358

SALIGRAM RUPLAL KHANNA & ANR

v.

KANWAR RAJNATH

May, I, 1974

[H. R.

KHANNA, M. H. BEG, AND Y. V.

CHANDRACHUD, JJ.j

A

Indian Partnership Act. ss. 42 and 47-Scope of-Dissolution of a finn B

constituted for a fixed

term-Mutual

rights and obligations of partners after

dissolution suit for rendition of aCC'o1111f's-Lin1!tation.

A partnership consisting of the appellants and the respondent had entered

into a lease agreement· with the Custodian of Evacuee Property in respect of

a mill and took possession of the mill on 31st August, 1952. The period of

partnership was for 5 years being tne period of the said lease. The partners

having failed to pay one instalment of rent the Custodian served on the C

partners a show cause notice on 12-2-54 why thi; lease should not be terminat-

ed. On account of certain financial difficulties the parties entered into · a

second agreement on February

24,

1954.

Disputes having arisen between appellants and the respondent, the appellants

filed a suit on De~ember 20. 1960 alleging lhat after the termination of' the

lease by the Custodian on May 25, 1954 the two appellants and the respon­

dent had orally agreed not to dissolve the partnership in spite of the termina-

tion

of the lease and prayed for a declaration that the partnership between D

them and the respondent

, was still subsisting on the tern1s and conditions set

out in the partnership deed dated 24th February, 1954. They also prayed

for rendition of the partnership accounts. The respondent on. the other hand

alleged that there was no oral agreement between the parties and that the

claim for rendition ·of accountS was barred by limitation.

The trial court held that the appellants had failed to prove that there

was an oral agreement between the parties and that the

clai.m for rendition

of accounts was barred by limitation. E

On appeal the High Court upheld the findings of the trial court.

Dismissing the appeal,

HELD :-( 1) No inference of' implied agreement can be drawn from the

rnaterial on record.

[371 E]

According to section 42 of the Indian Partnership Act. subject to a con­

tract between the partners a firm

is dissolved if constituted for a fixed term

by the expiry of that term. This provision makes it clear that unless some

contract between the partners

to the contrary is proved, the

firm, if constituted

for a

fixed te.rm

\VOu\J be dissolved by the expiry of that tern1. [371G-Ji]

In the instant case

it was indicated in the

agreement of partnership· that

the period of partnership had been fixed at

5 years

bei.:ause that was the

period of the lease of the mills and the lease

was _terminated on

bi1ay 25, J 954.

[372B-C]

According to s. 47 of the Tndian Partnership Act after the dissolution

of the firm the authority of each partner

to. bind the firm and the other mutual

rights

and obligations of the pa1tr.·~rs continue notwithstanding the dis·solution

so far as may be necessary to win.d up the affairs of the firm and to com­

plete transactions begun but unfinished. at the time of dissolution but not

otherwise. The· word 'transaction' in section 47 refers not merely to a com­

mercial transaction

of purchase and sale but would include also all other

matters relating

to the affairs of the partnership. The completion of a tran­

saction would cover also the taking of necessary

steps in connection with the

adjudicati'on of a dispute t~ whic? the firm before. its dis~olution was a party.

In the instant case after dissolution. the partnership subsisted merely for the

purpose of completing pending transactions, winding up the business and

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s. R. KHANNA v. RAJNATH (Khanna, J.) 359

adjusting the rights of partners anQ for these purposes and. these only the

authority, rights <ind obligations of the partners continued. [374B·D, F-G]

(3) The suit i'or rendition of accounts brought by the appellants on De­

cember 20, 1960 was barred by limitation. In the absence of a contract to

the contrary there could be no survival. of the firm after August 30, 1957

when the period

of partnership expired. [373D-F]

CIVIL

APPELLATE JURISDICTION : Civil Appeal No. 143 of 1969 .

(Appeal by Special Leave from the Judgment & Decree dated

the 22nd March, 1968 of the Bombay High Court in Civil Appeal

'.'Jo. 23 of 1963).

S. T. Desai, K. L. Hathi and P. C. Kapur for the appellants.

K. S. Cooper, A. B. Diwan, Vasant Kotwal and I. N. Shroff for

the respondent.

The Judgment of the Court was delivered by

KHANNA, J.-This appeal by special leave is

d[rected against the

judgment of a Division Bench of the Bombay High Court affirming

on appeal the decision of the learned single Judge whereby a suit for

dissolution of partnership and rendition

of accounts filed by the two

piaintiff-appellants,

Saligram Ruplal Khanna and Pessumal \Atalrai

Shahani, against Kanwar Rajnath defendant-respondent was dismissed.

The partnership which was sought to be dissolved carried on business

under the name and style of "Shri Ambernath Mills Corporation"

(hereinafter referred to as SAMCO). The property which according

to the appellants belonged to the partnership co1isistcd of three mills

at Ambernath. One of them was a woollen mill, the other was a

silk mill and the third was an oil and leather cloth factory with land,

bungalows and chawls attached thereto.

In addition to that, there

was a bobbin factory at Taradeo with offices at Bombay, Ahmedabad

and other places. For the sake of convenience the above property

may be described,

as it was done in the High Court, as

"Ambernath

Mills". Although the case involves a tangled skein of facts, the points

which survive for determination

in appeal are rather simple.

The Ambernath

Mills originally belonged to a company called

Ahmed Abdul Karim Bros. Private

Ltd. The

mills were declared

to be evacuee property in September 1951 and the Custodian took

over the management of the mills

in pursuance of the provisions of

the Administration of Evacuee Property Act, 1950.

It was then

decided that the mills should be managed by displaced persons who

had been industrialists in Pakistan. A private limited company was

formed of

31 persons for taking over the management of the mills.

Rs.

25,000 were contribnted by each one of those persons in that

connection. The appellants and the respondent too were members of

the company. Appellant No.

1 and the resoondent had migrated at

the time of oartition from Gujarat in West Punjab. The respondent

was a big industrialist and left behind extensive properties in Pakistan.

He

~eld verified claim of rupees 23 lakhs in lieu of property left bv

him in . West Pakistan. The first appellant had a verified claim of

5-L177SupCl/75

360

~UPREME COURT REPORTS [1975] l s.c.R.

