Companies Act Case Law Hansa Industries Pvt. Ltd. and others Vs Kidarsons Industries Pvt. Ltd

CASE NO.:
Appeal (civil) 1682 of 1999

PETITIONER:
Hansa Industries Pvt. Ltd. and others

RESPONDENT:
Kidarsons Industries Pvt. Ltd

DATE OF JUDGMENT: 13/10/2006

BENCH:
B.P. SINGH & ALTAMAS KABIR

JUDGMENT:
J U D G M E N T
B.P. SINGH, J.
This appeal by Special Leave is directed against the
judgment and order of the High Court of Delhi at New Delhi
dated March 25, 1998 in F.A.O (O.S.) No.39 of 1993, whereby
the Division Bench of the High Court dismissed the appeal
preferred by the appellants herein against the order of the learned
Single Judge dismissing their objections to the report of the
Chartered Accountants who had valued the share of Respondent
No.1  Company, and directing the implementation of the
settlement arrived at between the parties on 9th June, 1988. This
Court while granting special leave by its Order dated March 19,
1999 restricted the appeal to two issues only as recorded in the
order of this Court dated August 10, 1998, namely issues
relating:-

“(a) The portion of the Golf Links property which
was in the possession of N.N. Nanda.

(b) Modification of the Division Bench order so
that it is stated that the company shall challenge
the imposition of capital gains tax, if any
provided funds for that purpose are furnished by
the appellants”.
To appreciate the background in which the two aforesaid
issues arise, it is necessary to refer to the factual background of
the case. The relevant facts are really not in dispute. The
Respondent No.1  Company, namely  Kidarsons Industries Pvt.
Ltd. is a Private Limited Company closely held by the Nanda
family. Except for a few shares held by their relatives and friends
the entire shareholding of the Company is that of the members of
the Nanda family. Appellant No.2 before us is Shri Narendra
Nath Nanda. His three brothers namely, Mohinder Nath,
Varinder Nath and Rajinder Nath were the respondents in the
High Court alongwith their mother, who is no more.

The main source of income of Respondent No.1 
Company was the commission earned from the agency business
of M/s. Thyssen Sthal Union of Germany (hereinafter referred to
as ‘Thyssen’). Disputes arose between the brothers, and it
appears that appellant No.2 succeeded in getting the agency
exclusively in his name. M/s. Thyssen served a notice on
Respondent No.1  Company terminating their agency w.e.f. June
30, 1988 and thereafter the agency was given to appellant No.1,
namely Hansa Industries Private Limited, a company controlled
by appellant No.2.

After the termination of the agency of Respondent No.1 
Company, the appellants herein filed a petition for winding up of
Respondent No.1  Company alleging that the agency having
been terminated, the main source of income of the Company had
vanished and, therefore, it was just and equitable to wind up the
Company. On the other hand, the Respondents filed a suit for
declaration and for injunction restraining the appellants from
carrying on the agency business by holding themselves out as the
agent of M/s. Thyssen.

During the pendency of the proceedings the parties arrived
at a compromise whereby appellant No.2 Narendra Nath Nanda
and his group agreed to transfer their equity shares in Kidarsons
Industries (P) Ltd. Respondent No.1  Company, constituting
30.14% of the share capital of Respondent No.1  Company, in
favour of the respondents. The price of the shares was to be paid
in specie by transferring to the appellants 30.14% of the assets of
the Company. The agency of Thyssen was to be retained by
Narendra Nath Nanda, appellant No.2 and his group. The
relevant terms of the settlement are the following:-

“2. That the price of the aforesaid 5654 (later
corrected as 5564) equity shares of
Kidarsons Industries (P) Ltd., will be paid
to Shri Narendra Nath Nanda, and/or his
nominees in specie by Company by
transferring to him 30.14% of the assets of
the Company. Marginal amount not
exceeding 5 lakhs may be paid by the
company to Shri Narendra Nath Nanda
and/or his nominees as the case may be, in
cash if found necessary. Similarly Shri
Narendra Nath Nanda may make similar
compensatory equilisation payment to the
company. Parties by consent can,
however, agree to a larger amount.

6. That Shri P.N Khanna, Retired Judge is at
present acting as a Mediator. He will act
as a Commissioner, to separate 30.14% of
the assets of the company to be given to
Shri Narendra Nath Nanda Group as set out
hereinbefore.

