Holding

The broker possessed a transferable beneficial interest in the CANCIGO units, the scheme’s transfer restriction was not an absolute legal bar, and the attachment under the Special Courts Act was invalid.

Summary

Canbank Financial Services Ltd., a subsidiary of Canara Bank, purchased CANCIGO units worth Rs 33 crore from a stock broker (Respondent 2) who had applied for the units through two other banks (Respondents 3 and 4) that held the certificates in their names but transferred possession to the broker. The Special Court held that the units were illegal and attached them under Section 3 of the Special Courts Act, deeming the broker the notified person. On appeal, the Supreme Court examined whether the broker had a transferable beneficial interest, whether the scheme’s non‑transferability clause created an absolute legal bar, and whether the Benami Transactions Act applied. The Court held that the broker’s beneficial interest was transferable under the Indian Trusts Act and the Transfer of Property Act, that the scheme’s restriction was not an absolute legal prohibition, and that the transaction was not a benami one. Consequently, the attachment was invalid and the Special Court’s order was set aside. The appeals were allowed.

Issues considered

The existence and nature of a transferable beneficial interest in the CANCIGO units held by the broker (Respondent 2).
Whether the non‑transferability stipulation in the CANCIGO scheme created an absolute legal bar to transfer.
Applicability of the Benami Transactions (Prohibition) Act, 1988 to the transaction.
Whether the attachment of the units under Section 3 of the Special Courts Act was valid.
Interpretation of Section 10 of the Transfer of Property Act and Section 58 of the Indian Trusts Act in the context of the transaction.

Legislation cited

Benami Transactions (Prohibition) Act, 1988s. 3, s. 4, s. 5
Code of Civil Procedures. 317
Companies Act
Sale of Goods Act, 1930s. 19, s. 20, s. 4
Securities Contracts (Regulation) Act, 1956
Sick Industrial Companies (Special Provisions) Act, 1985
Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992s. 13, s. 3, s. 4, s. 9A
Transfer of Property Act, 1882s. 10, s. 6(d)

Subjects

beneficial trusttransfer of securitiesnon‑transferable unitsattachment of propertycustodianBenami transactionSpecial Courts ActTransfer of Property ActSale of Goods ActIndian Trusts Actsection 10 void restraint

Judgment

A CANBANK FINANCIAL SERVICES LTD.
v.
THE CUSTODIAN AND. ORS.

SEPTEMBER 3, 2004

B [N. SANTOSHHEGDE, S.B. SINHA AND A.K. MATHUR, JJ.]

The Special Courts (Trial of Offences Relating to .Transactions in
securities) Act, 1992.

Sections 3, 4, 9A and I 3-Units with stipulation making their transfer
c impermissible-Application for investment by some entities in own name-
However, consideration for allotment paid by a stock broker and certificates
· of units as well as interest thereon, though first received by those entities,
later handed over to stock broker-Transfer of these units by stock broker
in discharge of his liabilities towards another person who . also paid
D remaining consideration for units-Validity and legality of-Held: Stipulation .
. making transfer impermissible was not absolute legal bar-Units were
valuable securities capable of being transferred in terms of established ·
business practice, Sale of Goods Act, 1930 or Transfer of Property Act,
I BB2-Stock broker had transferable beneficial interest in units as cestui qui
trust was createdfor his benefit-It was not a case ofbenami transaction and
E Benami Transactions (Prohibition) Act, 19BB not applicable-There was no
statute forbidding either those entities from entering this transaction or
precluding the stock broker from transferring his interest to ano.ther person,
and both the transactions were legal-The arrangement may be unethical but
not illegal-As the transfer· took place before coming into force of the' 1992
F Act, stock broker had no interest therein which could have been attached by
Custodian appointed under that Act-C,anbank Mutual Fund (CANCIGO)
Scheme, J9BB, Conditions 2(k), 2 (r) 5, JO, 19, 22 and 24-Indian Trusts
Act, JBBB, Sections 7, 58, 82 and BB-Transfer of Property Act, 18B2,
Sections 6(d) and JO-Sale of Goods Act, 1930, Sections 4, 19 and 20-
Benami Transactions (Prohibition) Act, I 9B8, Section 3, 4 and 5.
G
Role of Custodian-His rights are same as that of notified person-
Properties of latter neither vest in him nor is he permitted to deal with any
property which did not belong to latter on the relevant date-He is not a
receiver within the meaning ofprovisions of Code of Civil Procedure or an
Official Receiver or an Official Assignee under the Insolvency laws-He is
H
60
CANBANKFINANCIAL SERVICES LTD. v. CUSTODIAN 61

also not Official Liquidator under the Companies Act. A
Section 3(3)-Attachment ofproperties of notified person-It is subject
to an encumbrance, if any-Even if a limited right is transferred by a notified
person to a third party, the order of attachment must be subject to the said
right of the third party-Under all circumstances the right of a third party
must be recognised.

Section 9A-Statutory attachment ofproperties of notified person-All
claims relating thereto must be adjudicated by Special Court only.

Sale ofGoods Act, 1930-Right, title and interest in movable property--
It passes by delivery ofpossession and upon paying of consideration unless
the transaction is forbidden under Section 23 of Contract Act, 1872.

Benami Transactions (Prohibition) Act, 1988-Scope and applicability
of Discussed.
D
Indian Trusts Act, 1888-Section 88-Fiduciary character-Discussed.

Maxims: Cesti qui trust-It is synonym with beneficiary and covers
cases falling under Sections 82 and 88 of Indian Trusts Act, 1888.
." E
Words and phrases-Trust--:Creation, annexed obligations, nature,
transferability and remedies-Meaning of-In context of Indian Trusts Act,
1888.

Appellant and CBMF are subsidiary companies of same nationalised
bank. CBMF floated a scheme of investment in units, named 'CANCIGO' F
with a stipulation making their transfer impermissible. Respondent No.
4, another nationalized bank and Respondent No. 3, its wholly owned
subsidiary, on request of Respondent No. 2, a registered stock broker
applied for those units aggregating to face value of Rs. 33 crores.
However, application money for purchase of those units was paid by
Respondent No. 2 himself, and certificates of those units as well as interest G I

thereon, though first received by Respondent Nos. 3 and 4, were also
later handed over to him-the latter two not claiming any right, title or
interest therein. In respect of purchase/sale of shares and securities of
several companies, there were diverse dealings between the appellant
and Respondent No. 2, and Rs 25,01,67,129 was due and payable by H
62 SUPREME COURT REPORTS [2004) SUPP. 4 S.C.R.

A latter to former. In discharge of these liabilities, Respondent No. 2 offered
aforementioned units as beneficiary thereof to appellant who accepted
the same. Balance consideration of those units viz. Rs. 7,98,32,971, was
. paid by appellant by a cheque drawn in favour of Respondent No. 3, but
the same was credited to account of Respondent No. 2.

B The Special Courts (Trial of Offences Relating to Transactions in
Securities) Act, 1992 was enacted to deal with serious irregularities in
security transactions. In terms of this law, Respondent No. 1 was
appointed as Custodian and it declared Respondent No. 2 a 'notified
person'. Also, a Special Court was esfablished with a sitting Judge of
c High Court having exclusive jurisdiction in relation to matters specified
in the Act as also trial of offences arising thereunder. On considering
the claims of appellant and Respondent No. 1 regarding aforementioned
units, this Special Court held inter alia that as the transaction was illegal,
the right, title and interest in units remained in Respondent
No. 2 and· stood attached in terms of Section 3 of the Act.
D
Aggrieved by the above judgment of Special Court, appellant filed
present appeals before this Court contending inter alia, that Respondent
No. 2 had beneficial interest in the units having made payment therefor
and obtained possession thereof; that purported bar that a unit holder
E cannot create 'any interest' therein or transfer them to a third person
would not apply to transfer of a beneficial interest; that an absolute
restriction on transfer is void under Section 10 of the Transfer of Property
Act; that the beneficial interest of Respondent No. 2 was transferable in
view of Section 58 of the Indian Trusts Act and Section 6(d) of the
Transfer of Property Act; that Rt;Spondent No. 2 having transferred the
F units in favour of the appellant, he had ·no interest therein warranting
attachment under the Act; and that repeal of Section 82 oflndian Trusts
Act by Benami Transactions Act, 1988 was of no consequence as
provisions of the Indian Trusts Act, 1882 were not exhaustive•.

Respondent No. 1 contended that no implied trust was created by
G and between Respondent No. 2 on one hand and Respondents no. 3 and
4 on the other, and in that view of the matter no beneficial interest could
be created in favour of Respondent No. 2; that in the absence of any
trust Section 58 of Indian Trusts Act would not apply particularly having
regard to provisions contained in Section 7 of the Benami Transactions
H Act where under Section 82 of the Trusts Act has been repealed; and
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN 63

that having regard to Benami Transactions Act, the right, title and A
interest in the units remained in Respondent Nos. 3 and 4 and
furthermore having regard to terms of issue of the units being non-
transferable, no title passed on to the appellant.

Allowing the appeals, the Court
B
HELD : 1. The Can bank Mutual Fund having regard to the materials
on records must be presumed to have issued the CANCIGOs in the names
of Respondent Nos. 3 and 4 with full knowledge that they would enure to
the benefit of Respondent No. 2. The effect of grant of CANCIGOs by the
Canbarik Mutual Fund despite such knowledge does not strictly fall for c
consideration but the same is relevant to determine the nature of illegality
of the transaction, if any. It is one thing to say that they could not have
done so having regard to the scheme, but it is another thing to say that the
same was illegal. A transfer can be held to be invalid provided it is
forbidden in law. It is one thing to say that the founders of the Scheme
would not recognise any transfer so as to make it liable to pay dividend to
D
a person other than the person in whose name a unit is held but it is
another thing to say that it is not legally transferable. Respondent Nos. 3
and 4 by reason of the said transaction held themselves to be the trustees
of Respondent No. 2 in relation to the securities in question. They applied
for allotment for the benefit of Respondent No. 2. They never enforced E
any claim in relation to the said securities in the court of law and, in fact,
disclaimed any right, title or interest therein. Possession of the securities
which are movable properties has been handed over to them. No statutory
provision has been brought to notice forbidding such transfer. Respondent
Nos. 3 and 4, therefore, were not statutorily prevented from entering into
F
such a transaction. In other words, the concerned parties, namely Can bank
Mutual Fund, Respondent Nos. 3 and 4 as well as Respondent No. 2
became parties to an arrangement which may be unethical but not illegal.
It is also not a case where a transfer has been made by a company beyond
its articles. Appellant has not acted ultra vires its articles. Furthermore, it
is one thing to say that a transfer is made contrary to Articles but it would G
not be correct to contend that the same was prohibited by terms of issue.
(93-H; 94-A-B; 95-A-B, H; 96-A-B; 98-H; 99-AJ

B.O.l Finance Ltd. v. Custodian and Others, (1997] 10 SCC 488,
applied.
H
64 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
•
A Harshad Shanti/al Mehta v. Custodian and Others, [1998) 5 SCC i
and V.B. Rangaraj v. V.B. Gopalakrishnan & Ors., AIR (1992) ~C 453,
referred to.

