A. Entertainment Pvt. Ltd vs Applause Entertainment Pvt. Ltd
2012 Latest Caselaw 6376 Del

          *IN THE HIGH COURT OF DELHI AT NEW DELHI

%                                   Date of decision: 31st October, 2012

+                               CO.APP. NO.87/2012

       A. ENTERTAINMENT PVT. LTD.           ..... Appellant
                    Through: Mr. Sandeep Agarwal & Mr. K.A.
                             Singh, Advs.

                                   Versus

    APPLAUSE ENTERTAINMENT PVT. LTD. ..... Respondent

Through: Mr. Anish Dayal with Mr. Siddharth Vaid & Mr. Ranabir Datta, Advs.

CORAM :-

HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW

RAJIV SAHAI ENDLAW, J

1. This appeal under Section 483 of the Companies Act, 1956 challenges

the order dated 19.09.2012 of the learned Company Judge of this Court

admitting Company Petition No.321/2010 filed by the respondent under

Sections 433(e), 434 and 439 of the Act read with Companies (Court) Rules,

1959 for winding up of the appellant, though deferring the publication of the

citation for four weeks to give a chance to the appellant to pay the sum of

`2,26,05,872/- in which the appellant has been found to be indebted to the

respondent along with interest at 9% per annum, to the respondent. We have

heard the counsel for the appellant for a considerable length at the admission

stage itself. The respondent being on caveat, appears though counsel.

2. The appellant Company had let out Flat No.101, Nisarg Building

1340-41, Pali Hill, Bandra (West), Mumbai belonging to it to the respondent

and had written a letter dated 10.10.2005 to the respondent containing the

terms and conditions on which the flat was so offered to the respondent. It

was inter alia mentioned in the said letter that the flat was to be for use as a

Guest House of the respondent on a rent of `1,50,000/- per month for a

period of three years with effect from 01.12.2005 and the respondent would

pay security deposit of `2,00,00,000/- and Extra Deposit equal to rent of 36

months i.e. `54,00,000/- refundable by the appellant to the respondent at the

rate of `1,50,000/- per month. It was also mentioned in the said letter that

'the arrangement' could be terminated by giving advance notice of 12

months from either side.

3. It is not in dispute that in terms of the aforesaid letter dated

10.10.2005, the flat was let out by the appellant to the respondent with effect

from 01.12.2005 and on the terms and conditions contained therein and that

the appellant received security deposit of `2,00,00,000/- and extra deposit of

`54,00,000/- from the respondent.

4. The respondent claims to have written a letter dated 12.07.2007 to the

appellant in pursuance of the 'mutual discussions' regarding the said flat,

vacating the flat with immediate effect and waiving the notice period; the

respondent in the said letter also sought refund of the amounts deposited

with the appellant. The respondent further claims to have written another

letter dated 12.12.2008 to the appellant demanding refund of the remaining

security deposit of `2,26,05,872/- with interest at 36% per annum from July,

2007 till the date of payment.

5. The respondent ultimately got issued a legal notice dated 07.05.2010

to the appellant demanding the aforesaid sum of `2,26,05,872/- with interest

and further notifying the appellant that upon non-payment thereof

appropriate proceedings including for winding up of the appellant shall be

taken. Reply dated 24.05.2010 was given by the appellant to the said notice

and in which reply the appellant inter alia stated that the real transaction

between the appellant and the respondent was something else which was

within the personal knowledge of Mr. Kumar Mangalam Birla (of the

respondent) alone and denied the demand of the respondent. A rejoinder

dated 06.07.2010 was sent by the respondent to the appellant.

6. Upon the appellant not complying with the notice aforesaid, the

petition aforesaid for winding up was filed. The appellant contested the

petition pleading that Mr. Anshumaan Swami, Director of the appellant was

the Chief Executive Officer (CEO) of the respondent since the year 2002

and had in fact set up the respondent Company as the Entertainment

Division of the Aditya Birla Group and engaged in the business of

Television, Feature Films etc.; that the respondent Company had also

produced the film 'Black' which was not only a commercial success but also

was critically acclaimed; that Mr. Birla, in appreciation for Mr. Swami,

sanctioned an unconditional amount of `2,50,00,000/- to be paid to Mr.

