Chennuru Gavararaju Chetty vs Chennuru Silaramamurty Chetty

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No. 91 of 1954

Decision Date: 6 October 1958

Coram: Bhuvneshwar P. Sinha, Syed Jaffer Imam, J.L. Kapur

In this matter the parties were Chennuru Gavararaju Chetty and Chennuru Silaramamurty Chetty, the case being reported on 6 October 1958. The appeal was heard by a bench of the Supreme Court of India consisting of Justice Bhuvneshwar P. Sinha, Justice Syed Jaffer Imam and Justice J. L. Kapur. It was a civil appellate case, identified as Civil Appeal No 91 of 1954, arising from a judgment and decree dated 10 December 1948 of the Madras High Court in Regular First Appeal No 609 of 1946. The High Court decision itself was based on an earlier judgment and decree dated 30 March 1946 of the Subordinate Judge of Chicacole in Original Suit No 1 of 1943. Counsel for the appellant were A. V. Viswanatha Sastri and R. Ganapathy Iyer, while counsel for respondents numbered 1, 2, 3, 5‑7, 13 and 24‑27 were K. M. Rajagopala Sastri and S. K. Sastri.

The sole question for determination in the appeal filed by the first defendant, supported by a certificate from the Madras High Court, was whether the renewal of a lease granting the right to operate a salt factory—issued by the Government in favour of the appellant and the other defendants numbered 1 to 7—could be regarded as an asset of the partnership that had been dissolved between the contesting parties. The trial court had decided this issue in favour of the contesting defendants. On appeal, the Madras High Court reversed that finding and held in favour of the appellants, who were the plaintiffs and some of the defendants aligned with them. Consequently, the present appeal was filed by the first defendant, whose interest was identical to that of defendants 2 to 7, and the Court’s reference to “the appellant” was to be read as including the interests of those non‑appealing defendants as well. In August 1941 the Government altered its policy for salt‑lease allocations, replacing the former method of awarding leases to the highest bidders with a system that renewed leases for those lease‑holders whose conduct the Department considered satisfactory. Acting under this policy, the Collector surveyed the existing lease‑holders with satisfactory records and asked whether they would accept renewal for a period of twenty‑five years. The appellant and the other aforementioned defendants, whose conduct had been deemed satisfactory, were among those invited to apply for renewal. They submitted their applications in July 1942, and a fresh lease for a term of twenty‑five years was granted to them on 15 April 1943, covering the period from January 1943 to December 1967, pursuant to the Collector’s order of November 1942 (Exhibit P‑15(a)). The specific terms of this new lease were to be examined later in the judgment. As the term of the previous lease and the licence to manufacture and sell salt—which comprised the partnership’s business—were set to expire at the end of December 1942, one of the contesting defendants served a notice upon one of

In this matter, the plaintiff served a notice on the defendants stating that, because the partnership was scheduled to expire at the end of the month, the partners were required to settle all accounts and to arrange for the disposal of the unsold stock, which amounted to 82,102 maunds of salt. The defendants responded to that notice on 28 December 1942 through counsel. In that reply they asserted, among other things, that the application for renewal of the lease for a period of twenty‑five years had been made with the consent of every partner and on behalf of all of them, and that consequently the partnership business was intended to continue even after the expiry of the previous partnership term. The defendants further alleged that the plaintiff acted fraudulently and with “evil intention”. They also demanded that each defendant pay a penalty of Rs 2,500 and that the entire partnership lease property be handed over to the plaintiff’s side.

The exchange of these notices was a preliminary step to the filing of a suit on 5 January 1943, a date that fell before the government had executed the fresh lease in favour of the contesting defendants numbered one through seven. The suit was founded on the proposition that the original partnership persisted beyond December 1942 because the new lease had been obtained pursuant to a unanimous resolution of all partners to secure the lease for the partnership’s business. Simultaneously, the plaintiff sought to advance an alternative argument: even if the partnership had, in fact, ceased to exist after December 1942 as a result of the defendants’ conduct, the benefit of the twenty‑five‑year lease should be treated as an asset of the dissolved partnership and therefore be considered in the process of winding up the partnership.

