LAL AND COMPANY v. A. R. CHADHA — 1969 DIGILAW 109 (DEL)

V. S. Deshpande, J. ( 1 ) THIS and RSA 61 of 1969 (Dr. Chiranji Lal v. Dwarka Nath) are so closely connected that they are being disposed of together today by two judgments, which may be read together as supplementing each other. Both centre round the question whether the tenancy rights in the premises at 14-Connaught Place held by Dr. Chiranji Lal from the landlord Shri A. R. Chadha were transferred by Dr. Chiranji Lal to Dwarka Nath or to the partnership entered into by him and Dwarka Nath by a deed executed by the partners on the 20th January, 1966. In a suit for dissolution of partnership filed by Dwarka Nath against Dr. Chiranji Lal, the learned Lower court had decided that the tenancy rights in the premises had been transferred by Dr. Chiranji Lal to the partnership and that on the dissolution of the partnership they were liable to be divided between the partners along with other assets of the partnership. In the judgment in RSA 61 of 1969 which is being delivered by me today, I have modified the decrees of both the learned lower courts and held that the suit for dissolution of partnership and accounts in so far as it related to the goodwill including the tenancy right in 14-C Connaught Circus is to stand dismissed. ( 2 ) THE landlord, Shri Chadha, also made an application for eviction against his tenant Dr. Chiranji Lal and Dwarka Nath. The only ground for eviction with which we are now concerned is that the tenant had sublet, assigned or otherwise parted with possession of the whole or part of the premises in favour of Dwarka Nath without the permission of the landlord within the meaning of proviso (b) to sub-section (1) of section 14 of the Delhi Rent Control Act, 1958 (hereinafter called the Act ). The tenant resisted the application. The Rent Controller, however, found that the landlord had failed to prove that the partnership agreement between Dr. Chiranji Lal and Dwarka Nath amounted to assignment, subletting or parting with possession of the premises by the tenant in favour of Dwarka Nath within the meaning of proviso (b) to sub-section (1) of section 14 of the Act. The Rent Controller, however, found that the landlord had failed to prove that the partnership agreement between Dr. Chiranji Lal and Dwarka Nath amounted to assignment, subletting or parting with possession of the premises by the tenant in favour of Dwarka Nath within the meaning of proviso (b) to sub-section (1) of section 14 of the Act. This finding of the Rent Controller was reversed by the Rent Control Tribunal which found that the tenant had transferred the whole of his interest in the premises in favour of the partnership consisting of himself and Dwarka Nath and that the tenant had parted with the possession of the premises in favour of the said partnership. The transaction of partnership was, thus, hit by section 14 (1) (b) of the Act giving the landlord right for eviction of the tenant. This second appeal has been filed by the tenant against the judgment of the Rent Control Tribunal. ( 3 ) THE sole question for decision, therefore, is whether the partnership agreement by itself or by virtue of any of its terms amounts to subletting, assignment or parting with possession of the premises by the tenant in favour of Dwarka Nath. Let us first consider whether the mere formation of the partnership by Dr. Chiranji Lal with Dwarka Nath amounted to assignment, subleting or parting with possession of the premises. Prior to the agreement of partnership, Dr. Chiranji Lal was admittedly the sole tenant of the premises. Did he cease to be so because of the partnership agreement ? It is well known that the privity of contract and estate exist only between the landlord and the tenant. It does not extend to other persons who may enter into an agreement with the tenant. It is clear, therefore, that Dwarka Nath did not establish any privity of contract or estate with the landlord by virtue of partnership agreement between him and Dr. Chiranji Lal. The learned Rent Control Tribunal has emphasised the fact that the exclusive possession of the premises enjoyed by Dr. Chiranji Lal prior to the formation of the partnership changed into joint possession of the premises enjoyed by Dr. Chiranji Lal and Dwarka Nath after the formation of the partnership. Chiranji Lal. The learned Rent Control Tribunal has emphasised the fact that the exclusive possession of the premises enjoyed by Dr. Chiranji Lal prior to the formation of the partnership changed into joint possession of the premises enjoyed by Dr. Chiranji Lal and Dwarka Nath after the formation of the partnership. Throughout his judgment, the learned Rent Control Tribunal has thought that this change in the quality of the possession of the premises amounted to a transfer of the the premises to the partnership and to the parting of possessiort of the premises to it by Dr. Chiranji Lal. In taking this view, however, the learned Rent Control Tribunal has fallen into a fundamental error. The partnership agreement as such is a mere personal contract which binds only Dr. Chiranji Lal and Dwarka Nath It creates only contractual rights in both of them against each other. Such a contract has to be distinguished from a conveyance. The transfer of tenancy rights would be a conveyance as distinguished from a contract. For, tenancy rights are immovable property. The tenancy rights in the present case are certainly worth more than Rs. 100. 