S.M. Kanniappa Nadar Vs. K.K. Karuppiah Nadar - Court Judgment

S. Ramachandra Iyer, C.J.

1. The suit out of which this Second Appeal arises was instituted by the appellant for the dissolution of a partnership known as Sarada Match Works at Ramalingapuram in Ramanathapuram District, for taking of accounts and payment of what is found due to him by the respondent; alternatively to direct the latter to pay the former a sum of Rs. 7,630-11-O' with subsequent interest. The facts which give rise to the claim are these :--The respondent who had obtained a licence under the provisions of the Central Excise and Salt Act, 1944, was carrying on business in the manufacture and sale of safety matches under the name of Sarada Match Works, Ramalingapuram. On nth July, 1955, the respondent admitted the appellant as a partner in the business which both agreed to run for a minimum period of six years. The agreement which was reduced to writing on 16th July, 1955, expressly stipulated that the partners were to obtain an amendment of the existing licence in favour of one of them in their joint names and that the appellant should contribute capital in a sum of Rs 10,000. The terms of the agreement relevant to the present controversy are contained in Clauses (2) and (3) thereto. It will be useful to set them out here verbatim:

(2) The party of the first part (respondent) herein mentioned being possessed of a licence to carry on the business of manufacture of matches and is the owner of the building and other appurtenances thereto, agrees hereby to utilise the licence for the purpose of the business of the partnership.

(3) The party of the second part shall also be entitled to become a joint licensee for the purpose of of the Central Excise and Salt Act, 1944 and the party of the first part herein mentioned shall do all that is necessary to enable the party of the second part to become a joint licensee.

It is apparent from the above that the parties intended to carry on the business after getting the licence suitably amended in accordance with the Central Excise and Salt Act, 1944.

2. The firm was duly registered under the Indian Partnership Act. The appellant claims to have advanced on various dates a sum of Rs 10,000 to the respondent in pursuance of the articles of the partnership. It also appears that the appellant and his son were put in charge of a section of the business at a place called Ellaipampannai. By the rules framed under the Central Excise Act, a licensee who admits a partner in his business should intimate the fact to the licensing authority within thirty days thereof; the respondent who took upon himself that obligation, failed to do so. The business continued as before till the parties fell out in December, 1955, when the respondent is said to have expelled the appellant from the business The latter, therefore, instituted the suit out of which this appeal arises for the reliefs aforesaid. In a very verbose and unintelligible written statement, the respondent denied the appellant's claim. The principal points for determination in the case were two, namely:

(1) Whether the suit partnership was illegal in that it contravened the provisions of the Central Excise and Salt Act, 1944.

(2) Whether even if the partnership was illegal, the appellant would be entitled to the alternative relief for restitution of the moneys paid by him to the business.

3. Both the Courts below accepted the defence that the contract of partnership which enabled the appellant to join the business without an appropriate licence-was prohibited by the statute and, therefore, illegal. They also negatived the appellant's prayer for the alternative relief on the ground that it was a mere equitable claim which did not deserve to be granted in the light of the circumstance that the appellant was put in charge of the business for sometime.

4. Before the lower appellate Court the appellant based his claim for accounts in two ways :--(1) that the partnership was not illegal, in that one of the parties had a licence and business could be done under it. (2) Further as under that rule the parties had thirty days time to intimate the authorities about the formation of the partnership, the firm should be considered to be legally constituted for that period of thirty days.

5. The second of the two contentions cannot be sustained, for the obvious reason that no contract between the parties to have a partnership for thirty days existed and indeed there could be none as what the agreement envisaged was the carrying on of the business by the firm only on obtaining a joint licence. If the licence was not obtained the contract itself would fail on account of impossibility of performance or the non-fulfilment of the basic condition thereof. The learned District Judge rejected both the contentions on the authority of the decision of Rajagopala Aiyangar J., in Govindaraja v. Kandasami Goundan : (1956)2MLJ578 . That was also a case coming under the Central Excise and Salt Act, 1944, the partnership concerned in it being in regard to the vending of tobacco to which the same rules of prohibition by an unlicensed vendor apply. Rajagopala Aiyangar, J., (as he then was) held that the rule recognised in cases under the Abkari Act by the decision of the Full Bench in Velu v. Sivasooriam (1950) 1 M.L.J. 315 : I.L.R. (1950) Mad. 987 , as to the illegality of contracts envisaging or enabling the contravention of what was prohibited by law, would equally apply to cases under the Central Excise and Salt Act, 1944.

