Union Of India & Anr vs M/S Mahalaxmi Saw Mills P. Ltd.
2015 Latest Caselaw 9554 Del

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

%                                  Date of decision: 23rd December, 2015.

+                               LPA No.2514-15/2005

       UNION OF INDIA & ANR                               ..... Appellants
                    Through:           Mr. Ruchir Mishra along with Mr.
                                       Mukesh Kumar Tiwari, Advs.

                                   Versus

    M/S MAHALAXMI SAW MILLS P. LTD.            ..... Respondent
                  Through: Mr. Kirti Kumar, Adv.
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW

RAJIV SAHAI ENDLAW, J.

1. This intra court appeal impugns the judgment dated 10th June, 2005 of

the learned Single Judge of this Court allowing W.P.(C) No.2546/2003 filed

by the respondent M/s Mahalaxmi Saw Mills Pvt. Ltd. by quashing the

communications dated 5th September, 2001 and 26th March, 2003 of the

appellants Land & Building Officer (L&DO) and issuing a mandamus

directing the appellants to mutate the leasehold rights in the land underneath

property No.3/13, Industrial Area, Kirti Nagar, New Delhi from the name of

Mahalaxmi Saw Mills, a partnership firm to the name of the respondent, a

private limited company, without treating the same as a sale of the property.

2. The appeal, vide order dated 9th January, 2007, was admitted for

hearing and the statement of the counsel for the respondent that he would not

press for compliance of the direction / writ issued by the leaned Single Judge

was recorded. The appeal, when came up for hearing on 28 th January, 2010

was dismissed for non-prosecution. After a long delay of more than four

years, the appellants applied for restoration of the appeal and which was

allowed vide detailed order dated 19th January, 2015. We heard the counsel

for the parties and reserved judgment giving them liberty to file written

submissions. Though the counsel for the respondent has filed written

submissions, no written submissions have been filed by the appellants.

3. The facts which are not in dispute are as under:

(i) the lease of land admeasuring 207 sq. yards bearing No.3/13,

Industrial Area, Kirti Nagar, New Delhi was granted by the President

of India to one Sh. Jagjodh Singh vide Lease Deed dated 31st

December, 1962 for a term of 99 years commencing from 1 st August,

1962;

(ii) Clauses (b) & (c) of the said Lease Deed are as under:

"(b) The Lessee shall before any assignment or transfer of the said premises hereby demised or any part thereof obtain from the Lessor approval in writing of the said

assignment or transfer and all such assignees and transferees and the heirs of the Lessee shall be bound by all the covenants and conditions herein contained and be answerable in all respects therefor.

(c) The Lessee can transfer the land after obtaining the permission of the Lessor aforesaid and the Lessor will not share any unearned increment in the value of the land (being the difference in the premium paid by him to the Lessor and the market value of the land then prevailing) for permitting such transfer. The Lessor will, however, be entitled to claim and recover the unearned increment in the value of land in the event of any subsequent transfer of the land by a transferee the amount so to be recovered being 50% of the unearned increment in the value of the land."

In the case of any subsequent transfer the Lessor shall have the pre-emptive right to purchase the premises as hereby demised and all the buildings and structures standing thereon, after deducting 50% of the unearned increment as aforesaid.

(iii) the lessee Sh. Jagjodh Singh sought and was granted permission

vide letter dated 14th July, 1966 to transfer the leasehold rights in the

said property to M/s Mahalaxmi Saw Mills, a partnership firm of (1)

Sh. Moolji Gopal, (2) Sh. Bhanji Moolji, (3) Sh. Panna Lal Moolji, (4)

Sh. Bhanji Nathu and (5) Sh. Harji Moolji and the leasehold rights

were accordingly transferred in the name of M/s Mahalaxmi Saw

Mills;

(iv) the constitution of the said M/s Mahalaxmi Saw Mills changed

from time to time but no intimation thereof was given to the appellants

L&DO; as on 7th May, 1986, M/s Mahalaxmi Saw Mills was a

partnership firm of (1) Sh. Harji Moolji, (2) Sh. Damodar Moolji, (3)

