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inder Mohan Kahanna and ors. Vs. Jai Parkash and anr. - Court Judgment

LegalCrystal Citation
SubjectTenancy
CourtDelhi High Court
Decided On
Case NumberSecond Appeal No. 157 of 1972
Judge
Reported inILR1978Delhi287b; 1978RLR367
ActsDelhi Rent Control Act, 1958 - Sections 14(l)
Appellantinder Mohan Kahanna and ors.
RespondentJai Parkash and anr.
Advocates: J.M. Khanna and; B.J. Nayyar, Advs
Cases ReferredSalomon v. Salomon (supra
Excerpt:
.....is not only a physical act but is a legal concept and it must, thereforee, be a parting with legal possession of the premises, i.e., the right to occupy as distinct from the actualoccupation. - - it was also not disputed on behalf of the landlords, again in view of the rather well settled legal position obtaining in that behalf, that a transfer of legal possession in favor of another person by the tenant to the total effacement of the tenant was necessary to constitute parting with possession, as envisaged by the act and mere introduction of another in the premises, which was not to the exclusion of the tenant, was insufficient. the fresh tenancy in 1962, was itself created after the business had been carried on for almost two years of the company which was incorporated in 1960,..........was reversed by the rent control tribunal on the ground that the tenant throughout retained legal possession of the demised premises and the mere conversion of business into a joint stock company did not constitute either sub-letting or parting with possession of any part of the demised premises. it was further observed that there was no material on record to show that the tenant had transferred the legal possession of the premises in favor of the company or had totally effected himself. that is how the landlords came to this court in second appeal and the question that was posed before the learned single judge was whether the conversion of the business by the tenant into a joint stock company amounted to parting with possession of the premises by the tenant in favor of the.....
Judgment:

H.L. Anand, J.

(1) This Second Appeal under Section 39 of the Delhi Rent Control Act, for short 'the Act', by the landlords against the appellate order of the Rent Control Tribunal reversing the order of the 1st Additional Rent Controller and dismissing the petition for eviction, comes up before us on a reference by a learned Single Judge of this Court and involves consideration of an important question of law as to whether the incorporation by a tenant of his business amounted to parting with the possession of the demised premises to another person w'thin the meaning of clause (b) of proviso to Sub-Section (1) of Section 14 of the Act so as to entitle the landlords to an order of eviction. The Second Appeal was filed in the following circumstances.

(2) It is a common case of the parties that the property in which the demised premises are situated was at one time an evacuee property, Shop No. 2681, Sadar Thana Road, being part of the demised premises was allotted by the evacuee property administration to Jai Parkash, the tenant, respondent No. 1 in the Appeal. Jai Parkash had been carrying on business in the shop along with his brothers, which was claimed to be the business of a Hindu undivided .family, and according to the material on record, this is how the business was being assessed to Income-tax. The tenancy, as indeed rent receipts, were throughout in the name of Jai Parkash. Meanwhile the property having been sold to the landlords, the tenant attorney to them and continued to carry on the business. In 1960 the brothers were carrying on the business of a chit fund. In the same year all the brothers constituted a Joint Stock Company known as Swastik Benefit Private Limited, the respondent No. 2 in the Appeal, and the business was continued in the name of the Company. All the shares in the Company were held by the brothers and other members of the family. All the brothers became the Directors of the Company. In the year 1962, the landlords extended the tenancy to a godown at the back of the shop and the rent for the composite premises was raised from Rs. 25 to Rs. 65 per month, apparently because the needs of the business of the Company necessitated the extension of the premises. The demised premises has since consisted of the enlarged shop with the addition of the godown at the back. One of the landlords happened to have subscribed to the fund and the landlords were, thereforee, aware of the fact that the original business, whether the exclusive business of Jai Parkash or of the Joint Hindu Family, had since 1960 been carried on in corporate form. The petition for eviction out of which the present Appeal has arisen was filed by the landlords in 1968. Jai Parkash, the tenant, and the Company were imp leaded as respondents No. 1 and 2 respectively and eviction was sought on the ground that 'The respondent No. 1 has sub-let, assigned or otherwise parted with possession of the premises in favor of respondent No. 2 in the year 1962-63 without obtaining consent in writing of the petitioners to respondent No. 2'. The petition was resisted and the allegation of assignment, sub-letting or parting with possession of the premises in favor of the Company was denied. In the course of written-statement it was brought out that initially the tenancy premises consisted of a shop in the front and the demised premises was extended in the year 1962 to the godown at the back and the rent was increased to Rs. 65 per month. It was further alleged that the shop had been initially taken by Jai Parkash for himself and for the members of his family for 'joint business' and thereafter was a 'joint Hindu family business' and that in the year 1962 after the addition the joint family business continued. It was further alleged that since 1960, when the Company was formed, the joint Hindu family business has been going on in the name of the Company which was Said to be neither a separate entity nor a separate person in the eye of law. It was alleged that the Company was only the name and style of the business of Jai Parkash and the family. A contention was also raised that the entire premises has throughout been under the possession and control of Jai Parkash. The liability to ejectment was, thereforee, denied. In the replication the landlords reiterated the allegations made in the petition and it was alleged that the premises had been let out to Jai Parkash alone in 1962; that the other members of his family had no right, title or interest in the tenancy; that the Company was not owned by Jai Parkash; that the Company was an independent legal person and a separate entity; and that the tenant had, thereforee, sub-let or parted with possession of the demised premises to the Company without the consent in writing of the landlords in '1962-63'. At the trial, evidence was led on behalf of the landlords to show that the tenancy, as indeed the receipts, were throughout in the individual name of Jai Prakash and the name of the Joint Hindu Family or the Company never figured at any stage. On behalf of the tenant evidence was led to show that prior to the incorporation of the Company the business was being carried on in the demised premises by Jai Parkash and his brothers as a Hindu undivided family and this 'is how the business was assessed to Income-tax. Evidence was also led to show that the membership of the Company was confined to Jai Parkash and his brothers and the other members of the family. It was also brought out that the brothers were the only Directors of the Company. In his statement as R.W. 8 Jai Parkash specifically stated that the premises in question was locked by him and if he wanted to put any lock on the premises no one could' stop him. It was also brought out that one of the landlords had subscribed to a chit in the business run by the Company. In cross-examination Jai Parakash, however, admitted that 'The entries about the payment of rent to the petitioners in respect of the premises in question are duly made in the account books of respondent No. 2'.

