By Astha Pratik, NUJS
Mortgage is a term most of us are familiar with even if we aren’t aware of its legal definition. The widely held views about mortgage correspond to what is termed in the language of the law as simple mortgage. However, mortgage, as a transaction is not restricted to only the simple type as presumed by the layman.
The ambit of transactions covered under a mortgage is very wide and includes among others usufructuary mortgages, anomalous mortgages, and mortgage by conditional sale, which is the topic that shall be dealt with in this paper. Before we deal with a particular type of mortgage it is essential to understand how a mortgage is generally defined by the black letter of the law.
In Gopal v. Parsotam[i], Justice Mahmood said that “mortgage, as understood in this country, cannot be defined better than by the definition adopted by the legislature in Section 58 of the Transfer of Property Act. It therefore makes immense sense to examine the said section of the given Act, which holds that mortgage is the “transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability.”[ii]
The self-explanatory of the section is evident from its language and the way it has been worded serves to cover a myriad of scenarios. One of the scenarios covered under this section and dealt with under a subsequent clause of the same section is that of a mortgage by conditional sale. Clause c) of section 58 of the Act[iii] provides that
“Where the mortgagor ostensibly sells the mortgaged property– on condition that on default of payment of the mortgage- money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale…”
The Privy Council has said that it can be assumed that the intention of the framers of the Transfer of Property Act was to provide legal validity to pre-existing customs and practices by framing the laws so as to include mortgage by conditional sale as a specific type of mortgage.
Mortgages by sale were referred to by a multitude of names in the various parts of the Indian subcontinent, from Khatkhabala in Bengal and Gahan Lahan[iv] in Bombay to Muddata Kriyam[v] or Peruarthum[vi] in Madras. Among the followers of Islam such transactions were denoted by the phrase bye-bil-wafa[vii] and were used as an evasive device against the Islamic prohibition of interest. Mortgage by conditional sale allows the mortgagee to become the absolute owner of the property in the event of the mortgagor defaulting on the debt repayment.
Sir Pramada Charan Banerjee’s opinions on the law of mortgage in the reported case of Balkishan versus Legge[viii] was an example of lucid exposition of the law on the mortgage by conditional sale, commonly known as “bye bil wafa” in this State. The Privy Council upheld the decision on appeal. His judgment on various aspects of property law in general and this aspect of a mortgage, that is, mortgage by conditional transfer in specific is followed by Courts and Counsel alike throughout the country.
THE RELEVANT LAWS
Certain characteristics need to be present in a transaction for it to be classified as a mortgage by conditional sale. First, as the name itself suggests, there needs to be a sale. An ostensible sale is necessary for such type of a mortgage. Second, as also evidenced by the name itself, is the need for a condition accompanying the sale. In so far as this particular class of transactions is concerned the condition required is fairly simple. The ostensible sale shall get converted to an absolute sale if the mortgagor is unable to repay the debt by the specified date.
Maclean CJ recognized the importance of the date of repayment of the debt by the mortgagor to the mortgagee. He held that this certain date is an essential element of the mortgage in a Calcutta High Court case[ix]. The phrase “on a certain date” was expanded to include dates on or before the specified date in a subsequent judgment[x] of the same court.
Madras High Court in a case[xi], then held that the phrase was inapplicable to mortgages dealt with under clause c) of Section 58 of the Act and hence were not relevant to mortgages by conditional sale as prior judgments of the Calcutta High Court had held to be, and this view on the phrase was reiterated by the Gujarat High Court in a subsequent case[xii]. Personal liability has not been dealt with in the definition of mortgages carried out through conditional sales and has been declared to not be a crucial ingredient of the transaction in the landmark case of Balkishen v. Legge[xiii].
Every conditional sale does not in itself imply a mortgage by conditional sale and the intention of the parties as to their rights and liabilities during the ostensible sale plays an extremely important part in the determination of the nature of the contract entered into by the parties. Clause c) of Section 58 of the Transfer of Property Act of 1882, that is, the part of the Act relevant to the transactions amounting to mortgages by conditional transfer has not always been the same.
The one major change undergone by this part has been in 1929 when a proviso was added to the clause. Prior to the inclusion of this proviso in the Act, the relevant transactions involved were carried out through two documents. The sake deed was one of the documents, the other being the one conveying the condition of reconveyance. The question raised with respect to the second type of document was whether it converted the sale transaction to one of mortgage or simply gave the mortgagor (or vendor as the case may be) the right to repurchase the property. As already mentioned, the intention of the parties is crucial for the determination of the nature of the transaction.
Generally, courts assuming the ostensible buyer of land to be in a position of power over the ostensible seller, favor the possibility of the transaction being a mortgage instead of a sale. In transactions, which were in the form of absolute transfers but are being claimed to be mere mortgages, evidence can be admitted before the court[xiv] notwithstanding anything contained in Section 92 of the Indian Evidence Act. It has been noticed that Muslims have tried to misuse these bye-bil-wafa transactions to claim as absolute sales, transactions, which are merely mortgages of the conditional sale type, and that the mere absence of the date on which money needs to be repaid does not establish the lack of mortgage altogether[xv]. In the case of Prag Dutt v. Harish Bahadur[xvi], it was held that two documents were evidence of one transaction and that transaction was not that of a sale but of a mortgage by conditional sale.
