http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 13  

PETITIONER: CHENNURU GAVARARAJU CHETTY

       Vs.

RESPONDENT: CHENNURU SILARAMAMURTY CHETTY AND OTHERS

DATE OF JUDGMENT: 06/10/1958

BENCH: SINHA, BHUVNESHWAR P. BENCH: SINHA, BHUVNESHWAR P. IMAM, SYED JAFFER KAPUR, J.L.

CITATION:  1959 AIR  190            1959 SCR  Supl. (1)  73

ACT:        Lease,   Renewal   of-Manufacture   of   salt-Lessees,    if        fiduciaries  of  quondam  partners-Constructive  trust-Test-        Presumption--Indian  Trusts Act, 1882 (II of 1882), ss.  88,        90--Madras Salt Act, 1889 (Mad. 4 of 1889).

HEADNOTE: The  appellant, defendant No. 1 in the suit, from which  the appeal  arises, and the father of defendants 2 to 7, as  the highest bidders, obtained a seventeen years’ lease of a salt factory  from the Government and the license to  manufacture and sell salt under the Madras Salt Act, 1889.  They entered into  a  partnership with the plaintiffs to carry  on  their business for the period of the lease.  On the death of their father,   defendants   2  to  7  were  admitted   into   the partnership.   The partnership agreement made  no  provision for  the  continuation of the partnership on expiry  of  the lease  or for the acquisition of a fresh lease on behalf  of the partnership.  The lease expired, the license came to  an end and the partnership stood automatically dissolved.   The Government changed its old policy of granting leases to  the highest  bidders and adopted one of renewing them in  favour of  previous  lessees  in whom  they  had  confidence.   The appellant 10 74 and  defendants 2 to 7 applied for the renewal of the  lease that stood in their names.  The plaintiffs also applied  for a  grant of it to them.  No premium was called for and  none had to be paid.  The Revenue Authorities chose to renew  the lease  in favour of the appellant and the said defendants  f or  a further period of 25 years.  The plaintiffs filed  the suit claiming that the renewal of the lease was an asset  of the  dissolved partnership.  The trial Court  found  against them  but  the High Court on appeal reversed  that  finding. The  suit  was instituted months before the renewal  of  the lease  and  years before the renewal of the  license,  which alone  could  enable the licensee to  manufacture  and  sell salt.   The  Courts below found that the allegation  of  the plaintiffs that the goodwill and assets of the firm had been utilised  for  obtaining  the  renewal  of  the  lease   was

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 13  

unfounded,  as they had failed to prove that  a  partnership firmatall  existed.  It was also found that during the  last three years of the existence of the partnership, the parties had  fallen apart and lost mutual confidence.  The  question for  decision  was whether s. 88 of the  Indian  Trusts  Act applied  and  the  renewal of the lease  in  favour  of  the appellant  and  the  said defendants for  running  the  salt factory  could  be  treated as an  asset  of  the  dissolved partnership between the contesting parties. Held, that in order that a case might be brought within  the purview of s. 88 of the Indian Trusts Act, it must be  shown either  that (1) a person had a fiduciary character and  was thus  in  duty bound to protect the interests of  others  or that  (2)  he had placed himself in such a  position  as  to render  his interest adverse to those of the others and  had thereby obtained a pecuniary interest which he must hold for their benefit as well.  As in the instant case the fiduciary character   of  the  partners  came  to  an  end  with   the termination  of  the original lease and of  the  partnership business  along  with  it,  there could  no  longer  be  any subsisting interest in a partner which another was bound  to protect nor could one partner be said to have availed of his character  as  a partner when he obtained the  fresh  lease. Section 88 of the Indian Trusts Act or the illustrations (d) or  (e) thereto could, therefore, have no  application,  nor could  s. go of the Act, which in terms had  no  application even if applied, improve the position of the plaintiffs. No  question of a constructive trust could also arise  under the  general  law  apart  from the  statute.   There  is  no absolute rule of law or equity in England that renewal of  a lease  by one partner must necessarily enure to the  benefit of  all the partners.  There is, however, a  presumption  of fact that there is an equity in favour of the renewal of the lease  enuring to the benefit of all the partners.   Such  a presumption  may  be rebutted by the facts of  a  particular case.   The Indian law as enacted in the Indian Trusts  Act, and particularly ss. 88 and go of that Act, is substantially the same.  In the instant case, the facts and  circumstances amply rebut that presumption. 75 Featherstonhaugh  v. Fenwick, (1810) 34 E.R. 115, Clegg   v. Fishwick,  (1849) 41 E.R. 1278, Clements v. Hall, (1857)  44 E.R.  954,  Clegg v. Edmondson, (1857) 44 E.R.  593,  In  Ye Biss,  Biss v. Biss, [1903] 2 Ch. 40 and Griffith  v.  Owen, [1907] I Ch. 195, G considered.