Rs. 22,000 in respect of residential property left in Pakistan. In

addition to that he had a disputed claim in respect of industrial pro­

perties. The ;econd appellant had a verified claim of about

Rs. 80,000. The two appellants and the respondent were associated

by the Custodian with the management of the Ambemath Mills. By

August 1952 all the members of the private limited company dropped

out. It was accordin,gly decided by the Custodian to grant a lease

of the Ambernath

Mills to the respondent and the two appellants.

On

August 30, 1952 two documents were executed. One of the docu­

ments

was an agreement of partnership between the two appellants

and the respondent for carrying on the business

of

A01bernath Mills

under the lease in the name and style of Shri Ambernath Mills Cor­

poration. The other document

was the agreement of lease executed

by the Custodian of Evacuee

Property as lessor and the appellants and

the respondent carrying on business in partnership under the name

and style

of

SAMCO as lessees. The subject-matter of the lease was

Ambernath Mills. It was stated in the lease that the lessees had

appointed the respondent

as their chief representative with fnll powers

of control, management and administration of the entire demised pre­

mises. The lease

was to be for a period of five years to be computed

from the date

on which the possession of the demised premises was

handed over to the lessees, subject to sooner determination thereof

on any of the contingencies provided in clause

21 or on the breach

of any condition on the part of the lessees or in the event of any

dispnte among the lessees resnlting in the closure

of the mills. It was

also provided that the lessees would purchase and the lessor wonld

sell to the lessees at an agreed

pdce the stocks of raw materials, un­

sold finished goods, consumer's stores, spare parts, cars and trucks

and other movables which had alreadv been vested in the lessor,

as

well as three diesel generating sets purchased by the lessor. In the

event of any difference

on the question of the price, the same was to

be fixed through one or more experts. The sale was to be completed

within a period of three months from the date of the agreement. The

lessees were authorised to take

as partner one or more clisplaced per­

sons who had

filed claims under the Displaced

Persons Qaims Act,

1950 subject to the prior approval of the Government. The agree­

ment also contained a provision for reference of any dispute arising

out of the agreement of lease to arbitrators chosen by the parties by

m'utual consent. The annual rent payable by the lessees was fixed

at Rs. 6,00,000 payable in four quarterly instalments of Rs. 1,50.000

each on or before 30th day of each quarter. The lessees also under­

took to deposit or fnrnish bank guarantee in the sum of Rs. 7.00,000

as security for the payment of the value of raw material, unsold finish­

ed goods, stores. spare parts and other articles. Clauses 17 to 21 of

the agreement of lease read as under :

"17. It is agreed between the Lessor and the Lessees

that when the entire claims of the lessees

filed by them under

the Displaced

Persons Oaims Act, 1950, for all their pro­

perties are determined and the compensation payable to them

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s. R. KHANNA v. RAJNATH (Khanna, J.) 361

by the Government of India is ascertained, the market value

of the entire demised premises shall be determined by an

expert appointed

in that behalf by the Government of India,

Ministry

of Rehabilitation, and such value as is

determine<j

shall be taken as price for acquisition by th·3 lessees ot the

full proprietary interest in the demised premises in the man­

ner shown in the next succeeding paragraph.

18. The Lessees, being all displaced persons from

Pakistan

and having left large properties in Pakistan, have all

of them put in claims in

resp3ct of their properties and other

assets left by them in Pakistan under the Displaced Persons

Claims Act, 1950. When the claims under the said Act of the

Lessees are verified and determined and compensation pay­

able in respect thereof has been ascertained the compensa­

tion payable to the Lessees shall be taken into consideration,

and it has been agreed as a term of this Agreement between

the parties hereto with

the concurrence of Govt. of India,

Ministry of Rehabilitation, that on such total compensation

being arrived at the Lessees shall be allotted proprietary

rights in the demised premises, in the manner shown

viz., in

case the value of the aggregate compensation payable

tq the

Lessees

is equivalent to the value of the demised premises

as assessed, the Lessor shall convey the demised premises

absolutely to them

as full proprietors thereof, their interest in

the demised premises being in proportion

to the compensatim

payable to each of the Lessees and the respective shares in

the proprietary interest shall be adjusted according to the

amount

of compensation payable to each as finally deter­

mined.

19.

In case the aggregate amount

cff compensation pay­

able by the Government

of India to the Lessees exceeds the

F value of the demised premises as determined, the demised

premises

will be conveyed to the Lessees, their share inter

se being in the proportion of the amount of compensation

payable to each.

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20. It is further agreed that in case the aggregate amount

of compensation payable to the Lessees falls short of the

value fixed for the demised premises, the Lessor shall be

entitled to associate with the Lessees in the ownership of the

proprietarv interest

lei be allotted as aforesaid other displaced

persons who have left industrial concerns in

Pakistan, so that

the total compensation payable to the Lessees and the others

thus associated

is equivalent to the total value of the demised

premises and the said demised premises shall then become

the absolute prciperty of

the Lessees and others thus asso­

ciated in proportion to

the total compensation payable to

each

as finally determined.

362

SUPREME COURT (EPORTS [1975] ! S.C.R.

21. The lease to be granted pursuance hereto shall be

liable

to determination earlier on the settlement of the claims

of the Lessees and the

allc~ment and transfer of the full pro­

prietary interest in the demised premises

as provided in

clauses

17 to

20 hereof; provided that if the value of the full

proprietary interest in the demised premises exceeds the

amount of compensation payable to the Lessees and part of

such proprietary interest

is allotted to

c~her persons as pro·

vided in clause 20 hereof, the Lessees shall be at liberty to

continue the lease for the unexpired residue of the term on

the terms and conditions and yearly rent prescribed here­

under, the yearly rent being adjusted proportionately to the

extent of the prc1prietary interest allotted and transferred to

the Lessees."

According to the partnership agreement executed by the two appellants

and the respondent on August 30, 1952, each partner had agreed to

contribute a capital of Rs. 1,00,000. The amount of Rs. 25,000 al­

ready paid by each partner to the Custodian

was regarded as part

payment

of the capital of rupees one lakh. Each partner had one­

third share in the partnership, but it

was provided that the shares

would he adjusted by

tile respondent if fresh partners were taken in

the partnership. The respondent

was to be the managing partner and

was entitled to assign work in the partnership to the

two appellants.

