# CHENNURU GAV ARARAJU CHETTY v. CHENNURU SILARAMAMURTY CHETTY

- **Citation:** [1959] Supp. 1 S.C.R. 73
- **Court:** Supreme Court of India
- **Decided:** 1959
- **Bench:** B. P. Sinha, Jafeb Imam, J. L. Kapur
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/chennuru-gav-araraju-chetty-v-chennuru-silaramamurty-chetty-1613
- **Pages:** 19

## Headnote

Lease, Renewal of-Manufacture of sal:t-Lessees, i,f fiduciaries
of ·quondam partners-Constructive trust-Test-PresumptionIndian Trusts :Act, z88a (II of z88a), ss. 88, 90-Madras Salt Act,
z889 (Mad. 4 of z889).
'
The appellant, defendant No. I in the suit, from which the
appeal arises, and the father of defendants. 2 to 7, as the highest
bidders, obtained a seventeen years' lease of a salt factory
from the Government and the license to manufacture and sell
salt under the Madras Salt Act, 1889. They entered into a
partnership with the plaintiffs to carry on their business for the
period of the lease. On the death of their father, defendants 2
to 7 were admitted into the partnership. The partnership agreement made no provision for the continuation of the partnership
on expiry of the lease or for the acquisition of a fresh lease on
behalf of the partnership. The lease expired, the license came
to an end and the partnership stood automatically dissolved,
The Government changed its old policy of granting leases to the
highest bidders and adopted one of renewing them in favour of
previous lessees in whom they had confidence. The appellant
10
Oo1ob1r 6.
74
SUPREM.E COURT liEPORTS
(1959] Supp.
i95S
and defendants 2 to 7 applied for the renewal of the lease that
stood in their names. The plaintiffs also applied for a grant of
Chen""'"
it to them. No premium was called for and none had to be
Gav"'"'''j" Clietty paid. 1'he }{evenuc Authorities chose to renew the lease in
'"·
favour of the appellant and the said defendants for a further
Cliennuru
period of 25 years. The plaintiffs filed the suit claiming that the
Silarafn;n111trty renewal of the lease was an asset of the dissolved partnership.
Chetty
The trial Court found against them but the High Court on appeal
""'' Other.<
reversed that finding. The suit was instituted months before
the renewal of the lease and years before the renewal of the
license, which alone could enable the licensee to manufacture
and sell salt. The Courts.below found that the allegation of the
plaintiffs that the goodwill and assets of the firm had been utilised for obtaining the renewal of the lease was unfounded, as they
had failed to prove that a partnership firm.at all existed. It was
also found that during the last three years.of the existence of
the partnership, the parties had fallen apart and lost mutual
confidence. The question for decision was whether s. 88 of the
Indian Trusts Act applied and the renewal of the lease in favour
of the appellant and the said defendants for running the salt
factory could be treated as an asset of the dissol\'ed partnership
between the contesting parties.
Held, that in order that a case might be brought within the
purview of s. S8 of the Indian Trusts Act, it must be shown
either that (I) a person had a fiduciary character and was thus
in duty bound to protect the interests of others or that (2) he had
placed himself in such a position as to render his interest ad\·erse
to those of the others and had thereby obtained a pecuniary
interest which he must hold for their benefit as well.
As in the
instant case the fiduciary character of the partners came to an
end with the termination of the original lease and of the partnership business along with it, there could no longer be any subsisting interest in a partner which another was bound to protect
nor could one partner be said to have availed of his character as
a partner when he obtained the fresh lease.
Section 88 of the
Indian Trusts Act or the illustrations (d) or (e) thereto could,
therefore, have no application, nor could s. 90 of the Act, which
in terms had no application even if applied, improve the position
of the plaintiffs.
No question of a constructive trust could also arise under
the general law apart from the statute. There is no absolute
rule of law or equity in England that renewal of a lease by one
partner must necessarily enure to the benefit of all the partners.
There is, however, a presumption of fact that

## Text

_Characters 0–39,719 of 44,346. This is a partial read: ask again with offset=39719 for what follows._

(1) S.C.R. SUPREME COURT REPORTS
73
the legal representative out of the estate of the
z9''
deceased. In our opinion, therefore, where the High Pranab Kumar
Court thinks it fit and proper to entertain a.n applica.-
Milr1a
tion in revisio~ or ca.lie for the record suo motu, it has
v.
the power to examine the whole question of the Thi s1a11 of w111
correctness, propriety or legality of the sentence of8 '"'"' IS- ,.,."'""
fine, which necessarily involves examining the order
5,;:; J.
of conviction itself from that point of view.
For the reasons aforesaid, we a.How the appeal, and
remit the case to the High Court to be des.It with in
accordance with law .
•
Appeal allowed.
CHENNURU GAV ARARAJU CHETTY
v.
CHENNURU SILARAMAMURTY CHETTY
AND OTHERS
(B. P. SINHA, JAFEB IMAM and J. L. KAPUR, JJ.)