00. Therefore, a sale of the tenancy rights could be done under section 54 of the Transfer of Property Act read with section 17 (l) (b) of the Registration Act only by a registered instrument. There is in this case no such registered conveyajnce of the tenancy rights, which were not transferable otherwise. Further, the exclusiveness of the possession of Dr. Chiranji Lal was relevant only to show that he was a tenant as distinguished from a licencee or occupant of the premises vis-a-vis the landlord. The fact that Dr. Chiranji Lal shares the possession of the premises with Dwarka Nath is not by itself relevant to show that either the rights of the premises or the possession thereof has been transferred to the partnership. The rights created by the partnership are only personal rights as distinguished from the rights or an estate in immovable property which includes tenancy. Unless, therefore, the partnership deed creates in Dwarka Nath a right or estate in the lease-hold property by way of an assignment, sub-lease or the transfer of legal possession, the requirements of proviso (b) to sub-section (1) of section 14 of the Act cannot be said to have been fulfilled. Unless, therefore, the partnership deed creates in Dwarka Nath a right or estate in the lease-hold property by way of an assignment, sub-lease or the transfer of legal possession, the requirements of proviso (b) to sub-section (1) of section 14 of the Act cannot be said to have been fulfilled. ( 4 ) IT is necessary to remember that a partnership has not been given the status of a legal person by the Partnership Act. We are not concerned here with its status under section 4 of the Income Tax Act, 1961 as it is only for the special purposes of that Act. A partnership is defined in section 4 of the partnership Act as merely a relationship between persons or as I have stated above a mere personal contract. Persons who have entered into such a contract are individually called partners and collectively a firm. But a firm merely means the partners constituting the firm. The firm is not a legal person as distinguished from the partners. It follows, therefore, that the agreement of partnership conferred rights on Dwarka Nath vis-a-vis Dr. Chiranji Lal, but did not vest any rights into a third entity called the firm independently of the partners. The learned counsel for the respondent refered to section 14 to 17 of the partnership Act and contended that the property of the firm is different fromthe property of the partners. Firstly, all these four sections are subject to contract between the partners . In the present case, as I shall show later, the partnership agreement does not amount to a transfer of property in preasentis. It does not bring into existence any partnership property in respect of the tenancy. It is true that under sections 48 and 49 of the Partnership Act when a property is made an asset of the partnership, such an asset is first liable to satisfy the demands of the creditors of the partnership in preference to the demands of the creditors of the individual partners. But these sections merely work out the application of the assets of the partnership on dissolution. They are not relevant to show that partnership property exists for all purposes as a different entity from that of the property belonging to the partners. But these sections merely work out the application of the assets of the partnership on dissolution. They are not relevant to show that partnership property exists for all purposes as a different entity from that of the property belonging to the partners. From the above discussion it is clear that the mere fact that the tanant entered into an agreement of partnership with Dwarka Nath did not by itself make the partnership a transferee of the tenancy right and holder of the tenancy as distinguished from the original tenant Dr. Chiranji Lal. ( 5 ) WE may now scrutinise the provisions of the partnership deed to find out if any of them shows an. assignment, subletting or parting with possession in favour of Dwarka Nath. These terms have been analysed and considered by me in the sister judgment in RSA 61 of 1969. In the present case, however, the learned counsel for the respondent has focussed his argument on the following provisions of clauses 14, 15 and 16 of the partnership deed, viz. (a) the partnership was to pay the rents and taxes in respect of the premises, (b) the goodwill including the tenancy rights belonging to Dr. Chiranji Lal were together valued at Rs. 45,000. 00 (c) the goodwill alone was to be used by the partnership on payment of commission to Dr. Chiranji Lal and (d) the goodwill including the tenancy right were to become an asset of the partnership at the time of the dissolution and were liable to division between the partners like any other asset of the partnership. The learned counsel for the respondent argued that the payment of rents and taxes for the premises of the partnership shows that the premises had been transferred to the partnership. I am unable to agree. The transfer of the tenancy can take place only by a registered instrument as stated above. The payment of rents and taxes of the premises by the partnership only meant that they were being paid equally by both of them, that is to say Dwarka Nath joined Dr. Chiranji Lal in paying the rent of the premises to the landlord. The only reason why Dwarka Nath did so was that under the partnership agreement he got the right to use the premises and remain in possession of them along with Dr. Chiranji Lal. Chiranji Lal in paying the rent of the premises to the landlord. The only reason why Dwarka Nath did so was that under the partnership agreement he got the right to use the premises and remain in possession of them along with Dr. Chiranji Lal. But the use and the possession of Dwarka Nath was joint with Dr. Chiranji Lal and not exclusive. The right to the management vested in both the partners. Dwarka Nath could not, therefore, exclude Dr. Chiranji Lal from possession. It is true that Dr. Chiranji Lal also could not exclude Dwarka Nath from possession. This only shows the personal rights