The plaint as originally framed contained a multitude of reliefs that the plaintiff claimed were his entitlement. These included a declaration that the partnership was continuing, a declaration that defendants one through seven had forfeited their rights in the partnership because of their fraudulent acts, an injunction restraining those defendants from operating the salt works independently of the partnership and on their own account, and a declaration that the renewal of the lease in the names of defendants one through seven for an additional twenty‑five years was for the benefit of the partnership. However, during the trial the plaintiff appear to have recognised the weakness of this position and, on 8 February 1946, filed a memorandum in the trial court limiting his prayers to reliefs based on a dissolved partnership and abandoning the other reliefs that were premised on the partnership’s continuation.

Consequently, at the trial the reliefs that were actually claimed were confined to the accounting between the parties of the dissolved partnership and to treating the fresh twenty‑five‑year lease as part of the assets of the dissolved firm. It is, therefore, not necessary to refer to

The defendants filed a written statement in which they opposed the plaintiffs’ request that the renewed lease for twenty‑five years be treated as an asset of the dissolved partnership. Defendants identified as numbers 1 to 7 vigorously denied that the plaintiffs’ claim concerning the fresh lease was well‑founded. They contended that they were only entitled to operate the business under the new lease and that the licence granted under that lease was intended solely for their own benefit, not for the benefit of the partnership that had been dissolved.

The trial court issued a preliminary decree which declared that the partnership had been dissolved on 31 December 1942 and ordered that accounts of the dissolved partnership be taken. Regarding the benefit of the renewed lease for twenty‑five years, the trial court rejected the plaintiffs’ contention that the dissolved partnership possessed any firm or trade name that could be said to have tangible goodwill. Consequently, the court held that the defendants could not be restrained from continuing the business under their own names as they had done previously. After expressing doubt as to the existence of any goodwill associated with a particular firm name, the court directed that “the Commissioner is authorized to sell the goodwill of the old firm for what it is worth by way of realization of the assets of the dissolved firm as amongst the partners.” In effect, the trial court concluded that the plaintiffs were not entitled to the benefit of the new lease.

On appeal, the Chief Justice delivering the judgment of the Division Bench of the High Court examined the case. The Court first found that the plaintiffs had not established that the fresh lease had been obtained as a result of a resolution of the partners to continue the business after the partnership ended in December 1942. However, on the plaintiffs’ alternative plea, the Court, after a detailed discussion of relevant English and Indian law, held that the plaintiffs were entitled to treat the new lease as an asset of the dissolved partnership. The High Court summarized its conclusion in its own words: “In conclusion, we hold that the new lease obtained by Defendants 1 to 7 in renewal of the old lease which formed the subject matter of the partnership, must be held by them for the benefit of the other members of the partnership, who are entitled to share in the advantage gained by Defendants 1 to 7. As the lease itself was executed after the termination of the partnership and as it is not the case of the Appellants that any one other than defendants 1 to 7 had furnished the consideration for the new lease, the benefit of the renewal alone will be treated as an asset of the partnership which terminated on 31st December 1942, and a value placed on it. The Commissioner appointed by the lower Court may, after taking such evidence as may be necessary, be …”

In the judgment, the High Court ordered that the Commissioner appointed to assess the assets of the dissolved partnership should first determine a monetary value for the new lease. The Court explained that, in fixing that value, it was necessary to consider the obligations of defendants 1 to 7 to provide capital and to incur the expenses required for operating the new business, together with the attendant risks and the possibility of profits. By issuing this direction, the High Court set aside the judgment and decree of the trial court and allowed the appeal, acknowledging that the Commissioner’s task of accounting for the dissolved partnership might prove difficult to execute.

Counsel for the appellant argued that the High Court had erred in interpreting the provisions of the Indian Trusts Act. He maintained that the Court was wrong to conclude that a constructive trust had arisen in favour of the plaintiffs and emphasized that there was no absolute rule that the renewal of a lease forming the subject‑matter of a partnership must inevitably benefit the former partners. He further contended that the essential elements of section 88 of the Trusts Act were not satisfied in the present case. According to his submission, the lease by itself did not confer any right to manufacture and sell salt; rather, a licence was a prerequisite for carrying on the salt manufacturing and sale business under the Department’s regulations, and the Department was free not to recognise any partners in that business. He noted that the licence to sell salt had been issued only in 1945.

