Patna High Court
Commissioner Of Agricultural ... vs Shree Hanuman Sugar Mills Ltd. on 20 January, 1964
Equivalent citations: AIR1965PAT58, [1964]54ITR113(PATNA), AIR 1965 PATNA 58
Bench: V. Ramaswami, N.L. Untwalia
JUDGMENT Untwalia, J.
1. As required under Section 28(3) of the Bihar Agricultural Income-tax Act, 1948 (Bihar Act XXXII of 1948), hereinafter called the Act, the Board of Revenue has stated a case and referred it to the High Court on the following questions of law:
1. Whether the alleged transactions of sale to some of the Directors and members of their family, pursuant to the resolution of the Board of Directors dated the 10th of April, 1950, are void in law?
2. Whether in the circumstances of the case the order dated the 14th of May, 1959, passed by the Board of Revenue is illegal for non-consideration of material evidence disclosed in the enquiry report?
The person assessed under the Act is a public limited Company, Shree Hanuman Sugar Mills Ltd., Motihari, hereinafter referred to as the assessee or the Company, which owns a sugar mill tor the crushing of sugarcane at Motihari in the district of Champaran and owned several agricultural farms wherein sugarcane was produced. The periods of assessment are 1951-52 and 1952-53, giving rise to two reference cases but the facts and points involved being identical, both of them have been heard together and are being disposed of by this Judgment.
2. The facts stated in the statement of case are these. Before 1357 fasli, the Company had about 4440 bighas of land, consisting of several farms, out of which 12 farms covering an area of about 4004 bighas of land had been sold by the Company to about 23 persons through registered sale deeds in August, 1950. The admitted relationship of the purchasers is that they include 3 Directors and their relations who between themselves held about 95 per cent of the shares in the Company at the time of the transfer of the lands aforesaid. These sales were sanctioned at a meeting of the Directors held on the 10th of April, 1950, and ratified by the share-holders at a meeting held on the 19th of December, 1953. The assessee's stand has been that, after the sales aforesaid, it had no concern with the lands sold, possession and management of which were taken over by the purchasers and as such the agricultural income from the said lands cannot be taxed as income of the Company.
3. The Agricultural Income-tax Officer, Motihari, by his orders dated 27-2-53 and 15-2-54, passed in respect of the two periods, has assessed the tax on the Company with respect to the agricultural income of the entire land measuring 4440 bighas. He has held that the alleged transfers to the 23 persons are not genuine and are sham and fictitious transactions entered into for the purpose of evading tax and that the sales are illegal and void in law. On appeals being filed by the assessee, the Deputy Commissioner of Agricultural Income-tax, Bihar, has held the sales to be good sales, in fact and in law, and has directed assessment of the Company in respect of the agricultural income derived from that area of the land which was nut sold and remained with the Company. The revision applications Filed by th Commissioner of Agricultural income-tax, Bihar, failed and have been dismissed by the Board of Revenue by its order contained in the resolution dated 14th May, 1959. The Board also refused to draw up a statement of case and refer it to the High Court under Section 28(2) of the Act.
4. Before I proceed to discuss and answer the two questions referred to this Court under Section 28(3) of the Act, I would like to state a few more facts from the various orders and petitions forming part of the paper book in the case. As statiled above, the impugned sales were effected in August, 1950. Prior to the passing of the two assessment orders in question, in respect of the period 1950-5], the Agricultural Income-tax Officer had passed an order assessing the agricultural income of the lauds transferred by the Company as its income after holding the sales to be invalid and fictitious. On appeal by the Company, the Deputy Commissioner of Agricultural Income-tax remanded the case for certain enquiries regarding the actual possession of the allegedly transferred lands which order was confirmed by the Board of Revenue. In pursuance of the appellate order, the assessing officer made certain enquiries after a considerable delay and without giving any notice to, and in absence of, any representative of the assessee. The enquiry report is dated 1-4-55- As a result of the said enquiry, the Agricultural Income-tax Officer modified the assessment order for 1950-51 by accepting the transfer of the land to the different transferees as valid and, instead of assessing the Company and the transferees separately, he treated the Company as the common manager under Section 13 of the Act and made the tax payable by the Company on its income as well as the income of the transferees, a procedure which, as observed by the successor Deputy Commissioner in the appellate order in question, was in no way beneficial to the Department.