It was agreed that the appellants were not to interfere directly or in­

directly in

any manner with the management and

contrd of the busi-

ness

by the respondent. The respondent was also authorized

tu form

a limited liability company

for running the business of the partnership

with the consent of the Custodian and the appellants agreed to join the

company

as

sharehclders on such terms and conditions as might be

agreed when such company was formed. The period of the partnership

was

five years

"being the period of said lease".

The partnership took possession of Ambernath Mills on August 31,

1952. The respondent directed the first appellant to be incharge of

the administraticirr of the mills at Ambernath, while the second appel­

lant, being an engineer, was placed incharge of the properties, machi­

nery and stores of the mills. The respondent was in overall charge of

the concerned.

It appears that the partnership made

SClffie progress in the first few

months. The stocks of raw material, finished goods, stores and ctther

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movables which were deemed to have been purchased by SAMCO G

under the terms of the agreement of lease were in the meantime valued

by an auditor appointed

by the Custodian at rupees 3() lakhs. The

Custodian called upon the partnership in April 1953 to pay a sum

cf

rupees 7 lakhs or to furnish a bank guarantee for the said amount as

provided in the agreement of lease. This payment could not be made by

the partnership. There was also difficulty in paying the sixth instal­

ment of the rent. A cheque for Rs. 1,50,000 was issued but the same H

was cjishonourcd. Subsequently, arrangements were made tci pay

Rs. 1,00,000. An amount of Rs. 50,000 out of the sixth instalment

remained unpaid.

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s. R. KHANNA v. RAJNATH (Khanna, ].) 363

On February 12, 1954 the Custodian served a notice on the res·

pendent and the two appellants to show cause why the agreement of

lease should not be cancelled cin account of breach of conditions in

the matter of the payment of the sixth quarterly instalment of rent and

the failure to deposit or furnish bank guarantee for the amount of

Rs. 7,00,000. A writ petition was thereupon filed by the partnership

on February 16, 1954 in the Bombay High Court fc~ quashing the

notice issued

by the Custodian ..

In the meantime, the second appellant sent letter dated February

8, 1954 to the respondent suggesting that his share in the partnership

be reduced to 1

'}nna in a rupee or to such other fraction as the res"

pendent thought fit. A similar letter was addressed by the first appel­

lant. On February 24, 1954 the parties entered into a secqnd agree­

ment of partnership. It was agreed in the new partnership agreement

that the share

of the first appellant would be 3 annas and that of. the

second appellant 1 anna in a rupee. The respondent was to have the

remaining

12 annas share. It was also agreed that the two appellants

would not have the right, title and interest in the name, capital, assets

and

goodwill of the partnership. It was provided that the new

part­

nership wc!llld be deemed to have been· formed as from October . 1 ,

1953. Accounts for the period from August 30, 1952 to September

30, 1953 were to be made up on the basis of the partnership agceement

dated August 30, 1952 and the profits and losses for that period were

to be distributed accordingly. The capital of the partnership was

agreed to be arranged by the respcl!l.dent and he was to be the manag­

ing partner in control of the entire affairs of the partnership. He was

also to get interest at 6 per cent on all finances arranged by him. The

appellants agreed to carry on snch dntics in the concern

as might be

assigned to them

by the respondent. The period of the partnership

was to be

"the c111tstanding period of the lease".

The writ petition referred to above filed by the partnership to quash

the notice

of the Custodian was allowed by a single Judge of the

Bom­

bay High Court on March 31, 1954. On appeal filed by the Cus­

todian, a Division Bench of the High Cciurt as per judgment dated

April

13, 1954 set aside the order of the

sing!e Judge and dismisser!

the writ petition. Certificate of fitness for appeal to this Court was

granted by the High Court on May 5, 1954. Stay Nder was also

issued on that day restraining the Custodian

frcim dispossessing the

respondent and the appellants from Ambernath

Mills. Appeal against

the decision of the Division Bench of Bombay High Court

was then

filed in this Court. The Custodian of Evacuee Property made an order

on May 25, 1954 cancelling the agreement

c~ lease of Amberanth

Mills dated August 30, 1952. The possession of the mills was volun­

tarily delivered by the partnership to the Custodian on June 30

1954. ,

Representations

were made on behalf of

SAMCO to the Minister

of Rehabilitation during the later half of 1954 for being allciWed to

retam Ambernath

Mills. A communication was also addressed on D~cember 14, 1954 to the Minister of Rehabilitation suggesting, inter

aha, that the claim of the Custodian against the partnership in respect

364 SUPREME COURT REPORTS [1975] 1 s.c.R.

of arrears of rent and the value of raw material and c~her goods should

be referred to arbitration.

The Displaced Persons (Compensation and Rehabilitation) Act,

1954 came into force on October 9, 1954.

On March

10, 1955 the

Central Government issued notification under sectiqn

12 of that

Act

acquiring the Ambernath Mills. An advertisement was then issued by

the Central Government for the sale of Ambernath Mills. Tenders for

the purchase of the mills were required to be submitted by July

9,

1955.

On June 7, 1955 a representation was made by SAMCO that

in view of the· pendency of its appeal in the Supreme Court in respect

of the Custodian's notice for cancellation of the lease, the Ambernath

Mills should not be sold.

On July 7, 1955 the partnership submitted

a tender for the purchase of the mills in accordance with the

Govern­

ment advertisement. The offer was for an aggregate amount of

Rs. 55,55,555. On October 14, 1955 the partnership made another

ct1Ier to purchase the mills for an aggregate amount of Rs. 75,00,000

on terms and oonditions to be mutually agreed upon.· The offer of

October 14, 1955

was made after the last date for the receipt of

tenders. The appeal referred to above filed by the partnership in this

Court against the judgment of the Bqmbay

High

Court was dismissed

by this Court on November 10, 1955 vide reported case Rai Bahadur

Kanwar Raj Nath

&

Ors. v. Pramod C. Bhatt, Custodian of Evacuee

Property(').

This

Court held that the Custodian had the power of

cancelling the lease under section 12 of the Administraticlll of Evacuee

Property Act and that the notice issued by the Custodian was valid.

This Court, however, left open the question whether the partnership

had any right to purchase the mills under the agreement of lease.