JUDGMENT: CIVIL APPELLATE, JURISDICTION: Civil Appeal No. 91 of 1954. Appeal from the judgment and decree dated December 10, 1948, of the Madras High Court in Regular First Appeal No. 609  of 1946, arising out of the judgment and decree dated March 30, 1946, of the Court of the Subordinate Judge of Chicacole  in Original Suit No. 1 of 1943. A.   V.  Viswanatha  Sastri and R. Ganapathy Iyer,  for  the appellant. K.   M. Rajagopala Sastri and S. K. Sastri, for  respondents Nos. 1, 2, 3, 5-7, 13 and 24-27. 1958.  October 6. The Judgment of the Court was delivered by SINHA J.-The only question for determination in this  appeal by the first defendant, on a certificate granted by the High Court  of  Madras,  is whether the renewal of  a  lease  for running a salt factory, granted by the Government in  favour of  the appellant and others (defendants 1 to 7),  could  be

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 13  

treated as an asset of the dissolved partnership between the contesting  parties.  The trial court decided this  question in  favour of the contesting defendants.  On appeal  by  the plaintiffs   and  some  defendants  on  the  side   of   the plaintiffs,  the  High  Court  of  Madras  determined   this controversy  in  favour of those  appellants.   Hence,  this appeal  by the first defendant whose interest  is  identical with  that  of  defendants 2 to 7.  The  reference  in  this judgment to I appellant’ will, thus, include the interest of the other non-appealing defendants also.  The  relevant  facts of this case, upon  which  the  appeal depends,  may shortly be stated as follows:  The  contesting parties used to carry on the business of salt manufacture in accordance with the rules laid down by the Government  under the Madras Salt Act 76 (Mad. 4 of 1889) (which will, hereinafter, be referred to as the  Act).   It  is  not  permissible  to  manufacture  salt otherwise  than tinder the provisions of the Act.  The  land and  the factory where salt used to be manufactured  by  the parties, are Government property.  It appears that the first plaintiff, the father of plaintiffs 2 to 4, plaintiff 5, the first  defendant and the deceased father of defendants 2  to 7, had made bids for the lease of the land and the  factory, and  the  highest  bid  of  the  defendants  aforesaid,  was accepted;  and  in pursuance thereof, a lease for  17  years from  January  1926, to December, 1942, was granted  by  the Government  in favour of the first defendant and the  father of defendants 2 to 7. ’By a deed of partnership dated  March 18,  1926,  the first plaintiff with a two-anna  share,  the father  of  plaintiffs 2 to 4, having a similar  share,  and plaintiff  5 with another two-anna share, on the  one  hand, and  the first defendant, having a five anna share, and  the father  of defendants 2 to 7, with the  remaining  five-anna share,  entered  into  a partnership for  running  the  salt factory.   The  terms  of the partnership will  have  to  be discussed in detail hereinafter.  They contributed a sum  of Rs.  30,000  for paying the premium for the  lease  and  for other  incidental  expenses  in  running  the  factory,   in proportion  to  the shares just indicated.   The  father  of defendants  2  to  7,  who had  a  five-anna  share  in  the business,  died in August, 1935, and the defendants 2  to  7 were  admitted  as partners in place of  their  father.   In accordance  with  the  rules of  the  salt  department,  the requisite  licence for the manufacture of salt, was  granted to the first defendant and the father of the defendants 2 to 7,  in, whose name, the lease also stood.  In or  about  the year  1939, differences arose between the parties, but  -the business  continued to be carried on by the defendants 1  to 7. In August 1941, in accordance with the changed policy  of the  Government, which substituted the practice of  settling salt  leases  by  renewal of the lease in  favour  of  those lease-holders  whose  conduct had been satisfactory  in  the opinion of the Department, for the old practice of  settling salt leases to highest bidders, the Collector enquired  from the old 77 lease-holders  whose record had been satisfactory  from  the point  of  view of the salt department, whether  they  would take  renewal  for a period of 25 years.  The  appellant  as also.  the other defendants aforesaid, their conduct  having been  satisfactory, were amongst those lessees who had  been 2invited  to  make  applications for the  renewal  of  their leases.   Accordingly, they made their application in  July, 1942, and a fresh lease for 25 years, was granted to them on