Lease, Renewal of-Manufacture of sal:t-Lessees, i,f fiduciaries
of ·quondam partners-Constructive trust-Test-PresumptionIndian Trusts :Act, z88a (II of z88a), ss. 88, 90-Madras Salt Act,
z889 (Mad. 4 of z889).
'
The appellant, defendant No. I in the suit, from which the
appeal arises, and the father of defendants. 2 to 7, as the highest
bidders, obtained a seventeen years' lease of a salt factory
from the Government and the license to manufacture and sell
salt under the Madras Salt Act, 1889. They entered into a
partnership with the plaintiffs to carry on their business for the
period of the lease. On the death of their father, defendants 2
to 7 were admitted into the partnership. The partnership agreement made no provision for the continuation of the partnership
on expiry of the lease or for the acquisition of a fresh lease on
behalf of the partnership. The lease expired, the license came
to an end and the partnership stood automatically dissolved,
The Government changed its old policy of granting leases to the
highest bidders and adopted one of renewing them in favour of
previous lessees in whom they had confidence. The appellant
10
Oo1ob1r 6.
74
SUPREM.E COURT liEPORTS
(1959] Supp.
i95S
and defendants 2 to 7 applied for the renewal of the lease that
stood in their names. The plaintiffs also applied for a grant of
Chen""'"
it to them. No premium was called for and none had to be
Gav"'"'''j" Clietty paid. 1'he }{evenuc Authorities chose to renew the lease in
'"·
favour of the appellant and the said defendants for a further
Cliennuru
period of 25 years. The plaintiffs filed the suit claiming that the
Silarafn;n111trty renewal of the lease was an asset of the dissolved partnership.
Chetty
The trial Court found against them but the High Court on appeal
""'' Other.<
reversed that finding. The suit was instituted months before
the renewal of the lease and years before the renewal of the
license, which alone could enable the licensee to manufacture
and sell salt. The Courts.below found that the allegation of the
plaintiffs that the goodwill and assets of the firm had been utilised for obtaining the renewal of the lease was unfounded, as they
had failed to prove that a partnership firm.at all existed. It was
also found that during the last three years.of the existence of
the partnership, the parties had fallen apart and lost mutual
confidence. The question for decision was whether s. 88 of the
Indian Trusts Act applied and the renewal of the lease in favour
of the appellant and the said defendants for running the salt
factory could be treated as an asset of the dissol\'ed partnership
between the contesting parties.
Held, that in order that a case might be brought within the
purview of s. S8 of the Indian Trusts Act, it must be shown
either that (I) a person had a fiduciary character and was thus
in duty bound to protect the interests of others or that (2) he had
placed himself in such a position as to render his interest ad\·erse
to those of the others and had thereby obtained a pecuniary
interest which he must hold for their benefit as well.
As in the
instant case the fiduciary character of the partners came to an
end with the termination of the original lease and of the partnership business along with it, there could no longer be any subsisting interest in a partner which another was bound to protect
nor could one partner be said to have availed of his character as
a partner when he obtained the fresh lease.
Section 88 of the
Indian Trusts Act or the illustrations (d) or (e) thereto could,
therefore, have no application, nor could s. 90 of the Act, which
in terms had no application even if applied, improve the position
of the plaintiffs.
No question of a constructive trust could also arise under
the general law apart from the statute. There is no absolute
rule of law or equity in England that renewal of a lease by one
partner must necessarily enure to the benefit of all the partners.
There is, however, a presumption of fact that there is an equity
in favour of the renewal of the lease enuring to the benefit of all
;
the partners. Such a presumption may be rebutted by the facts
of a particular case. The Indian law as enacted in the Indian
Trusts Act, and particularly ss. 88 and go of that Act, is substantially the same. In the instant case, the facts and circumstances amply rebut that presumption.
(I) S.C.R. SUPREME COURT REPORTS
75
Featherstonhaugh v. Fenwick, (1810) 34 E.R. u5, Clegg v.
Fishwick, (1849) 41 E.R. 1278, Clements v. Hall, (1857) 44 E.R'.
954, Clegg v. Edmo11dso11, (1857) 44 E.R. 593, In re Biss, Biss v.
Cloennuru
Biss, [1903] 2 Ch. 40 and Griffith v. Owen, [1907] I Ch. 195. Gavararaju Clotlly
considered.
v.
CIVIL APPEi.LATE JURISDICTION: Civil Appeal No.
91 of 1954.
Appeal from the judgment and decree dated December 10, 1948, of the Madras High Court in Regular
First Appeal No. 609 of 1946, arising out of the
judgment and decree dated ·March 30, 1946, of the
Court of the Subordinate Judge of Chicacole in
Original Suit No. 1 of 1943.
A. V. Viswanatha Sastri and R. Ganapathy Iyer, for
the appellant.
!(. M. Rajagopala Sastri and S. K. Sastri, for
respondents Nos. 1, 2, 3, 5-7, 13 and 24-27.
