Full Judgment Text
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PETITIONER:
BIHTA CO-OPERATIVE DEVELOPMENT CANE MARKETING UNION LTD.,
Vs.
RESPONDENT:
THE BANK OF BIHAR & ORS.
DATE OF JUDGMENT:
12/10/1966
BENCH:
MITTER, G.K.
BENCH:
MITTER, G.K.
WANCHOO, K.N.
SHELAT, J.M.
CITATION:
1967 AIR 389 1967 SCR (1) 848
CITATOR INFO :
R 1973 SC1034 (23)
F 1985 SC 582 (49)
R 1987 SC1603 (25)
R 1989 SC 227 (32)
ACT:
Bihar and Orissa Co-operative Societies Act (6 of 1935), s.
48 as amended by Bihar Act 16 of 1948 and s. 57- Dispute
between registered society and non-member-Jurisdiction of
Civil Court, when ousted.
HEADNOTE:
The first plaintiff was a Society registered under the Bihar
and Orissa Co-operative Societies Act, 1935, and the second
plaintiff was its Secretary. The Society had an account
with the first defendant Bank. The 6th and the 7th
defendants were the joint secretary and treasurer of the
Society respectively, who were jointly authorised to operate
on the account. A sum of Rs. 11,000 was withdrawn from the
account by means of a cheque which did not come out of the
cheque book of the Society but which was a loose cheque form
surrendered by an ex-constituent of the Bank. The spurious
cheque bore the signature of the 7th defendant and the
forged signature of the 6th defendant. The suit against the
Bank, its manager (the 2nd defendant) its employees (the
3rd, 4th and 5th defendants) and ,defendants 6 and 7 was
decreed against defendants 1, 2, 4, 5 and 7 jointly. On
appeal by the 1st and 2nd defendants, the High Court found
in favour of the plaintiffs-on the merits of the case, but
dismissed the suit on the ground that the jurisdiction of
the civil court was ousted by the combined operation of ss.
48(9) and 57 of the Act.
On appeal to this Court, the defendants sought to support
the judgment of the High Court on the ground that the words
in Explanation (1) to s. 48(1) of the Act must be understood
in their widest amplitude, so that, even if a dispute
between a registered society and a non-member did not fall
within any of the categories 48(1) (a) to (e), it would
still be within the purview of the section by reason of the
Explanation.
HELD: The judgment of the High Court should be set
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aside. [858 A]
(i) The scheme of s. 48(1) is that certain disputes
touching the business of a registered society should be
referred to the Registrar and not be taken to civil courts
and made the subject matter of prolonged litigation. Before
the Act was amended by Bihar Act 16 of 1948 disputes in
which a Society might be involved with non-members (except
as sureties) were not within the section. Therefore, the
Explanation to the section as it then stood, made no mention
of non-members as such and only served to clear up the doubt
as to whether a dispute was referable to the Registrar when
the debt or demand was admitted and the only point at issue
was the ability to pay or the manner of enforcement of
payment. The amendment in 1948, introduced cl. (e) in s.
48(1) by which a dispute in which one of the disputants was
not a member of a society was also covered by the section.
But only those non-members who bad disputes with a financing
bank were made amenable to the jurisdiction of the
Registrar, and in the present case the Society was not a
financing bank. Therefore cl. (e) would not apply. Nor
would the amended Explanation apply, because the Explanation
had to include non-members after the insertion of category
(e) in a. 48(1), but, by such inclusion, the Explanation did
not widen the scope of s. 48(1) so as to include claims by
societies against all non-members ,even if they were not
included in cl. (e). The Explanation cannot be read
849
as adding a new head to the categories under s. 48 (1) (a)
to (e) of disputes which may be referred to the Registrar.
It must be read only so as to harmonise with and clear up
any ambiguity in the main section. [854 B, E.H; 855 A-C]
Sagauli Sugar Works (Pw.) Ltd. v. Asstt. Registrar, Co-
operative Societies, Motihari, [1962] Supp. 3 S.C.R. 804,
followed.
(ii) Because the signature of the 6th defendant was forged,
there never was any mandate by the Society to the Bank.