(3) On the material on record and Additional Rent Controller passed an order of eviction on the ground that, even though the tenant had been carrying on the business in this shop with his brothers, the tenant had parted with the possession of the demised premises in that the business was being carried on by the Company, which was also paying rent and the payment was 'included in the account books of the limited Company' and that the tenant ceased to be in possession of the shop and had parted with possession in fabour of the Company even though the tenant and his brothers were conducting the business of the Company, as its Directors. On appeal, the order of eviction was reversed by the Rent Control Tribunal on the ground that the tenant throughout retained legal possession of the demised premises and the mere conversion of business into a Joint Stock Company did not constitute either sub-letting or parting with possession of any part of the demised premises. It was further observed that there was no material on record to show that the tenant had transferred the legal possession of the premises in favor of the Company or had totally effected himself. That is how the landlords came to this Court in Second Appeal and the question that was posed before the learned Single Judge was whether the conversion of the business by the tenant into a Joint Stock Company amounted to parting with possession of the premises by the tenant in favor of the Company and, in particular, whether the corporate veil of the Company could be torn to identify the real persons who constituted it and also if by the formation of the Company or otherwise, legal possession of the premises could be said to have been transferred by the tenant in favor of the Company so as to satisfy the requirements of clause (b) of the proviso to Sub-section (1) of Section 14 of the Act.

(4) At the hearing of the Appeal the rival contention canvassed on behalf of'the parties in the courts below and learned Single Judge were reiterated with the aid of quite a few principles of law and a large number of precedents. It was, however, not disputed on behalf of the tenant, in view of a long line of precedents from 1937 PC 279 to 1970 Supreme Court 564, that a Joint Stock Company was a separate legal entity distinct from the members who constituted it and, thereforee, had a separate legal existence. On the other hand, it was not disputed on behalf of the landlords that neither on the material on record nor on a mere change in the form of business could it be said that there was assignment of tenancy or any sub-letting of the premises in favor of the Company. It was also not disputed on behalf of the landlords, again in view of the rather well settled legal position obtaining in that behalf, that a transfer of legal possession in favor of another person by the tenant to the total effacement of the tenant was necessary to constitute parting with possession, as envisaged by the Act and mere introduction of another in the premises, which was not to the exclusion of the tenant, was insufficient. Within these two perimeters a number of propositions were urged. If a Joint Stock Company was a legal entity distinct from the members who constituted it, the conversion of an individual or group business into an incorporate form would tantamount to parting with possession, as it would constitute transfer of both physical and legal possession of the premises to the Joint Stock Company that comes into existence and continued the business. It would not be possible to tear the corporate veil to identify the persons behind it or to hold that those who constituted the Company were in fact carrying on business as if the Company was their alter ego or that they had not thereby effaced their individual status. True, the form of business had been changed but could the back-ground of the Company and the persons who were in facts its Directors be ignored. The incorporation of the Company changed merely the form of the business without affecting its identity and, in point of substance, it is the family business that is being continued through the instrumentality of corporate body. The rent was throughout being paid by the tenant and the Company thereforee, would have no legal right or interest in the premises which could in any way be said to have impaired the tenant's rights in the tenancy. The rent is being paid out of the funds of the Company and even though prior to the incorporation of the Company rents may have been paid out of the funds of the Joint Hindu Family business, the payment of rent from the funds of the Company constitutes transfer of legal possession and the factum of such payment would constitute a valid basis for the Company to resist any effort on behalf of the tenant to oust the Company from possession. The fresh tenancy in 1962, was itself created after the business had been carried on for almost two years of the Company which was incorporated in 1960, and if parting with possession was constituted by the very act of incorporation, such an eventuality could not have happened in 1962-63, as alleged by the landlords in the petition, and the landlords, thereforee, failed to establish the case as laid on the admitted hypothesis that the Company came into existence in 1960 and the fresh tenancy for the wider premises was created subsequent to it in 1962 and thereforee, there was nothing fresh that had happened in 1962 or 1963 which could be said to constitute an act of parting with possession. These are some of the contentions that are raised.