The appellant’s counsel also referred to English law, where a presumption might exist that a lease renewal would benefit the partners, but argued that such a presumption could not arise here and, even if it did, it was displaced by the facts. He pointed out that the original partnership was for a fixed term that ended with the expiry of the lease and the licence to manufacture salt in 1942. The partnership deed did not contemplate continuation of the business beyond that term, even if a new lease were obtained from the Government. The term of the partnership had been deliberately made to run concurrently with the lease and licence. The plaintiffs had never taken steps to obtain a lease renewal, nor was there any evidence that they had asked the defendants to secure a renewal for the benefit of all partners. In contrast, when the defendants applied on their own for a fresh 25‑year lease, the plaintiffs lodged a petition of protest and prayed that the Government include them as co‑lessees in the new lease, although that request was not successful.

In this dispute the petition of the plaintiffs to be included as co‑lessees in the newly granted twenty‑five‑year lease was unsuccessful. The plaint did not allege that the appellants had concealed their intention to obtain the lease for personal benefit, nor was any evidence produced showing that the defendants had exploited their position as partners or had used partnership funds to secure the fresh lease. The plaintiffs further argued that because disagreements had arisen between the parties during the period from 1939 to 1942, the plaintiffs could not be said to have placed sufficient confidence in the defendants to render the defendants constructive trustees within the meaning of section 88 of the Trusts Act. Conversely, the respondents contended that the twenty‑five‑year lease was granted to the appellants as a result of a change in Government policy, which replaced the former practice of awarding lease terms through open competition and auction with a system of renewal to approved parties. The respondents explained that the defendants obtained the lease in their own names because the Government records listed them as the original lessees, and because the original lease had been expressly for the benefit of all the partners, the new lease must likewise be regarded as founded upon the old lease. They also maintained that section 88 of the Trusts Act was not exhaustive; even if the present case did not fall strictly within that provision, the rule of English law on constructive trusts was applicable, and therefore the High Court was rightly justified in concluding that the lessees were in the position of trustees when they secured the renewed lease. The plaintiffs’ attempt to be placed in the category of joint‑lessees with the defendants failed because of the altered policy and the Department’s rules, leaving the plaintiffs at a disadvantage compared with the defendants, whose names appeared on both the original lease and the licence. In view of these facts, the plaintiffs were unable either to obtain the lease independently or to have their names included as joint‑lessees, and the presumption of law that the defendants were constructive trustees was not rebutted. Before considering the arguments advanced by the parties, it is helpful to outline briefly the system of operating salt factories under the Madras Salt Act of 1889, which was enacted to consolidate and amend the law relating to salt revenue in the Presidency. Under that Act, a “salt factory” is defined as any place used or intended to be used for the manufacture of salt or for its storage, as defined from time to time by the Collector of salt revenue.

The term “Licensee” under the Act was defined as any person to whom a licence for the manufacture of salt or salt‑peter was issued, and it also included any person who had been registered as the transferee of such a licence in accordance with the provisions of the Act. Section 8 of the Act specified that only persons who were licensees or public servants employed by the Central Government were authorised to engage in the manufacture of salt. Section 9 authorised the Collector of salt revenue to grant licences for the manufacture of salt at particular salt works, and the licence could contain particulars and conditions that the Central Government might prescribe from time to time. The licence could be issued either for the purpose of manufacturing salt for sale to the Central Government or for general commercial sale, and it could be transferred or relinquished only in the manner prescribed by the applicable rules.

Section 12 provided that a licence holder was to be regarded as the owner of both the licence and the salt works identified in the licence. The Central Board of Revenue retained the power to establish a new salt factory, and, subject to the payment of compensation, to close any existing salt factory or any part thereof, thereby enabling it to cancel or amend the licence. Section 17 made provision for the issuance of a temporary licence for the manufacture of salt under certain emergency circumstances. Section 25 empowered the Collector of salt revenue to impose a fine on a licence holder according to a prescribed scale, to suspend a licence, or even to cancel a licence where the licence holder failed to exercise due diligence or was in default. Section 43 prohibited the removal of salt from a salt factory except when the removal was on behalf of the Central Government or for transport to a storage place authorised by the Collector of salt revenue; such removal required a permit and payment of duty at the fixed rate. The Central Government was authorised to make general rules for the implementation of the Act and, in particular, to regulate matters specified in Section 85; once published in the official gazette, those rules had the force of law and were to be read as part of the Act. It was uncontested that the Government had laid down elaborate rules to regulate the manufacture and sale of salt so as to protect public revenue and to prevent the production of contraband salt. Consequently, it was clear that the salt‑manufacturing business carried on by the parties to the partnership agreement was not an ordinary occupation free from the strict regulatory framework imposed by the Act. The licensee owes a special responsibility

