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Jayalakshmi v. Shanmugham And Others
Case Summary — Revision Petition concerning treatment of tenancy right as a partnership capital asset
Factual and Procedural Background
The plaintiff (who is the revision petitioner) sued for dissolution of a partnership business dealing in plastic goods carried on from a shop at Tellicherry and for settlement of accounts. Defendants 1 and 2 are the brother and sister of the plaintiff's deceased husband. The plaintiff alleged that she and the two defendants were partners. Both defendants denied the existence of a partnership: the first defendant claimed the business was exclusively his, and the second defendant said she only advanced a loan of Rs. 5,000 to the first defendant.
The trial court accepted the plaintiff's case, passed a preliminary decree dissolving the partnership and declared that each of the three (plaintiff and the two defendants) was entitled to one-third share in the capital and profits of the business. In the final decree proceedings, on defendants' application, the trial court ordered that the tenancy right in the shop building where the business was conducted be sold by the receiver as a capital asset of the business. The plaintiff filed the present revision (C.R.P.) challenging that order. The revision challenges the trial court's order in the final decree stage concerning treatment of the tenancy right as a capital asset.
Legal Issues Presented
- Whether the trial court exceeded its powers or went against the preliminary decree by deciding in the final decree that the tenancy right in the shop building should be sold as a capital asset of the partnership.
- Whether the tenancy right in the shop building constitutes part of the 'capital' or property of the firm for the purposes of settlement of accounts under the preliminary decree.
- Whether, under Section 14 of the Partnership Act, the tenancy right (or the shop premises) was acquired for and treated as property of the firm (i.e., whether there was an express or implied agreement treating it as firm property).
- Whether the trial court's order was made without considering all relevant aspects and without giving the parties opportunity to tender evidence, thereby requiring reconsideration.
Arguments of the Parties
Revision Petitioner (Plaintiff) — principal contentions
- The trial court exceeded its powers and acted contrary to the preliminary decree by treating the tenancy right as a capital asset in the final decree proceedings.
- Implicit in this contention is that the preliminary decree conclusively fixed the parties' shares and the final decree should not go behind matters already decided by that preliminary decree.
Defendants — principal contentions
- Both defendants denied the existence of the partnership: the first defendant claimed exclusive ownership and operation of the business; the second defendant said she only advanced a loan of Rs. 5,000.
- Defendants contended that the running business along with the tenancy right had been purchased by the plaintiff for Rs. 15,000 and that, on induction as partners, each defendant contributed Rs. 5,000 towards the one-third share — a factual position bearing on whether the tenancy right formed part of the firm's capital assets.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| M. Ayyana v. M. Jaggarao, AIR 1977 SC 292 | Authority for the position that a preliminary decree, once passed, is final and conclusive on matters decided at that stage and the doctrine of res judicata (S.11 Code of Civil Procedure) applies between different stages of the same litigation. | The court invoked this authority to explain the limits of a final decree vis-à-vis matters already settled by the preliminary decree, and to frame the question whether the tenancy right issue had in fact been decided by the preliminary decree (concluding it had not). |
| B.N. Murthy & Sons v. V.V. Suguna, AIR 1978 Andh Pra 257 | Supports the interpretation of Section 14 of the Partnership Act: property of the firm depends upon the contract between the parties and must be brought into the stock of the firm or acquired for firm purposes to be firm property. | The court cited this decision to underline that mere use of property by a partnership does not convert it into partnership property; an intention or agreement (express or implied) is required. |
| Arjun Kanoji Tankar v. Santaram Kanoji Tankar, (1969) 3 SCC 555 | Holds that mere user of a shop or premises for business does not, by itself, make the shop (or tenancy right) a partnership asset. | The court relied on this to caution against treating tenancy rights as partnership property solely because the partnership used the premises; additional evidence of intention or acquisition for the firm is necessary. |
| Ganpat Rai v. Abnash Chander, AIR 1973 J & K 74 | Illustrates that benefits of tenancy rights can form part of the goodwill of a business, and goodwill is recognized as firm property under Section 14. | The court used this decision to show that tenancy rights may, in some circumstances, form part of firm goodwill and thus be treated as firm property if the parties' agreement or conduct indicates that. |
Court's Reasoning and Analysis
The court framed its analysis around the scope of a preliminary decree in partnership dissolution proceedings and the statutory definition of firm property under Section 14 of the Partnership Act.