(5) By virtue of the privilege that the statute regulating the formation and conduct of a Joint Stock Company confers on it a corporation is clothed with a legal entity and personality quite distinct from those who constitute it with the result that ordinarily it would not be possible to treat such a corporation as a mere association of natural persons, who have come together to facilitate their business enterprise. The case of Salomon V. Salomen LTR . 1897 A.C. 22 is the earliest authority for this proposition and is often set up as a shield of defense against the attempted tearing of the corporate veil. There have nevertheless been numerous instances of legislative as well as judicial inroads into corporate realm, both in England and following that in this country, and to a much larger extent in the United States of America, and the Continent. The principle behind the doctrine of piercing the veil or of cracking the corporate shell is that the corporate facade, being a privilege conferred on the promoters of a Company by a statute, it could and should be pierced and the veil lifted to look into the reality where the corporate entity is being abused for unjust and un-equitable purposes. Thus the corporate sanctity has at times been violated, both legislatively and judicially, in cases of fraud on the revenues in the sphere of taxation, where the enterprise entity has been recognised as distinct from the corporate entity. There are thus a number of provisions in the taxation laws, as indeed in the Indian Companies Act, which would enable the court to disregard the corporate veil and to see for itself those who operate behind the corporate mask. While there is a considerable divergence of juristic opinion as to the extent to which the courts may go in piercing the veil and there have recently been cases where the question arose in the context of what may be described as Government Companies, there is increasing realization that 'a limited company is more than a judicial entity with a personality in law of its own that there is a. room in Company Law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter-se which are not necessarily sub-merged in the company's structure'. (Re : Westbourne Galleries Ltd. 1973) A. C. 360.

(6) In considering the question if the corporate veil is to be ignorea in a particular case a distinction must however, be made between cases where the tearing of the corporate veil is being resisted by a Company and cases in which the privilege of the corporate veil is sought to be waived by the Company and those who costitute it. In the former class of cases the question has to be examined in the context of an attempt to deprive the corporation of its statutory privilege while in the other the corporation in laying itself bare for others to see. The present is a case which falls in the latter category. It is the landlords who are anxious to preserve the corporate veil of the Company, which was constituted by the tenant along with his brothers to continue a joint business. It is the case of the landlord's that it was the Company that operates the business being an entity distinct from those who constitute it. Look at the Company, contend the landlords, but ignore those who are behind it and hold that there has been parting with possession in favor of a new legal entity. It is the promoters of the Company themselves, the tenant and his brothers, as indeed the Company, which offer to raise the corporate curtain to show the persons who are behind the corporate facede. They claim the protection of the Act on the ground that the formation of the Company merely changed the form of business which continued in substance to be the same. It is, thereforee, waiving of a privilege conferred by the statute and would stand on a different footing. If that be the true legal position, the doctrine of tearing of the corporate veil and the limitations in the application of the doctrine would not be involved in the present case, being the voluntary exposure by the Company or those that constitute it. In that situation the position that would emerge is that the tenant, who was carrying on the business along with his brothers as a Hindu undivided family or on his own but otherwise in association with his brothers, continued to carry on the business in association with the brothers and the other members of the family though in a corporate form and without introducing any new element in the business or in the demised premises. The question, thereforee, of the tenant having parted with possession, in fact or in law, did not and could not arise. Such a conclusion would accordingly be determinative of the question as to the tenant's liability to ejectment.

