Category: Corporate And Other Laws

Nature of BPT:
The Bombay Port Trust was first constituted under the Bombay Port Trust Acts of 1873 and 1879. BPT is an Authority constituted for the administration, control and management of the port in Mumbai (which was and is a major port of India). Subsequently, a nationwide Act, called the Major Port Trusts Act, 1963 (‘the Act’) was enacted for all the major ports of India. This Act was made applicable to the Bombay Port Trust in the year 1975. Hence, now BPT is governed by the Major Port Trusts Act. The property owned by BPT absolutely vests in the Board by virtue of the provisions of the Act.

BPT is a State within the meaning of Article 12 of the Constitution of India and hence, it cannot act in an arbitrary or unjust manner. Its actions must be reasonable and always taken in public interest. This principle has been laid down by a host of Supreme Court decisions, such as, Dwarkadas Marfatia v. Board of Trustees of the Port of Bombay, (1989) 3 SCC 293, Maneka Gandhi v. UOI, (1978) 1 SCC 248, etc.

Land leased out by BPT:
As discussed earlier, BPT is involved in several disputes where it wants tenants to vacate in cases where lease is expiring or has expired. A majority of the disputes pertain to: whether BPT is bound to renew leases which have expired since it is a State and hence, it must act in public interest. Further, whether or not BPT can increase the rent significantly also forms a part of this dispute.

The decision of the Bombay High Court in the case of Omprakash Tulsiram Aggarwal, 1993 Mh LJ 1725 is significant in this respect. In this case, the renewal of the lease was refused by BPT. The lessees filed a writ stating that such a refusal was an arbitrary and unilateral decision of BPT and was not keeping with the conduct expected from a State. The High Court dismissed the writ petition and held that since BPT genuinely required the land for its own use, as was evident from its correspondences and it had also passed a resolution to that effect, there were ample reasons for refusal to renew the lease. Further, the acquisition was just fair and reasonable and did not suffer from the vice of Article 14, i.e., an arbitrary and unjust action. This judgment was subsequently affirmed by the Apex Court in Kumari Shri Lekha Vidyarthi v. State of UP, AIR 1991 SC 537.

In the case of Jayantilal Dharamsey, 2001 (1) Bom CR 44 it was held that BPT cannot act capriciously and arbitrarily and would have to fix the lease rent in accordance with fairness and reasonableness. This was a very path-breaking decision and ultimately went to the Supreme Court.

The Supreme Court in the case of Jamshed Hormusji Wadia v. BPT, 2004 (3) SCC 214 had an occasion to consider Jayantilal’s decision and a bunch of other cases, all of which dealt with the issue of whether or not BPT can increase the rent significantly and terminate leases in the case of illegal sub-letting by lessees. This famous decision of the Supreme Court laid down the all-important compromise proposal in this respect. BPT proposed a compromise formula to tide over the litigation and the same was accepted by the Supreme Court with some modifications. The important principles laid down by this decision were:

(a) After 1-4-1994, revision in rents shall be @ 10% for non-residential uses and @ 8% for residential uses; Interest chargeable by the Board of Trustees of the Port of Mumbai in respect of arrears of rent for the period commencing 1-4-1994 up to the date of actual payment shall be calculated @ 6% per annum.

(b) In the case of expired leases, fresh lease on new terms shall be at the sole discretion of the Board. The grant of fresh leases may be considered taking into account restructuring requirements for the City’s Development Plan, BPT’s Master Plan and the Development Control Regulations.

(c) Where a fresh lease is granted, arrears may be recovered in the form of premium at the applicable letting rate for respective use with simple interest at 15% per annum from the date of expiry of lease till grant of fresh lease.

(d) In the case of expired leases without a renewal clause, additional premium may be recovered at 12 months’ rent at the applicable letting rate.

(e) In the case of subsisting leases, assignments and consequent grant of lease on new terms would be at the prevailing letting rate at the relevant time and in relation to use. Where the lessee is already paying rent at the prevailing letting rate, assignment would be permitted on a levy of revised rent at 25% over the applicable letting rate or on levy of premium at 12 months’ rent at the applicable letting rate as may be desired by the lessee/tenant.

(f) Subletting, change of user, transfer, occupation through an irrevocable power of attorney and any other breaches may be regularised by levy of revised rent at the applicable letting rate at the time of such breach from the date of breach. Where the lessee/tenant is already paying rent at the prevailing letting rate, such regularisation be permitted on levy of revised rent at 25% over the applicable letting rate or a levy of premium at 12 months’ rent at the applicable letting rate as may be desired by the lessee/tenant.

