Sandvik Asia Limited vs M/s Vardhman Promoters Pvt. Ltd.

O.P. Dwivedi, J.—This order shall govern the disposal of IA No. 797/2000 seeking leave to defend under O.37 R.3(5) CPC. The plaintiff has filed this suit for recovery of Rs. 21,00,000/- (Rs. Twenty-one lakh only) which the plaintiff has paid to the defendant under the agreement of sale dated 19.11.1998 where under plaintiff had agreed to purchase entire 3rd floor having a super area of 3802 sq.ft. on the Plot No. 4, Block-J, Community Centre, Rajouri Garden, New Delhi for a total sale consideration of Rs. 84,82,262/- it is alleged by the plaintiff that the amount of Rs. 21 lakh was paid as advance towards sale consideration in the following manner:-

Rs. 50,000/- vide cheque No. 332571 dated 19.11.1998 Rs. 20,50,000/- vide cheque No. 332572 dated 20.11.1998 both drawn on Bank of Maharashtra, New Delhi.

Under the terms of the agreement of sale dated 19.11.1998 the defendant was to obtain requisite permission from the Income Tax Department u/s 269UL (3) of the Income Tax Act in Form 37-I and on receipt of the information regarding the said permission having been obtained, the plaintiff was to pay the balance sale consideration of Rs. 63,82,262/- within a period of ten days. At the same time vendor was required to execute General Power of Attorney, no objection affidavit, indemnity bond for mutation in the name of the plaintiff in the records of DDA. Clause 3 of the agreement provided that in case vendor fails to perform his part of the contract the vendee shall be entitled to get transaction enforced through the Court of Law by specific performance of the Contract or enforce any other appropriate legal remedy at the cost and expenses of the vendor. Clause 4 of the agreement provided that if the vendee fails to make the payment of the balance sale consideration within 10 days from the knowledge of the permission having been obtained from the Income Tax Department, the vendor shall be entitled to send a notice calling upon the vendee to make the payment within 10 days failing which the said advance money amounting to Rs. 21 lakhs will be forfeited by the vendor. Clause 5 of the agreement stipulated that if the transaction is not completed within a period of five months, the vendor shall immediately refund to the vendee the said advance of Rs. 21 lakh except when the advance money of the vendee has been forfeited in accordance with clause 4. Under clause 7 of the agreement, it was the duty of the vendor to ensure that the property is free from all kinds of encumbrances and under clause 9 of the agreement the liability to pay house tax, property tax, water and electricity charges, lease money etc. was of the vendor up to the date of the agreement. According to the plaintiff, defendant did not clear the property tax arrears. Besides the plot underneath was held by the defendant on perpetual lease basis from the DDA and a prior permission to sell had to be obtained by the defendant from the DDA under clause 6A of the perpetual lease but the said permission was not obtained by the defendant despite repeated requests by the plaintiff. Several letters were exchanged between the parties in this regard. It is pleaded that plaintiff had no knowledge that the defendant had obtained permission of the Income Tax Department in form 37-I, u/s 269UL(3) of the Income Tax Act nor the defendant had given any notice as stipulated under clause 4 of the agreement and therefore the said clause could not be invoked by the defendant for forfeiture of the advance money of Rs. 21 lakh. Rather the plaintiff is entitled to recover the said amount from the defendant as stipulated under clause 5 of the agreement. Hence the suit.

On being served with the summons in prescribed form under O. 37 CPC, the defendant has filed this application being IA No. 797/2000 seeking leave to defend under O. 37 R. 3(5) CPC. According to the defendant, he obtained the necessary sale permission from the Income Tax Department in the form of Certificate u/s 269UL (3) of the Income Tax Act vide certificate dated March 1999 and conveyed this fact to the plaintiff vide letter dated 31.3.99 and also called upon the plaintiff to pay the balance amount of Rs. 63,82,262/- of the sale consideration within 10 days but the plaintiff failed to do the same. In their reply dated 7.4.99 plaintiff expressed his willingness to complete the transaction yet balance sale consideration was not paid. The defendant sent another letter dated 9.4.99 calling upon the plaintiff to pay the balance sale consideration as he had obtained the necessary sale permission from the Income tax Department in the form of the Certificate u/s 269UL (3) of the Income Tax Act, but of no avail. Lastly defendant wrote letter dated 9.4.99 expressing his willingness to complete the transaction despite the fact that five months period had already expired. But instead of coming forward to pay the balance sale consideration, plaintiff sent a evasive reply dated 20.4.99. Under the circumstances defendant pleads that the advance amount of Rs. 21 lakhs stands forfeited in view of clause 4 of the agreement. In para 16 of the application, it has been specifically pleaded by the defendant that due to the breach of contract on the part of the plaintiff, the defendant has suffered damages to the tune of more than Rs. 75 lakh. The defendant has denied the property was in any way encumbered or any amount towards house tax was due against the defendant. In any case the defendant''s liability to pay the said tax was only up to the date of the agreement. In nutshell, the defence set up by the defendant is that advance money of Rs. 21 lakh stands forfeited in accordance with the terms of the agreement and the plaintiff is not entitled to any amount from the defendant. Besides, it is contended that suit under the provisions of O.37 CPC for recovery of Rs. 21 lakh is not maintainable.

