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Case Number

Appeal No. 291 of 1938.

Attorney(S)

Messrs. B. Sitarama Rao and A.K Sriraman for the Appellant.
Messrs. M. Krishna Bharathi, T.R Srinivasa Ayyangar, N.T Shamanna and B.S Narasimham for the Respondents.

Judges

Wadsworth
Patanjali Sastri, JJ.

Acts

provisions of S. 76(h) of the Transfer of Property Act
Madras Agriculturists Relief Act.
S. 20 of the Limitation Act,

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Smart Summary

Structured Summary of the Opinion (Delivered by Patanjali Sastri, J.)

Factual and Procedural Background

This appeal arises from a suit in the Court of the Subordinate Judge at Coimbatore for redemption of property that the plaintiffs claimed had been mortgaged by conditional sale. A preliminary decree for redemption had been passed in favour of the 1st respondent; the present appeal was preferred by the 6th defendant.

The underlying transaction was evidenced by three documents, all dated 19 September 1905:

Ex. I: Purported sale by the 1st respondent of item I in the plaint schedule for Rs. 15,000 to one Giria Chetty (now represented by respondents 2–6) — referred to in the opinion as the mortgagees.
Ex. A: Agreement to reconvey the property for Rs. 15,000 after five and within ten years, with a provision that reconveyance after that period would require payment of an additional Rs. 250 for every subsequent year.
Ex. B: Security bond relating primarily to items 2-a and 2-b but also governing item I. It provided for (a) annual accounting of income of the mortgaged properties during the first ten years and the mortgagor’s (1st respondent’s) liability to make up any deficit between stipulated interest and actual income; and (b) after ten years the mortgagee to take receipts in lieu of interest while the mortgagor was to pay an additional Rs. 250 per year so long as principal remained unpaid.

All the items were placed in the possession of the mortgagee and have been in his family's enjoyment. The Subordinate Judge found that Exs. I and A, read with Ex. B, created a mortgage by conditional sale; that finding was not contested in this Court by the appellant's counsel.

Legal Issues Presented

Whether and to what extent the amount payable by the 1st respondent should be reduced ("scaled down") under S. 8(2) of the Madras Agriculturists Relief Act by taking account of rents and profits received by the mortgagees.
Whether S. 8(2) of the Act is inapplicable to the portions of the mortgage relating to the period after 1915 because S. 10(2)(i) operates to exclude those receipts where no rate of interest is stipulated for that period.
Whether income received by the mortgagees after 1915 — when, under the bond, they were to take rents and profits in lieu of interest and were under no liability to account — can be treated as having been "paid" to the creditor within the meaning of S. 8(2) for the purpose of scaling down the debt.
Whether items 2-a and 2-b were charged merely with deficit interest (so that the 7th respondent's claim would have limited priority) or whether Ex. B created a usufructuary mortgage over those items in respect of the whole mortgage money, thereby giving the 7th respondent priority as a sub-mortgagee.

Arguments of the Parties

Appellant's Arguments (Mr. Sitarama Rao)

Contended that S. 8 of the Madras Agriculturists Relief Act is inapplicable by reason of S. 10(2)(i) for the period after 1915 because for that period no rate of interest was stipulated as due to the mortgagee.
Alternatively, contended that even if S. 10(2)(i) did not apply, the rents and profits received by the mortgagees after 1915 (in respect of which the mortgagees had no liability to account) could not be regarded as "paid" by the 1st respondent to the creditor within the meaning of S. 8(2), since no payment by the mortgagor had in fact been made.
As a subsidiary point, argued that Ex. B charged items 2-a and 2-b only with payment of deficit interest and did not create a mortgage on those properties for the principal; therefore the 7th respondent could not claim priority in respect of the principal amount directed to be deposited for redemption.

