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MANU/AP/0002/1983

Equivalent Citation : [1986 ]60CompCas 568 (AP )

IN THE HIGH COURT OF ANDHRA PRADESH

Appeal No. 67 of 1979

Decided On: 26.12.1983

Appellants: Vali Pattabhirama Rao and Anr.


Vs.
Respondent: Sri Ramanuja Ginning and Rice Factory P. Ltd. and Ors.

Hon'ble Judges:
K. Jayachandra Reddy and P. Kodanda Ramaiah, JJ.

Counsels:
For Appellant/Petitioner/Plaintiff: T. Veerabhadrayya, Adv.

For Respondents/Defendant: P. Ramachandra Reddy and A. Venkatrami Reddy, Advs.

Subject: Company

Subject: Law of Evidence

Acts/Rules/Orders:
Companies Act, 1956 - Sections 3, 4, 4(2), 5, 9, 11, 13, 14, 15, 20, 21, 24, 35, 42, 106, 108,
111, 111(9), 116, 205(1), 239, 240, 241, 242, 243, 244, 245, 246, 247, 248, 249, 250, 251,
252, 253, 253(1), 254, 255, 256, 257, 258, 259, 260, 261, 262, 263, 264, 265, 266, 565, 565
(1), 567, 568, 574 and 575

Cases Referred:
Official Receiver and Liquidator of Jubilee Cotton Mills Ltd. v. Lewis (1924) AC 958, 93 LJ Ch
414, 131 LT 579; Natal Land & C. Company v. Pauline Colliery Syndicate (1904) AC 120, 73 LJ
PC 22, 89 LT 678; Queen v. Tankard (1894) 1 QB 548, 70 LT 42, 42 WR 350; Proctor v. Bennis
(1887) 36 Ch D 740, 57 LJ Ch 11, 57 LT 662 (CA),; Erlanger v. New Sombrero Phosphate Co.
(1878) 3 AC 1218, 39 LT 269, 27 Wr 65; Phosphate Sewage Co. v. Hartmount (1877) 5 Ch D
394, 46 LJ Ch 661, 37 LT 9 (CA)

Authorities Referred:
Halsbury's Laws of England, Vol.5, Fourth Edn.; Halsbury's Laws of England, fourth edition;
Palmer's Company Law, in their 22nd edition, volume 1,; Mulla on Transfer of Property Act,
sixth edition; U. N. Mitra's Law of Limitation and Prescription, 9th edition; Rustomji on Law of
Limitation and Adverse Possession, sixth edition

Citing Reference:

Discussed 18

Distinguished 1

Mentioned 14

Case Note:

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Company - conveyance to vest property - Sections 3, 4, 4 (2), 5, 9, 11, 13, 14, 15, 20,
21, 24, 35, 42, 106, 108, 111, 111 (9), 116, 205 (1), 239 to 266, 565 to 568, 574 and
575 of Companies Act, 1956 - several issues pertaining to company, tenancy, lease,
adverse possession etc were dealt in said plaint - question relating to company was
whether conveyance is necessary to vest property of firm when same was converted
into company - as per Sections 567 and 568 partnership deed has to be filed before
Registrar before seeking registration - partnership firm which was treated as
company under Companies Act, 1956 can be registered under Part 9 of Act and
vesting is provided by Section 575 - Registrar is bound to give certificate of
registration under Section 574 which is conclusive proof of incorporation - no
conveyance is necessary when partnership is converted and registered as company -
held, if constitution of partnership firm is changed into that of company by registering
it under Part 9 there would be statutory vesting of title of all property of previous firm
in newly incorporated company without any need for separate conveyance.

JUDGMENT

P. Kodanda Ramaiah, J.

1. Among numerous question of law, two interesting company law problems are raised in this
civil appeal by Sri T. Veerabhadraiah, the learned counsel for the appellants :

(1) Whether a conveyance is necessary to vest the property of a firm when the
same was converted into a company ?

(2) Similarly whether such conveyance is necessary to claim title by the company in
respect of property acquired by the promoter before its incorporation ?

2. A considerable time and lengthy debate had taken place and, hence, we are impelled to state
this in the forefront. Now, we shall state the facts.

3. The plaintiffs in O.S. No. 36 of 1969 on the file of the Subordinate Judge's Court,
Vijayawada, are the appellants in this appeal. The suit is laid for eviction of the defendants from
the plaint schedule site after declaring the suit lease as duly terminated, removing the
structures and deliver vacant possession of the same. The plaintiffs are grandsons of one Vali
Subbarayudu and it is averred that the said Subbarayudu granted a lease to one Nidumukkala
Subbarayudu the suit lands for the purpose of constructing and running a ginning and rice and
oil factory under a lease deed dated July 10, 1903, and the said lease though called a
permanent lease was a tenancy at will and the said lease will enure for the life of the original
lessee only and the original lessee constituted the first defendant firm with himself and other
shares and erected the factory of the first defendant and the first defendant paid the rents due
till January 1, 1969, and committed default in payment of half-yearly rents and the first
defendant also committed breach of covenants of the aforesaid lease described in paragraph 7
in detail and the lease aforesaid offends the rule of perpetuities and consequently void. It was
further alleged that handing over of the leased premises by the original lessee to the first
defendant is unauthorised and, hence, the first defendant cannot claim to continue to be in
possession and, hence, the plaintiffs terminated tenancy in respect of the plaint schedule
properties and, hence, the defendants should deliver possession of the property and that the
second defendant maliciously set up the claim to a portion of the plaint schedule site and the
first defendant failed to set off the rents due against the decretal dues in O.S. No. 1 of 1966
and, hence, the suit.

4. The first defendant, a private limited company, registered under the Indian Companies Act,
1913, filed a written statement contending that the lease dated July 10, 1903, was a permanent
lease in favour in Nidumukkala Subbarayudu and the said property is continuously under the
possession and enjoyment of the lessee and his successor-in-interest and is being used for the
purposes contemplated in the original lease and there is no default in payment of rent and the

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allegation of breach of covenants of the lease deed is incorrect. The original lessor, his son and
the present plaintiffs know that the first defendant is running the factory and acquiesced in the
manner of enjoyment by the first defendant and, hence, they are stopped from questioning the
rights by the first defendant and the plaintiffs have taken considerable amounts by way of
advance from the first defendant and having committed default in payment of those amounts,
the first defendant obtained a decree in O.S. No. 1 of 1966 on the file of Principal Subordinate
Judge's Court, Vijayawada, against the plaintiffs and the same is being executed and the
plaintiff's suit for the adjacent land on the basis of trespass passed in O.S. No. 79 of 1969 is
frivolous and vexatious and the second defendant has no rights in the property and is not a
necessary party and the same is liable to be dismissed.

5. Second defendant is the former managing director of the first defendant firm and after his
death, defendants Nos. 3 to 12 were added as his legal representatives. 13th defendant was
added by the plaintiffs themselves as adopted son of the original lessor. 14th defendant was
also a supplemental defendant. The second defendant set up a claim for a portion of the land
and filed a separate written statement. But his claim for that land was dismissed in O.S. No.
139 of 1973 which was tried along with this suit and the same has become final and, hence, it
is unnecessary to examine his defence in this appeal. The present suit was also tried along with
the other suit, O.S. No. 79 of 1967, filed by the very same plaintiffs claiming that the first
defendant trespassed into the adjacent land belonging to them and not covered by the original
lease deed. The court below dismissed the said suit holding that the first defendant is in
possession of less than the original extent mentioned in the lease deed and hence no question
of trespass would arise and that judgment and decree have become final and hence we are
concerned only with the controversy in O.S. No. 36 of 1969.

6. On the material issues framed by the trial court, it found that the lease deed dated July 10,
1903, is a permanent lease and it can enure beyond the lifetime of the original lessee and the
first defendant did not commit any breach of covements of the lease, the plaintiffs and their
predecessors-in-interest have acquiesced in the mode of enjoyment of the plaint schedule
property by the first defendant and, hence, they are estopped from filing the present suit and
there is no default in payment of the rent by the first defendant, and the second defendant and
their legal representatives have no rights in the suit property and the plaintiffs have no right to
terminate the lease and obtain possession of the property and consequently dismissed the suit.
Issues Nos. 4 and 6 were deleted and issue No. 11 was found to be unnecessary which relates
to the validity of lease deed as being opposed to public policy and the rule of perpetuity, and
the termination of the lease, and validity of the quit notice, issued by the plaintiff respectively.