2.i. The Rules and Regulations framed by the Canbank Mutual
Fund in relation to the issuance of CANCIGO certificates do not have
B any statutory backing. [85-D]

2.2. Permission is not a legal restriction. However, in deserving
cases, Trustees may permit addi~i9n Qf names to the existing CANCIGO
holding after duly considering the same. Permission/Approval
C subsequently granted would validate the grant. (86-A)

• Graphite India Ltd. and Another v. Durgapur Projects Ltd. and Others, ,.._
[1999) 7 sec 645, referred to.

2.3. CANCIGOs indisputably are nluable securities. They are
D otherwise capable of being transferred in terms· of the established business
practice, the Sale of Goods Act, or Transfer of Property Act. No legal
bar has been created in transfer of the said securities. The scheme thus
does not and could not have created an absolute legal bar on transfer
of the CANCIGOs so as to invalidate the same. [86-B-C)

E 2.4. The Rules and Regulations framed by Can bank Mutual Fund
and the notes appended to the CANCIGO Credit Sheet differ in material
particulars. Rules and Regulations explaiit as to why an embargo in
transfer has been placed, i~e.; not to recognise Respondent No. 3 for the r

F
dividends or for other liabilities arising out of transfer. A transfer violating
the rules and regulations would only have the effect of the fame befog not •
•
binding the Canbank Mutual Fund. No other legal consequences flow
therefrom. The brochure merely states that the transfer is no.t permitted
but provisions exist for grant of such permission. (86-D-E)

3.1. Transfer of CANCIGO in favour of the Appellant was valid
G and legal as by reason of the transfer of possession of the CANCIGOs ·
by Respondent No. 2 in favour of the Appellant, a valid right has been
created therein, the same could not have been attached in terms of
Section 3(3) of the said Act. (102-Gl

3.2. Respondent No. 2 did not hold any personal interest which
H
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN 65

could come within the purview of Section 6(d) of the Transfer of Property A
Act. An interest in the CANCIGOs was not created in the Respondent
No. 2 for enjoyment in his personal capacity. Section 6(d) of the Transfer
of Property Act would apply when a transfer is in violation of such
stipulation which would defeat the object thereof. The Special Judge,
therefore, committed an error in invoking Section 6(d) of the Transfer B,
of Property Act. [101-B-C]

Na/lajerla Krishnayya v. Vuppala Raghavulu, AIR (1958) AP 658,
referred to.

3.3. The Appellant having paid a consideration of Rs. 33 crores in C
relation to the CANCIGOs in question had a just right to posses the
same to the exclusion of Respondent No. 2 and in that view of the matter
too the Special Court could not have directed the Appellant to hand
over the same to the Custodian. The said direction is unsustainable in
law. (102-C]
D
3.4. The Appellant Bank as well as Canbank Mutual Fund.are the
subsidiaries of Canara Bank. The appellant cannot be estopped from
raising either a limited or absolute title in them keeping in view the fact
that they had paid a sum of 33 crores of rupees by way of consideration
for transfer of interest of Respondent No. 2 in the said CANCIGOs. E
[86-E-F]

4.1. By reason of the legal consequences of the relationship of the
banker and the customer, vis-a-vis, the transaction in question, a beneficial
trust has been created. The same would, thus, be transferable as otherwise
it would be hit by Section 10 of the Transfer of Property Act. When F
there exists such a condition, in terms of Section 10, an absolute restraint
is void whereas partial restraint is not. [86-G)

Mohammed Raza and Others v. Mt. Abbas Bibi, AIR (1932) PC 158,
referred to.
G
4.2. The parties to the transaction cannot enter into any benami
transaction so as to get any property transferred in their names for
consideration, i.e., paid by a third party. A presumption, thus arises that
the parties never intended that the transaction would be a benami one. By
reason of the said transaction, a cestui qui trust was created, inasmuch as H
66 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A Respondent Nos. 3 and 4 applied for allotment on behalf of Respondent
No. 2 and not on their own behalf. The trust was created for a purpose,
namely, the benefit arising therefrom would be appropriated by
Respondent No. 2. The principle of cesti qui trust is a synonym of a
beneficiary. The said principle is not confined to the ingredients of Section
82 of the Indian Trust Act. It also covers cases falling under Section 88
B
thereof. Thus, if it be held that th~ properties were acquired by
Respondents Nos. 3 and 4 in their own names in breach of their obligations
while acting as an agent of Respondent No. 2, the case would be covered
under Section 88 of the Indian Trusts Act. Section 88 of the Trusts Act
has not been repealed by Section 7 of the Benami Transactions Act. In
c such a case, the Bena mi Transactions Act would not operate. [89-D-G]

P. V. Sankara Kurup v. Leelavathy Nambiar, AIR (1994) SC 2694 and v

R Rajagopal Reddy (dead) by LRs. and Ors. v. Padmini Chandrasekharan
(dead) by L.Rs., AIR (1996) SC 238, referred to.
D
Barclays Bank v. 9.uitclose Investments, [1970] AC 567; Re EVTR
' (1987) B.C.I.C. 647 ana Carreras Rothmans Ltd v. Freemand Mathews
Treasure Ltd., (1985) Ch. 207, referred to.

Equity & Trusts, 2nd Edition by Alastair Hudson, page 307, referred
E to.

4.3. A beneficial trust indisputably can be transferred. For the said
purpose, the only legal requirement will be the essence of a trust. The
right of a beneficiary to transfer his interest being absolute, the transferee
F derived rights, title and interest therein. Furthermore, the doctrine of
resulting trust was applicable in India even before the Indian Trusts Act
came into force. Thus, Respondent No. 2 had a transferable interest in
the CANCIGOs. [89-G-H; 90-D]

Hem Chandra Roy Chaudhury v. Suradhani Debya Chaudhurani and
G Others, AIR (1940) PC 134; Commissioner of Income Tax, Hyderabad v.
Nawab Mir Barkat Ali Khan Bahadur, AIR (1975) 838 at 845 and Mussamat
Ameeronnissa Khanum and Mussamat Parbutty (1871 ) 14 Moor Ind. App.
433, referred to.
,....
H 5.1. The allotment of CANCIGOs is not a transfer as thereby
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN 67

Canbank Mutual Fund had allowed the shares not as owner thereof. A
The Benami Transactions Act applies when there is a transaction in
which the property is transferred. If allotment of CANCIGOs is· not a
transfer of property, the Act would not apply. Even assuming that Benami
Transactions Act as also the bar on the transfer imposed by Canbank
Mutual Fund (CBMF) would apply, the properties would remain vested B
in Respondent Nos. 3 and 4 and Respondent No. 2 would have no interest
therein which would attract the provisions of Sub-section (3) of Section
3 of the Act. (90-E; 91-A-B]

Sri Raj Sachdeva v. Board of Revenue, AIR (1959) All. 595; The
Swadeshi Cotton Mills Co. Ltd, In re., (1932) Comp. Cas. 411 and Madura C
Mills Co. Ltd., Jn re., (1937) Comp. Cas. 71, referred to.

5.2. This Court is only concerned with the validity of the
transactions. In a case of this nature a beneficial interest is created
within the meaning of the provisions of Section 88 of the Indian Trusts r:)
Act in view of the fact that Respondent Nos. 3 and 4 have applied the
money of Respondent No. 2 for allotment of CANCIGO in their own
names and applied for allotment of the certificates on behalf of
Respondent No. 2 and not on their own behalves. It is, .therefore, not a
case where the transaction was benami in nature. It does not appear
also to be a case where the parties entered into a transaction with a view E
to contravene any law. It is also not a case where any amount belonging
to a bank has been utilized by a customer. Respondent Nos. 3 and 4
have not claimed any right; title and interest in CANCIGOs. In view of
the aforementioned circumstances, provisions of the Benami Transactions
Act would have no application whatsoever. [92-G-H; 93-A-B] Fi
5.3. In this case, the parties to the transactions are public sector
undertakings being scheduled banks and their subsidiaries. A
presumption would, thus arise that they would not encourage any benami
transaction nor would involve themselves therein. (91-G-H]
G
5.4. This Court is not concerned with the :right of a party to take
recourse to a remedy but is concerned with a rig:ht of a party to possess
the property over which it has a lawful title. In such a situation, Benami
Transactions Act will have no application in allo1cation of shares as the
same would not come within the purview of transaction relating to a H
68 SUPREME COURT REPORTS [2004) SUPP. 4 S.C.R.

A transfer of property. (102-F]

5.5. A transaction which falls within the purview of Section 88 of.
the Indian Trusts Act does not fall within the category of benami
transactions in terms of provisions of Benami Transactions Act. (88-F]

B 6.1. The properties of a notified person do not vest in the Custodian.
He is not a receiver within the meaning of the provisions of Code of
Civil Procedure or an Official Receiver or an Official Assignee under
the insolvency laws. He is also not an Official Liquidator under the
Companies Act. His right is same as that of the notified person. Only
C when the notified person had a subsisting right in a property, the same
being subject to statutory attachment, the custodian can approach the
special court for an appropriate direction in relation thereto. In other
words, the custodian is not permitted to deal with any property which
did not belong to the notified person on the relevant date. (93-F-G]

D 6.2. The position of custodian is the same as that of the notified
person himself. If by any law Respondent No. 2 was not precluded from
transferring the shares by him, the transfer thereof in favour of the
Appellants was legal. The transaction took place on 6.2.1992 i.e. much
prior to 6.6.1992 when Respondent No. 2 became notified person. If on
E or after 6.2.1992 Respond~nt No. 2 had no interest in the CANCIGOs,
the same could not have f:>een the subject matter of attachment of the
custody. The custodian could attach the property only when the right,
title and interest thereto remain on Respondent No. 2 and not otherwise.
(96-D-F]

F 7.1. Attachment under sub-Section (3) of Section 3 of the Act is
subject to an encumbran'ce, if any. Even if a limited right is transferr~d
by a notified person to a third party, the order of attachment, if any,
must be subject to the said right of third party. The Special Judge erred
in asking unto himself a wrong question that the statutory provisions
create no right in the. third party including the Appellant. (99-B, HJ
G
Harshad Shanti/a/I Mehta v. Custodian and Others, [1998) 5 SCC 1,
relied on.

C.B. Gautam v. Union of India & Others, [1993) 1 SCC 78, referred·.
to.
H
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN 69

V.B. Rangaraj v. V.B. Gopalakrishnan & Ors., AIR (1992) SC 453, A
held inapplicable.