In the present two assessment orders, the view taken by the Agricultural Income-tax Officer in regard to the impugned sales of the lands is the same as the one expressed by him in the original assessment order in respect of the period 1950-51. The learned Deputy Commissioner in his order dated 6-8-57, while disposing of the appeals, has observed that the main basis of the two assessment orders in question has lost its weight in iew of the subsequent enquiry report resulting in the final acceptance of the validity and genuineness of the impugned sales. But the Deputy Commissioner did not rest content with that and rightly proceeded to examine and decide for himself the validity and genuineness of the sales He has held the sales to be genuine, effected on proper price and valid in law. Since by the time the appeals came to be heard, the action of the Company's Directors had been ratified at a meeting of the share-holders held on 19-12-58, he has also taken note of this fact and has observed that after ratification there could be no question of the sales being void unless it could be shown that the meeting of the share-holders was an irregular meeting, and no evidence was led on behalf of the Commissioner of Agricultural income-tax to establish that it was so.
5. In the revision petition filed by the Commissioner of the Agricultural Income-tax before the Board of Revenue, copious references were made to the facts stated in the enquiry report dated 1-4-55 submitted in relation to the assessment for the year 1950-51, and the stand taken before the Board on behalf of the Taxing Department was that the transactions of sale were ficititious and sham in point of fact and null and void in point of law. The Board, by its order dated 14-5-59, upheld the decision of the Deputy Commissioner on both the questions and dismissed the revision applications of the Commissioner. In the order, the Member, Board of Revenue, has at one place observed:
"Ordinarily, a report of a local enquiry made in connection with a previous assessment should not be taken into account."
but has considered the report and the tacts stated therein subsequently in his order, on the ground that although, "no explanation is forthcoming as to why the assessing officer did not give a notice to the opposite party about the date, time and place of the enquiry, which was held after considerable delay, the fact remains that the opposite party had no opportunity of knowing the contents of the enquiry report before the hearing in that case."
On a consideration of the other facts and circumstances, the Board has held that the transactions of sale were genuine in points of fact and valid in law. While considering the legality of the impugned transactions, it has also referred to the fact of their ratification at a meeting of the share-holders subsequently held in December, 1953, but, at the same time, has observed that ratification was not necessary and the sales by themselves were good ones entered into on behalf of the Company on receipt of proper consideration.
6. Taking almost the same view, the successor Member, Board of Revenue, rejected the applications of the Commissioner for reference under Section 28(2) of the Act. The latter, by his applications under Section 28(2) and thereafter under Section 28(3) wanted a statement of the case on the four following questions of law.
"1. Whether the alleged transactions of sale of farm lands to some of the Directors and members of their family, pursuant to the resolution of the Board of Directors dated 10-4-1950 are void in law.
2. Whether any ratification of the said resolution by the share-holders was necessary in law and if so, whether it has been validly ratified by the resolution of the extraordinary general meeting elated 19-12-1953.
3. Whether in view of the circumstances dis closed by the enquiry report dated 1-4-1955 and other materials on record the alleged transactions are mere sham transactions there being no trans fer of the farm lands in question either in fact or in law.
4. Whether the order dated 14th May, 1959 passed by the Board of this case is illegal for non-consideration of material evidence disclosed in the enquiry report."
The High Court, by its order dated 20-2-61, required the Board to state a case on the Srst and the fourth question only.
7. The learned Government Advocate appearing on behalf of the Agricultural Income-tax Department, has strenuously urged that the resolution passed in the meeting of the Board of Directors of the Company held on 10-4-50 was in violation of section 91B of the Indian Companies Act, 1913, which was the relevant Act in force at the relevant time, and the transactions of sale entersd into and executed in pursuance of such a resolution are null and void; they have not been validly ratified by the meeting of the share-holders held on 19-12-53, and it is open to the Taxing Department to treat such sales as nullities in the eye of law and to assess tax on the agricultural income derived from such lands as income of the Company. Mr. A.C. Mitra, Senior Standing Counsel of the Covernment of West Bengal, who argued the case of the assessee before us, conceded that the impugned. resolution of the Board of Directors of the Company was in violation of the statutory provisions aforesaid; but, he submitted, the effect of such violation was not to make "either the resolution or the transactions of sale null and void, but they were merely voidable at the option of the Company or its share-holders; far from repudiating the transactions, the share-holders of the Company in their meeting held in December, 1993 ratified them; and whether such a ratification was valid is not a question which calls for our determination as the Board has not been asked to state A case in that regard nor were any facts placed before, or found, by, either the Deputy Commissioner or the Member, Board of Revenue, in support of the alleged invalidity of the ratification.