Sh. J.C. Gupta, (4) Smt. Anuradha Gupta, (5) Smt. Maneesha Gupta,

(6) Smt. Sushila Gupta and (7) Sh. Satish Gupta;

(v) the aforesaid seven partners of M/s Mahalaxmi Saw Mills on

26th August, 1986 got incorporated the respondent Company and

transferred the business, assets and liabilities of partnership firm M/s

Mahalaxmi Saw Mills to the respondent Company at their net book

value and became shareholders of respondent Company in proportion

of their shares in the partnership firm of M/s Mahalaxmi Saw Mills;

(vi) the respondent Company thereafter applied to the appellants

L&DO for mutation of the leasehold rights in the land aforesaid from

the name of M/s Mahalaxmi Saw Mills (partnership firm) to the name

of the respondent Company;

(vii) the appellants L&DO vide their letter dated 5th September, 2001

informed the respondent Company that such transfer would be

affected inter alia upon payment of unearned increase of

Rs.13,04,294/- together with penalty of Rs.35,532/- for sale without

permission;

(viii) the respondent Company vide its letter dated 15th October, 2001

represented to the appellants L&DO that the appellants L&DO were

not entitled to charge unearned increase as there was no transfer of

property and it was merely a change of name of the existing lessee

from that of a partnership firm with seven partners into a private

limited company with the same seven shareholders;

(ix) the appellants L&DO vide their letter 26th March, 2003

reiterated its demand aforesaid and further threatened that upon non-

payment, further action under the Public Premises (Eviction of

Unauthorised Occupants) Act, 1971 would be taken;

(x) the respondent Company filed the writ petition from which this

appeal arises contending that there was no transfer of leasehold rights

within the meaning of the clauses of the lease of the land set out herein

below and thus the appellants L&DO were not entitled to charge

unearned increase;

(xi) the appellants L&DO contested the writ petition contending (a)

that a partnership firm and the company are two separate and

independent legal entities, even though the partners / shareholders of

the two may be the same; (b) that a company is an independent juristic

entity having independent existence than its shareholders; (c) that the

same constitutes a transfer within the meaning of the clauses aforesaid

of the Lease Deed; (d) that in the present case, the constitution of the

partnership also had changed from the time when the appellants

L&DO vide letter dated 14th July, 1966 had granted permission to Sh.

Jagjodh Singh to transfer the leasehold rights in the name of the

partnership firm M/s Mahalaxmi Saw Mills and which also clearly

shows that first the constitution of the partnership firm was changed

and then a company was incorporated, making it a clear case of

transfer.

4. The learned Single Judge has allowed the writ petition of the

respondent Company by quashing the demand for unearned increase and by

directing the appellants L&DO to mutate / record the leasehold rights in the

property from the name of the partnership firm M/s Mahalaxmi Saw Mills to

the name of the respondent Company reasoning:

(a) that though the constitution of the partnership firm M/s

Mahalaxmi Saw Mills had, after acquiring the leasehold rights in the

land underneath the property pursuant to the permission dated 14th

July, 1966, changed several times but some of the original partners

continued to be partners till the conversion of the partnership firm into

a company, though certain persons who were not partners at the time

of acquiring the leasehold rights had also become partners in the firm;

(b) that the appellants L&DO, inspite of directions, had failed to

file any policy in force in this regard;

(c) that the counsel for the appellants had also failed to make any

arguments;

(d) that as per Addanki Narrayanappa Vs. Bhaskara Krishtappa

AIR 1959 Andhra Pradesh 380 (FB) and Commissioner of Income-

Tax, Madhya Pradesh, Nagpur and Bhandara Vs. Dewas Cine

Corporation AIR 1968 SC 676 cited by the counsel for the respondent

Company, mere reconstitution of a partnership firm cannot be per se

be treated as a transfer;

(e) that the appellants L&DO and other governmental agencies

granting such leases of land have become wiser with the passage of

time and had specifically inserted clauses for charging unearned

increase in case of conversion of a partnership firm into a limited

company; however there is no such clause in the lease of the said

property;