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 13  

April  15, 1943, for the period January, 1943  to  December, 1967,  in  pursuance  of the  Collector’s  order  passed  in November,  1942 (Ex.  P-15(a)).  The terms of the new  lease will have to be discussed later in the course of this  judg- ment.  As the term of the previous lease and of the  licence to  manufacture  and sell salt-which  ’was  the  partnership business-was to expire at the end of December, 1942, one  of the  contesting defendants, served a notice upon one of  the plaintiffs  to  the  effect that  as.  the  partnership  was expiring at the end of the month, the partners should settle their  accounts, and make arrangements for the  disposal  of the unsold stock of 82102 maunds of salt.  The reply to  the notice was given on December 28, 1942, through an  advocate, alleging inter alia that the application for the renewal  of the  lease for a period of 25 years had been made on  behalf and  with the consent of all the partners, and  that,  thus, the  partnership  business was agreed to be  continued  even after  the expiry of the term of the  previous  partnership. The answer further attributed fraud and "evil intention " to the other party.  The answer also called upon the defendants to pay a penalty of Rs. 2,500 per head, and to hand over the entire partnership lease property to the plaintiffs’  party. Thus, the exchange of the notices aforesaid was a prelude to the  institution of the suit on January 5, 1943, that is  to say,  even before the fresh lease had been executed  by  the Government in favour of the contesting defendants 1 to 7. The  suit  was instituted on the footing that  the  original partnership continued even after December, 1942, inasmuch as the  fresh  lease  had  been  obtained  in  pursuance  of  a unanimous resolution of all the partners 78 to  obtain the new lease for the partnership business.   But an alternative case also was sought to be made out that even if the partnership did not continue after December, 1942, as a result of. the acts of the defendants, the benefit of  the fresh  lease for 25 years should be treated as an  asset  of the dissolved partnership business, and should be taken into account  in the process of dissolution of  the  partnership. The plaint as framed contained a large number of reliefs  to which,  the  plaintiffs  claimed, they  were  entitled,  for example, a declaration that the partnership was  continuing, and that the defendants 1 to 7 had forfeited their rights in the  partnership  as a result of their fraudulent  acts,  an injunction  restraining defendants 1 to 7 from  carrying  on the salt works independently of the partnership and on their own  account,  and the declaration that the renewal  of  the lease  in the name of the defendants 1 to 7, for  a  further period of 25 years, was for the benefit of the  partnership. But  at  the trial, the plaintiffs, perhaps,  realizing  the weakness  of their position, elected to put in a  memorandum in  the  trial court on February 8,  1946,  confining  their prayers to reliefs on the basis of a dissolved  partnership, and  giving  up  other reliefs, which they  claimed  on  the footing  of the partnership still continuing.  Thus, at  the trial, the reliefs claimed were confined to taking  accounts between  the  parties  of  the  dissolved  partnership,  and treating the fresh lease for 25 years, as part of the assets of  the dissolved firm.  It is, therefore, not necessary  to refer  to  the defendants’ written  statement,  except  with reference to the plaintiffs’ claim to have the renewed lease for   25  years  treated  as  an  asset  of  the   dissolved partnership.   The  contesting  defendants 1  to  7  stoutly denied  that the plaintiffs’ claim in respect of  the  fresh lease  for 25 years, was well-founded.  They  asserted  that they  only  were entitled to run the business on  the  fresh

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 13  

lease  and licence meant only for their benefit and not  for the benefit of the dissolved partnership. The trial court-passed a preliminary decree, declaring  that the  partnership stood dissolved on December 31,  1942,  and for taking accounts.  As regards the 79 benefit  of the renewed lease for 25 years, the trial  court negatived   the   plaintiffs’  claim  that   the   dissolved partnership carried any firm or trade name, which(, could be said to have any tangible goodwill, and that the  defendants could  not  be restrained from carrying on the  business  in their  own names as they had been doing in the past.   After expressing a doubt as to whether there was any goodwill of a particular   firm  name,  the  court  directed   that   "the Commissioner  is authorized to sell the goodwill of the  old firm  for  what  it is worth by way of  realization  of  the assets  of the dissolved firm as amongst the  partners."  In effect,   therefore,  the  trial  court  decided  that   the plaintiffs  were  not  entitled to the benefit  of  the  new lease. On  appeal  to the High Court, the  learned  Chief  Justice, delivering  the judgment of the Division Bench, came to  the conclusion  that the plaintiffs’ case that the  fresh  lease had  been  obtained  as a result of the  resolution  of  the partners  to  carry on the business after the lapse  of  the specific  period of the partnership which came to an end  in December   1942,  had  not  been  made  out.   But  on   the alternative  plea  of the plaintiffs, the  Court,  after  an elaborate  discussion  of  English and  Indian  Law  on  the subject, held that the plaintiffs were entitled to treat the new  lease  as an asset of the dissolved  partnership.   The conclusion of the High Court may better be stated in its own words, as follows:- "In  conclusion,  we  hold that the new  lease  obtained  by Defendants 1 to 7 in -renewal of the old lease which  formed the subject matter of the partnership, must be held by  them for the benefit of the other members of the partnership, who are entitled to share in the advantage gained by  Defendants 1  to  7.  As  the  lease  itself  was  executed  after  the termination of the partnership and as it is not the case  of the Appellants that any one other than defendants 1 to 7 had furnished  the consideration for the new lease, the  benefit of  the  renewal alone ’will be treated as an asset  of  the partnership which terminated on 31st December,- 1942, and  a value placed on it.  The Commissioner appointed 80 by the lower Court may, after taking such evidence as may be necessary,  be  directed  to  fix the  value  in  the  first instance.   In  arriving  at  a  value,  the  liability   of defendants 1 to 7 to furnish capital and incur the necessary expenses for carrying on the new business with its attendant risks  and also possibilities of profits, are factors to  be taken into account." In  those words, the High Court set aside the  judgment  and decree  of the trial court, and allowed the appeal in  terms which  the  Commissioner appointed to take accounts  of  the dissolved partnership, may not find it easy to implement. In  support  of  this appeal, the learned  counsel  for  the appellant, has contended that the High Court has misdirected itself  in  construing the provisions of the  Indian  Trusts Act, in holding that a constructive trust had been made  out in favour of the plaintiffs; that there is no absolute  rule that the renewal of a lease which was the subject-matter  of a  partnership, must always enure to the benefit of the  old partners; and that the essential ingredients of s. 88 of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 13  