7. Sri T. Veerabhadraiah, the learned counsel for the appellants, raised questions Nos. 1 to 8,
some of them not raised in the court below. Sri P. Ramachandra Reddy, appearing for the
respondents, besides refuting those questions raises questions Nos. 9 and 10 and they are :

(1) Exhibit A-1 is not a permanent lease.

(2) The rights under exhibit A-1 are only heritable but not transferable and, hence,
section 108(j), proviso, of the Transfer of Property Act, 1882, is attracted.

(3) No transfer of original lessee's interest in fact took place under the terms of
exhibit B-53 to the firm formed by the said lessee, and, if so, the said transfer is
void as section 14 of the present Partnership Act 9 of 1932 has no application.

(4) The partnership entered into by the original lessee consisting of more than 20
persons is illegal under the Indian Companies Act, 1913, and any transfer of his
interest to the said firm is illegal and inoperative.

(5) When the previous firm was converted into first defendant company, a
conveyance is necessary to vest the property of the firm in the company.

(6) Similarly, a conveyance is necessary for the first defendant-company to claim

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title in the leasehold interest acquired by the original lessee under exhibit A-1.

(7) The possession of the first defendant is only that of a tenant holding over after
the death of the original lessee and the tendency is terminable on quit notice.

(8) The first defendant is liable to be evicted as there is a breach of convenant for
non-payment of rent and for committing waste.

(9) The plaintiffs and their predecessors-in-interest had acquiesced in the


enjoyment by the first defendant company of the suit property and, hence, they are
estopped from seeking eviction.

(10) The first defendant has perfected title by adverse possession for permanent
lessee's interest.

8. Before examining these questions, let us notice the facts that are not in controversy. Under
exhibit A-1 dated July 10, 1903, which is a registered deed, a permanent lease was granted by
the grandfather of the plaintiffs one Vali Subbarayudu of an extent of 16,423 sq. yards situate
in Vijayawada town to one Nidumukkala Subbarayudu for a sum of Rs. 180 to be paid in two
half-yearly installments of Rs. 90 each. The lessee under the said document entered into a
partnership, exhibit B-53, dated November 12, 1906, with 47 other persons for constructing the
factory. The said deed recites that the partners obtained the lease under exhibit A-1 for the
purpose of constructing a factory jointly and they constructed the buildings and installed
machinery and were carrying on the business since May 4, 1904. Subsequently, those partners
and the lessee, under exhibit B-54, converted the said firm into a private limited company
named as Sri Ramanuja Ginning and Rice Factory (P.) Ltd., Vijayawada, the first defendant
herein in the year 1920. The original lessor, Vali Subbarayudu, died in the year 1921 and the
original lessee, Nidumukkala Subbarayudu, died in the year 1951. It appears that the lessee,
Nidumukkala Subbarayudu, has no children. The thirteenth defendant was added as a party
defendant by the plaintiffs but subsequently they disputed his right in the suit property and the
court below also held that he is not entitled to any rights in the suit property on additional issue
No. 1 framed on January 28, 1974. During the lifetime of Vali Subbarayudu, he collected the
rent from the first defendant and, subsequently, his son, Raghavaiah, collected the rent from
the first defendant till 1956. It is admitted that the rent was paid till January 1, 1960, and,
subsequently, the first defendant filed Suit, O.S. No. 1 of 1966, on the file of Principal
Subordinate Judge's Court obtained a decree against the plaintiffs and brought their interest
(lessor's interest) in the suit property for sale. The present suit was filed to interdict the sale of
further proceedings in execution. It is also not disputed that the subsequent rents are deposited
in the court by the first defendant. The plaintiffs having failed to satisfy the money decree
obtained against them instituted the present suit in order to avert the sale of their interest in
the suit property and issued quit notice dated February 24, 1967, terminating the tenancy and
filed the present suit. This narrative clearly discloses that since 1903, the plaintiffs and their
predecessors-in-title are receiving the rents from the firm created by the original lessee under
exhibit B-53 on November 12, 1906, and also from the first defendant company which came
into force in 1920 till the present suit is filed terminating the tenancy. The first defendant
categorically stated in the written statement that the plaintiffs took advances and loans from
the first defendant which are far higher than the aggregate of total amount of rents payable to
the plaintiffs and having failed to pay those loans, the plaintiffs did not care to take any interest
either in discharging the aforesaid debts payable by them or with regard to the collection of the
rents from the first defendant and they are willing to pay the rents and the plaintiffs are at
liberty to collect the actual rents due to them. Hence, we have to examine under the facts and
circumstances whether the plaintiffs are entitled to, evict the defendants from the suit land on
the contentions now raised before us.

9. [After stating the facts and the case-law, the court held (i) that the lease, exhibit A-1, was a
permanent lease and it was heritable and transferable].

****

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10. Questions Nos. 3 and 4 : We must say that these two questions are not raised in the trial
court. In fact, the plaint states that the original lessee constituted the first defendant firm with
himself and other shares and erected the first defendant factory in the plaint schedule property
and since then carried on business therein under the name and style, "Sri Ramanuja Ginning
and Rice Factory (P.) Ltd., Vijayawada". This statement clearly discloses that the plaintiffs are
aware of the fact that the original lessee joined the third parties as partners and a firm was
created and, subsequently, it was converted into a private limited company, the first defendant.
The terms of exhibit B-53 dated November 12, 1906, a registered partnership deed state that
the suit site was taken in the name of Nedumukkala Subbarayudu for the purpose of erecting a
factory jointly. It also recites that the lease amount payable under the said permanent lease
shall be payable out of the income of the firm and it shall be the responsibility of the person
who will be the managing partner from time to time. It is not permissible to dispute the recital
of this document which is an ancient one of more than thirty years old and no material is placed
to displace the correctness of those recitals and hence we are proceeding on the basis that the
original lessee brought into the stock of the firm his leasehold interest and has become the part
of the firm's property.

11. The second limb of argument of the learned counsel is that in the absence of a registered
deed conveying interest of the original lessee to the firm, the title will not pass to the firm and
inasmuch as the firm was formed prior to the Indian Partnership Act 9 of 1932 and section 14 of
the said Act has no application and the decisions rendered by courts on the construction of
section 14 have no application as the transaction in question is governed by section 253 of the
Indian Contract Act of 1872. It is true that the partnership in question is governed by the
provisions of the Indian Contract Act of 1872 that embodied the rules of partnership in sections
239 to 266. The section corresponding to section 14 of the Partnership Act is section 253(1) of
the Indian Contract Act, 1872. It is necessary to notice the said provision :

"S. 253. In the absence of any contract to the contrary the relations of partners to
each other are determined by the following rules :

(1) all partners are joint owners of all property originally brought into
the partnership stock, or brought with money belongings to the
partnership, or acquired for the purposes of the partnership business.
All such property is called partnership property. The share of each
partner in the partnership property is the value of his original
contribution, increased or diminished by his share of profits or loss."

12. We do not find any material difference for the purpose of this question between section 14
and section 253(1). In fact, the Statement and Objects of the Indian Partnership Act recites
thus :

"Sections 14 and 15 contain the substance of sub-section (1) of section 20 and of


section 21 of the English Act, and of section 253(1) of the Indian Act, but the
matter has been re-arranged. An important difference is the introduction of the
goodwill of the business, which is now specifically included among the property of
the firm. It will, subject to contract between the partners, be included automatically
in all accounts for the determination of shares." - S.O.R.

"In the second paragraph, we have substituted the word 'acquired' for the word
'purchased' in order to cover the acquisition of leases, mortgages, etc. We have also
assimilated the wording in this paragraph to that in the first." - S.O.R.