10. Assets of the company will be valued as on
01.07.1988.

14. Shri Narendra Nath Nanda will continue to
occupy the portion of the property of the
company in which he is at present residing
as deemed owner/owner, and the value of
such portion will be taken into account for
evaluating the assets of the company. The
value of such part of the property as is
occupied by Shri Narendra Nath Nanda
will be adjusted in the value of his share.

16. That for the purpose of valuation of share
of Shri Narendra Nath Nanda Group, the
property No.K-72, Udyog Nagar, Rohtak
Road, Delhi will be treated as the property
of the company.

19. This agreement will be filed in the Suit
No.1310 of 1988 and C.P. No.28 of 1988,
and appropriate orders will be passed in the
suit”.
Justice P.N. Khanna acting as the Commissioner allotted
the Golf Links property to the group of appellant No.2 even
though he found that appellant No.2 and his group were entitled
to get assets worth Rs.1.10 crores whereas the value of the
property was Rs.1.82 crores. However, since further disputes
arose between the parties the matter came up before the Court and
it was agreed by the parties that the valuation of the shares of
Respondent No.1  Company namely, Kidarsons Industries
Private Ltd. and the immovable properties owned by the
Company shall be done, and for this purpose the Court by its
order of August 30, 1990 appointed M/s. V. Shankar Aiyer and
Company as the Chartered Accountants for valuing the assets of
the Respondent No.1  Company. They were required to work
out the value of each share after valuing the assets as well as the
liabilities of the Company. The Court passed an order to this
effect on September 4, 1990.

The Chartered Accountants gave their report and worked
out the net assets of Respondent No.1  Company at
Rs.1,68,95,570/-. On that basis the value of each share was
worked out as Rs.916/-. From this the valuers deducted 20% on
account of provision restricting transfer of the shares of
Respondent No.1  Company. By this process, the value of each
share was worked out to be Rs.733/-.

Appellant No.2 filed his objections to the report of the
Chartered Accountants which was dismissed by a learned Judge
of the High Court by his Judgment and order dated February 5,
1993. Objections were raised such as those relating to valuation
of goodwill, valuation of tenancy rights, valuation of Udyog
Nagar plot, deduction from the value of the assets, provision for
capital gains tax liability which may be payable on the
hypothetical transfer of property, the deductions made from the
value of the shares on account of restriction on transfer of the
shares, and the question of allotment of a portion of the Golf
Links property in favour of appellant No.2 Shri Narendra Nath
Nanda in terms of Clause 14 of the settlement between the
parties. In the instant appeal, we are only concerned with two
issues namely, whether the portion of Golf Links property which
at the time of settlement was occupied by Shri Narendra Nath
Nanda be not allotted to him, and secondly, whether appropriate
directions be given so that the appellants be made liable for
payment of capital gains tax, if any, levied in future which levy
shall be challenged by Respondent No.1  Company, provided
the funds are made available to it by the appellants for the
purpose.

At the threshold we may observe that the exercise
undertaken by the High Court was with a view to give effect to
the terms of settlement reached between the parties. It is trite that
the terms of settlement reached between the parties shall
ordinarily not be modified except with the consent of the parties.
In the instant case, it has not been argued by anyone that the
terms of settlement with which we are concerned are either illegal
as being opposed to any statute or that it is hit by impossibility of
performance and, therefore cannot be performed or that the
settlement was not reached bona fide. Learned counsel appearing
on behalf of the appellants submitted that Clause 14 of the
settlement in clear terms provided that appellant No.2 was to
continue to occupy the portion of the Golf Links property of the
Company in which he was residing as deemed owner/owner, and
that the value of such portion shall be taken into account for
evaluating the assets of the Company. The value of such part of
the property as was occupied by Shri Narendra Nath Nanda was
to be adjusted in the value of his share. He submitted that the
parties clearly agreed that Shri Narendra Nath Nanda, appellant
No.2 will be allotted the portion of Golf Links property occupied
by him on the date of settlement and that the value of the portion
occupied by him shall be adjusted against the value of his share.
It was submitted before us that in case anything more has to be
paid that will be paid by Shri Narendra Nath Nanda, but the
Respondents cannot insist on the ground of their convenience that
the entire Golf Links property be allotted to them. The High
Court in its impugned judgment has observed that having regard
to the acrimony between the parties it was practically impossible
for them to live in the same house. The strained relationship
between the parties was evident from the fact that there had been
instances of violence, and matters reached such a stage that
reports were made to the police. The High Court also observed
that being leasehold property, sub-division of the property was
not permitted. It further observed that under the settlement, the
appellants were entitled to 30.14% of the assets of the Company
and only a sum not exceeding 5 lakhs could have been paid by the
Company in cash, if the same was found necessary, and vice-
versa. Having regard to these circumstances the learned Judges
held that the interpretation placed on Clause 14 by the learned
Single Judge was correct and the said property could not in any
manner be given to Shri Narendra Nath Nanda.