8. Learned Government Advocate, while arguing the first question of law, also submitted that even if the transactions of sale were not nullities in the eye of law and fictitious in point of fact, the Directors being bound in a fiduciary character to protect the interests of the Company and its share holders by availing themselves of such character have gained pecuniary advantage or in any event have entered into the impugned dealings under circumstances in which their own interests were or might be adverse to those of the Company and its share-holders and have thereby gained for themselves a pecuniary advantage, they, therefore, in the eye of law under S. 88 of the Indian Trusts Act, 1882, must hold the income from the lands transferred for the benefit of the Company and its shareholders, and in that view of the matter also the Taxing Department will be justified in taxing the agricultural income from the lands in question as the income of the Company, it being its beneficiary in the eye of law. Mr. Mitra, in reply, submitted that such a stand has never been taken on behalf of the Department before any of the authorities, no question of law has been asked to be referred In this regard nor are there any facts to show that the Directors have sold the lands of the Company to themselves and to their relations at a low price, gaining for themselves any pecuniary advantage, nor has the Company or any of its share-holders made any claim or commenced any action against the Directors and the transferees of the land, holding them liable to account for the income of the land in question as trustees on their behalf. In such a situation, counsel submitted, it is not open -to the Taxing Department either to avoid the transactions of sale or to tax the income from the land as belonging to the Company in its own right as the owner of the land or being the beneficiary of the income.
9. The fact that the transferees of the land under the impugned transactions of sale are either the Directors of the Company or their relations is not disputed nor is it disputed that all the Directors, who were present in the meeting of the Board, held on the 10th of April, 1950, were directly or indirectly concerned with, or interested in, the transactions sanctioned in the said meeting and that the impugned resolution was passed on their vote. That being so, it has rightly been conceited on behalf of me Company that Section 91B of the Companies Act, 1913 was violated. Its relevant provisions read thus:
"(I) No director shall, as a director, vote on any contract or arrangement in which he is either directly or indirectly, concerned or interested nor shall his presence count for the purpose of forming a quorum at the time of any such vote; and if he does so vote, his vote shall not be counted."
The question for consideration, however, is as to what is the effect of the said violation, does it make the resolution void or voidable? Even if the resolution is void, does it follow that the transactions of sale are null and void in the sense that the Taxing Department can treat them as nullities and proceed to tax the income of the lands as belonging to the Company?
10. In P. Venkatachalapathi v. Guntur Cotton, Jute and Paper Mills Co. Ltd., AIR 1929 Mad 353, in appeals arising out of a suit by a company against its former secretaries and treasurers for certain reliefs, in regard to the violation of the provisions of Section 91-B of the Indian Companies Act, 1913, as it stood before the amendment of 1936, it was observed:
"As regards the matter of voting on the contract, it seems to me quite clear that the mere voting cannot of itself have any effect on the contract. Section 91(b)--(91-B)--certainly docs not say so and in my view, cannot be held to imply so. The effect of the section is merely that the vote, if given, shall not be counted. There is no object in saying that the effect of the vote is to render the contract illegal or voidable. Unless, therefore, the contract would not have been accepted if the vote had net been given, the contract remains unaffected. A pertinent case on this point is Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co., (1914) 2 Ch 488, in which a contract was held to be voidable, not because the vote was given, but because, if it had not been counted, there would not have been aquorum qualified to contract."
The same view was expressed by the Privy Council in T. R. Pratt (Bombay) Ltd. v. M. T. Ltd., AIR 1938 PC 159. The decisions of the Bombay High Court which gave rise to the appeal to the Privy Council in Pratt's case, AIR 1938 PC 159 are reported in T. R. Pratt (Bombay) Ltd. v. E. D. Sassoon and Co. Ltd., AIR 1936 Bom 62. From the facts of the said case, it would appear that Sassoon and Co. and M. T. Ltd. preferred two separate claims against T. R. Pratt Ltd., the claim of the former being to be a secured creditor of Pratts for Rs. 4,91,284/- by virtue of an equitable mortgage evidenced by an indenture dated 28-2-28 and confirmed by another indenture dated 11-8-31. Their Lordships of the Judicial Committee after quoting Section 91-B of the Act, as it stood at the relevant time, said:
"Their Lordships are of the opinion that the indentures of 28th February 1928 and 11th August 1931 embody a contract or arrangement in which each director of Pratts was concerned or interested within the meaning of the section by reason of his being a director and share-holder in M. T. Limited."
and, after referring to the case (1914) 2 Ch 488, they further observed:
"Subject to the question whether the Sassoon Company had notice of the facts as to the interest of the directors of Pratts, their Lordships think, therefore, that the indentures of 28th February 1928 and 11th August 1931, are voidable by the Official Liquidator. They are not of opinion that Section 91-B would operate to deprive of the benefit of his contract with the company a third party who had no notice of the defect in the directors' authority. This would be contrary to the principle; such a person would be entitled to assume that the internal management of the company had been properly conducted."