Trusts  Act,  had not been made out in this case.   He  also contended  that the lease by itself, did not create a  right to manufacture salt and to sell it, and that a licence is  a necessary   pre-requisite  to  carry  on  the  business   of manufacture and sale of salt in accordance with the rules of the Department, and that it is open to the Department not to recognise  any partners in the business.  In this  case,  it was  further  contended, the licence to sell salt  had  been granted only in 1945.  Under the English law, there may be a presumption  that  the renewal of a lease which  formed  the subject matter of a partnership, will enure for the  benefit of the partners, but he contended that in the  circumstances of  this case, such a presumption could not arise, and  even if it did, it was rebutted by the following facts.  The term of  the  original partnership was a fixed  one,  terminating with the term of the lease and of the licence to manufacture salt,  which  came  to  an  end  with  the  year  1942;  the partnership-deed  did  not contemplate  that  this  business would  be extended beyond the fixed term in the event  of  a fresh lease 81 being   obtained  from  the  Government.   It   was   highly significant that the term of the partnership to carry on the salt  business was deliberately fixed as  conterminous  with the  terms  of the lease and the  licence.   The  plaintiffs never  took any steps to obtain a renewal of the lease,  nor was  there  any evidence that they asked the  defendants  to take a renewal for the benefit of all the partners.  On  the other hand, when the defendants applied on their own  behalf for  a  fresh lease for 25 years, the plaintiffs  put  in  a petition of protest, and prayed to the Government for  being included  in  the  category of lessees in the  lease  to  be granted  for  25  years,  as  co-lessees,  but  without  any success.   There  is  no allegation in  the  plaint  of  any attempt at concealment on the part of the appellants to  the effect  that  they  were  taking the  lease  for  their  own benefit.  Nor was there any evidence that the defendants had taken  any advantage of their position as partners,  or  had utilized  any  funds of the partnership  for  obtaining  the fresh  lease.   Lastly, it was  contended  that  differences having cropped up between the parties during the years  1939 to  1942,  it could not be said that the  plaintiffs  placed such a confidence in the defendants -as to place them in the position  of constructive trustees within the meaning of  s. 88 of the Trusts Act. On  the  other  hand,  it was contended  on  behalf  of  the respondents  that the fresh lease for 25 years, was  granted to  the appellants as a result of the changed policy of  the Government,  by  which  they  substituted  the  renewal   to approved  parties in place of the old practice  of  settling the  terms of the lease by open competition and  by  holding auction-sales.  The contesting defendants obtained the lease in  their names because they were entered in the  Government records  as the original lessees, and as the original  lease was admittedly for the benefit of all the partners, the  new lease  also  must  be treated as being founded  on  the  old lease.   It was also contended that s. 88 of the Trust  Act, was  not exhaustive, and that even if the present  case  did not come strictly within the terms of that 11 82 section,  the rule of English law relating  to  constructive trusts,  applied to the case, and that, therefore, the  High Court  was quite justified in coming to the conclusion  that the  lessees  were  in the position of  trustees  when  they