13. It is clear that the main principle is that the property brought into the stock of the firm by
the partner becomes the property of the firm. On the other hand, the previous section 253(1) is
more specific in stating that all partners are joint owners of all properties originally brought into
the partnership stock and thus we have no doubt in our mind that the construction placed by
the Supreme Court on section 14 of the present Partnership Act in Addanki Narayanappa v.
Bhaskara Krishnappa MANU/SC/0281/1966, holding (at p. 1303) that "whatever may be the
character of the property which is brought in by the partners when the partnership is formed or

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which may be acquired in the course of the business of the partnership, it becomes the property
of the firm, and ...... since a firm has no legal existence, the partnership property will vest in all
the partners and in that sense every partner has an interest in the property of the partnership.
During the subsistence of the partnership, however, no partner can deal with any portion of the
property as his own." would usually apply to a firm formed prior to the coming into force of the
present Partnership Act and governed by the provisions of the Contract Act. In fact, no words of
dispositive character are necessary to bring the property to the common stock (Vide State v.
Chidambaram, MANU/TN/0071/1970 : AIR1970Mad5 [FB]). The declaration of the rights of
partners in exhibit B-53 is enough to make the property as the property of the firm. This
answers the third question.

14. Question No. 4 : Realising this, the learned counsel raised yet another limb of this
argument, the fourth question stating the partnership formed under exhibit B-53 is illegal as it
contravened section 4 of the Companies Act, 1913, as it admittedly consists of the original
lessee and 47 other partners and, as such, section 14 of the Partnership Act or the
corresponding earlier provision of section 253(1) of the Contract Act cannot be invoked as in
law there is no firm as such. It must be remembered that the partnership was formed on May
4, 1904, as recited in the registered partnership deed, exhibit B-53, dated November 12, 1906.

15. It is necessary to trace the history of the company law in our country. In this country,
following the English Companies Act of 1844, an Act for the registration of joint stock
companies was for the first time enacted as Act 43 of 1850. The Indian Companies Act, 1913 (7
of 1913), was passed which is said to be almost a verbatim reproduction of English Companies
(Consolidation) Act, 1908. Though a provision similar to section 4(2) of the Indian Companies
Act 7 of 1913 prescribing the upper limit for any trading associations to carry on a business was
found in existence in previous Indian Acts since 1866, sub-sections (3), (4) and (5) were added
to section 4 of the Act 7 of 1913 by the Amending Act 22 of 1936. It is sub-section (4) that
declared that a company, association or partnership carrying on business shall be personally
liable for all liabilities incurred in such business and it is sub-section (5) that declared that any
person who is a member of the company, association or partnership firm in contravention of the
said section shall be punishable with fine not exceeding Rs. 1,000. Thus, it is clear the
contravention is made illegal and punishable as an offence by virtue of the Amending Act 22 of
1936. In the present case, as exhibit B-54, the 1st defendant company was formed on
December 6, 1928, as per the certificate of incorporation and hence it is not permissible for the
appellants to contend that the partnership was illegal either on the date of its formation or 1904
or subsequently by the provisions of the 1913 Act as the offending clauses (3) to (5) of the said
section came into force on January 15, 1936, as per the notification dated November 28, 1936,
in the Gazette of India, dated November 28, 1936, Part I, page 1492. Hence, we overrule this
objection.

16. We may also add in this connection that even assuming that the property in question was in
the hands of the firm which was illegal for sometime before it was converted into a limited
company, the rights cannot be adjudged on the basis of the past event which is no longer in
existence for deciding the rights of the parties at present. It is enough if we note that courts
have ruled that the members of partnership or a company hit by this section can, however,
have beneficial interest in the property. (Vide Queen v. Tankard [1984] 1 QB 548 and Nibaran
Chandra v. Lalit Mohan MANU/WB/0206/1938). If the partnership agreement is illegal the court
cannot adjudicate in respect of such contract which the law declares to be illegal. (Vide Seth
Badriprasad v. Seth Nagar Mal [1959] 29 Comp Cas 229 ). This legal position would not in any
way advance the case of plaintiffs.

17. Questions Nos. 5 and 6 : We must again say that these questions were not raised in the
court below.

18. We have already held that the partnership firm in which the original lessee is partner was
legally constituted, and the firm continues to be lawful and the properties belonging to all the
partners have become the properties of the firm. The question is whether the property of the
said firm had vested in the first defendant company when the firm was registered under the
provisions of the Indian Companies Act, 1913. For that it is necessary to notice the terms of

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section 263 of the Indian Companies Act, 1913, that corresponds to section 575 of the present
Companies Act, 1956. Section 263 reads as follows :

"All property, movable and immovable, including all interests and rights in, to and
out of the property, movable and immovable, and including obligations and
actionable claims as may belong to or be vested in a company at the date of its
registration in pursuance of this part, shall, on registration, pass to and vest in the
company as incorporated under this Act for all the estate and interest of the
company therein."

19. The word "company" occurring in section 263 is not a company registered under the Act. It
is used in the sense of a group, assembly or association of persons. In fact, throughout the Act
the word "company" was used in several sections in the general sense of association of persons.
In fact, section 11 of the present Companies Act (section 4 of the previous Act) itself which
enacted the prohibition of associations exceeding a certain members for carrying on trade starts
with saying that no company or association or partnership consisting of more than ten members
shall be formed. Section 253 of the previous Act corresponds to section 565 of the present Act.
Section 565(1)(b) of the present Act corresponds to section 253(1) (ii) of the 1913 Act, which
permits any company otherwise duly constituted according to law consisting of seven or more
members to be registered as a company. A partnership must be one such. This is made clear by
the provisions of section 255 of the 1913 Act (present Act section 567) and section 256 of the
1913 Act (present Act section 568) where under a deed of partnership has to be filed before the
Registrar before seeking the registration. Hence, a partnership which was treated as a company
for the purposes of the Companies Act can be registered under Part 8 of the previous Act (Part
9 of the present Act) and the vesting is provided by section 263 of the 1913 Act (section 575 of
the present Act). The provision is mandatory and there will be statutory vesting in the
corporation so incorporated under the provisions of the Companies Act. The Registrar is bound
to give a certificate of registration under section 262 (present section 574) which is a conclusive
proof of incorporation, vide section 35 of the present Act that corresponds to section 24 of the
previous Act. Hence, it is clear that no conveyance is necessary when a partnership is converted
and registered as a company. However, it is not possible to acquire such title statutorily under
this section if the previous firm purports to convey title to the company in which event a
separate deed of conveyance is necessary. Thus, we hold that if the constitution of the
partnership firm is changed into that of a company by registering it under Part 9 of the present
Act (Part 8 of the previous Act), there shall be statutory vesting of title of all the property of the
previous firm in the newly incorporated company without any need for a separate conveyance.
A similar view was taken in Ramasundari Ray v. Syamendra Lal Ray ILR [1947] Cal 1.

20. D.W. 2 deposed that in 1920 the partnership was converted into a private limited company
and filed the articles of association, exhibit B-54. This evidence stood uncontradicted. In fact,
the plaintiffs and their predecessors-in-title treated the first defendant as successor-in-interest
of the previous firm and hence we are of the opinion that the leasehold interest that has
become firm's property by virtue of the original lessee bringing into the firm has vested in the
first defendant company after its registration.

21. Question No. 6 : Sri Veerabhadrayya, the learned counsel for the appellants, argued that
the terms of exhibit B-54 do not show that the partnership was converted into a company but it
reads as if for the first time the company was formed and in which event it cannot be treated
that the partnership as such was converted into a company and hence a conveyance required to
confer title on the first defendant. For this he relied upon Alapati Venkataramaiah v. CIT
MANU/SC/0108/1965 : [1965]57ITR185(SC) . But that was a case where a third party
purported to sell his property to the company and it is clear in such event a conveyance is
necessary. But if a promoter acquires property before the incorporation of the company, the
legal position is different.