6. This appeal originally came up before a Bench consisting of two among us (The Chief Justice and Srinivasan, J.). The learned Advocate-General appearing on behalf of the appellant pressed for a reconsideration of the decision in Velu v. Sivasoorium (1950) 1 M.L.J. 315 : I.L.R. (1950) Mad. 987 , and also contended that the decision of Rajagopala Aiyanger, J., in Govinda Raja v. Kandasami Goundan : (1956)2MLJ578 , was incorrect. As we felt persuaded that the latter decision did require further examination, the present Full Bench was constituted to hear the appeal. Section 6 of the Central Excise and Salt Act provides that no person shall, except under the authority and in accordance with the terms and conditions of the licence granted under the Act, engage himself in production or manufacture of any of the goods specified in the First Schedule to the enactment. Manufacture of safety matches comes under that category. Under the rule-making powers of the Central Government conferred by Section 37 of the Act, rules have been framed in regard to licensing, etc. Rule 178 (4) states:

If the holder of a licence enters into partnership in regard to the business covered by the licence he shall report the fact to the licensing authority within thirty days of his entering into such partnership and shall get his licence suitably amended. Where a partnership is entered into, the partner as well as the original holder of the licence shall be bound by the conditions of that licence.

7. It is contended on behalf of the appellant that the rule which only imposes a condition as to intimating the fact of. entering into a partnership agreement by the licensee, cannot be said to prohibit the partnership so as to make it ab initio illegal. This contention was specifically rejected in Govindaraja v. Kandaswami Gounder : (1956)2MLJ578 . The learned Judge's attention does not appear to have been drawn to the decision of the Privy Council in Govardhan Doss Kesowji v. Chapsey Dossa A.I.R. 1921 P.C. 137, where a licensee under the Bombay Salt Act admitting partners in his business but manufacturing salt himself was held not to have contravened the licensing provisions of the Act. Nor did the learned Judge consider the earlier decision of a Bench of this Court reported in Kalyanasundarm v. Chockalingam Chettiar : AIR1952Mad293 , where a question arose as to the Validity of a sale (i.e., a transfer) of the lease-hold interest of the judgment-debtor in certain salt pans, (manufacture of salt being regulated by the Central Excise and Salt Act, 1944). It was there held that the sale could not be held to be ab initio void as being opposed to public policy nor prohibited by the Central Excise and Salt Act, 1944, although the purchaser had no licence under the Act. In three recent cases, namely, Bhushayya v. Chinnappa Reddi : AIR1960AP39 ; C.S. & Co. v. Lal & Co. : AIR1960AP444 , and Venkatadri v. Govindaraju (1960) 2 An.W.R. 151, the Andhra High Court did not accept the view which commended itself to Rajagopala Aiyangar, J. in Govindaraja v. Kandaswami : (1956)2MLJ578 . The learned Advocate-General while opening his case submitted that a contract could not be held to be necessarily illegal because it might be carried out unlawfully and that so long as the parties could carry out lawfully without infringing in any manner the provisions of a statute, e.g., by allowing the licensee alone to sell the articles in accordance with the statute and allowing the partners who had no license to partcipate only in the benefits of the business, there would be no contravention of the prohibitory provisions of the statute and the agreement would be valid. He invited our attention to a number of cases to establish that the principle recognised in Velu v. Sivasooriam (1950) 1 M.L.J. 315 : I.L.R. (1950) Mad. 987 required modification. It was also contended that that decision would not apply to cases arising under the Central Excise and Salt Act, 1944. But this point was not pursued by the learned Advocate-General as he later conceded that it would be sufficient if the alternative relief claimed in the plaint were granted to the appellant. It has, therefore, become unnecessary for us to consider now, either the correctness of Velu v. Sivasooriam (1950) 1 M.L.J. 315 : I.L.R. (1950) Mad. 987 or Govindraja v. Kandasami Gounder : (1956)2MLJ578 .

8. The claim of the appellant for restitution depends for its basis that the contract was lawful in origin but became impossible of performance by subsequent events : in that case it is contended that the appellant would be entitled to be placed back (subject to all equities) in the position he occupied before the contract.

9. The parties in the present case never intended to trade without a joint licence. They contemplated obtaining a licence in the manner provided under the law.