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 13  

obtained the renewed lease.  The plaintiffs failed in  their attempt  to  be included in the  category  of  joint-lessees along  with those defendants because of the  changed  policy and the rules of the Department.  Hence, the plaintiffs were in a position of disadvantage as compared to the  defendants in whose name, the original lease and the licence stood.  In view   of  those  facts,  it  was  further  contended,   the plaintiffs could not either get the lease independently  for themselves,  or succeed in getting their names  included  in the  category  of joint-lessees.  Lastly, it  was  contended that   in  the  circumstances  of  the  present  case,   the presumption  of  law that the defendants  were  constructive trustees, had not been rebutted. Before  dealing with the arguments advanced on be.  half  of the parties, it is convenient to set out, in brief  outline, the  system of working salt factories under the Act (Mad.  4 of  1889), which was enacted to " consolidate and amend  the law relating to the salt revenue in the Presidency ".  Under the  Act,  a  " salt factory " includes any  place  used  or intended  to be used for the manufacture of salt or for  the storage or keeping of the same, as defined from time to time by  the Collector of salt revenue.  " Licensee ", under  the Act, means a person to whom a licence to manufacture salt or saltpeter, is issued, and includes any person registered  as the  transferee of such licence under the provisions of  the Act.   Under s. 8, only licensees or public  servants  under the Central Government, are authorized to manufacture  salt. Section  9  of the Act, authorizes the  Collector  of  salt- revenue  to  grant licences for the manufacture of  salt  in respect of specified salt works, containing such particulars and conditions as the Central Government may prescribe  from time to time.  Such a licence may be for the manufacture  of salt for sale to the Central Government or for general sale; and  may be transferred or relinquished in  accordance  with the prescribed rules.  Section 12 lays down that? 83 a licensee shall be taken to be the owner of the licence and of  the  salt works specified therein.  It is  open  to  the Central  Board of Revenue to establish a new salt,  factory, and,  subject to the payment of compensation, to  close  any salt factory or a portion thereof, and thus, cancel or amend the  licence.  A provision has also been made by s.  17  for the grant of a temporary licence for the manufacture of salt in   certain  contingencies.   Section  25  authorizes   the Collector  of salt revenue to impose upon a licensee a  fine according  to the prescribed scale, or to suspend a  licence or  even  to cancel a licence for want of due  diligence  or default  by a licensee.  Section 43 contains  a  prohibition against  the removal of salt from a salt  factory  otherwise than  on account of the Central Government or for  transport to  a place of storage authorized by the Collector  of  salt revenue,  except under a permit and upon payment of duty  at the  fixed  rate.  The Central Government is  authorized  to make rules generally for carrying out the provisions of  the Act, and specially for regulating certain matters set out in s. 85.  Such rules, on publication in the official  gazette, have  the force of law, and have to be read as part  of  the Act.   It  is common ground that elaborate rules  have  been laid down by the Government, for regulating the  manufacture and  sale of salt, so as to safeguard public revenue and  to prevent  the manufacture of contraband salt.  It  is,  thus, clear  that the business of manufacture of salt,  which  the parties to the agreement of partnership carried on, was  not an  ordinary  occupation, which, is free  from  such  strict rules and regulation as have been laid down by and under the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 13  

Act.   The  licensee owes a special  responsibility  to  the Government,  and, therefore, the transfer or  relinquishment of licences under the Act, has to be regulated according  to the  rules  laid down by the Government.  It  is  true  that there  is no absolute prohibition against such  transfer  or relinquishment,  but  the  Government  through  its   public officers, has the determining voice in such matters. It is in the background of the law laid down by or under the Act, that we have to discuss the rights and 84 lease.   The  first lease, a draft copy of which is  on  the record  as  ex.   P-16 at pp. 101 to 105,  is  an  indenture between  the Secretary of State for India in Council as  the lessor, and the first defendant and the father of defendants 2 to 7, as the lessees.  The consideration for -the lease is the  sum of Rs. 25,000/-.  The lease is for a period  of  17 years  from January 1, 1926, subject to either party  having the  right to determine the lease by a notice in writing  at the  close  of the salt manufacturing season.   It  provides that on the expiry of the lease or its sooner  determination as  aforesaid  by notice on either side, the  lessees  shall leave  the  demised  premises  which  had  been  leased  out exclusively  for the manufacture, storage and sale  of  salt and for the works connected therewith, without any right  to erect  any dwelling houses, etc.  It also provides that  the lessees  shall be granted a modified excise licence in  Form E-1(d).   It  also contains the condition that  the  lessees shall  not, except with the written consent of  the  lessor, first  had and obtained, assign, underlet, or part with  the possession  of the leased land or any portion thereof.   The lessees may take a partner or partners, who may be  approved by  the Collector in the business.  The lease also  contains detailed  provisions as to how the business  of  manufacture has  to  be carried on under the supervision of  the  public authorities like the Collector. The  renewed  lease, exh.  D-18, dated April  15,  1943,  is between  His Excellency the Governor-General in Council,  as the lessor and the contesting defendants as the lessees, for a period of 25 years commencing from January 1, 1943.  There is no payment of any premium for the lease.  The other terms and conditions of the lease are similar to the previous one. Though temporary licences were granted from time to time, it was  only  on  April 17, 1945, that a  "  revised  permanent licence " was granted, and the temporary licence granted for 1945, was cancelled. The " co-partnership deed " as it is called, which is  dated March  18, 1926, is between five individuals,  and  provides that those five persons should enjoy the profit 85 or bear the loss thereof, according to the shares  indicated above; " that as the licence in the salt stands in the names of Chennuru Appala Narasayya Chetty and Guruswamy Chetty out of  us,  the  said individuals  only  shall  be  responsible thereto  ";  and that " In case the  said  Appala  Narasayya Chetty  and Guruswamy Chetty or their heirs fail  to  render proper accounts whenever demanded according to the aforesaid terms  to the remaining three sharers or their heirs  during the salt lease period of seventeen years and commit defaults or  any  kind of frauds, Appala Narasayya  Chetty  Garu  and Guruswamy  Chetty  Garu shall pay by way of penalty  to  the said three sharers at the rate of Rs. 2,500/- (two  thousand five  hundred)  per  share  for  the  year  when  fraud   is committed,  without  having anything to do  with  the  other profits and losses." It is, thus, clear that the partnership was for the fixed term of 17 years, ending with the  -period

