Muddi Narayanam And Bro., A Firm And Others v. Kanumuri Subbaraju And Others

5. Mr. B. V. Subramaniam, learned counsel for the appellants, raised before us two points :

(i) The joint firm at its inception was constituted with a valid object and the fact that subsequently they carried on business on the basis of licence issued to the 1st defendant would not make the partnership illegal, and

(ii) The constitution of the joint firm was only to take over the management of the mill which was being managed by the 1st defendant-firm and the new management could operate on the preexisting licence in favour of the 1st defendant-firm though under the instructions, the fact of the change-over of the management should be intimated to the authorities concerned and duly recorded.

6. The first argument was not, in terms, raised before Chandra Reddy, J., or before the two Courts below. Before Chandra Reddy, J., it was urged that, as one of the partners had a licence in his individual capacity, both under the Foodgrains Control Order and the Madras Rice Mills Licensing Order, it was sufficient compliance with the requirements of the said orders. But, the present point, viz., that the business as originally constituted was not for an illegal object and, therefore, though subsequently the joint firm transacted with the goods purchased in contravention of the aforesaid orders, it would not make the partnership illegal, was not raised. Indeed, learned counsel for the appellants fairly conceded that the said point was not raised but contended that the point he was now pressing before us related to the question of the legality of the partnership, though from a different perspective. The facts necessary for appreciating his contention may be briefly stated.

7. Exhibit D-1, dated 2nd June, 1943, was a record of the resolutions passed at the meeting held by the partners of the joint firm. Therein, it was stated that the 1st plaintiff-firm had taken the Sri Dhanalakshmi Rice Mill on lease from Kannumuri Subbaraju, the proprietor of the said mill, for the period from 15th June, 1943, to 14th June, 1945 and obtained a lease-deed on 1st June, 1943, from him. The shares of the two firms were given as : Rs. A. P.

1. Maddi Narayanam and Brother ... 0 12 0

2. Kanumuri Subbaraju ... 0 4 0

1 0 0

8. The business was agreed to be conducted under the name and style of Sri Dhanalakshmi Rice Mill Contractors Maddi Narayanam and Brother. Chalasani Anjayya, the 5th defendant, was appointted as working manager. It was settled that every partner should pay Rs. 1,000 per one-anna share for the working capital and for the profit and loss. The 1st plaintiff-firm was given absolute right to close the business and settle the accounts.

9. Soon after the formation of the joint firm, the joint firm applied for a fresh licence under the Foodgrains Control Order. On 3rd July, 1943, Subbaraju applied to the Commercial Tax Officer, Kakinada, informing him that they had leased out the mill to the 1st plaintiff-firm and requesting him to issue another licence for carrying on his business. On 10th August, 1943, the Commercial Tax Officer, East Godavari, cancelled the licence issued to Kannumuri Subbaraju as proprietor of the 1st defendant-firm on the ground that it was given either on misrepresentation or on mistake of facts and Subbaraju was informed that the issue of a fresh licence in his name would be considered separately. The entire paddy, with which the joint firm was concerned, was purchased on the basis of the licence issued to Sree Dhanalakshmi Rice Mill before it was cancelled. On the aforesaid facts, it was contended that, when the joint firm was constituted, its object was to carry on business in strict compliance with the provisions of the aforesaid orders and, indeed, an application was also made for a licence and, therefore, the partnership was legal..... Reliance was placed upon section 23 of the Contract Act, which reads: "The consideration or object of an agreement is lawful unless, It is forbidden by law; or is of such a nature that, if permitted, it would defeat the provision of any law; or is fraudulent, or involves or implies injury to the person or property of another, or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void".

10. As the object of the suit partnership was to purchase paddy, mill the same and sell it at a profit and as on behalf of the partnership a licence under the Control orders was duly applied for, the argument proceeded, the contract was not hit at by section 23. This argument emphasises the form but ignores the substance. We must, therefore, ascertain what was prohibited by the Control Order, what was the substance of the partnership business and whether it contravened the prohibitions under the said orders.