It would, however, be found mentioned in the decision of Beaumont C. J. of the Bombay High Court at page 80(1):
"In my opinion therefore by virtue of Section 91-B, none of the directors of Pratts was competent to vote for the resolution to execute this mortgage in favour of Sassoons."
and after considering as to whether the latter company had notice of the violation of the provisions of Section 91-B of the Companies Act, it has further been observed at page 81(2):
"If that is so, the resolution of the directors of Pratts of 23rd February 1928 is void and the execution of the mortgage in favour of Sassoons must also be void; see In re, Greymouth Point Elizabeth Rly. and Coal Co., Ltd., ((1904) 1 Ch 32)."
I shall deal with the English cases relied upon in the decision referred to above a bit later What I want to emphasise at this place, however, is that the resolution of the directors of Pratts might he void but the mortgage in favour of Sassoons was voidable at the instance of the company or its official liquidator, as said by Sir George Rankin delivering the decision of the Privy Council. It would be void in the sense that, when avoided, the doctrine of relation back would come into operation and the transaction would be avoided from the Hate of its inception In Satgur Prasad v. Har Narain Das, AIR 1932 PC 89, a passage Front Queen v. Saddlers" Co., (1863) 10 HLC 404 has been quoted with approval at page 91 (column 2). The passage runs thus:
"Fraud as I think, renders any transactions voidable at the election of the party defrauded; and if, when it is avoidable, nothing hae occurred to alter the position of affairs, the rights and remedies of the parties are the same as if it had been void from the beginning."
It would also be of interest to note that Beaumont, C. J. rejected the argument of Mr. Munshi that, even if the document was void, it had been ratified by all the share-holders of Pratts not on the ground that the transaction being void was not capable of ratification but on facts that the document had not been ratified by all the shareholders. Sir George Rankin also, in the decision of the Privy Council in regard to the question of notice to the Sassoon Co. and the ratification by the shareholders, has said at page 164 (column 1):
"In their Lordships' opinion the Sassoon Company cannot on the facts disclaim knowledge of the interest of the directors of Pratts in 1928 or 1931 and were not entitled to assume on either occasion that the provisions of Section 91-B had been complied with. No case of ratification by the preference share-holders of Pratts can be made out, and the result is that the official Liquidator is entitled to avoid the equitable mortgage which is the Sassoon Company's sole ground of claim in the winding up of Pratts."
I am of the view that, if for violation of the provisions of Section 91-B of the Companies Act, a contract is a nullity in the sense that anybody in the world can ignore it, there would be no question of a third party, entering into the contract without notice of its violation, deriving a right or title under it, nor would the ratification by the shareholders make a transaction completely null and void a good one. These eventualities are possible only when the contract is voidable at the election of the party who can avoid it and when avoided, the rights and remedies of the parties would be the same as if it had been void from the very beginning.
11. I would here like to quote a few lines from the judgment of Denning, L. J., in Wiseman v. Wiseman, (1953) 1 All ER 601 at p. 607:
"The distinction between a transaction which is void and one that is only voidable, as I understand it, is this. If a transaction is void, then it is in law a nullity. It is not only bad, but incurably bad. There is no need for an order of the Court to set it aside. It is automatically null and void without more ado. A good instance is a bigamous marriage. But if a transaction is only voidable then it is not automatically void. Something must be done to avoid it. There must be an order of the Court setting it aside or some other act recognised by the law as sufficient for the purpose. And being only voidable, the Court has a discretion whether to set it aside or not, and may always impose terms as a condition of setting if aside It will usually refuse to set it aside where there has been a waiver by the party concerned or where third parties have acquired rights or interests in the belief that the transaction was good, though this is not an invariable rule."
It may not be an invariable rule to refuse to set aside a voidable transaction when there has been a waiver by the party concerned or where third parties have acquired rights or interests in the belief that the transaction was good, but the passage quoted above does, to my mind, Indicate that when such considerations arise, a transaction is only voidable and is not 'incurably bad' or 'automatically void'.
12. Learned Government Advocate endeavoured to distinguish the Madras and the Bombay cases on the ground of the introduction of the words 'nor shall his presence count for the purpose of forming a quorum at the time of any such vote', in the provisions of Sub-section (1) of Section 91-B of the Act by the Companies (Amendment) Act, 1936, and submitted that it may well be that violation of the said provisions made the resolution and the contract only voidable before 1936, but, it would be void after 1936, as by introduction of the words aforesaid the Legislature has commanded that the presence of an interested director shall not count for the purpose of forming a quorum in the meeting; hence the resolution passed at a meeting of the Board of Directors of the assesses Company on the 10th of April, 1950 was passed at a meeting which was no meeting in the eye of law as all the Directors present in the meeting were interested and their presence could not be counted for forming a quorum. In my opinion, the distinction is more illusory than real. I shall show with reference to the English cases that this has always been the law even before the introduction of the specific words in the Statute by the Companies (Amendment) Act, 1936, and for violation of either similar Articles of Association or the statutory provisions a resolution has been declared to be invalid or void but the transactions entered into in pursuance of such resolution have not been held to be nullities in the sense of being completely null and void or automatically void.
