AI Structured Summary
Not yet generated for this judgment
Judgment
Krishnaswami Ayyangar, J.—The appellant, a puisne mortgagee, holds a simple mortgage executed in his favour on 21st April 1922 by
respondent 2 over his house and ground No. 43, Veeraraghava Mudali Street, Triplicane. In this the sons of respondent 2 also joined. The
principal amount secured by the mortgage is stated to be Rs. 7000. But in fact, the appellant had advanced only Rs. 3400. The earlier mortgage
was a possessory one and also contained a power of sale. This mortgage had been executed on 31st October 1920, the mortgagee being the
Mylapore Hindu Permanent Fund Limited. The principal amount secured by the mortgage was Rs. 4000. Default having been made in the due
payment of the mortgage money as stipulated in the deed, the Fund exercised its power of sale and sold the property at an auction held on 5th
June 1926. The sale fetched Rs. 5750 out of which Rs. 120 went towards the expenses of the auction, Rs. 84-10-0 towards the municipal tax and
quit rent due on the property. A sum of Rs. 5473-15-0 was appropriated in satisfaction of the principal and interest due to the mortgagee. There
remained only a balance of Rs. 71-12-2 which respondent 1 has always been ready and willing to pay over to the appellant. The appellant
instituted the suit out of which this appeal has arisen praying for a decree directing the Fund to render an account of the various sums of money
which had or should have been realised by it by way of rents, profits and incomes when the mortgaged property was in its possession and for the
recovery of the surplus amount in its possession to, be ascertained on such accounts being taken. According to the plaint, the liability of the Fund
to render accounts arose on account of its having, during the continuance of the mortgage, taken possession of the property within the meaning of
Section 76, T.P. Act, 1882. The learned City Civil Judge has declined to grant this relief, but has given a decree for Rs. 71-12-2 which is the only
surplus amount in the hands of respondent 1 according to its case. The main question raised in the appeal is whether respondent 1, the Fund, who
is the first mortgagee is liable to render an account of the rents and profits of the mortgaged property which it should have collected but did not, in
fact, collect during the period of its alleged possession: in other words, whether the Fund is liable to render accounts on the footing of wilful default
in respect of the rents which could have been, but were not collected by it. A few more facts are necessary to appreciate the contentions raised.
The mortgage in favour of respondent 1, the Fund, was termed a possessory mortgage in the deed and contains the statement that by mortgaging
the property with possession and on his own personal liability as well, the mortgagor received a'' loan of Rs. 4000 and bound himself according to
the rules of the Fund to pay interest on the principal sum at the rate of Rs. 0-8-4 per cent, per mensem, amounting to Rs. 20-13-4 before the end
of each month. Clause 2 of the deed provides the machinery by which the interest was to be paid and received. The clause is as follows:
As I myself have to pay the interest on the said loan as aforesaid, the said Fund shall let out the mortgaged properties for rent and credit the rent
received every month towards the interest payable every month. In the event of the said rent being insufficient to cover the interest or the said
house not being occupied by any tenant, or the said house being let out to me, and the rent not having been paid by me, I shall be bound to pay the
interest accrued due on the principal amount together with interest thereon, at the rate of two pies per rupee per mensem. The mortgaged
properties have been given as security by means of this bond even for the repayment of the said monies.
This provision leaves the mortgagee free to let the house on rent either to the mortgagor or to any other stranger of its choice. In the event of the
property being leased to a stranger and the rent being insufficient to cover the interest the mortgagor bound himself to make good the deficiency
together with interest on interest at the rate of two pies per rupee per mensem. The mortgagor also undertook a similar liability even in the event of
the property not being tenanted or in case it was leased to himself and he neglected to pay the rent. In Clause (3) the mortgagor bound himself to
pay the principal amount before 30th. April 1927 or such other date as may be fixed by the directors under Rule 41 of the Fund. If, on the date of
payment, the interest remained in arrears, the same was to be paid together with interest at the rate of two pies per rupee per mensem. The
mortgagor further undertook to pay out of his own monies the municipal tax, quit rent and all other taxes payable in respect of the mortgaged
property irrespective of the property being in the possession of the fund or in the possession of the mortgagor himself. It is obvious from these
clauses as well as from what appears in Clause (4) of the mortgage deed that the parties contemplated the mortgagor himself being allowed to
occupy the property as a lessee from the fund. Accordingly a rental agreement was executed by the mortgagor in favour of the mortgagee
simultaneously with the execution of the mortgage instrument itself. It would be remembered that the sum of Rs. 20-13-4 is the monthly interest
payable by the mortgagor at the rate of Rs. 0-8-4 as per the stipulations of the mortgage deed. The lease deed recites that the property was taken
on lease by the mortgagor from the mortgagee, the rent being settled at Rs. 20-13-4 per mensem which is precisely the interest due on the
mortgage. The mortgagor also undertook to vacate and deliver possession of the property to the fund on one month''s notice being given. It may at
once be stated that it is common ground that the mortgagee failed and neglected to enforce due payment of the rent stipulated.
