Under the Indian Contract Act, consideration has been defined to mean any act or abstinence on the part of one party to the contract at the desire of the other. Such act or abstinence may be past, present or future. Thus, it is a valuable consideration, in the sense of the law and it may be in the form of some right, interest, profit, benefit, etc., which accrues to one of the parties to the contract or it may also be some forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other party.
It is important to note that unlike in many other countries, e.g., the USA, adequacy of consideration is immaterial in India. If there exists a consideration for a contract and the parties to the contract have consented to the same, then the Courts would not examine whether the consideration is adequate for the contract or not. The Act does not require that the value of the consideration by one party must be equivalent to the value of the goods / services provided or promises made by the other party. Thus, if two parties contract to sell a horse for Rs. 1,000 and the seller has freely consented to the same, then there exists a valid consideration for the horse. Under the Contract Act, consideration must be something which the law can consider of value but it need not necessarily be money or money’s worth. Sir Pollock in his famous book on Contracts has opined that ‘It does not matter whether the party accepting the consideration has any apparent benefit thereby or not; it is enough that he accepts it and the party giving it does thereby undertake some burden, or lose something which in contemplation of law must be of some value’. Section 25 of the Act provides that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining whether the consent was freely given. Of course, this position of adequacy of consideration has been altered to some extent by the Income-tax Act, 1961 by the introduction of deeming provisions such as sections 50C, 50CA, 56(2)(x), etc.
Under the Act, consideration may move from the party to the contract or even any other person who is a stranger to the contract. Based on this, the Madras High Court has held in the case of Chinnaya vs. Ramayya (1881) 4 Mad 137 that consideration in India can move from a person who need not be a party to the contract. In this case, a mother agreed to gift certain properties to her daughter in consideration for her daughter agreeing to maintain her uncle (mother’s brother). After the death of the mother, the daughter refused to maintain her uncle and in response to a suit filed by the uncle, she stated that the uncle was not privy to the contract as no consideration had flown from him to her. The Court upheld the maintenance suit of the uncle and held that under the Act consideration could flow from a third party, i.e., in this case the mother, and hence there was a valid consideration to the contract between the daughter and her uncle.
Similarly, under the Act the consideration need not flow directly to a party to the contract, it can also flow to a third party and that would be treated as a valid consideration. An important case in this respect is that of Keshub Mahindra & Other, 70 ITR 1 (Bom). In this case, three brothers were substantial shareholders and in the employment of a company. The brothers agreed to transfer some of their shares in the company to certain foreign entities in return for a good business relationship of the company with these foreign entities on favourable payment terms. The Gift Tax Officer held that since the brothers had not directly received any consideration for the sale of their shares, there was a gift by them to the foreign entities. Negating this argument, the Bombay High Court held that under the Indian Contract Act, consideration can not only flow from a third party but it can also flow to a third party. The Court held that the term consideration was defined in the Contract Act. Although the shareholders of the company were distinct from the company, as per the definition of the term consideration there was nothing to show that the benefit of the act or abstinence of the promisee must go directly to the other party only, i.e., the promisor. A contract can arise even though the promisee does an act or abstains from doing something for the benefit of a third party, i.e., the company in this case, and that was a good consideration for the three brothers to transfer their shares.
In this backdrop of consideration let us examine the ratio of the Supreme Court decision.
APEX COURT’S VERDICT
The Supreme Court’s verdict in Kewal Krishan vs. Rajesh Kumar & Ors., CA No. 6989-6992/2021, Order dated 22nd November, 2021 is relevant on the subject of consideration. In this case, the appellant had executed a power of attorney in favour of his brother. The Power of Attorney holder executed two sale deeds for selling immovable properties of the appellant. One was for selling to his wife and the other to his son. The appellant objected to these sales on various grounds. One of them was that the entire sale consideration for acquiring suit properties was not paid by the purchasers. Accordingly, it was prayed that the sale deeds should be set aside.