Notice under section 80 of the Code of Civil Prcl:edure was issued

to the Custodian and the Central Gove~nment on No_vember 9, ~9.55

intimating the intention of the partnership to file a su~t for restrammg

the Custodian and the Central Government from sellmg Ambernath

Mills. The Central Government on

Decemb.er

30, 1955 informed the

partnership that its offer to purchase the mills for Rs. 55,55,555 was

rejected. The partnership thereafter withdrew its subsequent offer ~f

purchase of the mills for Rs. 75,00,000. On January 31, 1956 a smt

was filed on behalf of the partnership against the Custodian and the

Central Government few permanent injunction restraining them from

selling Ambernath Mills to any perso~ .other than the partners. The

said suit was dismissed by the City Cm! Cc1Urt Bombay on Octo~r. 8,

1956. An appeal was thereupon filed by SAMCO ~gamst the d~c~s~on

of the City Civil Court. This appeal too was dismissed by a Div1S1on

Bench of the Bombay High Cciurt as per. judgment dat~ January 14,

1957. This judgment

is reported as

Shri Ambernath Mills Co~pora­

tion v. G. B. Godbole, Custodian of Evacuee Property & Anr.(-) It

was held by the Division Bench that the agreement ~f purchase co~­

taining clauses 17 to 21 of the lease deed was indefimte and vague Ill

varicius particulars and that the agreement of sale was not capable of

--------

(1) [1955] 2 S.C.R. 977. (2) A.I.R. [1957] Born. 119.

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specific performance. The Division Bench further held that the Central

Government by 'irtue of notification dated March 10, 1955 acquired

. the

mills

free from ·ail encumbrances and that such right as SAMCO

might have had of sp::cific performance of agreement of sale was in

the nature of an encumbrance. The Central Government, according

to the Division· Bench, must be deemed tq have acquired the mills

free from that encumbrance. . No appeal was filed· against the abov~

decision of the Bombay High. Court ..

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.. The respondent, it would appear, started making efforts from the

middle of 1957 to get the Ambemath

Mills for himself .. He was' . in

Delhi

fotr several months from June 1957 onwards. On August 14, ·

1957 an agreement for sale of Ambemath Mills to the respondent was

executed by the respondent and the President. The price of the mills

was fixed at Rs. 50,11,000. Out of this amount, a sum of Rs. 2,00.000

was to be paid on the execution of the agreement as earnest money

·and in part payment of the purchase price. This amount cc;.ild be

paid either iii cash or by adjustment of net compensation payable to

tlie respondent

or to other displaced persons who might assign their

verified

c!aim in favour of the respcmdent A . further sum of

Rs. 28,00,000 was to be paid within three months from the date of

the agreement either

in cash or by adjustment of the net compensation

payable to displaced persons who assigned their verified

claims .in

favour of the respondent. The balance

ci. Rs; 20,11,000 was to be

paid

in seven equal instalments. It was provided that if the

respon­

dent failed to pay the amount of Rs. 28,00,000 within three months

from the date 'of agreement the earnest money of Rs. 2,00,000 paid by'

him was to be· forfeited. In addition to the above, the respondent

undertook to mortgage the mills for a sum not exceeding Rs,:~0,00,000

to secure the payment of such amount as SAMCO might· be found

liable to pay to the CuStodian in respect of the claim referred to arbi­

tration. On September 20, 1957 the first appellant executed an agree­

ment for the transfer of his compensation claim amountin,g to Rs. 6,994.

The amount was to

be repaid to the first appellant

··within three

years with interest at the rate of 6 per .cent per annum.

It

was stated

in the agreement that the respondent was contemplating to . foqn · a

joint stock company to own, run and manage the

mills. The

resporule!lt.

agreed that in the event of such a company being · fcaned the first

appellant would have the option

to purchase shares of the said company

to

the extent of 50 per cent of the amount of his

claim compensation.

On August 12, 1957 the dispute between the Custodian on one

side and the two appellants

and the respondent.on the other, which

had been referred earlier

in accordance with

the· arbitration clause in

the agreement

of lease to the

arbitration of other arbitrators, ·was

referred to the arbitration of :Mr. Morarji Desai. On November 13,

1957 the respondent and the Custodian agreed before ·the arbitrator

that the dues

of the Custodian

·against the partnership be settled at

Rs. 18,00,000. A consent award .awarding Rs. 18,00,000 in favour cf

the Custodian against the partnership was made by Mr. Morarji Desai

on .the fdlowing day, viz., November 14, 1957. The award was made

a rule of the court

ori May 1, 1958.

--.

366 SUPREME COURT REPORTS [1975] 1.s.c.R.

The respondent was unable to submit to the Central Government

compensatiqn claims to the extent of Rs. 30,00,000 within three months

of the agreement dated August 14, 1957.

By April 1959 he submitted

compensation claims to

tuc extent of Rs. 20,0U,000. A supplememal

agreement

was executed by the

respondont and tile !'rec.ide:ir on April

29, 1959.

In this agreement the President acknowledged the receipt

from the respondent of the sum

df Rs. 20,00",000 by way of adjust­

ment of compensation

c1a1ms. The respondent undertook to pay the

remaining amount of

Rs.

30,11,000 and Rs. 18,00,000 under the

award of Mr. Morarji Desai,

in all, Rs.

48,11,000. It was agreed that

the aforesaid amount would be paid by the respondent in seven annual

instalments. A second supplemental agreement

was executed by the

President and the respondent

on April 6,

1960, but we are not con­

cerned with that. On April 21, 1960 the grant of the Ambernatli

Mills was made

by the President

tel the respondent. The same day the

respondent executed in favour of the President a mort­

gage of the Ambernath Mills for the payment of Rs. 48,11,000. The

sum was payable in seven equal annual instalments. On April 22,

1960 the respondent took possessiqn of Ambernath Mills which had

been lying idle for nearly six years since June 30, 1954. On May 7,

1960 the respondent sent a circular letter to all displaced persons

whose compensation claim had been transferred to him informing them

that possession of the mills had been handed c1Ver to him by the Cent-

ral Government. They were also informed that statement of their

accounts was being prepared. One suc)l letter was sent to the first

appellant.

He

also received a statement of account and in September

1960 a cheque for Rs. 204 was sent to him by way of interest.

On October 7, 1960 the first appellant sent a letter tc1 the respon­

dent complaining that his property had been attached in execution of

a decree for Rs. 271.44 which had been obtained by a creditor against

SAMCO. In this letter the first appellant hinted that he was a partner

of the respondent. The respondent in response sent to the first appel-

lant a cheque for Rs. 271.44.