13. In the case of (1904) 1 Ch 32, the Articles of the Company provided that any Director might enter into a contract or be interested in a business with the company but that he should not vote on any matter relating to the contract or business of the Company in which he was interested and that two Directors should form a quorum for the transaction of any business. The resolution passed at a meeting of 3 Directors, 2 of whom were interested in the subject matter of the resolution, was held to be invalid on the ground that "the two directors were not capable of voting on the question, and, therefore, there was no quorum, and no valid contract for the issue of debentures to the two McDonalds." It is important to note that thla declaration was made when a summons was taken out on behalf of the two McDonalds claiming a declaration that they were entitled to rank as first mortgage debenture holders part passu with other debenture-holders, and in such a situation, after holding the resolution to be Invalid, Farwell, J., also held that there was no valid contract for the issue of debenture to the two McDonalds.
A quite apposite case on the point is the decision of the Court of Appeal in (1914) 2 Ch 488 which has been followed by the Madras High Court in AIR 1929 Mad 353 and by the Judicial Committee of the Privy Council in AIR 1938 PC 159. The appeal arose out of an action to set aside two transactions between the plaintiff and defendant companies on the ground that the resolutions of the Board of the plaintiff company, by which they were authorised, were invalid owing to the Directors' Interests therein. It was held by the Court of Appeal:
"The provisions of this article were not observed when the resolution to purchase the Lydenberg shares was carried, as Harvey voted in favour or it, and without his vote being counted there was no quorum, whereof the defendants, the other contracting party, had full notice. The result is that the contract was voidable, and has been duly avoided, and the plaintiffs are accordingly entitled to have the purchase money repaid but they must return the Lydenberg shares."
14. Very strong reliance was placed by the learned Government Advocate on the decision of the Court of Appeal in Cox v. Dublin City Distillery Co. (No. 2) (1915) 1 Ir R 345. The case came up before Barton, J. in the first instance upon the Memorandum from the Chief Clerk submitting for the consideration of the Court the following question:
"Whether the resolutions of the Directors of the defendant Company, passed on the 12th and 16th May, 1903, respectively and on the 20th January, 1904, are invalid and of no effect, by reason of the meetings at which such resolutions were passed not being properly constituted for the purpose of passing same, and if so, whether the second mortgage debentures set out in the schedule hereto, which were issued in pursuance of said resolutions, are void and of no effect, and do not create any security In favour of the holders of same,"
Barton, J. held that the three resolutions were Invalid for violation of Article 94 of the Company's Articles and debentures issued in those meetings were declared to be void and of no effect and creating no security in favour of the holders of the same. But in regard to the debentures issued to the non-directors Barton, J., held at page 354;
"In such a case the onus lies, in my opinion, upon the party impeaching the debentures to show that a person who is prima facie an outside holder of a debenture, which is good on its face, had actual or constructive notice of the irregularity: County of Gloucester Bank v. Rudry Merthyr Steam and House Coal Colliery Co., (1895) 1 Ch 629. Accordingly, I hold that, although these resolutions were invalid, the ten debentures issued to a trustee for the Messrs. Adam and William Findlater are valid and binding."
The decision of the learned single Judge was upheld by the Court of Appeal, Cherry, L.C.J., has said at page 355:
"Now, that resolution was, In my opinion, the contract for the issue of debentures to the directors; and, inasmuch as all the directors were interested in it, it was, in my opinion, absolutely void, under the decision of Farwell, J. in the Greymouth Case, (1904) 1 Ch 32."
But in regard to the debentures Issued to the outsiders, his Lordship said:
"There is no evidence that either of these gentlemen had any notice of the irregularity of the resolutions of May, 1903. They advanced their money on the faith of debentures duly sealed by the company, and apparently regularly issued, and they are, in my opinion, entitled to the full benefit of their security."
To the same effect is the observation of Palles C. B. at page 371:
"Resolutions as to the issue of debentures are a matter of internal management of the company, and a person bona fide purchasing a debenture without notice of any invalidity or irregularity affecting its Issue, is entitled to relp upon the seal of the company as evidencing that all matters of that nature have been duly performed."