were granted to Dwarka Nath against Dr. Chiranji Lal. This did not, however show that any property or interest in the tenancy right passed to Dwarka Nath by the agreement. In several reported decisions, the payment of rents and taxes by the partnership of which the tenant was a partner was held not to show that the partnership had become a transferee of the tenancy rights. In H. C. Sharma v. Life Insurance Corporation, S. A. O. 234-D of 1964 decided by me on 8-4-1969 (1), the employee of the tenant who occupied the premises paid the rents and taxes and yet he was held to be only a licencee of the tenant. For, he was only given the use of the premises, but no interest in the tenancy right. ( 6 ) IN clauses 14 to 16 there is a sharp distinction made between goodwill including the tenancy right on the one hand and mere goodwill on the other hand. The former expression is used twice and the latter once. The intention of the parties was thus to use the two expressions in different senses. The learned counsel for the respondent argued that the word "goodwill" when used simplicitor included the tenancy right. This would be contrary to all cannons of interpretation. Firstly, the goodwill has nothing to do whatever with tenancy. Secondly, in clauses 14 to 16 whenever tenancy was to be included in the goodwill, this was specifically so stated. Therefore, when tenancy was not included in the goodwill, only the word "goodwill" is used singly. The payment of commission is, therefore, for the use of the goodwill alone and not for the use of the tenancy as included in the goodwill. Therefore, when tenancy was not included in the goodwill, only the word "goodwill" is used singly. The payment of commission is, therefore, for the use of the goodwill alone and not for the use of the tenancy as included in the goodwill. ( 7 ) THE learned counsel for the respondent further argued that the payment of the commission was by way of interest on the amount of Rs. 45,000. 00 which was the value of the goodwill including the tenancy. He argued that Rs. 45,000. 00 was goodwill consideration for the transfer of the goodwill and the tenancy right and that while the transfer was in preasentis the payment of consideration was postponed till the dissolution. The argument that there was a present transfer of the tenancy to the part- nership is without any basis. There are no words in the partnership deed to support this argument. On the contrary, these clauses of the partnership deed expressly state that neither the goodwill nor the tenancy was to vest in the partnership till the dissolution. The argument of the learned counsel far the respondent and to some extent of the learned lower appellate court is that Dr. Chiranji Lal has deliberately attempted to frame the tenancy agreement in such a way that it should not come within the mischief of proviso (b) to sub-section (1) of section 14 of the Act. They urge that virtually there has been a transfer of the tenancy to the partnership. The only basis for this argument was a feeling that the tenant is trying to do something which is forbidden by section 14 (l) (b) of the Act. This argument sometimes asks the court to look to the substance rather than the form of the matter. The courts should certainly not be deceived by the mere appearance but should try to find out the reality. But this does not authorise the court to ignore the express language of the partnership agreement and to conjecture that the reality was something else, though for this conjecture there is no support in the words of the partnership agreement. The courts should certainly not be deceived by the mere appearance but should try to find out the reality. But this does not authorise the court to ignore the express language of the partnership agreement and to conjecture that the reality was something else, though for this conjecture there is no support in the words of the partnership agreement. To negative the respondent s argument finally it is sufficient to cite the famous observation by Lord Russel in Inland Revenue Commissioners v. Duke of Westminister, which is as below :- "i view with disfavour the doctrine that in taxation cases the subject is to be taxed if, in accordance with a Court s view of what it considers the substance of the transaction the Court thinks that the case falls within the contemplation of spirit of the statute. Ifthe doctrine means that you may brush aside deeds, disregard the legal rights and liabilities arising under a contract between parties and decide the question of taxability or non-taxability upon the footing of the rights and liabilities of the parties being different from what in law they are, then I entirely dissent from such. a doctrine. " ( 8 ) THIS was approved by the Supreme Court in Commissioner of Income Tax v. B. M. Kharwar, CA 1678 of 1966 decided on 13th August, 1968 in the following words :- "the taxing authority is entitled and is indeed bound to determine the true legal relations resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the "substance of the transaction". This principle applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence-oral and documentary-and conduct of the parties to the transaction. " ( 9 ) THOUGH the above decisions related to taxation, the principle underlying these observations is of wider application and applies to the above argument made in this case. " ( 9 ) THOUGH the above decisions related to taxation, the principle underlying these observations is of wider application and applies to the above argument made in this case. While it is true that the substance of the matter rather than the legal form has to be looked into in deciding the nature of the transaction, this does not mean that the express language of the agreement should be ignored and the court should read into the agreement something which is not there at all. The parties to the partnership agreement were perfectly entitled to ensure that the tenancy right shall not be transferred by the tenant to the partnership. For, they knew that this would give the landlord a cause of action to evict the tenant from the premises. There is nothing wrong done by them if they did not want that the partnership agreement should not give such a cause of action to the landlord. They ensured this result simply by not transferring the tenancy to the partnership till the date of the dissolution. If they expressly agreed that the tenancy and the goodwill valued at Rs. 45,000. 