22. The original lessee undoubtedly played the part of a promoter of the company. We have
already noticed that lease deed, exhibit A-1, recited that the land was taken for purpose of
constructing the factory and the necessary buildings for running the same. Exhibit B-53, the
deed of partnership, recited that the original lessee took the permanent lease of the land in his

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name for the benefit of erecting the ginning factory and the firm was carrying on business for
the benefit of the members of the firm since 1904. Exhibit B-65 is the first list of shareholders
of the first defendant company signed by all the shareholders and the original lessee is one of
the signatories and four shares were given to him. Exhibit B-54, the articles of association,
recites that the permanent lease was taken by the original lessee on behalf of all the
shareholders and, hence, the permanent leasehold rights in the said lease and also the
buildings constructed in the land, machinery and other equipment shall be treated as property
of the factory. The capital of the factory was declared at Rs. 41,600 divided into 104 shares
each valued at Rs. 400 and this arrangement was adopted by a special resolution of the
directors. It was also recited that this capital can be enhanced further by a special resolution by
the directors. Exhibit B-54 is the latest copy of the articles of association adopted in the general
body meeting of the company dated December 30, 1955, and the company itself is called Sri
Ramanuja Ginning and Rice Factory (Private) Limited. The question is whether this leasehold
interest in the factory has become the property of the first defendant private limited company.
In view of the part played by the original lessee in securing the lease for the purpose of the first
defendant as promoter we have to see the legal consequences. For this purpose we have to
examine : (1) The nature of jural relationship between the promoter and the company. (2) The
rights of the company in respect of contracts before its incorporation. (3) Whether this
transaction comes under the purview of section 5 of the Transfer of Property Act.

23. The word "promoter" is not defined by the Companies Act, 1956 (1 of 1956), or by its
predecessor Act VII of 1913. It is said that it is not a term of law but do business. The earliest
definition given in Phosphate Sewage Co. v. Hartmount [1876] 5 Ch D 394, as person who as
principal procures or aids in procuring the incorporation of a company, was generally accepted
as the correct definition which was subsequently approved by the House of Lords in Official
Receiver and Liquidator of Jubilee Cotton Mills Ltd. v. Lewis [1924] AC 958 (HL).

24. A person although is not a director may be a promoter of a company. The promoter stands
in a fiduciary position towards the company and his position was defined so in Emile Erlanger v.
New Sombrero Phosphate Co. [1877] AC 1218 , by the House of Lords. Halsbury's Laws of
England, fourth edition, paragraph 38, states :

"A promoter stands in a fiduciary position with respect to the company which he
promotes from the time when he first becomes until he ceases to be a promoter
thereof; but his relation to the company is not that of trustee and beneficiary, or
agent and principal."

25. Lord Cairns L. C. observes in the above case (at p. 1236 of [1877] AC 3 :

"They (promoters) stand, in my opinion, undoubtedly in a fiduciary position. They


have in their hands the creation and moulding of the company; they have the
power of defining how, and when, and in what shape, and under what supervision,
it shall start into existence and begin to act as a trading corporation. If they are
doing all this in order that the company may, as soon as it starts into life, become,
through its managing directors, the purchaser of the property of themselves, the
promoters, it is, in my opinion, incumbent upon the promoters to take care that in
forming the company they provide it with an executive, that is to say, within the
directors, who shall both be aware that the property which they are asked to buy is
the property of the promoters, and who shall be competent and impartial judges as
to whether the purchase ought or ought not to be made. I do not say that the
owner of property may not promote and form a joint stock company, and then sell
his property to it, but I do say that if he does, is bound to take care that he sells it
to the company through the medium of a board of directors who can and do
exercise an independent and intelligent judgment on the transaction, and who are
not left under the belief that the property belongs, not to the promoter, but to some
other person."

26. Again Lord Blackburn, at page 1269, observes :

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"They must make a reasonable use of the powers which they accept from the
Legislature with regard to the formation of the corporation, and that requires them
to pay some regard to its interests. And consequently they do stand with regard to
that corporation when formed, in what is commonly called a fiduciary relation to
some extent."

27. He further observes : (at p. 1269) :

"Where, as in the present case, the company is formed for the purpose of becoming
purchasers from the promoters as vendors, the interests of the promoters and of
the company clash. It is the vender's interest to get as high a price as possible, and
they have a strong bias to overvalue the property which they are selling; it is the
purchasers' interest to give as low price as possible, and to secure that the price
actually given is not more than the property is really worth to them."

28. Thus, it is seen that they have got both fiduciary relationship and at the same time they
have individual interest to be served in the process of floating the company and hence it is
ruled that a promoter cannot therefore retain any profit made out of a transaction to which the
company is a party without full disclosure. It is necessary in this connection to see the binding
nature of the contracts entered into by them before the incorporation. The law in our country
varies from that obtained in England. Again Halsbury states in fourth edition at page 435,
paragraph 727 :

"A company is not bound by contracts purporting to be entered into on its behalf by
its promoters or other persons before its incorporation. After incorporation, it
cannot ratify or adopt any such contract because in such cases there is no agency
and the contract is that of the parties making it. The adoption and confirmation by a
director's resolution of a contract made before the incorporation of the company by
persons purporting to act on its behalf does not create any contractual relation
between it and the other party to the contract or impose any obligation on it
towards him."

29. Hence, the commentator states in paragraph 728 that :

"In order that the company may be bound by agreements entered into before its
incorporation, there must be a new contract to the effect of the previous
agreement."

30. The editors of Palmer's Company Law, in their 22nd edition, volume 1, at page 271, state
regarding pre-incorporation contracts :

"In common law. Before its incorporation a company has no capacity to contract.
Consequently, in common law, nobody can contract for it as agent because an act
which cannot be done by the principal himself cannot be done by him through an
agent, nor can a pre-incorporation contract be ratified by the company after its
incorporation. There is, however, nothing to prevent the company, when
incorporated, from entering into a new contract to put into effect the terms of the
pre-incorporation contract. But the mere acting after incorporation on the
preliminary contract does not in itself constitute sufficient evidence of the creation
of a new contract." Thus, virtually a new contract has to be entered into in order to
bind the company in respect of contracts entered before its incorporation. But, in
India, both the Specific Relief Acts 1 of 1877 and 47 of 1963, made provisions
making the pre-incorporation contracts binding on the company. Section 21(f) of
the 1877 Act which corresponds to section 14 of the 1963 Act did not retain in the
said provision as the said clause is covered by section 9. The present section 15(h)
corresponds to section 23(h) of the previous Act and section 19(e) of the present
Act corresponds to section 27(e) of the previous Act. Section 15(h) provides that
the company can enforce pre-incorporation contracts, if such contract is warranted

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by the terms of the incorporation and the company has accepted the contract and
has communicated such acceptance to the other party. The converse position is
covered by section 19(e) where a third party can enforce the contract against the
company if such contract is warranted by the terms of the incorporation of the
company and the company has accepted the contract and communicates such
acceptance to the other party to the contract, and hence, the dicta in Natal Land
and Colonization Co. Ltd. v. Pauline Colliery Syndicate Ltd. [1904] AC 120, 126 (PC)
of Lord Davey speaking for the Judicial Committee "that a company could not by
adoption or ratification obtain the benefit of a contract purporting to have been
made on its behalf before the company came into existence", cannot be invoked in
our country. No doubt it is true that the sections in the Specific Relief Act are
concerned with the executory contracts and cannot be applied to conveyances of
immovable property and, hence, we have to see whether the title has passed to the
company and whether the provisions of the Transfer of Property Act stand in the
way.

31. For this purpose we have to examine sections 5 and 9 of the Transfer of Property Act.
Section 5 and 9 are in the following terms :

"Section 5. In the following sections, 'transfer of property' means an act by which a


living person conveys property, in present or in future, to one or more other living
persons, or to himself, or to himself and one or more other living persons; and to
transfer property is to perform such act.

In this section, 'living person' includes a company or association or body of


individuals, whether incorporated or not, but nothing herein contained shall affect
any law for the time being in force relating to transfer of property to or by
companies, associations or bodies of individuals."

"Section 9. A transfer of property may be made without writing in every case in


which a writing is not expressly required by law."

