Indian Kanoon - Search engine for Indian Law

As Shri Jain had admittedly not obtained the permission general or special of the Reserve Bank, for opening the account aforesaid, the Director of Enforcement started proceedings against him under s. 4(1) of the Act. The explanation of Shri Jain was that the amounts in question had been deposited into the Bank by four German firms in settlement of claims which two Indian Companies the Rohtas and the New Central Jute Millis Ltd. had against them for delayed and defective supplies of machinery and equipment under previous contracts, that the deposits in question had been made subject to the condition that they should be utilised only for making initial payments towards price of new machineries to be purchased from the German firms and that in consequence there was no loan by the appellant within s.4(1) of the Act. The Director rejected this explanation and held that s.4(1) had been contravened and imposed a fine of Rs. 55 lakhs on Shri Jain under s. 23(i)(a) of the Act. Against this order there was an appeal to the Foreign Exchange Appellate Board who, examining the question in the light of fresh materials which were made available to them accepted the version of Shri Jain, and held that the deposits had been made by the German firms under the circumstances and on the condition stated by him. They however held that even so the deposits in question would inn law be loans by Shri Jain to the Bank, and. that in consequence, s.4(1) of the Act had been infringed, as no permission had been obtained as required by it. In this view they confirmed theorder of the Director but reduced the fine to Rs.5 lakhs. Against this order both Shri S. P. Jainand the Union of India have preferred the above appeals with the leave of this Court under Art.136 of the Constitution. In this judg- ment Shri S. P. Jain will be referred to as the appellant and the Union of India as respondents.

For a satisfactory determination of the question as to the terms on which the deposits in account No. 50180 were made, it is necessary to narrate briefly the history and nature of the disputes, which form the subject-matter of the settlements. They have their origin in four contracts entered into with four German firms, two of them by the Rohtas and the other two by the New Central Jute Mills Ltd. Taking the first of them, some time prior to 1953 the Rohtas had placed an order with a German firm called Messrs. Voith & Company for the supply of three paper Machines. The shipment of these machines was delayed beyond the time stipulated and moreover when they were supplied their production was found to be far below what had been guaranteed under the agreement. The Rohtas claimed compensation from M/s. Voith & Company on both these accounts and after some correspondence between them a representative of the German firm Mr. Zimmermann came over to India to make an enquiry on the spot, and as a result of the discussion which he had with the Rohtas he recommended on February 21, 1957 that a sum of pound 17,900/- might be paid by the German firm as compensation for delay in ship- ment. He however declined to admit the claim made by the Rohtas on account of the deficiency in the output of the machines. In accordance with this recommendation Messrs. Voith & Co. remitted on March 15, 1958, German Marks equivalent to the sum of pound 17,900/- to the Deutsche Bank to be credited in the name of the appellant and it was so credited on March 20, 1958. The appellant was in due course informed of the deposit, but on May 14, 1958, he wrote to M/s. Voith & Co. that he was not prepared to accept the amount in full satisfaction as no compensation was paid for deficiency in output. Thus 'the dispute 'was still unsettled, when the appellant left for Germany. Coming next to the second contract, some time in 1951 the Rohtas had purchased from M/s. Escher Wyss another firm in West Germany a Yankee Paper-making Machine. As soon as it was installed it was discovered that some of its parts were defective and that its output was also below what was guaranteed. On December 17, 1953, the appellant brought these defects to the notice of the German firm and asked them to substitute good and suitable parts in the place of the unusable old ones. On this a protracted correspondence followed but as the machines could not be worked without replacement of the defective parts, the Rohtas could not wait until a settlement was reached and so purchased, the requisite parts from another German firm called O'Dorries and made a demand on M/s. Escher Wyss & Company for compensation. A representative of the firm Mr. Staudenmaier came over to India some time in 1956 to investigate the matter, and after making a local inspection he submitted proposals for remodelling the machines. On June 17, 1957, the Rohtas wrote to the German firm that they were not agreeable to these proposals and requested them "to have the claims settled as put forward by us in our previous letters". Thus the claim under this contract was also pending settlement at the material period. The facts relating to the third and fourth contracts concerned in these disputes are that the New 'Central Jute Mills Ltd. had decided to instal at Varanasi a Gas and Synthesis Ammonia Plant for the manufacture of Chemicals and Fertilisers and placed orders for the machineries and parts with two German firms M/s. Friedrich Udhe and M/s. Pintsch Bamag. The case of the appellant is that many of the equipments which were supplied by the two firms were not in accordance with the specifications, that the pipe lines were Dot properly fabricated and were untailored and that there was also shortage in the supplies made by M/s. Pintsch Bamag. The New Central Jute Mills Co. claimed compensation for the defective supplies as aforesaid from the German firms, and negotiations for settlement of these claims were also pending at the relevant dates.