It is also stated that the respondent in­

formed the first appellant on telephone that he did not regard the

latter

as his partner. On December

20, 1960 the two appellants filed

the present suit.

· It was alleged in the plaint that after the termination of the agree­

ment of lease by the Custodian on

May 25, 1954 the two appellants

and the respondent assembled and orally agreed not

to dissolve the

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partnership in spite of the termination of the lease. The agreement G

between the parties was further stated to be that

"the partnership should

be continued for the purpose of acquiring on behalf and for the bene-

fit of the said partnership the properties Ex.

1 (Ambernath Mills)

hereto and to exploit the said

industries". The respondent was stated

to have made a representation that he

was acquiring the Ambernath

Mills on behalf

c~ the partnership and that the agreement had been

executed in the respondent's name because the Central Government H

desired to deal with only one individual. It was also stated that the

respondent had admitted utilisation of a sum of Rs. 2,00,000 out of

the partnership fund for payment of earnest money. The respcl!ldent

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s. R. KHANNA v. RAJNATH (Khanna, ].) 367

being a partner, according to the appellants, stood in a fiduciary charac­

ter

vis-a-vis the appellants and was bound to protect their interest. He

could not gain for himself pecuniary advantage by entering into

deal­

ings under circumstances in which. his interests were adverse to those

c& the appellants. The properties and profits acquired by the respon­

dent were stated to be for the benefit of the partnership

also. In the

plaint,

as it was initially filed, the appellants prayed for a declaration

that the partnership between them and the respondent

was still sub­

sisting on the terms and conditions set out in partnership deed dated

February 24, 1954 excepting the terms relating to the period of part­

nership. Prayer

was made for a declaration that the Ambernath Mills

belonged to the partnership and for rendition

of the partnership ac­

oounts.

By a subsequent amendment prayer was added that the part­

nership be dissolved from the date

of the filing of the suit.

The respondent in his written statement denied the alleged oral

agreement between the parties on or about May

25, 1954. According

to the respondent, the partnership stood dissolved

cin March 10, 1955

when the Central Government acquired the Ambernath Mills. Ac­

cording further to the respondent, the funds of the partnership were

utilized for the payment of various creditors of the partnership and

after those payments were made the partnership did not have sufficient

funds to pay to the remaining creditors. With regard to the negotia-·

tions for the acquisition of the mills, the respondent stated that the

first appellant

was aware that Ambernath Mills were being acquired by

the respondent for himself

alon·o. The respondent denied that he ever

told the first appellant that the amount of earnest money of Rs. 2,00,000

for the purchase of the Ambernath Mills had been paid out of funds

belonging to the partnership. Allegation

was also made by the

r~s­

pondent that the first appellant had requested that he might be given

some benefit in the nature of appointment or agency in the business

of Ambernath Mills. The claim c~ the appellant for rendition of the

accounts

was stated to be barred by limitation. In an affidavit filed on

January

11, 1961 the respondent stated that in case it was held that

there

was an oral agreement of partnership between the parties, the

same should be taken to have been dissolved.

Learned trial judge held that the appellants had failed to prove that

there

was an oral agreement between the parties on or abcfllt May 25,

1954.

It was further held

that' there was no agreement, express or

G implied, to form a partnership for acquiring the mills and for carrying

on the business thereon. The appellants were held not entitled tc1 have

the mills treated

as partnership assets by invoking principles enun­

ciated

in section 88 of the Indian Trusts Act, to which reference had

been made on behalf of the appellants. The learned judge also held

the appellants claim for

renditic1n of accounts to be barred by limita­

tion because in his view the partnership had stood dissolved on May

H 25, 1954 when the agreement

of lease was cancelled. Jn any case, 2ccordiM to the learned judge, the partnership must be deemed to have

been dissolved either on January 14, 1957 when the suit filed by the

two appellants and the respondent against the Custodian and the Cent-

368 SUPREME COURT REPORTS (1975] J S.C.R.

ral Government for permanent injunction was finally dismissed in appeal A

by a Division Bench

of the Bombay High

Court or on August 30 1957

when the period of the lease came to an end. '

In appeal before the Division Bench the following four contenticns

were advanced on behalf of the appellants :

"(I) that on 25th May 1954 the parties expressly agreed

to continue their partnership for acquiring the Mills and ex­

ploiting them, that a partnership at will thus came into exis­

tence between them, and that therefore the Mills acquired

by the defendant cir his agreement with the President of

India dated 14th August 1957 and the subsequent grant by

the President

of

India on 21st April 1960 must be held to

be

an asset of the said partnership;

(2) that if such

an express agreement is held not to have

been proved, an implied agreement to the same effect should

be inferred from the conduct of the parties and the corres­

pondence between them;

(3) that, even supposing that there

was no express

c~

·implied agreement as stated above, the rights acquired by the

defendant

as a result of his agreement with the President of

India dated 14th August 1957 and the subsequent

Presi­

dential grant are impressed with a trust in favour of the part­

nership under section 88 of the Indian Trusts Act; and

(

4) that, even if it is held that the Mills are no longer

an asset of the partnership, the plaintiffs are still entitled to

accounts of the partnership

which admittcdlv

existed between

them and the defendant for wc~king the Mills under Agree-

ment of lease dated 30th August 1952."

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The learned judges constituting the Division Bench repelled all the F

contentions advanced on behalf of the appellants and substantially

agreed with the findings of the trial

judge. On the question of the

limitation, the learned judges held that the partnershlp had been

dis­

solved at the latest on November 10, 1955 when all the attempts of

the partr.ers tc1 get the Custodian's order dated May 25, 1954 set aside

came to an end with the decision of the Supreme Court. The present

suit for rendition of accounts brought on December 20, 1960 more G

than three years after the date

of the dissolution of the partnership

was held to be barred by limitaticin. Tu the result the appeal was

dismissed.

Tu appeal before us Mr.

