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  • — Sh. B.C Misra Senior Advocate with Shri G.N Aggarwal and Mr. S.N Gupta, Advocate.
  • — Sh. S.L Watel, Advocate.
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Advocates
  • — Sh. B.C Misra Senior Advocate with Shri G.N Aggarwal and Mr. S.N Gupta, Advocate.
  • — Sh. S.L Watel, Advocate.
Acts
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Smart Summary

Factual and Procedural Background

The appellant, Dr. Chiranji Lal, was the tenant of premises at 14-C Connaught Place, New Delhi and carried on business in the name and style of Lal & Co. On 20 January 1956 he executed a partnership deed with the respondent, Dwarka Nath Mattu. Clauses 14, 15 and 16 of that deed are central to the dispute: clause 14 provided that the partnership business would be carried on at 14-C Connaught Place and the partnership would pay rents and taxes; clause 15 valued the goodwill of Lal & Co., including the right of tenancy, at Rs. 45,000 and provided a commission arrangement for the appellant; clause 16 provided that on dissolution the appellant would be credited with Rs. 45,000 and thereafter the goodwill including the right of tenancy would be divisible among the partners.

The learned trial court and the learned lower appellate court held that, by virtue of the partnership deed clauses, the appellant had assigned, sublet or parted with possession of his tenancy right in favour of the partnership, and passed a preliminary decree for the respondent. The appellant appealed a second time against those decisions. The High Court (V.S. Deshpande, J.) considered whether the tenancy rights were transferred at the inception or during the life of the partnership and whether clause 16's stipulation to transfer at dissolution was legally enforceable in light of subsequent rent control legislation.

The suit for dissolution of the partnership was instituted after the commencement of the Delhi Rent Control Act, 1958. The appeal before the court challenged the conclusions of the lower courts that the tenancy and goodwill had vested in the partnership.

Legal Issues Presented

  1. Whether the appellant assigned, sublet or parted with possession of his tenancy right in 14-C Connaught Place to the partnership by virtue of clauses 14, 15 and 16 of the partnership deed dated 20 January 1956.
  2. Whether clause 16 of the partnership deed — providing that on dissolution the goodwill including the right of tenancy would vest in the partnership upon payment of Rs. 45,000 — was legally enforceable, particularly after the commencement of the Delhi Rent Control Act, 1958 (i.e., whether the doctrine of supervening illegality rendered that clause void).

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Chaplin v. Smith Illustrates that a lessee who forms a company and allows the company to carry on business in the premises does not necessarily part with possession; use by others does not equate to transfer of legal possession. Used to support the conclusion that actual use of the premises by the partnership did not amount to vesting of tenancy in the partnership; the appellant retained legal possession.
Pratap Chand v. Radhey Singh (SAO 309 of 1967) Shows that where a partnership agreement gives exclusive management to the other partner so as to exclude the lessee, legal possession is parted with and the partnership may be ostensible. Distinguished on facts: in the present case the partnership was genuine and managed by both partners, so the present partnership did not result in parting with legal possession.
H.C. Sharma v. Life Insurance Corporation of India Noted that Rent Control legislation affected landlord-tenant law and led to the emergence of a concept of "possessory licence" distinct from traditional licences under section 52 of the Easements Act. Relied upon to support recognition of the possessory licence concept: the respondent's possession as partner was a licence, not a transfer of tenancy.
Cobb v. Lane Lord Denning's articulation that the decisive question is intention: whether the occupier was intended to have only a personal privilege with no proprietary interest. Applied to emphasise that the parties' intention, as manifested in the partnership deed, pointed to a licence-like arrangement rather than transfer of tenancy.
Torbett v. Faulkner Another decision cited as elaborating the concept of a possessory licence which, even if exclusive, may not amount to a lease or assignment. Used with other Lord Denning authorities to underpin the possessory licence analysis in this case.
Facchini v. Bryson Also cited among Lord Denning's decisions on possessory licences and the role of intention. Supported the court's conclusion that possession by partner could be possessory licence and not an assignment/lease.
Associated Hotels of India v. R.N. Kapur Recognised by the Supreme Court the existence of a possessory licence not amounting to a lease or assignment. Invoked to show that higher authority accepted the possessory licence concept which the court applied here.
M.B. Lal v. Dunlop Rubber Company Another Supreme Court decision recognising the possessory licence concept. Used to corroborate that the tenancy/use arrangement could be a possessory licence and not a transfer.
Associated Hotels of India v. S.B. Sardar Ranjit Singh Further Supreme Court recognition of a possessory licence not amounting to a lease or assignment. Applied alongside the other Supreme Court decisions to support the licence characterization of the respondent's possession.
Ambler v. Bolton Illustrates that a partner may hold an asset that is untransferable (e.g., a government contract) and upon dissolution the partner in whose name the contract stands must be debited with its value; the law contemplates untransferable partnership assets remaining with the holding partner. Relied upon to show that where transfer of an asset (here tenancy) is forbidden by law, that asset continues to belong to the partner who held it and the void part of an agreement is severable from the rest of the partnership agreement.
Waman Shrinivas v. R.B. & Co. The Supreme Court held that a contract for subletting (opposed to public policy) could not be enforced and could not be legalised by the conduct of the parties; analogous to contracts for transfer of tenancy rights. Applied to the present case to support the conclusion that the agreement to transfer tenancy rights post-commencement of the 1958 Act could not be enforced and was void.