Therefore, there was no negligence on the part of the
Society. On the Contrary, there was negligence on the part
of the Bank in not ascertaining whether the signatures on
the cheque were genuine and the circumstances attending the
encashment of the cheque showed conclusively that the Bank
was negligent and some of its officers fraudulent [857 E-G]
London Joint Stock Bank, Ltd. v. Macmillan, [1918] A.C.
777, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 699 of 1964.
Appeal from the judgment and decree dated April 14, 1961 of
the Patna High Court in Appeal from Original Decree No. 162
of 1955.
A. K. Sen, B. R. L. Iyengar and A. G. Ratnaparkhi, for the
appellants.
S. V. Gupte, Solicitor-General and R. C. Prasad, for
respondents Nos. 1 and 2.
R. S: Sinha, K. N. Srivastava and K. K. Sinha, for
respondent No. 7.
The Judgment of the Court was delivered by
Mitter J. This is an appeal from a judgment and decree of
the Patna High Court on a certificate granted by it.
The main question in this appeal is, whether the suit out of
which this appeal arises was entertainable by a civil court,
in view of the provisions of s. 48(1) read with S. 57 of the
Bihar and Orissa Co-operative Societies Act, 1935. Broadly
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speaking, s. 48(1) enumerates disputes between certain
classes of persons and/or the societies registered under the
Act which have to be referred to the Registrar of Co-
operative Societies for adjudication and S. 57(1) provides
that no civil court shall have jurisdiction in respect of
any dispute required by s. 48(1) to be so referred. This
point was not taken in the written statement of any of the
defendants. The Subordinate Judge decreed the suit against
several of the defendants including the Bank of Bihar Ltd.
On appeal, the learned Judges of the Patna High Court
concurred, in the main, with the findings of the Subordinate
Judge but gave effect to the contention raised on behalf of
two of the defendant-appellants on the basis of s. 48(9)
read with s. 57 of the Act. The appellants before this
Court are the plaintiffs. The only contesting respondents
are the Bank of Bihar Ltd., Madan Mohan Pandit and Babu Lal
Varma (defendants 1, 2 and 6 in the suit).
850
In order to find out whether s. 48(1) embraces the dispute
between the parties in this case, we have to examine the
facts out of which this appeal arises. The first appellant,
Bihta Co-operative Development Cane Marketing Union Ltd.
(hereinafter referred to as the Union) is a society
registered under the Bihar and Orissa Co-operative Societies
Act, 1935 (hereinafter referred to as the Act). The second
plaintiff was a Secretary of the Union at the time when the
suit was filed in 1951. Under a Resolution dated the 16th
April, 1947 of the Executive Committee of the Union, the
defendant No. 6, Babu Lal Varma, Joint Secretary of the
Union and Ram Janame Varma, defendant No. 7, the Treasurer
of the Union, were jointly authorised to withdraw moneys of
the Union from the 1st defendant, the Bank of Bihar Ltd.,
with which it had a running account. On the 26th of May,
1948, defendant No. 6 and defendant No. 7 went to the bank
to encase a cheque on behalf of the Union and then they came
to learn that the funds in the account of the Union were not
sufficient to meet the cheque. It appears that on the 16th
of April, 1948 a sum of Rs. 11,000/- had been withdrawn from
the said account by means of a cheque which did not come out
of the cheque book of the Union and that a loose cheque form
surrendered by an ex-constituent of the bank issued to
someone on the 23rd March, 1948 had been converted into a
cheque purporting to bear the signatures of defendant No. 6
and defendant No. 7. It is not necessary to state the facts
in detail and it will be sufficient to note that the
spurious cheque bore the signature of defendant No. 7 but
the purported signature of the defendant No. 6 thereon was
found to be a forgery at the trial of the suit. Criminal
proceedings were started and five defendants including
defendants Nos. 6 and 7 were put on trial. Defendants Nos.
3, 4 and 5 were employees of the defendant-bank.
Ultimately, however, all the accused were acquitted. The
suit was instituted by the two plaintiffs against seven
defendants, all of whom have already been mentioned except
the second defendant who was the Manager of the Bank and in
charge of its affairs and management at the relevant time.