First, the court explained the nature and effect of a preliminary decree under Order 20, Rule 15, Civil Procedure Code: a preliminary decree declares proportionate shares and directs accounts and other acts, and where matters are finally settled by a preliminary decree those aspects are conclusive between the parties (res judicata between stages). The court cited M. Ayyana v. M. Jaggarao for this principle.
Second, the court examined the content of the specific preliminary decree in this matter: the preliminary decree declared that the plaintiff and the two defendants were each entitled to one-third of the capital and profits, but it did not specify what constituted the 'capital' to be divided. Therefore, the court held that the composition of capital assets remained an undecided issue and properly fell to be determined in the final decree proceedings.
Third, applying Section 14 of the Partnership Act, the court emphasized that whether a particular item is property of the firm depends on the contract between the parties and on whether the property was brought into the stock of the firm or acquired for firm purposes. The court quoted authority (B.N. Murthy & Sons) and Supreme Court precedent (Arjun Kanoji Tankar) to support the propositions that:
- Property belonging to a partner does not automatically become firm property merely by being used for the business;
- There must be an intention — express or implied — or acquisition for the firm for an item to be firm property;
- Mere user of a shop or tenancy right is not enough to convert it into partnership property.
Fourth, the court recognized that 'goodwill' is included in firm property under Section 14 and that benefits of tenancy rights may constitute part of goodwill (citing Ganpat Rai). Thus, tenancy rights could in principle be treated as part of firm property if the circumstances show the parties intended that.
Applying these principles to the facts before it, the court found that the trial court's order treating the tenancy right as a capital asset of the partnership was made without considering all relevant aspects and without affording parties an opportunity to tender evidence on the crucial factual questions (e.g., purchase of business and tenancy for Rs. 15,000, contributions of Rs. 5,000 by the defendants, plaintiff's possessory mortgage and claimed title). The court therefore declined to decide on the substantive question (it explicitly did not express an opinion whether the tenancy right is firm property) and held that the dispute should be decided afresh on the merits after permitting evidence.
The court also rejected the allegation that the defendants were approbating and reprobating (i.e., taking inconsistent positions): the earlier contention that the business belonged exclusively to the first defendant and that he was a tenant of the plaintiff was a position that had been negatived by the preliminary decree and did not preclude the present claim concerning the tenancy right.
Holding and Implications
Holding: The C.R.P. is allowed and the impugned order is set aside.
Direct consequences for the parties:
- The trial court's order directing that the tenancy right be sold by the receiver as a capital asset of the business has been set aside.
- The matter is remitted to the court below to decide the issue of whether the tenancy right is a firm property (and related settlement of accounts) on the merits in the final decree proceedings, after permitting evidence and considering the parties' contentions and materials.
- No costs were awarded.
Broader implications:
The court did not lay down a new substantive rule on whether tenancy rights are partnership property; instead it applied established principles under Section 14 of the Partnership Act and relevant case law to require that the factual question be examined with evidence. Thus, no new precedent was announced on the substantive issue — the decision remits the matter for factual and evidentiary determination by the trial court.
Petition allowed.