Section 19 of the Transfer of Property (Amendment) Act of 1929 enabled the addition of the proviso to clause c) of Section 58 of the Act.
Provided that no such transaction shall be deemed to be a mortgage unless the condition is embodied in the document, which affects or purports to affect the sale.”
After this proviso came into the effect, any deed purporting to effect sale would be classified as a mortgage by conditional sale if it fulfilled any of the three conditions given under clause c) of section 58 of the Act, the language of which is reproduced here:
“Where the mortgagor ostensibly sells the mortgaged property– on condition that on default of payment of the mortgage- money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale and the mortgagee a mortgagee by conditional sale.”
These conditions for judging whether the given transaction is a sale or mortgage were applied in the case of Debi Singh v. Jagdish Saran[xvii]. However, this amendment is not retrospective. Also, now, for a transaction to be treated as a mortgage by conditional sale and not sale itself, it is imperative that the condition for repurchases needs to be necessarily incorporated into the same document that provides for the ostensible sale.
This is in stark contrast to the functioning of this law prior to the amendment given the decrease in the number of documents and the great emphasis now placed on the inclusion of the repurchases clause in the original sale deed itself. However, it does not in any way claim that all such documents containing the repurchase clause within them would amount to mortgages. The intention of the parties was and remains paramount and evidence can be produced before the court to support one’s claims in case they are in contrast to the written word of the deed in question[xviii].
DIFFERENTIATION BETWEEN SALE AND MORTGAGE
As mentioned in the previous section, intention plays an enormous role in the determination of the nature of the transaction between the ostensible buyer and seller of the property. However, certain extrinsic circumstantial evidence can also be immensely helpful and relevant in the above-mentioned determination. Outstanding debt or the lack thereof is an example of such evidence. If there exists such a relationship between the parties where one is indebted to the other creates an impression in favor of mortgage rather than the sale.
The absence of debt excludes the possibility of the mortgage even though the presence is a necessary but not sufficient condition to prove mortgage.[xix] The price paid for the repurchase of the property also goes to indicate whether the transaction is a mortgage or not. If the repurchase happens at the price of sale but with interest or if the price is below the normal market value of the property, the assumption of a mortgage will be favored over that of sale.
If the possession of the property stays with the ostensible seller even after the sale deed it can be taken to be a mortgage rather than sale[xx]. Also if the time for reconveyance of property is longer, the evidence favors mortgage.
Mortgage by conditional sale is a type of mortgage where there occurs an ostensible sale, which is converted into absolute sale in the event that the ostensible seller is unable to repay the loan. The ostensible seller in such a mortgage incurs no personal liability as far as the debt is concerned. Previously the relevant sections of law pertaining to this topic were framed so as to ensure that two separate documents were drawn up to carry out such a transaction, the sale deed and another document regarding the reconveyance of the property.
The provisions were subsequently amended to provide for both halves of the transaction to happen through a single document. There have been cases where confusion has arisen between such mortgages by conditional sales and pure sales of property. In such cases, the confusion has been dealt with by taking into consideration a number of factors, primarily the intention of the parties regarding the nature of the transaction at its commencement. The intention of the parties has been arrived at and/or supplemented by a number of extrinsic factors that prove helpful in the determination of the intention of the parties while entering into the transactions under consideration.
The various causes for confusion notwithstanding, the practice of mortgaging property has been prevalent in India and other parts of the world for a substantial amount of time under different names and mortgage by conditional sale is no exception to this trend and it can be said that these practices shall continue to flourish even in the times to come.
Formatted on February 20th, 2019.
[i] (1883) 5 All 121, 137 (FB)
[ii] S. 58, The Transfer of property Act 1882
[iii] Transfer of Property Act, 1882
[iv] shankarbhai v. kassibhai (1872) 9 Bom HCR 69; Krishnaji v. Ravji (1872) 9 Bom HCR 79
[v] Lakshmi v. Krishna (1871) 7 Mad HC 6
[vi] Shekari v. Mangalom (1876) 1 Mad 57
[vii] Preamble to Reg 1 of 1878
[viii] [viii](I. L. R. 19 Allahabad 434)
[ix] Kinuram v. Nitve Chand (1907) 11 Cal WN 400
[x] Mahomed Mozaffer ali v. asraf ali (1915) 25 IC 93
[xi] padmanabha v sitarama (1928) 54Mad LJ 96, 106 IC 158, AIR 1928 Mad 28
[xii] Asmal Bagas Abharam v. raj Mahijibhai Parbhasingh AIR 1974 Guj 19
[xiii] (1897) ILR 19 All 434
[xiv] Maung Kyin v Ma Shwe 45 Cal 320 (PC)
[xv] Md. Usman v. Abdul Rahaman AIR 1925 Cal 1151 (1152), 42 CLJ 74.
[xvi] AIR 1947 All 334, 1947 ALJ 271
[xvii] AIR 1952 All 716 (FB)
[xviii] Kuppa v. Mhasti AIR 1931 Bom 371; Sambhu Singh v. Jagadesh AIR 1941 Oudh 582
[xix] Ramayya v. Krishnamma 9 M.L.J. 457
[xx] Narsingerji v. Panuganti ILR 47 Mad. 729 (P.C.)