Devji @ Deviji Shivji vs Maganlal R. Athrana and Others

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

Court: supreme-court

Case Number: Civil Appeal No. 46 of 1961

Decision Date: 01/04/1964

Coram: J.R. Mudholkar, A.K. Sarkar, Raghubar Dayal

In this case the Supreme Court recorded that the petitioner, Devji @ Deviji Shivji, instituted a suit on 1 April 1964 against the respondents, including Maganlal R. Athrana and others, seeking recovery of a sum of Rs 57,000. The petitioner held permanent lease‑hold rights over a certain colliery. On 31 January 1949 the petitioner granted a sub‑lease of that colliery to respondent No. 4 for a period of five years. The petitioner also joined respondents 1, 2 and 5 as defendants on the ground that these three persons together with respondent No. 4 formed a partnership firm known as Saurashtra Coal Concern, which was identified as defendant No. 5 in the suit. The petitioner’s case asserted that respondent No. 4 acted as a benamidar for the partnership firm and therefore all the respondents were liable for the claimed amount. Respondents 1 and 2 denied the petitioner's claim entirely, maintaining that respondent No. 4 had taken the sub‑lease in his personal capacity and not on behalf of the other respondents. Respondents 4 and 5, who were father and son, admitted the petitioner’s allegation that the lease had been obtained by respondent No. 4 on behalf of the partnership firm. The trial court issued a decree against all the respondents. On appeal, the High Court set aside the decree as against respondents 1 to 3 but affirmed it as against respondents 4 and 5. The Supreme Court held that Section 22 of the Indian Partnership Act, 1932 requires that, in order to bind a firm, an act or instrument executed by a partner on behalf of the firm must be done in the name of the firm or in any other manner that expresses or implies an intention to bind the firm. The sub‑lease in this case was not executed in the name of the firm, and the parties did not intend to bind the firm by the transaction. Consequently, the Court limited the decree to respondents 4 and 5 only. The Court distinguished several authorities, including Karmali Abdullah Allarakia v. Vora Karimji Jiwanji, Gouthwaite v. Duckworth, Mathura Nath Choudhury v. Sreejukta Bageswari Rani, Pandiri Veeranna v. Grandi Veerabhadi‑aswami, Lakshmishankar Devshankar v. Motiram Vishnuram and Gordhandas Chhotalal Seth v. Mahant Shri Raghubirdasi Gangaramji. The judgment was rendered in the civil appellate jurisdiction as a civil appeal.

No. 46 of 1961 was the appeal against the judgment and decree dated 17 July 1958 issued by the Patna High Court in appeal from Original Decree No. 162 of 1952. The appellant was represented by counsel, while respondents 1 through 3 were represented by counsel. The appeal was decided on 1 April 1964, and the judgment was delivered by Justice Mudholkar. The appeal arose under a certificate granted by the Patna High Court pursuant to Article 133(1)(a) of the Constitution. It concerned a suit instituted by the appellant to recover a sum of Rs. 57,000 from the respondents. The appellant asserted that he held permanent lease‑hold rights over a colliery known as the Jealgora Govindpur Colliery and that he had himself worked the colliery for a period of time. On 31 January 1949, the appellant granted a sub‑lease of the colliery to respondent No. 4 for a term of five years. At that time, a quantity of 2,803 tons of slack and rubble coal lay in the colliery, and a separate agreement executed by respondent No. 4 required him to pay the appellant Rs. 10 per ton after selling that coal. The appellant claimed that respondent No. 4 sold the coal but failed to pay the price, which amounted to Rs. 28,030. In addition, the appellant contended that royalty and commission were due from the respondents for the coal extracted by them, and that an amount of Rs. 1,355 ⅟ 8 ⅟ 3 was outstanding on account of a loan that the respondents had taken from the appellant on 17 February 1949. The appellant placed a tentative total value on his claim at Rs. 57,000. To support his case, the appellant joined respondents 1, 2 and 5 as defendants, alleging that these three persons, together with respondent No. 4, constituted a partnership firm named Saurashtra Coal Concern, which was joined as defendant 5 and is now respondent No. 3 before this Court. The appellant argued that respondent No. 4 acted as a benamidar for the partnership firm, and consequently all the respondents were jointly liable for the claim. Respondents 4 and 5, who were father and son, admitted that the lease had been obtained by respondent No. 4 on behalf of the partnership firm, but they contended that they had surrendered their lease‑hold interest to the appellant on 1 November 1950, an act that the appellant had accepted. They asserted that, because of that surrender, the appellant was not entitled to claim royalty and commission for the period after 1 November 1950. Moreover, they maintained that the figure of 2,803 tons was only a rough estimate, as the coal had not been weighed at the time of the agreement. According to their version, at the time of surrender there existed a stock exceeding 2,803 tons of slack and rubble, together with soft coke and other material, including the stock left by the appellant at the time of granting the sub‑lease, which could not be sold. They claimed that the appellant took possession of the entire stock in November 1950 after promising to adjust it against the dues, and therefore they disclaimed any liability to pay for the price of the 2,803 tons. They also denied having taken any loan from the appellant as alleged. No separate written statement was filed on behalf of respondent No. 3, but respondents 1 and 2, who had been defendants 2 and 4 in the trial court, denied the appellant’s claim in entirety, asserting that respondent No. 4 had taken the sub‑lease in his personal capacity and not on behalf of the other respondents. They further contended that there was no privity of contract between them and the appellant, and consequently the appellant was not entitled to a decree against them. The respondents described the real facts as being that respondent No. 4 took a sub‑lease of the property from the appellant and then gave a managing agency of the same to the Saurashtra Coal Concern.