In reply the plaintiff had re-asserted that there is no justification for the defendant to forfeit the said amount of Rs. 21 lakh because plaintiff is not in breach of the contract. It is contended that once the defendant admits the receipt of Rs. 21 lakh under the agreement of sale dated 19.11.98 and no ground for forfeiture is made out, the plaintiff has become entitled to recover the said amount as a debt/liquidated demand in money on the basis of written contract.

I have learned Counsel for the parties and perused the record.

The question regarding grant/refusal of leave to defend has engaged the attention of the Supreme Court in number of cases. The apex court has consistently taken the view that if the defence raises a triable issue, leave must be granted and if defence raised prima facie appears to be dishonest such leave should not be granted unconditionally. After considering the case law on the point exhaustively, the apex court has laid down the following critetia in the case of M/s Mechelec Engineers & Manufacturers Vs. M/s Basic Equipment Corporation - (1976) 4 Supreme Court Cases 687, while considering application leave to defend:

(a) If the defendant satisfied the court that he has a good defence to the claim on its merits the plaintiff is not entitled to leave to sign judgment and the defendant is entitled to unconditional leave to defend.

(b) If the defendant raises a triable issue indicating that he has a fair or bona fide or reasonably defence although not a positively goods defence the plaintiff is not entitled to sign judgment and the defendant is entitled to unconditional leave to defend.

(c) If the defendant discloses such facts as may be deemed sufficient to entitled him to defend, that is to say, although the affidavit does not positively and immediately make it clear that he has a defence, yet shows such a state of facts as leads to the inference that at the trial of the action he may be able to establish a defence to the plaintiff''s claim the plaintiff is not entitled to judgment and the defendant is entitled to leave to defend but in such a case the court may in its discretion impose conditions as to the time or mode of trial but not as to payment into court or furnishing security.

(d) If the defendant has no defence or the defence set up is illusory or sham or practically moonshine then ordinarily the plaintiff is entitled to leave to sign judgment and the defendant is not entitled to leave to defend.

(e) If the defendant has no defence or the defence is illusory or sham or practically moonshine then although ordinarily the plaintiff is entitled to leave to sign judgment, the court may protect the plaintiff by only allowing the defence to proceed if the amount claimed is paid into court or otherwise secured and give leave to the defendant on such condition and thereby show mercy to the defendant by enabling him to try to prove a defence.

Affirming the said legal position, the apex court in a later decision in the case of AIR 1990 2218 (SC) observed as under:-

leave is declined where the Court is of the opinion that the grant of leave would merely enable the defendant to prolong the litigation by raising untenable and frivolous defences. The test is to see whether the defence raised a real issue and not a sham one, in the sense that if the facts alleged by the defendant are established there would be a good or even a plausible defence on those facts. If the Court is satisfied about that leave must be given. If there is a triable issue in the sense that there is a fair dispute to be tried as to the meaning of a document on which the claim is based or uncertainty as to the amount actually due or where the alleged facts are of such a nature as to entitle the defendant to interrogate the plaintiff or to cross-examine his witnesses leave should not be denied. Where also, the defendant shows that even on a fair probability he has a bona fide defence, he ought to have leave. Summary judgments under Order 37 should not be granted where serious conflict as to matter of fact or where any difficulty on issues as to law arises. The Court should not reject the defence of the defendant merely because of its inherent implausibility or its inconsistency.

At the stage of considering the question of grant of leave, the court is not required to examine the merits of the defence. All that is required to see is whether the defence raises a triable issue which if held in favour of the defendant would non suit the plaintiff. In the present case main defence set up by the defendant is that said amount of Rs. 21 lakhs is liable to be forfeited in view of clause 4 of the agreement dated 19.11.98. Clause 3 to 9 of the agreement 19.11.98 which need to be referred to in this connection are as under:-

That within 10 days from the knowledge of the date of receipt of permission from the appropriate authorities in form 37-I, u/s 269UL (3) of Income Tax Act, 1961 the vendee will pay to the vendor the balance consideration amount of Rs. 63,82,262/- (Rupees sixty three lacs eighty two thousand two hundred sixty-two only). At the same time vendor will execute an irrevocable and registered General Power of Attorney, no objection affidavits for mutation in DDA and Indemnity Bond for property tax, water, electricity or other encumbrances and/or any other relevant document requested by the vendee in favour of vendee, failing to which vendee shall be entitled to get transaction enforced through the court of law by specific performance of the contract or enforce any other appropriate legal remedy at the cost and expenses of the vendor.

