State of Madras (now Andhra) vs Andhra Paper Mills Co. Ltd.

Subba Rao, C.J.—These are appeals against the decree and judgment of Panchapakesa Ayyar J. in O. S. No. 197 of 1951 on the file of the Original Side of the High Court of Judicature at Madras.

The Plaintiffs, the Andhra Paper Mills Co. Ltd., situate at Rajahmundry, were a limited company incorporated under the Indian Companies Act 7 of 1913. By an order dated 23-9-1947 in O. P. No. 235 of 1947 on the file of the High Court, Madras, the said company was directed to be wound up and an Official Liquidator was appointed. The Official Liquidator called for offers in December 1947 and January 1948 to purchase the Andhra Paper Mills as a going concern.

As there was paper shortage and labour unrest, the Government of Madras, after due inspection, made an offer to purchase it for an amount not exceeding Rs. 25,00,000/- With the permission of the Court that offer was accepted by the Official Liquidator As there was delay in executing the sale deed, at the request of the Plaintiffs, the Defendants commenced taking possession of the mills at Rajahmundry on or about 3-5-T 948 and had completely taken possession of the whole of the property by 17-5-1948.

After the Defendants took possession of the mills, the Plaintiffs called upon the Defendants to pay the consideration amount of Rs. 25,00,000/- with interest. On 8-11-1948, the Defendants paid to the Plaintiff''s the said sum of Rs. 25,00.000/-. The sale deed was executed only in 1953 after the filing of the suit.

The Plaintiffs fled the aforesaid 1 suit for recovery of interest on Rs. 25,00,000/- at 6 per cent per a ''mini from the date of the taking over of the suit mils i.e., 17-5-1948 up to 8-11-1948 when the consideration amount was paid. The Plaintiffs claimed in the paint that Defendants were liable to painter t at the aforesaid rate both under law and equity.

The Defendants in their written statement allied that they were not liable to pay interest as, under the agreement, they had to pay the sensed ration money only after the execution of the sale deed, that the plant was not in a working condition on the date they took possession but was put to part used only on 16-8-T948 after expending a sun of Rs. 37 0,''Kn/- and could be worked completely only from 1-10-1949 after spending a interest sum of over a lakh of runes and that, therefore, the Claim for interest was neither equitable nor just.

The learned Judge found that the Plaintiff Would betided to interest in lien of rent and profits u/s 55 (4)(a) Transfer of Property Act and also in equity from the date the Defendant heron to work the mills i.e., 16-8-1948 up to 8-11-1948 when the consideration amount was paid.

The learned Judge held that, during that period, the Defendants must have made some profit and, at any rate, would be liable to pay some rent, even it; there was no profit. He awarded 3 per cent interest in lieu of rents and profits on the ground that they were making every day during that period one ton of paper worth Rs. 1,220/- by using the machinery and the premises and, therefore, 20 or 25 per cent of drat price would be the reasonable rent and a so on the ground that the capital of Rs. 25,00,000/- would require the payment of at least 3 per cent interest when the machinery and the premises were being actually used. In the result, the suit was decreed for recovery of interest at 3 per cent p. a. on Rs. 25,00,000/- from 16-8-1948 to 8-11-1948.

The Defendants filed O.S.A. No. 5 of 1954 in so far as the suit went against them and the Plaintiffs filed O.S.A. No. 11 of .1.954 in so far as they failed. After the constitution of the Andhra High Court, the aforesaid two appeals were transferred to this High Court.

The learned Government Pleader contended that the Plaintiffs would not be entitled to interest u/s 55 (4)(a) Transfer of Property Act as they did not derive any profit during the crucial period and as under that clause the vendor would not be entitled to occupation rent. He added that the Plaintiffs would not be entitled to interest in equity as equity had no place when a statutory provision governed a situation or also because there was a contract to the contrary or where the circumstances obtaining at that time would otherwise disentitle them to claim interest.

