Uttamchand vs S.M. Lalwani

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

Court: supreme-court

Case Number: Not extracted

Decision Date: 28 August 1964

Coram: P.B. Gajendragadkar, J.C. Shah, N. Rajagopala Ayyangar

The special leave petition presented a concise issue: whether the lease that the respondent, Sardar Mal Lalwani, had executed in favour of the appellant, Uttamchand, qualified as a lease of “accommodation” as defined in Section 3 of the Madhya Pradesh Accommodation Control Act, 1955 (the Act). The appellant had applied to the Rent Controller seeking an order fixing the rent payable under that lease, invoking the power granted by Section 9(1) of the Act, which authorises the Authority to determine a reasonable annual rent for a demised accommodation. The respondent opposed the application, contending that the premises demised to the appellant did not constitute “accommodation” within the meaning of Section 3, and therefore the Act could not be invoked to fix the rent. The Rent Controlling Authority at Bhopal examined the parties’ submissions, rejected the respondent’s argument, and on the merits adjudicated that a reasonable annual rent of Rs 2,400 was payable under the lease.

Subsequently, the respondent appealed to the District Judge at Bhopal, asserting that the Rent Controlling Authority lacked jurisdiction to intervene in the rent dispute and that, even assuming jurisdiction, the amount fixed was unreasonably low. The District Judge dismissed the respondent’s jurisdictional plea, holding that the lease was indeed covered by the provisions of the Act. Turning to the merits, the Judge observed that the Authority had arrived at the rent figure in a manner that was essentially arbitrary and that it had failed to apply a proper definition of reasonable annual rent. Accordingly, the Judge set aside the Authority’s order, remanded the matter back to the Authority, and directed it to conduct an inquiry and to determine the reasonable annual rent in accordance with the observations recorded in his judgment.

Unsatisfied with the District Judge’s decision, the respondent approached the High Court of Madhya Pradesh exercising its revisional jurisdiction. In that proceeding, the respondent challenged the validity of the remand order on the ground that the lease did not fall within the ambit of the Act, and consequently the appellant could not invoke Section 9(1) to obtain a rent fixation. The High Court accepted the respondent’s submission, allowed the revisional application, and dismissed the appellant’s request for fixing a reasonable annual rent. The appellant then filed the present petition before the Supreme Court by way of special leave. The sole point raised by the appellant’s counsel was that the High Court, in concluding that Section 9(1) of the Act was inapplicable to the lease, had mischaracterised the nature of the lease and had erred in interpreting the effect of the relevant provisions of the Act.

The appellant argued that the High Court, in holding that Section 9(1) of the Act was not applicable to the lease in question, had mischaracterised the nature of the lease and had incorrectly applied the relevant statutory provisions. The Act, enacted by the Madhya Pradesh Legislature in 1955, was intended to regulate the letting and rent of both residential and non‑residential accommodation and to prevent the eviction of tenants. Section 2(1) of the Act expressly excludes from its operation any accommodation described in Clauses (a) to (d). Clause (d) of Section 2, for example, deals with places of entertainment and adjoining land that are used for entertainment or catering purposes. Consequently, places of entertainment listed in Clause (d), as well as properties covered by Clauses (a), (b) and (c), lie outside the protective scope of the Act. Section 2(2) further empowers the Government to exempt from any or all provisions of the Act any accommodation owned by an educational, religious or charitable institution, or by a nursing or maternity home, where the entire income generated is utilized for the institution or the nursing or maternity home. Having provided for such exemptions, Section 3 defines the terms employed in the Act, including the term “accommodation.” Section 3(a) defines “accommodation” to mean: (x) any land not being used for cultivation; and (y) any building or part of a building, which includes (1) any garden, open land and outhouses appurtenant to such building or part of a building; (2) any furniture supplied by the landlord for use in such building or part of a building; and (3) any fittings attached to such building or part of a building for the more beneficial enjoyment thereof. In the present matter, the lease concerns a building that contains certain fittings, so the crucial issue is whether the lease pertains to an “accommodation” as defined by Section 3(a)(y)(3). Section 4 restricts the lessor’s power to evict a tenant, providing that no civil suit may be instituted against a tenant for eviction from any accommodation except on one or more of the grounds enumerated in Clauses (a) to (n) of that section. Section 9 governs rent control. Section 9(1) provides that the rent payable for any accommodation to which the Act applies shall be the amount agreed upon between landlord and tenant, but in no case shall it exceed the rent calculated on the basis of a reasonable annual rent. The point for determination in this appeal is whether the rent payable by the appellant to the respondent falls within the meaning of “accommodation” under Section 9(1) of the Act.