1958. October 6.
The Judgment of the Court was
delivered by
SINHA J.-The only question for determination in
this appeal by the first defendant, on a certificate
granted by the High Court of Madras, is whether the
renewal of a lease for running a salt factory, granted
by tQ.e Government in favour of the appellant and
others (defendants 1 to 7), could be treated as an asset
of the dissolved partnership between the contesting
parties.
The trial court decided this question in
favour of the contesting defendants. On appeal by
the plaintiffs and some defendants on the side of the
plaintiffs, the High Court of Madras determined this
controversy in favour of those appellants. Hence,
this appeal by the first defendant whose interest is
identical with that of defendants 2 to 7. The reference in this judgment to ' appellant' will, thus, include the interest of the other non-appealing defendants also.
The relevant facts of this case, upon which the
appeal depends, may shortly be stated as follows:
The contesting parties used to carry on the business
of salt manufacture in accordance with the .rules laid
down by the Government under the Madras Salt Act
Cliennuru
Silaramamurty
Chelty
a11d Others
Sinha ].
76
SUPREME COURT REPORTS [1959] Supp.
r95B
(Mad. 4 of 1889) (which will, hereinafter, be referred to
Ch
as the Act). It is not permissible to manufacture salt
Ga••••;;:u:;helly otherwise than under the provisions of the Act..
The
v.
land and the factory where salt used to be manufac.
Che•nurn
tared by the parties, are Government property. It
Silaram,.,nurty appears that the first plaintiff, the father of plaintiffs
Chelly
2 to 4, plaintiff 5, the first defendant and the deceased
and Others
father of defendants~ to 7, had ma.de bids for the
Sinha 1.
lease of the land and the factory, and the higheMt bid
of the defendants aforesaid, was accepted ;
11.~1.d in
pursuance thereof, a. lease for 17 yea.rs from J anua.ry
1926, to December, 1942, was granted by the Government in favour of the first defendant and the father
of defendants 2 to 7.
By a deed of partnership dated
March 18, 1926, the first plaintiff with a. two-a.nna
share, the father of plaintiffs 2 to 4, having a. similar
share, and plaintiff 5 with another two-a.nna. share, on
the one hand, and the first defendant, having a. five
a.nna share, and the father of defendants 2 to 7, with
the remaining five-anna. share, entered into a partnership for running the salt factory. The terms of the partnership will have to be discussed in detail hereinafter.
They contributed a. sum of Rs. 30,000 for paying the
premium for the lease and for other incidental expenses in running the factory, in proportion to the shares .
just indicated. The father of defendants 2 to 7, who
had a. five-a.nna. share in the busimiss, died in August,
1935, and the defendants 2 to 7 were admitted as
partners in place of their father. In accordance with
the rules of the salt department, the requisite licence
for the manufacture of salt, was granted to the first
defendant and the father of the defendants 2 to 7, in
whose name, the lease also stood. In or a.bout -the
year 1939, differences arose between the parties, but
the business continued to be carried on by the defendants I to 7. In August 1941, in accordance with the
changed policy of the Government, which substituted
the practice of settling salt leases by renewal of the
lease in favour of those lease-holders whose conduct
had been satisfactory in the opinion of the Department, for the old practice of 11ettling salt leases to
highest bidders, the Collector enquired from the old
{l) S.C.R.
SUPREME COURT REPORTS
77
lease-holders whose record had been satisfactory from
z958
the point of view of the salt department, whether
Cit
•
ent111111
they would take renewal for a period of 25 years. The G•varrmju Chelly
appellant as also the other defendants aforesaid, their
v.
conduct having been satisfactory, were amongst those
Chennuru
lessees who had been invited to make applications for
Silart•mamurly
the renewal of their leases. Accordingly, they made
an~"~:~,,,
their application in July, 1942, and a fresh lease for
25 years, was granted to them on April 15, 1943, for
Sinll• J.
the period January, 1943 to December, 1967, in pursuance of the Collector's order passed in November,
1942 (Ex. P-15(a)). The terms of the new lease will
have to be discussed later in the course of this judgment. As the term of the previous lease and of the
licence to manufacture and sell salt-which was the
partnership business-was to expire at the end of
December, 1942, one of the contesting defendants,
served a notice upon one of the plaintiffs to the effect
that, as the partnership was expiring at the end of
the month, the partners should set.tie theil' accounts,
and make arrangements for the disposal of the unsold
stock of 82102 maunds of salt. The reply to the notice
was given on December 28, 1942, through an advocate, alleging inter alia that the application for the
renewal of the .lease for a period of 25 years had been
made on behalf and with the consent of all the partners, and that, thus, the partnership business was
agreed to be continued even after the expiry of the term
of the previous pa1·tnership. The answer further attributed fraud and" evil intention" to the other party.
The answer also called upon the defendants to pay a
penalty of Rs. 2,500 per head, and to hand over the
entire partnership lease property to the plaintiffs'
party. Thus, the exchange of the notices aforesaid
was a prelude- to the institution of the suit on January 5, 1943, that is to say, even before the fresh
lease had been executed by the Government in favour
of the contesting defendants 1 to 7.