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 13  

of the lease, and the parties did not, in terms, contemplate the continuance of the partnership after the expiry of  that period.   Their  rights and liabilities  are  entirely  with reference  to  the said period of 17 years, there  being  no provision  for  the  continuance  of  the  business  by  the partnership after the expiry of the said term. If there bad been a specific stipulation in the  partnership deed,  or even an indication that the  partnership  business would  continue even after the expiration of the  17  years, which   was   the  term  of   the   partnership,   different considerations  may have arisen.  It could then have  justly been said that the managing partner owed a duty to the other partners to obtain a renewal of the previous lease.  It  is, therefore, not without significance that in para. 12 of  the plaint, the plaintiffs specifically alleged that it had been unanimously  resolved by the partners that a renewal of  the lease  should  be  obtained for a  further  period  for  the benefit  of the partnership, and that as a matter  of  fact, the renewal was obtained in pursuance of that resolution and by  using  the goodwill of the partnership.   This  specific case  has  failed  in both the courts below,  but  the  High Court,  in disagreement with the trial court,  has  accepted the alternative case as made ’out, 86 in  para.  17 of the plaint, that the renewal of  the  lease should  be  treated  as  an  asset  of  the  partnership  in ,settling  the  accounts  and dividing  the  assets  of  the dissolved  partnership.  But even in para. 17, there  is  no specific case made out under s. 88 of the Indian Trusts  Act (II  of  1882).   It  is not alleged,  in  terms,  that  the contesting  defendants  filled a  fiduciary  character,  and were,  thus,  bound  to protect the interest.%  of  all  the partners in obtaining the renewal of the lease, or that,  in so doing, their interests were adverse to those of the other partners, and they had, this gained a pecuniary advantage to the detriment of the other partners.  Though the  plaintiffs had  suggested  that  the contesting  defendants  had  large funds,  amounting to about Rs. 90,000, of  the  partnership, portion  of which had been set apart for Payment of  premium and  for  other expenses incidental to the  renewal  of  the lease,  it  had been found, and there cannot  be  the  least doubt  about it, that no funds of the partnership  had  been utilized for obtaining the new lease.  As already indicated, no  premium had to be paid for the fresh lease  obtained  by the contesting defendants. Though  no  foundation was laid in the  pleadings,  strictly construed, for a case tinder s. 88 of the Indian Trusts Act, we  have  still to examine the question’  whether  the  High Court was right in holding that either under that section or under  the  general law, apart from the statutory  law,  the contesting  defendants  bad  placed  themselves  in  such  a position as to render themselves accountable as constructive trustees.  Section 88 is in these terms:- "  88.  Where a trustee, executor, partner, agent,  director of  a  company,  legal adviser or other person  bound  in  a fiduciary  character  to protect the  interests  of  another person,  by  availing himself of his  character,  gains  for himself  any  pecuniary advantage,’ or where any  person  so bound enters into any dealings under circumstances in  which his  own interests are, or may be, adverse to those of  such other  persons  and thereby gains for  himself  a  pecuniary advantage, he must hold for the benefit of such other person the advantage so gained." 87 The  section  is in two parts.  In order to bring  the  case