The learned Counsel for the Plaintiffs did not press his argument u/s 55 (4) (a) but confined it only to equity. He contended that, in equity, the Defendants would be liable to pay interest from the date they took possession of the entire premises and that there was neither a contract to the contrary nor other circumstances obtaining at that time, which precluded the operation of the wo''1-recognised principle of equity.

In view of the attitude adopted by the Plaintiffs, it is not necessary to consider the argument of the learned Government pleader based upon Section 55(4) (a), Transfer of Property Act. It would be enough if we noticed the cases recognising the principle of equity laying down its limitations.

The earliest case, which clearly laid down the rule of equity, is found in Fludyer v. Cocker, (1805) 33 ER 10 (A). There in 1792 the Defendant entered into contracts for the purchase of the estates of the Duke of Newcastle in three lots. Two of the lots were purchased by private contracts on the 7th of May and the 18th of July the Duke of Newcastle covenanting to convey respectively on or he-fore the 25th of Juno and the 18th of February following, the Defendant covenanting to pay the purchase money at the time of executing the conveyances.

The Defendant was let into possession of the premises comprised in those lots at midsummer and Christmas 1792 respectively. The 3rd was purchased by the Defendant in July In 1798 m answer to an application for the residue of the purchase money with interest, the Defendant offered to pay the residue of the purchase money hut refused to pay interest. On those facts, the Master of the Rolls made the following observations:

At law the purchaser could not have the right to the estate nor the vendor to the money, until the conveyance was executed. But that has nothing to do with the mode in which this Court executes the agreement. The purchaser might have said, he would not have anything to do with the estate, until he got a conveyance. But that is not the course he took. He enters into possession; an act, that generally amounts to a waiver even of objections to title. He proceeds upon the supposition that the contract will be executed and therefore agrees that from that day he will treat it as if it was executed.

The act of taking possession is an implied agreement to pay interest; for so absurd an agreement, as that the purchaser is to receive the rents and profits, to which he has no legal title and the vendor is not to have interest, as he has no legal title to the money, can never be implied.

The aforesaid passage brings out clearly and tersely the principle underlying the rule of equity invoked by the Plaintiffs. An implied agreement to pay interest was inferred under the circumstances. In Bennett v. Stone 1903 1 Ch 509 (B) Cozens-Hardy, L.J. summarised the law on the subject at page 524 as follows:

The position of vendor and purchaser under a contract which is silent as to possession and as to interest does not admit of doubt. From the time when the purchaser could prudently take possession - that is to say, from the time when a good title is first shown - the parties in view of a Court of Equity change characters.

The purchaser becomes the owner of the land and entitled to the rents and profits and bound to discharge outgoings and the vendor becomes entitled to the purchase money with interest until actual payment and in respect of this right the vendor has a lien upon the land for his unpaid purchase money which the Court will enforce.

Whether the interest is greater or less than the rents and profits is wholly immaterial. There may, however, he conduct on the part of the vendor, or of the purchaser, which suffices to relieve; the purchaser wholly or in part from the liability to pay interest.

In India, this equitable principle was applied under similar circumstances. In Ratanlal Chunilal v. Municipal Commissioner for the City of Bombay ILR 43 Bom 181: AIR 1918 PC 129) (C) under the provisions of the Bombay City Municipal Act and the City of Bombay Improvement Trust Act when the Appellant submitted a plan for erecting a new building on his property the Commissioner directed that the line of the new building should be set back which involved a sacrifice to the owner of 28-41 Sq. yds. of site. The Municipality had taken possession of the said extent on 30-6-1909. One of the questions was whether the Municipality was liable to pay interest to the Appellant from the date it took possession. The Judicial Committee at page 200 (of ILR Bom): (at p. 134 of AIR) made the following observations:

The Board is of opinion that the right to interest defends upon the following hroad and clear consideration. Unless there be something in the contract of Darties which necessarily imports the opposite the date when one party enters into possession of the property of Anr. is the proper date from which interest on the unpaid price should run. On the one hand, the new owner has possession, use and fruits; on the other, the former owner, parting with these has interest on the price. This is sound in principle and authority fully warrants it.

