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Pamulapati Bhushayya v. Kommareddy Chinnapareddi And Another
Judgment Summary — Jaganmohan Reddy, J.
Factual and Procedural Background
This appeal was brought by the 2nd defendant against a judgment and decree of the Subordinate Judge, Guntur, which had been entered in favour of the plaintiff (referred to in the record as the 1st respondent).
The plaintiff (1st respondent) sued on a promissory note alleged to have been executed by the appellant (the 2nd defendant in the trial) and the 2nd respondent (who was the 1st defendant at trial). The claim arose from business dealings in tobacco during 1948: the plaintiff alleged that he and the appellant carried on a joint tobacco business and that the appellant owed him money. Differences arose and, after mediation, the parties settled that Rs. 8,000 was due. A promissory note dated 24-6-1950 was executed for Rs. 8,000 payable with interest at 9% per annum. The defendants failed to pay despite demands (including a registered notice dated 5-6-1951), and the plaintiff filed O.S. No. 18 of 1953.
During the suit, supplemental defendants (the brothers of the 2nd defendant) were added but later given up by the plaintiff. The pleadings disclosed competing contentions about the nature of the promissory note and the underlying transaction: one defendant alleged he signed only as surety without consideration; the appellant contended the promissory note was untrue, unsupported by consideration and arose from an illegal partnership (and thus was unenforceable). The Subordinate Judge found that the promissory note was executed by the defendants, was supported by consideration, and that the 2nd respondent was a co-executant rather than a mere surety; further, the trial Judge found no proof that any partnership contravened licence terms so as to render the note unenforceable.
On appeal the appellant did not challenge the trial court's findings on execution and consideration; the appeal focused on whether the alleged partnership was illegal and whether the promissory note was void as being against public policy under Section 23 of the Indian Contract Act.
Legal Issues Presented
- Whether the partnership alleged to have existed between the plaintiff and the appellant (and involving the 2nd respondent) was illegal or unlawful under the Central Excise and Salt Act and related rules, and therefore whether the contract (and the resulting promissory note) was void as against public policy under Section 23 of the Indian Contract Act.
- Whether, in the light of the statutory scheme and relevant rules (including Rule 178(4) and Rule 210), contravention of licensing provisions renders partnerships or transactions void, or whether such contraventions attract only penal or administrative consequences while leaving contracts enforceable.
Arguments of the Parties
Appellant's Arguments
- The suit promissory note was not true or valid and was not supported by consideration.
- The debt (as pleaded and recited in the promissory note) arose from a settlement of accounts of a partnership which was illegal, opposed to public policy and prohibited by law; therefore the promissory note was invalid and unenforceable.
- The second respondent was a dormant partner who colluded with the plaintiff to file a false and frivolous suit.
- At oral argument the appellant's counsel relied on the recital in the promissory note showing that tobacco business was "jointly carried on" as evidence of partnership and therefore of the alleged illegality.
2nd Respondent's (1st Defendant at trial) Arguments
- The 2nd respondent said that, on account settlement between the appellant and the plaintiff, a certain sum was found due by the appellant and that the appellant represented (to the 2nd respondent) that if a proper surety joined the promissory note the plaintiff would reduce the amount; as a result he signed the promissory note without receiving any consideration.
- He contended that his liability would arise only if the plaintiff could not realise the debt from the appellant and that the plaintiff should proceed first against the appellant rather than against him.
Plaintiff (1st Respondent)'s Arguments
- The plaintiff's advocate disputed that a partnership existed: he argued that the evidence pointed to the plaintiff selling tobacco to the appellant and giving credit in the appellant's books rather than engaging in a partnership.
