Mortgage vs. Sale: Supreme Court Decides on Land Transaction in Karnataka (25 April 2017)

Can a document titled “Conditional Sale” be considered a mortgage? The Supreme Court of India recently addressed this question in a property dispute from Karnataka. This case examines the fine line between a conditional sale and a mortgage, impacting property rights. The judgment was delivered by Justices R.K. Agrawal and Abhay Manohar Sapre. Justice Abhay Manohar Sapre authored the opinion for the bench.

Case Background

In 1969, M.N. Channabasappa, the original plaintiff, needed money. He borrowed Rs. 1,500 from B.M. Narayana Shetty, the original defendant No. 1. To secure the loan, Channabasappa executed a document (Ex. P-1) on July 28, 1969, and gave possession of the land to Shetty.

Channabasappa argued that Ex. P-1 was a mortgage deed. He claimed that he gave possession of the land for five years, and he could redeem the land by repaying Rs. 1,500 within that time. However, Shetty contended that Ex. P-1 was a sale deed, making him the owner. Shetty further sold the land to Srinivasaiah (defendant No. 2) on September 25, 1986.

On June 30, 1987, Channabasappa sent a legal notice to Shetty, offering to repay the loan and redeem the land. Shetty refused, leading Channabasappa to file a civil suit on September 19, 1987, seeking redemption of the mortgage, a declaration that the sale to defendant No. 2 was invalid, and recovery of possession.

Timeline

Course of Proceedings

The Trial Court initially ruled in favor of the plaintiff, holding that Ex. P-1 was a mortgage deed. However, the first Appellate Court reversed this decision, stating that the document was a conditional sale and that the suit was barred by limitation.

The High Court of Karnataka, in a second appeal, overturned the first Appellate Court’s decision. The High Court agreed with the Trial Court that Ex. P-1 was a mortgage by conditional sale and that the suit was filed within the limitation period. The High Court restored the Trial Court’s decree.

Defendant No. 2 then filed a review petition, which was dismissed by the High Court. Subsequently, Defendant No. 2 appealed to the Supreme Court.

Legal Framework

The core legal issue revolves around Section 58(c) of the Transfer of Property Act, 1882, which defines a mortgage by conditional sale. Section 58(c) states:

“Where, the mortgagor ostensibly sells the mortgaged property— on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called mortgage by conditional sale and the mortgagee a mortgagee by conditional sale: Provided that no such transaction shall be deemed to be a mortgage, unless the condition is embodied in the document which effects or purports to effect the sale.”

The Supreme Court also relied on the case of Chunchun Jha vs. Ebadat Ali and Another, AIR 1954 SC 345, which provides a test to distinguish between a mortgage by conditional sale and a sale with a condition to repurchase.

Arguments

The plaintiff argued that Ex. P-1 was a mortgage deed. They contended that the land was given as security for the loan, with the understanding that it would be returned upon repayment. The plaintiff relied on the fact that the document was titled “Deed of Conditional Sale,” and they offered to repay the loan, which was refused by the defendant.

Defendant No. 1 argued that Ex. P-1 was a sale deed, not a mortgage. They claimed that the plaintiff had sold the land for Rs. 1,500, and the condition to repurchase was a separate agreement. Further, defendant No. 1 argued that the plaintiff failed to pay the loan within five years, thus losing the right to get the suit land restored in his name.

Defendant No. 2, the subsequent purchaser, supported defendant No. 1’s argument, contending that the document was a sale deed. He also relied on the decision in Vanchalabai Raghunath Ithape vs. Shankarrao Baburao Bhilare, (2013) 7 SCC 173, to support his claim that Ex. P-1 was a sale out and out.

Submissions of Parties

The innovativeness of the plaintiff’s argument lies in emphasizing the intent behind the document and the circumstances surrounding the transaction, arguing that the document was intended as a security for a loan, not an outright sale.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. What is the true nature of the document dated 28.07.1969 (Ex.P-1)? Is it a “mortgage by conditional sale” or a “sale out and out with a condition to repurchase”?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• Chunchun Jha vs. Ebadat Ali and Another, AIR 1954 SC 345 – This case laid down the test for determining whether a transaction is a mortgage by conditional sale or a sale with a condition to repurchase. The Court relied on this case to interpret the document in question.
• Section 58(c) of the Transfer of Property Act, 1882 – This provision defines a mortgage by conditional sale. The Court used this to determine whether the document Ex. P-1 met the criteria for a mortgage.
• Vanchalabai Raghunath Ithape vs. Shankarrao Baburao Bhilare, (2013) 7 SCC 173 – The appellant relied on this case to support the argument that Ex. P-1 was a sale. However, the Court distinguished this case, stating that it did not consider the ratio in Chunchun Jha.
• Article 61(a) of the Limitation Act – This provision prescribes a limitation of 30 years for redeeming a mortgage. The Court used this to determine that the suit was filed within the limitation period.
• Durga Prasad & Anr. vs Deep Chand & Ors., AIR 1954 SC 75 – This case deals with the form of decree in specific performance cases where the property has been transferred to a third party. The Court used this to determine how to balance the equities between the parties.
• Section 65 of the Indian Contract Act – This provision states that when a contract becomes void, any person who has received any advantage under it must restore it. The Court used this to determine that defendant No. 1 was required to refund the sale consideration to defendant No. 2.