In this case the Court examined whether the amount paid by the appellant to the respondent could be described as rent for an “accommodation” within the meaning of Section 9(1). The essential issue therefore was whether the rent note executed between the parties qualified as a rent note for an accommodation defined by Section 3(a)(y)(3). If the rent note could not be said to relate to such an accommodation, then Section 9(1) would not apply to the appellant. To resolve this question the Court turned to the specific provisions of the lease itself. The lease identified the lessor as the owner of the Dal Mill Building located in Mandi Abidabad, Bhopal, and it specified that the building contained fixed machinery and other accessories listed in the Schedule annexed to the lease. Consequently, the lease was expressly for the Dal Mill Building together with its fixed machinery and accessories. Clause 2 of the lease stated that the lessor agreed to grant a lease of the building, machinery and accessories on the terms set out in the instrument. Sub‑clause 2(a) demised to the lessee the Dal Mill Building, the fixed machinery and the accessories described in the Schedule, to be held by the lessee from 12 March 1957 for a period of one year at an annual rent of Rs 6,000. Sub‑clause 2(b) imposed on the lessee a covenant to pay the entire yearly rent of Rs 6,000 to the lessor at the commencement of the lease, that is on 12 March 1957, before the Sub‑Registrar of Bhopal. The lease further provided that possession of the mill was delivered to the lessee in sound working order. Clause 3 set out additional obligations: the lessor was required to pay municipal charges on the land on which the mill stood and to insure the mill building at his own expense, bearing any loss if insurance was not obtained; the lessee was obligated to insure the machinery at his own cost and to return the machinery and accessories in working order, subject only to ordinary wear and tear. The lessor agreed to repair the premises whenever necessary, while the lessee bore responsibility for any wilful damage, being required either to repair, replace or compensate for such damage. The lessee also had to pay for electrical and water charges necessary for the operation of the mill.

The lease further stipulated that if, during the term, the lessee installed any additional machinery, he would be entitled to remove that additional machinery at the expiry of the lease. The lessee was given an option to renew the lease for another one‑year period on the same terms and conditions, provided that three months’ notice was given before the expiry of the second lease; failure to give such notice would be deemed a continuation of the lease on the same terms but at an increased annual rent of Rs 7,200. The lessee was expressly prohibited from assigning, underletting or subletting the mill, the premises, or any right therein without the prior written consent of the lessor. The lessor retained the right to terminate the lease at any time after two years by giving three months’ notice. Additionally, the lessor or his agent possessed a right to enter and inspect the premises and the machinery at any reasonable time. The Schedule attached to the lease listed fifteen items of machinery that were fixed in the building and covered by the lease. The appellant’s case was that the lease in question was …

The lease provided that if the lessee installed any additional machinery during the tenancy, he would be entitled to remove that additional machinery when the lease expired. The lessee was also given a one‑year renewal option on exactly the same terms and conditions as the original lease. To exercise the renewal, the lessee had to serve a notice of three months before the expiry of the second lease term; if he failed to give such notice, the lease would be deemed to have continued automatically on the same terms but with an annual rent fixed at Rs 7,200. The lease expressly prohibited the lessee from assigning, underletting, or subletting the mill or the premises, or any right therein, without the prior written consent of the lessor. The lessor retained the right to terminate the lease at any time after the passage of two years, provided he gave three months’ notice before termination. In addition, the lessor or his authorized agent were entitled to enter the premises at reasonable times to inspect both the building and the machinery. The lease schedule listed fifteen specific items of machinery that were fixed in the building and therefore formed part of the leased property.

In the appeal, the appellant argued that the lease was principally a lease of the building itself, with the machinery being only incidentally included because it was fixed to the structure. He submitted that shortly after taking possession, he discovered that the existing machinery was not functional, which led him to remove it and replace it at his own expense. The appellant contended that the monetary value of the building far exceeded the value of the machinery and that, for the purpose of determining whether the lease qualified as a lease of accommodation under Section 3(a)(y) of the Act, the relative values of the building and the machinery must be considered. He further maintained that the dominant intention of the parties was to lease the building, not the machinery, and that this intention makes the lease fall within the definition of accommodation under the cited statutory provision. To support this position, counsel cited the decision in Levermore v. Jobey, where Justice Jenkins observed that when construing a lease, the court must consider the surrounding circumstances and the nature of the subject‑matter of the letting. Relying on that observation, counsel argued that the lease should be viewed primarily as a lease of the Dal Mill building, with the machinery only incidentally included as fixed plant. He also referred to additional judicial authority, which was to be discussed in the following portion of the judgment.