- The plaintiff relied on a registered notice (Ex. A-13) containing admissions that, as the court found, supported the existence of a partnership and the account settlement that produced the promissory note.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Bhikan Bhai v. Hiralal Ramdinshet, ILR 24 Bom 622 | Principle that agreements made in contravention of statutory conditions are void only where the object of the statute is public order/safety or protection of persons; where the condition is administrative (e.g., convenient collection of revenue), agreements may remain valid. | The court relied on this distinction to assess whether the Central Excise Act's requirements were fiscal/administrative (so contracts remain valid) or public-policy driven (which might render contracts void). |
| Kalyanasundaram Pillai v. Chockalingam Chettiar, 1951-2 Mad LJ 459; AIR 1952 Mad 293 | Held (under Central Excise and Salt Act) that certain sales/transfers (sale in execution of decree of leasehold interest in salt pans) are not void ab initio as being opposed to public policy or prohibited by the Act. | Cited as authority that the Central Excise Act / Salt Act is essentially fiscal and does not automatically render such transactions void as against public policy; used to support holding that the partnership and settlement were not void. |
| Velu Padayachi v. Sivasooriam Pillai, 1950-1 Mad LJ 315; AIR 1950 Mad 444 (Full Bench) | Full Bench principle considered in prior cases about whether certain transfers should be declared void as opposed to public policy under statutes governing excisable goods. | The court considered whether the principle in Velu Padayachi should be applied to render transactions void but treated that authority as distinguishable in context and did not apply it to invalidate the partnership or the promissory note. |
| Sitharama Murthy v. Guruswamy, 1949-1 Mad LJ 400; AIR 1949 Mad 860 | Discussion distinguishing Acts (e.g., Abkari Act) that serve public policy ends from fiscal statutes (e.g., Salt Act/Central Excise Act). | Used to reinforce the distinction that the Central Excise Act is fiscal in character, unlike the Abkari Act, and thus less likely to invalidate private contracts merely by imposing licensing conditions. |
| Soorampelli Reddi v. Motamarri Seetharamayya and Sons, S.A. No. 2914 of 1944 (Mad) | Authoritative material on the scope and object of statutes dealing with excisable goods and whether prohibitions are against public policy. | Cited as part of the line of decisions that distinguish fiscal licensing statutes from those enacted for public policy reasons; supported the court's assessment that the Central Act was fiscal. |
| Nazaralli Sayad Imam v. Babamiya Dureyatimsha, ILR 40 Bom 64; AIR 1915 Bom 244 | Held that although a licence prohibited taking a partner, the licencee's act in taking a partner could not be regarded as against the law where the licensing authority could revoke the licence. | Relied on to show that taking a partner under licence restrictions did not necessarily make the partnership illegal or void, supporting the court's conclusion that the partnership was enforceable. |
| Bhagawant Genuji v. Gangabisan Ramgopal, AIR 1940 Bom 369 | Held that a partnership formed solely to obtain toll contracts at public auction was not in itself illegal; public policy principles could not be stretched to declare such combinations void merely because government revenue was involved. | Applied by the court to illustrate that combinations involving contracts with or affecting public revenue are not automatically against public policy and to support the conclusion that the partnership in question was not hit by Section 23 of the Contract Act. |
Court's Reasoning and Analysis
The court framed the decisive question narrowly: whether the partnership (and therefore the promissory note executed in settlement of partnership accounts) was illegal and void under Section 23 of the Indian Contract Act because it contravened licensing provisions in the Central Excises and Salt Act and the rules made thereunder.
The court first reviewed the evidentiary record. Although the licences from 1948 were not produced, the court had evidence pointing to joint trade activity: a recital in the promissory note referring to business "jointly carried on" in 1948, the testimony of D.W.2 (stating equal shares in the joint business and that the plaintiff supplied tobacco and credits were given in the appellant's account), and admissions in a registered notice (Ex. A-13) describing joint investment and profit-sharing arrangements. On these factual materials the court was satisfied that a partnership for trading in tobacco had been formed by the parties.
The court then analysed the relevant statutory provisions relied upon to establish illegality: Section 6 (prohibiting wholesale purchase/sale or storage of excisable goods without licence), Section 7 (issue of licences), Section 9 (penalties for contravention), and the rules (in particular Rule 175(2), Rule 178(4) and Rule 210). It noted that Rule 178(4) required the holder of a licence to report entry into partnership concerning the licensed business and to have the licence amended, and that Rule 210 provided for penalties (fine and confiscation) where breaches occurred.
Crucially, the court interpreted these provisions as regulatory and primarily fiscal in character rather than as embodying a public policy that would render private contracts void. The court observed that:
- Rule 178(4) requires intimation of partnership and subjects a partner to the licence's conditions, but it does not on its face declare such partnerships illegal or void; instead, non-compliance appears to attract penalties.