Court's Reasoning and Analysis

The court's analysis proceeded in two main parts: (A) construction of clauses 14–16 to decide whether the tenancy and goodwill vested in the partnership at inception or during its life; and (B) the legal effect of clause 16 (an executory agreement to transfer on dissolution) after the Delhi Rent Control Act, 1958 came into force.

A. Construction of clauses 14–16 and whether tenancy was transferred at inception

  • The court started from the language of the partnership deed and observed that the parties were aware of proviso (b) to s.13(1) of the Delhi and Ajmer Rent Control Act, 1952 and had made efforts to ensure the agreement would not amount to assignment/subletting/parting with possession.
  • The court drew five conclusions from clauses 14–16: (1) the goodwill including the right of tenancy was valued at Rs.45,000; (2) neither goodwill nor tenancy was made an asset of the partnership at inception (the amount was not credited to the appellant); (3) the partnership was to pay the rent because it would use the premises; (4) the appellant would be paid commission for use of goodwill, indicating goodwill remained his property; and (5) clause 16 provided for crediting Rs.45,000 at dissolution and thereafter dividing goodwill and tenancy.
  • The court emphasised the distinction between use and ownership: the partnership's use of the goodwill and premises did not effect a transfer of legal title or possession. The appellant remained the legal holder of the tenancy; the other partner's use was on a licence basis.
  • Authoritative decisions (Chaplin v. Smith and several Lord Denning authorities, as well as Supreme Court decisions) were invoked to support the doctrine that such use can amount only to a possessory licence and not to assignment/lease where intention and contractual language indicate retention of legal title.
  • The court distinguished Pratap Chand v. Radhey Singh on the basis that in that case exclusive management and exclusion of the lessee demonstrated a transfer of legal possession; in the present case the partnership was genuine with shared management, so no such transfer occurred.

