Karnani Industrial Bank Limited vs The Province Of Bengal And Ors.

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 4 May 1951

Coram: Saiyid Fazl Ali

Karnani Industrial Bank Limited appealed against The Province of Bengal and others before the Supreme Court of India. The judgment for this appeal was delivered on 4 May 1951. The opinion was authored by the judge appointed to the bench, and it was recorded by the presiding justice. The central issue that the Court needed to resolve concerned whether a particular lease had come to an end automatically because the fixed term had expired, or whether the tenant had continued to occupy the premises after the expiry, thereby creating a holding over situation as contemplated in section one hundred sixteen of the Transfer of Property Act. The Court noted that several subsidiary questions would arise in the course of its analysis, and it set out to consider those after first presenting the factual background that gave rise to the dispute.

The Province of Bengal, referred to in the proceedings as respondent number one or the plaintiff, openly admitted that it owned a tract of land measured at one thousand one hundred twenty-five bighas and a fraction, situated in the village of Akra. On 17 February 1928, the plaintiff entered into a lease with the appellant for that land. The lease, identified as exhibit three in the record, granted the appellant a ten-year term for the purpose of manufacturing bricks. The annual rent stipulated in the lease was six thousand rupees, payable in advance, and the lease was to commence on 24 February 1928. The agreement expressly prohibited the lessee from assigning or subletting any portion of the demised premises without the lessor’s consent, except in the case of a transfer to a limited company. Additionally, the lease contained a general condition requiring the lessee, at the end of the term, to return the premises to the lessor in the same condition as at the commencement of the lease, allowing for reasonable wear and tear. Two further provisions of the lease were highlighted as being particularly material to the determination of the appeal and were reproduced verbatim. The first of these, Clause eleven of Part One of the Schedule, reads as follows: “The Secretary of State reserves the right to terminate the lease at any time subject to six months’ notice in the event of the lessee’s failing to observe and duly perform the conditions hereinbefore and after mentioned and it is hereby agreed that the lessee shall before the expiration or prior termination of the lease hereby granted remove his boilers engines trucks kilns railway and tram lines bricks tools and plant and all other materials whatsoever and yield up the said demised premises unto the Secretary of State and that those bricks tools and plant and other materials that shall not be removed before such expiration or prior termination shall become the property of the Secretary of State.” The second provision, Clause one of Part Three of the Schedule, provides: “The lessee shall be at liberty to keep on the said premises hereby demised for three months after the expiration or prior termination of the term of this lease any bricks boilers engines trucks kilns railway and tram lines and all other materials whatsoever as may have been manufactured by him in the premises in accordance with the conditions of these presents.” It was further recorded that, at the time the lease was executed, the lessee had purchased from the lessor, for fifty thousand rupees, all of the boilers, engines, trucks, kilns, railway and tramway lines, and all other movable plant and machinery situated on the demised premises.

The plaintiff’s case contended that the appellant, identified in the suit as defendant number one, had violated the lease terms by subletting the brickfield to respondents numbered two through eighteen without obtaining the required consent from the plaintiff. The plaintiff alleged that those sub-lessees caused serious damage to the brickfield, failed to maintain the embankments and sluices in proper repair, and thereby incurred a total loss assessed at sixteen thousand eight hundred forty rupees. Moreover, the plaintiff claimed that the defendants refused to surrender possession of the premises although the lease had come to an end, and that they had not removed the bricks, pugmills and other materials within the three-month period permitted by the lease. These allegations formed the basis of the relief sought by the plaintiff and were the matters that the Court needed to examine in light of the lease provisions and the statutory framework governing holding over.

It was recorded that any bricks or other materials that remained on the premises in violation of the lease condition would become the absolute property of the Secretary of State without any payment being required. At the time the lease was executed, the lessee had purchased from the lessor, for a sum of Rs 50,000, all of the boilers, engines, trucks, kilns, railway and tramway lines and all other movable property, plant and machinery situated on the demised premises. The plaintiff, identified as respondent No 1, alleged that the defendant, who was the appellant and also designated as defendant No 1, had breached the lease terms by sub-letting the brickfield to respondents numbered 2 through 18 without obtaining the consent of respondent No 1. According to the plaintiff, those sub-lessees had caused serious damage to the brickfield generally and had failed to keep the embankments, sluices and other structures in proper repair, leading to a total loss calculated at Rs 16,840. The plaintiff further contended that the defendants had refused to surrender possession even after the lease had terminated and that they had not removed the bricks, pugmills and other materials within the three-month period prescribed after termination. On the basis of these allegations, respondent No 1 sought several reliefs: (a) a decree for ejectment and specific possession of the brickfield; (b) damages of Rs 4,000 for the period from the lease termination to the institution of the suit together with mesne profits for the later period; (c) a decree for Rs 16,840 as compensation for the damage caused to the field; and (d) a permanent injunction restraining the defendants from removing or otherwise disposing of the bricks, pugmills and related items that the plaintiff claimed had become its property.