The appellant left India for Europe on June 30, 1958. In the following months he contacted the respresentative of the four German firms mentioned above and all the disputes were settled. According to the appellant, the terms of the settlement which were same in all the four contracts were as follows: The amount payable to the Indian Companies as compensation was fixed. It was to be deposited by the German firms to the credit of the appellant in the Deutsche Bank. The Indian Companies were to obtain import licences from the Government of India and place orders with the respective firms for the supply of new machineries. The amounts 'in credit in the Deutsche Bank were to be supplied pro tanto for the payment of the price of these machines to the respective firms. The appellant was not to operate on this account except for the purpose of making payments to the German in the manner aforesaid. It is now necessary to refer to the evidence bearing on the settlements, because, as already stated, while the respondents admit that there were settlements with the German firms and deposits were made pursuant thereto, they do not admit that the deposits were made subject to condi- tions, as stated by the appellant. It will be remembered that on March 20, 1958, M/s. Voith & Company had deposited with Deutsche Bank DM. 210.081,31 Marks being the equivalent of pound 17,900/- as compensation for delayed shipment, which was the only portion of the claim admitted by them, in full settlement of all the claims of the Rohtas. Now pursuant to the settlement reached with the appellant, they deposited on August 1, 1958, a further sum of DM. 201,67,659 Marks in the name of the appellant in the Deutsche Bank. The terms of the settlement appear, in two letters written by M/s. Voith & Company on August 1, 1958, one to the Rohtas and the other to the Deutsche Bank. In the letter addressed to the Rohtas M/s. Voith and Company say "Mr. Jain informed us of your plans for the future such as the establishment of a new complete pulp and paper making unit in Assam, and in particular, of your immediate desire to increase the production of your Board Machine P.M. I in Dalmia 'a ar.. For this re-construction project we have already submitted an offer......Regarding the remodelling of your P.M. I., we understand that you have already obtained an industrial licence and that you expect to get an import licence for the equipment offered by us. An advance payment of 20% of the ex-works price is, however, for this comparatively small order a pre-condition for our credit insurance. In view of Mr. Jain's assurance that we will enjoy preference for the supply of our machinery in the event that an import licence for the new paper mill will eventually be obtained, and in order to make the early placing of your order for the reconstruction of P.M. I possible, we have finally agreed to meet your claims for the paper machines already supplied to the extent of a total sum of DM. 412,058 including the amount already placed with the Deutsche Bank, Dusseldorf, in March representing 20% of the price quoted in our offer of January 15th, 1958. We are, therefore, remitting the balance to the Deutsche Bank as per letters addressed to them translation of which we attach hereto. This settlement of your claims is, considered on the definite understanding that the total amount can only be utilised by you to make to us the initial payment of 20% on and when the import licence for the reconstruction of P.M.I. is received. The Bank is, therefore, instructed to hold both remittances made by us at your disposal for this purpose only. On the same day M/s. Voith & Company advised the Deutsche Bank that they had remitted a further sum of DM.? 201,676.59 to it in addition to the previous remittance of DM. 210,381.31 and then go on to say ,the two amounts are paid in final settlement, of the claims of Messrs. Rohtas Industries Limited against us in connection with the supply of 3 paper machines. We repeat that the said amounts may be utilised by Mr. S. P. Jain, Chairman of Messrs. Rohtas Industries Limited, only for the purpose of asking initial payments to us against further purchase of machinery, which payments will be made on final approval of our tender after receipt of the Indian import licence. For other's sake please confirm receipt of these instructions to us."