The cause of action for the suit as against defendants 3 to
7 was that they, in collusion and conspiracy with one
another had authorised an illegal withdrawal of Rs. 11,000/-
out of funds of the Union lying with the bank. The bank was
sought to be made liable on the ground that it was a trustee
for the Union and had abused the trust by allowing the
amount in question to be embezzled through its gross
negligence. All the defendants put in written statements,
some doing so jointly while others did so individually. A
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large number of witnesses were examined and the Subordinate
Judge came to the conclusion that the cheque in question was
a forged and fabricated document and that defendants 4, 5
and 7 acting in collusion and conspiracy with one another
had withdrawn the sum of Rs. 11,000/- from the plaintiff’s
account with the bank fraudulently by means of the said
forged cheque. He, however, thought that
851
there was no sufficient evidence against defendants 3 and 6
and passed a decree as against defendants 1, 2, 4, 5 and 7
jointly. Defendants 1 and 2 only went up in appeal to the
Patna High Court. The High Court agreed with the finding of
the Subordinate Judge that defendants 4, 5 and 7 were
parties to the conspiracy resulting in the withdrawal of the
sum of Rs. 11,000/-, but absolved the defendant No. 2 from
any liability on the ground of negligence.
Before the High Court, a further contention was put forward
on behalf of the bank that even if the bank was otherwise
liable for the negligence of its employees, it should not be
held to be liable because defendants 6 and 7 who were the
agents of the Union were negligent and dishonest in the
discharge of the duty entrusted to them by the Union. The
High Court, on an examination of the evidence, found itself
unable to hold that there was any negligence or lack of
reasonable precaution on the part of the Union. It further
held that Ram Janame Varma may have been a party to the
conspiracy which culminated in the withdrawal of the money
through the disputed cheque, but the Union could not be said
to be negligent or lacking in reasonable precaution merely
because of that.
Having found in favour of the plaintiffs on the merits of
the case, the High Court allowed the appeal of the bank on
the ground that the jurisdiction of the civil court was
ousted by the combined operation of s. 48(9) read with s. 57
of the Act. There is no controversy before us that if the
dispute in the suit is covered by s. 48(1) it could not be
agitated in a civil court but had to be referred to the
Registrar of Co-operative Societies. It is, therefore,
necessary to, set out the relevant portion of s. 48(1) which
reads as follows:-
"48. (1) If any dispute touching the business
of a registered society (other than a dispute
regarding disciplinary action taken by the
society or its managing; committee against a
paid servant of the society) arises-
(a) amongst members, past members, persons
claiming through members, past members or
deceased member and sureties of members, past
members or deceased members, whether such
sureties are members or non-members; or
(b) between a member, past member, persons
claiming through a member, past member or
deceased member, or sureties of members, past
members or deceased members, whether such
sureties are members or non-members, and the
society, its managing committees or any
officer, agent or servant of the society; or
(c) between the society or its managing
committee and any past or present officer,
agent or servant of the society; or
852
(d) between the society and any other
registered
society; or
(e) between a financing bank authorised
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under the provisions of sub-section (1) of
section 16 and a person who is not a member of
a registered society such disputes shall be
referred to the Registrar:
Provided that no claim against a past member or the estate
of a deceased member shall be treated as a dispute if the
liability of the past member or of the estate of the
deceased member has been extinguished by virtue of section
32 or section 63.
Explanation-(1) A claim by a registered
society for any debt or demand due to it from
a member, nonmember, past member or the
nominee, heir or legal representative of a
deceased member or non-member or from sureties
of members, past members or deceased members,
whether such sureties are members or non-
members, shall be a dispute touching the
business of the society within the meaning of
this sub-section even in case such debt or
demand is admitted and the only point at issue
is the ability to pay or the manner of
enforcement of payment.
It will be noticed that not all disputes in which a
registered -society may be involved are within the mischief
of the section. Assuming that the dispute in this case
touches the business of the Union which is a registered
society, the question is: is it one which ,comes under any
of the heads mentioned in sub-cls. (a) to (e) of the sub-
section? Sub-cl. (a) has no operation if one of the
disputants is the society itself. So far as sub-cl. (b) is
concerned, a dispute between the society and a non-member
would only fall within this clause if the non-member was a
surety of a member. Cl. (c) can have no operation unless
one party to the dispute was a past or present officer,
agent or servant of the society. Clause (d) is restricted
to disputes between two societies. Clause (e) which was
introduced by way of an amendment in 1948 (Bihar Act XVI of
1948) would certainly include a dispute in which one of the
disputants is not a member of the society, but it is only
operative when the other party to the dispute is a financing
bank authorised under the provisions of sub-s. (1) of s. 16.