7.2. It is no doubt true that Section 13 of the Act provides for a
non-obstante clause but before the said clause is resorted to, it must be
shown that there exists a provision inconsistent with the provision in
any other Act. In any event, if Respondent Nos. 3 and 4 could transfer
B
or relinquish their right in favour of Respondent No. 2 who in turn
could transfer the same to the Appellant, provisions of the said Act
would not entitle the custodian to claim a property which ceased to be
the property of Respondent No. 2. Here again, the Special Judge
committed an error in holding that by reason of Section 4(2) of the c
. Benami Transactions Act, the Appellant is forbidden from raising a
defence in respect of the CANCIGOs although such a bar would not
apply in the case ofthe Custodian. (100-B-C)

8. The list of persons specified in Section 88 of the Indian Trusts
Act is not exhaustive. The expression 'other person bound in fiduciary D.
character to protect the interests of other persons' includes a large
variety of relationship. The heart and soul of the matter is that wherever
as between two persons one is bound to protect the interests of the other
and the former availing of that relationship makes a pecuniary gain for
himself, the provisions of Section 88 would be attracted, irrespective of E
any designation whkh is immaterial. The said principle would also apply
for a banker holding the customer's money. (88-G-H]

Fibrosa Spolka v. Akeyjna v. Fairbaim Lawson Combe Barbour Ltd,
[1942) 2 All ER 122, referred to.
F
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 164of1994.

From the Judgment and Order dated 22.9.93 of the Special Court (Trial
of offences relating to transactions in Securities) at Bombay in Misc. P. No.
13 of 1993.
G
WITH

C.A. No. 165 of 1994.

Ms. Sunita Dutt for Mis. Janendra Lal & Co. for the Appellant. H
70 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A Subramonium Prasad for the Respondents.

The Judgment of the Court was delivered by

S.B. SINHA, J. :

B BACKGROUND FACTS:

Andhra Bank (Respondent No. 3) is a nationalized bank. Andhra
Bank Financial Services Limited (Respondent No. 4) is a company wholly
owned by Andhra Bank. Canbank Mutual Fund (CBMF) is a subsidiary
c company of Canara Bank, another nationalized bank. The Appellant herein
is also a subsidiary of Canara Bank. In or about 1989, Can bank Mutual Fund
floated an open.ended investment scheme known as CANCI GO on an assured
return of 12.5% p.a. payable half yearly; the lock in period wherefor was
one year. A stipulation was also made to the effect that transfers are not
permitted. Hiten P. Dalal (Respondent No. 2) was a registered stock broker.
D Respondent No. 3 at his request applied for CANCIGO units of face value
of Rs. 11 crores. Similarly, Respondent No. 4 also at the request of
Respondent No. 2 applied for CANCIGO units of face value of Rs. 22 crores.
Indisputably, the payment ofapplication money for purchase of said CANCIGO
.units was to be made, out of the monies lying in the bank account of
E Respondent No. 2. The Respondent Nos. 3 and 4 complied with said request
of Respondent No. 2. The CANCIGO certificates received by the Respondent
Nos. 3 and 4 were handed over to the Respondent No. 2. The interest
accruing from the CANCIGO received by the Respondent Nos. 3 and ~ was
also credited to the account of Respondent No. 2. The said Respondents did
not claim any right, title or interest therein. There had been diverse dealings
F by and between the Appellant herein and the said Respondent No. 2 in respect
of the purchase and sale of shares and securities of various companies. A
sum of Rs. 25,01,67,129 was due and payable by the Respondent No. 2 to
the Appellant herein in respect of the said transactions as on 6th February,
1992. Respondent No. 2 offered the aforementioned CANCIGOs to the
G Appellant herein as a beneficiary thereof. The said offer of the Respondent
No. 2 was accepted in discharge of his aforementioned liabilities to the
Appellant. The Appellant on 6th February, 1992 paid the balance amount of
consideration of the said CANCIGOs, viz., a sum of Rs. 7,98,32,871 by a
cheque dated 11th February, 1992 drawn in favour of the Respondent no.
3 but the same was to be credited in the account of Respondent No. 2.
H
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 71

In or about May, 1992 serious irregularities in security transactions were A
discovered whereupon the Reserve Bank of India constituted a Committee
known as ~Jankiraman Committee' to look into the real nature of the
transactions and to ascertain the true facts. Investment in CANCIGO by
Respondent No. 3 found place in the report of the said Committee wherein
it was contended that it had made an application dated 28th August, 1991 B
for investment in CANCIGOs on behaif of Respondent
No. 2 for 11 crores. Pending investigation, the Appellant was advised not
to part with the two sets ofCANCIGO certificates without the consent of the
Reserve Bank of India.

The President of India promulgated an ordinance known as "The C
Special Courts (Trial of Offences Relating to Transactions in Securities)
... Ordinance, 1992". It was repealed and replaced by 'The Special Courts (Trial
of Offences Relating to Transactions in Securities) Act, 1992 ("the Act"), the
Statement of Objects and Reasons wherefor are as under:-
D
"(l) In the course of the investigations by the Reserve Bank
of India, large scale irregularities and malpractices were
noticed in transactions in both the Government and other
securities, indulged in by some brokers in collusion with the
employees of various banks and financial institutions. The said
irregularities and malpractices led to the diversion of funds from E
banks and financial institutions to the individual accounts of certain
brokers.

(2) To deal with the situation and in particular to ensure speedy
recovery of the huge amount involved, to punish the guilty and F
restore confidence in and maintain the basic integrity and credibility
of the banks and financial institutions the Special Court (Trial of
Offences Relating to Transactions in Securities) Ordinance, 1992,
was promulgated on the 6th June, 1992. The Ordinance provides
for the establishment of a Special Court with a sitting Judge of a
G
High Court for speedy trial of offences relating to transactions in
securities and disposal of properties attached. It also provides for
appointment of one or more custodians for attaching the property
of the offenders with a view to prevent diversion of such _properties
by the offenders."
H
72 SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.

A On or about 6th June, 1992 the Respondent No. 2 was declared to be
a 'notified person' under the Act.

" established.
In tenns of the provisions of the Act, a Special Court was
The Special Court was conferred with exclusive jurisdiction in relation to the
B matters specified therein as also trial of offences arising thereunder.

CLAIM OF THE PARTIES BEFORE THE SPECIAL COURT:

Both the Custodian and the Appellant filed applications before the
Special Court which were registered as Misc. Application Nos. 13 of 1993
C and 55 of 1993 respectively.

In its application, the Appellant prayed for the following reliefs:

"(a) that it be declared by this Hon'ble Court that:

D (i) that the property/debt in the CANCI GO covered under the two
certificates issued by Canbank Mutual Fund are the property
of the petitioners;

(ii) that the CANCIGOs covered under the said two certificates are
not within the purview of the Notification dated 6th June 1992
E notifying Respondent No. 2 issued by Respondent
No. 1 under sub-section (2) of Section 3 of the said Act.

(iii) In the alternative to prayer (ii) above, the Respondent No.
subject to the directions of this Hon'ble Court is entitled to deal
F with, dispose of and encash the CANCIGOs under the said two
Certificates, pay the same to the Petitioners and pennit the
Petitioners to appropriate and/ or adjust the net realization
thereof in or towards the satisfaction of Petitioners dues from ·
the Respondent No. 1;

G (b) Without prejudice to prayer (a) above and in the alternative,
in the event of this Hon'ble Court coming to the co~dusion
..
that CANCIGOs under the said two certificates are not the
property of the Petitioners and/ or the Petitioners are not
entitled to encash them, the Respondent No. 1 and/ or
H Respondent No. 2 be ordered and directed to pay to the
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 73

Petitioners a sum of Rs. 40,83,32,054 as per particulars more A
particularly described in Exhibit "F" hereto with further interest
at the rate of 24% per annum on the principal amount of Rs.
33 crores from the date hereof till payment and/ or realization;

(c) that pending the hearing and final disposal of the petition, the B
Respondent be directed not to deal witl1, dispose of and/ or
encash the CANCIGOs covered under the said two Certificates."

However, the Custodian, in its application, prayed for the following
reliefs:
c
"(a) that Canfina or any other Respondent who may be in possession
of the said CANCIGOS worth Rs. 33 crores be ordered and directed
by this Hon'ble Court to handover to the Applicant the said
CANCIGOS together with any accrued interest thereon.
D
(b) that the CMF be ordered and directed by this Hon'ble Court
to handover to the Applicant the accrued interest of Rs. 2,06,43,836
and all future sums of interest that may accrue on the said
CANCIGOS worth Rs. 33 crores.

(c) that pending the hearing and final disposal of his application E
CMF be ordered and directed by this Hon'ble Court to handover to
the Applicant the said accrued interest of Rs. 2,06,43,836 and all
further sums of interest that may accrue on the said CANCIGOS
worth Rs. 33 crores.
F
(d) that pending the hearing and final disposal of this application
the Respondents be directed to file an affidavit showing how the
transactions relating to the said CANCIGOS are reflected in their
respective books/accounts."

The Respondent Nos. 2, 3 and 4 did not claim any interest in the said G
CANCIGOS before the Special Court.

By reason of the impugned judgment, the Special Court allowed the
application filed by the Custodian and rejected that of the Appellant herein.
Hence these appeals. H
74 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A JUDGMENT:

Before the learned Special Judge a contention was raised by the
Respondent No.1 to the effect that as the CANCIGOS were allotted in the
names of the Respondent Nos. 3 and 4, Respondent No. 2 did not have any
interest therein. A further contention was, however, raised that as the
B
Respondent No. 2 was the real owner thereof, he in view of the said restriction
on transfer could not have transferred any interest whatsoever (whether
limited or absolute) in favour of the Appellant.