In Paget's Law of Banking, Sixth Edition, p. 43, it is stated that "superimposed on this general relationship of banker to customer there may be special relationships arising from particular circumstances and requirements" and that the express terms of those relationships overrides the implied terms arising from the general relationship. It was argued for the respondents, that this statement of the law could have, as suggested by the word superimposed', reference only to special contracts entered into with customers, and that involves the admission that the appellant is a customer. Normally no doubt Banks would undertake these works for their customers, but there is nothing to prevent them from doing so for others as well. In Corpus Juris Secundum, Vol. 9, it is stated "The intention of the parties controls the character of the relation between Bank and depositor, which may be that of bailee and bailor, but is ordinarily that of debtor and creditor" (Page 546). And it is pointed out when money is delivered to a Bank "for application to a particular specific purpose" it is not a general deposit creating the relationship of debtor and creditor, but a (,specific deposit" creating the relationship of bailee and bailor or trustee and beneficiary. Vide p. 570, Therefore the fact that money has been put in a Bank does not necessarily import that it is a deposit in the ordinary course of banking. We have to examine the substance of it to see whether it is in fact so or not. It is unnecessary for the purpose of this case to elaborately examine what banking business, properly so called, consists in. It is summed up as follows in Halsbury's Laws of England. Third- Edition Vol. 2 p. 150 Para 277: ','the receipt of money on current or deposit account and the payment of cheques drawn by and the collection of cheques paid in by a customer." Applying these tests, can it be said that account No. 50180 is truly a banking account? Did the appellant open the account in the Bank with a view to deposit his moneys from time to time, and to operate on it by drawing cheques? The question admits of only one answer, and that is in the nega- tive. The account was opened in the Bank with a view to effectuate the arrangement between the German firms, and the appellant, which was that the amounts were to be repaid to the depositors a price of new machineries to be supplied by them and the appellant was not to operate on it except for that purpose. The Bank was informed of this arrangement and took the deposits with notice of the rights of the parties thereunder. Under the circumstances the Bank has really only custody of the money as if it were a stakeholder, with a liability to hand it over to the persons who would become entitled to it under the arrangement. On these facts it cannot be said that there is a deposit in a commercial sense of the word. It would be more correct to say that the Bank holds the money under a special arrangement which constitutes it not a debtor, but a sort of a stakeholder. It was also argued on behalf of the appellant that when Deutsche Bank received the amounts from the German firms on the terms mentioned by them, the relationship that was constituted between it and the appellant was one of trustee and beneficiary and not that of debtor and creditor and that therefore s. 4(1) was out of the way. We are unable to agree with this contention. Under the terms of the arrangement between the German firms and the appellant the deposits were to stand in the name of the appellant and so they never vested in the Bank. It is true that the- Bank would have the right to use the funds but that is not because they belong to it but because it must be taken to be the understanding of the parties, when they entrusted the moneys to it pending there repayment to the German firms in terms of the agreement, that the Bank was to have the right to use them until a demand is made for their return. Relience was placed for the appellant on the decision of the Privy Council in Official Assignee v. Bhat (1), where it was held that a trust fund which was authorised to be invested in business could be traced, on the principle laid down in re. Hallett's Estate (2), into the assets of the business. But in that case it was admitted that the deposit was a Trust and the point for decision was only whether the undoubted rights of the beneficiary to follow that amount was lost by the authority given to the trustee to use it in his business. But here the question is whether the Bank is a trustee and the fact that they are entitled to use the funds does not clothe them with the character of a trustee. If that were not so every banker must be a trustee which clearly is not the law. Then again who are the beneficiaries under the trust, the German firms or the appellant? The fact is that the arrangement under which the monies were deposited in the Bank is sui generis and its position in truth is that of a bailee, not a debtor or trustee. It is unnecessary to pursue the discussion further (1) (1933) L.R. 60. I.A. 203.