We respectfully follow the aforesaid observations.

The Bombay High Court in Pandurang Balaji Apte Vs. Mahadeo Gopal Jog, ) applied the principle laid down in the aforesaid decision of the Judicial Committee to the facts before them. There; in pursuance of a contract for sale of property, a purchaser was let into possession. The vendor sought to recover the balance of the purchase money with interest. The High Court held that he was entitled to recover interest. Macleod C. J. after citing the passage from the decision of the Judicial Committee extracted supra, proceeded to state at page 197 (of ILR Bom): (at p 187 of AIR):

That is a principle of equity and it is quite independent of the provisions of the Transfer of Property Act. If the ordinary course is followed, the vendor executes the sale deed, the purchaser pays the sale price and gets possession but if as happened in this case the purchaser gets possession without paying the whole of the purchase price, then it follows in equity that he cannot retain the money and also enjoy the profits of the property.

At page 198 (of ILR Bom): (At p. 187 of AIR), the learned Judge continued to state:

Now it may very well be that facts can be proved which would disentitle the vendor to receive more than the balance of the purchase money. The basis of the principle laid down by the. Privy Council is that the purchaser in possession and enjoying the fruits of the property should not at the same time be enjoying the use of the unpaid price, unless it can be shown that the parties have contracted to that effect and admittedly in this case there was no contract that the purchaser should enjoy the interest on his money as well as the profits of the property.

A Division Bench of the Madras High Court in Ramineedi Bayalamma and Others Vs. Sree Muthangi Butchiramayya Garu and Others, (E) noticed the principle with approval. Venkataramanarao J. at page 266 (of Mad LJ):(at p. 437 of AIR) observed:

In case of sales and purchases of land, as pointed out by Viscount Cave in Swift and Co. v. Board of Trade, 1925 AC 520 (F):

It is the practice of the Court of Chancery to require the purchaser to pay interest on his purchase money from the date when he took or might safely have taken, possession of the land but this practice rests, upon the view that the act of taking possession is an implied agreement to pay interest and this rule has been extended to cases of compulsory purchase under the statutory enactments.

The learned Government Pleader''s argument that this rule of equity cannot displace the statutory provisions of Section 55 (4)(a) may now be considered. It is true that, when a situation is governed by a statute equity has no place. But can it be said that Section 55(4)(a), Transfer of Property Act would apply to the facts of this case? The section reads:

Section 55:

In the absence of a contract to'' the contrary the buyer and the seller of Immovable property respectively are subject to the liabilities and have the rights mentioned in the. rules next following or such of ''them as are applicable to the property sold:

(4) The seller is entitled (a) to the rents and profits of the property till the ownership thereof passes to the buyer.

It will be seen that Section 55 declares the rights and liabilities between the seller and the buyer Sub-section (4) (a) enacts that, till the date the ownership passes the vendor would get the rents and profits of the property and thereafter the vendee gets them. In the case of immovable property the title passes only after a registered sale deed is executed. This clause gives the rents and profits of the property up to that date to the vendor and those accruing thereafter to the vendee. If the alienated property is in possession of a tenant the rule apportions the rent between the vendor and the vendee. So too, if the vendor continues to be in actual possession after the title passes he would have to pay the rents and profits realised to the vendee.

But this provision, in our view, has no application to a case where in anticipation of the transfer of property the prospective buyer is put in possession of property. In that case there is no completed transfer and therefore the statutory rule has no application. That situation therefore is not provided for by Section 55, Transfer of Property Act. That is governed by the equitable principle laid down in the aforesaid cases on the basis of an implied agreement arising out of the fact of taking over possession without paying the consideration amount.

