IN a case of this nature where valuable right is created which may or may
not confer an assignable right, the question requires clear determination having
regard to the equitable principle in mind, and would have far reaching
consequences, as a large number of banks and financial institution advance a
huge amount only on the basis of allotment letters. If such allotment letters
are to be totally ignored, the same may deter the banks in making advances which
would in effect and substance create a state of instability.
( 42 ) APART from the said question, the effect of an admission by an authorized
representative of the State having regard to the rules of executive business or
otherwise vis-'-vis the Appellant-Bank also requires consideration.
( 43 ) WE, therefore, are of the opinion that keeping in view the importance of
the questions raised at the Bar, as noticed hereinbefore, and in the context of
the factual matrix involved in the matter, the questions require consideration
by a larger bench so that an authoritative pronouncement can be made thereupon.

        From the principles as laid down and reiterated, it was held that such
mortgages are to be treated necessarily as unenforceable and invalid, since
there is no valid mortgage.  However, having regard to the larger importance in
question effecting various financial institutions, the Apex Court has referred
the matter to the Larger Bench.  An attempt was made on behalf of the counsel
appearing for the respondents to the effect that since reference was made to the
Larger Bench this case be adjourned awaiting the said decision.  However, on the
undisputed prepositions as to the requirement of stamp and registration, this
Court is bound by the same under Act 141 of the Constitution of India.  This
will however subject to any charge in the proposition.
        Learned counsel appearing for the respondents herein submits that dehors
the said question it can sustain the charge on the other grounds and that aspect
alone would not be a criteria, which of course, is being dealt in later paras.
However, we are of the view that though subject to the view taken and the
principles that would be laid down by the Larger Bench, such transaction would
not amount to a valid mortgage and cannot be enforced.
        Coming to the other aspect of the matter, on which the learned counsel for
the respondent sought to take us on a different claim to sustain the legality of
the charge and its right to proceed against the property.   It is their case
that having regard to
Ex. B-2, dated 23-11-1982 and terms and conditions contained therein treating
the financial agency to be the first mortgagee and the defendant No.3 falling to
the 2nd charge, as per the clause contained therein putting a restraint against
the Defendant No.2 against alienation or otherwise to create any liabilities and
especially "No Objection Certificate" issued by the defendant No.3  under Ex.B-5
on     23-11-1982, the due charge was created under
Ex.B-15 with the Registrar of companies, as provided  under section 125 of the
Companies Act r/w Rule 6 Form-A pointing it.   According to the learned counsel,
notice to all concerned including any purchaser has to be deemed as contemplated
under section 126 of the Companies Act.
        Having given due consideration to the submissions made and the scope and
the object behind the said provisions, it is to be seen that the charge as
provided under section 125 of the Companies Act totally stand on a different
footing and cannot be equated with the charge or rights or obligations and
liabilities that arise from a valid mortgage,  as per the provisions of section
58 of Transfer of Property  Act vis--vis Stamp and Registration.  At the
outset, it is to be stated that the provisions of the Companies Act does not
override the provisions of the Transfer of Property Act or with Stamp Act or
Indian Registration Act on this count, nor would they exclude or make
inapplicable and dispense with these requirements.   Further, the provisions of
the Transfer of Property Act or Stamp Act or Indian Registration Act does not
make any exception to the alleged charge contemplated under Section 125 of the
Companies Act. Therefore, it follows that for any such charge, registered under
Section 125 of the Companies Act, necessarily it has to be under a valid
transaction as contemplated under law for its enforcement.  And the only law
which provides for creation of valid charge or mortgage is the Transfer of
Property vis--vis compliance of Stamp Act or Indian Registration Act.
        Thus, we are of the view, that a charge registered with the Registrar of
the Companies under section 125 of the Companies Act to be valid one and
enforceable, necessarily it should be in consonance with the Transfer of
Property Act vis--vis Indian Registration Act or Stamp Act.    Hence, we do
not find any reason to accept the submissions made on behalf of the respondents-
defendants in this regard.
        For the foregoing reasons, we hold that there being no valid and
enforceable mortgage, the plaintiff would be entitled for the declaration in
respect of the deed or transaction dated 24-11-1982 as invalid and
unenforceable.  Secondly, we hold that the registration with Registrar of
Companies Act under Section 125 of Companies Act, of the charge would constitute
a valid and enforceable mortgage.
        The appeal accordingly is allowed and  the suit is decreed both for the
declaration and injunction as prayed.  However, this will be subject to the
condition that it is open for the defendant No.1 Corporation to take other
proceedings as contemplated under law for the purpose of recovery of the amount.
No order as to costs.

?1 (2007) 8 Supreme Court Cases 361


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