B. Legality of clause 16 (agreement to transfer at dissolution) and supervening illegality

  • The court noted that under the earlier Delhi and Ajmer Rent Control Act, 1952 section 44(3) only penalised subletting and did not expressly prohibit assignment; therefore clause 16, when made in 1956, was not necessarily forbidden by section 23 of the Contract Act.
  • However, the Delhi Rent Control Act, 1958 (effective 9-2-1959) altered the law: s.16(3) forbade assignment, subletting or transfer after commencement; s.48(2) punished assignment and parting with possession. Clause 16 was an executory agreement (to be performed at dissolution) and therefore came to be governed by the law as it stood when the suit was instituted (after the 1958 Act's commencement).
  • The court applied the doctrine of supervening illegality under the second paragraph of section 56 of the Contract Act — a contract to do an act which subsequently becomes unlawful becomes void when it becomes unlawful — and held clause 16 became unlawful upon the 1958 Act's commencement and thus void.
  • The court held that the void portion (the agreement to transfer tenancy at dissolution) was severable from the remainder of the partnership agreement; the tenancy and goodwill therefore did not become partnership assets at dissolution. Ambler v. Bolton was invoked to illustrate that partnership law contemplates assets that cannot be transferred to the firm by law and that such assets remain with the partner.
  • The court further relied on Waman Shrinivas v. R.B. & Co. which held that contracts for subletting/transfer opposed to public policy cannot be enforced or legalised by conduct, to reinforce that clause 16 could not be given effect after the 1958 Act.

Holding and Implications

HOLDING: APPEAL ALLOWED.

Direct consequences and remedial order:

  • The court held that the goodwill including the tenancy rights belonging to the appellant did not vest in the partnership at its formation or during its life.
  • The court held that clause 16 — the agreement that at dissolution the goodwill including the right of tenancy would vest in the partnership upon payment of Rs.45,000 — was rendered void by the supervening change in law effected by the Delhi Rent Control Act, 1958 (ss.16(3) and 48(2)), and therefore the tenancy rights could not legally vest in the partnership at dissolution.
  • As a result, the goodwill and tenancy right of the appellant are not partnership assets; the respondent's suit for dissolution and accounts, insofar as it related to the goodwill and tenancy right at 14-C Connaught Place, is dismissed. The decrees of the trial court (Case No. 142 of 1959) and of the Additional District Judge (R.C.A. 20 of 1967) are modified accordingly.
  • No order as to costs was made.

Implications beyond the parties:

The decision applies established principles concerning contractual construction, the distinction between use and legal ownership (licensee vs. assignee/lessee), and the doctrine of supervening illegality under section 56 of the Contract Act. The court applied prior case law and statutory provisions to the facts; the opinion does not purport to create a new legal principle beyond those applications. The direct effect is the protection of the appellant's tenancy and goodwill from being treated as partnership assets in the circumstances described.

Show full summary ...

    Dr. Chiranji Lal v. Shri Dwarka Nath Mattu

    V.S Deshpande, J.:— The first question for consideration in this case is whether the appellant, Dr. Chiranji Lal, assigned, sublet or parted with possession of his tenancy right in 14-C Connaught Place in favour of the partnership consisting of himself and the respondent, Dwarka Nath Mattu by virtue of clauses 14, 15 and 16 of the partnership deed executed by them on the 20th January, 1956. The question was answered in the affirmative by both the learned lower courts, who have thereupon passed a preliminary decree in favour of the respondent. Hence this second appeal by the appellant.