The definition of "financing bank" was included for the
first time in the Act by s. 2 of the Bihar Co-operative
Societies Act XVI of 1948. Under the definition, a
’financing bank’ means a registered society whose main
object is to make advances in cash or kind to other
registered societies or to agriculturists etc. It is
nobody’s case that the dispute in this case is one between a
financing bank and a non-member. The question then arises
whether the first Explanation to the section widens the
853
scope of sub-s. (1) of s. 48 so as to include claims by
registered societies against non-members even if the same
are not covered by clause (e). It is to be noted that the
word "non-member" was not to be found in the Explanation to
the section before its Amendment of’ 1948. The history of
legislation with regard to co-operative societies in general
and Bihar and Orissa Co-operative Societies Act in
particular was traced in a decision of this Court i.e.,
Sagauli Sugar Works (Private) Ltd. v. Assistant Registrar,
Co-operative Societies, Motihari & Others(1). In that case,
there was a dispute between the appellant, a company
registered under the Indian Companies Act and a society.
registered under the Act. The Society claimed a sum of Rs.
1,20,809/- from the appellant company as commission and
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interest for the supply of sugar cane and referred the same
to the first respondent. The preliminary objection of the
appellant to the jurisdiction of the first respondent to
adjudicate upon the dispute was over-ruled. The appellant
went to the Patna High Court under Articles 226 and 227 of
the Constitution for quashing the orders of the first
respondent. The High Court following a previous decision in
Union of India v. Registrar, Co-operative Societies Patna(2)
summarily dismissed the application. Before this Court, in
appeal, it was contended that the dispute was beyond the
pale of s. 48 and as such, not referable thereunder. The
Court took into consideration the various amendments which
were introduced by the Act of 1948 and observed:
"Before the amendments introduced by the Act
of 1948, the disputes which could be
entertained by the Registrar were disputes
among members, past members or their heirs, or
their sureties or between a society and its
officers, agents or servants, or between a
society and other registered societies
(without meaning to ekhaust all the
categories). But before the amendments, one
who was not a member of society or was not
claiming through a member or a past member or
a deceased member, or was not a surety of a
member or a deceased member, was not subject
to the jurisdiction of the Registrar under s.
48. That is to say, any dispute between a
society or its members, past members or
deceased members or sureties of such members
on the one hand and non-members on the other
was not within the purview of the section, so
that the appellant company, which is not a
registered society or a member of a registered
society, could not have its claim, or a claim
against it by a registered society, referred
to the Registrar for decision, under this
section."
According to the Court, the effect of the amendments
introduced by the Act of 1948 was "that a claim by a
financing bank against a
(1) (1962] Supp. 3 S.C.R, 804-A.I.R. 1962 S.C. 1367.
(2) I.L.R. 40 Patna, 7.
854
non-member to whom the former had made an advance in cash or
kind, with the sanction of the Registrar under s. 16(1),
would be entertainable by the Registrar, on a reference, but
that does not mean that a claim which is not of the
description referred to in s. 16(1) read with s. 2(c), by a
registered society against any nonmember, who is not an
agriculturist, is within the purview of s. 48(1) read with
the Explanation. The Explanation cannot be read as adding a
new head to the categories (a) to (e) under s. 48(1) of dis-
putes which may be referred to the Registrar. Originally,
the Explanation had been added only to make it clear that
even if a debt or demand is due and the only point at issue
is the ability to pay or the manner of enforcement of
payment the dispute would come within the purview of the
main section 48(1). The addition of the word ’non-member’
by the Amending Act of 1948, to the First Explanation has
not enlarged the scope of the main section 48(1) so as to
make all kinds of disputes between a registered society and
a non-member cognizance by the Registrar, thus excluding the
jurisdiction of the ordinary courts."