(f) thus, it cannot be held that any transfer took place on that

account;

(g) that the Division Bench of Andhra Pradesh High Court in Vali

Pattabhirama Rao Vs. Sri Ramanuja Ginning and Rice Factory (P)

Ltd. AIR 1984 Andhra Pradesh 176 relying on Section 575 of the

Companies Act, 1956 has held that if a partnership firm registered as a

company, there was a statutory vesting including of all immovable

property and no separate conveyance was required for the same;

(h) that if no conveyance deed is required for vesting of a property

from a partnership firm to a company, it could not be said that any

transfer of the property takes place which would require levy of

unearned increase;

(i) that the appellants L&DO, apart from stating that it is a case of

transfer, have not rendered any further assistance in the matter.

5. The counsel for the appellants has, besides reiterating the appellants‟

stand before the learned Single Judge, (i) contended that properties of

shareholders are not properties of the company and vice-versa properties of

the company are not properties of the shareholders; (ii) contended that

conversion of a partnership firm into a private limited company is a

voluntary transfer and not a deemed transfer; (iii) relied on Delhi State

Industrial Development Corporation Ltd. Vs. Vikas Pharma (India) Pvt.

Ltd. 117 (2005) DLT 644 (DB). No policy is shown to us either.

6. Per contra, the counsel for the respondent Company while supporting

the judgment of the learned Single Judge has additionally relied on (a)

Malabar Fisheries Co. Vs. Commissioner of Income Tax, Kerala (1979) 4

SCC 766 to contend that upon the partners converting the partnership into a

private limited company, the vesting of property in the company, is a legal

consequence; (b) judgment dated 7th November, 2014 in LPA No.391/2014

titled Delhi State Industrial and Infrastructure Development Corporation

Ltd. Vs. K.G. Electronics Pvt. Ltd.; (c) Human Care Medical Charitable

Trust Vs. DDA 186 (2012) DLT 395; and (d) DDA Vs. Mahabir Prasad and

Sons MANU/DE/3308/2009.

7. We have considered the rival contentions and for the reasons

hereinafter appearing are unable to concur with the view taken by the learned

Single Judge and / or with the additional arguments of the counsel for the

respondent Company before us.

8. Clause (b) supra of the Lease Deed of the land aforesaid requires the

lessee to obtain approval in writing of the appellants L&DO before any

"assignment or transfer" of the leased premises.

9. Clause (c) supra of the Lease Deed entitled the appellants L&DO to

claim and recover unearned increase at the time of „transfer‟ subsequent to

the first „transfer‟.

10. The „transfer‟ if any by M/s Mahalaxmi Saw Mills (partnership firm)

to respondent Company is a transfer subsequent to the first transfer which

was effected by Sh. Jagjodh Singh in favour of M/s Mahalaxmi Saw Mills.

Thus, if it is a transfer or assignment within the meaning of clauses aforesaid

of the Lease Deed, as is contended by appellants L&DO, unearned increase

would be payable thereon.

11. A firm under the Indian Partnership Act, 1932 is not a juristic person

and has no entity independent from that of its partners and is merely a

compendious name for its partners. The property of a firm is the property of

all its partners in proportion to their share in the partnership firm. Reference

in this regard can be made to (i) Addanki Narayanappa Vs. Bhaskara

Karishtappa AIR 1966 SC 1300; (ii) Commissioner of Income Tax, Madras

Vs. R.M. Chidambram Pillai (1977) 1 SCC 431; and, (iii) Munshi Ram Vs.

Municipal Committee, Chheharta (1979) 3 SCC 83. Thus, seen, the

property of the partnership firm M/s Mahalaxmi Saw Mills was the property

of its partners.

12. The said partners of the partnership firm M/s Mahalaxmi Saw Mills

converted the partnership firm into a private limited company i.e. the

respondent Company herein and further provided in the Memorandum of

Association of the respondent Company that all the assets of the partnership

firm stood vested in the respondent Company by so doing, what was earlier

the property of the partners of the partnership firm M/s Mahalaxmi Saw

Mills became the property of the respondent Company.