The contention of the appellant, based on the two transactions, namely the mortgage and the lease, is that the mortgagee must be deemed to
have taken possession of the mortgaged property within the meaning of Section 76, T.P. Act, 1882, and the fund was accordingly bound to use its
best endeavours to collect the rents and profits, its default in this respect carrying with it, the consequence set out at the end of the section, namely
that when accounts are taken under the mortgage decree the fund should be debited with the loss occasioned by the omission. The Fund answers
by stating (1) that the liability of a mortgagee to account on the footing of wilful default, which is of course in consequence of the duty placed on it
by Clause (b) of the section, arises only in a case where the mortgagee takes actual possession and control over the property and intercepts the
rents from going to the mortgagor; but this is not the case if the mortgagor is himself allowed to remain in possession as a tenant under a lease or an
attornment clause in favour of the mortgagee; (2) that the section only governs the relationship between the mortgagor and the mortgagee and not
between a prior and puisne encumbrancer, the latter having no higher rights than the mortgagor himself; that is to say, where the mortgagor has no
right to call upon the mortgagee to render accounts on the footing of a wilful default, the puisne encumbrancer deriving his title from him is subject
to the same disability.
The learned City Civil Judge in upholding the contention of the Fund supported himself by the decision in Madhwa Sidhantha Onahini Nidhi,
Ltd. v. Venkataramanuiulu Naidu (1903) 26 Mad. 66 of White C.J. and Subramania Ayyar and Davies JJ. There, as here, there was a possessory
mortgage executed simultaneously with a rental agreement by the mortgagor in favour of the mortgagee. The mortgagor left the rents to fall into
arrears. The mortgagee instituted a suit on the mortgage impleading not merely the mortgagors and his sons but also the representative of the puisne
mortgagee The trial Judge dismissed the suit on the ground that on a proper construction of the two instruments the plaintiff was not entitled to sue
for the mortgage money or to ask for the sale of the property. The appeal preferred by the plaintiffs was contested by the puinse mortgagee and
two of the sons of one of the mortgagors. It may be mentioned that the facts were on all fours with those present here. There was there, as here, a
possessory mortgage and a rental agreement simultaneously executed with terms practically identical with those in the instrument arising for
consideration in this appeal. It also appears that the mortgagors made default in the punctual payment of the rents as stipulated in the rental
agreement. The Court held that the two instruments should be read together constituting as they did parts of one and the same transaction and that
the intention was that the rights and obligations of the parties were to be gathered from the provisions of both. So doing, the Court expressed the
opinion that the transaction was one entirely of mortgage, with an express covenant to pay the principal and interest in instalments and conferring a
power on the mortgagee to take possession of the property mortgaged and apply the usufruct in the discharge of the interest and principal.