Swami; even otherwise, the said Mr. Swami, as per terms of his employment

letter with the respondent, was entitled to 10% of the profits in excess of

targeted profits for each year; however in order to save tax for the

respondent, the respondent proposed routing the payment of the said sum of

`2,50,00,000/- by taking the flat aforesaid of the appellant on rent in which

Mr. Swami was already living; that though under the terms of letting, the

sum of `2,54,00,000/- aforesaid was paid, out of which `54,00,000/- was

refundable by the appellant to the respondent at the rate of `1,50,000/- per

month, the respondent, against the amount of `1,50,000/- so refunded by the

appellant to the respondent per month, issued cheques of `1,16,340/- per

month after deduction of Tax at Source (TDS) in favour of the appellant;

that the said arrangement continued till July, 2007 when Mr. Swami resigned

from the respondent Company. The appellant denied receipt of letters dated

12.07.2007 and 12.12.2008 supra. The appellant further pleaded that the

amount of `2,00,00,000/- and the balance out of the Extra Deposit of

`54,00,000/- was not refundable to the respondent since the same was

received on account of `2,50,00,000/- sanctioned by Mr. Birla to Mr.

Swami.

7. Needless to state, the respondent controverted the aforesaid pleas of

the appellant.

8. The contention of the appellant before the learned Company Judge

was that its defence aforesaid raised disputed questions of fact which could

not be adjudicated in winding up jurisdiction and there could not be said to

be any debt due from the appellant to the respondent.

9. The learned Company Judge however in the impugned judgment has

inter alia held the defence aforesaid of the appellant to be wholly illusory

and moonshine and in conflict with the undisputed documentary evidence on

record and thus not entertainable and raised only to ward off the winding up

petition. The aforesaid defence of the appellant, in contravention of the

written documents, was also held to be not entertainable and barred by

Sections 91 and 92 of the Evidence Act, 1872.

10. The counsel for the appellant has at the outset impugned the judgment

of the learned Company Judge as suffering from non-application of mind for

the reason of the learned Company Judge having in one paragraph of the

judgment observed that no reply had been given by the appellant to the

demand notice preceding the filing of the winding up petition and the

defence taken in the reply to the winding up petition being thus an

afterthought. Though undoubtedly, the said error has crept in the judgment

of the learned Company Judge, inasmuch as the reply was admittedly given

by the appellant to the notice preceding the petition, however, merely for the

said reason, the judgment cannot be set aside if otherwise found to be in

accordance with law.

11. The counsel for the appellant has next contended that though at an

earlier stage in the proceedings before the learned Company Judge, on the

appellant disputing the receipt of letters dated 12.07.2007 and 12.12.2008

supra, directions had been issued to the respondent to produce the receipts

showing dispatch / delivery of the said letters on the appellant and also to

show the documents under which the flat aforesaid taken on rent by the

respondent from the appellant had been placed at the disposal of Mr. Swami

aforesaid, but inspite of the same no documents having been filed, the

impugned judgment believes delivery of the letters dated 12.07.2007 and

12.12.2008 on the appellant.

12. The counsel for the appellant, on merits, has again urged that the

defence aforesaid raised by the appellant to the winding up petition was a

valid and tenable defence and could not be said to be illusory or moonshine

and raised disputed questions of fact which could not have been adjudicated

in winding up jurisdiction.

13. We have bestowed due consideration to the arguments aforesaid of the

appellant. The appellant Company is an income tax assessee and was

admittedly filing the Income Tax Returns (ITR) during the relevant period.

We have enquired from the counsel for the appellant as to how the appellant

Company had shown the receipt aforesaid of `2,00,00,000/- and

`54,00,000/- in its Books of Accounts and in its ITRs i.e. whether as

Security Deposit / Advance Rent / Extra Deposit or as Incentive Receipt on

behalf of its Director Mr. Swami. Though the counsel for the appellant first

stated that the said payments in the Books of Accounts and in the ITRs were

shown as having been received towards Security Deposit / Extra Deposit /

Advance Rent but subsequently retracted by saying that there is no plea on

record in this regard.

14. We have next enquired from the counsel for the appellant that if the

case of the appellant was that the sum of `2,00,00,000/- and `54,00,000/-

aforesaid, instead of being the Security Deposit / Extra Deposit / Advance

Rent, was towards Incentive Payment due to Mr. Swami, Director of the

appellant in terms of his employment with the respondent, whether Mr.

Swami in his ITRs (he of course must be an income tax assessee since as per

the appellant, he was earning a monthly salary in excess of `90,000/-) had

shown the same as his income. The answer again is that no such plea has

been taken by the appellant.

15. The very fact that the appellant has not taken any such plea and which

the appellant would have taken had it been so, shows that the amounts

aforesaid of `2,00,00,000/- and `54,00,000/- admittedly received by the

appellant from the respondent were entered and reflected by the appellant in

its Books of Accounts as Security Deposit / Extra Deposit / Advance Rent

only i.e. in consonance with the case of the respondent and not in

consonance with the case set up by the appellant in defence to the winding

up petition. The question which arises for consideration is, whether the

appellant is entitled to do so i.e. for the purpose of Income Tax and

compliance of other laws, take one stand and before the Court, another. We

are unequivocally of the opinion that the appellant cannot be permitted to do

so. If we allow the appellant to do so, we will make this Court privy to

illegalities including as to tax evasion.

