Veil Of Partnership Can Be Lifted To See If It's Device To Cloak Illegal Sub-letting : Supreme Court

Observing that a partnership arrangement cannot be used as a device to conceal unlawful transfer of possession, the Supreme Court on April 10 held that courts are entitled to tear the veil of partnership to ascertain whether it is merely a cloak for unauthorised sub-letting.

The Bench comprising Justice Ahsanuddin Amanullah and Justice R. Mahadevan was hearing an appeal filed by the appellant challenging the Karnataka High Court's decision, which had set aside the trial court's eviction order.

The trial court ordered the eviction of Respondent Nos. 2 and 3 from the premises which was originally rented to Respondent No.1(a partnership firm), upon finding that the original tenant had divested its possession and control over the property, and sub-let the property to the Respondent Nos. 2 and 3 under the pretext of a partnership arrangement, a strategic move intended to mask an unlawful sub-letting in their favor, as neither individual was a party to the lease deed executed with the original tenant.

The landlord alleged that the original tenant-partner had retired and handed over exclusive possession to two individuals who were strangers to the original lease. While the Respondent Nos. 2 and 3 argued that the business had merely undergone a "reconstitution of partnership," the trial court found that the original tenant had entirely divested himself of "legal possession and control”.

Setting aside the High Court's decision, the judgment authored by Justice Mahadevan restored the trial court's eviction order, upon finding that the Respondent Nos. 2 and 3 failed to establish their status as partners of the original tenant i.e., Respondent No.1-firm to prove their contention that the arrangement was a continuation of a partnership deed.

“No cogent or reliable evidence has been adduced to establish the existence of a valid partnership, reconstitution deed, lawful induction, or consent of the landlord to such arrangement. In the absence of such evidence, the possession of Respondent Nos. 2 and 3 remains unexplained and unlawful.”, the court observed.

The Court said that mere retirement from the partnership doesn't amount to sub-letting so long as the tenant retains control and legal possession. According to the Court, the determinative test is whether the original tenant continues to retain legal possession and control over the premises. The Court held that once Respondent No. 1 retired and relinquished both possession and control of the premises, the arrangement became an unjustifiable sub-letting. The Bench ruled that such a transfer cannot be defended under the "cloak" of a continuing partnership deed for the benefit of Respondent Nos. 2 and 3, who were essentially strangers to the original agreement.

Citing Parvinder Singh v. Renu Gautam (2004) 4 SCC 794, the Court observed that no sub-letting arises if the tenant stays active in the business and retains control of the property, even alongside partners who were not original parties to the lease. Conversely, if the tenant cedes total control and uses a partnership deed as a mere "cloak" for illegal profiteering, the Court will "tear the veil of partnership" to uncover the real deal.

In light of the aforesaid, the essence of law as laid down was:

“(i) sub-letting requires parting with legal possession, i.e., transfer of the right to exclusive possession;

(ii) mere induction or retirement of partners does not amount to sub-letting so long as the tenant retains control and legal possession;

(iii) courts are entitled to lift the veil of partnership where it is used as a device to conceal an impermissible transfer; and

(iv) once exclusive possession of a third party is established, the burden shifts to the tenant to prove that the arrangement is bona fide.”

The Court held that the landlord had discharged the initial burden of proving sub-letting by establishing that the original tenant was no longer in possession and that third parties were in exclusive occupation of the premises.

Once such exclusive possession was established, the burden shifted to the tenants to explain the nature of their occupation. The Court found that they failed to produce reliable evidence such as a valid partnership deed, retirement deed, or proof of consent from the landlord.

It further held that the original tenant had ceased to have any role in the business or control over the premises, and the alleged reconstitution of partnership was merely a device to conceal an unlawful transfer of possession.

Accordingly, the appeal was allowed, restoring the eviction order.

Cause Title: SRI M.V. RAMACHANDRASA SINCE DECEASED REPRESENTED BY LEGAL HEIRS VERSUS M/S. MAHENDRA WATCH COMPANY REPRESENTED BY ITS PARTNERS & ORS.

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Appearance:

For Petitioner(s) Mr. Devashish Bharuka, Sr. Adv. Mr. H.S. Somnath, Adv. Ms. Sarvshree, AOR Ms. Soumya Sandilaya, Adv. Ms. Yashaswi Agrawal, Adv.

For Respondent(s) Mr. Paras Jain, Adv. Mr. T. Harish Kumar, AOR Mr. Shubham Kothari, Adv. Mrs. Aiyushi Daga, Adv. Mr. Shubham P. Chopra, Adv.