32. We shall divide section 5 into component parts and examine. It lays down that if a living
person conveys property in present or in future, to -

(1) one or more other living persons; or (2) to himself; or (3) to himself and one or
more other living persons. The words "living person" are said to include -

(i) a company, or (ii) association or body or individuals, whether


incorporated or not.

33. So it is clear that the transfer must be by one living person to another living person. It must
be inter vivos (During life : between living persons). Though a company is a living person for
the purpose of this section before its corporation, it is not a company. The words "whether
incorporated or not" in the second paragraph applies to other associations or body of individuals
is that are unincorporated. The second conspicuous element of this definition is that a transfer
to oneself is contemplated. Thus, a person may create a trust and constitute himself the first
trustee so that the legal estate in the property continues to vest in him though in his capacity
as a trustee. (Vide Tulsidas Kilachand v. CIT MANU/SC/0163/1961 : [1961]42ITR1(SC) ). It is
necessary in this connection to state that the Transfer of Property Act is not exhaustive of the
law relating to a transfer of Property Act by act of parties. The preamble itself indicates two
things. (1) It purports to define and amend certain parts of law relating to transfer or property.
(2) It relates to the transfer of property by act of parties. Thus, it excludes from its purview
sales in execution of decrees, insolvency proceedings, testamentary and intestate succession.
The word "convey" occurring in the first paragraph of the section is of wider import. The sweep
of this expression can usefully be gathered from the definition given in section 205(1) (ii) of the
Law of Property Act of England. "'Conveyance' includes a mortgage, charge, lease, assent,
vesting declaration, vesting instrument, disclaimer, release and every assurance of property or

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of any interest therein by any instrument except a will."

34. Let us turn to section 9 which states that a transfer of property may be made without
writing in every case in which a writing is not expressly required by law. The said provision is
enacted as ex abundanti cautela though it is really unnecessary. The Act did not deal with all
the types of transfers. It deals only with enumerated and specified transactions of sale,
mortgage, lease, exchange and gift. That is why the inclusion of Chapter 8 relating to transfer
of actionable claims in this Act was criticised by jurists as being not consistent with the scheme
of the Act. It is true that other than the provisions of this Act also require certain documents to
be in writing such as Indian Trusts Act and the Indian Succession Act. But section 9 lays down
that if a transaction is transfer of property and there is no express provision of law requiring it
to be in writing, section 9 will enable it to be made without writing. But, if on the other hand,
the transaction is not a transfer of property and there is no express provision of law requiring it
to be in writing, then it can also be done without writing. Thus, there are innumerable instances
where courts recognised oral transfers such as release, relinquishment, surrender, compromise,
partition, transfer of easementary rights, settling maintenance claims, creating charge,
dedication to an idol and family settlements to name a few. Further, in view of section 5, a
transfer to an unborn person can be made only by a machinery of trust and hence section 13 of
the Act used the expression "transfer" for the benefit of an unborn person.

35. Thus, we see a promoter of a company though fulfils some fiduciary duties, he cannot be
described as a trustee as there is no beneficiary as defined under section 3 of the Indian Trusts
Act. He cannot also be an agent as there is no principal born by that time. Hence, the promoter
occupies a peculiar position of a quasi-trustee. Hence, the question is whether the declaration
made by him constitutes transfer of property and whether the company can claim any interest
in the property so declared belonging to it by the promoter. The declaration of the promoter
that the property is held by him for the company to be formed does not constitute either a sale,
mortgage, lease, exchange or gift and the company before its incorporation is not a living
person and, hence, section 5 is not attracted. Such declaration also does not constitute a
transfer to himself and the company has not come into force as a beneficiary and, hence, it will
not become a trust. Hence, the transaction is outside the purview of section 5 of the Transfer of
Property Act and also the Trusts Acts and it does constitute a conveyance as a vesting
instrument or other assurance of property and can be made orally under section 9 of the
Transfer of Property Act.

36. If he purchases property from a third party, he will be acquiring the title though apparently
in his name for the benefit of the company yet to be formed. The property vests in him for the
benefit of the company though his assurance is sufficient to clothe the company after its birth
to claim full title. Hence, we hold that the property acquired by a promoter can become the
property of the company by its acceptance and adoption after its birth. A Division Bench of the
Madras High Court had an occasion to consider in an unreported judgment in Writ Appeals Nos.
85 and 86 of 1963 dated August 5, 1964, whether a promoter of a private limited company
prior to its corporation can make a valid application on its behalf for the grant of a stage
carriage permit and it was held that if the company came into came into existence before the
actual determination by the authorities, it can be justified either on principle of adoption or
novation by a subsequent application. But if the company is incorporated subsequent to the last
date of consideration, it cannot ratify the application of the promoter. In that case, section 57
(2) of the Motor Vehicles Act requires an application to be made on behalf of the legal person.
So their Lordships had some difficulty in sustaining the claim on behalf of the company before
its incorporation as the application itself must be made on behalf of a legal person. In Weavers
Mills v. Balkis Ammal, MANU/TN/0244/1969 : AIR1969Mad462 , Justice Veeraswami, as he then
was, held that the benefit of the purchase made by the promoter passed to the company on its
incorporation without any registered deed. But, in that case, the claim of the company was
negatived on the ground that the previous proceedings operate as res judicata and, hence, the
company lost its claim for the said property. We find from the reasoning of the learned judge a
clear supportable legal principle to sustain the claim of a company in respect of the property
acquired by a promoter on its behalf.

37. Hence, we hold that the property acquired by the promoter can be claimed by the company

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after its incorporation without any need for conveyance.

38. However, we may add even assuming that the legal position is, otherwise as the promoter
is a quasi trustee, he can be compelled to convey the property to the company and if necessary
on payment of consideration in view of the part played by him for obtaining the benefit before
its incorporation.

39. Hence, we hold that the lease hold interest obtained by the original lessee would enure for
the benefit of the first defendant company without any separate conveyance. Further, we are of
the opinion that if the original lessee or his successor-in-interest disputes the assignment of
leasehold interest so made by him, he can be compelled to convey the said interest specifically
to the company in view of the benefit obtained by him.

40. Question No. 7 : TENANCY HOLDING OVER AND TERMINATION OF TENANCY :

The plaint as originally filed stated that the lease dated July 10, 1903, purported to
be a permanent lease and the said Subbarayudu constituted the first defendant firm
with himself and other sharers and erected the first defendant factory in the plaint
schedule property and since then carried on business therein under the name and
style of Sri Ramanuja Ginning and Rice Factory (Private) Limited. As per the orders
in I.A. No. 3370 of 1973 dated December 31, 1973, the plaint was amended and
the word "purporting" was struck off and the word "calling" was used and a new
paragraph was added stating that the said lease though called a permanent lease
was really a tenancy at will of either party under law, as the lessee was given the
right to give up the leasehold right if he did not require the lease hold property and,
as such, the lessor was also entitled to the same right to cancel the lease and take
back the leasehold property at his will and even if otherwise the lease can enure
only for the lifetime of the lessee and not beyond his lifetime and the use of the
word "putra, poutra" in the lease deed are superfluous and would have no legal
effect. In the court below, it was contended by the defendants that the plaintiffs
filed this application purporting to be a consequential amendment petition arising
out of the order of the court permitting the thirteenth defendant to be added as a
party and they were not aware of these insertions and consequently they filed an
application to receive the additional written statement in I.A. No. 1090 of 1974.
Two more applications are filed to strike off the amendment portion in the plaint
(I.A. No. 842 of 1975) and for striking of the pleading relating to the version that
the lease would enure only for the lifetime (I.A. No. 1973 of 1974). Though the
defendants were permitted to file additional written statement, the later two
applications were dismissed permitting them to raise the contentions at the time of
the arguments. So it is seen that in the original plaint, the plaintiffs stated that the
lease deed, exhibit A-1, is a permanent lease but urged forfeiture of the lease as
there is violation of the covenants of the lease as stated in paragraph 7. In fact,
even in the registered notice issued by the plaintiffs in exhibit A-2 to the first
defendant, it was categorically admitted that the lessee and his representatives
were carrying on the business of the said premises for manufacturing purposes
under the name of Sri Ramanuja Ginning and Rice Factory (Private) Limited,
Vijayawada (first defendant), and the lessee and his representatives paid the rent
till January 1, 1959, but subsequently committed default in payment of rent and
also committed breach of covenants of the lease and hence liable to be evicted. The
theory that the tenancy under exhibit A-1 is a tenancy at will is built upon those line
of cases where lessees were to hold for such time as they require or wish, the
tenancy was construed as tenancy at will of the lessee and by implication of law,
such tenancy is tenancy at will of the lessor also. The earliest authority is K. R.
Manicka Mudaliar v. T. Chinnappa Mudaliar ILR [1912] Mad 557. In an ordinary
lease, such term stood by itself and was construed to be tenancy at will but when
the document was construed as a permanent lease considering the other terms of
the lease, the term in the lease that a lessee can surrender if he does not want to
continue cannot be construed as tenancy at will. In fact, we have already held on
question No. 1 on the authority of the judgment of Sivayogeswara Cotton Press v.