- If the statute intended to make the partnership void, the rules would not have simultaneously provided that an unlicensed partner would be bound by licence conditions on becoming a partner; that suggests a remedial/penal regime rather than one that voids contracts.
- By analogy to prior authorities, statutes whose object is the protection of revenue (fiscal statutes) are less likely to render private transactions void for contravention: the imposition of a penalty alone does not necessarily imply that associated contracts are illegal or unenforceable.
The court relied on established principles (as discussed in authorities and extracts from legal texts cited in the judgment) distinguishing statutes intended to protect the public at large or public order from statutes whose principal object is revenue collection. The court surveyed precedent (including decisions under the Salt and Central Excise framework and authorities dealing with forest and toll statutes) and concluded that the Central Excise and Salt Act and its rules were fiscal/administrative in character and were not enacted to invalidate contracts or partnerships as a matter of public policy.
On this basis the court held that Section 23 of the Contract Act (which voids agreements opposed to public policy) did not apply to render the partnership illegal, and therefore the settlement of accounts and the promissory note executed for the payment of the settled amount were not void.
Holding and Implications
Holding: The court's final decision was to dismiss the appeal. The core ruling may be summarized as:
APPEAL DISMISSED.
Implications:
- The court held that the alleged partnership to trade in tobacco did not fall within Section 23 of the Indian Contract Act as being against public policy; consequently, the settlement of accounts and the promissory note executed in respect of that settlement were declared valid and enforceable.
- The court rejected the contention that contravention of the licensing provisions of the Central Excise and Salt Act (and related rules) necessarily rendered the partnership or the promissory note void; contravention attracted penal or administrative consequences under the statute, but did not ipso facto invalidate private contractual obligations in the circumstances before the court.
- The judgment disposes of the parties' dispute by upholding the trial court's findings on enforceability and dismissing the appeal with costs. The opinion does not purport to establish a novel principle beyond applying existing authorities to hold that the Central Excise and Salt Act's licensing requirements are fiscal in character and do not render the partnership (or the promissory note arising from the partnership account settlement) void as against public policy in this case.
Disposition recorded in the opinion: "In this view of the matter, the appeal is dismissed with costs." (Final line: "Appeal dismissed.")
Jaganmohan Reddy, J.:— This is an appeal by the 2nd defendant against the judgment and decree of the Subordinate Judge, Guntur, passed in favour of the plaintiff-1st respondent. 2nd respondent is the 1st defendant. Plaintiff-1st respondent had filed a suit on promissory note executed by the appellant and the 2nd respondent on the allegation that he and the appellant carried on tobacco business jointly in the year 1948 and in connection therewith, the appellant had to pay certain amount to him.
2. As there were differences, the matter was referred to mediators and an amount of Rs. 8,000/- was settled as being due to the 1st respondent by the appellant, who along with the 2nd respondent agreed to and executed a promissory note on 24-6-1950 for that amount payable with interest at 9 per cent per annum from that date till the date of payment. As the defendants failed to pay in spite of repeated demands orally and by a registered notice Ex. A-5 dated 5-6-1951, 1st respondent filed the suit O.S No. 18 of 1953.
3. Defendants 3 and 4 who are the brothers of the 2nd defendant were also added as supplemental defendants as per the order on I.A No. 848 of 1953, but were given up at the time of trial by the plaintiff, who endorsed the same on the plaint. The case of the 2nd respondent (1st defendant) was that on a settlement of account between the appellant and the 1st respondent a certain sum of money was found due by the appellant to the 1st respondent and that the appellant represented to him at the instance of the first respondent that if a proper surety was found to join in the execution of the suit promissory note the first respondent would reduce the amount. In view of this representation, the second respondent alleged, that he affixed his signature to the promissory note without having received even a pie from out of the consideration thereunder. He contended, therefore, that since his liability would arise only in the event of the plaintiff (the 1st respondent) not being able to realise his debt from the appellant, the first respondent should only proceed against the appellant in the first instance.