In my opinion, the decision in Cox's case, 1915-1 Ir R 345, does not militate against the view expressed by me above; rather, it supports it. A resolution passed in contravention of the provisions like those contained in Section 91-B of the Indian Companies Act or in the Articles of Association in a meeting where there was no valid quorum of disinterested Directors is invalid and the transactions entered into in pursuance of such a resolution between the Company and the interested Directors or persons who had notice of the invalidity of the resolution will be voidable at the instance of the Company or its share-holders and would be declared to be void and unenforceable on such avoidance. It would, however not affect the rights of outsiders who had no notice of the invalidity ot the resolution. That shows that the transactions are not void in the sense that any person can treat them as mere nullities conferring no rights upon the persons who are parties to the contract
15. The same view was expressed in In re, North Eastern Insurance Co. Ltd., (1919) 1 Ch 198 and following the decision of Farwetl, J. in Greymouth's case, 1904-1 Ch 32 it was held that the resolution for the issue of debenture was invalid for want of disinterested quorum. But again it is Important to note that this declaration was made and the 3 debentures issued in pursuance of the invalid resolution were declared to have been invalidly issued upon a summons issued by the liquidator of the Company, to determine their validity. In Victors Ltd. v. Lingard, (1927) 1 Ch 323, in an action brought by the plaintiff company in liquidation, it was held, to quote the placitum:
". . that the directors were 'interested' in the arrangement come to with the bank in regard to the issue of the debentures, and that the resolution providing for the issue of the debentures was a nullity; but that on the facts, having regard to the subsequent history of the proceedings between the company and the bank, the company was estopped from alleging the invalidity of the debentures and that the action consequently failed and must be dismissed."
This case shows that the Court can refuse to set aside the transaction or declare it void or unenforceable on the ground of estoppel, or, on a parity of reasoning, on the ground of waiver.
16. That an invalid transaction, when avoided, can be void or a nullity in the sense I have indicated above, will also find support from a passage occurring at page 45 (column 2) in the decision of this Bench in Phula Kuer v. Deodhari Rai, 1964 BLJR 44 :
"It is well established in law that a gift or other alienation by a Hindu widow of the property of her deceased husband is valid against every one except the reversioners, and it is also valid as against the latter unless they elect to treat it as a nullity and sue for possession within twelve years of their interest becoming vested."
17. Considering the provisions of Sub-section (1) Section 91-B of the Companies Act, as they stand after the amendment of 1936, a Bench of the Bombay High Court in the Bank of Poona Ltd. v. Narayandas Shriram, AIR 1961 Bom 252 has pointed out, to quote the placitum:
"Though under Section 91-B{1) the presence ot a director acting in breach of the provisions of the sub-section is not to be counted for the purpose of forming "a quorum at the time of vote at the meeting the contract entered into in such meeting is not void ab initio... It would be voidable at the instance of the Company and not the Director."
18. On the authorities referred to above, I am of the view that the resolution dated 10th April, 1950, by which the impugned transactions of sale by the Company to the Directors and their relations were sanctioned, was invalid for violation of the provisions of Section 91-B of the Companies Act, but the consequence of this violation was that the properties of the Company were transferred without a valid resolution and that would make the transactions ultra vires the Directors. Apart from the fact that in law the Directors were bound to comply with the provisions of the Indian Companies Act, 1913, it was specifically provided also in Article 102 of the Articles of Association of the Company, that:
"The Directors shall comply with the provisions of the Indian Companies Act, 1913, or other statutes relating to Joint Stock Companies The transactions were, however, not ultra vires the Company as Clauses 12, 21 and 34 of the Memorandum of Association of the Company authorising it to let, mortgage, sell or otherwise dispose, of any part of the real or immoveable and personal or moveable property and rights of the Company whenever and however acquired. That being so, it would be of use to quote here a passage from Halsbury's Laws of England, 3rd Edition, Volume 6, page 415, paragraph 803:
"The objects of the company as stated in its memorandum, unless and until altered under the Act, cannot be departed from. An attempted departure is as invalid as if the memorandum were a statute of incorporation; it is ultra vires the company and cannot be validated by the assent of a general meeting of the members or of every individual member, or by taking judgment against the company by consent, or by estoppel. On the other hand, a transaction which is ultra vires the directors but within the powers of the company may be ratified by an ordinary resolution of the members in general meeting, although to authorise such acts in the future an alteration of the articles by special resolution is required."
In my judgment, the impugned transactions being ultra vires the Directors but within the powers of the Company, were capable of ratification by an ordinary resolution of the members in the general meeting. Learned Government Advocate did not dispute' this position of law, but he submitted that there was no valid ratification by an ordinary resolution of the members in the general meeting as the ratification to be valid must be made by the members with the express knowledge of the illegality of the transactions entered into by the Directors on behalf of the Company. In the present case, according to his submission, there being nothing to indicate that the share-holders who were not interested in the transactions had notice of the Illegality of the transactions as a matter of fact, most of the share-holders present were interested in the transactions as the Directors and their relations hold 95 per cent of the shares in the Company. In support of his proposition, he placed reliance upon the case of Smt. Premila Devi v. Peoples Bank of Northern India Ltd., AIR 1938 PC 284 wherein Lord Romer has said at page 289 (column 2):
"There can in truth be no ratification without an intention to ratify and there can be no intention to ratify an illegal act without knowledge of the illegality".