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Panchaksharappa, MANU/SC/0342/1961 : [1962]3SCR876 , that this terms is not
destructive of the lease being a permanent lease. Once we hold the lease is a
permanent one, it is not possible to contend that exhibit A-1 creates only a tenancy
at will. Realising this, the learned counsel argued that the first defendant has
become a tenant holding over as after the death of the original lessee, the lessor
and his successors have accepted the rents and hence the first defendant has
become a tenant holding over and his tenancy was terminated under exhibit A-2.
This is again a new question raised.

41. Hence we have to examine whether the first defendant can be described as a tenant holding
over. We must look to section 116 of the Transfer of Property Act, 1882, which defines the
effect of holding over which is in the following terms :

"If a lessee or underlessee of property remains in possession thereof after the


determination of the lease granted to the lessee, and the lessor or his legal
representatives accepts rent from the lessee or underlessee, or otherwise assents to
his continuing in possession, the lease is, in the absence of an agreement to the
contrary, renewed from year to year, or from month to month, according to the
purpose for which the property is leased, as specified in section 106."

42. For the application of section 116 as held by the Supreme Court in Karnani Industries Bank
Ltd. v. Province of Bengal, MANU/SC/0049/1951 : [1951]2SCR560 , two things are necessary.
(1) The lessee should be in possession after the termination of a lease. (2) The lessor or his
representative should accept the rent or otherwise assent to his continuing in possession. The
contention of the learned counsel is that the tenancy is for life of the original lessee or heritable
but not transferable and once the original lessee has no progeny, the tenancy came to an end
and the acceptance of the rent from the first defendant would only mean that the first
defendant is a tenant holding over. We have already held that exhibit A-1 is heritable and
transferable, and also held that the first defendant is the assignee from the original lessee and
the rent is being received by the plaintiffs and their predecessors-in-tittle and consequently
there is no termination of the lease. In fact, there is no determination of lease in any of the
modes contemplated under section 111 of the Transfer of Property Act. But if the lease is
determined on the death of the original lessee and the assignment is not valid, there might
arise the question of termination of the tenancy. But the plaintiffs did not plead any fresh lease
after the death of the original lessee. Hence, it is not possible to hold that there is a termination
of lease and the continuance of the tenancy thereafter with the first defendant. Issue No. 6
which was framed on this question is in the following terms. "Whether the plaintiff is entitled for
the declaration that the suit lease dated July 10, 1903, was duly terminated and not binding on
the plaintiffs ?" That issue was deleted by the court as per the order dated January 9, 1974, in
I.A. No. 8901 of 1973 and hence it is not a case of termination of tenancy and a subsequent
creation of jural relationship by acceptance of rent. In view of the foregoing, we hold that the
first defendant is not a tenant holding over and such a tenancy is not terminated.

43. Question No. 8. The forfeiture of lease due to non-payment of rent and waste.

44. In the plaint in paragraph 7, seven grounds were urged to show that the defendants
committed breach of covenants of the aforesaid lease and hence liable to be evicted. This pre-
supposes that the first defendant is a tenant. This contention is on the basis even assuming
that the first defendant is successor-in-interest, he forfeited the tenancy right. The learned
counsel urged before us only two grounds. Forfeiture due to non-payment of rent and waste. It
is submitted in the plaint that the rent was paid up to January 1, 1959. The court below found
that the subsequent rent due has been deposited in the court during the pendency of the suit
and hence this ground is factually baseless. Further, exhibit A-1 provides 12% interest for non-
payment of rent till the date of payment and there is no clause entitling the lessor to evict the
defendants for non-payment of rent and hence this ground is factually incorrect.

45. The ground of waste pleaded in the trial court is causing material damage to the leased
premises by wasteful and destructive acts due to gross negligence. The court below found in
paragraph 43 of its judgment that there is no proof that any material damage to the leased

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premises was done by wasteful acts or destructive acts. Under this ground, the learned counsel
argues that there is deficiency in the extent of land leased out as found the court below in the
connected suit in O.S. No. 79 of 1967 and hence a portion of the land is lost to the estate and
hence it constitutes a waste and there shall be forfeiture of the lease. We must say that this is
not the ground urged in the court below. However, we see under exhibit A-1 property was
described with specific boundaries. A commissioner was appointed in O.S. No. 79 of 1967 when
these very plaintiffs filed the said suit on the ground that the first defendant trespassed on the
adjacent land belonging to them. The Commissioner submitted a report along with a plan which
were remarked as exhibits A-28 and A-29. The court below found that there is no trespass on
the part of the first defendant of the adjacent land as the first defendant was in possession of
15,092 sq. yards instead of 16,423 square yards as originally said to have been granted under
exhibit A-1. The plaintiffs having failed in O.S. No. 79 of 1967 to establish trespass on the
adjacent land raise the present contention that in view of the diminution of the extent of land in
the possession of the first defendant, it should constitute a waste and that shall be a ground for
forfeiture of the lease. The court below found that the lease was given by the boundaries and
three plots of land were given. It found that when the lease deed, exhibit, A-1 was executed,
some extent of land after measuring the three plots shown in the lease deed has not been
measured and the first defendant was in possession of the original extent of land as given by
the boundaries and hence the diminution of any extent cannot be ascribed as any loss to the
estate. It is true as held by the Supreme Court permanent tenancies are within the rule of
section 111(g) of the Transfer of Property Act and are liable for forfeiture if there is a disclaimer
of tenancy or denial of the landlord's title. (vide Raja Mohammad Amir Ahmad Khan v. Municipal
Board of Sitapur MANU/SC/0326/1964. But these two grounds now do not constitute forfeiture
of permanent lease and we hold accordingly.

46. Question No. 9 : Estoppel by acquiescence : The term "acquiescence" is used when a
person refrains from seeking redress when there is a violation of his rights to his knowledge.
There is an element of laches in it. It is defined as "quiescence" to infer assent on the part of
the owner. This doctrine of acquiescence operating as an estoppel was founded on fraud.
Acquiescence differs from estoppel in that for acquiescence it is not necessary that a person
should have made any representation by words or conduct that he did not intend to enforce his
rights. (See Proctor v. Bennis [1887] 36 Ch 740 Bown L.J. This doctrine is intended to relieve
persons against fraud when a person refrains from interfering when his legal rights are being
violated. Let us see the facts to apply this principle.

47. We have already referred to the allegations in the original plaint and also the quit notice,
exhibit A-2, wherein the first defendant was described as a successor-in-interest of the original
lessee. In fact, in the connected suit filed in O.S. No. 79 of 1967, the plaintiffs themselves have
admitted that the first defendant is a representative-in-interest of the original lessee. That suit
relates not to the leased property but an adjacent land and no doubt the first defendant denied
the said allegation. Now, in the present suit, the first defendant pleaded that they are the
successors-in-interest of the original lessee. Even the amended plaint in paragraph 4 as already
extracted, earlier portion of our judgment states that Nidumukkala Subbarayudu, the original
lessee, took the plaint schedule property for constructing and running a ginning, rice and oil
factory and it is he who constituted the first defendant firm with other sharers. So the plaintiffs
and their predecessors-in-title are fully aware that the purpose of lease is for raising of the
factory and the lessee himself constituted the first defendant firm. Though the first defendant is
now a private limited company, the plaintiffs and their predecessors-in-title were still treating it
as a firm not knowing the legal significance of conversion of the firm into a company.