1. Plaintiff is the revision petitioner and the matter arises from final decree proceedings. Defendants 1 and 2 are the brother and sister of plaintiff's deceased husband. The suit is one for dissolution of a partnership business in plastic goods conducted in a shop at Tellicherry and for settlement of accounts. Though plaintiff claimed that herself and defendants 1 and 2 are the partners, both defendants denied the partnership. First defendant claimed the business to be exclusively his. Second defendant denied haying anything to do with the business except advancing a loan of Rs. 5,000/- to the first defendant. Trial court accepted plaintiff's case and passed a preliminary decree for dissolution and held that each is entitled to 1/3 share in the capital and profits of the business. In the final decree proceedings, on the application of the defendants, the trial court ordered the tenancy right in the shop building, in which the business is conducted, also to be sold by the receiver as a capital asset of the business. Revision is directed against that order.
2. The first contention of the revision petitioner was that the trial court exceeded its powers and went against the provisions of the preliminary decree. Order 20, R. 15 of the Civil P.C provides for passing of a preliminary decree in a suit for dissolution of partnership of taking of partnership accounts. The preliminary decree has to declare the proportionate shares of the parties and direct accounts to be taken and other acts to be done, as it thinks fit. Passing of a preliminary decree is only discretionary. That means a preliminary decree need be passed only in cases when it is necessary. When there is no dispute to be gone into and decided in a final decree, the decree in the first instance could be a final decree. Anyhow that contingency has not arisen here and the decree passed is a preliminary decree. So far as matters decided in the preliminary decree are concerned, it is final and conclusive between the parties subject to the result of appeal, if any. In that respect there cannot be any dispute. The principle evolved in the doctrine of res judicata S. 11 of the Code could be applied not only in independent cases but also between different stages of some litigation. Otherwise there cannot be finalities to decisions which are binding on parties. When a dispute is finally settled by the preliminary decree, the final decree cannot amend or go behind the preliminary decree in that respect. It can decide only such other matters directed to be decided by the preliminary decree accepting the findings in the preliminary decree as the basis. If at all any authority is required for this position, it could be had from M. Ayyana v. M. Jaggarao, AIR 1977 SC 292.
3. But the question is whether such a contention is available in this case. The preliminary decree only said that plaintiff and defendants 1 and 2 are entitled to 1/3 in the capital as well as profits of the business. What is the ‘capital’ that has to be divided in the process of settlement of accounts is not decided by the preliminary decree. Now the contention is that the tenancy right of the shop room in which the business is conducted is also a capital asset of the partnership. That is not an aspect on which the preliminary decree has rendered a verdict. Therefore it is well within the competence of the court to decide in the final decree proceedings as to what all items will constitute the capital assets to be taken into account in rendering accounts. Otherwise it may not be possible to pass an effective final decree in terms of the preliminary decree. Items constituting the capital assets of the business was not a matter in controversy between the parties in the preliminary decree proceedings. The fact that in the judgment dismissing the appeal against the preliminary decree it was stated that the building belongs to the plaintiff under possessory mortgage cannot be taken as a finding that the tenancy right in the building does not belong to the partnership. In the preliminary decree proceedings the only-dispute between the parties was whether the business is a partnership of the individual concern of the first defendant. That alone was solved by the preliminary decree. Therefore it cannot be said that the court went against the preliminary decree.
4. The building belonged to a Muslim family. One Manual took the same one case and was conducting a business in it. As evidenced by Exts. A1 to A5 the business along with the tenancy right was got assigned by the plaintiff from the widow of the lessee Manual after his death. Plaintiff continued that business. It was thereafter that defendants were taken in as partners and the business continued in the same premises as a partnership concern. From the jenmi family, plaintiff has taken a possessory mortgage also. Equity of redemption is also claimed to have been purchased by the plaintiff from the jenmi family. The title of the plaintiff to the building is not seen disputed. But that fact is not having any relevance in deciding whether the tenancy right is also a capital asset of the partnership.