13. Even though all the erstwhile partners of M/s Mahalaxmi Saw Mills

were shareholders of the respondent Company in proportion to their share in

the partnership firm but a company incorporated under the Companies Act,

1956 as distinct from a partnership firm is not only a juristic person and a

corporation sole but also, as distinct from a partnership firm, a legal entity

different from its shareholders. Thus, notwithstanding the partners of M/s

Mahalaxmi Saw Mills who as aforesaid were the owners / lessees of the

aforesaid property of M/s Mahalaxmi Saw Mills being the shareholders of

respondent Company, the ownership / leasehold rights in the aforesaid

property vested not in them as shareholders but in the respondent Company.

14. A Division Bench of this Court in New Delhi Municipal Council Vs.

Ram Kishan Kulwant Rai & Sons MANU/DE/4961/2012, in the context of

assessment of property tax of an immovable property, and relying on

Western Coalfield Limited Vs. Special Area Development Authority, Korba

(1982) 1 SCC 125 and Electronics Corporation of India Ltd. Vs. Secretary,

Revenue Department, Government of Andhra Pradesh (1999) 4 SCC 458,

held that (i) a company incorporated under the Companies Act has a

corporate personality of its own, distinct from that of its shareholder; (ii) the

lands and buildings are vested and owned by the company and the

shareholders own only the shares; (iii) a company registered under the

Companies Act is a legal person separate and distinct from its individual

members; (iv) property of the company is not the property of the

shareholders; (v) a shareholder has merely an interest in the company arising

under its Articles of Association, measured by a sum of money for the

purpose of liability and by a share in the profit; (vi) the mere fact that the

entire share capital of a company may be contributed by the Central

Government and the fact that all its shares were held by the President and

certain officers of the Central Government did not make the company

Central Government or the State for its income to be exempted from union

taxation; (vii) even though a company may be controlled by the State

Government, it has a separate entity than the State Government; (viii) a clear

distinction must be drawn between a company and its shareholder, even

though that shareholder may be only one; (ix) in the eye of law, a company

registered under the Companies Act is a distinct legal entity other than the

legal entity or the entities that hold its shares.

15. In the aforesaid state of law, it cannot be said that the change in the

ownership / title to leasehold rights from that of the partners of M/s

Mahalaxmi Saw Mills to the respondent Company did not result in change of

ownership / title to leasehold rights. Transfer is defined in Black‟s Law

Dictionary, 8th Edition as any mode of disposing of or parting with an asset

or an interest in an asset; Assignment is defined as transfer of rights or

property. A change in ownership of leasehold rights in the land underneath

the property from partners of M/s Mahalaxmi Saw Mills to respondent

Company would thus amount to the said partners parting with the leasehold

rights to the respondent Company and would constitute a transfer or

assignment of leasehold rights within the meaning of Clauses (b) & (c) supra

of the Lease Deed.

16. The learned Single Judge also in the impugned judgment has not

observed anything contrary to the above well established legal position.

What the learned Single Judge, relying upon Vali Pattabhirama Rao supra

has however held is that since under Section 575 of the Companies Act,

there is a statutory vesting of the property of the partnership in the company

and no separate Conveyance Deed is required to be executed, there is no

transfer.

17. Though we entertain doubts about the applicability of Section 575 to

the instant facts as discussed by us in the succeeding paragraphs but even if

the same were to be applicable and the property of the partners of the

partnership firm statutorily vested in the company got incorporated by them

thereby obviating the need for a separate Conveyance Deed, we fail to see as

to how it would still not constitute a transfer or assignment of the leasehold

rights in the property. We are unable to garner any proposition of law that if

a disposition or change of ownership of property or any rights therein,

instead of being effected by execution of a Conveyance Deed is effected by

law, it is not a transfer or assignment of property. Transfer, as aforesaid is

disposition or parting with an asset or an interest in the asset and vesting

thereof in another. It matters not whether it is by Conveyance Deed or by

law. Once there is a transfer, the liability for unearned increase is incurred.