'fhe suit was instituted on the footing that the
original partnership continued even after December,
1942, inasmuch as the fresh leaile had been obtained in
pursuance of a unanimous resolution of all the partners
78
SUPREME COURT REPORTS (1959] Supp.
to obtain the new lease for the partnership business. But an alternative case also was sought to be
Ch'".""'c", 11 made out that even if the partnership did not continue
Gavarara;u
"' Y f
D
b
2
I
f
v.
a ter
ecem er, 194 , as a resu t o the acts of the
Ch'""""'
defendants, the benefit of the fresh lease for 25 years
Silaramamutty should be treated as an asset of the dissolved partnerCh.ity
ship business, and should be taken into account in the
and Othm
process of dissolution of the partnership. The plaint
Sinha].
as framed contained a large number of reliefs to which,
the plaintiffs claimed, they were entit.Jed, for example,
a declaration that the partnership was continuing, and
that the defendants I to 7 had forfeited their rights
in the partnership as a result of their fraudulent acts,
an injunction restraining defendants l to 7 from carrying on the salt works independently of the partnership
and on their own account, and the declaration that the
renewal of the lease in the name of the defendants l to
7, for a further period of 25 yea.rs, was for the benefit
of the partnership. But at the trial, the plaintiffs,
perhaps, realizing the weakness of. their position,
elected to put in a memorandum in the trial court on
February 8, 1946, confining their prayers to reliefs on
the basis of a dissolved partnership, and giving up
other reliefs, which they claimed on the footing of the
partnership still continuing. Thus, at the trial, the
reliefs claimed were confined to taking accounts between the parties of the dissolved partnership, and
treating the fresh lease for 25 years, as part of the
assets of the dissolved firm. It is, therefore, not necessary to refer to the defendants' written statement,
except with reference to the plaintiffs' claim to have
the renewed lease for 25 years treated as an asset of
the dissolved partnership. The contesting defendants
I to 7 stoutly denied that the plaintiffs' claim in i:espect of .the fresh lease for 25 years, was well-founded.
They asserted that they only were entitled to run the
business on the fresh lease and licence meant only for
their benefit and not for the benefit of the dissolved
partnership.
The trial court passed a preliminary decree, declaring that the partnership stood dissolved on December 31, 1942, and for taking accounts. As regards the
-
(1) S.C.R.
SUPREME COURT REPORTS
79
benefit of the renewed lease for 25 yea.rs, the trial court
z9s~
negatived the plaintiffs' claim that the dissolved
Cilnnum
partnership carried a.ny firm or trade name, which Guv11r11raju Cillly
could be said to have any tangible goodwill, and that
v.
the defonda.nts could not be restrained from carrying
Cl'"""""'
on the business in their own names as they had been
5'1"'""''-'"'"'1Y
Chdlty
doing in the pa.st.
After expressing a. doubt as to
and 011,m
whether there was any goodwilJ of a. pa.rticula.r firm
name,"the court directed that " the Commissioner is
stnli11 J.
authorized to sell the good will of the old firm for
what it is worth by way of realization of the assets
of the dissolved firm as amongst the partners." In
effect, therefore, the trial court decided that the
plaintiffs were not entitled to the benefit of the new
•
lease.
On appeal to the High Court, the learned Chief
Justice, delivering the judgment of the Division Bench,
came to the conclusion that the plaintiffs' case that
the fresh lease had been obtained as a result of the
resolution of tho partners to carry on the business
after the lapse of the specific period of the partnership
which came to a.n end in December 1942, had not been
made ont. But on the alternative plea.· of the plaintiffs, the Court, after an elaborate discussion of English
and Indian Law on the subject, held that the plaintiffs were entitled to treat the new lease as an asset
of the dissolved partnership. The conclusion of
the High Court may better be stated in its own words,
as follows:-
" In conclusion, we hold that the new lease obtained by Defendants 1 to 7 in renewal of the old lease
which formed the subject matter of the partnership,
must be held by them for the benefit of the other
members of the partnership, who are entitled to share
in the advantage gained by Defendants 1 to 7. As the
lease itself wa.s executed after the termination of the
partnership and a.s it is not the case of the Appellants
that a.ny one other than defendants 1 to 7 hai;l furnished the consideration for the new lease, the henefit of
the renewal a.lone will be treated as an asset of the
partnership which terminated on· 31st December, 1942,
and a value placed on it. The Commissioner appointed
80
SUPREME COUR'r REPORTS [1959] Supp.
r95B
by the lower Court ma.y, after ta.king such evidence
Ch
a.s ma.y be necessary, be directed to fix the value in the
Gavara:.~:"'~het1y first instance. In arriving a.t a. value, the liability of
v.
defendants 1 to 7 to furnish ca.pita.I a.nd incur the
Cheunuru
necessary expenses for carrying on the new business
Silaramamurty with its attendant risks and a.lso possibilities of profits,
Chetty
a.re factors to be ta.ken into account."
and Others
•
In those words, the High Court set aside the judgment
a.nd decree of the trial court, and allowed the appeal
in terms which the Commissioner appointed to take
accounts of the dissolved partnership, ma.y not find it
easy to implement.