(g) The Bombay Port Trust is an instrumentality of State and hence an ‘authority’ within the meaning of Article 12 of the Constitution. It is amenable to writ jurisdiction of the Court. The consequence which follows is that in all its actions, it must be governed by Article 14 of the Constitution. It cannot afford to act with arbitrariness or capriciousness. It must act within the four corners of the statute which has created and governs it. All its actions must be for the public good, achieving the objects for which it exists, and accompanied by reason and not whim or caprice.

(h) In the field of contracts, the State and its instrumentalities ought to so design their activities as would ensure fair competition and non-discrimination. They can augment their resources but the object should be to serve the public cause and to do public good by resorting to fair and reasonable methods. The State and its instrumentalities, as the landlords, have the liberty of revising the rates of rent so as to compensate themselves against loss caused by inflationary tendencies. They can and rather must also save themselves from negative balances caused by the cost of maintenance, and payment of taxes and costs of administration. The State, as landlord, need not necessarily be a benevolent and good charitable samaritan. However, the State cannot be seen to be indulging in rack renting, profiteering and indulging in whimsical or unreasonable evictions or bargains.

(i) The ‘Compromise Proposals’ so modified shall bind the parties and all the lessees, even if not parties to the proceedings before the Supreme Court.

Consequent to the above Supreme Court decision, the Estate Department of BPT issued a Circular in November 2006 which laid down the following important provisions:

(a)    It is obligatory on the part of lessees/tenants to obtain prior consent in writing of BPT for any assignment/transfer, subletting, under letting in any manner or parting with possession of the premises or any part thereof whether on leave and licence basis or otherwise.

(b)    Further, BPT was not bound to accord its sanction to a proposal for the above breaches which take place without its prior consent and if they proceed any further with such breaches, they shall be doing so at their own risk, cost and consequences.

(c)    It fixed 10-3-2004 as the cut-off date for the purpose of regularising past breaches, subletting, etc. Breaches committed after 10-3-2004 would attract application of revised rent/compensation prospectively i.e., from 1-9-2006 calculated based on 6% per annum return on the rates prescribed in the Stamp Duty Ready Reckoner for the year 2006 with 4% per annum increase every October, pro rata to the area of breach.

(d)    It was also decided by the Board that in future, changes in lease terms like additional construction, change of user, etc. should be with prior approval.

(e)    In case of subletting/assignment without prior approval, the Board reserves the right to resume possession and failure to obtain prior approval will attract, in addition to revised rent/compensation, a penalty of 12 months’ rent/compensation at the revised rates for every year of delay without prejudice to the Board’s rights and remedies including eviction and recovery of arrears, etc.

Even after the above-mentioned Supreme Court decision, several lessees are yet locked in a fierce battle with BPT, since not all issues have been resolved. A very famous club in Mumbai is currently locked in a fierce litigation with BPT which may threaten its very existence if BPT wins the ultimate battle. Its lease expired in 1990. BPT has been demanding possession of the land and premises constructed thereon. Several lessees of South Mumbai have filed an appeal in the City Civil Court which is pending. By virtue of this appeal, BPT’s order demanding possession has been stayed. It is also challenging the levy of rent from 2006 to 2010 on the grounds that it tantamount to an exorbitant enhancement of rent.

Applicability of other laws:

Another  issue  which  arises  is  whether  the provisions of the Maharashtra Rent Control Act, 1999 apply to land leased by BPT?

In the case of Jamshed Hormusji Wadia v. BPT, 2004 (3) SCC 214, the Court held that the issue as to the applicability of the Maharashtra Rent Control Act, 1999 to the Port of Mumbai and the property held by it is left open to be decided in appropriate proceedings.

Section 3(1) of this Act provides that it does not apply to any premises belonging to the Government or a local authority. Under the previous Rent Control Act of 1947, the definition of local authority was not given in the Act and hence, various decisions such as Ram Ugrah Singh, (1983) Mah LJ 815 had held that the BPT is a local author-ity. However, now Section 7(6) of the 1999 Rent Act expressly defines the term local authority in an exhaustive manner and does not include BPT within its definition. Hence, now BPT is not a local authority and accordingly, it is not exempt from the provisions of the Rent Act.

The Public Premises (Eviction of Unauthorised Occupants) Act, 1971 would also apply to property held by BPT — Ashoka Marketing Ltd. v. PNB, AIR 1991 SC 855.

Auditor’s duty:

The Auditor should enquire of the auditee, in case the auditee is dealing in property which is under lease from the BPT, whether the covenants of the lease deed, such as rent increases, renewal, etc. have been duly complied. Non-compliance with this could have serious repercussions for the buyer/lessee.