It was next observed that these findings brought the case within the ruling of the Privy Council in Juggeewundas Keekashah v. Ramadas
Brijbookundas (1841) 2 M.I.A. 487 in which the Privy Council made a distinction between cases where there was a binding contract by which the
mortgagee was under the duty to apply the rents and profits to the payment of the debt in which case the omission to collect the rents and profits
would render him liable to the extent of the rents and profits unreceived during the period when he was in possession, and the case where the
mortgage deed simply confers a power not a duty to take possession and collect the rents and profits and apply the same towards the satisfaction
of the mortgage debt. The Privy Council pointed out that in the latter case the omission to collect the rents and profits from the mortgagor left in
possession under the lease would make no difference as between the mortgagee and the mortgagor that is to say, notwithstanding such omission,
the mortgagee would be entitled to recover the whole of the principal and interest due on the mortgage. A different result would, it was pointed
out, follow in so far as a second or a later encumbrance is concerned if after notice of his encumbrance the mortgagee permits the mortgagor to
receive the rents and profits, that is to say, the mortgagee would be liable to account for the rents and profits which he failed to collect from the
mortgagor after notice of the puisne mortgage. This consequence, it is clear, would only follow if after taking possession the mortgagee neglected
to realize the rents, but not where he never took possession himself. Applying the Privy Council decision to the facts before Court, the learned
Judges held that the liability of the mortgagor to repay the entirety of the debt to the mortgagee was too clear for discussion. As regards the
position between the mortgagee and the puisne encumbrancer, they made the following observation:
The question as between the mortgagee and puinse encumbrancers also is equally clear, since the former, not having taken possession of the
mortgaged property, there is no scope for the application of the rule as to a mortgagee in possession being liable to account for the consequenoes
of his wilful default and the doctrine of notice to which frequent reference was made in the argument.
The meaning of these observations is beyond question, namely, the rental agreement notwithstanding the mortgagee was deemed not to have
taken possession of the mortgaged property so as to charge him with a liability for the uncollected rents and profits. The case would thus appear to
fall within the decision cited above. But the learned advocate for the appellant has boldly argued that this decision is no longer law, in view of later
decisions of the highest tribunal which according to him have interpreted such transactions in a different sense altogether. The three decisions of the
Privy Council to which reference has been made are those in Abdulla Khan v. Basharat Husain (1913) 35 All. (1933) 1 ITR 219 (Privy Council)
and Commissioner of Income Tax, B. and O. v. Maharajadhiraja of Dharbanga AIR 1935 P.C. 17 in Abdulla Khan v. Basharat Husain (1913) 35
All. 48 it would appear that the mortgagee took possession of the mortgaged property in pursuance of a, term contained in the mortgage deed to
the effect that the profits of the property should be taken in lieu of the interest on the mortgage money and the Court held that whatever the income
received by the mortgagee he was not accountable in respect of it to the mortgagor. This was the actual decision arrived at by the Board. But the
Judicial Committee referred to the erroneous view taken in the High Court to the effect that in spite of the mortgage being usufructuary in form it
was merely intended as a simple mortgage carrying interest at the rate of six percent. Their Lordships pointed out the error of this view and stated
that the mortgage and the lease were parts of one and the same transaction: but there was no inconsistency between the two, nor would there have
been any inconsistency if the mortgage itself had contained a provision for granting a lease on the terms upon which the lease was actually granted.
In (1933) 1 ITR 219 (Privy Council) there was a possessory mortgage accompanied by a lease back of the mortgaged property to the mortgagor
in possession for the period of the lease. At the termination of the period, the mortgagee sued for recovery of possession of the property from the
mortgagor. He was met by the plea that the transaction evidenced by the two documents really amounted to a simple mortgage and he could not
therefore demand possession. The Court of the Judicial Commissioner,of the North-West Frontier Province having upheld this objection, an
appeal went up to the Privy Council. The judgment of the Judicial Commissioner was reversed and the Privy Council pointed out that there is
nothing suspicious in a transaction evidenced by two documents, namely a possessory mortgage and a lease back and there was no reason to
construe the mortgage as other than a possessory mortgage entitling the mortgagee to possession. It was pointed out that the mere absence of a
formal handing over of the land to the mortgagee, and handing back by him to the mortgagor in the character of lessee, is a circumstance of little
consequence.
In Commissioner of Income Tax, B. and O. v. Maharajadhiraja of Dharbanga AIR 1935 P.C. 17 the question which arose for consideration
was whether the profits or income of agricultural lands leased to a money-lender on a zarpeshgi usufructuary mortgage constituted agricultural
income not assessable under the Income Tax Act, the contention being that it was really interest received upon a mortgage of the property in
question and accordingly formed part of the taxable profits or gains of the money-lending business of the plaintiff. Their Lordships held that the
profits received by the mortgagee were agricultural income and not interest. These cases do not, in our opinion, lend any support to the appellant''s
contention that the decision in Madhwa Sidhantha Onahini Nidhi, Ltd. v. Venkataramanuiulu Naidu (1903) 26 Mad. 662 is inconsistent with them
or has been rendered untenable in any way.