11. In exercise of the powers conferred by sub-rule 2 of Rule 81 of the Defence of India Rules, the Foodgrains Control Order was promulgated, Under clause 3 of the said order, no person shall engage in any undertaking which involves the purchase, sale, or storage for sale, in wholesale quantities of any foodgrains except under and in accordance with a licence issued in that behalf by the Provincial Government or by an officer authorised by the Provincial Government in this behalf. Violation of that rule was punishable both under clause 7-A of the Foodgrains Control Order and also under rule 81 (4) of the Defence of India Rules. The punishment was imprisonment for a term which may extend to three years or with fine or with both in addition to the penalty mentioned in the proviso to the sub-rule. The defence of india rules and the Foodgrains Control Order were presumably made and issued in public interest to control business in foodgrains as they were then in short supply. So, any person who engaged himself in an undertaking involving the purchase, sale or storage for sale of foodgrains without a licence broke a statutory prohibition and, therefore, committed an offence.

12. A Full Bench of the Madras High Court in Velu Padayachi v. Sivasooriam Pillai 1930-1 Mad LJ 315 : (AIR 1950 Mad 444) (A), dealt with the legality of a partnership business carried on in toddy without a licence under the Abkari Act. Rule 27 made under the Abkari Act prohibited transfer of a licence and section 56 made it punishable. Selling toddy without a licence was a branch of section 15 of the Act and was also punishable under section 55. In that case, a partnership was entered into for the purpose of conducting a business in arrack or toddy on a licence granted only to one of the partners. The Full Bench held that the partnership was ab initio void. Horwill, J., who delivered the judgment on behalf of the Full Bench, after considering the case-law on the subject, expressed his view at page 324 as follows : "From the above discussion it is evident that there is a long and consistent body of opinion of this High Court from Marudamuthu Pillai v. Rangaswami Moopan ILR 24 Mad 401 (DB), onwards, with which we agree, that a partnership entered into for the purpose of conducting a business in arrack or toddy on a licence granted or to be granted to only one of them is void ab initio, whether the contract was entered into before the licence was granted or afterwards, in that it either involves a transfer of the licence which is prohibited under rule 27 and punishable under S. 56, or a breach of S. 15 of the Abkari Act, punishable under S. 55, because the unlicenced partner, by himself or through his agent, the other partner, sells without a licence. If a partnership is lawful at its inception, because it is not intended to infringe any provision of the Contract Act, it nevertheless becomes unlawful when it intends to conduct the business jointly on a licence granted to one only of the partners". The Full Bench decision meets the argument of the learned counsel. Just like under the Foodgrains Control Order, the provisions of the abkari act and the rules framed thereunder prohibit a sale by a person without a licence and the contravention of the rule is made an offence. Under the Foodgrains Control Order a person cannot engage himself in an undertaking involving the purchase, sale, or storage for sale of foodgrains except under a licence and the contravention of the prohibition is made punishable under both the defence of india rules and also under clause 7-A of the Foodgrains Control Order. Though the Full Bench decision arose under a different Act and the rules framed under that Act, the reasoning applies with equal force to a case arising under the defence of india rules and the Foodgrains Control Order, for with verbal variations, the effect of these two sets of rules are in pari materia. The Full Bench decision also gives a conclusive answer to the argument based upon the distinction sought to be made by the learned counsel between the legal inception of the partnership business and the subsequent indulging by the partnership in illegal transactions. In the aforesaid passage, Horwill, J., made it clear that though a partnership was lawful in its inception because it was not intended to infringe any of the provisions of the Contract Act, it nevertheless became unlawful when it intended to conduct business jointly on a licence granted to only one of the partners. Though the joint firm had no intention at the inception of the business to operate on the licence issued in favour of the 1st defendant-firm for one reason or other it took over the entire paddy purchased by the 1st defendant-firm on the basis of its licence and, indeed, started the account with those transactions. It is also conceded that there were no other transactions besides the impugned transactions. In substance, therefore, the partnership carried on its entire business in direct violation, of clause 3 of the Foodgrains Control Order for, every unlicensed partner of the joint firm by himself or through his agent, the other partner, engaged himself in an undertaking which involved the purchase, sale or storage for sale of foodgrains. The business would be a mere name if the illegal transactions were excluded and, therefore, it can reasonably be held that the partnership from the beginning was unlawful and even if that was wrong, the partnership became unlawful from the moment they took over the paddy and entered it in the accounts, i.e., from 27th June, 1943.