The learned Special Judge noticed that although in its application the
c Appellant had made out a case to the effect that the CANCIGOs worth 33
crores were held by them by way of security but a different stand was taken
before it that they are the absolute owners thereof. It was held that the
Appellant having claimed that possession of CANCIGOs were delivered by
the Respondent No. 2 as security, they were not and could not have become
owners thereof as the Respondent No. 2 had no beneficial interest therein,
D
having regard to the fact that such interest was not admitted by the Custodian
and in that view of the matter the question of passing any right, title or
interest, legal or beneficial, in the CANCIGOS in favour of the Appellant by
the said Respondent would not arise. Relying on a decision of this Court
in V.B. Rangaraj v. V.B. Gopalakrishnan & Ors., AIR 1992 SC 453: [1992]
E 1 sec 160, the learned Judge opined that the said decision is an authority
for the proposition that any transfer contrary to the Articles of Association
or terms of issue would not be valid. The learned Judge held that having
regard to the fact that the transaction was ·illegal, the right, title and interest
of CANCIGOs remained with Respondent No. 2 and, thus, stood attached
F in terms of Section 3 of the Act, observing:

"Under Section 3 of the Special Court Act, any property, movable
or immovable, or both, belOnging to any person notified stands
attached. Therefore there is a statutory attachment of "any property
belonging to the person notified". The definition "any property
G belonging to the perwn notified" must necessarily include property
in which a person notified has a beneficial interest. By virtue of
Section 13 of the Special Courts Act, the provisions of the Special
Courts Act prevail notwithstanding anything to the contrary in any .
other law or contract. Therefore, the Custodian is making a claim
H under a statutory provision which allows him to do so. That
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.) 75

statutory provision creates no right in favour of third parties, A
including the 5th Respondent. Therefore, merely because the
Custodian claims on the footing of the lst Respondent is the
beneficial owner does not ipso facto give a right to the 5th
Respondent to claim that the beneficial interest in these CANCIGO's
is transferable."
B
Analysing the provisions of Section 4(2) of the Benami Transactions
Act and Section 13 of the Act, the learned Judge opined:

"Therefore, so far as the Custodian is concerned, he can make a
claim to any property even though the same is held benami in some c
other person. The same can't be done by the 5th Respondent. The
provisions of the Benami Transactions Act would squarely apply to
the 5th Respondent. It is the 5th Respondent who can't make a claim
or bring an action to enforce any right in respect of the CANCIGO's
either against 1st or 2nd or 3rd Respondent or the Custodian. Also,
by virtue of Section 4(2) of the Benami Transactions Act the 5th
D
Respondent can't be allowed to raise a defence in respect of the
CANCIGO's even to the extent of claiming a beneficial interest."

Repelling the contentions of the Appellant as regard applicability of
Section 58 of the Trusts Act, it was held that the expressions "any interest" E
are of very wide amplitude and would, thus, include a beneficial interest.

· It was further held:

"It is thus clear that Respondent No.5 could not have purchased the
CANCIGO's nor could the beneficial interest in the CANCIGO's be F
transferred to them. Respondent No. 5 have got thus no right, title
or interest in the CANCIGO's and cannot be allowed to hold on to
them. This is particularly so as they have now given up their claim
that these were deposited with them, as and by way of security. The
claim, if any, of Respondent No. 5, against the 1st Respondent, is G
a mere money claim. The CANCIGO's remain the property of
Respondent No. 1 and stand attached. They must be handed over
by Respondent No. 5 to the Custodian. It must be mentioned that,
even if the 5th Respondent had claimed that the CANCIGO's were
:
deposited with them as security for repayment of debts due by the
H
76 SUPREME COURT REPORTS [2004] SUPP.4 S.C.R.

A l st Respondent, the terms of issue would still have prevented any
interest being created in their favour.

It was directed:

"Under these circumstances, Application No. 55 of 1993 is made
B absolute in terms of prayers (a). Clarified that it is the 5th
Respondent who must hand over the concerned CANCIGO'S to the
Custodian. Application No. 55 of 1993 is also made absolute in
terms of prayer (b). Prayer (a) of Application No. 13of1993 stands
rejected. So far as prayer (b) of Application No. 13 of 1993 is
c concerned, the claim of 5th Respondent being a money claim, the
same will have to be taken up at time of distribution of assets. As
set out in Judgment dated 22nd July, 1993 in Misc. Application No.
·-
96 of 1993, the distribution would have to be in the manner laid
down under Section 11 of the Special Courts Act. Therefore so
far as prayer (b) is concerned, this Petition is adjourned sine die.
D Office is directed to put this Petition on board when the Court is
considering distribution of assets of Respondent No.I."

SUBMISSIONS:

E Mr. Roh it Kapadia, learned senior counsel appearing on behalf of the
Appellant would submit that in the facts and circumstances of this case,
Respondent No. 2 huving transferred the CANCIGO units in favour of the
Appellant, he had no interest therein warranting attachment under the Act.
It was urged that the rights of the Custodian are the same as that of the notified
person. The learned counsel would contend that as Respondent Nos. 3 and
F 4 claimed no right, title or interest of any nature whatsoever in the
CANCIGOs despite the fact that they were registered in their names, the
Respondent No. 2 must be held to have an interest therein by reason of his
having made payment therefor and obtained possession thereof. It was
pointed out that even the custodian contended before the Special Court that
G the Respondent No. 2 had a beneficial interest and in that view of the matter
the question of the Custodian's application seeking to enforce attachment was
not maintainable.

It was argued that having regard to the provisions contained in Section
58 of the Indian Trusts Act the beneficial interest of Respondent No.2 was
H
-<
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.) 77
'
transferable. The purported bar to the effect that a CANCIGO holder cannot A
create 'any interest' therein or transfer them to a third person would not apply
to transfer of a beneficial interest keeping in view the fact that restriction on
transfer was on the Respondent Nos. 3 and 4 and not on the beneficial owner.
No interest having been created in the Respondent No. 2 by any act or deed
of Respondent Nos. 3 and 4, the beneficial interest accrued in him by way B
of operation of law was transferable. It was contended that in the event it
be held that the Respondent Nos. 3 and 4 could not validly transfer any
interest in favour of the Respondent No. 2, the question of enforcing
attachment would not arise as the legal title thereof would remain vested in
the Respondent Nos. 3 and 4. In any event such an absolute restriction on
transfer is void under Section IO of the Transfer of Property Act and, thus, C
cannot be acted upon.

The learned counsel would contend that findings of the Special Court
to the effect that Respondent No. 2 had an interest therein which could not
have been transferred in terms of Section 6(d) of the Transfer of Property D
Act is not correct. It was urged that the question of repeal of Section 82 of
the Indian Trust Act by reason of The Benami .Transactions (Prohibition) Act,
1988 (for short 'The Benami Transactions Act') would.be of no consequence
as the provisions of the Indian Trusts Act, 1882 are not exhaustive. It was
argued that Section 82 embodied a principle of equity underlying creation
of a "Resulting Trust" which was held to be applicable even prior to E
enactment of the Indian Trusts Act. Reliance in this connection has been
placed on Mussumat Ameeronnissa Khanum and Mussumat Parbutty v.
Mussumat Ashrufoonnisa, (1871) 14 MooindApp 433.

Mr. Subramonium Prasad, learned counsel appearing on behalf of the F
Respondent No.I, on the other hand, would submit that no implied trust was
created by and between Respondent No. 2, on the one hand, and Respondent
Nos. 3 and 4, on the other, and in that view of the matter, no beneficial interest
could be created in favour of the Respondent No. 2.

In absence of any trust, Mr. Prasad would argue, Section 58 of the G
Indian Trusts Act would not apply particularly having regard to the provisions
contained in Section 7 of the Benami Transactions Act whereby and
whereunder Section 82 of the Trusts Act has been repealed and, thus, the
question of there being an implied trust between Respondent No. 2, on the
one hand, and Respondent Nos. 3 and 4 on the other, would not arise. H
78 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A Having regard to the objects and reasons of the Benami Transactions
Act, Mr. Prasad would submit, the right, title and interest in the CANCIGO
remained in the Respondent Nos. 3 and 4 and furthennore having regard to
the term of issue CANCIGOs s being non-transferable, no title passed on to
the Appellant herein in relation thereto. Respondent Nos. 3 and 4, it was
contended, were bound by the conditions restricting transfer and in that
B
view of the matter the purported transfer in favour of the Appellant was
void.

Section 4 of the Benami Transactions Act prohibits an action by the
beneficiary for recovery of the property and, in that view of the matter, the
C Appellant herein could not have filed an application for the Custodian
claiming an interest therein. But the said provision would not apply in the
case of the Custodian having regard to the fact that he had a duty to attach
the property belonging to a notified person and further in view of the fact
that in terms of Section 13 of the said Act, the provisions thereof had an
D overriding effect over any other law for the time being in force as a result
whereof the provisions of the Act would prevail over the Benami Transactions
Act Reliance in support ~f the said contention has been placed on Solidaire
lndia Ltd v. Fairgrowth Financial Services Ltd. & Ors., (2001) 2 SCALE
I.

E ISSUE:

The primal issue which arises for consideration is as to whether the
Respondent No. 2 had any transferable interest in respect of the securit-ies
in question.

F RESTRICTIONS ON TRANSFER :

The relevant provisions of the CANCIGO Scheme are· as under:

"12(a) Only the holder or any person specifically authorized in this
behalf by him and recognized as such by the Trustee, shall be
G
entitled to deal with the Cancigos held by the holder thereof.

12(b) *** *** ***
12(c) A Caricigo-holder may dispose of or encash Cancigos only by ~
·'
H means of encashment slips in the fonn prescribed by the Trustee.
CANBANI( FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 79

12(d) A Cancigo holder desirous of encashing ten or more Cancigos A
held by him shall apply to the Authorised Office for the purpose in
the prescribed form. Upon ~uch a request being found in order, the
number of Cancigos desired to be encashed. shall be paid to the
holder thereof on signing a duly stamped receipt for the amount.

B
13. The contract for allotment of Cancigo with an Applicant by the
Trustees shall be deemed to have been concluded on the Acceptance
Date. On such conclusion of the contract for allotment, the Trustees
may deliver or send to the Applicant an acknowledgement therefor.
The Trustees shall thereafter issue to the Applicant one Cancigo
credit sheet representing the Cancigo allotted to the Applicant, or, c
if the Applicant so desires and the Trustees agree, such number of
certificates in such denominations as the Applicant may specify.

Provided that in that event the Trustees may charge such fee for
issuing more than one certificate as the Trustees may consider
D
appropriate.

19. Except in the cases hereafter mentioned, no Cancigo shall be
transferable, nor shall any holder thereof be entitled to create any
interest therein, whether by way of charge or otherwise, or assign
or transfer any part thereof, and the Trustee shall not be bound to_ E
take any notice of any purported transfer, assignment, .charge,
encumbrance, trust, or any other interest sought to be creat~d by the
holder. Accordingly the Trustee shall recognize only the holder
thereof as having any right title or interest in the Cancigo held by
such holder.
F
22. The Trustee shall not be required to maintain any register of
Cancigo holders.

25. The Trustee shall not be bound by any notice or take notice
of execution of any trust in respect of any Cancigos and they shall G
recognize only the Cancigo holders in whose name the same shall
have been entered as the holder or holders of the Cancigos."

In the Brochure for offer of CANCIGOS, the restriction on transfer of
CANCIGOS was stated in the following terms:
H
80 SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.

A "Transfer of' CANCIGO: Transfer of CANCIGO holding from one
person to another person is not permitted. However, in deserving
cases Trustees may permit addition of name/s to the existing
CANCIGO holding after duly considering the same. However,
deletion of name of a CANCIGO holder is permitted, generally, in
the event of his death and not otherwise."
B
It is not in dispute that the CANCIGOS stood in the names of
Respondent No. 3 and Respondent No. 4.

c .
Note 4 appended to CANCIGO Credit sheet states:

"Cancigo holders cannot create any interest in Cancigos or transfer
them to a third person."