We may observe that before us counsel appearing on
behalf of Shri Narendra Nath Nanda gave up his claim of
allotment of the entire Golf Links property to him and submitted
that he will be satisfied if the portion in his occupation on the
date of settlement is allotted to him. He has very strongly
asserted that when a settlement had been reached which is
sought to be given effect, the Court cannot re-write the
settlement. There is no ambiguity in Clause 14 of the
settlement, and there is nothing to indicate that it is unworkable,
however inconvenient it may be to the respondent. Certainly, it
was not incapable of being implemented and the architects may
have a solution for their problem. It is submitted that if,
however, the Court comes to the conclusion that Clause 14
cannot be given effect, it being one of the important conditions
of the settlement, the whole agreement becomes un-enforceable
with its concomitant consequences. It is, therefore, submitted
that in terms of Clause 14 of the settlement the portion of the
Golf Links property which was in occupation of Shri Narendra
Nath Nanda ought to be demarcated and allotted to him and the
value thereof be adjusted against his share. It is submitted that
in the ultimate analysis the parties will themselves have to find
a solution to their problems, if any, and learn to live peacefully
in the premises. On the other hand, counsel for the respondent
submitted that this was really a case of family settlement and
the learned Judges have taken the broadest view of the matter
with a view to give effect to the settlement reached between the
parties. It is submitted that the over- all intention was to give
respondent No.1  Company to the contesting respondents and
by compensating the appellants who are entitled to their 30.14%
share in specie and the agency business of Thyssen. If the
dominating intention of the parties has been effected minor
issues like the one raised by the appellants should not defeat the
settlement reached between the parties. It is submitted that a
little ironing out of creases in family settlements must be
permitted. It is therefore, submitted that the finding of the High
Court on this aspect of the matter required no interference.
Learned counsel for the respondents has brought to our
notice a decision of the this Court in Kale and others vs. Deputy
Director of Consolidation and others : (1976) 3 SCC 119 laying
down the approach of the Court in giving effect to a bona fide
family arrangement entered into between the parties with a view
to resolving disputes once for all. This Court held that the family
arrangements are governed by special equity peculiar to
themselves and would be enforced if honestly made. Reference
was made with approval to a passage appearing in Kerr on Fraud
wherein the following pertinent observations appear:-
“The principles which apply to the case of ordinary
compromise between strangers, do not equally apply
to the case of compromises in the nature of family
arrangements. Family arrangements are governed by a
special equity peculiar to themselves, and will be
enforced if honestly made, although they have not
been meant as a compromise, but have proceeded
from an error of all parties, originating in mistake or
ignorance of fact as to what their rights actually are,
or of the points on which their rights actually
depend.”

Reference was also made to the observations regarding the
essentials of the family settlement and the principles governing
the existence of the same in Halsbury’s Laws of England,
Volume 17, Third Edition at pp. 215-216 which are as follows :-

” A family arrangement is an agreement between
members of the same family, intended to be generally
and reasonably for the benefit of the family either by
compromising doubtful or disputed rights or by
preserving the family property or the peace and
security of the family by avoiding litigation or by
saving its honour.
The agreement may be implied from a long
course of dealing, but it is more usual to embody or to
effectuate the agreement in a deed to which the term
“family arrangement” is applied.
Family arrangements are governed by
principles which are not applicable to dealings
between strangers. The Court, when deciding the
rights of parties under family arrangements or claims
to upset such arrangements, considers what in the
broadest view of the matter is most for the interest of
families, and has regard to considerations which, in
dealing with transactions between persons not
members of the same family, would not be taken into
account. Matters which would be fatal to the validity
of similar transactions between strangers are not
objections to the binding effect of family
arrangements.”