48. D.W. 1, one Malladi Satyanarayana, was examined to bear out the circumstances under
which the first defendant became the representative of the original lessee. This witness if aged
about 76 years. He states that Nidumukkala Subbarayudu executed the lease for the benefit of
the partners and his fathers was the first managing director and this witness rote accounts for
the firm even since 1920. The court below accepted his evidence which is not challenged before
us that the firm itself paid the amount to Vali Subbarayudu and Nidumukkala Subbarayudu was
not paying the rent in his personal capacity. After the death of Vali Subbarayudu, the plaintiff's
father accepted the rent. This witness filed a certified copy of the first list of the shareholders of
the first defendant company, exhibit B-165, in which his father was shown as a shareholder

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against serial No. 32 and the original lessee, Nidumukkala Subbarayudu, was shown as serial
No. 25. He also takes that the original shareholders have sold away their respective shares and
the present shareholders are the assignees of the original shareholders constituting the first
defendant firm. Therefore, the plea of the first defendant is not successor-in-interest of
Nidumukkala Subbarayudu is opposed to the very plaint case. The original lessor is fully aware
that the lease was taken for the purpose of raising a factory. D.W. 2 deposed the value of
building is Rs. 4,00,000 and factory is Rs. 2,00,000 and rent was received by lessor initially
from the firm consisting of original lessee as per exhibit B-53 since 1906 and from the first
defendant since 1920 till suit notice was issued on February 24, 1967, for over a period of six
decades. The account books of the first defendant firm show that the rent was received by the
plaintiffs and their predecessors from the first defendant company. They have also borrowed
from the first defendant. D.W. 1 deposed that he is prepared to deposit arrears with interest or
adjust the amount towards the decree debt due from the plaintiffs. The evidence is clear that
the first defendant was treated as successor-in-interest of the original lessee. These facts
clearly disclose that his is not a case of a mere acquiescence without any representation by
words or conduct but the plaintiffs and their predecessors-in-title have accepted the assignment
in whatever manner the original lessee did to the first defendant and received the rent from the
first defendant and hence they are estopped from contending that the first defendant is not a
successor-in-interest and no leasehold interest was passed to it and consequently we hold that
all principles of equitable and legal estoppel are attracted to the facts of the present case, and
we accordingly affirm the finding of the trial court on issue No. 3 that the plaintiffs and their
predecessors-in-interest have acquiesced in the mode of enjoyment of the plaint schedule
property by the first defendant and they are now estopped from contending to the contrary.

QUESTION NO. 10 ADVERSE POSSESSION

49. In view of the fact that we have permitted the plaintiffs to raise new grounds challenging
that the first defendant is not a successor-in-interest of the original lessee, we have to permit
the defendant to urge the ground of adverse possession. It is true that there is no plea of
adverse possession raised by the first defendant. Facts forming the basis of this ground are not
in controversy or at least found by the court below and further no evidence is necessary while
examining questions 7 and 9 relating to the tenancy holding over and also the estoppel. We
have already stated that the plaintiffs and their predecessors-in-title are fully aware of the fact
that the leasehold interest is being enjoyed by the first defendant after it is formed and before
that by the firm consisting of the original lessee. If the lease stood terminated on the death of
the original lessee and the assignment in favour of the first defendant is invalid and inoperative
for any reason as there is no conveyance in its favour, and the principle of estoppel also is not
attracted to the facts of this case, then we have to alternatively see whether the lessee's
interest is acquired by the first defendant by prescription.

50. Now, it is well settled that a permanent tenancy may be acquired by prescription. Mulla on
Transfer of Property Act, sixth edition, states that :

"A permanent tenancy may be acquired by prescription, for it is a well established


rule that there can be adverse possession of a limited interest in property as well as
of the full title of the owner."

51. The Supreme Court ruled in Raja Rameshwar Rao v. Raja Govind Rao,
MANU/SC/0385/1961 : [1962]1SCR618 , that there is no doubt that there can be adverse
possession of a limited interest in property as well as of the full title as owner. The learned
counsel for the appellants urged that the legal position is altered after the death of the original
lessee and a new tenancy must be deemed to have been created after the death of the original
lessee as the original lessor accepted the rent subsequent to the death of the original lessee.
We have already held that no fresh tenancy was created and the jural relationship between the
first defendant and the original lessor cannot be that of a tenant holding over. It we proceed on
the basis that the tenancy was terminated on the death of the original lessee and no fresh
tenancy was created, the first defendant is in possession of the property paying the rent
claiming under the original lessee, for over the statutory period and hence the question is
whether the first defendant had perfected title by adverse possession for a limited interest of

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permanent lessee.

52. It is fairly settled that when a tenant dies and the rent is accepted by the landlord from a
person claiming to be the heir of the original tenant for a period of twelve years, the
relationship of landlord and tenant is not effected and the heir acquired the status of the
tenant : Sadanand Mandal v. Jyotish Kanta Ray MANU/WB/0468/1925 : AIR 1926 Cal 952.
Recently in a case arising under the Andhra Pradesh Buildings (Lease, Rent and Eviction)
Control Act of 1960 our learned brother, Seetharam Reddy J., held that when a person
continues in possession in a building after the death of his grandfather who is the original
tenant for over a statutory period, he prescribes interest of tenancy. (Vide M. Vijaya Ram v.
Kamaran [1983] 1 AP LJ 45; [1983] 1 ALT 79. The rule that a landlord's cause of action to
recover possession from a tenant or any one claiming under the tenant only accrues from the
time when he determines the tenancy was first enunciated by Sir Barnes Peacock C.J. in Davis
v. Kazee Abdool Hamed [1867] 8 Suth WR 55 which is followed in several decisions and was
finally accepted by their Lordships of the Privy Council in Katyayani Debi v. Udoy Kumar Das
MANU/PR/0029/1924. In Davis v. Kazee Abdool Hamed [1867] 8 Suth WR 55. Sir Barnes
Peacock C.J. observed at page 58 :

"When the forfeiture is committed, and the landlord elects to put an end to the
lease on the ground of forfeiture, the landlord's title to recover possession accrues.
He could not, pending the lease, recover possession from the tenant or any one
claiming under the tenant, nor even from a trespasser."

53. This view was reiterated by Vivian Bose J., delivering a judgment as a member of the Full
Bench in Punjaram Jagoba Teli v. Ramu Chintoo Gond MANU/NA/0013/1939, 64 stating that :

".... in England that landlord cannot sue for possession during the continuance of a
tenancy even if there is a trespasser on the land. His rights in that respect do not
accrue until the tenancy is determined. Until then all he can do is to sue in respect
of injuries to his reversionary interest; and this of course entails the rights to
institute a declaratory suit under section 42 of the Specific Relief Act but not one for
possession. The law in India is the same."

54. This dicta that the cause of action will not accrue even in a case of trespass during the
continuance of tenancy is not accepted by Sundara Iyer J. in Ambalavana Chetty v. Singaravel
Udayar [1912] MWN 669; 15IC 146, contrary to views expressed in a number of cases. We are
not concerned with the case of trespass. (See page 1704 of U. N. Mitra's Law of Limitation and
Prescription, 9th edition).

55. In Kumar Kamakhya Narayan Singh v. Ram Raksha Singh MANU/PR/0015/1928 : AIR 1928
PC 146, it was ruled that where after the death of the original lessee to whom a life estate
alone was given, the heirs remained in possession and paid rent to the lessor but receipts are
given in the name of the original lessee, the case is not governed by section 116 of the Transfer
of Property Act and the suit for recovery of possession brought beyond 12 years is barred.
Hence, it is seen in this case, if the assignment is void after the death of the original lessee, the
possession of the first defendant becomes adverse and subsequent payment of rent creates in
them a limited title of permanent tenancy.