According to the respondents, the stock of coal that was present in the colliery at the time the sub‑lease was granted could not be sold, and the appellant subsequently took possession of the entire stock in November 1950 after promising to adjust the value of that stock against the amounts owed by the respondents. On that basis, the respondents asserted that they disclaimed any liability to pay the price for the alleged 2,803 tons of coal. They further denied that they had ever received a loan from the appellant, as the appellant alleged. No separate written statement was filed on behalf of respondent No 3; however, respondents No 1 and No 2—who had been defendants 2 and 4 in the trial court—rejected the appellant’s claim in its entirety. These two respondents contended that respondent No 4 had taken the sub‑lease in his individual capacity and not on behalf of the other respondents. They argued that there was no contractual privity between themselves and the appellant, and therefore the appellant was not entitled to obtain a decree against them.

The respondents further explained that the factual situation was that respondent No 4 had obtained a sub‑lease of the property from the appellant and then assigned the management of that sub‑leased property to the Saurashtra Coal Concern, in which the first respondent acted as the financing partner and the second respondent acted as the working partner. According to them, this concern was never itself a sub‑lessee of the appellant. They also denied any involvement with the coal stock that the appellant claimed to have sold to respondent No 4. The trial court, after hearing the evidence, rejected the appellant’s claim for the alleged loan but granted a decree for the sum of Rs 28,030 as the price of the coal and the commission thereon, holding all respondents jointly liable for that amount. In addition, the trial court issued a preliminary decree directing the parties to determine the exact amount of royalty and commission that would be due to the appellant on account of the sub‑lease, and it indicated that the minimum amount recoverable on that head would be Rs 26,000.

Respondents No 1, 2 and 3 appealed the trial court’s decision to the High Court, and the High Court granted leave to appeal. Consequently, the decree of the trial court remained enforceable only against respondents No 4 and 5, while it was set aside as against respondents No 1 to 3. Both the trial court and the High Court had concurred in finding that the sub‑lease in question had been obtained solely by respondent No 4. The appellant’s counsel, Mr Sarjoo Prasad, advanced only one argument in support of the appeal: he submitted that because respondent No 4 was a partner in the Saurashtra Coal Concern, all partners of that firm should be liable under the lease, on the ground that the firm had taken possession of the demised colliery. He further pointed out that, even according to the statements of respondents No 1 to 3, possession of the demised colliery had been taken immediately after the execution of the sub‑lease, and he urged the Supreme Court to infer from this that the partnership had already been formed before the lease was obtained. The appellant, however, had never argued this point before the lower courts. The only case the appellant relied upon in the lower courts was that the lease had been taken by respondent No 4 on behalf of the partnership firm.