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 13  

within  the  first  part,  it  has  to  be  shown  that  the contesting  defendants had a fiduciary character,  and  were thus,  in duty bound to protect the interests of  the  other partners in the matter of obtaining the lease; and that they obtained  the  lease  for themselves  instead,  by  availing themselves  of that character.  As already pointed  out,  it was  not within the scope of the partnership  in  accordance with  the  terms  of the deed, to obtain a  renewal  of  the lease.   At the time of entering into the  partnership,  the parties were fully cognizant of the rules of the  Department then  in  force, according to which a fresh lease  could  be granted to the highest bidder irrespective of any other con- siderations  as  to whether any one of the  bidders  war,  a previous  lessee.  The renewal of the lease without  payment of any premium, was the result of the changed policy of  the Government,  according to which the personal conduct of  the lessees, and not the amount of premium, was the  determining factor  in  the  grant  of  a  fresh  lease.   Because   the contesting  defendants bad managed the factory well  and  to the satisfaction of the Revenue Authorities, they were  able to  obtain the fresh lease, and it cannot be said that  they had  availed  themselves of their character as  partners  in obtaining  the  renewal  of  the  lease.   The   plaintiffs’ allegation  that the goodwill of the firm had been  utilized for  obtaining the renewal, has also not been found  by  the courts  below to be true, because the basic allegation  that there  was a partnership firm with a goodwill, had not  been established  as  a  fact.  In our  opinion,  therefore,  the plaintiffs  have failed to bring the case within  the  first part of s. 88. We  shall  now examine the position whether  the  plaintiffs have  made  out a case in terms of the second  part  of  the section.   In  order to do so, it bad to be shown  that  the contesting defendants, while obtaining renewal of the lease, had placed themselves in such a position as to render  their interests  adverse to those of the other partners,  and  had thereby  obtained  a pecuniary advantage, which  they.  must hold for the -benefit 88 of  the  other  partners  as  well.   In  this   connection, illustrations  (d) and (e) under the section,  are  instruc- tive.   If the plaintiffs had succeeded in proving, as  they had  attempted to do, that any funds or any goodwill of  the alleged  firm  name,  had been utilized  for  obtaining  the renewal  of  the lease, the case would  have  directly  come under illustration (d). illustration (e), on the face of it, does not apply, because on the findings, the defendants were not  negotiating for the renewal of the lease on  behalf  of the  entire  body of partners, nor is there  any  allegation that  they  had clandestinely stipulated  for  themselves  a benefit  to  the detriment of the  partnership  business  or funds.  In this connection, it has to be noted that the suit was instituted months before the renewed lease was  actually granted,  and  years  before a  permanent  licence  for  the manufacture  and sale of salt, was issued to the  contesting defendants.   It has also to be noted that the grant of  the lease  by  itself does confer on the grantee  the  right  to manufacture and sell salt.  The lease has to be followed  by a permanent licence in order to enable the grantee to  carry on the business of manufacturing, storing and selling  salt. Hence,  the  lease  by  itself has no  value  unless  it  is followed  by a licence to manufacture and sell  salt,  which was granted only on April 17, 1945, about two years and four months  after the expiry of the previous lease and  licence, which, as already indicated, were conterminous with the term

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 13  

of  the partnership.  That is the reason why the High  Court granted  the  decree in favour of the  plaintiffs  in  terms which  are  rather amorphous and which do  not  easily  lend themselves  to  conversion  in terms of money.   This  is  a business  in  which the personal factor of  the  persons  in charge  of  managing the business, is  more  important  than anything else.  Another important matter which has a bearing on the case, has also to be adverted to.  Between the  years 1939  and 1942, that is to say, during the last three  years of  the  term of the partnership, the partners Were  not  on cordial  terms, and there does not appear to have been  much of  confidence  between  them.   The"  had  already  started quarreling and attributing 89 unworthy motives.  There is, therefore, hardly any room  for importing  the idea of such confidence amongst  partners  as would   render  the  contesting(,  defendants  occupying   a fiduciary  position,  apart  from the fact  that  they  were partners. As  already indicated, the partnership  stood  automatically terminated at the end of the year 1942.  The actual grant of the  lease  in  question was made in  April  1943,  and  the permanent licence to manufacture and sell salt, was  granted only  in 1945.  Hence, strictly speaking, when the suit  was instituted in January, 1943, legally, there was no lease  in existence, nor could the business of manufacture and sale of salt  be  effectively  carried on until  the  grant  of  the permanent  licence.   The plaintiffs could have a  cause  of action in respect of the renewed lease if their  substantive case  of continuing partnership had been  established.   But that case having failed, it is a little difficult to  appre- ciate how they could claim any interest in the renewed lease as  an  asset of the partnership  business.   The  fiduciary character  as  between  the  partners  had  ceased  on   the termination  of  the original lease and of  the  partnership business.   On such a termination, there was no interest  of the partners, which the contesting defendants were bound  to protect.  For the same reasons, the defendants’ character as partners had ceased, and they could not, therefore, be  said to have availed themselves of their character as partners in obtaining  the fresh lease.  For all these reasons, it  must be  held that the plaintiffs have failed to bring  the  case strictly within the terms of s. 88 of the Indian Trusts Act. A passing reference was made by the learned counsel for  the respondents to the terms of s. 90 of the Trusts Act.  But it will  be noticed that whereas s. 88, quoted above,  makes  a specific  reference to partners and agents, etc., s. 90,  in terms,  applies  to  a  tenant  for  life,  a  co-owner,   a mortgagee,  or  any other qualified owner of  any  property. Section  90,  therefore, in terms, -could not apply  to  the case.   Even  if  it did, it does not  carry  the  case  any further in favour of the plaintiff-respondents. 12 90 that even though the provisions of the Trusts Act, did  not, in  terms, apply to the case, the general principles of  law as  applied in the English courts, support  the  plaintiffs’ case.   In  this connection, reliance was  placed  upon  the cases of Featherstonhaugh v. Fenwick (1), Clegg v.  Fishwick (2),  Clements  v. Hall (3), Clegg v. Edmondson (4),  In  re Biss,  Biss v. Biss (5), Griffith v. Owen (6) . The  law  in England  has been summarized in Halsbury’s Laws of  England, 2nd Ed., Vol. 24 (Lord Hailsham’s Edition) in Art. 863 at p. 450, as follows:- " The renewal of a lease of the partnership property by  one