In support of this a.ppea.l, the learned counsel for
the a.ppella.nt, ha.s contended tha.t the High Court ha.s
misdirected itself in construing the provisions of the
Indian Trusts Act, in holding tha.t a. constructive trust
had been ma.de out in favour of the plaintiffs; tha.t
there is no absolute rule tha.t the renewal of a. lease
which wa.s the subject-matter of a. partnership, must
always enure to the benefit of the old partners; a.nd
that the essential ingredients of s. 88 of the.Trusts Act,
had not been ma.de out in this ca.se. He a.lso contended tha.t the lease by itself, did not create a. right
to manufacture sa.lt a.nd to sell it, a.nd tha.t a. licence is
a. necessary pre-requisite to carry on the business of
manufacture and so.le of salt in accordance with the
rules of the Department, a.nd tha.t it is open to the
Department not to recognise a.ny partners in the business. In this ca.se, it wa.s further contended, the
.:licence to sell so.It ha.d been granted only in 1945.
Under the English law, there ma.y be a. presumptiontha.t the renewal of a. lease which formed the subjectma.tter of a partnership, will enure for the benefit of
the partners, but he contended that in the circumstances of this case, such a. presumption could not
a.rise, and even if it did, it was rebutted by the following facts. The term of the original partnership wa.s a
fixed one, terminating with the term of the lease and
of the licence to manufacture salt, which ca.me to a.n
end with the yea.r 1942; the partnership-deed did not
contemplate that this business would be extended
beyond the fixed term in the event of a. fresh lease
(1) S.C.R.
SUPREME COURT REPORTS
81
being obtained from the. Government. It was highly
significant that the term of the pal'tnership to carry
Clmmuru
on the salt business was deliberately fixed as conter- Gava1araja c1 .. 11y
minous with the terms of the lease and the licence.
v.
The plaintiffs never took any steps to obtain a renewal
Clsen"'""
of the lease, nor was there any evidence that they Sila'""'""'"''Y
asked the defendants to take a. renewal for t.he benefit
":a':J:T..,.
of all the partners. On the other hand, when the
defendants applied on their own behalf for a. fresh
lease for 25 yea.rs, the plaintiffs put in a petition of
protest, and prayed to the Government for being
included in the category of lessees in the lease to be
granted for 25 yea.rs, as co-lessees, but without any
success. There is no allegation in the plaint of any
attempt at concealment on the pa.rt of the appellants
to the effect that they were ta.king the lease for their
own benefit. Nor was there any evidence that the
defendants had ta.ken any advantage of their position
as partners, or had utilized any funds of the partnership for obtaining the fresh lease. Lastly, it was contended that differences having cropped up between
the parties during the yea.rs 1939 to 1942, it could not
be said that the plaintiffs placed such a. conficfonce in
the defendants as to place them in the position of
constructive trustees within the meaning of s. 88 of
the Trusts Act.
On the other hand, it was contended on behalf of
the respondents that the fresh lease for 25 yea.rs, was
granted to the appellants as a. result of the changed
policy of the Government, by which they substituted
the renewa.l to approved parties in pla.ce of the old
practice of settling the terms of the lease by opou
competition and by holding auction-sales. The contesting defendants obtained the lease in their names
because they were entered in the Government records
as the original lessees, and as the original lea.se was
admittedly for the benefit of all the partners, the new
lease also must be treated as being founded on the old
lease. It was also contended that s. 88 of the Trust
Act, was not exhaustive, and that even if the present
oa.se did not come strictly within the terms of that
II
SinA:1 }.
82
SUPREME COURT REPORTS [1959] Supp.
19_,a ,
section; the rule of English law relating to constructive
trusts, applied to the case, and that, therefore, the
CA,.nu•~A
High Court was quite justified in coming to the conG••••••·~~ '111 olusion that the lessees were in the position of trustees
cA1nnuru
when they obtained the renewed lease. The plaintiffs
Sil•r•mamurty failed in their attempt to be included in the category
Che11y
of joint-lessees along with those defendants because of
and Othm
the changed policy and the rules of the Department.
Si1tha ].
Hence, the plaintiffs were in a position of disadvantage
as compared to the defendants in whose name, the
original lease and the licence stood. In view of those
facts, it was further contended, the plaintiffs could not
either get the lease independently for themselves, or
succeed in getting their names included in the category
of joint-lessees. Lastly, it was contended that in the
circumstances of the present case, the presumption of
law that the defendants were construct.ive trustees,
had not been rebutted.