4. The appellant's case was that the suit promissory note was not true, nor valid, nor was it supported by consideration and that even as per the plaint averments and the recitals contained in the suit promissory note, the debt came into existence on settlement of accounts of a partnership which was illegal, opposed to public policy and prohibited by law. The suit promissory note is invalid and unenforceable. It was further averred that the second respondent who was a dormant partner with the appellant has colluded with the plaintiff-first respondent and got this false and frivolous suit filed.
5. On these pleadings, issues were drawn up for determining whether defendants 1 and 2 executed the promissory note and if so whether the suit promissory note is not supported by consideration and is not enforceable at law.
6. The trial Judge on the evidence held that the suit promissory note was executed by defendants 1 and 2 in favour of the plaintiff and that the same is supported by consideration and that the 2nd respondent is also an executant and not a surety as alleged by him. On the question of the suit promissory note being unenforceable at law, the Subordinate Judge held that there is no proof that the partnership between the plaintiff and the second defendant came into existence in contravention of the licence granted to them and such being the case the suit promissory note cannot be said to be unenforceable.
7. In this appeal, so far as the execution and the consideration of the promissory note are concerned, the appellant does not challenge the finding of the trial court. The only question is whether the partnership is illegal and unlawful and consequently the promissory note executed in settlement of account of an illegal partnership void and unenforceable under Section 23 of the Indian Contract Act. It may be stated that the first respondent had a licence to carry on tobacco trade for Phirangipuram while the appellant had a licence to carry on the said trade in Pericherla. The promissory note Ex. A-1 recites that:
“In regard to the business in tobacco jointly carried on by you and Bhushayya, the second individual of us, during the year 1948, the amount which was agreed in full discharge as per the settlement effected by mediators towards the amount found due in your account is Rs. 8,000/- (Rs. eight thousand only).”
The learned advocate for the appellant submits that the recital that the tobacco business was jointly carried on between the appellant and the first respondent shows that there was a partnership. The contention of the first respondent's advocate is that there is nothing to show that there was a partnership and that tobacco was sold by the first respondent to the appellant for which credit was given in the books of the appellant.
8. This cannot be said to be illegal because the first respondent did not contravene the terms of the licence as he purchased and sold tobacco within the area for which the licence was given. Similarly, the appellant also did the same and if there was joint business for sharing profits, it cannot be said to be a partnership which is illegal and contrary to public policy. The appellant as D.W 2 stated that he and the plaintiff had eight annas share each in the joint business and that the second respondent was a sub-partner under him.
9. In cross-examination he says that the plaintiff-first respondent was supplying tobacco for the joint business, that he (plaintiff) had a licence to deal in tobacco and under their licence he used to purchase from ryots and supply for the joint business and that whenever the first respondent supplied tobacco he (witness) used to give credit in his (witness') account and he used to sell that tobacco. The plaintiff-first respondent in his registered notice Ex. A-13 dated 5-6-1950 made certain admissions from which it becomes evident that there was a partnership between the appellant and himself. In that notice he stated as follows:
“Subsequently, during the month of April, 1948, my client and the third individual among you, on behalf of you made arrangements that they shall invest jointly and carry on business in country-tobacco, that my client shall purchase the tobacco and shall deliver the same to you at your godown and that you shall get it soaked in water, and make the same fit for sale and shall sell it to others and that the profit or loss obtained thereby shall be shared equally by my client and yourselves and to pay interest at the rate of Rs. 0-8-0 per cent per mensem on the respective investments.”
In another place he said that the appellant had not yet settled his profits on business and he did not co-operate. It is in consequence of this registered notice, the matter was referred to mediation and settled at Rs. 8,000/- for which the suit promissory note was executed. It is, therefore, clear that the appellant and respondents 1 and 2 formed a partnership to trade in tobacco for which each of the said persons had a licence to operate individually in a specified area. The question, therefore, is whether such a partnership is illegal. In our view, tills would depend upon the question whether the prohibitions contained in the Central Excise Act and the rules made thereunder are for the protection of revenue or are designed to achieve the object of a public policy.
10. Before dealing with this question, we may observe that the licences have not been produced, but there is an application C.M.P No. 1699 of 1959 to receive three documents viz., a licence for a private bonded warehouse dated 16-12-1950, a covering letter dated 8-1-1954 from the Superintendent, Central Excise Department, sending the licence and a cover in which those documents were sent.