1st Respondent's Arguments (Mr. Srinivasa Ayyangar)

Maintained that the rents and profits appropriated by the mortgagees (while in possession and taking receipts in lieu of interest) should be treated as payments made on account of the mortgagor for the purposes of S. 8(2) of the Act.
Relied on the decision in Mylan v. Annavi Madan as authority that appropriation of produce by a creditor placed in possession can amount to a constructive payment of interest.
The Subordinate Judge had directed an account to be taken of rents and profits up to the date of decree, and no objection was raised below to the mode of scaling down adopted there.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Jagannatha Aiyangar v. Senniveera Chettiar	Held (in that decision) that appropriation of rents and profits by a mortgagee in possession under terms that absolve him from accounting cannot be treated as a payment by the mortgagor for purposes akin to S. 8(2).	The bench considered this decision persuasive. Although not formally binding on the present Bench, the Court saw no reason to depart from the view expressed in that case and relied on its reasoning in rejecting the contention that such appropriation amounted to payment under S. 8(2).
Mylan v. Annavi Madan	Established that where a creditor is placed in possession under an agreement to take produce as interest, and where the arrangement creates an agency coupled with an interest allowing adjustment in satisfaction of interest, such receipt may be regarded as a constructive payment (sufficient, for example, for the purposes of S. 20 of the Limitation Act in that case).	The Court distinguished the case on its facts: in Mylan the agreement created an agency coupled with an interest and there was a settlement/adjustment of a claim for interest. In the present case the mortgagee was to take receipts in lieu of interest without liability to account, so no constructive payment or adjustment existed — Mylan therefore did not assist the 1st respondent.
Commissioner of Income-tax Bombay Presidency v. Bombay Trust Corporation Ltd.	Referred to for comparison in relation to the limited rule that receipt by a mortgagee in possession is deemed payment only when a statute so provides or under specific legal arrangements; used by analogy to statutory treatments.	The Court invoked this comparison to support the general proposition that, absent express statutory provision (or analogous special arrangement), a mortgagee's receipt of rents or produce cannot automatically be treated as payment by the mortgagor.

Court's Reasoning and Analysis

The Court's reasoning proceeds in distinct steps, tied closely to the documents and the statutory provisions invoked:

Characterisation of the transaction:
- The Court accepted the Subordinate Judge's finding (uncontested on appeal) that Exs. I and A, when read with Ex. B, created a mortgage by conditional sale.
Scope of relief under the Madras Agriculturists Relief Act (S. 8(2)):
- The principal question was whether the debt could be scaled down by counting rents and profits received by the mortgagees as payments under S. 8(2).
- It was noted that during the first ten years the parties had settled accounts annually under Ex. B, producing arrears of interest that must be wiped out under the Act; an account up to the date of decree had been directed by the Subordinate Judge and no issue on that procedure was taken below.
First contention (effect of S.10(2)(i)):
- The appellant argued S. 8 should not apply post-1915 because no rate of interest was stipulated for that period and S. 10(2)(i) therefore excluded such cases.
- The Court rejected this contention: it found that the bond required the mortgagor to pay Rs. 250 per year in addition to the mortgagee taking receipts in lieu of interest; that Rs. 250 is interest on the principal and its rate is mathematically ascertainable. The Court held that S. 8 does not require the rate of interest to be expressly stated in the mortgage instrument.
Second contention (whether appropriation by the mortgagee is "payment" under S. 8(2)):
- The Court examined whether the mortgagee's taking of rents and profits (after 1915, when he had no liability to account) could be treated as payment by the mortgagor.
- Relying on the reasoning in Jagannatha Aiyangar v. Senniveera Chettiar and distinguishing Mylan v. Annavi Madan, the Court concluded that where a mortgagee, under the terms of the bond, takes receipts in lieu of interest and is under no liability to account, such appropriation is not a constructive payment by the mortgagor: there is no settlement of accounts or adjustment of mutual claims, nor any agency coupled with an interest that would justify treating the receipts as satisfaction of the mortgagor's obligation.
- The Court observed that the Limitation Act's S. 20(2) — which expressly deems receipt of rent or produce by a mortgagee in possession to be a payment for certain purposes — implies that in the absence of such express enactment a receipt by a mortgagee should not be treated as a payment. The Court thus found the appellant's contention on this point persuasive.
- The Court further held that S. 10(2)(i) does not render S. 8(2) otiose: S. 10(2)(i) can be understood as clarifying the Legislature’s intention that rents or produce received by a mortgagee in possession are not to be regarded as payments by the mortgagor for the statutory scaling-down purpose.
Priority of the 7th respondent (subsidiary point):
- The appellant argued Ex. B created only a charge on items 2-a and 2-b for deficit interest and not a mortgage for principal, so the 7th respondent could not claim priority for principal repayment.
- The Court analysed Clauses (2) and (6) of Ex. B and concluded these provisions showed that the mortgagee was to appropriate annual income from items 1, 2-a and 2-b towards interest and that the mortgagee would retain possession of items 2-a and 2-b until payment of the entire principal. This, the Court concluded, created a usufructuary mortgage of items 2-a and 2-b for the whole mortgage money.
- As a result the 7th respondent, as a sub-mortgagee, had a claim in priority to the appellant (who was a subsequent assignee of the mortgage right) in respect of the amount due under his sub-mortgage.