I do not feel called upon to decide in this case as to whether the ratification by the share-holders in their meeting of the 19th December, 1953, was valid or not. The Deputy Commissioner, in his appellate orders, as I have said above, remarked that no evidence was led on behalf of the Taxing Department to establish that the meeting in which the ratification was made was invalid or that there was no valid ratification. The Board of Revenue was not required by this Court to state a case on the question of ratification, nor is it necessary, in my opinion, to go into this question, as, the ratification, if valid, would validate the invalid transactions from, their very inceptions as avoidance will make them void from the very beginning. But the point which I want to emphasise is that the transactions which were ultra vires the Directors were capable of being ratified at a meeting of the shareholders and that unmistakably leads to the conclusion that the impugned transactions were such as could be declared to be void from the very beginning, if avoided by the Company or its shareholders, and could be held to be good if ratified by them. But, in absence of either (ignoring the subsequent ratification), the Taxing Department, I have no doubt in my mind, has no right to treat the transactions as mere nullities in law conferring no right upon the transferees and to tax the income from the properties transferred as the income of the Company.
19. The submission of the learned Government Advocate with reference to the provisions of Section 88 of the Indian Trusts Act, 1882, can be disposed of shortly, No such stand has ever been taken on behalf of the Department before any of the authorities nor was any question of law asked to be referred in this regard nor are there any facts found to show that the Directors have gained for themselves any pecuniary advantage by selling the lands of the Company to themselves and their relations at a lower price; rather, the finding of the Deputy Commissioner is that the prices charged for the land were not low. In this respect, a confusion seems to have been made by the Agricultural Income-tax Officer in that he seems to be under the impression that the price of rupees 14 lacs and odd charged in the sale deeds is the price of both the land as well as the standing crops. It was satisfactorily shown to us that it was not so. Rupees 14 lacs and odd were charged as the price of the land only and rupees 8 lacs and odd were charged as the price of the standing crop which, of course, was a sugarcane crop of immature and small height in the month of August, 1950. The purchasers naturally had to meet other considerable costs in making the crops ripe, in harvesting them and delivering them at the mill gate in the sugar-cane crushing season. In that view of the matter, that merely because a sum of rupees 14 lacs and odd was realised as the price of the sugarCane supplied to the mills as against the price of rupees 8 lacs and odd paid for the standing crop cannot lead to the conclusion that the prices charged were low.
20. Learned Government Advocate placed strong reliance upon the decision, of the Privy Council in E. B. M. Co. Ltd. v. Dominion Bank, AIR 1937 PC 279 where Lord Russell of Killowen at page 286 has pointed out:
"....the overriding fact remains that the old Company (acting through its directors and not by its share-holders in general meeting) purported to apply its property for the benefit of those directors. In such a case it is well settled that the Court will treat the transaction as unenforceable, and refuse even to enquire whether the Company has derived any benefit from it: and that on the ground that the Company has not received the protection to which it is entitled."
His Lordship has, thereafter, quoted with approval the well known passage from the leading case of Aberdeen Ry. Co. v. Blalkie Brothers, (1854) 1 Macque, 481 from the judgment of Lord Cran-worth, L. C. It should be noted, however, that the appeal before the Privy Council arose out of an action commenced by the old Company claiming the balance of the cash proceeds of the bonds remaining in the Bank's hands after payment of the Government's claim. In principle, this case also supports the conclusion which I have arrived at earlier, as will be further clear from a passage at page 285 (column 1) which reads thus:
".... if the directors misuse their powers as directors for their own advantage, the transaction is as against the Company of no effect, and the Court will not inquire whether the Company derived any benefit from the transaction."
I fail to understand how the Taxing Department can force the Company to avoid the transaction and to claim the income of the transferred lands either as the beneficiary or by way of mesne profits after the avoidance.
21. Another case strongly relied upon by the learned Government Advocate is the decision or the Privy Council in Cook v. G.S. Decks, (1816) 1 AC 554: (AIR 1916 PC 161). Three directors of a Company carrying on a business of railway construction contractors obtained a contract in their own names to the exclusion of the company. The contract was obtained under circumstances which amounted to a breach of trust by the directors and constituted them trustees of its benefits on behalf of the company. By their votes as holders of three quarters of the issued shares they subsequently passed a resolution at a general meeting of the share-holders declaring that the company had no interest in the contract. The action was commenced by a share-holder of the Company on behalf of himself and all other share-holders against the directors and the company for a declaration that the directors were trustees for the company of the benefit of a contract made between them and the railway company and for ancillary relief. Lord Buckmaster L. C. held on the facts that, if the contract in question was entered into in such circumstances that the directors could not retain the benefit of it for themselves, then it belonged in equity to the company and ought to have been dealt with as an asset of the company. In such a situation, his Lordship has said:
"....a resolution that the rights of the company could be disregarded in the matter would amount to forfeiting the interest und property of the minority of share-holders in favour of the majority, and that by the votes of those who are interested in securing the property tor themselves. Such use of voting power has never been sanctipned by the Courts, and indeed, was expressly disapproved in the case of Menier v. Hooper's Telegraph Works, (1874) 9 Ch A 350."