The English authorities do not appear to be uniform on the question under consideration. But the preponderance of opinion is certainly in favour
of the view that a mortgagee does not render himself liable to ac count as a mortgagee in possession to subsequent encumbrancers merely because
of an attornment clause under which the mortgagor continues to remain in actual occupation, though as a tenant for the mortgagee (see Fisher and
Lightwood on ''Mortgage'' Edn. 7, pp. 721 and 722). In 28 Halsbury at p. 368 the following statement of law occurs:
Where the mortgage deed creates a tenancy in the mortgagor under the mortgagee at a rent, this does not put the mortgagee in possession so as to
make him liable to account to subsequent encumbrancers tor the amount of the rent reserved.
In Stanley v. Grundy (1883) 22 Ch. D. 478 which is a direct decision on the point, Bacon V.C. treated the observations in the earlier cases in
In re Stockton Iron Furnace Co. (1879) 10 Ch. D. 335 and Ex parte Harrison; In re Betts (1881) 18 Ch. D. 127 as merely containing obiter dicta
on the point and laid down the rule that an attornment clause in a mortgage was merely an additional security for the mortgagee, as much for the
payment of principal as for the payment of interest and that a mortgagee was not obliged to avail himself of this clause, and there was no pretence
for saying that because the mortgage deed contained an attornment clause, under which possession had not been taken, the mortgagee was
thereby fixed with all the liabilities of mortgagee in possession. In Ex parte Harrison; In re Betts (1881) 18 Ch. D. 127 the position was examined
and it was held that:
If the mortgagee is in receipt of the rents and profits the account is taken against him as if he were in possession and he is answerable not only for
what the tenants pay, but for not letting the property if he could have done so, and for not getting the full rents from the tenants if they could have
paid them; and he is looked upon as if he had taken upon himself the control and management of the estate as between those in actual occupation
and the mortgagor so as to put an end to any right which the mortgagor has of dealing with the estate in the way of management including letting
and making allowances to tenants, and getting the best rent from them he can.
In order to hold that a mortgagee not in actual possession is in receipt of the rents and profits, in my opinion, it ought to be shown not only that he
gets the amount of the rents paid by the tenants, even although he gets their cheques or their cash, but that he, receives it in such a way that it can
be properly said that he has taken upon himself to intercept the power of the mortgagor to manage his estate, and has himself so managed and
received the rents as part of the management of the estate.
The case in Green v. Marsh (1892) 2 Q.B. 330 was cited for the appellant as a case in which the Court of appeal laid down the contrary
proposition. After referring to the decision in In re Stockton Iron Furnace Co. (1879) 10 Ch. D. 335 which was held inapplicable, the Court made
the following observations:
The attornment clause was not such a taking possession by the mortgagee as was contemplated by the proviso, though no doubt it would render
him liable to account at the suit of a subsequent mortgagee for all the rent agreed to be paid by the mortgagor which might be unreceived owing to
the mortgagee''s wilful default. But this attornment clause, not being registered, was void.
This statement of the law is plainly an obiter dictum. We are not satisfied that there are good grounds for holding that the decision in Madhwa
Sidhantha Onahini Nidhi, Ltd. v. Venkataramanuiulu Naidu (1903) 26 Mad. 662 has stated the law erroneously or that it is inconsistent with later
Privy Council eases. In this view, it is unnecessary to consider the question whether Section 76, T.P. Act, regulates the rights and obligations as
between the mortgagor and the mortgagee only and we are not therefore called upon to express an opinion on this question. In the view we have
taken on the first point, the appeal fails and must be dismissed with costs. A claim for interest has been made. But there is no evidence on the
record to show that the Fund after being appraised of the rights of the appellant withheld the money. That being so, no interest can be allowed for
the period before the suit, but only from the date of the plaint at 6 per cent, per annum. The decree of the lower Court will be modified to this
extent.