Patna High Court
Satdeo Narain And Ors. vs Union Of India (Uoi) Through Income-Tax ... on 16 March, 1964
Equivalent citations: AIR1964PAT521
JUDGMENT Misra, J.
1. The appellants are a Hindu joint family firm carrying on the business of selling gold and silver ornaments under the name and style of Mahesh Lal Satdeo Narain, their principal place of business being in the town of Gaya. According to their case, the firm suffered heavy losses in various forms and the business was accordingly closed on the 26th of July, 1954. They filed an application for being adjudicated as insolvents, which gave rise to Insolvency Case No. 10/4 of 1955/1956 in the Court of the Additional District Judge, Gaya. An objection was filed to the application by the Union of India in respect of the income-tax dues payable by the appellants to it. Other creditors also joined in opposing the appellants' application. The learned Additional District Judge, however, by his order dated the 5th of July, 1957, found in favour of the appellants and adjudicated them insolvents. A Receiver was duly appointed. The Receiver realised certain amounts which were below the amount of debts payable by the firm. The appellants, however, did not apply for discharge. Accordingly, the Additional District Judge passed an order, dated the 10th of January, 1958, under Section 43(1) of the Provincial Insolvency Act (hereinafter referred to as 'the Act') annulling the adjudication.
2. On the 3rd of February, 1958, the applicants filed an application for leave to present a petition for adjudication as insolvent under Section 10(2) of the Act. This gave rise to Insolvency Case No. 3 of 1958. This was transferred to the Court of the Additional District Judge, II, Gaya. The Union of India, among others, objected to the prayer of the appellants. On the 25th of July, 1960, an order was passed by the learned. Additional District Judge dismissing the application, holding that the applicants did not come to Court with clean hands. The application for insolvency was filed with a view to defraud the Income Tax Department of its dues. The closure of ancestral business of the firm in July 1954 was followed by a new business started by them as 'Guinea Jewellery House'. The applicants did not also mention-in schedule B of the petition their ancestral house and their plea that this house was gifted to the sister of applicant No. 1 (who was examined as A. W. 1) was a false plea, inasmuch as an ancestral house could not be gifted by the father in a Hindu joint family, consisting of himself and his sons, even in respect of the father's own share. The applicants came up to this Court for leave to appeal under Section 75 (3) of the Act and leave was granted by this Court on the 18th of August, 1960.
3. Mr. Ramanugrah Prasad appearing in support of the appeal has raised three questions. The first one is that the learned Additional District judge erred in rejecting the prayer of the appellants for adjudication as insolvents on mere suspicion, and conjecture. The scope of the enquiry under Section 25(2) and 10(1) of the Act for rejecting the debtor's petition is to find as a fact that he is able to pay his debts, and not to take into consideration other factors. The second question raised is that the Court is not required in an enquiry under sections 25(2) and 10(1), at the stage of considering the petition of debtor for adjudication to look into the bona fides of a transaction i.e., whether it is benami or a genuine transaction. The stage for that comes up later on when the application for discharge is filed. The learned Additional District Judge, therefore, erred in rejecting the application of the petitioners at this stage. The third point raised is that once the applicants were adjudicated insolvents by the learned Additional District Judge, Mr. S.M. Karim, on a consideration of the evidence led by the parties including the Union of India in the Income Tax Department, and that having been annulled only because the appellants failed to apply for discharge within a period of six months from the date of the order n/ adjudication, and permission having been granted to the appellants to file the application, the finding of Mr. S.M. Karim could not be re-opened. Even if it were not to be regarded as res judicata, at any rate, that finding should not have been disturbed unless fresh facts or materials were available for reconsidering the matter.
4. Section 10 of the Act lays down the condition on which a debtor may file a petition for adjudication as an insolvent and Clause (2) of this section provides the circumstances in which am order of annulment once passed can be re-opened on a fresh application. Section 10 stands thus: --
"10 (1) A debtor shall not be entitled to present an insolvency petition, unless he is unable to pay his debts and
(a) his debts amount to five hundred rupees; or (b) he is under arrest or imprisonment in execution of the decree of any court for the payment of money; or
(c) an order of attachment in execution of such a decree has been made and is subsisting, against his property.