    The relevant clauses of the partnership deed run as follows :—
    “14. That during the continuance of the partnership the business of the partnership will be carried on at 14-C Connaught Place, New Delhi. The partnership will pay all rents, taxes, in respect of the said premises.
    15. That the goodwill of Lal & Co. including the rights of tenancy has been valued at Rs. 45,000/- (Fortyfive thousand) which has not been credited to the account of the first party and in lieu of interest of the goodwill the first party will be paid commission Rs. 2% on retail gross sales and Rupee 1% on wholesale gross sales. This commission will be the exclusive income of the first party who will be entitled to withdraw this amount during the continuance of the partnership.
    16. At the time of the dissolution, first party will be credited with this amount of Rs. 45,000/- as stated in para No. 15, and the goodwill including the right of tenancy will then be liable to division amongst the partners just like other “assets of the partnership.”
    In construing me above clauses of the agreement of partnership, we must be guided by the language used by the parties. It is clear that the parties were aware of the provision of proviso (b) to sub-section (1) of section 13 of the Delhi and Ajmer Rent Control Act, 1952 (hereinafter referred to as ‘the Act of 1952). When they entered into the partnership agreement they made conscious effort to ensure that the agreement should not amount to an assignment, subletting or parting with possession of the premises by the tenant in favour of the partnership, inasmuch as the landlord of the appellant would thereby get a cause of action to evict the appellant-tenant from the premises. There was nothing wrong with such intention. The parties were free to enter into a genuine agreement which would not come within the mischief of proviso (b) to sub-section (1) of section 13 of the Act of 1952. If, on the other hand, the transaction amounted to an assignment, sub-letting or parting with possession on the wording of the agreement itself, then the parties, could not prevent the landlord from proving that he was entitled to evict the tenant. But the construction of the agreement must not be influenced by any consideration that the transaction should or should not come into the mischief of proviso (b) to sub-section (1) of section 13 of the Act of 1952.
    The following conclusions can be drawn from the language of clauses 14, 15 and 16 :
    1. The good will of Lal & Co. including the right of tenancy vested in the appellant were valued at Rs. 45,000/-.
    2. But neither the goodwill nor the right of tenancy was made an asset of the partnership at the inception of the partnership. This is what is meant by the words “goodwill of Lal & Co. including the right of tenancy has been valued at Rs. 45,000/-, which has not been credited to the account of the first party”. That is to say the right of the appellant to the goodwill and the tenancy, which was worth Rs. 45,000/-, was not transferred or given over to the partnership and, therefore, the consideration of Rs. 45,000/- was not paid to the appellant as these two rights remained with the appellant and were not transferred to the partnership. In making the accounts of the partnership, if the appellant had been regarded as the seller of the goodwill and the tenancy to the partnership, then an amount of Rs. 45,000/- would have been given out of the fund of the partnership for payment to the appellant after which the assets of the partnership including the goodwill and the tenancy would have become divisible between the two partners. This amount of Rs. 45,000/- was not credited to the appellant when the partnership was entered into;
    3. The rent of the premises, which was the original consideration for the tenancy was to be paid by the partnership to the landlord of the appellant, inasmuch as the premises were to be used by the partnership for its business;
    4. The goodwill of Lal & Co., which was used by the partnership was to be separately paid for by way of a commission to the appellant, inasmuch as the goodwill continued to belong to the appellant; and
    5. At the time of the dissolution of the firm, however, the appellant was to be credited with an amount of Rs. 45,000/- as consideration of the goodwill including tenancy belonging to the appellant. Thereafter, the goodwill including the right of tenancy was liable to be divided between the partners like the other assets of the partnership.
    The actual use of the goodwill and the tenancy premises of the appellant by the partnership has been held by the learned lower Courts to amount to the vesting of the goodwill and the tenancy in the partnership. They have been influenced by the fact that virtually the partnership used these rights as belonging to it. In my view they confused thereby the use of these rights with the ownership of the same. It was entirely legal and possible that the appellant should continue to hold the goodwill including the tenancy and only allow the tenancy to use the same without transferring it to the partnership. The mere fact that the holder of these rights enters into partnership with another and enables both the partners to enjoy these rights does not necessarily mean that these rights vest in both the partners. On the contrary, the legal title to and possession of these rights continued to be with the appellant and only the use of the goodwill and the premises was allowed to be made by both the partners, viz. by the partnership.