PROVISIONS OF THE RELEVANT STATUTES:

D Indian Trusts Act:

Sections 58, 82 (as it then stood), and 88 of the Indian Trusts Act, 1882
read as under:

"58. Right to transfer beneficial interest.-The beneficiary, if
E competent to contract, may transfer his interest, but subject to the
law for the time being in force as to the circumstances and extent
in and to which he may dispose of such interest:

82. Transfer to one for consideration paid by another. - Where
F property is transferred to one person for a consideration paid or
provided by another person, and it appears that such other person
did not intend to pay or provide such consideration for the benefit
of the transferee, the transferee must hold the property for the benefit
of the person paying or providing the consideration.

G Nothing in this section shall be deemed to affect the Code of
Civil Procedure, section 317, or Act NO.XI of 1859 (to improve the
law relating to sales of land for arrears of revenue in the Lower
Provinces under the Bengal Presidency), section 36.

88. Advantage gained by fiduciary- Where a trustee, executor,
H
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] . 81

partner, agent, director of a company, legal advisor, or other person A
bound in a fiduciary character to protect the interests of another
person, by availing himself of his character, gains for himself any
pecuniary advantage, or where any person so bound enters into any
dealings under circumstances in which his own interests are, or may
be, adverse to those of such other person and thereby gains for B
himself a pecuniary advantage, he must hold for the benefit of such
other person the advantage so gained."

Transfer of Property Act:

Sections 6(d) and 10 of Transfer of Property Act read as under: C
"6. What may be transferred.-Property of any kind may be
transferred, except as otherwise provided by this Act or by any other
law for the time being in force, -

(a) *** D

(b) ***

(c) ***

(d) An interest in property restricted in its enjoyment to the owner E
personally cannot be transferred by him.

JO. Condition restraining alienation.-Where property is transferred
subject to a condition or limitation absolutely restraining the transferee
or any person claiming under him from parting with or disposing F
of his interest in the property, the condition or limitation is void,
except in the case of a lease where the condition is for the benefit
of the lessor or those claiming under him: provided that property
may be transferred to or for the benefit of a women (not being a
Hindu, Muhammadan or Buddhist), so that she shall not have power
during her marriage to transfer or charge the same or her beneficial .G
interest therein."

Sale of Goods Act:

Sections 4, 19 and 20 of Sale of Goods Act read as under: H
82 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A "4. Sale and agreement to sell.-(l) A contract of sale of goods is
a contract whereby the seller transfers or agrees to transfer the
property in goods to the buyer for a price. There may be a contract
.of sale between one part-owner and another.

(2) A contract of sale may be absolute or conditional.
B
(3) Where under a contract of sale the pro!)erty in the goods is
transferred from the seller to the buyer, the contra'.::t is called a sale,
but where the transfer of the property in the goods is to take place
at a future time or subject to some condition thereafter to be fulfilled,
c the contract is called an agreement to sell.

19. Property passes when intended to pass-(l) Where there is a
contract for the sale of specific or ascertained goods the property
in them is transferred to the buyer at such time as the parties to the
contract intend it to be transferred.
D
(2) For the purpose of ascertaining the intention of the parties regard
shall be had to the terms of tre contract, the conduct of the parties
and the circumstances of the case.

(3) Unless a different intention appears, the rules contained in
E
Sections 20 to 24 are rules for ascertaining the intention of the
parties as to the time at which the property in the goods is to pass
to the buyer. ·

20. Specific goods in a deliverable state.-Where there is an
F unconditional contract for the sale of specific goods in a deliverable
state, the property in the goods passes to the buyer when the contract
is made, and it is immaterial whether the time of payment of the
price or the time of delivery of the goods; or both, is postponed."
~ ~ .

BENAMI TRANSACTIONS ACT:
G
Sub-Section ( l) of Section 3 of the Benami Act provides that no person
shall enter into any benami transaction. Sub-Section (3) of Section 3 thereof
provides that whoever enters into any benami transaction shall be punishable
with imprisonment for a term which may extend to three years or with fine
H or with both. Section 4 provides for a prohibition to the right to .recover
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 83
property held benami either by way of claim or by way of defence. Section A
5 provides that all properties held benami shall be subject to acquisition by
such authority, in such manner and after following such procedure, as may
be prescribed.

In terms of Section 7 inter alia Section 82 of the Indian Trusts Act, 1882 B
stood repealed.

THE ACT:

Sections 2(c), 3, and 4 of Special Courts Act read as under:
c
"2(c) "se«urities" includes-

(i) shares, scrips, stocks, bonds, debentures, debenture stock, units
of the Unit Trust of India or any other mutual fund or other
marketable securities of a like nature in or of any incorporated D
company or other body corporate;

(ii) Government securities; and

(iii) rights or interests in securities;
E
3. Appointment and functions of Custodian.-

( l) The Central Government lllay appoint one or more Custodians
as it may deem fit for the purposes of this Act.

(2) The Custodian may, on being satisfied on infonnation received F
that any person has been involved in any offence relating to
transactions in securities after the I st day of April, 1991 and on and
before 6th June, 1992 notify the name of such person in. the Official
Gazette.
G
(3) Notwithstanding anything contained in the Code and any other
law for the time being in force, on and from the date of notification
under sub-section (2), any property, movable or immovable, .or both,
belonging to any person notified under that sub-section shal'I stand
attached simultaneously with the issue of the notification. H
84 SUPREME COURT REPORTS {2004] ~UPP. 4 S.C.R.

A (4) The property attached under sub-section (3) shall be dealt with
by the Custodian in such manner as the Special Court may direct.

4. Contracts entered into fraudulently may be cancelled-

(1) If the Custodian is satisfied, after such inquiry as he. may think
B fit, that any contract or agreement entered into at any time after the
1st day of April, 1991 and on and before the 6th June, 1992 in
relation to any property of the person notified under sub-section (2)
·of section 3 has. been entered into fraudulently or to defeat the
provisions of this Act, he may cancel suclJ. contract or agreement
c and on such cancellation such property shall -stand attached under
this Act;

Provided.that no contract or agreement shall be cancelled except
after giving to the parties to the contract or agreement a reasonable
opportunity of being heard.
D
(2) Any person aggrieved by a notification issued under sub-section
(2) of section 3 or any cancellation made under sub-section (I) of
section 4 or any other order made by the Custodian in exercise of
the powers conferred on him under section 3 or section 4 may file
a petition objecting to the same within thirty days of the assent to
E
the .Special. Court· (Trial of Offences Relating to Transactions in
Securities) Bill, 1992 by the President before the Special Court
where such notification, cancellation or order has been issued before
the date 'of assent to the Special Court (Trial of Offences Relating
to Transaetions in Securities) Bill, 1992 by the President and where
F such notification, cancellation or order has been issued on or after
that day, within thirty days of the issuance of such notification,
cancellation or order, as the case may be; and the Special Court after
hearing the parties, may make such order ~s it deems fit.

The Special Court exercises all jurisdiction, powers. and authority as
G were exercisable, immediately before such commencement by any Civil
Court in relation to a matte.r or claim specified therein.

CANBANK MUTUAL FUND (CANCIGO)-SCHEME, 1988:

H Canbank Mutual Fund framed a scheme known as CANCIGO Scheme.
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 85

The said Scheme came into force on 22nd April, 1988. The provisions df A
the CANCIGO Scheme are applicable to the issue of units called CANCIGOS
by Canara Bank acting in its capacity as Trustee of the Canbank Mutual
Fund.

Condition 2(k) defines 'Cancigo Scheme' to mean the Cancigo Mutual B
Fund (Cancigo) Scheme, 1988 under which Cancigos are issued by the
Trustee. 'Holder' in terms of Condition 2(r) to mean a person who has made
an application to the Trustee and to whom not less than five Cancigos have
been issued or any person or persons nominated by the Trustee in this behalf
for the purpose of participating in the Cancigo Scheme. Condition No. 5
provides as to the person eligible to apply for the issue of Cancigos. C
Condition No. 10 provides that all allotments should be at the discretion of
the Trustee.

JS THE CLOG ON TRANSFER ABSOLUTE?
D
The Rules and Regulations framed by the Canbank Mutual Fund in
relation to the issuance of CANCIGO certificates do not have any statutory
backing. The CANCIGOs had a lock in period of one year which means that I
the holder thereof must not encash the securities within the aforementioned
period. The question as regard the non-transferability of the units will have
to be construed upon reading the scr..eme in its entirety and in particular the E
Condition No. 22 thereof, in terms whereof the Trustees were not required
to maintain any register of CANCIGO holders. In terms of Condition No.
24, the person whose name is shown in a CANCIGO Certificate would be
the only person to be recognized by the Trustees as the holder of such
Cancigo and as having any right, title or interest in or to such securities. No F
Trust created was also to' be recognized.

Condition No. 19 creating a bar on transfer has to be construed in the
aforementioned context. The bar on transfer created was to have thi= eff¢ct
that the same would not be binding on Canbank Mutual Fund as it was not
bound to take any notice thereof and only the holder shall be recognized as G
having the right, title or interest on the CANCIGO.

The expressions contained in Condition No. 19 ofCANCIGO Scheme
differ in material particulars from the expressions used in the Brochure in
terms whereof transfer of CANCIGO from one person to another person is H
86 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A not pennitted. Pennission is not a legal restriction. However, in ~eserving
cases Trustees may pennit addition of names to the existing CANCIGO
holding after duly considering the same. Pennission/Approval subsequently
granted would validate the grant. (See Graphite India Ltd and Another v.
Durgapur Projects Ltd and Others, [1999] 7 SCC 645). · CANCIGOs
indisputably are valuable securities. They are otherwise capable of being
B
transferred in tenns of the established business practice, the Sale of Goods
Act or Transfer of Property Act. No legal bar has been created in transfer
of the said securities. The scheme, thus, does not and could not have created
an absolute legal bar on transfer of the CANCIGOs so as to invalidate the
same.
c
EFFECT OF THE BAR:

The Rules and Regulations framed by Canbank Mutual Fund and the
notes appended to the CANCIGO Credit Sheet differ in material particulars.
Rules and Regulations explain as to why an embargo in transfer has been
,D
placed, i.e., not to recognize the Respondent No. 3 for the dividends or for
other liabilities arising out of transfer. A transfer violating the rules and
regulations would only have the effect of the same being not binding the
Canbank Mutual Fund. No other legal consequence flows therefrom. We
have also noticed that the Brochure merely states that the transfer is not
E permitted but provisions exist for grant of such pennission. The Appellant
Bank as well as Canbank Mutual Fund are the subsidiaries of the Canara
Bank. The Appellant cannot be estopped from raising either a limited or
absolute title in them keeping in view of the fact that they had paid a sum
of 33 crores of rupees by way of consideration for transfer of interest of the
Respondent No. 2 herein in the said CANCIGOS.
F
EFFECT OF SECTION JO OF TRANSFER OF PROPERTY ACT:

As would appear from the discussions made hereinafte·r that by reason
of the legal consequencies of the relationship of the banker and the customer,
G vis-a-vis, the transaction in question, a beneficialtrust has been created. The
same would, thus, be trl:i.nsferable as otherwise it would be hit by Section 10
of the Transfer of Prope:rty Act. When there exists such a condition; in terms
of Section I 0, an abso Jute restrain is void whereas partial restraint is not.
Section 10 would not be attracted only when the restriction as to alienation
H is only partial. (See Mohammad Raza' and Others v. Mt. Abbas B'!ndi Bibi,
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 87

AIR (1932) PC 158). A stipulation taking away the whole power of A
alienation substantially is a question of substance and not of form. Section
10 limits the application of such stipulation.

