A two-judge Bench of the Supreme Court comprising of Justice K.M. Joseph and Justice PS Narasimha, after a detailed discussion of the previous authorities on the subject, held that the principle laid down in Union of India vs. Col. L.S.N. Murthi, (2012) 1 SCC 718 did not commend itself to it.

The Court noted that while it was in agreement that the illegality cannot be a matter of conjecture nor the purpose divined by the Court from parliamentary debates, the Court in L.S.N. Murthi Case, did not consider the decision of the Court in Jambu Rao Satappa Kocheri v. Neminath Appayya Hanamannayar, AIR 1968 SC 1358 wherein the question before the Bench was as to whether the enforcement of the contract would defeat the provisions of Bombay Tenancy and Agricultural Lands Act, 1948.

The Court, in the instant case, noted the Rules in question before it were undoubtedly Statutory Rules, and therefore it was not necessary for it to refer the matter to a larger bench on account of observations found in L.S.N. Murthi Case.

The Court made the following crucial observations:

"What is contemplated under Section 23 of the Indian Contract Act is law, in all its forms, being immunised from encroachment and infringement by a contract, being enforced. Not only would a Statutory Rule be law within the meaning of Article 13 of the Constitution of India but it would also be law under Section 23 of the Indian Contract Act."

Defendant 1(a), Defendant 1(b), and Defendant No. 2 filed the appeals before the Supreme Court. The underlying suit was a suit for specific performance. The Trial Court refused specific performance and directed the return of the amount paid by Plaintiff under the contract.

The High Court allowed Plaintiff's appeal and directed execution of the sale deed. Hence the appeals before the Supreme Court.

Ms. Kiran Suri appeared on behalf of defendant no. 2 while Mr. R. Basant appeared on behalf of the plaintiff. Ms. Kirti Renu Mishra advanced submissions on behalf of Defendants 1(a) and 1(b).

The suit property was allotted to Defendant no. 1 by the Bangalore Development Authority. A lease cum sale agreement was entered into and the first Defendant was put in possession. The first Defendant then entered into an agreement with the Plaintiff agreeing to execute the sale deed within 3 months from the date Plaintiff obtained the sale deed from BDA.

Correspondence was exchanged between the parties. The advance amount of Plaintiff was forfeited. The suit was instituted.

The Court noted the City of Bangalore Improvement Act, 1945 was enacted for the improvement of the city of Bangalore and to provide space for its future expansion.

The Court, analyzing various provisions, made the following observations:

"Thus, in a case of allotment under Rule 17, the condition against alienation is to exist for a period of 10 years from the date of allotment. In the case of conveyance deed, which is executed in favour of the allottee, the condition against alienation will again operate for the period of ten years from the date of allotment. This is apart from the other conditions, viz., construction of the building on the site. In short, the allottee becomes the owner of the site before the expiry of 10 years upon power being invoked under Rule 18(1) but the assignment of the rights, which would have been otherwise absolute, is subjected to the conditions, as mentioned in Rule 18(2)(a), which includes the prohibition against the alienation. We must remind ourselves that under Section 29(3) of the Act of 1945, the Transfer of Property Act is eclipsed by the terms of any grant or transfer. The condition against alienation is not to be counted from the date of the execution of the conveyance deed but for the unexpired period, in the case of the lease-cum-sale agreement executed."

After a detailed analysis of the evidence led by both the parties, the Court discussed the maxim in pari delicto potior est conditio defendentis that means that if both parties are wrong, the position of the defendant is stronger.

On the issue of the conditional decree of specific performance, the Court made the following observations:

"All that is necessary to notice and find is that when an agreement to sell is entered into, whereunder to complete the title of the vendor and for a sale to take place and the sale is not absolutely prohibited but a permission or approval from an Authority, is required, then, such a contract is, indeed, enforceable and would not attract the shadow of Section 23 of the Indian Contract Act, 1872."

The Court noted that the first head under which an agreement would become unlawful is when the consideration is forbidden by law.

The Court, then, culled out the following question for its consideration:

"In the facts of this case, the question would, therefore, be, as to whether the enforcement of the agreement to sell dated 17.11.1982, expressly or impliedly , lead to palpably defeat the law in question which is contained in the Statutory Rules or is prohibited by the same."

The Court noted that the price that was agreed upon was qua the site alone. The Court rejected the contention of the plaintiff that there was nothing that could have prevented putting up a building.

The Court noted that the agreement to sell involved terms that were impliedly prohibited by law. The Court noted that illegality goes to the root of the matter. The Court then observed as follows:

"The illegality is not trivial or venial. The illegality cannot be skirted nor got around. The plaintiff is confronted with it and he must face its consequences. The matter is clear. We do not require to rely upon any parliamentary debate or search for the purpose beyond the plain meaning of the law. The object of the law is set out in unambiguous term. If every allottee chosen after a process of selection under the rules with reference to certain objective criteria were to enter into bargains of this nature, it will undoubtedly make the law a hanging stock."

The Court noted that the contract was unenforceable as it would defeat the object of the Rules that were statutory in nature. The Court held that the contract was patently illegal.

The Court noted that the High Court erred in finding that transaction as a sham transaction. The Court noted that it would not be oblivious to the special nature of jurisdiction it exercises while granting special leave and after.

The Court noted that this was not a case where the condition of the plaintiff was such that interests of justice would overwhelm its findings that agreement relied upon by the Plaintiff constituted a clear intrusion into the requirement of law.

The Court held that High Court had erred in holding that suit was maintainable. The Court noted that to do complete justice, it must pass an order which will result in a fair amount being paid to the plaintiff. The Court noted that while the suit is dismissed, the appellants should pay Rs. 20,00,000 to the plaintiff.

Accordingly, appeals were allowed.

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