The Supreme Court held that there was no evidence adduced to show that the purchasers had indeed paid the consideration as shown in the sale deeds. It examined section 54 of the Transfer of Property Act, 1882 in this respect. This section deals with the definition of sale of immovable property. It defines a sale (in respect of immovable property) to mean a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. In Samaratmal vs. Govind, (1901) ILB 25 Bom 696, the word ‘price’ as used in the sections relating to sales in the Transfer of Property Act was held to be in the sense of money.
The Apex Court in Kewal’s case (Supra) went on to hold that a sale of an immovable property had to be for a price. The price may be payable in future. It may be partly paid and the remaining part can be made payable in future. The payment of price was an essential part of a sale covered by section 54 of the Transfer of Property Act. If a sale deed in respect of an immovable property was executed without payment of price and if it did not provide for the payment of price at a future date, it was not a sale at all in the eyes of law. It was of no legal effect. Therefore, such a sale would be void. It would not impact the transfer of an immovable property.
The Court deduced that since no evidence was provided to show payment of sale consideration, the sale deeds would have to be held as void being executed without consideration. Hence, the sale deeds did not affect in any manner the share of the appellant in the suit properties. In fact, such a transaction made by the Power of Attorney holder of selling the suit properties on the basis of the power of attorney of the appellant to his own wife and minor sons was nothing but a sham transaction! Thus, the sale deeds did not confer any right, title and interest on his wife and children as the sale deeds were to be ignored being void. It further held that a document which was void need not be challenged by claiming a declaration as the said plea could be set up and proved even in collateral proceedings. As no title was transferred under the said sale deeds, the appellant continued to have undivided share in the suit properties.
Thus, it is clear that for a sale transaction presence of consideration in the form of money would be a must. If the consideration is anything other than money, i.e., in kind, then it would be an exchange and not a sale. However, a sale can also take place where instead of the buyer paying the seller, some debt owed by the seller to the buyer is set off. For instance, in Panchanan Mondal vs. Tarapada Mondal, 1961 (1) I.L.R. (Cal) 619, the seller agreed to sell a property to the buyer for a certain price by one document and by a second document he also agreed to buy another property of the buyer for the same amount. Instead of the buyer paying the seller and vice versa, they agreed to set-off the two amounts. It was held that the transactions were for execution of two sale agreements.
INCOME-TAX CONSEQUENCES
One related issue would be could section 56(2)(x) of the IT Act be invoked by the Department against the purchaser? Since the agreements were without consideration could it be held that the buyer received the immovable property without payment of adequate consideration, and conversely could section 50C be invoked on the seller as being a transfer less than the stamp duty ready reckoner value? One would have to go back to the decision of the Supreme Court for the answer.
The Court has clearly held that the sale deeds did not affect in any manner the share of the appellant in the properties. It was nothing but a sham transaction. The sale deeds did not confer any right, title and interest on the buyers and the seller’s share remained intact. Hence, in such a scenario there is no receipt of immovable property by the buyer and there is no transfer by the seller. Accordingly, it stands to reason that neither section 50C could be invoked on the seller nor could section 56(2)(x) be invoked on the buyer.
STAMP DUTY CONSEQUENCES
A sale deed is liable to be stamped with duty as on a conveyance. However, what happens when the sale deed is held to be a sham as in the above case? The Maharashtra Stamp Act, 1958 provides for the refund of stamp duty paid in case it has been used on an instrument which is afterwards found to be absolutely void in law from the beginning. An application for refund must be made to the Collector, normally within a period of six months from the date of the sale deed. Some amount is deducted while making refund of Stamp Duty, which is as follows – for stamps falling in the category of e-payment (simple receipt / e-challan and e-SBTR), 1% of the duty amount is deducted with a minimum of Rs. 200- and a maximum of Rs. 1,000. For stamp categories other than mentioned above a deduction of 10% of the duty is made.
CONCLUSION
This Supreme Court decision has once again highlighted the importance of consideration in the context of any agreement. Due care and caution should be exercised as to the manner and mode of consideration. Failure to do so could invalidate the entire transaction as seen above.