TRUST WHETHER CREATED:

Chapter IX of the Indian Trusts Act provides for certein obligations in B
the nature of trusts. A Trust is an obligation annexed to the ownership of
property, and arising out of a confidence reposed in and accepted by the
owner or declared and accepted by him, for the benefit of another, or of
another and the owner. A trust in terms of Section 4 of the Trust Act may
be created for any lawful purpose. C
When a real or personal property is purchased in the name of another,
a presumption of resulting trust arises in favour of the person who is proved
to have paid the purchase money as a result whereof a beneficial interest
in the property results to the true purchaser. Law relating to trust has not
recognized only a resulting trust but other kinds of trust as well. When an D
express trust is created by reason of an agreement between the parties and
one of them being a beneficiary thereof, the same would be transferable.

A beneficial interest in the trust is created in different situations.
(See, for example, Barclays Bank v. Quistc/ose Investments, [1970] AC 567).
E
In Barclays Bank (supra) a company which was substantially indebted
to the bank needed funds in order to pay a dividend on its shares. Quistclose
Investments advanced the necessary funds on the basis that they were only
to be used for this purpose and they were paid into a separate account at the
bank, which was made aware of the arrangement. The company went into
F
liquidation before the dividend had been paid. If Quistclose Investments
were no more than a creditor of the company, then the funds in the bank
would belong to the company and the bank would be entitled to set off the
credit balance of the account against the substantially greater indebtedness
of the company. If, on the other hand, the funds were held on trust for
Quistclose Investments, its proprietary interest therein would enjoy priority G
over the rights of the bank. The House of Lords held that arrangements for
the payment of a person's creditors by a third person give rise to "a
·relationship of a fiduciary character or trust, in favour as a primary trust, of
the creditors, and secondarily, if the primary trust fails, of the third person".
Once the primary purpose was fulfilled, the third person would be no more H
88 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A than an unsecured creditor. However, there was "no difficulty in recognizing
the co-existence in one transaction oflegal and equitable rights and remedies".
Since the purpose for which the funds had been advanced had failed, the
funds were still held on trust for Quistclose Investments, whose beneficial
interest was binding on the bank because it had been aware of the basis on
which the funds had been transferred." [See Equity & Trusts, 2nd Edition
B
by Alastair Hudson, page 307]

In that case the common intention of both the parties was that the fund
in question should be held on trust. The principle in Barclays Bank (supra)
has been applied both where part of the funds advanced had indeed been used
c for the specific purpose in question, holding that the creditor was entitled to
recover whatever was left (See Re EVTR (1987) B.C.L.C. 647) as also where
the funds, although advanced for a specific purpose, were paid not by way
of loan but rather in satisfaction of a contractual debt. [See Carreras
Rothmans Ltd v. Freeman Mathews Treasure Ltd., (1985) Ch. 207]
D
In this case, the Respondent Nos. 3 and 4 acted in· consonance of the
confidence reposed upon them.

Had Respondent Nos. 3 and 4 not disclosed that the applications
for allotment of CANCIGOs were for the benefit of the 2nd
E Respondent herein, Section 88 of the Indian Trusts Act would have been
attracted.

A transaction which falls within the purview of Section 88 of the Indian
Trusts Act does not fall within the category of benami transaction in terms
of the provisions of the Benami Transactions Act. (See P. V. Sankara Kurup
F
v. Leelavathy Nambiar, AIR (1994) SC 2694).

The list of persons specified in Section 88 of the· Indian Trusts Act is
not exhaustive. The expression 'other person bound in fiduciary character
to protect the interests of other persons' includes a large variety of relationship.
G The heart and soul of the matter is that wherever as between two persons one
is bound to protect the interests of the other and the former availing of that
relationship makes a pecuniary gain for himself, the provisions of Section
88 would .be attracted, irrespective of any ·designation which is immaterial.
The said principle would also apply for a banker holding the customer's
money.
H
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 89

A fiduciary would not be liable for any action ifthere is no concealment A
by him or no advantage taken by him.

A civilized society furthermore always provides for remedies for cases
of what was been called unjust enrichment or unjust benefit derived from
another which it is against conscience that he should keep. (See Fibrosa
Spolka v. Akcyjna v. Fairbairn Lawson Combe Barbour, Ltd.. [1942] 2 All B
ER 122)-

In Carreras Rothmans Ltd. v. Freeman Mathews Treasure Ltd, (1985)
Ch. 207 at page 222, it is stated :

" ....equity fastens on the conscience of the person who receives from
c
another property transferred for a specific purpose only and not .
therefore for the recipient's own purposes, so that such person will
not be permitted to treat the property as his own or to use it for other
than the stated purpose."
D
The parties to the transactions cannot enter into any benami transaction
so as to get any property transferred in their names for consideration, i.e.,
paid by a third party. A presumption, thus, arises that the parties never
intended that the transaction would be a benami one. By reason of the said
transaction, a cestui qui trust was created, inasmuch as the Respondent Nos.
3 and 4 applied for allotment of CANCIGOs on behalf of the· Respondent E
No. 2 and not on their own behalf. The trust was created for a purpose,
namely, the benefit arising therefrom would be appropriated by the Respondent
No. 2. The principle of cestui qui trust is a synonym of a beneficiary. The
said principle is not confined to the ingredients of Section 82 of the Indian
Trusts Act. It also covers cases falling under Section 88 thereof. Thus if it 'F
be held that the properties were acquired by the Respondents Nos. 3 and 4
in their own names in breach of their obligations while acting as an agent
of the Respondent No. 2, the case would be covered under Section 88 of the
Indian Trusts Act. Section 88 of the Trusts Act has not been repealed by
· Section 7 of the Benami Transaction Act. In such a case the Benami
Transactions Act would not operate.
G

A beneficial interest indisputably can be transferred. For the said
purpose, the only legal requirement will be essence of a trust. The right of
a beneficiary to transfer his interest being absolute, the transferee derived
rights, title and interest therein. H
90 SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.

A Furthermore, the legal effect of a document cannot be taken away even
if the property is chosen to conceal by a device the legal relation. [See
Commissioner of Income Tax, Hyderabad v. Nawab Mir Barkat Ali Khan
Bahadur, AIR (1975) SC 838 at 845].

In Hem Chandra Roy Chaudhury v. Suradhani Debya Chaudhurani and
B Others, AIR (1940) PC 134, it is held:

" ... No doctrine of the Jaw of India has been indicated to their
Lordships which prevents a beneficiary under a trust from dealing
with his interest by way of mortgage, though it is true enough that
c in India such an interest is not technically regarded as an equitable
estate .... "

Furthermore, the doctrine of resulting trust was applicable in India even
before the Indian Trusts Act.came -into force. [See Mussumat Ameeronnissa
Khanum and Mussumat Parbutty (supra)]. We, therefore, are of the opinion
/ D that the Respondent No. 2 had a transferable interest in the CANCIGOS.

ALLOTMENT OF CANCJGO - JS IT A TRANSFER?

The allotment of CANCIGOs is not a transfer as thereby Canbank
Mutual Fund had allowed the shares not as owner thereof. The Benami
E Transactions Act applies when there is a transaction in which the property
is transferred. If allotment of CANCIGOs is not a transfer of property, the
Act would not apply. [See Sri Raj Sachdeva v. Board ofRevenue, AIR ( 1959)
All 595] and The Swadeshi Cotton Mills, Co. Ltd, In re., (1932) Comp. Cas
411.
F
In Madura Mills Co. Ltd., In re. (1937) Comp. Cas 71, Varadachariar,
J. stated the law thus:

"As we have already observed, it is no doubt true that in the hands
of a shareholder, a share is property and when a shareholder
G exchanges his shares with another it may be possible to regard the
transaction as amounting to a transfer whether by way of exchange
or conveyance: Cf Coats v. Inland Revenue CommissiOners, (1897]
2 Q.B. 423. But when the company is for the first time issuing
shares, it seems_ to us that there is no question of property already
H possessed by the company being thereby transferred to the allottee."
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 91

Even assuming that the Benami Transactions Act as also the bar on A
transfer imposed by Canbank Mutual Fund (CBMF) would apply, the
properties would remain vested in Respondent Nos. 3 and 4 and Respondent
No. 2 would have no interest therein which would attract the provisions of
Sub-section (3) of Section 3 of 'the Act'.

BENAMI TRANSACTIONS ACT - APPLICABILITY:
B

Benami transactions in India were generally recognized by the Courts.
But the same had not been given effect to when the
...
transaction :
c
(a) violates the provisions of any law; or

(b) defeats the rights of innocent transferees for value from the
benamidar without notice; or when

( c) the object of the benami transaction was to defraud the creditors D
of the real owner and that object has been accomplished; or when,

(d) it is against public policy.

Benami Transactions, however, used to be effected for various purposes
- to avoid taxes, to avoid ceiling laws etc. Blank transfers of shares had also E
posed serious problems as dividends are paid to the registered shareholders
and not to the real shareholders as in the case of benami holdings of shares,
but despite the same the transactions have not been declared to be invalid
in law by any statute including the Benami Transactions Act.
F
'Benami Transaction' has been defined in Section 2(a) of the Benami
Transactions Act to mean any transaction in which property is transferred
to one person for a consideration paid or provided by another person.
'Transfer' of property, therefore, is sine qua non for attracting the said
definition.
0
In a transfer invo.lving benami transaction, three parties are involved.
The benamidar may be a party therein. In this case, the parties to the
transactions are public sector undertakings being scheduled banks and their
subsidiaries. A presumption would, thus, arise that they would not encourage
any benami transaction nor would involve themselves therein. In a situation H
92 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

.A of this nature and, in particular, having regard to the fact that a disclosure
was made by the Respondent Nos. 3 and 4 in their applications for allotment
of CANCIGO; that the same were filed on behalf of the Respondent No. 2
herein, the intention of the parties was not to enter into a benami transaction.

The Benami Transaction Act is not a piece of declaratory or curative
B legislation. It creates substantive rights in favour ofbenamidars and destroys
substantive rights of real owners who are parties to such transactions- and for
whom new liabilities are created by the Act. A statute which takes away the
rights of a party must be strictly construed. [See R. Rajagopal Reddy (dead)
by L.Rs. and Ors. v. Padmini Chandrasekharan (dead) by L.Rs., AIR (1996)
c SC 238].