    The appellant, doing the business in the name and style of Lal & Co., in the leasehold premises, was already carrying on the business of sale of medicines before he entered into this partnership. This business was to be continued by the partnership. The management of the business was to be by both the partners. The profit and loss of the firm were to be divided equally between the partners. Both the partners were to contribute the stock of goods of their respective businesses to the partnership and the inequality between their contributions was to be made good by payment of cash. The partnership was, therefore, a genuine one. In such a partnership, the partner who is in legal possession of the tenancy prior to the formation of the partnership continues to be in such legal possession and the actual possession of the premises by both the partners does not change the position. The use of the premises by the other partner would be as a licencee. This is illustrated by the leading case of Chaplin v. Smith(1), in which the lessee formed a company of which he became the Managing Director and the company carried on its business in the premises. It was held that the lessee had not parted with the possession of the premises. For the same reason the premises of the appellant cannot be said to have been either sublet or assigned to the partnership. In fact, the partnership meant only the appellant and the respondent. There was no transfer by the appellant in favour of himself and the respondent. In Pratap Chand v. Radhey Singh (2), SAO 309 of 1967, decided by me on 14th March, 1969, the lessee entered into a partnership with another person, but the partnership agreement allowed the other person to be in exclusive management of the business. He could, therefore, exclude the leasee from the possession. It was, therefore, held that the legal possession of the premises had been parted with in favour of the other partner. The partnership was, therefore, only ostensible and not a genuine one. In the present case, on the other hand, the partnership is a genuine being managed by both the partners. There was, therefore, neither any assignment nor any subleting, nor any parting with possession by the appellant in favour of the partnership or the respondent.
    The possession of the respondent as a partner of the appellant over the premises was that of a licencee. It was not exclusive inasmuch both the appellant and the respondent were in possession of the premises. The possession of the respondent was, however, in pursuance of the partnership agreement and, therefore, as of right arising out of the said agreement. Even if the possession of the respondent had been exclusive, it would not have amounted to possession as an assignee or a lessee, inasmuch as the legal possession remained with the appellant, who alone continued to remain as the tenant of the premises as the tenancy had not been transferred to the partnership. In H.C Sharma v. Life Insurance Corporation of India(3), I had occasion to point out that the Rent Control Legislation had an impact on the Law of landlord and tenant. This has given rise to the emergence of a new concept, which may be called a possessory licence to distinguish it from the older orthodox type of licence which gave no right to exclusive possession and which is defined in section 52 of the Easements Act. Even though exclusive, such possession does not amount to an assignment or a lease. This concept has been elaborated by Lord Denning in several decisions such as Cobb v. Lane(4), Torbett v. Faulkner (5) and Facchini v. Bryson(6). As observed by Lord Denning at page 1202 of the decision in Cobb v. Lane(4), referred to above, the question in all these cases is one of intention. “Did the circumstances and the conduct of the parties show that all that was intended was that the occupier should have a personal privilege with no interest in the land ?” The question can be answered in the affirmative in the present case, in the light of the provisions of the partnership agreement discussed above. The Supreme Court has also recognised the existence of such a possessory licence not amounting to a lease or assignment in three recent decisions, viz., Associated Hotels of India v. R.N Kapur(7), M.B Lal v. Dunlop Rubber Company(8), and Associated Hotels of India v. S.B Sardar Ranjit Singh(9). For the above reasons I hold that the partnership agreement entered into by the parties did not transfer the tenancy rights of the appellant to the partnership at the inception and during the life of the partnership.
    The next question for consideration is the legality of the agreement embodied in clause 16 of the partnership deed, that at the time of the dissolution the goodwill including the right of tenancy would vest in the partnership, for which a consideration of Rs. 45,000/- would be paid to the appellant after which the goodwill and the tenancy would be liable to division between the partners.
    Section 44(3) of the Act of 1952 prohibited and penalised only the subletting of the whole or part of the premises by the tenant. It did not expressly prohibit the assignment or parting with possession of the premises. The agreement to transfer the premises by the appellant to the partnership at the time of its dissolution was not, therefore, forbidden by Law within the meaning of section 23 of the Contract Act.