Before dealing with the arguments advanced on behalf of the parties, it is convenient to set out, in brief
outline, the system of working salt factories under the
Act (Mad. 4 of 1889), which was enacted to " consolidate and amend the law relating to the salt revenue in
the Presidency", Under the Act, a "salt factory"
includes any place used or intended to be used for the
manufacture of salt or for the storage or keeping of
the same, as defined from time to time by the Collector
of salt revenue. " Licensee ", under the Act, means
a person to whom a licence to manufacture salt or
saltpetre, is issued, and includes any person registered
as the transferee of such licence under the provisions
of the Act. Under s. 8, only licensees or p11blic
servants under the Central Government, are authorized
to manufacture salt. Section 9 of the Act, authorizes
the Collector of salt-revenue to grant licences for the
manufacture of salt in respect of specified salt works,
containing such particulars and conditions as the
Central Government may prescribe from time to time.
Such a licence may be for the manufacture of salt for
sale to the Central Government or for general sale ;
and may be transferred or relinquished in accordance
with the prescribed rules. Section 12 lays down that
{1) S.C.R.
SUPREME COURT REPORTS
83
a licensee shall be taken to be the owner of the licence
1938
and of the salt works specified therein. It is open to
Cit
the Central Board of Revenue to establish a new salt. Gu""'";:j';,"';'.h,11,.
factory, and, subject to the payment of compensation,
v.
·
to close any salt factory or a portion thereof, and thus,
c1ic111111ru
cancel or amend the licence.
A provision has ahm
s;1,,,,,,,.a,,mrty
been made by s. 17 for t.he grant of a tempora1·y
Chetty
licence for the manufacture of salt in certain contin-
"
11
<1 Others
gencies. Section 25 authorize/; the Collector of salt
si11ha ].
revenue to impose upon a licensee a fine according to
the prescribed sea.le, or to suspend a licence or even to
cancel a licence for want of due diligence or default
by a licensee. Section 43 contains a prohibition
against the removal of salt from a salt factory otherwise than on account of the Central Government or for
transport to a place of storage authorized by the
Collector of salt revenue, except under a permit. and
upon payment of duty at the fixed rate. The Central
Government is authorized to make rules generally for
carrying out the provisions of the Act, and specially
for regulating certain matters set out in s. 85.
Such
rules, on publication in the official gazette, have the
force of law, and have to be read as part of the Act.
It is common ground that elaborate rules have been
laid down by the Government, for regulating the
manufacture and sale of salt, so as to safeguard public
revenue and to prevent the manufacture of contra.band
salt. It is, thus, clear that the business of manufacture of salt, which the parties to the agreement of
partnership carried on, wa;; not an ordinary occupation, which is free from such strict rules and regulations as have been laid down by and under the Act..
The licenr;ee owes a special responsibility to the
Government, and, therefore, the transfer or relinquishment of licences under the Act, has to be regulated
according to the ruleR la.id down by the Government.
ft is true that there is no absolute prohibition against
such transfer or relinquishment, but the Government
through its public officers, has the determining voice
in such mattern.
It is in the background of the law laid down by 01·
under the Act,, that we have to diseusR the rights and
84
SUPREME COURT REPORTS [1959) Supp.
r958
liabilities of the parties in respect of the renewed
lease. The first lease, a draft copy of which is on the
G
Ch••.•ur~h 1 record as ex. P .16 at pp. 101 to 105, is an indenture
•••'"'·;~
'
1 Y between the Secretary of State for India in Council as
Chennuru
the lessor, and the first defendant and the father of
Silaransamurty defendants 2 to 7, as the lessees. The consideration
Chetty
for the lease is the sum of Rs. 25,000/-. The lease is
•"" Others
for a period of 17 years from January I, 1926, subject
Sinlla J.
to either party having yhe right to determine the lease
by a notice in writing at the close of the salt manufacturing season. It provides that on the expiry of
the lease or its sooner determination as aforesaid by
notice on either side, the lessees shall leave the demised premises which had been leased out exclusively for
the manufacture, storage and sale of salt and for the
works connected therewith, without any right to erect
any dwelling houses, etc. It also provides that the
lessees shall be granted a modified excise licence in
Form E-l(d). It also contains the condition that the
lessees shall not, except with the written consent of
the lessor, first had and obtained, assign, underlet, or
part with the possession of the leased land or any
portion thereof. The lessees may take a partner or
partners, who may be approved by the Collector in
the business. The lease also contains detailed provisions as to how the business of manufacture has to be
carried on under the supervision of the public authorities like the Collector.
The renewed lease, exh. D-18, dated April 15, 1943,
is between His Excellency the Governor-Genera.I in
Council, as the lessor and the contesting defendants as
the lessees, for a. period of 25 years commencing from
January 1, · 1943. There is no payment of any
premium for the lease. The other terms and conditions
of the lease are similar to the previous one. Though
temporary licences were granted from time to time, it
was only on April 17, 1945, that a "revised permanent
licence " was granted, and the tern porary licence
granted for 1945, was cancelled.