Holding and Implications

Holding: The appeal is allowed as against the 1st respondent; the decree of the lower court is set aside and a fresh decree for redemption is directed.

Direct effect on the parties (as ordered by the Court):

The 1st respondent is directed to pay within three months from the date of the judgment the sum of Rs. 15,000 with interest at Rs. 250 per annum from 1 October 1937 until the date fixed for payment, and thereafter interest at six percent per annum.
Costs: Respondents other than respondents 2 to 9 shall pay the costs of the appellant here and in the Court below and shall bear their own costs. The appeal is dismissed with costs as against the 7th respondent.
The 7th respondent, as sub-mortgagee, is entitled to have the amount due under his sub-mortgage paid in priority to any claim of the appellant, the latter being a subsequent assignee of the mortgage right.

Broader implications: The Court applied and clarified the interaction between the Madras Agriculturists Relief Act (S. 8(2) and S. 10(2)(i)) and factual situations where a mortgagee in possession takes rents and profits in lieu of interest without liability to account. The opinion does not purport to lay down a novel general principle beyond its application to the facts before it; the Court relied on existing authorities and statutory interpretation to decide that such receipts, when taken without liability to account, are not "payments" by the mortgagor for the purpose of scaling down under S. 8(2).

N.R.R

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Doctor Manavala Ayyar v. Muhammad Yoosaf Maracair (Since Deceased) And Others

(Delivered by Patanjali Sastri, J.).

This appeal arises out of a suit brought in the Court of the Subordinate Judge at Coimbatore to redeem what was claimed to be a mortgage by conditional sale. A preliminary decree for redemption having been passed in favour of the 1st respondent, this appeal has been preferred by the 6th defendant.

The transaction as to the nature of which there was some dispute in the Court below was embodied in three documents, Exs. I, A and B, all executed on the same date viz., 19th September 1905. Ex. I purports to be a sale by the 1st respondent of item I of the plaint schedule for Rs. 15000 to one Giria Chetty now represented by respondents 2 to 6 (hereinafter referred to as mortgagees), and Ex. A purports to be an agreement to reconvey the property for the same sum to the 1st respondent after five and within ten years from that date, with a provision that if a reconveyance was claimed after the expiry of that period, an additional sum of Rs. 250 was to be paid for every subsequent year. Ex. B is a security bond between the same parties, and though it relates to items 2-a and 2-b of the plaint schedule, it contains several provisions governing item I as well. It provides that if the income received from all these items in any year within the first ten years was less than the amount of annual interest on Rs. 15000 calculated at twelve annas per cent per mensem, the deficit should be paid by the 1st respondent and be a charge on items 2-a and 2-b. For this purpose an account of such income was to be sent to the 1st respondent every year during that period. After the period of ten years, the receipts from the properties were to be taken in lieu of interest and the 1st respondent was to pay an additional sum of Rs. 250 every year so long as the principal sum remained unpaid. All the items were placed in the possession of the mortgagee and have admittedly been in the enjoyment of his family. There can be little doubt that Exs. I and A, read in the light of Ex. B, created a mortgage by conditional sale, and the finding of the learned Subordinate Judge to that effect has not been questioned before us by the appellant's learned Counsel Mr. Sitarama Rao.