(2) A debtor in respect of whom an order of adjudication whether made under the Presidency-towns Insolvency Act, 1909, or under this Act has been annulled, owing to his failure to apply, or to prosecute an application for his discharge, shall not be entitled to present an insolvency petition without the leave of the Court by which the order of adjudication was annulled. Such court shall not grant leave unless it is satisfied either that the debtor was prevented by any reasonable cause from presenting or prosecuting his application, as the case may be, or that the petition is founded on facts substantially different from those contained in the petition on which the order of adjudication was made,"
It has been contended that in terms the present case is governed by Clause (2) of the section. Once leave has been granted by the Court to present the petition for insolvency, it is not open to the Court to start a fresh enquiry.
Section 25(2) relates to dismissal of the petition. Clause (1) of it concerns the dismissal of the petition for insolvency filed by the creditor and Clause (2) deals with the case of a petition presented by a debtor. Section 24 lays down the procedure at the hearing of the application for adjudication as insolvent. The proviso to Sub-clause (a) of Clause (1) of Section 24 lays down--
"Where the debtor is the petitioner he shall, for the purpose of proving his inability to pay his debts, be required to furnish only such proof as to satisfy the court that there are prima facie grounds for believing the same and the Court, if and when so satisfied, shall not be bound to head any further evidence thereon:"
It also refers to the necessity that at the hearing of such an application the court shall require proof that the creditor or the debtor, as the case may be, is entitled to present the petition.
Mr. Prasad has urged that in this case there was abundant evidence before the Court, both, to satisfy the requirement of Section 10(1) and Section 24(1). The appellants had to pay debts exceeding the amount of Rs. 500/- and as such their right to apply for insolvency was established. The only further consideration was that they were not able to pay their debts. The learned. Additional District Judge rejected their application on the ground that there was an ancestral house which was gifted by the father to his daughter which was illegal and, further, that another business was started by the family under a different name out of the assets of the family. Proviso to Section 24 (1) (a)? quoted above, however, lays down that whenever the debtor is an applicant, what he is required to prove in order to be adjudicated as insolvent is the existence of prima facie grounds and the Court is not entitled to enter into the question of benami etc., in tills connection.
He has also drawn our attention to sections 6, 7 and 9 of the Act. Section 6 lays down what will constitute an act of insolvency. Clause (c) of the Section refers to the transfer of property by the debtor which would, under this Act, or any other enactment for the time being in force, be void as a fraudulent preference if he were adjudged an insolvent. Clause (f) provides that if the debtor petitions to be adjudged an insolvent under the provisions of this Act, that in itself would be an act of insolvency. Section 7 lays down that if a debtor commits an act of insolvency, an insolvency petition may be presented either by a debtor or a creditors and the Court may on such petition make an order adjudging him an insolvent. The explanation attached to this Section says that the presentation of petition by the debtor shall be deemed an act of insolvency within the meaning of this section, and on such petition the Court may make an order of adjudication. Section 9 deals with the condition on which the creditor may make an application for having a debtor adjudged an insolvent. That section, however, is not relevant inasmuch as both the petitions in this case were filed by the debtors themselves. They were dealt with by Mr. S.M. Karim, the Additional District Judge, as also the present one giving rise to this appeal.
In support of his contention, Mr. Ramanugrah Prasau has referred to the cases of Chhatrapat Singh Dugar v. Kharag Singh Lachmiram, 44 Ind App 11: (AIR 1916 PC 64) and Narayanappa v. Bheemappn, AIR 1926 Mad 494. It is true, no doubt, that the decision in the Madras case supports the contention of Mr. Prasad and the following observation in the judgment of their Lordships of the Judicial Committee is also consistent with that view: --
"The Provincial Insolvency Act presents a complete and exact delineation of a debtor's right to an order of adjudication on his own petition. Subject to the conditions, specified in the Act, if a debtor commit? an act of insolvency an insolvency petition may be presented by the debtor, and the Court may on such petition make an order adjudging him an insolvent. The presentation by him of a petition is deemed an act of insolvency, and on that petition the Court may make an order of adjudication (Section 5)."