The defendants contested the suit and advanced a defence that the appellants had held over the premises with the implied consent of respondent No 1, thereby arguing that the lease had not validly terminated. They further asserted that no damage or injury had been inflicted upon the land, that the clause in the lease allowing forfeiture of the appellants’ properties was a penalty provision and therefore unenforceable, and that the plaintiff was not entitled to an injunction. The trial judge, delivering his judgment on 24 November 1941, found that there was no holding over with the plaintiff’s assent and that both parties had been mistakenly under the impression that the lease had expired on 23 February 1938. He also concluded that the evidence did not demonstrate any damage or injury to the property. Accordingly, the judge decreed the suit in part: respondent No 1 was ordered to be put into possession of the brickfield and was awarded a decree for Rs 4,000 as mesne profits up to the date of taking possession. The plaintiff’s prayer for damages for injury was left undecided at that stage.

The trial judge found that the allegation of damage to the field and the request for an injunction were both rejected. He granted the appellants a period of three months to remove all of their possessions from the Akra brickfield, expressly including kilns, pugmills, bricks, coals and any other brick-making material that might be present. The judge further stipulated that any items remaining in the field after the expiry of that three-month period would become the absolute property of the plaintiff. After the judgment, the appellants filed an appeal before the High Court at Calcutta, while respondent No 1 lodged a cross-objection seeking to overturn the denial of the injunction and to obtain a full decree for damages. The learned judges of the High Court, in their judgment dated 13 February 1948, dismissed the appellants’ appeal and allowed the cross-objection of respondent No 1 in part. In their reasoning they held that, on the facts proved, there was no holding over of the lease. They further observed that the clause in the lease providing that any bricks or related materials not removed from the field within three months after the lease termination would vest in respondent No 1 was not a penalty clause and therefore must be given effect. The High Court also concluded that respondent No 1 had failed to establish a claim for damages arising from any injury to the demised premises. The present appeal is directed against that judgment of the High Court.

The parties admitted a concise set of facts concerning the rent payments made by the appellants. The appellants paid Rs 6,000 as rent to respondent No 1 in February 1928. In February 1929 they paid a sum of Rs 6,714 and some additional amount for the period from 17 February 1929 to 31 March 1930. Thereafter they continued to remit Rs 6,000 per year for each yearly period running from 1 April to 31 March of the succeeding year. The final rent payment was made in April 1937 by way of a cheque accompanied by a covering letter, the material portion of which read: “We beg to enclose herewith a cheque for Rs 6,000 in payment of rent Akra brickfield for the year 1937-38 ending 31 March 1938, and shall thank you to please favour us with your formal receipt for the above.” The cheque was duly presented and cashed, and the receipt of the amount was entered in the plaintiff’s cash book with the notation: “5-4-37 (date of receipt). Received without prejudice from Karnani Industrial Bank Ltd. on account of yearly rent for Akra brickfield for the year ending 31 March 1938.” On 27 August 1937 the appellants addressed a request to the Secretary of the Government of Bengal, Public Works Department, seeking renewal of the lease for an additional ten-year term, but no response was forthcoming. After sending several further letters, the appellants eventually received a letter dated 23 February 1938, which was accompanied by a copy of an accompanying document.