The Court observed that the public officers of the Government possessed the decisive authority in matters concerning licences issued under the Act. In the context of the statutory framework established by the Act, the Court turned to examine the rights and lease arrangements that formed the factual backdrop of the dispute. The first lease, reproduced in the record as exhibit P‑16 covering pages 101 to 105, was an indenture executed between the Secretary of State for India in Council, who acted as the lessor, and the first defendant together with the father of defendants numbered two through seven, who were the lessees. The lease stipulated a monetary consideration of twenty‑five thousand rupees and granted a term of seventeen years commencing on 1 January 1926. Either party retained the right to terminate the lease by delivering a written notice at the close of the salt‑manufacturing season. Upon expiry of the lease or its earlier termination by notice, the lessees were required to vacate the demised premises, which had been leased exclusively for the purpose of manufacturing, storing and selling salt and for carrying out related works, and they were expressly prohibited from erecting any dwelling houses on the site. The lease further provided that the lessees would receive a modified excise licence in the form of E‑1(d). A restrictive condition was imposed whereby the lessees could not, without the prior written consent of the lessor, assign, underlet or otherwise part with possession of any portion of the leased land. The lease did permit the lessees to admit a partner or partners, subject to approval by the Collector, and it contained detailed provisions requiring that the salt‑manufacturing business be conducted under the supervision of public authorities such as the Collector.

The Court then considered whether, in the absence of a specific pleading foundation, a claim could be sustained under section 88 of the Indian Trusts Act. Although the pleadings did not expressly allege a case under that provision, the Court felt compelled to assess the correctness of the High Court’s conclusion that, either pursuant to section 88 or on the basis of general law, the defendants had positioned themselves as constructive trustees liable to account for any advantage obtained. Section 88 reads that where a trustee, executor, partner, agent, director of a company, legal adviser or any other person bound by fiduciary duty obtains a pecuniary advantage for himself by exploiting that fiduciary character, or where such a person enters into dealings that place his own interests adverse to those of the beneficiary and thereby secures a pecuniary benefit, he must hold that benefit for the beneficiary. The Court set out to determine whether the plaintiffs had established a case under the second part of this section. To do so, it was necessary to demonstrate that the defendants, in securing the renewal of the lease, had placed themselves in a position that made their interests adverse to those of the other partners and that they had consequently obtained a pecuniary advantage which must be held for the benefit of the other partners.

It was observed that the defendants had placed themselves in a situation where their personal interests conflicted with those of the other partners, thereby obtaining a monetary advantage that, according to the statutory provision, they were required to hold for the benefit of the other partners as well. To clarify the application of the provision, the Court referred to illustrations (d) and (e) contained in the section, describing them as instructive. The Court noted that had the plaintiffs succeeded in demonstrating, as they attempted, that any funds or goodwill associated with the alleged firm had been used to secure the renewal of the lease, the matter would have fallen squarely within illustration (d). By contrast, illustration (e) was found not to apply because, based on the findings, the defendants were not negotiating the lease renewal on behalf of the entire partnership, and there was no allegation that they had secretly arranged a benefit for themselves to the detriment of the partnership’s business or its assets.

The Court further remarked that the suit was filed several months before the renewed lease was actually granted and years before a permanent licence for the manufacture and sale of salt was issued to the defendants. While the grant of the lease alone conferred upon the grantee the right to manufacture and sell salt, such a lease could become operative only after the issuance of a permanent licence, which was necessary for the grantee to conduct the business of manufacturing, storing and selling salt. Consequently, the lease held no intrinsic value without the accompanying licence. The permanent licence was only granted on 17 April 1945, which was approximately two years and four months after the expiry of the previous lease and licence—leases that had terminated concurrently with the partnership’s term. This timing explained why the High Court had rendered a decree in favour of the plaintiffs using language that was rather vague and not readily convertible into a monetary award.