The "co-partnership deed" as it is called, which is
dated March 18, 1926, is between five individuals, and
provides that those five persons should enjo:y the profit
(I) S.C.R. SUPREME COURT REPORTS
85
or bear the loss thereof, according to the shares indi1958
cated above ; " that as the licence in the salt stands in
the names of Chennuru Appala NaraRavya Chetty andG
Chm_""'c"h 1
('
Ch
f'
l
'd .• d• ' 'd
l
l
avarrm•;u
e ty
,,-uruswamy
etty out o us, t 1e sa1 m 1v1 ua s on y
v.
shall be responsible thereto "; and that " In ca8e the
Chetmum
said Appala Narasayya
Uhetty and Guruswamy
Silara11wnl1irl)'
C'hPtt,v or their heirs fail to render proper accounts
Chr.tty
whenever demanded according to the aforesaid terms
""d Others
to the remaining three sharers or their heirs during
_.,.;,.1,4 .f.
the salt lease period of seventeen years aml commit
defaults or any kind of frauds, Appala :\arasayya
Chetty Garn an<l Guruswamy Chetty Garu shall pay
by way of penalty to the said three sharers at the rate
of Rs. 2,500/- (two thousand five hu11dred) per share
for the year when fraud is committed, without having
anything to do with the other profits and losses." It
is, thus, clear that the partnership was for the fixed
term of 17 years, ending with the period of the lease,
a.nd the part.les did not, in terms, contemplate the
<.:ontiuw:.rnce of the partuership after the l'xpiry of that
period. Their rights and liabilit.ies are entirely with
reforence to the said period of l 'i years, there being no
provision for the continuance of the business by the
partnership after the expiry of the said term.
If there had been a specific stipulation in the
partnership deed, or even an indication that the partnership business would continue eYen after the expira1 iou of the 17 years, which was the term of the partnership, different considerations may have arisen. It
eould then have justly been said that the managing
partiwr owed a dut.y to the other partners to obtain a
n'tl<'\ntl of the previous lease. It is, therefore, not
without significance that in para. 12 of th(' plaint, the
plaintiffs specifically aJleged that it had bel'n unanimously resofred by the partners that a renewal of the
lease should be obtained for a further period for the
be1wfi t of the partnership, and that as a mat tcr of fact,
the renewal \Yas obtained in pursuance oft hat resolutioi_i and . ?Y using the. goo? will of the partnership.
Thrn spuciti.c cafle has failed m both the <"ourts below,
but the High Court, in disagreement with the trial
court, has accepted the alternath-e case as made out
86
SUPREME COURT REPORTS [1959) Supp.
•95B
in para. 17 of the plaint, that the renewal of the tease
Ch
should be treated a.s a.n asset of the partnership in
c ••• ,.:~7."'~helly settling the accounts and dividing the assets of the
v.
dissolved partnership. But even in para.. 17, there is
Chenlruru
no specific case made out under s. 88 of the Indian
Silaramumurty Trusts Act (II of 1882). It is not alleged, in terms,
Ch•tty
that the contesting defendants filled a fiduciary
and Olh~rs
h
c aracter, and were, thus, bound to protect the
Sinha J.
interests of all the partners in obtaining the renewal
of the lease, or that, in so , doing, their interests were
a.d verse to those of the other partners, and they had,
thus gained a. pecuniary advantage to the detriment
of the other partners. Though the plaintiffs had
suggested that the contesting defendants bad large
funds, amounting to about Rs. 90,000, of the partnership, portion of which had been set apart for payment
of premium and for other expenses incidental to the
renewal of the lease, it had been found, and there
cannot be the least doubt about it, that no funds of the
partnership had been utilized for obtaining the new
lease. As already indicated, no premium had to be
paid for the fresh lease obtained by the contesting
defendants.
Though no foundation was laid in the pleadings,
strictly construed, for a case under s. 88 of the Indian
Trusts Act, we have still to examine 'the question
whether the High Court was right in holding that
either under that section or under the general law,
apart from the statutory law, the contesting defendants
had placed themselves in such a. position as to render
themselves accountable as constructive trustees. Sect.ion 88 is in these terms:-
" 88. Where a. trustee, executor, partner, a.gent,
director of a. company, legal adviser or other person
bound in a. fiduciary character to protect the interests
of another person, by availing himself of his character,
gains for himself any pecuniary advantage, or where
any person so bound enters into any dealings under
circumstances in which his own interests are, or may
be, adverse to those of such other persons and thereby
gains for himself a pecuniary advantage, he must
bold for the benefit of such other person the advantage so gained,"
•
'
/
(1) S.C.R.
SUPREME COUH,T REPORTS
87
The section iK in two parta. In order to bring the
r958
case within the first part, it has to be shown that the
Ch
contesting defendant,s had a fiduciary character, and r.allara:~:"~hetty
were thus, in duty bound to protect the interests of
v.
t,he other partners in the matter of obtaining the
Chennuru
lease; and that they obtained the lease for themselves Silaramamurty
instead, by availing themselves of that character.
As
Chetty
and Others
already pointed out, it was not within the scope of the
partnership in accordance with the terms of the deed,
Sinha J.
· to obtain a renewal of the lease.
At thfl time of
entering into the partnership, the parties were fully
cognizant of the rules of the Department then in
force, acc01·ding to which a fresh lease could be granted to the highest bidder irrespect.ive of any othP.r considerat.ions as to whether anv one of the bidders was
a previous lessee.