It is also agreed that in case the vendee fails to make the payment within 10 days from the knowledge of the receipt of aforesaid permission from Income Tax Department, the vendor shall be entitled to send a notice under Registered AD and UPC at the registered office and Delhi office (M/s Sandvik Asia Limited, Indira Palace, Connaught Place, New Delhi -110001) of the vendee as aforesaid mentioned, demanding from the vendee to make the balance payment within ten days. Even after the expiry of ten days from the receipt of the notice, if the vendee fails to pay the balance consideration, the advance money amounting to Rs. 21,00,000/- (Rs. Twenty-one lacs only) will be forfeited by vendor.

Except when the advance money of the vendee has been forfeited in accordance with paragraph 4 above, if the parties for whatsoever reasons or even for any reasons attributed to any of the parties, fail to sign and execute the irrevocable and registered power of attorney and sale deed within a period of 5 months of signing of this Agreement to sell, the vendor shall immediately refund the vendee of its advance of Rs. 21,00,000/- shall carry a penal interest of 24% per annual till its refund and/or recovery. The refund of the said advance shall be without prejudice and in addition to the right of the vendee to have the specific performance of this agreement enforced through the court of law or any other appropriate legal remedy.

The time is of essence in this agreement.

That the vendor hereby assures the vendee that the said property is free from all kinds of encumbrances such as prior sale, gift, mortgage, disputes, litigation, acquisition, requisition, attachment in the decree of any court, lien, court injunction, lease, notices, claims, demands, will trust, exchange, prior agreement to sell, and if it is ever proved otherwise, then the vendor will be liable and responsible to absolutely indemnity and make good the loss and damages suffered by the vendee.

That the vendor hereby further assures the vendee, that the perpetual lease deed referred to above has not been cancelled not the lessor in the perpetual lease deed had ordered re-entry into the property hereby agreed to be sold to the vendee.

That the house tax, property tax, water and electricity charges, ground rent, lease money and other dues and demands of whatsoever nature if any payable in respect of the said property shall be paid and borne by the vendor up to signing of this agreement to sell and thereafter the vendee will be responsible for the payment of the same.

From the plain reading of various terms and conditions of the agreement dated 19.11.98, it appears that after signing of the agreement dated 19.11.98, the first step to be taken by the defendant was to obtain the requisite permission from the Income Tax Department u/s 269UL (3) of the Income Tax Act in form 37-I and then on receipt of the information regarding such permission having been obtained, it was for the plaintiff to clear the balance sale consideration amounting to Rs. 63,82,262/- within 10 days. Simultaneously, the defendant was required to execute some documents namely an irrevocable and registered General Power of Attorney, no objection affidavits for mutation in DDA and indemnity bond for property tax, water, electricity or other encumbrances. The said requisite permission from the Income Tax Department in the form of Certificate u/s 269UL (3) of the Income Tax Act in Form 37-I had been obtained by the defendant in March 1999 and in this connection defendant wrote letter dated 31.3.99 informing the plaintiff about the receipt of the said permission and asking the plaintiff to pay the balance sale consideration of Rs. 63,82,262/- Under the clause 3 of the agreement, plaintiff was required to deposit the balance sale consideration within 10 days but he did not do so. Instead, the plaintiff wrote a letter dated 7.4.99, expressing their willingness to pay the balance sale consideration but insisted on execution of various documents mentioned in clause 2 of the agreement plus sale deed. The agreement dated 19.11.98 does not contain any stipulation for the execution of the sale deed. Therefore, withholding of payment of balance sale consideration by the plaintiff was in violation of the terms and conditions of agreement. Defendant wrote letter dated 9.4.99 calling upon the plaintiff to pay the balance sale consideration within 10 days and to take possession. This was followed by another letter dated 15.4.99. Ultimately defendant served a notice dated 19.4.99 giving plaintiff one more chance as a special consideration to pay the balance price with 21 days from 19.4.99. Exchange of letters between the parties was not disputed at the time of arguments. The fact that the balance sale consideration was not tendered by the plaintiff after having got the knowledge of the receipt of requisite permission from the I.T. Department by the defendant, was also not disputed.