The main question argued in the appeal related to the determination of the amount properly payable by the 1st respondent (who is an agriculturist) as scaled down under the Madras Agriculturists Relief Act. It may be mentioned here that the account of the income of the mortgaged properties sent every year during the period of the first ten years as provided in Ex. B was accepted by the 1st respondent, and as a result of these periodical settlements, various amounts have been found to be payable to the mortgagees as deficit interest, as the annual income during that period was less than the interest stipulated. There can be no doubt that these arrears of interest have to be wiped out under the provisions of the Act. The 1st respondent, however, claimed that the whole debt should be deemed to have been discharged under S. 8(2) of the Act as the mortgagees had received in all more than twice the amount of the principal by way of income derived from the mortgaged properties in their possession. For the purpose of giving effect to this contention the learned Subordinate Judge directed an account to be taken of the rents and profits of the mortgaged properties up to the date of the decree. No objection was apparently taken in the Court below to the scaling down of the debt in this manner, and no question was raised as regards the applicability of S. 8(2) to the facts of this case.

In the appeal, however, Mr. Sitarama Rao has contended before us that the provisions of S. 8 are rendered inapplicable to the present case by S. 10(2)(i) as the suit mortgage, so far as it relates to the period subsequent to 1915, is one where no rate of interest can be said to be stipulated as due to the mortgagee, and, secondly, that even if S. 10(2)(i) does not cover the case, the income received by the mortgagees after 1915 in respect of which they are not accountable to the mortgagor under the terms of the mortgage, cannot be said to have been “paid” to the creditor within the meaning of S. 8(2), no payment having in fact been made by the 1st respondent.

As regards the first contention we are unable to agree that there is no rate of interest stipulated in the suit mortgage even as regards the period subsequent to 1915. As observed already the mortgage provides during this period not only that the mortgagee was to take the income of the mortgaged properties in lieu of interest but also that the mortgagor should pay in addition a sum of Rs. 250 every year till redemption. This sum cannot be regarded as anything but interest on the principal money, and the rate per cent is ascertainable by a simple arithmetical calculation. The section does not require that the rate per cent should be specified in the instrument of mortgage.

Turning to the second contention, direct authority in support of it is to be found in Jagannatha Aiyangar v. Senniveera Chettiar(1) decided by one of us, but as the decision is not binding on this Bench, we have heard full arguments on the point, and we see no reason to depart from the view expressed therein. It was urged by Mr. Srinivasa Ayyangar for the 1st respondent that the mortgagees having been placed in possession of the mortgaged properties and asked to appropriate during the period in question the rents and profits in lieu of interest on the mortgage money, such appropriation by them must be regarded as payment made on account of the mortgagor for the purposes of S. 8(2) of the Act. It may be that a payment need not always involve the actual passing of money or money's worth from one hand to another, and may be made by settlement of account or adjustment of mutual claims between the parties. A constructive payment of that kind, however, involves an agreement between the parties which results in the satisfaction of some subsisting claim or demand. But where, as here during the later period, there can be no question of any claim or demand for interest by the mortgagee who is, under the bond, to take the income of the mortgaged properties in lieu of interest without any liability to account, it is difficult to see how the appropriation by the mortgagee in terms of the bond can be said to be a constructive payment by the mortgagor. No settlement of account or adjustment of claims is involved, and no constructive payment can, it seems to us, be imported, in such cases. The decision of this Court in Mylan v. Annavi Madan relied on by Mr. Srinivasa Ayyangar is distinguishable on the facts and can have no application here. The promissory note on which the suit was brought in that case provided for payment of interest in money, but the creditor was placed in possession of certain land under an agreement that he should take the produce as interest. A question of limitation having been raised it was held that there was a payment of interest as such, sufficient to satisfy the requirements of S. 20 of the Limitation Act. It will be seen that the arrangement between the parties created an agency coupled with an interest as regards the receipt of the produce, and its adjustment in satisfaction of the claim for interest under the promissory note was regarded as a constructive payment of such interest. When, however, a mortgagee holds possession of the mortgaged property under an agreement that he should take the receipts from such property in lieu of interest, there can be no question of agency or of settlement of claim for interest and no constructive payment by the mortgagor can be implied in such circumstances. We are therefore of opinion that the decision in Mylan v. Annavi Madan, does not assist the 1st respondent. On the other hand, the analogy afforded by S. 20 of the Limitation Act, so far as it goes, supports the contention of the appellant. Sub-S. (2) of that section, which enacts that where mortgaged land is in the possession of the mortgagee, the receipt of the rent or produce of such land shall be deemed to be a payment for the purpose of Sub-S. (1), implies that, but for such express enactment, such receipt cannot be regarded as a payment. Compare Commissioner of Income-tax Bombay Presidency v. Bombay Trust Corporation Ltd.(2).