00 were not to become the assets of the partnership till the dissolution, we are not entitled to say that their agreement should be ignored and we should treat the tenancy as having been transferred to the partnership by clauses 14 to lb of the agreement. The argument that Rs. 45,000. 00 is the price for the present transfer of the tenancy rights and the goodwill is expressly contradicted by clauses 14 to 16 of the partnership deed, which say that the goodwill and the tenancy right were to remain with Dr. Chiranji Lal and were to vest in the partnership only at the time of dissolution. In reading clauses 14 to 16 we must give effect to the well known distinction between an executory agreement and an executed agreement. The agreement of partnership was executory in so far as it stated that the tenancy was not to become an asset of the partnership till the dissolution. Looked at from another angle, the distinction between an agreement and a conveyance is also to be borne in mind. Partnership deed was only an agreement. It was not a conveyance of the tenancy right. Looked at from another angle, the distinction between an agreement and a conveyance is also to be borne in mind. Partnership deed was only an agreement. It was not a conveyance of the tenancy right. In so far as this agreement contemplates that the tenancy right would vest in the partnership at the time of the dissolution it is contrary to sub-section (2) of section 48 of the Act, according to which subletting assignment or parting with possession of the premises is punishable with fine which may extend to Rs. 1,000. 00. Such an agreement is void by virtue of section 23 of the Contract Act. It is, therefore, still-born and of no effect whatever. We must, therefore, ignore that part of the partnership agreement, which says that at the time of the dissolution the tenancy right is to vest in the partnership. That part of the agreement is void and unenforceable. It cannot, therefore. be said that Dr. Chiranji Lal has entered into an agreement with Dwarka Nath that at the time of the dissolution of the partnership the tenancy right alone with other assets would be divisible between the partners. Tenancy right has to be excluded from such a division and the legal position is that there was no agreement between the partners that the tenancy right was to vest in the partnership at all even at the time of the dissolution. The possession of Dwarka Nath over the premises was not exclusive. As pointed out by me in Pratap Chand v. Rajdev Singh, unless the possession of the other partner is exclusive in, the sense that he is entitled to exclude the tenant from possession, it cannot be said that the tenant has parted with the legal possession of the premises in favour of the partner. ( 10 ) IN clause 10 of the partnership deed, it is stated that Dr. Chiranji Lal would be entitled to continue his Medical practice including the Laboratory in a part of the premises as he has been doing from before the partnership. This has been construed by the learned lower appellate court to mean that Dr. Chiranji Lal needed the permission of Dwarka Nath to do so because of the partnership agreement. The inference suggested is that Dr. Chiranji Lal was not in exclusive possession of the premises. As stated above, it is not necessary that Dr. This has been construed by the learned lower appellate court to mean that Dr. Chiranji Lal needed the permission of Dwarka Nath to do so because of the partnership agreement. The inference suggested is that Dr. Chiranji Lal was not in exclusive possession of the premises. As stated above, it is not necessary that Dr. Chiranji Lal must continue in exclusive possession to rebut the suggestion that he has assigned, sublet or parted with possession of the premises to Dwarka Nath or the partnership. For, the partnership means Dr. Chiranji Lal and Dwarka Nath both. It would be a contradiction in terms to say Dr. Chiranji Lal has parted with possession to himself and Dwarka Nath. Secondly, it is wrong to think that Dr. Chiranji Lal required the permission of Dwarka Nath to carry on his Medical practice in the premises after the formation of the partnership. On the contrary, the right of Dr. Chiranji Lal to do so has been reserved at the inception of the formation of the partnership. It is on the basis of the reservation that the partnership is formed. Instead of the right of Dr. Chiranji Lal being dependent on the consent of Dwarka Nath, the entry of Dwarka Nath into the premises has itself been made conditional on his acceptance of this reservation. ( 11 ) FOR the reasons stated above, supplemented by the reasons given in the sister judgment in RSA 61 of 1969, which is being delivered today, I hold that there has been no assignment, sublease or parting of the possession of the premises by the tenant to Dwarka Nath and allow the appeal of the tenant and set aside the judgment of the Rent Control Tribunal. The application of the landlord for eviction of the tenant under proviso (b) to Subsection (1) of section 14 of the Act shall stand dismissed. The parties shall bear their own costs in this appeal.