56. Sri Veerabhadraiah, the learned counsel, very strongly relied upon Datto v. Babasaheb
MANU/MH/0159/1933, to show that when the tenant is shown to have paid rent, the
presumption, the absence of evidence, is, he is yearly or monthly tenant. That was a case
where the permanent lease deed granted was held to be inadmissible for want of registration
and the terms also could not be looked into in view of section 92 of the Evidence Act. Mulla's on
Transfer of Property Act, sixth edition, at page 657, remarks about this case as a clear case of
permanent tenancy acquired by prescription. The tenant came into possession in 1865 under a
permanent lease which was inadmissible as evidence of a lease for want of registration and
hence that case is of no assistance to the appellants. In fact that was distinguished in In re
Vadasseri Tharawattil Karnavan and Manager Ittichathara Valid Mannadiar
MANU/TN/0087/1957 : AIR 1957 Mad 73, where a Division Bench held that the said case

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cannot be an authority for the proposition that the right of permanent lessee cannot be
acquired by prescription.

57. Sri Veerabhadraiah next contends on the strength of Nainapillai Marakayar v. Ramanathan
Chettiar ILR [1924] Mad 337, that no tenant of land in India can obtain right of permanent
tenancy by prescription again his landlord. But this case was already explained in a number of
decisions and the earliest judgment is Periyanan Chetty v. Govinda Rao MANU/TN/0050/1931,
holding that the dicta in Nainapillai Marakayar v. Ramanathan Chettiar ILR [1924] Mad 337,
that permanent right of occupancy can only be obtained by a tenant by custom or by grant
from an owner of the land who happens to have power to grant such right or under an Act of
Legislation, means that a tenant who has entered into possession under a valid lease which is
not permanent, cannot by his own assertion or act during the tenancy enlarge his rights into a
permanent tenancy. (Also see page 757 of Rustomji on Law of Limitation and Adverse
Possession, sixth edition), In Atyam Veerraju v. Pecheti Venkanna, MANU/SC/0349/1965 :
[1966]1SCR831 , the Supreme Court refrained from pronouncing upon the correctness of the
observation of the Full Bench of the Patna High Court when a tenant can prescribe permanent
rights of prescription. The Full Bench of the Patna High Court in Bastacolla Colliery Co. Ltd. v.
Bandhu Beldar, MANU/BH/0122/1960 : AIR1960Pat344 [FB], observed regarding the acquisition
of permanent tenancy by prescription (at p. 348) :

"There are, however, some cases in which a lessee can acquired the right of a
permanent tenant by prescription in spite of payment and acceptance of rent. Those
are cases where the lessee pays rent on the basis of a notorious claim of permanent
tenancy to the knowledge of the owner. The acceptance of rent by the owner on the
basis of the lessee's claim as a permanent tenant will not prevent the acquisition of
such a right by the lessee. If the lessee tenders the rent on the basis of permanent
tenancy and the owner refuses to accept it on that basis, the parties are at arm's
length and no relationship of landlord and tenant can come into existence between
them. Hence, the lessee's possession is adverse to the lessor, and he may acquire a
limited right of permanent tenancy by being in adverse possession for the statutory
period."

58. The Supreme Court observed adverting to this passage MANU/SC/0349/1965 : [1966]
1SCR831 :

"As we did not hear any argument on that point, we do not also decide whether this
passage lays down the correct law. This passage must be read with the following
observation of the Patna High Court in the same court. If one a tenancy of some
kind comes into existence either under an express lease or under a lease implied by
law, the tenant cannot convert his tenancy into a permanent one by doing any act
adverse to the landlord."

59. The view expressed by the Supreme Court was again considered by the same High Court in
Administrator of District Board, Gaya Shri Deonath Sahay, MANU/BH/0040/1970 :
AIR1970Pat256 , holding that once a tenancy of some kind has come into existence, any
subsequent assertion of permanent tenancy right by the tenant cannot create any such right in
his favour by adverse possession. So it is clear that if an ordinary tenant got into possession by
his mere assertion, he cannot convert the tenancy into one of permanent tenancy. But exhibit
A-1 created a permanent tenancy, and we hold so and hence we conclude that if the
assignment of interest of the original lessee, in whatever form, to the first defendant is invalid
and inoperative, the possession of the first defendant becomes adverse to the original lessor
and the acceptance of the rent for over the statutory period of 12 years makes the assignee to
prescribe for the limited title of permanent interest. In fact, the possession of the first
defendant had all the qualities of adequacy, continuity, exclusiveness and publicity to constitute
its possessions as adverse. There is clear animus on the part of the first defendant under the
colour of assignment of the interest under exhibit A-1 to it. It is true that there is no lease
granted to the first defendant but the first defendant is claiming under the colour of title, viz.,
the lease granted to one of its shareholders. We have already held that the interest under
exhibit A-1 has become part of the firm's property, and it was declared to be the property of

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the company under exhibit B-54. Assuming that the declaration does not convey any title to the
first defendant, the first defendant continued in possession of suit property for over a statutory
period to the knowledge of the plaintiffs and their predecessors-in-title and thus perfected title
by adverse possession to the limited interest of the permanent lessee.

60. We have completed the bundle of inconsistent and incongruous pleas and reject the claim of
the plaintiffs for possession as clearly unsustainable.

61. Now, we state the result of our discussion. It is clear that the lessee can transfer his
interest by way of an assignment. We have already examined the scope of section 108(j) of the
Transfer of Property Act and held that the lessee can transfer absolutely his interest and there
is no prohibition on such alienation. It is well-settled that an absolute assignment of the whole
interest of a lessee creates privity of estate between the lessor and the assignee and the
assignee becomes liable to the lessor or covenants running with the land including the
covenants to pay the rent. In fact, the present suit was filed treating the first defendant as
successor-in-interest on the basis of such assignment paying court fee on the basis of annual
rent. If the plaintiffs consider that the first defendant is not the representative-in-interest of the
original lessee, the suit should not have been framed as one for eviction of tenant paying court
fee on yearly rent. They should treat him as trespasser and the suit must be based on title.
They plaintiffs did not plead any fresh tenancy and once the assignment is found to be true and
valid and there is no forfeiture of permanent lease and the first defendant continues to be
successor-in-interest of the original lessee and so long as he is willing to pay the rent stipulated
in the lease deed, the present suit for eviction is not maintainable. We also held that the
plaintiffs are precluded from contending that the first defendant is not a successor-in-interest as
the principle of estoppel stands in way.

62. Even assuming that the assignment in favour of the first defendant by the original lessee is
not valid for want of conveyance or otherwise, so long as the permanent lease is not forfeited
and validly terminated, even the licensee or any one claiming from the permanent lessee can
continue in possession. This is not a case of abandonment of estate by the lessee. Hence, a
permissive possession from the lessee cannot be removed so long as the lease is not validly
terminated. The suit is not maintainable without terminating the lease. The grounds of
forfeiture of lease are found to be factually incorrect and legally untenable. The plaintiffs have
not sued any heir of the lessee and we cannot accept that he died heirless though he may not
have any progeny and hence the suit against the first defendant must be treated as one based
on private of estate. We also alternatively hold that even assuming that the assignment is
invalid and inoperative, the first defendant perfected title by adverse possession for permanent
lessee's interest as he continued in possession of the property since the death of the original
lessee in 1951 till the date of suit. Hence, we see no legal basis on which the plaintiffs' suit can
be decreed and hence the appeal is dismissed but, in the circumstances, without costs.

63. The appeal coming on for further consideration on the oral application of the counsel for the
appellant, Mr. T. Veerabhadrayya, for leave to appeal to the Supreme Court and upon hearing
the arguments on both sides, the court made the following order :

After the judgment is pronounced, the learned counsel for the appellant made an
oral application for grant of leave to appeal to the Supreme Court.

64. This appeal involves a substantial question of law of general importance and in our opinion
it requires to be decided by the Supreme Court of India. Accordingly the certificate will be
issued under article 133(1) of the Constitution.

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