The Court stressed that the nature of the salt‑manufacturing business placed greater importance on the personal qualities of those managing it than on other factors. An additional relevant consideration was the relationship among the partners during the final three years of the partnership, namely the period from 1939 to 1942. During those years the partners were not on harmonious terms, confidence among them was lacking, and disputes and accusations of improper motives had already begun. Hence, there was little basis for assuming a level of confidence that would render the defendants fiduciaries beyond the mere fact of their partnership. As previously mentioned, the partnership automatically dissolved at the end of 1942. The actual lease in question was granted in April 1943, and the permanent licence to manufacture and sell salt was only issued in 1945. Therefore, strictly speaking, when the

When the suit was instituted in January 1943, there was no lease in existence because the original lease had already terminated, and the business of manufacturing and selling salt could not be effectively carried on until a permanent licence was granted. The plaintiffs could have pursued a claim regarding the renewed lease only if they had successfully established that the partnership continued in substance. Because that claim failed, it was difficult to see how the plaintiffs could assert any interest in the renewed lease as an asset of the partnership business. The fiduciary relationship that existed between the partners ended with the termination of the original lease and the dissolution of the partnership business. At that point, the partners no longer possessed any interest that the defendants, who were contesting, were obligated to protect. Consequently, the defendants’ status as partners also ceased, and they could not be said to have relied on their former partnership character to obtain the new lease. For these reasons, the court concluded that the plaintiffs had not established a cause of action that fell within the provisions of section 88 of the Indian Trusts Act.

The counsel for the respondents made a brief reference to section 90 of the Trusts Act. However, the court observed that while section 88 specifically mentions partners, agents and similar fiduciaries, section 90 applies only to a tenant for life, a co‑owner, a mortgagee or any other qualified owner of property. Accordingly, section 90 could not be applied to the present facts, and even if it could, it would not advance the plaintiffs’ position. The court further noted that, although the Trusts Act provisions did not directly apply, the general principles of law recognized by English courts were nevertheless cited in support of the plaintiffs’ claim. The plaintiffs relied on several English decisions, namely Featherstonhaugh v. Fenwick, Clegg v. Fishwick, Clements v. Hall, Clegg v. Edmondson, In re Biss, Biss v. Biss and Griffith v. Owen. The English law on the matter was summarized in Halsbury’s Laws of England, second edition, volume 24, article 863, page 450, which stated that the renewal of a lease of partnership property by one or more partners without the consent of the others was to the benefit of all partners, that the rule applied irrespective of whether the partnership term was fixed or indefinite, and that representatives of a deceased partner might share in profits derived from such a renewal. The court considered these authorities in evaluating the relevance of the English position to the case at hand.

In this case the Court noted that the authorities cited on behalf of the respondents constitute the English statement of law quoted earlier. A careful review of those English precedents shows that there is no absolute rule of law or equity requiring that a renewal of a lease by one partner must automatically benefit every partner. Rather, the law recognizes a presumption of fact – distinct from a presumption of law – that equity will favor a renewal of the lease to the benefit of all partners. Because this presumption is factual, it is rebuttable and must be assessed in light of the particular facts and circumstances of each case. The Indian Legislature has substantially adopted this English principle by embedding it in the Indian Trusts Act, especially sections 88 and 90, and by enacting provisions that mirror the English position as reflected in the cited authorities (1810) 34 E.R. 115, (1849) 41 E.R. 1278, (1857) 44 E.R. 954, (1857) 44 E.R. 593, (1903) 2 Ch. 40 and (1907) I.Ch. 195. Turning to the facts of the present dispute, the parties deliberately fixed the term of their partnership to run conterminously with the term of the lease and licence, both of which were to expire in 1942. They did not, either expressly or by necessary implication, provide for an extension of the partnership period or for obtaining a renewal of the lease and the requisite licence. No allegation or evidence was presented that the defendants who obtained the renewal acted clandestinely. The plaintiffs themselves made attempts, though unsuccessful, to be included among the grantees at the time the lease was renewed. The special nature of the business required personal efficiency and good conduct on the part of the actual managing agents, and no partnership funds or goodwill were used to secure the new lease. The fresh lease and licence were granted to the defendants in consideration of their personal qualities of sound management and conduct. Moreover, the relationship between the parties had deteriorated during the final years of the partnership, and the lease and permanent licence were awarded after the partnership automatically dissolved at the end of 1942. All of these circumstances point to a single conclusion: the renewal of the lease was not intended to benefit all the former partners. Consequently, the factual presumption that the lease should extend to every partner is fully rebutted. For these reasons the Court held that the judgment and decree of the High Court, insofar as they reversed the trial‑court decision, were erroneous and must be set aside.

The Court accordingly allowed the appeal and ordered that costs be awarded throughout the proceedings, because the costs were attributable solely to the single issue that this Court had decided. Consequently, the appeal was allowed.