Appearing for the respondents 1 and 2, the learned Solicitor
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General in effect contended- that the above decision
required reconsideration and the words in the Explanation
must be understood in their widest amplitude so that even if
a dispute between a registered society and a non-member
which did not fall within any of the categories (a) to (e)
it would still be within the purview of the section by
reason of the Explanation.
We find ourselves unable to accept this contention. Before
the amendments introduced in 1948, the Explanation to the
section made no mention of non-members and non-members had
to be included in the Explanation because of the inclusion
of this class of persons in category (e) of sub-s. (1) of s.
48. The Explanation must be read so as to harmonise with
and clear up any ambiguity in the main section. It should
not be so construed as to widen the ambit of the section.
The scheme of sub-section (1) of s. 48 seems to be that
certain disputes touching the business of a registered
society should not be taken to civil courts and made the
subject matter of prolonged litigation. The legislature
took pains to specify the persons whose disputes, were to be
subject matter of reference to the Registrar. Non-members
did not come into the picture at all. Non-members other
than officers, agents or servants of the society do not
figure in sub-cls. (a) to (d) except as sureties of members.
By sub. cl. (e) only those non-members who had disputes with
a financing bank authorised under the provisions of sub-s.
(1) of s. 16 were made amenable to the jurisdiction of the
Registrar. It was probably thought desirable in the
interest of the financing bank which might otherwise be
faced with litigation in a civil court in respect of its
ordinary day-to-day transactions of advances to
agriculturists
855
who were non-members that disputes between the society and
this class of persons should be quickly and inexpensively
adjudicated upon by the Registrar. Before the amendment of
1948, the Explanation only served to clear up the doubt as
to whether a dispute was referable to the Registrar when the
debt or demand was admitted and the only point at issue was
the ability to pay or the manner of enforcement of payment.
As already pointed out by this Court, the Explanation had to
include non-members after the. insertion of category (e) in
sub-s. (1) of s. 48. The purpose of the Explanation never
was to enlarge the scope of sub-s. (1) of s. 48 and the
addition of category (e) to that sub-section and the
inclusion of non-members in the Explanation cannot have that
effect.
In our opinion, the High Court was not justified in allowing
the appeal of the bank on that ground.
The learned Solicitor General then sought to support the
judgment of the High Court on the ground that its decision
on the merits of the case was not correct. His argument in
substance was that even though there was negligence on the
part of the bank and its employees, the plaintiff society
was not altogether free from blame or negligence in that but
for the part played by at least one of its employees in the
matter of encashment of the cheque for Rs. 11,000/the fraud
could not have been perpetrated. It was argued that if both
parties were negligent or blameworthy, the plaintiffs’ claim
ought not to succeed. He referred us to the judgment of the
House of Lords in London Joint Stock Bank, Limited v.
Macmillan & Arthur(1) in support of his argument. The facts
in that case were as follows.
The plaintiffs, Messrs. Macmillan and Arthur brought a suit
for a declaration that the defendant, the London Joint Stock
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Bank, was not entitled to debit the plaintiffs with a cheque
for pound 120. The plaintiffs had in their employ a
confidential clerk who had been with them for some years.
They left to him the copying of their books and filling up
cheques for signatures. The usual practice in the office of
the plaintiffs seems to have been for the clerk to present
cheques for signatures to get petty cash usually for pound
3. On a certain day, the clerk made out a cheque for pound 2
and asked one of the partners to sign it which the partner
did. As the clerk did not turn up the next day, the
partners became suspicious and went to the bank. There they
learnt that the clerk had presented a cheque for pound 120
which had been paid. The clerk was a thief and had
absconded with the money. :The learned trial Judge found
that at the time when the cheque was presented to the
partner for signature the figure ’2’ was written thereon
with enough space on either side for insertion of additional
figures and the clerk had taken advantage thereof and
altered the figure ’2’ to 120. The
(1) [1918] A.C. 777.
856
question was, whether the plaintiffs had been so negligent
with regard to the cheque that their action against the bank
should fail. The trial Judge found that the respondents
were not guilty of any negligence in the mode of signing the
cheque and assuming that they had been guilty of negligence,
the negligence was not the proximate cause of the loss. He
therefore ordered judgment to be entered for the plaintiffs.