Notice in this respect may also be taken of Section 9 of the Transfer of

Property Act, 1882 which provides that a transfer of property may be made

without writing in every case in which a writing is not expressly required by

law.

18. The clauses aforesaid of the Lease Deed however entitle the lessor i.e.

the appellants L&DO to unearned increase when the lessee transfers the

leasehold rights. It suggests a voluntary act of transfer on the part of the

lessee and not an involuntary transfer as happens in the case of succession on

death. Section 6 of the Transfer of Property Act also, though not affecting

any law relating to transfer of property to or by companies, associations or

bodies of individuals, defines transfer of property as an act by which a

person conveys property to another person or to himself. Thus, for a transfer

to incur liability for unearned increase, it has to be by a voluntary act.

19. It is not as if the vesting even if any under Section 575 of the

Companies Act of the property is an involuntary act. The conversion of a

partnership firm into a private limited company was a voluntary act of the

partners of M/s Mahalaxmi Saw Mills and it is not the case of the respondent

Company that there was any legal compulsion therefor. The vesting of

leasehold rights in the property from the partners of Mahalaxmi Saw Mills

(partnership firm) to the name of the company, even if under Section 575

supra was thus a voluntary act to qualify as a transfer.

20. We say that we entertain doubt as to the applicability of Section 575

supra because Section 575 is situated in Part IX of the Companies Act titled

"Companies Authorised to Register under this Act". Section 565 thereunder

provides for companies entitled to register and we are unable to find the

word "company" therein to be including a partnership firm. Proviso (iv)

thereunder expressly provides that a company that is not a joint stock

company as defined in Section 566 shall not register in pursuance of the said

provision as a company limited by shares. A partnership firm is definitely

not a joint stock company. To us, thus it appears that a partnership firm is

not entitled to register as a company under Section 565 and once that is so,

Section 575 also would have no application. The partners of a partnership

firm can of course otherwise than under Part IX of the Companies Act

incorporate a company and vest the assets and liabilities of the partnership in

the company. However, we refrain from giving any final opinion in this

respect, being not relevant for our purposes.

21. The learned Single Judge has based his judgment on Vali

Pattabhirama Rao supra. The questions for adjudication in the said

judgment were, whether a conveyance is necessary to vest the property of a

firm when the same was converted into a company and whether such a

conveyance is necessary for the company to claim title to the property. The

said questions arose in a suit for eviction. It was inter alia the contention of

landlord that though the lease granted was permanent and transferable but

upon conversion of the tenant which was a partnership firm into a company,

there was no assignment / conveyance of leasehold rights to the company

and hence the company did not become a tenant under him. It was held that

the property of the firm vests in the company, which is incorporated by

partners of firm and in which company all assets and liabilities of firm are

vested, under Section 575 of Companies Act and no separate conveyance is

necessary. It was further held that Section 5 of the Transfer of Property Act

requires a transfer to be inter vivos i.e. between living persons; since a

company is not a living person before its inception, vesting of property in the

company at the time of its inception, is not transfer within the meaning of

Section 5 and hence does not require an instrument or Conveyance Deed and

is a transfer within the meaning of Section 9 of the Transfer of Property Act

which is possible without an instrument or Conveyance Deed.

22. It would thus be seen that the judgment of the Division Bench of

Andhra Pradesh High Court relied upon by the learned Single Judge also

does not hold that vesting of property of a partnership firm into a company,

to which the partnership firm converts itself, is not a transfer.

23. We will however be failing in our duty if do not mention CIT Vs.

Texspin Engineering & Manufacturing Works MANU/MH/0197/2003

(DB); CIT Vs. Rita Mechanical Works MANU/PH/3828/2010 (DB); and,

CIT Vs. Hansa Footwear MANU/AP/1017/2011 (DB) holding that when an

erstwhile partnership firm converts to a company under Part IX of the

Companies Act, even though there is transfer of assets from firm to newly

constituted company but it is not a transfer within the meaning of Section 45

of the Income Tax Act, 1961 attracting Capital Gains Tax.