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 13  

or  more of the partners without the privity of  the  others enures  for the benefit of all.  The rule is the  same  when the intention to renew is communicated to the others if  the latter  are  prompt  to  assert  their  rights;  and  it  is immaterial  whether the term of the partnership is  definite or indefinite, or whether the lessors would have refused  to renew to the partners who are not privy to the renewal.  The representatives  of a deceased partner may have a  right  to share in the profits derived from a renewal of the lease  by the surviving partner." Most of the cases relied upon on behalf of the  respondents, form  the  basis  of the statement of the  law  in  England, quoted above. On a close examination of the English precedents  aforesaid, it  will be found that there is no absolute rule of  law  or equity  that  a  renewal of a lease  by  one  partner,  must necessarily  enure  for  the benefit of  all  the  partners. There  is  a presumption of fact, as  distinguished  from  a presumption of law, that there is an equity in favour of the renewal  of  the lease enuring for the benefit  of  all  the partners.   But  such a presumption being one  of  fact,  is rebuttable,  and must, therefore, depend upon the facts  and circumstances  of  each case.  The  Indian  Legislature  has substantially  adopted the English law quoted  above,  while enacting (1)  (1810) 34 E. R. 115. (3)  (1857) 44 E. R. 954. (5)  [1903] 2 Ch. 40. (2)  (1849) 41 E. R. 1278. (4)  (1857) 44 E. R. 593- (6)  [1907] I. ch. 195. 91 the rules laid down in the Indian Trusts Act,  particularly, ss.  88 and 90 of the Trusts Act.  In the instant case,  the facts  that. the parties deliberately chose to fix the  term of  the  partnership as conterminous with the  term  of  the lease  and licence ending with the year 1942; that they  did not, in express terms, or by necessary implication, make any provision for extending the period of the partnership or for obtaining  renewal of the lease and the  necessary  licence; that there was no averment or proof of any clandestine  acts on  the part of the contesting defendants in the  matter  of obtaining  the  renewal of the lease;  that  the  plaintiffs themselves  made  attempts,  though  unsuccessful,  to   get themselves included in the category of grantees at the  time of the renewal of the lease ; that the special nature of the business  required personal efficiency and good  conduct  on the part of the actual managing agents; that no funds of the expiring partnership or any goodwill of the partnership  was utilized for obtaining the fresh lease; that the fresh lease and  licence  were granted to the contesting  defendants  in consideration of their personal qualities of good management and  good conduct; that the parties were not on the best  of terms  during  the last few years of  the  partnership,  and finally,  that  the  lease and the  permanent  licence  were actually  granted after the partnership stood  automatically dissolved   at   the  end  of  1942,  are  all   facts   and circumstances  which point to only one  conclusion,  namely, that the renewal of the lease was not intended to be for the benefit  of  all  the quondam  partners.   Those  facts  and circumstances  amply rebut any presumption of fact that  the lease should enure to the benefit of all the parties. For  the  reasons  given above, it must  be  held  that  the judgment  and decree passed by the High Court, in so far  as they  reverse those of the trial court, are  erroneous,  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 13  

must be set aside.  The appeal is, accordingly, allowed with costs throughout, which are attributable to the single issue which has been decided in this Court.                                Appeal allowed. 92