It was said that, in this view, the provisions of S. 10(2)(i) would become otiose and that, therefore, S. 8(2) should be understood as affording relief to a mortgagor even where the mortgagee has received the rents and profits of the property mortgaged without any liability to account for any part of the same, provided the case does not strictly fall within S. 10(2)(i). We see no force in this argument. S. 10(2)(i) may well have been enacted merely to make the intention of the Legislature clear that the rent or produce received by a mortgagee in possession should not be regarded as interest paid by the mortgagor for the purpose of scaling down debts as provided in the Act. Our conclusion accords with and gives effect to this intention. On the other hand, it will, in our view, be illogical and anomalous to hold that, while the rent or produce received by a mortgagee in possession who has not stipulated for any rate of interest is protected, such protection is withdrawn where he is to take the rent and profits in lieu of interest and receive, as in this case, a fixed annual sum from the mortgagor as well. To both cases alike the provisions of S. 76(h) of the Transfer of Property Act to which reference was made in the course of the argument are inapplicable. We are therefore of opinion that the rents and profits received by the mortgagees from 1915 onwards, when they were under no liability to account to the mortgagor for any part thereof, should not be taken into account as payments received from the 1st respondent in applying S. 8(2) of the Act. Whether the rents and profits received by the mortgagees during the earlier period i.e, from the date of the mortgage up to 1915 can, in view of the different terms of Ex. B applicable to that period, be regarded as “paid” to the mortgagees within the meaning of S. 8(2) it is unnecessary to decide, as the 1st respondent did not invoke the method of scaling down indicated in that provision if the receipts during the subsequent period were to be excluded from the computation.

Mr. Sitarama Rao also raised a subsidiary point regarding the priority allowed by the lower Court in respect of the claim of the 7th respondent who obtained a usufructuary mortgage of items 2-a and 2-b under Ex. XVIII in October 1918 from the original mortgagee. The appellant purported to purchase item 1 from him in 1930. Mr. Sitarama Rao argued that Ex. B charged items 2-a and 2-b only with the payment of deficit interest and did not create a mortgage on these properties in respect of the principal money advanced, and that, therefore, the 7th respondent could not claim any priority in respect of the principal amount which the mortgagor has been directed to deposit as a condition of redemption. This argument proceeds on a misconstruction of Ex. B. Cl. (2) of Ex. B provides that the annual income derived not only from item 1 but also from items 2-a and 2-b should be appropriated by the mortgagee towards the interest and Cl. (6) provides that the mortgagee shall retain possession of items 2-a and 2-b also so long as the principal sum of Rs. 15,000 remains unpaid and shall deliver possession of them only on payment of that sum by the mortgagor. These provisions in Ex. B clearly show that the document created a usufructuary mortgage of items 2-a and 2-b in respect of the whole mortgage money and not merely a charge on these items for deficit interest. In this view the 7th respondent as sub mortgagee is clearly entitled to be paid the amount due to him under his sub-mortgage in priority to the claim of the appellant who can only be regarded as a subsequent assignee of the mortgage right.

In the result, the appeal is allowed as against the 1st respondent, the decree of the lower Court will be set aside and a fresh decree will be made for redemption on payment by the 1st respondent within three months from this date the sum of Rs. 15,000 with interest at Rs. 250 per annum from 1st October 1937 till the date fixed for payment and thereafter at six per cent per annum. The respondents other than respondents 2 to 9 will pay the costs of the appellant here and in the Court below and bear their own. The appeal is dismissed with costs as against the 7th respondent.

N.R.R

Doctor Manavala Ayyar v. Muhammad Yoosaf Maracair (Since Deceased) And Others

Structured Summary of the Opinion (Delivered by Patanjali Sastri, J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments (Mr. Sitarama Rao)

1st Respondent's Arguments (Mr. Srinivasa Ayyangar)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Doctor Manavala Ayyar v. Muhammad Yoosaf Maracair (Since Deceased) And Others

Comments