    The Delhi Rent Control Act, 1958 (hereinafter referred to as ‘the Act’), which came into force on 9-2-1959, however, changed this position. Section 16(3) clearly stated that after the commencement of the Act no tenant shall either assign, sublet or transfer his rights in the tenancy. Section 48(2) forbade and penalised not only the subletting, but also the assignment or parting with possession of the premises. The agreement to transfer the leasehold rights to the premises at the time of the dissolution of the partnership was an executory agreement. Firstly, it was to be acted upon only at the time of the dissolution of the firm. Secondly, the consideration for the transfer was to be paid only at the time of the dissolution of the firm. Till the dissolution, the agreement was neither to be acted upon nor was the transfer to be paid for. This agreement, though legal when it was entered into, was overtaken by a supervening illegality when the Act came into force as shown by sections 16(3) and 48(2) of the said Act. These provisions forbade the agreement within the meaning of section 23 of the Contract Act. The learned lower appellate court in paragraph 10 of its judgment has taken the view that the assignment of the tenancy rights had already vested in the partnership before the Act came into force and, therefore, the agreement embodied in clause 16 of the partnership deed was legal. I am unable to agree. Clause 16 expressly says that the transfer of the tenancy rights was to take place only at the time of the dissolution. The suit for the dissolution of the partnership was instituted after the Act had come into force. On the date of the suit, therefore, the agreement embodied in clause 16 of the partnership deed had already become illegal as it was forbidden by sections 16(3) and 48(2) of the Act. The second paragraph of section 56 of the Contract Act squarely applies to the present case. It's relevant part runs as under :
    “A contract to do the act which after the contract is made, becomes by reason of some event which the promisor could not prevent unlawful, becomes void when the act becomes unlawful.”
    This is doctrine of supervening illegality. From the commencement of the Act of 1958, therefore, the agreement embodied in clause 16 of the partnership deed became unlawful and, therefore, void. This void part of the partnership agreement is severable. The tenancy right of the appellant cannot legally vest in the partnership even at the time of the dissolution. As on separate consideration for the transfer of the goodwill as distinguished from the transfer of tenancy rights was stipulated even the goodwill of the appellant would not vest in the partnership. The avoidance of this part of the partnership agreement does not in any way affect the rest of the partnership agreement. In Ambler v. Bolton(10), a part of the assets of the partnership consisted of a Government contract entered into in the name of one of the partners and containing a provision against its alienation. It was held that upon the dissolution of the partnership, the partner in whose name the contract was taken and should continue to carry it must be debited in the accounts with its value. This decision is cited with approval in Lindley on Partnership, 12th Edn. page 572. The Law of Partnership, thus, contemplates a case in which a partner holds an untransferable asset. Such an asset will continue to belong to the said partner alone inasmuch as its transfer to the partnership is forbidden by law.
    In Waman Shrinivas v. R.B & Co.(11) the Supreme Court held that a contract for subletting was opposed to public policy. The same may be said of a contract for the transfer of tenancy rights. The Supreme Court held at page 693 of the judgment that such a contract could not be enforced and it could not be legalised by the conduct of the parties. This observation applies to the present case also. The suit in the present case was filed alter the commencement of the Act. Therefore, it was governed by the provisions of this Act. It is only the suits and proceedings which were pending when the Act came into force that would be governed by the Act of 1952 as provided in sub-section (2) of Section 57 of the Act.
    For the above reasons, I hold that die goodwill including the tenancy rights belonging to the appellant were not transferred to the partnership at the time of the formation of the partnership and that the agreement to transfer such rights to the partnership at the time of the dissolution of the partnership is void being contrary to law. The goodwill and the tenancy right of the appellant is not, therefore, an asset of the partnership and no decree for the dissolution of the partnership can affect them. They continued to remain with the appellant and the partnership is not required to pay any consideration to the appellant, inasmuch as they have not been transferred and are not transferable to the partnership. The appeal is allowed in the above terms. The decrees of the trial court in case No. 142 of 1959 and of the learned Additional District Judge in R.C.A 20 of 1967 are modified and it is ordered that the suit of the respondent for the dissolution of partnership and accounts in so far as it related to the goodwill including the tenancy right in 14-C Connaught Place belonging to the appellant is dismissed. No order is made as to costs.
    A.N.K Appeal allowed.
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    Comments

    Dr. Chiranji Lal v. Shri Dwarka Nath Mattu
    (May 26, 1969)