In the course of the proceedings, the record contained a communication that consisted of an extract from a letter addressed by the Executive Engineer of the Suburban Division to the Assistant Engineer of Sub-division No III. The extract read: “He is requested to make arrangements with Messrs. Karnani Industrial Bank Limited for vacant possession of the Akra brickfield on the 24th instant as the lease with the Bank will expire on the 23rd instant according to the terms of the agreement.” Subsequently, on 17 March 1938, the appellants received a further notice from the Executive Engineer, Suburban Division, which stated: “I would inform you that it is not the intention of Government in this Department to lease out the brickfields and arrangement is being accordingly made to make over the lands to the Government in the Revenue Department for disposal.” Later, in a letter dated 14 September 1938, the Executive Engineer wrote to the appellants: “I am instructed to state that Government have decided that you cannot be allowed to continue in occupation of the premises any further… However, as a matter of grace Government will allow you time till the 30th day of September next, to dismantle the kilns and to remove all your bricks, boiler etc. from the site, on which date Government will take over possession of the property from you.” The correspondence referred to above did not contain any indication that the plaintiff had ever consented to the appellants remaining in possession after the expiry of the lease. By contrast, several letters authored by the appellants demonstrated that, even after they had paid rent up to 31 March 1938, they continued to act on the premise that the lease would terminate in February 1938. For example, in a letter dated 23 August 1937 the appellants wrote: “We are desirous of renewing the lease of the brickfield for a further period of 10 years from the date of the expiration of the period of the lease dated 17-2-1928.” A later letter of 23 October 1937 again referred to their application for renewal of the lease for an additional ten-year term upon its expiry. Moreover, in a letter drafted on their behalf on 3 March 1938—after the date on which the lease was deemed to have terminated—the appellants reiterated the earlier statements and added: “We applied for renewal of the lease on the 23rd August, 1937, six months prior to the date of expiration of the lease.” That letter made no claim that the appellants were holding over by virtue of the rent paid up to 31 March 1938. At the conclusion of the same letter the appellants prayed: “We therefore pray that if the Government is not at all inclined to renew the lease, time may be granted to us for dismantling and removing till the …” The ellipsis indicated a request for additional time. The record further showed that the appellants assumed the lease had expired in February 1938, as reflected in their request for “seven months” of proportional rent to be paid up to the end of December 1938, consistent with a February termination. Correspondence issued by the Government corroborated this understanding. In a letter dated 25 February 1938 the Government wrote: “I have the honour to inform you that none of your agents was present at the Akra brickfield today as previously arranged to make over the possession of the brickfields. You are therefore requested to please inform me as to what arrangements are being made by you to make over the possession of the said brickfield to this department. The term of lease expires on the afternoon of the 23rd February, 1938.” Both parties, therefore, operated on the common assumption that the lease terminated on 23 February 1938, a fact that was reflected in their respective letters and negotiations.

In the appellant’s letter the parties requested that, if the Government chose not to renew the lease, they be allowed to remain in possession until the end of December 1938 and that they would pay the Government a proportionate rent for the seven-month period in accordance with the lease terms. The reference to a seven-month period indicates that the parties proceeded on the premise that the lease had already terminated in February 1938. The correspondence issued by the Government also supports this inference, showing that both sides acted on the belief that the lease was scheduled to expire on 23 February 1938. For example, a Government-dated letter of 25 February 1938 stated that none of the appellant’s agents had appeared at the Akra brickfield as previously arranged for the handover of possession, and it requested information regarding the appellant’s plans for surrendering the brickfield to the department. The same letter expressly noted that “the term of lease expires on the afternoon of the 23rd February, 1938.”

Beyond the observation that the appellants never asserted in any of their letters that they were holding over, the Court needed to consider whether the appellants’ claim of a valid holding-over plea could be sustained. The record shows beyond doubt that the appellants proved rent had been paid on their behalf up to 31 March 1938 and that this rent was accepted by Respondent No 1. Moreover, the evidence established that the rent was paid by way of a cheque, which was subsequently honoured by the Government. The appellants relied upon Section 116 of the Transfer of Property Act, which provides that if a lessee remains in possession after the lease has determined and the lessor or his legal representative accepts rent or otherwise assents to the lessee’s continued possession, the lease is, absent an alternative agreement, deemed to be renewed from year to year or from month to month according to the purpose for which the property is let. The Federal Court, in the case of K. B. Capadia v. Bai Jerbai Warden and Another, had interpreted this provision to apply where the landlord accepted rent after the tenancy had expired by the passage of time, even if the landlord described the receipt as a partial deposit towards compensation for unlawful occupation and reserved his rights. It is pertinent to note that in that precedent the rent was accepted after the expiry of the tenancy. The present case, however, could not be governed by that decision, because, as the Court found, the payment of rent covering the period up to 31 March 1938 was made…

In this case the Court observed that the rent in dispute had been paid on 5 April 1937, which was almost a year before the lease was scheduled to expire, and not after the lease had terminated. The Court explained that for section 116 of the Transfer of Property Act to apply, two conditions must be satisfied: first, the lessee must remain in possession after the lease has ended; second, the lessor or his agent must accept rent or otherwise give assent to the lessee’s continued possession. The use of the term “otherwise” indicated that the landlord’s acceptance of rent was treated as a form of assent to the tenant’s continued occupation. The Court noted that the lessee could not be said to be “continuing in possession” before the lease had actually expired, and that the provision dealing with acceptance of rent was intended to operate at a time when the landlord’s acceptance would amount to assent to the lessee’s post-expiry possession. Both lower courts, after detailed consideration, had concluded that in the present circumstances the consent of respondent No. 1 to the appellants’ continued possession could not be inferred, and the Court agreed with that finding. It was pointed out on behalf of the respondent that the entry in the plaintiff’s books regarding the payment contained the words “received without prejudice from Karnani Industrial Bank…”. The Court observed that the same wording appeared in several earlier entries and therefore did not attach any special significance to it. Moreover, the Court held that the very fact that the payment was made at a time when the lessor could not be said to have assented to the lessee’s continued possession, and that neither party treated the payment as indicating such assent, was sufficient to remove the matter from the mischief that section 116 seeks to address. The Court also recognised an alternative view that could be taken from the facts. It noted that the rent for the first year had been paid in advance at the time the lease was executed, a circumstance that did not affect the present dispute. When the second instalment was made, the amount of Rs 6,714 and a fraction was paid to cover rent up to 31 March 1930. Thereafter, each subsequent payment covered rent up to 31 March of the following year, reflecting the parties’ practice of aligning the financial year from 1 April to 31 March. It appeared that this pattern prompted the plaintiff to file an application on 6 November 1941 to amend the plaint by adding a statement concerning these payments.