(7) For our present purpose it is, however, unnecessary to carry the doctrine of tearing of the veil beyond the conventional way it is looked upon in England and in this country, under an obvious spectre of the decision in the case of Salomon v. Salomon (supra), and one may, thereforee, assume that the corporation, being a legal entity distinct from those who constitute it, there was good reason why a tenant-landlord dispute was not a proper occasion for the investigation as to who was running the business was not a good reason, to tear the corporate veil and to identify those who are behind the Company. The landlords would even then be in no better position. This is so because conversion of the business- by an individual or more than one individual into a corporate form could not in law by itself constitute a parting with possession of the premises in which the business was being carried on. The case of the landlords being primarily based on the contention that the very act of conversion of business into a corporation ipso-facto operated as parting with possession must, thereforee, fail on the short ground that that is not the necessary consequence of such a conversion. There may, however, be something in the arrangement between the tenant and those who along with him constitute the corporation or between the tenant and the corporation, that was brought into existence, which may provide a valid basis for the conclusion that on the constitution of the corporation, or after it came into existence, there has been a parting with possession of the promises in dispute in favor of a person different that the tenant. It has already been pointed out that mere introduction in the premises of another legal entity does not by itself constitute a parting with possession within the meaning of the Act because a parting with possession is not only a physical act but is a legal concept and it must, thereforee, be a parting with legal possession of the premises i.e. the right to occupy as distinct from the actual occupation. The material brought on the record by the parties does not justify the conclusion that there has been any transfer of legal possession or Transfer of any right or interest in the tenancy in favor of the company. That the tenant and his brothers continued to be on the premises as part of the business of the Company was not disputed. That the rent was throughout being paid to the landlords by the tenant and the receipt was being executed by the landlords in favor of the tenant was also not in dispute. There is nothing either in the Memorandum of Association of the Company or in any instrument between the tenant and the Company, which may be construed as conferring any right or interest in the tenancy in favor of the Company or which may form a valid basis for a claim by the Company that it was entitled to occupy the premises independently of the tenant, there is nothing on the record which may indicate any act of the tenant by which he divested himself in relation to tenancy or that there has been any corresponding vesting in the Company of any rights or interest in the tenancy. The continuance of the business in the form of the Company did not have the effect of diminishing the legal possession of the premises by the tenant or the effacement of the tenant in relation to the premises. The only indicia, according to the landlords, of transfer of legal possession was an admission by the tenant in the course of his statement in cross-examination that the payment of rent to the landlords was duly reflected in the records of the Company. An inference was sought to be drawn on behalf of the landlord from this statement that the rent of the premises was being debited in the books of accounts of the Company to its expense account. There is, however, no warrant for such an inference. There is no indication as to how the payment of rent was being reflected in the books of account of the Company. Whether it was being debited to the tenant or the payment was being shown as made by the Company to the tenant. On this material it is not possible to hold that there has been any transfer of legal possession in favor of the Company so a.s to entitle the landlords to an order of eviction.

(8) What is worse, the case of the landlords as laid must fail for another reason. The Company was formed in the year 1960. In the year 1962 fresh tenancy in respect of the composite premises was created by the landlords in favor of the tenant. Eviction of the tenant was sought on the ground that there has been assignment, subletting or parting with possession in 1962-63 i.e. after the fresh tenancy apparently by virtue of the fact that the business was converted at that time into corporate form. Unfortunately for the landlords, the business had been converted into a corporate form in 1960 even before the composite tenancy was created. Nothing further is alleged to have or has in fact taken place after the creation of the composite tenancy which would possible constitute an act of parting with possession. The act of parting with possession complained of by the landlords in the petition for eviction was the conversion of the business into a corporate form. Such a conversion having preceded the creation of the tenancy the case of the landlords, as laid in the petition, must fail in the absence of any averment that there was some overtact or omission on the part of the landlord's after the creation of the composite tenancy which entitled the landlords to an eviction order.

(9) A number of English and Indian precedents were cited in support of their various contention on behalf of the landlords both on the question as to the tearing of the corporate veil and' as to the concept of patting with possession. The way we have looked at the matter, it is unnecessary to discuss these decision, it being sufficient to point out that the principles enunciated in the decisions were not in doubt but the question in each of the cases was as to whether there was transfer of legal possession as distinct through the mere change in the form of business and a mere introduction of a different legal entity into the premises. The mere introduction of a legal entity into the premises and' the mere change in the form of business was not held in any of these cases to constitute by itself an act of transfer of legal possession of the premises. What constituted such a transfer, with its adverse consequences, was the conduct and overtact of the parties in relation to the premises, whether by a legal instrument or otherwise. It is this element that distinguishes the present case from those decisions and the absence of which disentitles the landlords to an order of eviction.

(10) In the result the appeal fails and is hereby dismissed but, in the peculiar circumstances, without cost.


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