Authorities Considered by the Court

Judgment

Treatment of Submissions

Court’s View on Authorities

• The Supreme Court relied on Chunchun Jha vs. Ebadat Ali and Another, AIR 1954 SC 345, stating that the tests laid down in this case were applicable to the present case. The court held that the intention of the parties must be gathered from the document itself and that if the condition of repurchase is embodied in the document that effects the sale, it is a matter of construction as to what was meant.
• The Court applied Section 58(c) of the Transfer of Property Act, 1882, holding that the document satisfied the conditions of a mortgage by conditional sale. The Court noted that the document was titled “Deed of Conditional Sale” and contained a condition that the property would be re-conveyed to the seller upon repayment.
• The Court distinguished Vanchalabai Raghunath Ithape vs. Shankarrao Baburao Bhilare, (2013) 7 SCC 173, stating that it did not consider the ratio in Chunchun Jha and that the facts were different as there was no debtor-creditor relationship in that case.
• The Court applied Article 61(a) of the Limitation Act, holding that the suit was filed within the 30-year limitation period.
• The Court followed Durga Prasad & Anr. vs Deep Chand & Ors., AIR 1954 SC 75, to balance the equities between the parties and directed defendant No. 1 to refund the sale consideration to defendant No. 2.
• The Court applied Section 65 of the Indian Contract Act, holding that defendant No. 1 was required to refund the sale consideration to defendant No. 2 because the sale was declared void.

What Weighed in the Mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the document (Ex. P-1) and the application of the law. The Court emphasized the importance of the intention of the parties, as gathered from the document itself, and the conditions outlined in Section 58(c) of the Transfer of Property Act, 1882. The Court also considered the fact that the document was titled “Deed of Conditional Sale,” which indicated that it was not an outright sale.

The Court’s reasoning was also influenced by the need to balance the equities between the parties. The Court recognized that defendant No. 2 had paid Rs. 30,000 for the land and that the sale was declared void. Therefore, the Court directed defendant No. 1 to refund the sale consideration to defendant No. 2 to prevent further litigation.

Sentiment Analysis of Reasons

Ratio of Fact:Law

Logical Reasoning

The Supreme Court considered an alternative interpretation that Ex. P-1 was a sale with a condition to repurchase. However, this was rejected because the condition of repurchase was embodied in the same document, and the intention was to secure a loan. The Court held that the document satisfied the conditions of a mortgage by conditional sale under Section 58(c) of the Transfer of Property Act, 1882.

The Court’s decision was based on the interpretation of the document, the application of the law, and the need to balance the equities between the parties. The Court’s reasoning was clear and accessible, and it provided a detailed explanation of the legal principles involved.

The majority opinion was delivered by Justice Abhay Manohar Sapre, with Justice R.K. Agrawal concurring. There were no dissenting opinions.

The Supreme Court quoted the following from the judgment:

“The question whether a given transaction is a mortgage by conditional sale or a sale outright with a condition of repurchase is a vexed one which invariably gives rise to trouble and litigation.”

“If the condition of repurchase is embodied in the document that effects or purports to effect the sale, then it is a matter for construction which was meant.”

“We also note that the High Court rightly took note of the law laid down in the case of Chunchun Jha (supra) and the requirements of Section 58(c) of the T.P. Act and keeping the same in mind interpreted Ex.P-1 and came to a right conclusion.”

Key Takeaways

• A document titled “Deed of Conditional Sale” can be considered a mortgage if it meets the conditions of Section 58(c) of the Transfer of Property Act, 1882.
• The intention of the parties, as gathered from the document itself, is the determining factor in deciding whether a transaction is a mortgage or a sale.
• If the condition of repurchase is embodied in the same document that effects the sale, it is more likely to be considered a mortgage by conditional sale.
• The limitation period for redeeming a mortgage is 30 years from the date the right to redeem accrues.
• In cases where a property is sold to a third party and the sale is later declared void, the seller is required to refund the sale consideration to the buyer.

This judgment clarifies the distinction between a mortgage by conditional sale and a sale with a condition to repurchase. This will impact future cases involving similar transactions. The judgment also emphasizes the importance of examining the intent of the parties and the specific conditions outlined in the document.

Directions

The Supreme Court gave the following directions:

1. The plaintiff (respondent Nos. 1-5) shall deposit Rs. 1,500 in the executing court for being paid to the defendant (respondent Nos. 6-11) within 3 months.
2. Defendant No. 1 (respondent Nos. 6-11) shall deposit Rs. 30,000 in the executing court for being paid to the appellant (defendant No. 2) within 3 months.
3. Defendant No. 1 (respondent Nos. 6-11) and the appellant (defendant No. 2) will jointly execute the sale deed in the plaintiff’s (respondent Nos. 1-5) favor and hand over possession of the suit land to the plaintiffs.

Development of Law

The ratio decidendi of this case is that a document titled “Deed of Conditional Sale” can be considered a mortgage by conditional sale if it meets the conditions outlined in Section 58(c) of the Transfer of Property Act, 1882. The Court reaffirmed the principles laid down in Chunchun Jha vs. Ebadat Ali and Another, AIR 1954 SC 345, and clarified that the intention of the parties, as gathered from the document itself, is the determining factor. This judgment does not change the previous position of law but reinforces the existing principles and provides clarity on their application.

Conclusion

The Supreme Court held that the document (Ex. P-1) was a mortgage by conditional sale, not a sale with a condition to repurchase. The Court upheld the High Court’s decision, directing the original owner to repay the loan and the original lender to return the land. The Court also directed the original lender to refund the sale consideration to the subsequent purchaser. This judgment clarifies the legal distinction between a mortgage and a sale, and it emphasizes the importance of the intention of the parties and the specific conditions outlined in the document.