13. A Division Bench of the Madras High Court in Viswanathan v. Namakchand Gupta ILR (1954) Mad 1013 : ((S) AIR 1955 Mad 536) (C), followed and applied the Full Bench decision to a partnership conducted without a licence under the Cinematograph Act. A lease of the theatre and a licence for running the talkie were obtained by one of the partners in his own name and subsequently a formal deed of partnership was executed. Under the agreement, the benefits of the lease and the furniture, fittings and other equipment and machinery and goodwill of the theatre together with benefits the licences obtained therefor under the Cinematograph Act should the properties of the partnership.....Clause 7 of the licence provided that the licence shall not, without the permission of the licensing authority, assign, sub-let or otherwise transfer the licence or licensed premises, nor shall the licensee without the permission aforesaid allow any other person during the period of currency of the licence, to exhibit films in the licensed premises. The learned Judges held that the partnership in so far as it related to the carrying on of the business under the licence must be held to be illegal and void ab initio and that as the only business contemplated by the agreement was the running of the theatre as a cinema-house and that was illegal, the entire partnership was illegal and must be declared void ab initio. As in that case in the present case also, the entire joint firm business consisted only of illegal transactions and, therefore the whole partnership business must be held to be void.

14. The unreported judgment of a Division Bench of this Court in Appeal No. 747 of 1950 (D) is not of much help to the appellants. Though in that case the learned Judges threw some doubt on the interpretation to be put upon clause 7 of the licence by the learned Judges in ILR (1954) Mad 1013 : ((S) AIR 1955 Mad 536) (C), they found in fact that the rules were not infringed.

15. Nor the decision in 1896-1 Ch 496 (E), is of much relevance. There, the plaintiff and defendant were partners in a book-makers and betting business, which was carried on by the defendant. The plaintiff claimed an account of the profits of the partnership and the defendant contended that, having regard to the nature of the business, no such relief could be obtained. Chitty, J., held that, as a book-making and betting business could be carried on without contravening the Betting Act, 1853, and that as the plaintiff when he entered into this partnership contemplated that the business would be so carried on in the usual way, the fact that the defendant had acted illegally was immaterial and the plaintiff was entitled to the account claimed. Reliance was placed upon this decision in support of the contention that the business at its inception was legal and therefore, even the subsequent illegal transactions should be accounted for in a suit filed to dissolve the legal partnership. This judgment does not lay down any such proposition. Indeed, that question was expressly left open by the learned Judge at page 501 : "There was a third defence that might have been raised, namely, that the plaintiff was aware that this business was being carried on by the defendant in contravention of the statute; but no such case was made, or attempted to be made, against him. At the end of his able argument, Mr. Younger suggested that some question might arise on the taking of the account, from the fact that some particular winnings might have been earned by illegal practices. I will leave that question - on which there seems to be no authority - open till it arises on the taking of the account". In view of the aforesaid observations, this case is not an authority for a position which it expressly left open.

16. That apart, in the present case, no such difficulty arises for the impugned transactions cover the entire field of the business and, in substance the business was bad from its inception. We therefore, hold that the partnership was illegal and that no suit for dissolution or for settlement of accounts of that partnership would lie.