The evil of benami transaction was sought to be curbed by reason of
the provisions of the Urban Land (Ceiling and Regulation) Act, 1976, the
State Ceiling Laws, Income Tax Act, 1961 as amended by the Taxation Laws
(Amendment) Act, 1975 (See Sections 281 and281A of the Income Tax Act),
D Section 5 of the Gift Tax Act, 1958, Section 34 B of the Wealth Tax Act
and Section 5(1) of the Estate Duty Act (since repealed). It is only with that
view the Benami Transactions (Prohibition) Act, 1988 prohibiting the right
to recover benami transaction was enacted. Section 5(1) provided that all
properties held benami shall be subject to acquisition as different from
E forfeiture provided for in the Smugglers and Foreign Exchange Manipulators
(Forfeiture of Property) Act, 1976. But even Sectio~ 5 had not been made
workable as no rules under Section 8 of the Act for acquisition of property
held benami were framed.

A nationalized bank cannot hold somebody else's property in its name.
F We do not know as to under what circumstances it applied for allotment of
CANCIGOs in its name on behalf of the Respondent No. 2. We have also
not been informed at the Bar as to whether there exists such a practice or
the same is otherwise permissible. We in these matters, however, are not
concerned with an ethical question. We are also not concerned with the
G misconduct of any officer of the Bank, criminal or otherwise, in this behalf.
This Court is only concerned with the validity ofthe transactions. We have
noticed hereinbefore that in a case of this nature a beneficial interest is 'created
within the meaning of the provisions of Section 88 of the Indian Trusts Act
in view of the fact that the Respondent Nos. 3 and 4 have applied the money
of the Respondent No. 2 for allotment of CANCIGO in their own names
H
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 93

and applied for allotment of the certificates on behalf of the Respondent No. A
2 and not on their own behalves. It is, therefore, not a case where the
transaction was benami in nature. It does not appear also to be a case where
the parties entered into a transaction with a view to contravene any law. It
is also not a case where any amount belonging to a bank has been utilized
by a customer. The Respondent Nos. 3 and 4 have not claimed any right, . B
title and interest in CAN CIGOS. In view of the aforementioned circumstances,
provisions of the Benami Transactions Act would have no any application
whatsoever.

ROLE OF CUSTODIAN UNDER THE ACT:

The Custodian has three main functions to perform:
c
(i) He has the authority to notify a person in the Official Gazette, on
being satisfied on information received that he has been involved
in any offence relating to transactions in securities during the
period 1-4-1991 to 6-6-1992. D
(ii) He has the authority to cancel any contract or agreement relating
to the properties of the notified persons which, in his opinion, has
been entered into fraudulently or for the purpose of defeating the
provisions of the Act as specified in Section 4.
E
(iii) He is required to deal with the properties in the manner as directed
by the Special Court.

The properties of a notified person do not vest in the Custodian. He
is not a receiver within the meaning of the provisions of the Code of Civil
Procedure or an Official Receiver or an Official Assignee under the F
Insolvency laws. He is also not an Official Liquidator under the Companies
Act. His right is same as that of the notified person. Only when the notified
person had a subsisting right in a property, the same being subject to statutory
attachment, the custodian can approach the special court for an appropriate
direction in relation thereto. In other words, the custodian is not permitted G
to deal with any property which did not belong to the notified person on the
relevant date.

ARE THE TRANSACTIONS ILLEGAL?

The Canbank Mutual Fund having regard to the materials on records H
94 SUPREME .COURT REPORTS [2004] SUPP. 4 S.C.R.

A must be presumed to have issued the CANCIGOs in the names of the
Respondent Nos. 3 and 4 with full knowledge that they would enure to the
benefit of the Respondent No. 2. The effect of grant ofCANCIGOs by the
Canbank Mutual Fund despite such knowledge does not strictly fall for our
consideration but the same is relevant to determine the nature of illegality
B of the transaction, if any. It is one thing to say that they could not have
done so having regard to the scheme, but it is another thing to say that the
same was illegal. The area of law concerning illegality and resulting trust
has undergone some changes in view of a recent decision of the House of
Lords in Tinsley v. Milligan, reported in [1993] 3 All E.R.65. In the said
case, Lord Browne-Wilkinson specified the core applicable principles which
c are as under:
t=
"I. Property in chattels and land can pass under a contract which '
is illegal and therefore would have been unenforceable as a
contract.
D
2. A plaintiff can at law enforce property rights so acquired
provided that he does not need to rely on the illegal contract
for any purpose other than providing the basis of his claim to
a property right.

E 3. It is irrelevant that the illegality JJf the underlying agreement
was either pleaded or emerged in evidence: ifthe plaintiff has
acquired legal title under the illegal contract that is enough."

It was held that illegality being not the source of Milligam' s equitable
F rights as her contribution to the purchase price was the source therefor. In
that case, Respondent did not have to rely on her own illegality because she ·
was entitled to an equitable share in the property in any event because she
had contributed to the purchase price. The prineiples evolved in Tinsley
(supra) apply to the fact of the present case. The said decision was followed
by this Court in B.O.l Finance Ltd v. Custodian and Others, [1997] IO SCC
G 488.

The Scheme suggests that Canbank Mutual Fund intended to absolve
itself from such responsibilities.

H Does by such contract the holder of a unit is debarred from transferring
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 95

a valuable security? The answer to that question must be rendered in the A
negative. A transfer can be held to be invalid provided it is forbidden in law.
It is one thing to say that the founders of the Scheme would not recognize
any transfer so as to make it liable to pay dividend to a person other than
the person in whose name a unit is held but it is another thing to say that
it is not legally transferable. In this case, the Court is not concerned with B
the question whether in the facts and circumstances of this case the Appellant
should have accepted the units of face value of Rs. 33 crores and adjusted
a sum of Rs. 25,01,67,129 followed by issuance of a cheque of Rs.
7,98,32,871, but with the question as to whether such a transaction was
legally impermissible. The case at hand poses a peculiar problem. Respondent
Nos. 3 and 4 applied for· allotment of CANCIGOs in their name under the C
instructions of Respondent No. 2. Respondent Nos. 3 and 4 were not to invest
their own money. The consideration paid towards the allotment of the units
was paid from the account of the Respondent No. 2. Even the dividends paid
to them at the· first instance were credited in the account of the Respondent
No. 2. Respondent Nos. 3 and 4 had never claimed any right, title or interest D
in the said securities. Respondent No. 4 in its affidavit dated 26th July, 1993
had categorically stated:

"I say and submit thatRespondents No. 4 are neither necessary nor
proper parties to the petition inasmuch as Respondents No. 4 have
no claim whatsoever in the subject securities." E
A similar statement had been made by Respondent No. 3. Respondent
Nos. 3 and 4 did not claim any right, title or interest as evidently
the possession of CANCIGOs were delivered in favour of the Respondent
No. 2.
F
Even the Benami Transactions Act while prohibiting benami transactions
does not provide that by reason of such a transaction no title whatsoever
would pass or the property would vest in the State as for acquisition of benami
property recourse to Section 5 of the Act has to be resorted to. In absence
of any proceedings taken and a binding order passed in terms of Section 5
of the Benami Transactions Act, only Section 4 of the Act would apply.

Respondent Nos. 3 and 4 by reason of the said transaction held
themselves to be the trustees of Respondent No. 2 in relation to the securities
in question. They applied for allotment for the benefit of Respondent No.
H,
96 SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.

A 2. They never enforced any claim in relation to the said securities in a court .
of law and, in fact, disclaimed any right, title or interest therein. Possession
of the securities which are movable properties has been handed over to them.
No statutory provision has been brought to our notice forbidding such
transfer. The Respondent Nos. 3 and 4, therefore, were not statutorily
B prevented from entering into such a transaction.

In other words; the concerned parties, namely, Canbank Mutual Fund,
the Respondent Nos. 3 and 4 as well as the Responde~t No. 2 became a party
to an arrangement which may be unethical but not illegal.

c A contract may be unlawful or partly lawful or partly unlawful. If it
is lawful, it will be given effect to whereas in case it is wholly unlawful being
opposed to the public policy, it would not be. In case a transaction is partly
lawful and partly unlawful, if they are severable, t_he lawful part shall be given
effect to. [See B.0.1 Finance Ltd (supra)].

D The said decision is also an authority for the proposition that the
position of the custodian is same as that of the notified person himself. If
by any law th .. Respondent No. 2 was not precluded from transferring the
shares held by him, the transfer thereof in favour of the Appellants was legal.
The transaction took place on 6.2.1992, i~e., much prior to 6.6.1992 when
E Responden_t No. 2 became a notified person. If on or after 6.2.1992,
Respondent No. 2 had no interest in the CANCIGOs, the same could not have
been the subject matter of attachment of the custody. The custodian could
l---
attach the property only when the right, title and interest thereto remain on
the Respondent No. 2 and not otherwise.

F In B.0.1 Finance Ltd. (supra) the questiori which fell for consideration
_of this Court was as to whether ready-forward or buy-back transactions are
valid. In that case the nature of transaction was not in dispute. The
transaction consisted of two interconnected legs, namely, the first or the ready
leg, consisting of purchase or sale of certain securities at a specified price
G and the second or forward leg, consisting of the sale or purchase of the same
or similar securities at a later date at a price determined on·the first date. It
was held that the first leg of the transaction was not illegal whereas the second
leg of the transaction was contrary to the provisions of the Securities
Co.ntracts (Regulation) Act, 1956. In the said decision, non-compliance of the
direction issued by the Reserve Bank also came up for consideration and this
H
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.) 97

Court in no uncertain terms held that whereas non-compliance thereof may A
result in prosecution but would not result in invalidation of any contract
entered into by the bank with a third party.

It was opined :

"60. In the present case the appellants are basing their claim by B
relying not on the terms of the ready-forward contract, but on the
payment of market price against delivery of the securities. The claim
to title is independent of the ready-forward agreement.

61. There can be little doubt that the appellants, when they paid the
market price and took delivery of the securities had become owners
of the same. According to Section 5 of the Transfer of Property Act,
1882, "transfer of property" inter alia means an act by which a
person conveys property to another person. Section 6 of this Act
deals with what property may be transferred. What is relevant in
Section 6(h) ac_cording to which no transfer can be made (I) insofar D
as it is opposed to the nature of the interest affected thereby, or (2)
for an unlawful object, or consideration within the meaning of
Section 23 of the Indian Contract Act, or (3) to a person legally
disqualified to be transferee. According to Section 23 of the Contract
Act the consideration or object of an agreement will be unlawful if E
it is forbidden by law; or is of such a nature that, if permitted, it
would defeat the provisions of any law, or is fraudulent, or involves
or implies injury to the person or property of another, or the court
regards it as immoral or opposed to public policy, In the instant case
the object of the contracts entered into between the banks and the
notified parties was for the transfer and, subsequently, re-transfer of
F
the securities. The transfer took place on delivery of securities on
payment of market price as consideration. The coPsideration for the
transfer of the securities, in the ready leg, was the payment of market
price.
G
62. The validity of the transfer of the securities has to depend on
the provisions of the Transfer of Property Act and the Sale of Goods
Act relating to transfer and not to the validity of the agreement
preceding the transfer. Like any other moveable goods the securities
could validly be purchased on delivery against payment of price as
H
98 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A per Sections 4, 19 and 20 of the Sale of Goods Act. The price paid,
while taking delivery, was the consideration for the transfer of the
securities. When the transfer of title has taken place the agreement
between the parties preceding this cannot invalidate the transfer..."