Learned Counsel for the plaintiff sought to justify the non-payment of balance sale consideration mainly on two grounds viz (1) that the defendant was not ready to execute the sale deed and (2) that no notice as stipulated in clause 3 of the agreement calling upon the plaintiff to pay the balance consideration, was served on the plaintiff. Thus according to the learned Counsel, the plaintiff was not in breach of the agreement and therefore, the advance money of Rs. 21/- lakh was not liable to be forfeited. As regards the first ground, I have already observed that the agreement to sell nowhere stipulates the execution of the sale deed. Execution of sale deed would have been the last step for which purposes the plaintiff was also required to execute some documents before DDA. As per terms and conditions of the agreement under clause 2 thereof, first step was to be taken by the defendant to obtain permission from the appropriate authority in form 37-I u/s 269UL (3) of the I.T. Act. Admittedly the defendant has complied with this requirement as he obtained the requisite permission from the I.T. Department in March 1999. The next step as per clause 3 of the agreement was to be taken by the plaintiff by paying balance sale consideration within 10 days from the receipt of the information that the defendant has obtained requisite permission from the I.T. Department. Vide letter dated 31.3.99 the defendant has intimated this fact to the plaintiff but the balance sale consideration was not paid. Defendant wrote another letter dated 9.4.99 again intimating the plaintiff that the requisite permission from the I.T. Office has been obtained. It also contained a request for making the payment of balance sale consideration. This was followed by another letter dated 15.4.99 and the notice dated 19.4.99. The contention put forward on behalf of the plaintiff is that these letters do not tantamount to a notice under clause 4 of the agreement because notice was required to be sent by registered A.D. & UPC on the registered office as well as Delhi office of the plaintiff. As already observed, the fact that the plaintiff has been informed repeatedly through these letters that the requisite permission has been obtained yet balance amount has not been paid, prima facie, indicates that plaintiff was not sincere in finalizing the deal. Finding technical faults in the form of notice to wriggle out the terms and conditions of the agreement is suggestive of lack of good faith on the part of the plaintiff. Under the circumstances, the defendant''s plea that they are entitled to forfeit the amount in view of clause 4 cannot be said to be without substance.

Learned Counsel for the plaintiff cited several decisions in support of her plea that section 74 of the Contract Act is attracted where forfeiture clause in the agreement of sale is in the nature of penalty. Reference in this connection may be made to:- (1 Marimuthu Gounder Vs. Ramaswamy Gounder and Others,

The submission of the learned Counsel for the plaintiff was that in his application leave to defend, defendant has not raised any plea of having suffered any damages. So the question of forfeiture does not arise and in any case in view of section 74 of the Contract Act, the defendant would be entitled only to reasonable amount of compensation. As already observed in para 16 of the application the defendant has clearly averred that due to breach of contract they have suffered damages to the tune of Rs. 75 lakh. u/s 74 of the Contract Act, the party having suffered due to breach of agreement is entitled to reasonable compensation from the party in breach, whether or not actual damages or losses stand proved, subject to the limit mentioned in the agreement. Question as to whether the defendant suffered any damage on account of breach of agreement by the plaintiff and if so what would be the extent of reasonable compensation is a question of fact which can be determined only at the trial.

It was lastly contended by the learned Counsel for the plaintiff that under clause 5 of the agreement defendant is bound to return the said amount to the plaintiff if the deal is not finalized within five months for any reason whatsoever. Therefore, according to the learned Counsel for the plaintiff, plaintiff becomes entitled to the refund of said amount under clause 5 of the agreement whatever may be reasons for failure of the transaction. This argument overlooks the rider contained in the opening sentence of clause 5 of the agreement which opens with the words "Except when the advance money of the vendee has been forfeited in accordance with paragraph 4 above...."

In the present case defendant claims forfeiture of Rs. 21 lakh under clause 4 of the agreement which plea, prima facie cannot be said to be dishonest sham or moonshine. Clause 5 of the agreement does not come into operation if forfeiture is held to be in consonance with clause 4 of the agreement.

Having considered the submissions of the learned Counsel for the parties in light of the material on record and the case laws citied at the bar, I think, the case in hand falls under category (a) as mentioned in the judgment of the Apex Court in the case of M/s. Mechelec Engineers & Manufacturers Vs. M/s Basic Equipment Corporation - (1976) 4 Supreme Court Cases 687. Therefore, defendant is entitled to leave to defend unconditionally. According IA No. 1797/2000 seeking leave to defend under O.37 Rule 3(5) CPC is allowed and the defendant is granted unconditional leave to defend the suit.

SUIT No. 1599/1999

Defendant shall file written statement within a period of four weeks with advance copy to the plaintiff. Plaintiff may file replication within a period of four weeks thereafter.

List the matter before Joint Registrar for admission and denial of documents on 8th December 2003.

List the matter before Court for framing of issues on 8th January 2004.