10. It can be taken as settled law that if a contract is forbidden by a statute either expressly or by necessary implication or the contract itself is ex facie illegal or where the contract though legal can be performed only illegally or was intended to be so performed, neither party would be entitled either directly, or indirectly to enforce his rights under such a contract. The question then is whether the parties in the present case intended to do anything which was prohibited by law or was in contravention of the provisions of the Central Excise and Salt Act of 1944 by entering into a partnership for the sale and manufacture of safety matches. Entering into partnership by a licensee cannot be held to be per se illegal. Rule 178 of the Rules framed under the Central Excise and Salt Act impliedly recognises that when it states that a licensee on entering into such partnership, shall report the fact to the licensing authority within thirty days of his entering thereto. It assumes that a partnership can be entered into even before the licence is amended under Rule 178 (4). In the instant case it was the respondent who under the terms of the contract and under Rule 178 was to apply for an appropriate amendment of the licence : and he failed to do so. He, therefore, committed a breach of the terms of the agreement which disabled further performance. He will normally be under a duty to restore the benefits received under the contract which had been put an end to.

11. As the respondent was unrepresented before us we requested Mr. P.S. Sri-sailam, an advocate of this Court to assist us amicus curiae. Mr. Srisailam contended that on a true construction of the agreement of partnership it must be held that the parties contemplated the doing of the business without a licence and that such a construction was reinforced by the fact that the appellant and his son were actually put in charge of the business from the date of the agreement, even before there was an application for a licence. It was, therefore, argued that the parties did intend to break the law, namely, that of enabling the appellant to manufacture and trade in matches without getting or amending the licence in favour of the partners and that, therefore, the contract was illegal.

12. We are, however, unable to agree with this contention. A reading of paragraphs 2 and 3 of the agreement which we have extracted above clearly shows that the parties intended to do the business only in a proper manner after obtaining the licence from the appropriate authority in favour of the partnership. Paragraph 3 of the agreement specifically obliges the respondent to do all that is necessary to enable the appellant to become the joint holder of the licence. It cannot be denied that the running of the business in the manufacture and sale of safety matches after obtaining a licence under the Central Excise and Salt Act, 1944, would be perfectly lawful. Even if Clause (3) of the agreement were not a part of the agreement, the Court will, as the learned Advocate-General contended, presume that the parties to the contract intended to do the business lawfully. That the licence was not subsequently obtained cannot necessarily mean that the original object was illegal; but that only showed that the contract as contemplated did not come into existence. It is not disputed that it would have been possible for the appellant to have taken appropriate steps to compel the respondent to apply for the amendment of the licence. He did not, however, do so. He took advantage of the result brought about by the default of the respondent and has in his alternative prayer sued for the return of the monies advanced by him. In effect he bases his claim as one for restitution on the contract having become impossible of performance or on his exercising his right of rescinding the contract by reason of the breach, committed by respondent before the conclusion of the contract.

13. In Murlidar Chatterjee v. International Film Co., Ltd. (1943) 2 M.L.J. 369 : L.R. 70 IndAp 35 : (1943) I.L.R. 2 Cal. 213 (P.C.), Sir George Rankin in delivering the judgment of the Privy Council analysed the various provisions of the Indian Contract Act and held that money received by a party to a contract in part discharge of the consideration due or to become due, though applied for defraying the expenses of carrying out his part of the contract and spent for that purpose was nevertheless a benefit or advantage had by him, liable to be restored under Section 64, on his recission of the contract by reason of a breach thereof. It would follow that where an agreement of partnership like the present one has either become impossible of performance by reason of the fact that no joint licence had been obtained in favour of both the partners or by reason of the rescission by one party or the other to the contract, the party in the position of the appellant will be entitled to restitution of the moneys paid by him towards the contract.

14. Both the Courts below have rejected the claim of the appellant in respect of his alternative claim on the ground that it was a mere equitable relief which in the circumstances could not be granted. We are unable to appreciate how a relief to which a party is entitled to under the law, could be denied to him by merely calling it an equitable relief. The question then will arise as to what exactly is the amount which the appellant would be entitled to recover from the respondent. The learned trial Judge has stated that the appellant had admitted in his evidence that he did not give any amount to the defendant. This, however, is not very clear. It may be that the appellant might not have given any sum of money actually into the hands of the respondent. He might have put it into the business of the respondent. There is no finding on this aspect of the case by any of the two Courts below.' Issue 3 in the suit covers that question. But that issue has not been properly determined. While we reject therefore the case of the appellant for dissolution of the partnership and for accounts (the relief in respect of which not having been pressed before us) we are of opinion that the decree of the Courts below in so far as they dismissed the appellant's claim for the alternative relief must be set aside. We direct the trial Court to rehear the issue after allowing an opportunity to both the parties to let in such evidence as they may have and dispose of the suit in the light of the observations made above. There will be no order as to costs in this Court or in the lower appellate Court. Costs of the suit will be provided for by the trial Court in the revised decree after disposing of the alternative prayer of the appellant.

15. Before parting with this case we must express our thanks to Mr. Srisailam who acted as amicus curiae and stated what all could possibly be said on behalf of the respondent.