11. It is obvious that this licence has no relevance, firstly, because it is a licence given on 16-12-1950 while the relevant licence is of 1948, and secondly, this licence is only for a bonded warehouse, while the licence of 1948 which is now in question is for wholesale trade of tobacco in the area specified therein. The C.M.P is, therefore, rejected.
12. The illegality of the partnership is based on the contravention of Section 6 of the Central Excises and Salt Act (I of 1944) and Rules 175(2), 178(4) and 210 of the Rules made under the above Act. Section 6 provides that no person without a licence can do any whole-sale purchase or sale (whether as a broker or Commission Agent) or store any excisable goods specified in part A of the II Schedule, of which tobacco is one of the items. Section 7 provides for the issue of a licence for such area, if any, for such period subject to such restrictions and conditions and in such form and containing such particulars as may be prescribed.
13. Section 9 prescribes the penalties, so far as it is relevant, for contravention of any of the provisions of the notification issued under S. 6 or S. 8, or of any rule made under cl. (iii) of sub-s. (2) of S. 37. Clause (2) of R. 175 made under the powers conferred by S. 37, lays down that if the same person desires to have licences for carrying on business in more than one capacity, he shall submit a separate application and where the applicant has more than one place of business, he shall obtain a separate licence in respect of each such place of business. Rule 178(4) provides that:
“If the holder of a licence enters into partnership in regard to the business covered by the licence he shall report the fact to the licencing authority within thirty days of his entering into such partnership and shall get his licence suitably amended. Where a partnership is entered into, the partner as well as the original holder of the licence shall be bound by the conditions of that licence.”
Rule 210 provides for a penalty where no other penalty is provided. It is in the following terms:
“210. General penalty: A breach of these Rules shall, where no other penalty is provided herein, be punishable with a penalty which may extend to one thousand rupees and with confiscation of the goods in respect of which the offence is committed.”
From the above rule it is evident that a partnership as such by persons who are licensed with those who have no such licences is not absolutely prohibited. All that the rule 178(4) requires is that intimation should be given to the authority concerned within a month from the date of an unlicensed person becoming a partner with a licensed person.
14. Though the omission to intimate within the prescribed time may expose the persons concerned to a fine only, it does not appear that the intention of the rule is to declare the partnership illegal or invalid, because, if that was so the rule would not have provided that the unlicensed partner would also be liable for all the terms and conditions of the licence on his becoming a partner. This means that notwithstanding the omission to give intimation of an unlicensed person becoming a partner with a licensed person, he will still be responsible for the terms and conditions of the licence.
15. Apart from the fact that under the rule there is a clear distinction, cases under the Abkari, Opium or Forest Acts have no application in determining the validity of partnerships made in contravention of the provisions of the Central Excises and Salt Act, as the prohibition is for protection or convenient collection of revenue. Where, therefore, a statute merely imposes a penalty without declaring it to be illegal or void, the imposition of penalty by itself does not, in our view, have the effect of making any contract made in contravention of a specific provision of the statute illegal or void.
16. It must further be seen whether the statute was designed as a whole to further a public policy. The principle followed by Courts in such cases is given in Ansone's Law of Contract in the following words:
“The effect in such a case depends on the proper construction of the particular statute. But where the words of the statute leaves room for doubt as to its intention, it is material to ask whether the object of the Act in imposing the penalty is merely to protect the revenue or whether its object or one of its objects is to protect the general public or some class of the general public by requiring that the contract shall be accompanied by certain formalities or conditions, as for example, registration in the case of a money-lender. In the latter case, it is probable that the act for the doing of which the penalty is imposed is impliedly prohibited by the statute and therefore illegal.”
In Bhikan Bhai v. Hiralal Ramdinshet, ILR 24 Bom 622, Parsons J., after citing a passage from the 7th edition of Pollock and Mulla on Contract, page 139, observed at page 625:
“When conditions are prescribed by statute for the conduct of any particular business or profession and such conditions are not observed, agreements made in the course of such business or profession are void, if it appears by the context that the object of the legislature in imposing the condition was the maintenance of public order or safety or the protection of the persons dealing with those on whom the condition is imposed. But they are valid if no specific penalty is attached to the specific transaction and if it appears that the condition was imposed for merely administrative purpose e.g, the convenient collection of the revenue.”