The Court observed that the plaintiff had filed, on 6 November 1941, an application to amend the plaint by inserting a statement that the registered lease had terminated on 23 February 1938 by agreement between the plaintiff and defendant No 1, but that the latter had been permitted to remain in possession until 31 March 1938. The application was rejected because it was made after the closing of the defendants’ evidence and after an adjournment had been granted to the plaintiff to adduce rebutting evidence. Nevertheless, the Court held that, on the basis of the evidence, the parties had implicitly consented to extend the lease term up to 31 March 1938. Consequently, respondent No 1 became entitled to re-enter the premises after that date, and no notice under section 106 of the Transfer of Property Act was required. In these circumstances the decree for ejectment issued by the lower courts was affirmed.

The Court then turned to the proper interpretation of clause 11 of Part I and clause 1 of Part III of the lease, both of which had been previously quoted. It concluded that clause 11 must be read as a whole and is intended to apply only when the Secretary of State exercises a right to terminate the lease “at any time subject to six months’ notice” because the lessee has failed to observe or perform the conditions of the lease. In such a case, if the lessee does not remove boilers, engines and other materials and does not surrender the premises, those articles become the property of the Secretary of State. The Court found that this provision was not relevant to the present dispute.

Accordingly, the Court held that the clause applicable to the present case was clause 1 of Part III, which governs the ordinary expiration of a lease by the passage of time. That clause provides that the lessee may retain on the demised premises for three months after the lease expires any bricks, boilers, etc., but stipulates that “any bricks and other materials left in contravention of this condition shall become the absolute property of the Secretary of State without payment.” The Court was unequivocal that, under this provision, the bricks and other materials have become the absolute property of the plaintiff. The remaining issue was the meaning of “other materials.” Upon examination of the lease as a whole, the Court discerned a distinction between “materials” and “machinery and tools and similar articles.” The phrase “other materials” was held not to refer to engines, trucks, railway or tramway lines, or plant, but to building supplies such as bricks, tiles and comparable articles that might have been manufactured by the appellants on the demised premises.

The Court held that, on the basis of the foregoing findings, the decree that was under appeal needed to be altered to reflect those conclusions. The sole remaining issue for the Court’s consideration concerned the plaintiff’s request for a permanent injunction directed against the defendants. The injunction sought to prevent the defendants from removing or otherwise disposing of the items that were the subject of the decree. The appellants argued that because respondent No 1 did not possess the cited property, it could not obtain an injunction unless it first secured a declaration of title to the property and a finding of possession. To support this argument, the appellants cited the cases of Ratnasabhapathi Pillai and Others v. Ramaswami Aiyar [I.L.R. 33 Mad. 482], Bhramar Lal Banduri and Others v. Nanda Lal Chowdhuri [24 I.C. 199] and Valia Tamburatti v. Parvati and Others [I.L.R. 13 Mad. 455]. After a careful review of those authorities, the Court concluded that they were wholly inapplicable to the present dispute. The Court reiterated that it had already determined that the bricks and other materials, as described, had become the property of the plaintiff, and therefore there was no legal impediment to granting the injunction that the plaintiff had requested.

Consequently, the Court found that the appeal failed in substance and ordered that it be dismissed, with costs awarded against the appellants. The Court further directed that the final decree expressly state that only the building materials—such as bricks, tiles and similar articles that might have been manufactured by the appellants on the demised premises—would vest in respondent No 1. The Court clarified that items such as boilers, engines, trucks, kilns, railway and tramway lines, and similar plant and equipment would not become the property of respondent No 1. Instead, the Court granted the appellants a period of three months, measured from the date of the decree, within which they must remove those remaining items from the demised premises. The Court concluded by confirming the dismissal of the appeal.