The matter has been gone into in a Full Bench decision of this Court reported in Mohammad Alam v. Babulal Marwari, AIR 1936 Pat 18, Reliance has also been, placed by Mr. Dutta for the respondents on the following decisions: Muni Lalkatariar v. Shashi Bhusan Rai, AIR 1921 Pat 315; Ganesh Lal v. Sanehi Ram, AIR 1933 Pat 43; Jagarnath Sahu v. Beni Prasad, AIR 1934 Pat 97; Ram Narain Lal v. Abdul Kalam, AIR 1958 Pat 528 and Haridayal Sah v. Motilal Sarawagi, AIR 1960 Pat 522. In my opinion, in view of the decision of the Full Bench of this Court, it is difficult to accede to the contention of Mr. Prasad that the mere filing of petition would be such an act as to oust the jurisdiction of the Court to enter into the question of bona fides of the application for adjudication as an insolvent filed either by the creditor or the debtor. The following observation of the Court in the above Full Bench case is relevant: --
"This case was followed in ILR 12 Pat 866: (AIR 1934 Pat 97(1)). In using the expression the creditors will be equally entitled to call such evidence, etc." I think I went too far. The meaning of the proviso is merely that the Court is enabled to deal summarily with the opposition by the creditor, that is to say the Court must listen to such evidence as the debtor may care to adduce and the debtor may be cross-examined and if the Judge is satisfied after such hearing he may refuse to hear any further evidence and may grant the adjudication, but this is very far from saying that the Judge, if he shall be inclined to hear any evidence presented by the creditor, is not entitled to hear such evidence. He may, if he likes, hear the evidence and may hear as much evidence as he may think fit in the circumstances which, will vary of course according to the difficulty of the case." In the case of Muni Lal Kataria, AIR 1921 Pat 315 also, it has been held that even where an application for adjudication as insolvent has been filed, the court is to look to the bona fides of the application. In view of the consistent decisions of this Court on this matter, it must be held that merely because the debtor has filed an application for being declared an insolvent, it will not preclude the Court from examining whether the application is a bona fide one or it has been filed with some ulterior purpose of running away from the liability for the payment of the debt.
Mr. Prasad's contention, however remains all the same which is that even on merits the Court must not go upon mere suspicion or conjecture. The learned Additional District Judge was not right in holding that merely because the Receiver found movable properties worth only a few hundred rupees, it must be inferred that the other movables were out of the way in order to defeat the creditors. Nor, likewise, should the court have taken the view that the gift to the daughter was made in order to put this property out of the reach of the creditors. In my opinion, the argument of Mr. Prasad is one of substance in view of the proviso to sub-clause (a) of Clause (i) of Section 24 of the Act which puts an application by the debtor on a special footing in so far as it lays down that where the debtor is the petitioner he is required to furnish only such proof as to satisfy the Court that there are prima facie grounds for believing the same. The expression "prima facie grounds" would indicate that if on the records of the proceedings it appears to the Court that there are properties in possession of the debtor which would disprove his claim that he is unable to pay his debt, in that case alone, his application shall be dismissed. If, however, there is no such clear evidence on the record, the debtor must be adjudged an insolvent in terms of Section 24 (1) (A). This is also consistent with the observation of their Lordships of the Judicial Committee in the above case.
If any other view were taken of Clause (1) of Section 24 and if an elaborate enquiry were warranted at any early stage, the subsequent provision before an order of discharge is passed necessitating a full enquiry into the title of the properties of the debtor would be rendered wholly nugatory. The Select Committee Report on this point (dated 24th September, 1919) also runs thus:
"With reference to this addition it has been objected that it will involve preliminary enquiry into matters which have to be gone into fully at a later stage, particularly if it is alleged that 'there has been any fraudulent concealment of assets. To meet this objection we have provided that at the stage with which Section 14 deals, prima facie, proof only shall be required of the debtor's inability to pay his debts".
It is, no doubt, true that this Court has expressed an opinion in the case of Narayan Mistri v. Ram Das ILR 7 Pat 771 : (AIR 1928 Pat 477) as also in the case of ILR 12 Pat 107 : AIR 1933 Pat 43 that the court is not bound to accept the statement of the petitioner but is required to investigate the facts itself, but it is to be borne in mind, at the same time, that the investigation is only of a prima facie nature and not a conclusive enquiry. As I have said above, if it were not so, the fuller enquiry which is contemplated before an order of discharge is passed would be rendered wholly nugatory. Sections 4 and 53 of the Act have made ample provision to defeat any fraud practised by the person petitioning to be adjudged an insolvent. In the case of Firm Baijnath Rameshwar Lal v. Atal Prasad Kumar, 17 Pat LT 857 : AIR 1937 Pat 134, it has been held that whether the transfers alleged to have been made by the debtor were for. inadequate consideration could arise only after the order of adjudication was made. The learned Additional District Judge, was, therefore, clearly in error in dismissing the application of the appellants on the ground that certain properties were transferred by them and new ones acquired in a farzi name, when this question could be gone into at a subsequent stage before the order of discharge would be passed.