This Court held that courts have leaned in favour of
upholding a family arrangement instead of disturbing the same on
technical or trivial grounds. Where the courts find that the family
arrangement suffers from a legal lacuna or a formal defect the
rule of estoppel is pressed into service and is applied to shut out
plea of the person who being a party to family arrangement seeks
to unsettle a settled dispute and claims to revoke the family
arrangement under which he has himself enjoyed some material
benefits. The principles were concretized and succinctly reduced
to the following propositions :-
“(1) The family settlement must be a bona fide one so
as to resolve family disputes and rival claims by a fair
and equitable division or allotment of properties
between the various members of the family;
(2) The said settlement must be voluntary and should
not be induced by fraud, coercion or undue influence;
(3) The family arrangement may be even oral in
which case no registration is necessary;
(4) It is well settled that registration would be
necessary only if the terms of the family arrangement
are reduced into writing. Here also, a distinction
should be made between a document containing the
terms and recitals of a family arrangement made
under the document and a mere memorandum
prepared after the family arrangement had already
been made either for the purpose of the record or for
information of the Court for making necessary
mutation. In such a case the memorandum itself does
not create or extinguish any rights in immoveable
properties and therefore does not fall within the
mischief of Section 17(2) (sic) (Section 17(1)(b)?) of
the Registration Act and is, therefore, not
compulsorily registrable;
(5) The members who may be parties to the family
arrangement must have some antecedent title, claim or
interest even a possible claim in the property which is
acknowledged by the parties to the settlement. Even if
one of the parties to the settlement has no title but
under the arrangement the other party relinquishes all
its claims or titles in favour of such a person and
acknowledges him to be the sole owner, then the
antecedent title must be assumed and the family
arrangement will be upheld, and the Courts will find
no difficulty in giving assent to the same;
(6) Even if bona fide disputes, present or possible,
which may not involve legal claims are settled by a
bona fide family arrangement which is fair and
equitable the family arrangement is final and binding
on the parties to the settlement.”

The aforesaid judgment of this Court refers to many other
decisions to which we need not advert in this case but some of
those decisions do take the view that a compromise or family
arrangement is based on the assumption that there is an
antecedent title of some sort in the parties and the agreement
acknowledges and defines what that title is, each party
relinquishing all claims to property other than that falling to his
share and recognising the right of the others, as they had
previously asserted it, to the portions allotted to them
respectively. That explains why no conveyance is required in
these cases to pass the title from the one in whom it resides to the
person receiving it under the family arrangement. It is assumed
that the title claimed by the person receiving the property under
the arrangement had always resided in him or her so far as the
property falling to his or her share is concerned and therefore no
conveyance is necessary.
We have made the above observations only because it has
some relevance to the second issue which arises for our
consideration in this appeal.
It is true that the High Court has taken note of the
practicalities of the situation and has proceeded on the basis that
the appellants and the respondents cannot peacefully live in the
same premises. The High Court has, therefore, not favoured
allotment of a portion of the house in favour of appellant No.2
and has approved the allotment of the house to the respondents
who owned the majority shares in the respondent No.1 
Company. This was done with a view to ensure that the parties
live separately but in peace and harmony. We cannot find fault
with the concern shown by the High Court, but the problem
which arises in the instant case is that the High Court was not
considering a matter in which it could have exercised its
discretion to make allotment one way or the other as in a case of
family partition. The decree of the Court is based upon a
settlement reached between the parties. Even at the time when
the settlement was reached the parties were well aware of the
strained relationship which existed and the unfortunate events
that occurred between the branch of appellant No.2 and the
remaining members of the family. Despite this, it was agreed by
all of them that the portion in occupation of appellant No.2 shall
be allotted to him and the value thereof adjusted against his share.
The respondents cannot now be heard to say that it would be
inconvenient for them to reside with appellant No.2 and his
family members in the same house, though in separate portions.
The question as to how the parties will manage their affairs is a
matter with which they only are primarily concerned and the
Court cannot advise them in the matter. It may be that the
architects may provide a solution for their problems, or it may be
that in view of the circumstances one party may agree to sell its
share or buy the share of the other party with a view to purchase
peace, if that becomes necessary. These are matters in which the
Court may have nothing to say.

Clause 14 of the settlement being unambiguous, clear and
categoric, it must be given effect because one cannot term the
said Clause 14 as vitiated by fraud, or illegal being in breach of
any statutory provision, or against public policy, or hit by the
principle of impossibility of performance. The settlement was
made bona fide by the parties to resolve all their disputes and all
facts were known to the parties when they reached the settlement.
With their eyes open and fully aware of their experiences of the
past, they agreed to share the Golf Links property. The relevant
clause in the settlement is not vitiated by any consideration which
may impel the court not to give effect to that clause in the
settlement. The question of practical inconvenience should have
concerned the respondents when they entered into the settlement.
They cannot at the stage of implementation of the settlement
avoid a covenant in the settlement solemnly incorporated with
their consent on the pretext of practical inconvenience of living in
the same house, albeit in separate portions, in the unfortunate
background of bickerings and acrimony. This issue must,
therefore, be decided in favour of the appellants.