In the judgment of the Andhra Pradesh High Court reported in K. Venkayya v. Thammana Peda Venkata Subbarao, AIR 1957 Andh Pra 619 at page 626, the Court examined the nature of the lease that was before it. The learned Judge, Viswanatha Sastri J., observed that there existed a great variety of structures that could be described as buildings, and he rejected the view that every enclosure of brick, stone, or mud walls covered by a roof, irrespective of its purpose, automatically qualified as a building within the meaning of the Act. He further remarked that such a broad construction would bring every factory and mill—normally situated in buildings—within the operation of the statute. The Judge explained that the relevant inquiry in each case was to determine which portion of the demised property constituted the dominant part and for what purpose the building had been constructed and let out. In the specific case he was deciding, the issue was whether the lease in dispute qualified as a building lease under the Madras Act 25 of 1949. Counsel for the respondent, Mr. Iyengar, argued that the lease before the Court should be interpreted by applying the test of the dominant intention of the parties, and that this approach was appropriate for ascertaining the character of the lease. The Court agreed that the contention was well founded and that the character of the lease needed to be determined by asking what the dominant intention of the parties had been when they executed the lease document.

The Court then turned to Section 3(a)(y)(3), which defined “accommodation” to include any building or part of a building, together with any fittings affixed to such building or part of a building for the more beneficial enjoyment thereof. The Court noted that the machinery fittings involved in the present case could not be said to have been installed for the more beneficial enjoyment of the building itself. The fitting contemplated by Section 3(a)(y)(3) was intended to provide incidental amenities for the person occupying the building, not to constitute industrial equipment. Consequently, the Court concluded that the machinery fittings did not fall within the ambit of Section 3(a)(y)(3). If the fittings had been covered by that provision, there would have been no difficulty in holding that the lease related to accommodation as defined by the provision. The Court then examined the dominant intention of the parties in entering the transaction. Having set out the material terms of the lease, the Court found it clear that the appellant’s principal purpose in accepting the lease from the respondent was to use the premises as a Dal Mill. Although the lease instrument described the lease as being of the Dal Mill building, that description was not decisive, because even assuming the parties intended to let out the mill, the building would inevitably have to be described as the Dal Mill building. The dominant intention, therefore, was to let the mill, with the building necessarily included, rather than to lease the building alone with machinery incidentally attached.

The Court observed that even if the parties had intended merely to let the mill to the appellant, the property would still have been described as the Dal Mill building. It was not a situation in which the lease concerned only the building and, as a consequence, the machinery fixtures associated with the mill were transferred incidentally. In reality, the mill itself constituted the subject‑matter of the lease, and because the lease was intended to let the mill, the building necessarily had to be let together with the mill. The appellant’s claim that the machinery conveyed under the lease was not very serviceable and that he was forced to install his own equipment did not, in the Court’s view, alter the fundamental character of the transaction. The arrangement was not a lease entered into for the purpose of residing in the building; rather, the appellant entered into the lease to operate the Dal Mill situated within the building. The Court noted that a mill of this nature must be housed in some building, and therefore the mere description of the lease as concerning the building did not transform it into a lease of accommodation as defined by Section 3 (a) (y) (3). The fixtures listed in the lease schedule were not intended for the enhanced enjoyment of the building; instead, those fixtures represented the primary object of the lease, with the building serving only an incidental role. Accordingly, the Court agreed with the High Court that the rent payable by the appellant under the lease could not be characterised as rent for any accommodation to which the Act applies.

The Court further noted that both the Rent Controlling Authority and the District Judge appeared influenced by the appellant’s argument that if a mill such as the Dal Mill were meant to be exempt from the operation of the Act, Section 2 (1) would have expressly provided for that exemption. The Court recalled that Section 2 (1) (d) expressly exempts places of entertainment prescribed therein, and that clauses (a), (b) and (c) of Section 2 (1) create additional exemptions. The appellant contended that because a mill located in a building is not specifically exempted by Section 2 (1), it would be unreasonable to deem the lease in the present case to be a lease of accommodation as defined by Section 3 (a) (y) (3). The Court found this contention without substance. It held that the mere absence of an express exemption for a mill situated in a building under Section 2 (1) did not support the appellant’s argument, and therefore the lease could not be treated as one falling within the definition of accommodation for the purposes of the Act.

The Court explained that the question of whether an exemption under the Act applied would hardly affect the outcome because a lease could only be governed by the Act if it were shown to relate to accommodation as defined in Section 3(a). Accordingly, the Court said that the analysis must first address the issue of whether the lease in the present dispute falls within the description set out in Section 3(a)(y)(3). The Court further observed that if the answer to that preliminary question were negative – that is, if the lease did not pertain to accommodation – then it would be unnecessary to examine whether the lease had been exempted from the operation of the Act. In such a circumstance, the exemption provision would have no relevance. Accordingly, the Court concluded that the appeal could not succeed. As a result, the Court ordered that the appeal be dismissed and that costs be awarded against the appellant.