17. Now, coming to the second contention, some relevant facts may be stated : Under clause 3 of the Foodgrains Control Order, no person shall engage in any undertaking which involves the purchase, sale or storage for sale, in wholesale quantities of any foodgrains except under and in accordance with a licence issued in that behalf by the Provincial Government or by an officer authorised by the Provincial Government in this behalf. The Commercial Tax Officer, presumably under some powers conferred on him, issued a notice Exhibit P-19, dated 14th May, 1943. The relevant clauses of the notice read: "6. Those who have not carried on business in paddy, rice and wheat for over one year and those who have not carried on business in cholam, ragi, pulses, etc., from 20th October, 1941, to 20th October, 1942, i.e., at least for over one year, are not entitled to obtain licences for doing business in the respective food-stuffs (grains). In case those who are so disentitled have obtained licences previously, they should immediately before 10th June, 1943, send their licences by registered post to the Commercial Tax Officer for being cancelled. (7) If any of the individuals, who are not entitled to obtain licences as mentioned in paragraph above, is a joint partner, such individual should be immediately removed from the partnership and the matter should be intimated before 10th June, 1943, by registered post to the Commercial Tax Officer. If the mills and firms that had previously obtained licences fail to note this matter properly and remove immediately the individuals who are not so competent, they should clearly understand that they are liable for prosecution". Para. 7, therefore, directs the partnerships to exclude a partner who did not comply with the? terms contained in para. 6. Exhibit P-18, dated 2nd July, 1943, was another circular sent by the Commercial Tax Officer to merchants. The relevant portion of the circular reads : "The proprietors of the rice-mills working in this district are hereby informed that the instructions contained in paragraphs 6 and 7 of my printed notice, dated 14th May, 1943, regarding one years standing in business will not be enforced in their case.

2. The Board in its reference quoted above was pleased to observe that licences to mills should be issued in the names of the persons who are actually managing them for the time being. In cases where licences have already been issued, the names of the new managers if any in place of the old has to be inserted The proprietors of the mills are, therefore, directed to report within three days of receipt of this circular, the names of the managers actually managing the mills at present for inclusion of their names in the licence. Subsequent changes, if any, in the managership should also be reported promptly as and when they occur and the licence submitted for correction". On the basis of Exhibits P-18 and P-19, it was contended that the 1st defendant-firm was the old manager, that under the agreement, the joint firm became the new manager, that no fresh licence was necessary to be taken in favour of the new manager and that the application Exhibit X-I filed by the joint firm complied with the condition laid down in Exhibit P-18. This contention was not raised before Chandra Reddy, J., or before the lower Courts, and, in our view it was not raised for obvious reasons. To accept this argument, we must stretch the facts to a breaking point. The 1st defendant-firm owned the mill. Under the new partnership agreement embodied in Exhibits P-1 and D-1 the joint firm obtained the leasehold interest therein and, thereafter, the leasehold interest of the mill was one of the assets of the joint firm. It was not a case of a change of managership but it was a case of a new agreement of partnership, the previous owner, i.e., the first defendant-firm leasing out the mill to the new partnership. The first defendant firm was not the manager of the firm but was its proprietor and the joint firm became the proprietor of the lease hold interest. Under the new partnership, the fifth defendant, one Anjayya, was appointed manager, and, under the terms of the notice, his name should be recorded. In our view, Exhibit P-18 was issued for convenience of supervision and presumably to protect proprietors, who did not take an active part in the business from prosecution or other penalties. It, therefore, enjoined on the proprietors of rice-mills to get the licences issued in the name of person actually managing the mill. To illustrate, if one of the partners or even a third party was managing the first defendant-firm or the joint firm and if he ceased to manage and a new person was appointed, under the circular the name of the new manager should be entered in the licence. We cannot apply this circular to the facts of the present case. That apart, the circular cannot obviously be construed in such a way as to circumvent or make nugatory the statutory provisions. We cannot, therefore, accept the second contention either.

18. In the result, the appeal fails and is dismissed with costs. Appeal dismissed.