The next question is whether the judgment of the High
Court could be suitably modified to provide for challenge by
respondent -Company to any order that may be passed in future
by the tax authority imposing capital gains tax on the hypothetical
transfers made under the settlement. We find from the judgment
of the High Court that the matter was discussed at length and the
Court was of the view, prima facie, that the transfers may attract
capital gains tax. There was, therefore, justification for deduction
of the anticipated capital gains tax liability from the total value of
assets.

Before us learned counsel for the respondent did not want
to join issue on this question and left it to us to pass an
appropriate order. Learned counsel for the appellants argued
before us that no capital gains tax is payable in the instant case
because the transfers are by virtue of an order of the Court and,
therefore, Sections 100 to 104 of the Companies Act are attracted.
There is in reality no transfer or sale that may attract capital gains
tax, in view of the pre-existing right and title of the parties which
gets crystalised under a family arrangement. He further
submitted that so far as respondent – Company is concerned it
does not get any consideration and, therefore, there is no question
of any capital gains tax liability so far as respondent  Company
is concerned. In any event even if the capital gains tax liability is
imposed that will be the liability of the appellants herein, and
they will be obliged to discharge that liability in accordance with
law. Learned counsel for the appellant made a clear and
categoric statement before us that if any liability arises out of the
valuation of the assets or capital gains relating to properties
covered by the settlement, the appellants shall be liable to
discharge that liability. The appellants are willing to execute an
undertaking to this effect and to creating a charge on the assets
which may fall to their share for discharge of such tax liability, if
any, imposed. It was submitted that there was no need to deduct
this amount from the value of the assets of the Company and this
Court may direct that in case such a liability arises in future and
any demand is raised against respondent  Company of capital
gains tax, the appellants shall be liable to discharge that liability.
Respondent No.1 shall be entitled to challenge the tax demand, if
any, for which necessary funds will be made available by the
appellants. All this has been stated on the assumption that on a
future date there is a demand of capital gains tax by the tax
authority on the alleged transfers made under the settlement.

We are of the view that since no demand of capital gains
tax has been made so far, if any such demand is made in future in
respect of the transfer of assets under the settlement for which
20% has been deducted by the Chartered Accountants, the
respondent  Company shall challenge the demand provided the
appellants shall place at its disposal necessary funds for the
purpose. In any event the liability under the head “capital gains”,
if any, shall be that of the appellants who shall furnish an
undertaking to this effect accepting their liability, and create a
charge over the aforesaid assets to secure payment of capital
gains tax, if any, imposed in future. Subject to this being done,
there shall be no deduction from the value of the assets of the
company of the anticipated liability of capital gains.

We, therefore, allow this appeal to the extent indicated
below:-

a) that the judgment and order of the High Court is
modified to the extent that appellant No.2, namely 
Shri Narendra Nath Nanda shall be allotted the
portion of the Golf Links house which was in his
occupation on the date of settlement, and the value
thereof shall be adjusted against his share. If
something remains to be paid even after adjustment,
the appellants shall pay such amount within a period
of two months from the date of the order of the High
Court.

b) That no deduction shall be made from the value of
the assets of the anticipated capital gains tax liability
on the hypothetical sale under the settlement. In
case a demand of capital gains tax is made by the tax
authority in future against respondent  Company,
the aforesaid Company shall be entitled to challenge
the imposition of such tax subject to appellant No.2
providing sufficient funds to the respondent 
Company for this purpose. In any event, the capital
gains tax, if found payable, shall be the liability of
the appellants to be discharged by them. They shall
furnish an undertaking before the High Court
accepting such liability, and shall execute a
document creating a charge on the assets allocated to
them under the settlement to discharge capital gains
tax liability, if found payable.
The matter is remitted to the High Court for giving effect to
the aforesaid modifications which may involve directing the
Chartered Accountants to make a re-calculation on the basis of
the directions contained in this judgment, and apportion the assets
accordingly.
This appeal is allowed to the extent indicated above.
Parties to bear their own costs.

WITH
CIVIL APPEAL NO.1705 OF 1999

Hansa Industries Pvt. Ltd. and others Appellants
Versus
Kidarsons Industries Pvt. Ltd. Respondent
J U D G M E N T

B.P. SINGH, J.
In view of the judgment passed by us today in Civil Appeal
No. 1682 of 1999 it is not necessary to pass any order in this
appeal. The appeal stands disposed of.

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