There are also several decisions where monies were held to be recoverable under the Forest Act, the Tolls and Ferries Act, notwithstanding the condition in the licences prohibiting such transfers without the sanction of the Collector, on the ground that the prohibition related to the convenient collection of the revenue. It is unnecessary to deal with the Abkari and Opium Acts where the Courts have held on the provisions of those Acts that they were designed in furtherance of a public policy and the prohibitions contained therein would have the effect of declaring contracts or partnerships made in contravention of the provisions illegal and void.
17. In Kalyanasundaram Pillai v. Chockalingam Chettiar, 1951-2 Mad LJ 459 : (AIR 1952 Mad 293) a Bench of the Madras High Court consisting of Govinda Menon J., and Chandra Reddy J., (as he then was) dealt with a case specifically under the Central Excise and Salt Act of 1944 where the provisions of Ss. 6 and 7 and Rules 102, 103 and 104 were considered. It was there held that the sale by Court in execution of a decree of the lease-bold interest of the judgment-debtor in salt pans is neither void ab initio as being opposed to public policy, nor prohibited by the Central Excises and Salt Act.
18. After examining the provisions of Sections 6, 7, 8 and 9 of the Central Act I of 1944 and the provisions of the Madras Salt Act IV of 1889 which was repealed and the rules made under Section 37 of the former Act, and after also considering the ailment that the possession of the receiver was tantamount to the transfer of the right of the licencee, the Bench dealt with the question whether the principle laid down in the Full Bench case of Velu Padayachi v. Sivasooriam Pillai, 1950-1 Mad LJ 315 : (AIR 1950 Mad 444), should be made applicable to that case, which would have the effect of declaring the sale void as being opposed to public policy.
19. Govinda Menon J., after considering the case of Sitharama Murthy v. Guruswamy, 1949-1 Mad LJ 400 : (AIR 1949 Mad 860), and Soorampelli Reddi v. Motamarri Seetharamayya and Sons, S.A No. 2914 of 1944 (Mad), observed at page 463 (of Mad LJ): (at p. 295 of AIR) as follows:
“………… Further it has to be considered that the scope and object of the Abkari Act are entirely different from those of the Salt Act. The Madras Salt Act, which got repealed by Central Act I of 1944, was only a tax collecting statute. So is the Central Act I of 1944 which deals not only with salt but with various other articles on which excise duty has to be levied. It deals in the first schedule with kerosene, matches, mechanical lighters, motor spirit, silver, tobacco and various other things in addition to salt. It is, therefore, clear that the Act we have to consider is nothing but a fiscal one intended for collecting taxes, whereas the Madras Abkari Act had a public purpose and what is prohibited by the Madras Abkari Act is against public policy.”
In Nazaralli Sayad Imam…(Original Plaintiff) v. Babamiya Dureyatimsha…(Original Defendant)*, ILR 40 Bom 64 : (AIR 1915 Bom 244), a partner was taken by a forest contractor, and upon objection being taken to the agreement of partnership, it was held that although the terms of the agreement prohibited the taking of the partner, the fact that the forest officer could revoke the licence, the licencee's act in taking a partner could not be regarded as against the law or defeating the provisions of any law.
20. Similarly in Bhagawant Genuji v. Gangabisan Ramgopal, AIR 1940 Bom 369, it is held that a partnership formed solely with a view to take toll contracts at a public auction is in itself not illegal. The principle of public policy cannot be made to apply in its result to a combination of persons who agree not to bid against one another at a public sale held for farming out public revenue.
21. The combination is not rendered illegal merely because the Government is a party to the sale, or that the proceeds of the sale would be credited to public revenues or that it might result in possible loss to Government, nor can the combination be regarded as other than innocent merely because it discouraged competition amongst the partners themselves. In these circumstances we have no hesitation in holding that Section 23 of the Contract Act does not hit the partnership and consequently the settlement of account and the promissory note executed for the payment of the amount is not void.
22. In this view of the matter, the appeal is dismissed with costs.
GC/V.R.B
23. Appeal dismissed.
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