May 25, 2024
Home » What is the difference between ‘Mortgage By Conditional Sale’ & ‘Sale With Condition Of Retransfer’: Supreme Court’s Elucidation of TPA Sections
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Case Title: Prakash (Dead) By LR. v. G. Aradhya & Ors.

In a landmark judgment titled Prakash (Dead) By LR. v. G. Aradhya & Ors, the Supreme Court of India meticulously elucidated the legal distinctions between two intricate property transactions: ‘mortgage by conditional sale’ and ‘sale with condition of retransfer’. This legal exposition is grounded in the interpretation of various sections of the Transfer of Property Act, of 1882 (TPA), and the judgment offers profound insights into the nuanced realm of property law.

The adjudicating Bench, comprising Justices Hima Kohli and Rajesh Bindal, undertook a comprehensive analysis of the pivotal Section 58(c) of the TPA, which pertains to mortgages by conditional sale. This section is crucial for understanding the differentiation between these two legal concepts.

The court’s observation on the provision is worth noting: “A deeming fiction was added in the negative that a transaction shall not be deemed to be a mortgage unless the condition for reconveyance is contained in the document which purports to effect the sale.”

At the crux of the matter lay the crucial question of whether the transaction in question constituted an absolute property sale or a mortgage arrangement. The appellant contested the decision of the High Court of Karnataka, which upheld the trial court’s ruling. The appellant sought to challenge this outcome through the present appeal.

Factual Synopsis:

The backdrop of the case traced back to October 16, 1963, when the appellant’s father, Gangaramaiah, acquired a property in the appellant’s name when he was a minor. Subsequently, on December 24, 1973, Gangaramaiah sold the said property to Rudramma for ₹5000. The appellant, a minor at the time, was listed as 13 years old. On the same day, an additional unregistered document, referred to as a “Reconveyance Deed,” was executed. This document stipulated that the property would be re-transferred to the vendor within five years of the Sale Deed, subject to payment of the ₹5000 sale consideration.

The father of the appellant issued a notice to Rudramma on November 24, 1978, invoking the Reconveyance Deed’s condition for a re-transfer. Rudramma’s response, communicated through her counsel on December 2, 1978, asserted that the December 24, 1973, Sale Deed was a definitive property sale rather than a mortgage.

Court’s Interpretation and TPA Sections:

The Supreme Court embarked on a meticulous examination of Section 58 of the TPA, with an emphasis on the definitions of “mortgage,” “mortgagor,” and “mortgagee.” Notably, Sub-section (c) of this provision pertains to “mortgage by conditional sale.” The court focused on the proviso of this subsection, emphasizing that a transaction would not be deemed a mortgage unless the reconveyance condition was explicitly stated in the document affecting the sale.

The court’s scrutiny of Section 58(c) was fortified by its citation of Bishwanath Prasad Singh v. Rajendra Prasad and another (2006) 4 SCC 432. This precedent established that a mortgage by conditional sale must be substantiated by a single document, while a sale with a condition of retransfer can involve multiple documents. This type of sale, as clarified by the court, does not equate to a mortgage but constitutes an absolute transfer of rights, with a personal right remaining for the purchaser.

Furthermore, the court invoked the case of Umabai v. Nilkanth Dhondiba Chavan (2005) 6 SCC 243, to illuminate the distinction between a mortgage by conditional sale and a sale with a condition of repurchase. This distinction highlighted that a mortgage entails a continuing debt and the right to redeem, while a sale with a repurchase condition doesn’t resemble a borrowing and lending framework.

In dissecting the documents at hand, the court noted the use of the term “reconveyance agreement” in one of the documents. This document, executed by Rudramma in favor of Gangaramaiah, underscored that the property had already been sold and registered in Rudramma’s name. The court, upon examining the Sale Deed, explicitly mentioned that it reflected an absolute sale intended to fund domestic and educational expenses. Consequently, the court concluded that the transaction, when re-evaluated within the ambit of legal principles and TPA sections, did not align with the characteristics of a property mortgage. Instead, it stood as an initial absolute sale, with the subsequent Reconveyance Deed conferring the appellants with the singular right to repurchase the property.

What are reconveyance agreements?

A “reconveyance agreement” refers to a legal document or contract that outlines the terms and conditions under which ownership of a property, which was previously transferred to someone else, is returned or “reconveyed” back to the original owner or a designated party. This type of agreement is often used in property transactions where there is a specific condition of retransfer attached to the initial sale.

In the context of the case discussed earlier, the “reconveyance agreement” refers to the unregistered document executed on the same day as the sale of the property. This document set forth the condition that the property would be re-transferred to the vendor (the seller) within a specified timeframe (in this case, within five years) from the Sale Deed, provided that the sale consideration amount mentioned in the Sale Deed was paid. The reconveyance agreement essentially created a condition for the reversion of ownership to the vendor based on certain predefined criteria.

The concept of a reconveyance agreement is often used to establish a form of security or assurance for the original owner (vendor) in situations where the transfer of ownership is not intended to be permanent and there is an intention for the property to revert back to the original owner under specific circumstances. This mechanism allows for flexibility in property transactions and can be used to address situations where the parties involved want to maintain a certain level of control or future interest in the property.