By broadening his peripheral knowledge, the Auditor can make intelligent enquiries and thereby add value to his services. He can caution the auditee of likely unpleasant consequences which might arise. It needs to be repeated and noted that the audit is basically under the relevant law applicable to an entity and an auditor is not an expert on all laws relevant to business operations of an entity. All that is required of him is exercise of ‘due care’.

The Hindu Adoptions and
Maintenance Act, 1956 (‘the Act’) is not a commercial or corporate
legislation, but its importance in today’s business world is being felt
because of succession issues, family separations and family feuds
becoming the order of the day. With an increasing number of families
adopting children, the question often arises as to whether the adopted
child is entitled to succeed the father in the business, property, etc.
In several cases, questions, such as whether the adoption was valid,
what happens if the adopted father has subsequently a natural child,
etc., are raised. Hence, it becomes essential to examine this Act. This
is all the more true in a country such as India where a great number of
businesses are family owned or controlled.

 Although a great deal
of the Hindu Law is based on customs and usages, certain portions have
been codified. The Act is one such instance of codified law. It would
hence, overrule any text, custom, usage of Hindu Law.

Application

The Act applies to:

(i) Any person who is a Hindu, Jain, Sikh or Buddhist by religion.

(ii) Any person who is not a Muslim, Christian, Parsi or a Jew.

(iii) Any person who becomes a Hindu, Jain, Sikh or Buddhist by conversion or reconversion.

(iv)
A legitimate/Illegitimate child whose one or both parents is a Hindu,
Jain, Sikh or Buddhist by religion. However, in case only one parent is a
Hindu, Jain, Sikh or Buddhist by religion, then the child must be
brought up by such parent as a member of his community, family, etc.

(v)
Any child, legitimate or illegitimate, who has been abandoned both by
his father and mother or whose parentage is not known and who in either
case is brought up as Hindu, Buddhist, Jain or Sikh. This is a very
important clause which was added by the Amendment Act of 1945. The
reason for this Amendment was that only a Hindu can be adopted. As the
religion of an abandoned child or of a child whose parentage is not
known or cannot be ascertained, the explanation to section 2(1) of the
Act was amended to the effect that a child, legitimate or illegitimate
who has been abandoned by both of his parents or whose religion is not
known, but who in either case is brought up as a Hindu, will be a Hindu
by religion.

The Act does not apply to members of Scheduled
Tribes unless the Government so directs. Manner of making adoption Any
adoption by or to a Hindu must be made in accordance with the provisions
of the Act. It is interesting to note that in case the adoption is not
in accordance with the Act, then it shall be void. The consequences of a
void adoption are:

(a) it does not create any rights in the adoptive family in favour of the adopted child; and

(b) his rights in the family of his natural birth also subsist and continue.

Thus,
in a case of a void adoption, the adopted child would not be entitled
to any inheritance or succession benefits in his adopted family. The
pre-requisites of a valid adoption u/s.6 are as follows:

 (a) the adopter is capable of and has a right of adopting under the Act;

(b) the adoptee is capable of being taken in adoption under the Act;

(c) the person giving the adoptee is capable of doing so under the Act; and

 (d) all other conditions specified under the Act have been fulfilled.

Capacity of adopter

A male Hindu is capable of adopting a son or daughter:

(a) if he is of sound mind;

 (b) if he is a major, i.e., he is above 18 years of age;

(c)
if he has a wife, he shall not adopt except with the consent of his
wife, unless she has renounced the world or ceased to be a Hindu or has
been declared to be of unsound mind. If he has more than one wife, then
the consent of all wives is required.

The wife’s consent must be
obtained before the adoption and not after it. The proviso mandates the
consent as a condition precedent to adoption and hence subsequent
consent cannot validate the adoption.

In Kashibai W/O Lachiram
v. Parwatibai W/O Lachiram 1995 SCC (6) 213, has held that the wording
is mandatory and an adoption without wife’s consent would therefore be
void.

Now a Hindu can adopt a son or a daughter. Under the old
law, adoption of a daughter was invalid except where it was customarily
accepted among certain parts of India.

A female Hindu is capable of adopting a son or daughter:

 (a) if she is of sound mind;

(b) if she is a major, i.e., above 18 years of age;

 (c)
if she either is not married or her husband is dead or has been
declared of unsound mind or has renounced the world or has ceased to be a
Hindu or her marriage has been dissolved.