S.T. Desai on behalf of the appellants has

frankly conceded that he

is not in a position to challenge the concur-

rent

findings of the trial judge and the appellate bench that the appel-H

lants had failed to prove that on May 25, 1954 the parties had ex­

pressly agreed to continue the partnership for acquiring the mills and

exploiting them. Although Mr. Desai indicated at the commencement

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of the arguments that he would challenge the finding of the appellate

bench that the rights acquired

by the respcndent as per agreement

dated August

14, 1957 with the President and the subsequent

Presi­

dential grant are impressed with trust in favour of the partnership ·

under section 88 of the Indian Trusts Act, no arguments were ulti­

mately advanced by him on that score. Mr. Desai has, hcrwever,

challenged the finding of the trial judge and the appellate bench that

no implied agreement

as alleged by the appellants could be inferred

from the material on record. The main burden of the arguments

elf

Mr. Desai, however, has been that the appellants were entitled to the

accuunts of the partnership which admittedly existed between the

parties

as per partnership agreements dated August 30, 1952 and

February 24, 1954. According to

Mr. Desai, there had been nq

dis­

solution of the firm prior to the institution of the suit and the appe­

lants' suit for the rendition of accounts was not barred by limitation.

The High Court, it

is urged, was in errcir in holding to the contrary. The above contentions have been controverted by Mr. Cooper on be­

half of the respondent and, in our opinion, are not well-founded.

We may first deal with the questicin as to whether the implied agree­

ment as alleged by the appellants can be inferred from the material on

record. In this respect Mr. Desai has submitted that the appellants no

longer claim

any interest in the ownership of Ambernath Miils which

now vest in the respondent. 1t is, however, urged that an agreement

can

be inferred from the conduct of the parties that Ambernath Mills.

were to be run by the respondent in partnership with the appellants,

even though the crwnership of the same might vest in the respondent.

In this connection

we find that no case of such an implied agreement

was set

up in the trial court, either in the plaint or otherwise, nor was.

such a case set up iu appeal before the Division Bench. What was

actually contended was that the agreement was for acquiring the mills

as an asset of the partnership. The above stand of the appellants

cciuld plainly be not accepted when one keeps in view the· agreement of

lease dated August 30, 1952 as well as other documents on record.

The said agreement

of lease shows that Ambernath Mills wou

Id be­

come the absolute property not only of the appellants and the respon­

dent but of all persons whet were to be associated with the lessees in

the crNnership of the proprietary interest in proportion to the total

compensation payable to each

of them. The agreement of lease

further

contemplated that the lessee rights c~ the two appellants and the res­

pond~nt were to be distinct from the proprietary interest in the demised.

premises and that the lessees

were at liberty, in spite of the transfer

of proprietary interest, to continue the lease for the unexpired residue

of

the te~ on the terms and conditions of the lease and payment cd' .

rent prescnbed thereunder. The respondent submitted representation

on August 9, 1954 on behalf of SAMCO to the Custodian for the

restart of the mills and along with it the respondent sent ccipies of

letter of auth.on.ty ~~ ~articulars of veri~ed claims of 30 displaced

per~ons. It is 1mphc1t m the representat10n that in case Ambernath

Milis was transferred, the same would vest in all the 30 displaced

per,ons whose claims were submitted.

370 SUPREME COURT REPORTS [1975] l s.c.R.

There are two documents which run counter to the stand taken on

behalf of the appellants in this Court that there

was an implied argec­

ment that in case the respondent acquired the ownership of the mills,

the mills would

be. worked by the respondent in partnership with the

appellants.

One of those documents is agreement dated September 20,

1957 which was signed by the first appellant and the respondent a day

before the respondent executed bond in favour of th_at appellant in

view of the fact that the first appellant agreed to have

his claim com­

pensation amounting

to Rs. 6,994 adjusted towards the price of

Ambernath Mills.

It was stated in the agreement dated September

20,

1957 that the respondent was contemplating the formation of a joint

stock company

to own, ruh and manage the mills and it was agreed bttween the parties that in the event of such company being formed,

the first appellant would have the option to purchase shares of the

said company to the extent of 50 per cent of the amount of the adjusted

daim compensation. In case the option was exercised in favour of the

purchase of the shares of the company, the respondent

was to ensure

that the said shares would be allotted to the first appellant at par.

It

was further agreed that if the shares applied for or any proportion

thereof were not allotted to the first appellant by the said company, the

respondent would not in any

way be liable to the first appellant on

that account.

In the bond the respondent agreed to pay to the first

appellant interest at the rate of 6 per cent on the amount of compen­

sation from the date of the adjustment of the

first appellant's claim

compensation. Had the first appellant any interest in the Ambernath

Mills which were being acquired by the respondent, there could arise

no occasion for the execution of the agreement dated September 20,

1957 and the bond dated September 21, 1957. All that was agreed

by the respondent in those two documents

was that in case he pro­

moted a company for owning, running and managing of the Ambernath

Mills, the first appellant would get a share of the value of half of his

claim compensation of Rs. 6,994. The said amount when compared

to the price of Ambernath Mills

was wholly insignificant. No question

could arise for the respondent borrowing money from the first appel­

lant for payment of price of the mills in case the acquisition of the

mills

was for the benefit of the respondent as well as the appellant. It

may also be stated_ that the interest on account of the above compen­

sat10n was duly paid by the respondent to the first appellant.

Another document which has a bearing in the above context

is

letter dated December 18, 1959 which was addressed by the first appel­

lant to the Collector of Bombay in connection

with the recovery of

arrears of sales tax. The first apJ)ellant in that letter stated that the

responsibility for the payment of such arrears of sales tax

was that of

the respondent and the first appellant

was no more in picture. The

above letter shows that the first appellant repudiated his liability for

the payment of the sales tax by disclaiming his connection with the

business in question.

Our attention has been invited by Mr. Desai to the following

observations contained

in the judgment of the appellate bench :

"There is no dispute between the parties that the part­

ners met on 25th May 1954, after ·the Custodian's order

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s. R. KHANNA v. RAJNATH (Khanna, J.)

371

terminating the Agreement of Lease and decided that they

should try to have the Custodian's order set aside by pur~u­

ing the appeal in the Sul?r~me Court as w~~ a.s by makmg

representations to the

Mirustry of Rehab1htatton m the

Central Government.

It is also not disputed that either on

25th

May 1954 or soon thereafter the parties decided that

they should also try

to acquire the proprietary interests in

the Mills

by relying on clauses 17 to 21 of the Agreement

of Lease. What is disputed is whether it was agreed between

the parties that, after acquiring the

proprietary interest in the

Mills, the business of the Mills should be carried on in

partnership between the parties.