The appellant contended that the sub‑lease had been taken by respondent No 4 on behalf of all the respondents, essentially arguing that respondent No 4 acted as a benamidar for the partnership firm. The Court observed that this was the only position that the respondents were required to address, and it would be inappropriate to allow the appellant to introduce an entirely new argument at this juncture. The Court then turned to the statutory provision governing partnership authority. Section 22 of the Indian Partnership Act, 1932 states that, in order for a firm to be bound by an act or instrument executed by a partner on its behalf, the act must be done or the instrument must be executed in the name of the firm, or in any other manner that expresses or implies an intention to bind the firm. The sub‑lease in the present case was not executed in the name of the partnership, and the lower courts had already found that respondent No 4, in obtaining the lease, did not act on behalf of the firm. Consequently, the parties to the sub‑lease did not intend to bind the partnership by that transaction.

To support his claim, counsel for the appellant relied heavily on the decision in Karmali Abdulla Allarakia v. Vora Karimji Jiwanji and others. That precedent examined whether one partner could be held liable for a hundi drawn by another partner when the hundi was not drawn in the name of the firm. The Privy Council, following Gouthwaite v. Duckworth, held that the other partner could be liable even though the hundi did not purport to be on behalf of the firm. The Court noted, however, that this authority did not assist the appellant because, in the earlier case, the transaction involving the hundi was undeniably a partnership transaction, whereas here the taking of the sub‑lease was found not to have been carried out on behalf of the partnership.

The appellant also cited Mathura Nath Choudhury v. Sreejukta Bageswari Rani and others. In that case, the issue was whether a firm was liable for money borrowed by one of its partners. The High Court emphasized that liability in such circumstances is a factual question that depends on the specific facts and circumstances of each case. It further held that liability arose only when the contract was entered into by a partner in connection with the partnership’s business. The Court observed that this case is analogous to the Karmali decision, as both concerned the question of a partner’s authority to bind the firm, but it did not provide any assistance to the appellant because, again, the sub‑lease was not executed in the name of the partnership and was not a partnership transaction.

The Court observed that it was permissible to infer the existence of authority from the surrounding circumstances, referring to the authorities ILR 39 Bom. 261 at 274, (1810) 12 East 421, 46 CLJ 362 and ILR 41 Mad. 427 (Full Bench). It held that these precedents did not aid the appellant’s case. The Court then examined the decision in Lakshmishankar Devshankar v. Motiram Vishnuram (6 BLR 1106). That judgment had held that when a partner borrows money in the name of the firm without the consent of the other partners and the amount is applied to discharge the firm’s debts, the lender is, in equity, entitled to recover from the firm the sum that can be shown to have been so applied. The same principle was said to extend to money bona‑fide borrowed and applied for any legitimate purpose of the firm. The Court found that this principle did not further the present dispute because the sub‑lease in question had not been executed in the name of the firm. Finally, the Court considered the case of Gordhanadas Chliotalal Seth v. Mahant Shri, Raghuvirdasji Gangaramji (34 BLR 1137). In that case the firm was held bound by debts incurred by the managing partner for the operation of a factory belonging to the partnership, and all partners were held liable because the transaction was undertaken by the managing partner for the purpose of the partnership business. The Court noted that this case was analogous to the preceding one and therefore also of no assistance to the appellant.

Counsel for the appellant further cited two additional decisions: Ram Kinkar Banerjee and others v. Satya Chararan Srimani and others (AIR 1939 P.C. 14) and Raja Sri Sri Jyoti Prasad Singh Deo Bahadur v. Samuet Henry Seddon (ILR 19 Pat. 433 at 459). Those judgments involved defendants who were assignees of a lease and sought liability, a situation not relevant to the present matter. Counsel conceded that respondents 1 to 3 could not be held liable on the basis of a privity of estate with the appellant. The Court agreed with the High Court’s view that the decree should be confined to respondents 4 and 5, dismissed the appeal, and awarded costs to the respondents. Appeal was dismissed.