For aught we know, no share-holder of the assessee Company has brought any such action against it or its Directors and I find no principle or any authority which would entitle the Taxing Department to commence such an action or to tax the income as the one belonging to the Company. Under the Bihar Agricultural Income-tax Act, 'agricultural income' means 'any income derived from such land'. The mode of determination of such agricultural income is prescribed in Section 7 of the Act. On the reading of those provisions, it would be clear that, what is assessed and taxed in the hands of the assessee is the income derived from the land by agriculture and not the right to claim such income. A person may have a right to claim the income from the lands which have gone out of his, possession by the illegalities or the unlawful acts committed by others, yet he may not choose to recover back the land or to claim the income. The Taxing Department cannot force him to do so. Nor can it tax merely his right to get the income. This view of mine also finds support from the provisions of Sections 12 and 13 of the Act.
22. The passage in the judgment of Viscount Sankey in Regal (Hastings) Ltd. v. Gulliver, (1942) 1 All ER 378 at p. 381 to the effect:
"The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as a trustee, he is bound to account for it to cestui que trust", relied upon by the learned Government Advocate, does not advance his point any further and can be distinguished in the manner already indicated.
23. It may be possible to take a view in this case that under the latter part of Section 88 of the Indian Trusts Act, the directors by the impugned dealings with the Company gained for themselves a pecuniary advantage in the sense of deriving the income from the lands transferred to them and their relations although the transfers may have been effected at proper prices, and hence upon the authority of the decision of the Judicial Committee of the Privy Council in Satgur Prasad's case, AIR 1932 PC 89 referred to above, the Company or its share-holders entitled to claim back the land or the Income may be put back in the position which they occupied on the dates of the transfers of the lands and claim an account of the rents and profits of the immovable properties from those dates, but, unless they make such a claim and get the income, no tax can be levied on the agricultural income from the lands as the income belonging to the Company.
24. I would, therefore, answer the first question of law referred by the Board against the Department and hold that the alleged transactions of sale to some of the Directors and members of their family in pursuance of the resolution of the Board of Directors dated 10-4-50 are not void in law but are voidable at the instance of the Company.
25. The second question presents no difficulty of any magnitude. The finding of the Deputy Commissioner as also of the Board is that the impugned transactions of sale were not fictitious and sham and that the transferees got possession of the land transferred thereunder The ambit of the second question referred to this Court is as to whether such finding of the Board of Revenue is illegal for the alleged non-consideration of materials disclosed in the enquiry report dated the 1st April, 1955. In my opinion, it is not so. The enquiry report, as I have said above, was submitted in connection with the assessment of the earlier year, i.e., 1950-51, in pursuance of the appellate order of remand passed in relation to that assessment. The enquiry was made in absence of any representative of the assesses Company and without any notice to it. Even upon its basis, the transfers of land were held to be genuine and the Company was assessed as common manager of the transferees under Section 13 of the Act.
Apart from all these, the Deputy Commissioner and the Board of Revenue have considered the matter afresh on the materials before them and have come to the conclusion that the transactions are genuine and valid. Their finding is supported by evidence. While so doing, the Board of Revenue has also taken into consideration some materials disclosed in the enquiry report. Our attention was drawn by the learned Government Advocate to paragraph 7 of the application in revision filed by the Commissioner of Agricultural Income Tax before the Board of Revenue, where the materials disclosed in the enquiry report have been enumerated. A major part of the recitals in the said paragraph is argumentative, and some of its sub-clauses refer to the invalidity of the resolution of the Board of Directors, and the inadequacy of the price, matters which have been separately dealt with by the Deputy Commissioner, the Board and me. I am unable to hold, on the facts and in the circumstances of this case, that the order dated 14th May, 1959, passed by the Board of Revenue is illegal for non consideration of material evidence disclosed in the enquiry report. Hence the second question also must be answered against the Department.
26. In the result, both the questions referred to this Court under Section 28(3) of the Act are answered in favour of the assess"e and against the Commissioner of Agricultural Income-tax, Bihar. On the peculiar facts of tills case, I would not award any cost of the reference to the assessee.
Ramaswami, C.J.
27. I agree.