It is the defendant's case

that

the proprietary interest in the Mills was sought to be

acquired

by the partners for certain incidental advantages but

that it

was never intended that the Mills after acquisition

should be run in partnership under the terms agreed in the

partnership deed

of 24th February

1954."

The above.observations may have some bearing on the question of

the express agreement, but so far as such an agreement is concerned,

it has already been pointed out above that the concurrent findings of the

trial judge and the appellate bench have not been challenged before

us. No inference of implied agreement mentioned by the learned

counsel

for the appellants can be drawn from the above observations.

We are, therefore, of the view that no inference of the implied

agreement referred

to by Mr. Desai can be drawn from the material

on record.

So far as the question is concerned as to whether the claim for

rendition

of accounts was within time, we find that according to clause

16 of the partnership deed dated August

30, 1952 the period of

partnership

was fixed at five years, being the period of the lease.

Clause

17 of the deed of partnership dated February 24, 1954 pro­

vided that

the "period of partnership shall be the outstanding period of

such lease". The possession of Ambernath Mills under the agreement

of lease was delivered on August 31, 1952. The period of five years

of the lease was thus to expire on August 30, 1957. As the partner­

ship was for a fixed period, firm would in normal cour'e dissolve

on the expiry of the period of five years on August 30, 1957. No agree­

ment between the partners to keep the firm in existence after the ex­

piry of the fixed term of five years has been proved'. Accordin~ to sec­

tion 42 of the Indian Partnership Act, subject to contract bet;een the

partners a

firm is dissolved-

" (a) if constituted for a fixed term, by the expiry of that

term;

(b) if constituted to carry out one or more adventures or

undertakings

by the completion thereof;

( c)

by the death of a partner; and

!d) by the adjudication of a partner as an insolvent."

The

above provision makes it clear that unless some contract

between!

.3 72

SUPREME COURT REPORTS [ 197 5] 1 s.c.R.

the partners to the contrary is proved, the firm if constituted for a

fixed term would

be dissolved by the expiry of that term. If the firm

is constituted

to carry out one or more adventnres

()f undertakings, the

firm, subject

to a contract between the

partner~, would be dissolved

.by the completion of the adventures or undertakings. Clauses ( c) ~nd

( d) deal with dissolution of firm on death of a partner or his bemg

.adjudicated insolvent. '

It was indicated in the agreement of partnership that the period of

partnership had been fixed

at five years because that was the period .of the lease of Ambernath Mills. The lease, however, ran into rough

weather.

On February 12,

19~4 the Custodian served notice on the

respondent and the two appellants to show cause why the agreement

of lease should not be cancelled in accordance with the terms of that

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.agreement on account of the breach of conditions in the matter of pay-C

ment of instalment of rent and the failure of the respondent and the

.appellants to deposit

or furnish bank guarantee for the amount of

Rs.

7,00,000. The respondent and the appellants challenged the validity

of the above notice by means of a writ petition and, though they suc­

ceeded before a single judge, the appellate bench of the Bombay High

Court upheld the validity of the notice.

On May 25, 1954 the Custo-

dian cancelled the lease

of Ambernath Mills and on June

30, 1954 got D

possession of the mills. The respondent and the appellants assailed the

decision of the appellate bench of the Bombay High Court in this

Court, but this Court also took the view as

per judgment dated Novem-

ber

10, 1955 that there was no legal infirmity in the notice for the

termination

of the lease issued by the Custodian. After the above

judgment of this Court, whatever hope

or

expectation the partners of

SAMCO had of running Ambernath Mills on lease under the agree-E

men! of lease dated August 30, 1952 came to an end and were

extinguished.

In the meantime, as already stated earlier, the possession of

Ambernath Mills was handed over by the partners of

SAMCO to the

Custodian on June 30, 1954. On March 10, 1955 the Central Govern­

ment issued notification under section 12

of the Displaced Persons

(Compensation and Rehabilitation) Act, 1954 for acquiring the Mills.

The mills were then advertised for sale. The partners

of

SAM CO having

been thwarted for good in their efforts to get back the mills

on lease now

made an effort

to acquire the ownership of the mills in accordance

with clauses 17

to 21 of the agreement of lease. Snit was accordingly

brought by the respondent and the appellants for permanent injunc­

tion restraining the Central Government and the Custodian from selling

· the Ambernath Mills to any person other than the partners of SAMCO.

The suit was dismissed by the City Civil Court and the appeal filed by

the partners

of

SAMCO too was dismissed by a Division Bench of the

Bombay High Court

on January 14, 1957. The Division Bench held

that the agreement of purchase contained in clauses 17 to 21 of the

agreement of lease was indefinite and vague and such agreement

of

sale was not capable of specific performance. It was further held that

in view of notification dated March

10, 1955 the Central Government

acquired the mills frt;e from an encumbrances. The rights of the part­

ners of SAMCO which were m the nature of an encumbrance were

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S, R. KHANNA v. RAJNATH (Khanna, J.) 373

held to be no longer enforceable. No appeal was filed against t~e

above decision of the Bombay High Court. As such, the aforesaid

judgment becaine final. Any expectation which the partners of SAMCO

could have of acquiring the ownership of Ambernath Mills under

clauses

17 to 21 of the agreement of lease was also thus dashed to the

ground.

View was expressed by the learned trial

judge that the firm of

SAMCO stood dissolved on May 25, 1954 when the lease was cancel­

led. Another date cf dissolution, according to the learned judge, could

be January 14, 1957 when the suit filed by the partners of that firm

against the Custodian and the Central Government for permanent

injunction

was finally dismissed by the High Court. The appellate

bench expressed the

view that the firm of

SAMCO stood dissolved on

November 10, 1955 when the Supreme Court dismissed the appeal

regarding the validity of notice.

It is, in our opinion, not necessary to

dilate upon this aspect

of the matter because in any case there can

be

no manner of doubt that the firm of SAMCO got dissolved and was

not subsisting after August 30, 19_?7 which was the date on which the

period of

five years for which the partnership

l.!_ad been formed came

to an end. The question as to whether the firm got dissolved earlier

than August 30, 1957

is purely academic and is not of much

signi­

ficance, because in any event in the absence of a contract to the

contrary there could be no survival of the firm after August 30, 1957

when the period of partnership expired. Calculating the period of

limitation even from that date, the suit for rendition of accounts brought

by the appellants on December 20, 1960 was barred by limitation. It

is not disputed that the period of limitation for such a suit is three

years from the date of dissolution.