16. The principle of public policy is, ex dolo malo non-oritur action

i.e. no court will lend its aid to a man who founds his cause of action

upon an immoral or an illegal act. If, from the litigants own stating or

otherwise, the cause of action appears to arise ex turpi causa or in

transgression of a positive law of the country, the Court will refuse to

render its assistance to such a litigant. The Supreme Court in Nair

Service Society Ltd. Vs. Rev. Father K.C. Alexander AIR 1968 SC 1165

held that in a case in which a litigant must rely upon his own illegality,

the Court may refuse him assistance. Similarly in Smt. Surasaibalini

Debi Vs. Phanindra Mohan Majumdar AIR 1965 SC 1364 also it was

held that if the litigant seeks the assistance of the Court to effectuate an

illegal transaction, the Court will refuse to assist him. In Sita Ram Vs.

Radha Bai AIR 1968 SC 534 it was held that the principle that the Courts

will refuse to enforce an illegal agreement at the instance of a person who

is himself a party to an illegality or fraud is expressed in the maxim in

pari delicto potior est conditio defendentis. Similarly in Kedar Nath

Motani Vs. Prahlad Rai AIR 1960 SC 213 it was held that where a party

rests its case upon an illegality, then public policy demands that it should

not be allowed to take advantage of the position. Mention in this context

may also be made of S.P. Chengalvaraya Naidu Vs. Jagannath (1994) 1

SCC 1 holding that the Courts of law are meant for imparting justice

between the parties; that a person whose case is based on falsehood has

no right to approach the court and can be summarily thrown out at any

stage of litigation. It was also noted that the process of the court is being

abused - property grabbers, tax evaders, bank loan dodgers and other

unscrupulous persons from all walks of life find the court process a

convenient lever to retain the illegal gains indefinitely.

17. We are also tempted to refer to Ram Sewak Vs. Ram Charan AIR

1982 Allahabad 177. It was a case of concealment of profits; the parties had

been keeping double set of accounts for evading payment of income tax and

sales tax. The Lower court reported the matter to the Taxation Authority.

The High Court held that the Courts should have refused to entertain the suit

on the ground of public policy, as it involved directing the recovery of an

amount found to be due to either party as a share of the profits which had

been deliberately concealed by the parties from the books of account in

order to evade the payment of taxes. It was held that no Court can

countenance a deliberate evasion of tax laws of the country and to lend the

aid of the court for recovering an amount which had been deliberately kept

concealed by the parties in order to evade payment of taxes due thereon. It

was further held that if the courts were to do so, it would amount to aiding

and abetting evasion of the laws by the court itself. It was further held that

since the object of the parties was found to be that the profits will be earned

in such a way or retained in such a manner as to evade the payment of taxes

which was forbidden by law and which defeats the provision of the tax laws,

therefore the object of the agreement was forbidden by law and is opposed to

public policy. The agreement between the parties to earn concealed profits

being void, it was held that the court could not enforce the agreement by

directing an inquiry into that amount or the destination of the concealed

profits in order to enforce the recovery of the share therein of one party from

another.

18. The defence of the appellant to the winding up petition is steeped in

illegality and not entertainable and the appellant cannot be allowed to, on the

basis of said defence, withhold dues of the respondent.

19. We entirely agree with the reasoning given by the learned Company

Judge of the defence of the appellant to the winding up petition being in

contravention of the written documents and being unsustainable in view of

Sections 91 and 92 of the Evidence Act, 1872 which prohibit the Court from

taking evidence in contravention of written documents. Reference in this

regard can be made to Roop Kumar Vs. Mohan Thedani (2003) 6 SCC 595

laying down that it is a general and most inflexible rule that wherever

written instrument are appointed to be repositories and memorials of truth,

any other evidence is excluded.

20. The counsel for the appellant has argued that Mr. Swami being an

employee of the respondent could not have rejected the modus aforesaid

suggested by the respondent for payment of `2,50,00,000/- promised by Mr.

Birla of the respondent to Mr. Swami of the appellant. We are however not

convinced on this aspect either. Mr. Swami was not a menial workman but

is stated to be the CEO of the respondent earning a salary in excess of

`90,000/- per month and for whose accommodation, the respondent was

paying monthly rent of `1,50,000/-. Moreover, we fail to see as to how the

modus aforesaid of payment of `2,50,00,000/- if due to Mr. Swami as an

employee of the respondent could be beneficial to the respondent. The

counsel for the appellant states that it was to save the tax payable by the

respondent. We are however of the view that had the respondent paid the

sum of `2,50,00,000/- to Mr. Swami as an employee, the said amount would

have been a deductable expenditure out of the income of the respondent and

it was Mr. Swami who would have paid tax thereon. However by payment

as Security Deposit under the Lease Deed, the same could not constitute

expenditure of the respondent and on the contrary became non taxable in the

hands of Mr. Swami through the appellant. It was thus Mr. Swami /

appellant who stood to evade tax by adopting the modus aforesaid and the

respondent does not appear to have gained anything therefrom. The counsel

for the appellant is unable to argue to the contrary. There is thus no merit in

the plea that it was the respondent who would be interested in paying

`2,50,00,000/- if due to Mr. Swami in terms of his employment, in the form

of Security Deposit under a Lease Deed.