The Court of Appeal upheld this decision. This was,
however, reversed in appeal to the House of Lords. Lord
Finlay L. C. observed:
"As the customer and the banker are under a
contractual relation in this matter, it
appears obvious that in drawing a cheque the
customer is bound to take usual and reasonable
precautions to prevent forgery. Crime, is
indeed, a very serious matter, but every one
knows that crime is not uncommon. If the
cheque is drawn in such a way as to facilitate
or almost invite an increase in the amount by
forgery if the cheque should ’get into the
hands of a dishonest person, forgery is not a
remote but a very natural consequence of
negligence of this description."
The learned Lord Chancellor observed further
at page 795:
"Of course the negligence must be in the
transaction itself, that is, in the manner in
which the cheque is drawn. It would be no
defence to the banker, if the forgery had been
that of a clerk of a customer, that the latter
had taken the clerk into his service without
sufficient inquiry as to his character.
Attempts have often been made to extend the
principle of Young v. Grote, 4 Bing. 253
beyond the case of negligence in the immediate
transaction, but they have always failed."
According to the learned Lord Chancellor, leaving blank
spaces on either side of the figure ’2’ in the cheque
amounted to a clear breach of duty which the customer owed
to the banker. The learned Lord Chancellor said:
"If the customer chooses to dispense with
ordinary precautions because he has complete
faith in his clerk’s honesty, he cannot claim
to throw upon the banker the loss which
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results. No one can be certain of preventing,
forgery, but it is a very simple thing in
drawing a cheque to take reasonable and
ordinary precautions against forgery. If
owing to the neglect of such precautions it is
put into the power of any dishonest person to
increase the amount by forgery, the customer
must bear the loss as between himself and the
banker."
857
According to Lord Shaw the responsibility of what happens
between the signature and presentation of the cheque, a
period wholly in the customer’s control, lies entirely with
him.
The principle of this case cannot help the respondent before
us. If the signatures on the cheque had been genuine so that
there was a mandate by the customer to the banker but the
cheque was somehow got hold of by an unauthorised person and
encashed by him, the bank might have had a good defence. If
the signatures on the cheque or at least that of one of the
joint signatories to the cheque are not or is not genuine,
there is no mandate on the bank to pay and the question of
any negligence on the part of the customer, such as, leaving
the cheque book carelessly so that a third party could
easily get hold of it would afford no defence to the bank.
According to Halsey’s Laws of England (3rd Edition) Vol. 2
article 380 :
"A document in cheque form to which the
customer’s name as drawer is forged or placed
thereon without authority is not a cheque, but
a mere nullity. Unless the banker can
establish adoption or estoppel, he cannot
debit the customer with any payment made on
such document."
In this case, the finding is that one of the signatures was
forged so that there never was any mandate by the customer
at all to the banker and the question of negligence of the
customer in between the signature and the presentation of
the cheque never arose. Not only was there negligence on
the part of the banker in not ascertaining whether the
signatures on the cheque were genuine, the circumstances
attending the encashment of the cheque show conclusively
that the banker was negligent and some of its officers
fraudulent right from the beginning. The cheque form did
not come out of the customer’s cheque book. A loose cheque
form returned by ,in ex-constituent had been used for the
purpose of making out a cheque purported to be drawn by the
customer. The entries in the register for the issue of such
loose forms were so suspicious that it is difficult to
believe that the employees of the bank concerned with the
encashment of the cheque were acting bonafide. There was no
negligence on the part of the customer according to whose
resolution, the cheque had to be signed jointly by two
persons. The fraud could only be perpetrated because of the
complicity of the employees of the bank, no doubt, with the
help of one of the officers of the Union. The dishonesty of
a particular officer of the Union was not the proximate
cause of the loss to the bank. In our opinion, the case of
G. C. Kurbar & Another v. Balaji Ramji Dange(1) referred to
in the judgment of the High Court has no application to the
facts of this case.
(1) A. 1. R. 1941 Bombay 274.
M17Sup.CI/66-10
858
In the result, the appeal succeeds, the judgment of the
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Patna High Court is set aside and that of the Subordinate
Judge restored. The appellants do not want a decree against
respondent No. 7. Consequently, there will be no decree as
against the said respondent. The other respondents must pay
the costs of this appeal.
V.P.S.
Appeal allowed.
859