Mr. Desai has referred to letter dated November 17, 1955 addres­

sed by the respondent on behalf of SAMCO to the National Bank of

India Bombay requesting for the despatch of thrne bales of wool tops

to Ludhiana. In this letter an assurance

was held to the Bank of cordial

relations for the future expected business. Reference has also been

made by

Mr. Desai to the statement of the respondent in

cross-exaini­

~ation that. up to ~e end of ~cember 1956 the firm was actively

interested m acqmrmg the mills. The above letter and statement in

our opinion, would not militate against the inference that the firm st~od

subsequently dissolved on August 30, 1957. As already mentioned

above, no agreement to keep the firm in existence after the expiry of

the fixed period of partnership has been proved on the record.

Reference has also bem made on behalf of the appellants to the

consent given by the respondent on behalf of SAMCO on November

13, 1957 to the awai:d of ~· 18,00,000 by Mr. Morarji Desai in

favour of the Custodian agamst SAMCO. It is urged that this docu­

ment would go to show that the firm of SAMCO had not been . dis­

s.olv~d before that date. We are unable to agree. The arbitration pro­

ceedmgs h~d b~en started .as a result of application under section 20

of.the Arb1trat10n Act filed. on April 21, 1955 when SAMCO was in

existence and was a running concern. The arbitration proceedings

rel.ated to a claim of the Custodian of Rs. 30,00,000 on account of the

pnce of stocks of raw material, stores and other movables

as well as

374 SUPREME COURT REPORTS [1975] I s.c.R.

about the arrears of rent. Counter-claim had also been made by SAMCO

against the Custodian for a sum of Rs. 17 ,67 ,080 as per written state­

ment dated December 18, 1956 filed in arbitration proceedings. The

consent which

was given by the respondent on November 13, 1957

was with a

view to get the dispute between

SAMCO with the Cu'todian

finally settled. This was a necessary step for the purpose of winding up

the affairs of SAMCO and to comylete transaction of arbitration pro­

ceedings which had been begun but ~mained unfinished at the time

of dissolution. According to section 4 7 of the Indian Partnership Act,

after the dissolution of a firm the authority of each partner to bind

the firm, and the other mn!t1al rights and obligations of the partners,

continue notwithstanding the dissolution, so far as may be necessary

to wind np the affairs of the

firm and to complete transactions begun

but unfinished at the time of the dissolution, but not otherwise. The

word

"transaction" in section 4 7 refers not merely to commercial trans­

action of purchase and sale but would include also all other matters

relating to the affairs of the partnership. The completion of a transac­

tion would cover also the taking of necessary steps in connection with

the adjudication of a dispute to which a

firm before its dissolution is

a party. The legal position in this respect has been stated on page 251

of Lindley on Partnership (Thirteenth Edition) as under :

"Notwithstanding a dissolution each partner can pay,

or receive payment of, a partnership debt; for it is clearly

settled that payment by one of several joint debtors, or to

one of several joint creditors, extinguishes the debt irrespec­

tive of any question of partnership. So, again, it has been

held that a continuing or snrviying partner may issue a bank­

ruptcy notice in the firm name in respect of a judgment

obtained before the dissolution, and that notice to him of the

dishonour of a _bill of exchange is sufficient, and that he can

withdraw a deposit or sell the partnership assets, or pledge

them for the purpose of completing a transaction already

commenced, or of secnrin!'! a debt already incurred, or the

over-draft on the partnership current account at the bank."

The proposition, in our opinion, cannot be disputed that after dissolu­

tion, the partnership subsists merely for the purpose of completing

pending transactions, winding

up the business, and adjusting the rights

of the partners; and for these purposes, and those only, the authority.

rights, and obligations of the partners continue

(see page 573 of

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Halsbnry's Laws of England Third Edition Vol.

28). We

would, there-G

fore, hold that the consent given by the respondent on November

13,

1957

to the award of Mr. Desai

would not detract from the. conclusion

that the

firm of the parties stood dissolved on the expiry of the fixed

period of partnership,

viz., August 30, 1957.

The proposition of law referred to by Mr. Desai that a dissolution

does not necessarily follow because a partnership has ceased to do H

business would not be of any material help to the appellants because

we are not basing our conclusion of the dissolution of the firm of the

parties upon the fact that the partnership had ceased to do business.

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Oa tpe contrary, we have arrived at the above conclusion in accor­

dance with the principle of law that a firm constituted for a fixed term

shall stand dissolved, in the absence of a contract to the contrary, on

too expiry of that term. likewise, the appellants can derive no help

from the decision of the Judicial Committee in Sathappa Chetty &

Ors. v. S. N. Subrahnianyan Chetty & Ors.(') The said case did not

relate to a firm constituted for a fixed term and no question arose in

that case of a firm dissolving on the expiry of the fixed term of part­

nership.

Our attention has also been invited to the correspondence between

tbc first appellant and the respondent during the period from June to

September, 1957. These letters reveal that the first appellant enter­

tained hopes and expectation of deriving some benefit in case the

respondent succeeded in acquiring the Ambemath Mills. The exact

nature of the benefit

was not, however, specified in the letters. The

respondent in his replies while not belying those hopes and

expecta­

tions took care not to make any commitment. After, however, the

respondent succeeded in acquiring the mills, there developed a cool­

ness in his attitude towards the first appellant. This circumstance must

necessarily have caused disappointni'ent and disillusionment to the first

appellant. The respondent, it s~s, kept some kind of carrot dangling

before the first appellant during the delicate stage of his negotiations

with the Government for the acquisition of the

mills lest the first

appellant did something to sabotage those efforts. After acquisition of

the

mills by the respondent, his attitude changed and he gave a

cold

rebl!ff to the first appellant. The above conduct of the respondent may

have a bearing on the question of the award of costs, but it cannot affect

our decision on the point

as to whether the suit is within limitation er

not.

We, therefore, dismiss the appeal but in the circumstances without

costs.

P.B.R.

Appeal dismissed .

(Ii AIR 1927 P.C. 70.

6-177SupCl/75