21. We may also notice that save for the bald plea that Mr. Birla had

promised `2,50,00,000/- to Mr. Swami, there is nothing to show the same.

The letter of employment of Mr. Swami with the respondent lays down

procedure for calculation and payment of incentive of 10%. The appellant

has been unable to show that any incentive was due. Rather the plea is that

it was to be paid by way of appreciation.

22. Once we see the matter in the aforesaid light, the dispute raised by the

appellant about non receipt of the letters dated 12.07.2007 and 12.12.2008 is

irrelevant. We may however state that at least the letter dated 12.07.2007,

even if there is nothing to show dispatch / delivery thereof, is in consonance

with the contemporaneous events. Mr. Swami had admittedly 'in

continuation to our discussions' on 11.07.2007 submitted his resignation to

the respondent and which was immediately accepted. The appellant in its

reply to the winding up petition also admitted that the arrangement between

the parties with respect to the flat continued till July, 2007 only. The

counsel for the appellant admits that thereafter no rent as was earlier being

paid, was paid by the respondent and no demand therefor was also raised by

the appellant on the respondent. This is in consonance with the letter dated

12.07.2007 whereunder the respondent claims to have vacated the flat with

immediate effect and demanded refund of security deposit. In this regard, it

may also be mentioned that the respondent in its legal notice preceding the

winding up petition had expressly referred to the letter dated 12.07.2007

whereunder the flat was vacated and though the appellant had in its reply

thereto generally denied the contents of the legal notice but had not

expressly denied the receipt of the letter dated 12.07.2007. In fact the

appellant in the said reply evaded to even set out as to on what account the

amounts aforesaid had been received if not as Security Deposit / Extra

Deposit and vaguely stated that they were under some other arrangement

known to Mr. Birla only. Such conduct of the appellant also is indicative of

the appellant surely building up its defence and the same being not based on

true facts.

23. The payment by the respondent to the appellant of `1,16,340/- per

month till July, 2007 was towards rent of `1,50,000/- per month, less TDS

as agreed and not in reimbursement of `1,50,000/-, admittedly refunded by

appellant out of extra deposit of `54,00,000/-, in terms of letter dated

10.10.2005 supra.

24. Yet another contention of the counsel for the appellant is that letting

was for three years terminable prior thereto by a 12 months notice and which

had not been given; that the respondent is thus not entitled to refund of

Security Deposit. Though as aforesaid, the letter dated 12.07.2007 records

that 12 months notice as agreed had been waived but we may further state

that if such be the plea of the appellant then it would amount to the tenancy

of the respondent of the flat in question continuing; if the respondent is still

a tenant and Mr. Swami upon resignation from employment of the

respondent having lost the right to occupy the said flat, we have enquired

from the appellant whether the appellant is willing to vacate the flat to let the

respondent enjoy the same as a tenant. No answer is forthcoming. The

appellant has to sail or sink on his pleas and cannot on the one hand contend

that the tenancy has not been determined by the respondent and on the other

hand also deny enjoyment of the flat as tenant to the respondent. Even

otherwise, a Lease for three years could be created by a registered document

only and which admittedly does not exist. The Lease in the present case is

by delivery of possession on the terms proposed by the appellant itself a

couple of months prior to letting and such a Lease would be a month to

month Lease and would not require a notice of determination of 12 months

notwithstanding a stipulation to the said effect in the letter of offer of the

premises. Such a lease is terminable by a 15 days notice and the maximum

claim which the appellant can have on the said account can be for 15 days

rent only.

25. We may finally observe that in law, the appellant Company is a

distinct entity from its Directors and the payment due to its Director could

not have been received by the appellant Company. This is yet another

illegality in the defence of the appellant.

26. Seen in this light, it is obvious that the defence of the appellant to the

winding up petition indeed was a moonshine and illusory and unsustainable

in law and has been rightly rejected by the learned Company Judge. Once

we find the appellant to be having no defence to the refund of the amounts

admittedly received by the appellant, the power of winding up has been

correctly exercised and no ground in opposition thereto has been urged.

27. We thus do not find any merit in this appeal and dismiss the same.

We however refrain from imposing any costs on the appellant.

RAJIV SAHAI ENDLAW, J

CHIEF JUSTICE OCTOBER 31, 2012 'gsr'