The rene~al of the lea.->e without
payment of a.ny
premium, was the result of the
changed policy of the Government, according to which
the personal conduct of the lessees, and not the
amonnt of premium, was the determining factor in
the grant of a fresh lease.
Because the contesting
defendants had managed the factory well and to the
satisfaction of the Revenue Authorities, thev were
able to obtain the fresh lease, and it cannot
0he said
that they had availed themselves of their character
as partners in obtaining the renewal of the lease.
The plaintiff:;' allegation that the goodwill of the
firm had been utilized for obtaining the renewal, has
also not been found by the courts l;>elow to be true,
because the basic allegation that there was a partnership firm with a goodwill, had not been established
as a fact. In our opinion, therefore, the plaintiffs
have failed to bring the case within the first part of
s. 88.
We shall now examine the position whet.her the
plaintiffs have ma.de out a. case in terms of the second
part of the section. In order to do so, it had to be
shown that the contesting defendants, while obtaining
renewal of the lease, had placed themselves in such a
position as to render their interests adverse to those of
the other partners, and had thereby obtained a pecuniary advantage, which they must hold for the benefit
88
SUPREME COURT REPORTS [1959] Supp.
1958
of the other partners as well. In this connection,
Chrnnum
illustrations (d) and (e) under the section, are instrucGavararaju Chetty tive. If the plaintiffs had succeeded in proving, as
v.
they httd attempted to do, that any funds or any
Chennuru
goodwill of the alleged firm name, had been utilized
5ilaramamurty for obtaining the renewal of the lease, the case would
•• ~h;;,e~ers
have directly come under illustration (d).
Illustration (e), on the face of it, does not apply, because on
Sinha J.
the findings, the defendants were not negotiating for
the renewal of the lease on behalf of the entire body
of partners, nor is there any allegation that they had
clandestinely stipulated for themselves a benefit to the
detriment of the partership business or funds. In this
connection, it has to be noted that the suit was instituted months befora the renewed lease was actually
granted, and years before a permanent licence for the
manufacture and sale of salt, was issued to the contesting defendants. It has also to be noted that the
grant of the lease by itself does confer on the grantee
the right to manufacture and sell salt. The lease has
to be followed by a permanent licence in order to
. enable the grantee to carry on the business of manufacturing, storing and selling salt.
Hence; the. lease
by itself has no value unless it is followed by a licence
to manufacture and sell salt, which was granted only
on April 17, 1945, about two years and four months
after the expiry of the previous lease and licence,
which, as already indicated, were conterminous with
the term of the partnership. That is the reason why
the High Court granted the decree in favour of the
plaintiffs in terms which are rather amorphous and
which do not easily lend themselves to conversion iu
terms of money. This is a business in which the personal factor of the persons in charge of managing the
business, is more important than anything else.
Another important matter which has a bearing on the
case, has also to be adverted to.
Between the years
1939 and 1942, that. is to say, during the last three
years of the term of the partnership, the partners
were not on cordial terms, and there does not appear
to have been much of confidence between them. They
b.ad ·already started quarrelling and attributing
(I) S.C.R.
SUPREME COURT REPORTS
89
unworthy ·motives. There is, therefore, hardly any
z958
room for importing the idea of such confidence
Ch
.
ennuru
amongst partners as would render the contesting Gavararaju Chetty
defendants occupying a fiduciary position, apart from
v.
the fact that they were partners.
Chennuru
As already indicated, the partnership stood automa_Silaramamurty
Chetty
tically terminated at the end of the year 1942. The
and Others
actual grant of the lease in question was made in April
1943, and the permanent licence to manufacture and
Sinha J.
sell salt, was granted only in 1945. Hence, strictly
speaking, when the suit was instituted in January,
1943, legally, there was no lease in existence, nor could
the business of manufacture and sale of salt be effectively carried on until the grant of the permanent
licence. The plaintiffs could have a cause of action in
respect of the renewed lease if their substantive case
of continuing partnership had been established. But
that case having failed, it is a little difficult to appreciate how they could claim any interest in the renewed
lease as an asset of the partnership business. The
fiduciary character as between the partners had ceased
on the termination of the original lease and of the
partnership business. On such a termination, there was
no interest of the partners, which the contesting defendants were bound to protect. For the same reasons,
the defendants' character as partners had ceased, and
they could not, therefore, be said to have availed
themselves of their character as partners in obtaining
the fresh lease. For all these reasons, it must be held
that the plaintiffs have failed to bring the case strictly
within the terms of s. 88 of the Indian Trusts Act.
A
passing reference was made by the leamed counsel for
the respondents to the terms of s. 90 of the Trusts
Act. But it will be noticed that whereas s. 88, quoted
above, makes a specific reference to partners and
agents, etc., s. 90, in terms, applies to a tenant for
life, a co-owner, a mortgagee, or any other qualified
owner of any property. Section 90, therefore, in terms,
could not apply to the case.