5. This conclusion meets both, the contentions of Mr. Dutta which were advanced against the argument of Mr. Prasad for the appellants and, in my opinion5 the order of the learned Additional District Judge is to be set aside even on the aforesaid authority of this Court in the case of Firm Baijnath Rameshwar Lal, 17 Pat LT 857 : (AIR 1937 Pat 134).
6. A wider question which has been canvassed before us relates to the effect of filing of a fresh application for insolvency after an order of annulment by the Court having once declared the debtor an insolvent. An annulment follows because of the debtor's failure to apply for discharge within the period allowed by the Court. In this case, as I have already stated, the time fixed by Mr. S.M. Karim to adjudge the appellants as insolvents was a period of six months to apply for their discharge. They failed to apply for a discharge. It is stated that they failed to do so because the principal appellant looking after the case had fallen ill. In fact, the time which elapsed between the date of annulment and the present application was not considerable. The order of annulment was passed by Mr. S.M. Karim on the 10th of January, 1958, and the present application was filed on the 3rd of February, 1958. Thus, the delay covered only 23 days. In fact, the application was presented with the leave of the Court.
Mr. Prasad has raised two questions of law based on Clause (2) of Section 10 of the Act. The one is that when permission was granted to the debtors-appellants to present the application giving rise to this appeal, on the 21st of February, 1958, this fulfilled the requirement of Section 10 and it was not open to the learned District Judge thereafter, to start an enquiry into the merits of the application. The effect of granting permission to present a fresh application after annulment is to accept the title of the debtor to make an application and once the title has been established any further enquiry is altogether out of place. Section 24 (1) says that in clear terms, The second point raised by him is that once permission has been granted in terms of Clause (2) to present the petition, the Court is only required to look to the previous order passed by the predecessor-in-office of the Court. The clause lays down that the permission to present another application for adjudication as insolvent will be entertainable when the Court is satisfied that the petitioner by any reasonable cause was not able to prosecute his application for discharge which resulted in the annulment of the adjudication or when he has presented fresh facts substantially different from those contained in the petition on which the order of adjudication was made. The effect of this provision is to put such proceedings on the same footing as Order 9, Rules 9 and 13, of the Code of Civil Procedure, If it were to be held otherwise and if an enquiry were permitted to be made by the Court on the second occasion which might go against the conclusion recorded in the proceeding resulting in the order of adjudication, the entire object of Clause (2) of Section to would be defeated.
In my opinion, the argument of Mr. Prasad is not without force. In the case of Gopi Chand Duni Chand v. Hukmat Khan, AIR 1937 Pesh 85 such a question arose in which the Insolvency Court had ordered the debtor to be treated as an insolvent in the subsequent proceeding following the annulment order merely on the strength of the previous order. The judgment was set aside by the Court of the Judicial Commissioner not on the ground that the procedure followed was bad but on the technical ground that the petitioner had not made a specific prayer in the second petition for being adjudged an insolvent. In my opinion, the contention urged by Mr. Prasad with regard to the second branch of his argument on this point is not without force, for, if it were otherwise as I have said, the provision for satisfying the same Court that passed the order of annulment for reopening the proceedings would be redundant and meaningless. It is true, no doubt, that where the petition is founded on facts substantially different from those in the previous petition it will be proper for the Court to embark upon fresh enquiry. Where, however, facts are not different, there is no rational basis for the contention as to why the same Court that once came to a decision on the same facts, must necessarily hold a different enquiry. As for the first branch of the contention of Mr. Prasad that once an order to present a petition in terms of Clause (2) of Section 10 is passed, it amounts to accepting the title of the applicant to be adjudged insolvent, it is an argument which although interesting is not free from difficulty. In any view of the matter, since the appeal is being allowed on merits as well, it is not necessary for the Court on this occasion to give a conclusive pronouncement on this branch of the argument of Mr. Prasad relating to Clause (2) of Section 10.
7. In the result, therefore, the appeal is allowed, the order of the learned Additional District Judge is set aside and it must be held that the appellants should be adjudged as insolvents and the subsequent enquiry as to the bona fides of the transaction entered into by him shall be taken up when the appellants put in the necessary application for their discharge. The period fixed for making application may depend upon the discretion of the Court in view of the fact that the-matter has already been prolonged and the other creditors have not been able to realise their dues since the year 1955. In the circumstances of the case, parties will bear their own costs of both the Courts.
A.B.N. Sinha, J.
8. I agree.