5. In order to resolve the controversy the court has to decide what are the properties of the firm. According to S. 14 of the Partnership Act that is a matter depending upon contract between the parties. Subject to such contract the property of the firm includes all property and rights and interests in the property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the good will of the business. Unless a contrary intention appears, property and rights and interests in the property acquired with the money belonging to the firm are deemed to have been acquired” for the firm. In this case the contention of the defendants is that the running business along with the tenancy right in the building was purchased by the plaintiff for Rs. 15,000/- and when they were inducted as partners they contributed Rs. 5,000/- each towards their 1/3 share. That is a contention which has to be gone into on the merits in the final decree proceedings in order to decide whether the tenancy right is also a capital asset of the firm. If actually the tenancy right is also part of the capital asset of the firm, its non-inclusion in the capital assets will seriously prejudice the defendants because stripped of the tenancy right what remains to be divided is probably only the plastic goods and money if any including the other assets and liabilities.
6. In deciding whether the tenancy right is also a capital asset of the firm the following aspects will have to be borne in mind. Property belonging to the partners, or to one of them, does not become the property of the firm merely by being used for the purpose of the business. Rights depend upon the terms of the agreement of partnership. There is no rule that whatever is brought by a partner in the partnership and is continued to be used by the members is presumed to have become the property of the partnership. It will become so only if the partners show an intention to make it so. There must be an agreement, express or implied, that the property is to be treated as the property of the partnership. Under S. 14 it must have been brought into the stock of the firm originally when the partnership was formed or acquired subsequently by the firm. (See B.N Murthy & Sons v. V.V Suguna, AIR 1978 Andh Pra 257). It is not necessary that every partnership for the purpose of its business should own and utilise its own partnership property. Therefore mere user of a shop for the business will not make the shop or the tenancy right in it a partnership asset. Something more is required. It was so held by the Supreme Court in Arjun Kanoji Tankar v. Santaram Kanoji Tankar (1969) 3 SCC 555 also.
7. Under S. 14 of the Partnership Act ‘goodwill’ of the business is also property of the firm. Goodwill can be an advantage connected with the premises in which the business is carried on. The benefits of tenancy rights can also form part of the goodwill in the absence of any stipulation to the contrary (See Ganpat Rai v. Abnash Chander, AIR 1973 J & K 74). ‘Goodwill’ is a thing which is very easy to describe but very difficult to define. It is an advantage which is acquired by business beyond the mere value of the capital stock, fund or property employed therein, in consequence of general public patronage and encouragement which it receives from constant or habitual customers. It is composed of a variety of elements and is an advantage connected with the premises in which the business was previously carried on. The benefit of a tenancy right in the premises may also form part of the goodwill without which the business may some times be of no use and value. This aspect has also to be borne in mind in considering whether the parties agreed that the tenancy right is also part of the capital asset.
8. User of the premises by the partnership with an added indication that the partners were dealing as if the tenancy right is also in the common hotchpot is sufficient to treat the tenancy right as part of the property of the firm. All joint properties of partners need not necessarily be partnership properties. Principles of co-ownership cannot attach to such properties. Only properties answering the descriptions in S. 14 of the Partnership Act will be partnership properties. Bearing these principles in mind the court has to decide, on the materials made available in the light of the contentions and the previous conduct of parties, whether the tenancy right is a property of the firm or whether it was so intended and treated. I do not think that there is any merit in the contention of the revision petitioner that respondents are approbating and reprobating in the sense that they are now taking a stand which is inconsistent with the one taken earlier. The earlier contention of the first defendant was that the business belongs to him exclusively and he is running the business as a tenant of the plaintiff in the said premises. That contention was found against and the business was found to be partnership concern. Such a contention or the decision cannot go against the present claim.
9. In the way in which I am going to decide the case, I am not expressing any opinion as to whether the tenancy right is the property of the firm or not. That has to be decided by the trial court. The order under challenge was without considering all the aspects including the contentions and materials on record and without giving opportunities to tender evidence. The matter has to be decided afresh on the merits after allowing evidence, if any, also.
The C.R.P is allowed and the order is set aside. The matter is sent back to the court below in order to decide the dispute on the merits in the final decree proceedings in the light of what is stated above. No costs.
Petition allowed.
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