This decision applies in all fours to the fact of the present case.
B
Right, title and interest in a movable property can pass by delivery of
possession and upon ·paying of the considerations in view of the provisions
of the Sale of Goods Act. Passing up of a title in favour of the transferee
would not be illegal, unless it is forbidden by law. For the said purpose, the
C transaction must attract the wrath of Section 23 of the Indian Contract Act
and not otherwise. Section 3 of the Act does not contemplate extinction of
right of a third party. For getting the transaction invalidated in law, only
Section 4 of the Act can be taken recourse to.

_ The constitutional validity of the Act came up for consideration before
D this Court in Harshad Shanti/a/ Mehta v. Custodian and Others, [1998] 5
sec 1. The vires of the said statute was upheld, inter alia, on the ground
that by reason thereof the right, title and interest in a property belonging to
- Respondent No. 3 is not affected. The interest of the Appellant, thus, was ;,
not affected by the said Act or by the.Benami Transactions Act. Extinction I
/
E in right, title and interest in a property must be caused as a result of operation L.,
of la\\' and not otherwise. Creation of title by an act of parties is subject
to law. Once a title vests in a person he cannot be divested therefrom except
by reason of or in accordance with a statute and not otherwise . .An admission
does not create a title; the logical corollary whereof would be that an
admission of a party would not lead to relinquishment of his right therein,
F if he has otherwise acquired a title in the property.

Title in a property connotes a bundle of rights. Subject to prohibitory
or regulatory statute, such rights are capable of being transferred. Apart from
the provisions of Benami Transactions Act, no other provision operating in
G the field which would negate the claim of the Appellant was pointed out. As
discussed hereiilbefore, the Benami Transactions Act will have no application
in the. instant case.

It is also not a case where a transfer has been made by a company
beyond its articles. Appellant has not acted ultra vires its article_s. Furthermore,
H
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 99

it is one thing to say that a transfer is made contrary to Articles but it would A
not be correct to contend that the same was prohibited by terms of issue.

ATTACHMENT:

Attachment under sub-Section (3) of Section 3 of the Act is subject to B
an encumbrance, if any. Even if a limited right is transferred by a notified
person to a third party, the order of attachment, if any, must be subject to
the said right of the third party. In other words, under all circumstances, the
right of a third party must be recognized. It is now well-settled, in view
of the decision of this Court in C.B. Gautam v. Union of India & Others,
[1993] l sec 78, that even where a statute provides for compulsory purchase, c
the property will not vest in the Government free from all encumbrances but
would vest subject to the encumbrances.

In C.B. Gautam (supra), this Court held:

"36 .... Reading down is not permissible in such a manner as would
fly in the face of the express terms of the statutory provisions. In
view of the express provision in Section 269-UE that the property
purchased would vest in the Central Government "free from all
encumbrances" (emphasis supplied) it is not possible to read down
the section as submitted by learned Attorney General. In the result E
the expression "free from all encumbrances" in sub-section (1) of
Section 269-UE is struck down and sub-section (l) of Section 2<9-
UE must be read without the expression "free from all encumbrances"
with the result the property in question would vest in the Central
Government subject to such encumbrances and leasehold interests F,
as are subsisting thereon except for such of them as are agreed to
be discharged by the vendor before the sale is completed ..."

In V.B. Rangaraj (supra), whereupon reliance has been placed by the
learned counsel for the Respondents, transfer was contrary to the Articles of
the Company. This Court therein had no occasion to consider the effect of G
a transaction which is contrary to the terms of issue. The said Act provides
for certain statutory consequences which must be kept within the four comers
thereof. The Learned Special Judge, therefore, erred in asking unto itself
a wrong question that the statutory provisions create no right in the third party
including the Appellant herein. The question which should have been posed H
100 SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.

A was : Had any right, title or interest of Respondent No. 2 existed on the
notified date in the said CANCIGOs authorizing the Custodian to act in tenns
of Section 3? The answer to that question must be rendered in the negative.
It is no doubt true that Section 13 of the said Act provides for a non-obstante t
clause but before the said clause is resorted to, it must be shown that there ..
exists a provision inconsistent with the provision in any other Act. In any
B
event, if Respondent Nos. 3 and 4 could transfer or relinquish its right in
favour of Respondent No. 2 who in tum ·could transfer the same to the
Appellant, provisions of the said Act would not entitle the custodian to claim
a property which ceased to be the property of the Respondent No.' 2. Here
again, the learned Special Judge committed an error in holding that by reason ,
c of Section 4(2) of the Benami Transactions Act, the Appellant is forbidden
from raising a defence in respect of the CANCIGOs although such a bar
would not apply in the case of the Custodian.

The Appellant, in our opinion, had also the requisite locus to maintain
its application before the Special Court with a view to show that it having
D
an interest in the CANCIGOs, the same is beyond the purview of purported
automatic attachment under Section 3(3) of the Act and consequently neither
the custodian derived any right to deal therewith nor the special court could ·
issue any direction in relation thereto. In any event having regard to the
provision contained in Section 9A of the Act, all claims relating to the
E properties which are claimed to have been statutorily attached must be.
adjudicated by the Special Court only. The claim petition of the Appellant
was, thus, maintainable.

In V.B. Rangaraj (supra), this Court held that shares being movable
F property, a shareholder has a free right to transfer his shares. Such right can
only be taken away by Articles of Association and not otherwise.

The stand of the custodian, in this behalf, is inconsistent and self-
contradictory. If by reason of the embargo placed on transfer of any
CANCIGO, the right remains vested in the Respondent Nos. 3 and 4, the
G question of the same being subject to attachment would not arise. However,
if, according to the custodian, right, title and interest in the CANCIGOS
vested in the Respondent No. 2, he being a third party can transfer his interest,
as he was not bound by the rules for allotment. On the one hand, it is
contended that the Respondent Nos. 3 and 4 were bound by the conditions
H imposed by Canbank Mutual Fund and on the other a contention was raised
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.] 101

that they were benamidars. Both cannot stand together. Similarly, a A
contention has been raised that the condition contained in Note No. 4 of the
Credit Sheet is an absolute restraint on alienation, but at the same time it is
contended that even the third party cannot transfer his interest (if he has any)
in favour of another although a transfer can be given effect to after the expiry
of the lock-in period. B

Furthem1ore, in a case of this nature, the Respondent No. 2 did not hold
any personal interest which would come within the purview of Section 6(d) ,
of the Act. An interest in the CANCIGOS was not created in the Respondent
No. 2 for enjoyment in his personal capacity. Section 6(d) of the Transfer
of Property Act would apply when a transfer is in violation of such stipulation· C
which would defeat the object thereof. The learned Special Judge, therefore, ,
committed an error in invoking Section 6(d) of the Transfer of Pr<?perty Act.

In Nallajer/a Krishnayya v. Vuppala Raghavulu, AIR (1958) AP 658,
it is stated:
D
"5 .. .lf, on a construction of the relevant terms of the instrument,
the Court comes to the conclusion that rights were created against
the property, the matter is taken out of the purview of Section 6(d)
of the Transfer of Property Act."
E
In Harshad Shanti/al Mehta (supra), this Court held:

"I 8. The last question can be answered first. As stated above,
Section 3(3) clearly provides that the properties attached are properties
which belong to the person notified. The words "belong to" have F
a reference only to the right, title and interest of the notified person
in that property. If in the property "belonging to" a notified person,
another person has a share or interest, 'that share or interest is not
extinguished. Of course, if the interest of the notified person in the
property is not a severable interest, the entire property may be
attached. But the proceeds from which distribution will be made . G
under Section 11(2) can only be the proceeds in relation to the right,
title and interest of the notified person in that property. The interest
of a third party in the attached property cannot be sold or distributed
to discharge the liabilities of the notified person. This would also
be the position when the property is already mortgaged or pledged · H
·J
102 SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.

A on the date of attachment to a bank or to any third party. This,.
however, is subject to the right of the Custodian under Section 4 to
set aside the transaction of mortgage or pledge. Unless the Custodian
exercises his power under Section 4, the right acquired by a third
party in the attached property prior to attachment does not get
extinguished nor does the property vest in tile Custodian whether
B
free from encumbrances or otherwise. The ownership of the property
remains as it was.

The Appellant having paid a consideration of Rs. 33 crores in relation
to the CANCIGOS in question had a just right to possess the same to the
'C exclusion of the Respondent No. 2 and in that view of the matter too the
Special Court could not have directed the Appellant to hand over the same
to the Custodian. The said direction is unsustainable in law.

SECTION 13 OF THE ACT:
D In. Solidaire India Ltd (supra), the Custodian initiated proceedings
before the Special Court for recovery of an amount of loan of Rs. l crore
due to the Respondent No. I from the Appellant therein. The suit was decreed
and only during pendency of appeal, the Appellant became sick. The
question which arose for consideration was as to whether in view of the Sick
E Industrial Companies (Special Provisions) Act, 1985, no proceeding could
have been initiated or continued under the said Act. Referring to Section 13
of the Act, this Court held that the provisions of the said Act would prevail
over the provisions of the Sick Industrial Companies (Special Provisions)
Act, 1985.
F
We are here not concerned with the right of a party to take recourse
to a remedy but are concerned with a right of a party to possess the property
over which it has a lawful title. In such a situation, Benami Transactions
Act will have no application in allocation of shares as the same would not
~o}lle within the purview of transaction relating to a transfer of property.
G Transfer ofCANCIGO in favour of the Appellant was, thus, valid and legal
as by reason of the transfer of possession of the CANCIGOs by Respondent
No. 2 in favour of the. Appellant, a valid right has been created therein, the
same could not have been attached. in terms of Section 3(3) of the said Act. '

The Custodian thought it expedient not to invoke the provisions of Sub-
H
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.) 103

section (2) of Section 4 of the said Act. He was at liberty to do so. Even A
now he is free to do so, if so advised.

CONCLUSION:

For the reasons aforementioned, the impugned judgment cannot be
sustained which is set aside accordingly. These appeals are allowed. In the B
facts and circumstances of this case, however, there shall be no order as to
costs.

V.S.S. Appeals allowed.