24. However the said judgments proceed on the interpretation of Income

Tax Act and in any case also do not hold there to be no transfer. Moreover,

the Lease Deed aforesaid is a government grant and qua which not only is it

statutorily provided in the Government Grants Act, 1895 but otherwise is the

settled proposition of law that the grant has to be interpreted as per its own

tenor and any rule of law, statute or enactment of legislature to the contrary

notwithstanding. The provisions of Transfer of Property Act have been

expressly made inapplicable to government grants. For this reason also, the

transfer of the leasehold rights from the partners of M/s Mahalaxmi Saw

Mills to the respondent Company, and who are two different persons, would

constitute a transfer or assignment of leasehold rights within the meaning of

Clause (b) & (c) of the Lease Deed and attract unearned increase.

25. The present, even as per Vali Pattabhirama Rao supra, is at best a

case of transfer of leasehold rights of the partnership firm which was the

lessee under the Lease Deed aforesaid into the respondent Company by

operation of law i.e. Section 575 of Companies Act. Other instances of

transfer of property by operation of law can be found in the various Land

Acquisition Laws under which also transfer is effected by operation of law

and without requiring any Conveyance / Transfer Deed to be executed.

26. As far as the judgments cited by the counsels are concerned, we find

no applicability thereof to the matter in hand. M/s. Vikas Pharma (India)

Pvt. Ltd. supra cited by the counsel for the appellants L&DO merely affirms

the judgment of the learned Single Judge without any discussion or

consideration of the issues involved. A perusal of the judgment of the

learned Single Judge reported as Vikas Pharma (India) Ltd. Vs. Lt.

Governor of Delhi MANU/DE/1968/2002 shows that the learned Single

Judge passed the judgment on the statement of the counsel for the petitioner

therein agreeing to pay the unearned increase. As far as the judgments cited

by the counsel for the respondent before us are concerned, (i) Malabar

Fisheries Company supra merely holds that distribution of assets between

erstwhile partners as a consequence of dissolution does not amount to

transfer of assets within the meaning of Section 34(3)(b) read with Section

2(47) of the Income Tax Act; (ii) K.G. Electronics Pvt. Ltd. and Human

Care Medical Charitable Trust supra were cases of change of shareholders /

directors of a company and trustees / members respectively of the company

and society respectively which were lessees and hold the same to be not

constituting transfer; and thus have no application to present controversy.

27. We may however notice that the learned Single Judge in the impugned

judgment has also observed that since it was a case of mere transfer of the

property from partners of a partnership firm to a company in which the said

partners were shareholders, no transaction requiring levy of unearned

increase had taken place. The Division Bench of this Court in Mahavir

Prasad and Sons supra also, though not concerned directly with the issue

has observed that levy of unearned increase requires a „sale‟, for the reason

that without a „sale‟ there would be no measure to the price of land.

28. We are however of the view that the Clauses (b) & (c) supra of the

Lease Deed do not require the transfer or assignment to be for consideration.

The measure for unearned increase provided therein, of the difference

between the premium paid and the market value of the land prevailing, also

does not require exchange of any consideration for computation of unearned

increase. We are unable to find any requirement of monetary consideration

as a necessary concomitant of transfer, neither in Transfer of Property Act

nor in any other law. If it were to be so, a gift, for consideration of natural

love and affection, would also cease to be a transfer and would not attract

any stamp duty or unearned increase. It is also not as if there was no

consideration in the subject transaction. The consideration for the partners

of M/s Mahalaxmi Saw Mills (partnership firm) to transfer their property to

the respondent Company was the issuance of shares of the respondent

Company to the partners in lieu thereof. However, that consideration has got

nothing to do with the computation of unearned increase as above.

29. We thus allow the appeal and set aside the judgment of the learned

Single Judge and dismiss the writ petition filed by the respondent Company.

In the circumstances, no costs.

RAJIV SAHAI ENDLAW, J.

CHIEF JUSTICE DECEMBER 23, 2015 „bs‟