The aforesaid principle of equity is independent of the Transfer of Property Act. Having regard to the circumstances, the Courts implied an equitable arrangement between the parties. The prospective vendee cannot take possession of the property and at the same time, enjoy the use of the unpaid price. This agreement may be negatived by a contract either express or implied. The conduct of the vendor and the purchaser may relieve the purchaser wholly or in part from the liability to pay interest. For instance, if the vendor did not take the consideration amount though offered by the purchaser, he may by his conduct preclude himself from claiming interest.

But the fact that the income from the land is less than the interest from the consideration money cannot, in our view be in itself a circumstance to nagative the claim for interest for if the vendee with open eyes purchases a property for a specific amount the fact that the vendee does not make the profit he expected to make is not a relevant consideration. So far as the parties are concerned, as the vendee got what he has bargained for he cannot take the property and at the same time enjoy the use of the unpaid price.

Now, we shall proceed to consider whether on the facts of this case, there was any contract to the contrary excluding the equitable principle or any other circumstances which disentitle the vendor to claim interest on the purchase money. (His Lordship considered the correspondence that passed between the parties, and proceeded;)

16-17. It was said that the Government obliged the Plaintiffs by taking over possession on condition that they would not be liable to pay interest. For flits argument reliance is placed upon Ex. P-25 wherein they stated that the consideration would be paid only after the execution of the sale deed.

When they wrote Ex. P-25 the question of interest was not in the mind of either the Plaintiffs or the Defendants & the Government only mentioned the fact that they would pay the consideration amount only after the execution of the sale deed which they naturally expected would take a short time. From this statement alone it is not possible to contend that the Plaintiffs entered into an agreement to give up their equitable right to claim interest on (ho consideration amount from the date the vendee took possession. Nor can we agree that the Defendants took over possession to oblige the Plaintiffs.

The aforesaid correspondence clearly indicates that there was labour unrest and paper shortage and the Government were anxious to purchase the Mills and run the same in the interests of the public. As there was delay in the execution of the sale deed, due to them they accepted the suggestion of the Official Liquidator that possession should be taken immediately as otherwise the Plaintiffs would be incurring heavy loss. That served the purpose of both the parties and the Government who purchased the property in the interest of public naturally was anxious to take possession and indeed the subsequent events show that they had spent a large amount to increase production and to serve the purposes for which it was purchased.

The fact that for some time they ran the Mills at a loss is not of much relevance for the evidence of D. W. 1 the General Manager of the Andhra Paper Mills, shows that for 1048-41) there was loss of about Rs. 7,000/- that for 1910-50 the profits wore about Rs. 15,000/-, for 1950-51 the profits were Rs. 1,20,000/- and for 1951-51the profits were Rs. 1,78,000/-. There may be loss in the first year as the initial expenditure would be heavier and that fact cannot weigh against the Plaintiffs for the Government purchased the Mills after inspection and satisfied themselves that the Mil''s were worth Rs. 25,00,000/-. The subsequent events clearly show that Government''s estimate of the price was not wrong and that they benefited by the transaction.

There are therefore no circumstances from which we can infer a contract to the contrary nor are there any facts disclosed in the evidence which debar tire Plaintiffs from claiming the equitable relief. The Plaintiffs parted with possession of property worth Rs. 25,00,000/- and the Defendants having taken possession of the property cannot at the same time, enjoy the use of the unpaid price. They must pay the Plaintiffs reasonable interest on this amount.

The next question is what would be the reasonable rate of interest in the circumstances of the case the learned Judge puts it at 3%. We cannot say it is unreasonable. We cannot agree with the learned Counsel for the Plaintiffs that we should award interest at 6%. The large amount of Rs. 25,00,000/- if invested in Government securities would not have yielded more than 3% interest. We would, therefore, hold that in equity, having regard to the aforesaid principles; the Plaintiffs would be entitled to claim interest at 3% per annum from 17-5-1948 till 18-11-1948.

In the result, O.S.A. No. 5 of 1954 is dismissed with costs. O.S.A. No. 11 of 1954 is allowed in part. The parties will pay and receive proportionate costs. Time till 15-11-1955 is given u/s 82, Code of Civil Procedure.