In a jurisprudential context, the court’s decision, in this case, exemplifies the intricate interplay between statutory provisions like those in the Transfer of Property Act and the nuanced legal distinctions they shape. This ruling not only clarifies the differentiation between ‘mortgage by conditional sale’ and ‘sale with condition of retransfer’ but also underscores the necessity of meticulous legal scrutiny in property transactions.

What is the difference between ‘Mortgage By Conditional Sale’ & ‘Sale With Condition Of Retransfer’

Mortgage by conditional sale’ and ‘sale with condition of retransfer’ are two distinct legal concepts that involve property transactions, and they differ primarily in their nature and legal implications. Here’s a breakdown of the key differences between these two concepts:

  1. Nature of Transaction:
    • Mortgage by Conditional Sale: In a mortgage by conditional sale, a property is ostensibly sold to a party (the mortgagee) by the owner (the mortgagor), but the sale is subject to a condition of retransfer. This means that while the ownership of the property is transferred to the mortgagee, the mortgagor retains an implied right to reacquire the property by repaying the mortgage debt within a stipulated time period.
    • Sale with Condition of Retransfer: In a sale with a condition of retransfer, the property is sold outright by the owner to another party, but the sale contract includes a condition that allows the original owner (the seller) to repurchase or reacquire the property by fulfilling certain conditions within a specified time frame.
  2. Ownership and Rights:
    • Mortgage by Conditional Sale: In this scenario, even though the property is transferred to the mortgagee, the mortgagor retains an equitable interest in the property. The mortgagee holds the property as security for a debt, and if the debt is repaid within the stipulated time, the ownership reverts to the mortgagor.
    • Sale with Condition of Retransfer: In this case, the ownership of the property is completely transferred to the purchaser. The original owner retains no equitable interest, and the condition of retransfer is more like an option to repurchase. The seller can repurchase the property, but they do so by entering into a new purchase transaction with the purchaser.
  3. Legal Characterization:
    • Mortgage by Conditional Sale: This transaction is legally characterized as a mortgage, even though it appears as a sale. The law recognizes the underlying intention to secure a debt, and the transaction is treated as a mortgage for legal purposes.
    • Sale with Condition of Retransfer: This transaction is a genuine sale, but with a contractual provision that allows the original seller to buy back the property within the specified conditions and time frame. The original sale itself is not negated; rather, a separate transaction occurs if the retransfer condition is fulfilled.
  4. Number of Documents:
    • Mortgage by Conditional Sale: Generally, this type of transaction is evidenced by a single document that combines both the sale and mortgage elements.
    • Sale with Condition of Retransfer: This type of transaction may involve multiple documents, such as the original sale agreement and a separate agreement outlining the conditions of retransfer.
  5. Rights and Obligations:
    • Mortgage by Conditional Sale: The mortgagee has a right to hold the property as security, and the mortgagor has an obligation to repay the debt. If the debt is not repaid within the stipulated time, the mortgagee becomes the full owner of the property.
    • Sale with Condition of Retransfer: The purchaser has full ownership rights, and the original seller has an option (but not an obligation) to repurchase the property.

In summary, the main distinction between these two concepts lies in the legal characterization, the ownership arrangement, and the nature of the transaction. While both involve conditions related to the retransfer of property, they operate in different legal frameworks and have varying implications for the parties involved.

Certainly, let’s delve deeper into the differences between ‘Mortgage by Conditional Sale’ and ‘Sale with Condition of Retransfer’ by referencing relevant sections of the Transfer of Property Act, of 1882:

  1. Mortgage by Conditional Sale: This concept is primarily governed by Section 58(c) of the Transfer of Property Act, of 1882. According to this section: “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. “This section emphasizes the transaction’s true nature, even though it may appear as a sale. The essence is that it’s a mortgage where the sale is subject to a condition.
  2. Sale with Condition of Retransfer: The concept of a ‘Sale with Condition of Retransfer’ is not explicitly defined in the Transfer of Property Act. However, it involves a scenario where an absolute sale is made, but the contract includes a condition allowing the original owner to repurchase the property. While there’s no specific section addressing this type of transaction, its legal implications can be inferred from the general principles of contract law and the property rights conferred by Sections 54 and 55 of the Transfer of Property Act.
    • Section 54: This section deals with the sale of immovable property. It states that a sale is a transfer of ownership in exchange for a price paid or promised to be paid. This forms the basis of a typical sale transaction.
    • Section 55: This section lists the rights and liabilities of the buyer and seller in a sale transaction. It provides insights into the parties’ obligations and conditions associated with the sale.

In essence, the key difference between the two concepts lies in their legal characterization and the underlying intent of the transaction. A ‘Mortgage by Conditional Sale’ is essentially a mortgage, while a ‘Sale with Condition of Retransfer’ is a sale with a contractual provision for repurchase. The Transfer of Property Act, through its various sections, provides the legal framework within which these concepts are understood and interpreted.

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