Thus, a Hindu married
woman whose husband does not suffer from any of the disabilities
specified above would not be able to adopt a child on her own even with
her husband’s consent. This is a unique position and a departure from
the earlier position under the uncodified Hindu Law. This principle has
also been laid down by the Bombay High Court in the case of Dasharath
Ramachandra Khairnar v Pandu Khairnar, (1977) 79 Bom LR 426. The Court
held that elaborate provisions are made in the Act setting out
circumstances under which a wife could have a capacity to adopt and the
consent of the husband to enable the wife to adopt is not one of the
enabling circumstances under the provisions.

Capacity of adoptee

A person may be adopted if:

(a) he is a Hindu;

(b) he has not been already adopted;

(c) he has not been already married, unless a custom or usage permits married people to be adopted; and

(d)
he must be below 15 years of age, unless a custom or usage permits
persons above 15 years to be adopted. The above conditions equally apply
to females. One of the most relevant conditions to be borne in mind is
that the adoptee must be below 15 years of age.

Capacity of person giving in adoption

The person giving the child in adoption can do so if he fulfils the following conditions:

(a) Only the natural father or mother or the guardian of a child can give him in adoption.

(b) The natural guardian can give consent for adoption to any person including himself, under the following situations:

(i) the natural father and mother are dead, have renounced the world, abandoned the child, been declared of unsound mind, etc.;

(ii) the City Civil Court has granted permission for the same

(iii) before granting permission the Court will have to be satisfied about the welfare of the child and other factors.

The additional conditions for a valid adoption are as follows:

(i)
If the adoption is of a son/daughter, the adoptive father or mother by
whom the adoption is made must not have a Hindu son/daughter,
grandson/granddaughter or great grandson/ granddaughter (whether by
legitimate blood relationship or by adoption) living at the time of
adoption; (where there is a child, adoption cannot be done even with the
consent of the child.)

(ii) If the adoption is by a male and
the person to be adopted is a female, the adoptive father is at least 21
years older than the person adopted;

(iii) If the adoption is
by a female and the person to be adopted is a male, the adoptive mother
is at least 21 years older than the person to be adopted;

(iv) The same child may not be adopted simultaneously by two or more persons;

(v)    The child to be adopted must be actually given and taken in adoption by the parents or guardians concerned or under their authority with intent to transfer the child from the family of its birth or in the case of an abandoned child or a child whose parentage is not known, from the place or family where it has been brought up, to the family of its adoption.

Effect of adoption

From the date of adoption the child will be considered to be the natural child of the adoptive family and all the ties with the original family are severed. The three exceptions to this Rule are:

(i)    The child cannot marry any person whom he could not have married had he continued in the original family of his birth;

(ii)    The adopted child is not deprived of the estate vested in him or her prior to his/her adoption when he/she lived in his/her natural family, subject to any obligations arising from such vesting of the estate; and

(iii)    The adopted child shall not divest any persons in the adoptive family of any estate vested in that person prior to the date of adoption. For instance, a Hindu widow absolutely inherits property on her husband’s death. Thereafter, she adopts a son. He cannot challenge the alienation made by the widow on the grounds that now he has an interest in such property since the property had already vested in the widow and the adoption does not relate back — Joti v. Mankubai, AIR 1988 Bom. 348/ Banabai v. Wasudeo, (1980) 82 Bom. LR 388.

(iv)    A valid adoption by a Hindu female operates as a valid adoption even by her husband. The principle has been laid down in Sawan Ram v Kala Wanti, 1967 AIR 1761 (SC). The Supreme Court held that “it is well-recognized that, after a female is married, she belongs to the family of her husband. The child adopted by her must also, therefore, belong to the same family. On adoption by a widow, therefore, the adopted son is to be deemed to be a member of the family of the deceased husband of the widow. ………… thus, itself makes it clear that, on adoption by a Hindu female who has ‘been married, the adopted son will, in effect, be the adopted son of her husband also.”

A valid adoption once made cannot be cancelled by the adoptive father or mother or any other person. Further, the adopted child also cannot renounce his adopted parents and return back to his natural family. If the adoption process has been properly followed, the consequences of the same cannot be undone and then the motive of the adoption has no relevance — Devgonda Patil v. Shamgonda Patil, AIR 1992 Bom. 189.

In the case of Chandan Bilasini v. Aftabuddin Khan, (1996) 7 SCC 13, the legal effects of an adoption have been well summarised:

“Section 12 of the Hindu Adoptions and Maintenance Act clearly provides that an adopted child shall be deemed to be the child of his adoptive father or mother for all purposes with effect from the date of the adoption and from such date all ties of the child in the family of his or her birth shall be deemed to be severed and replaced by those created by the adoption in the adoptive family. As a consequence, when a widow adopts a child, the child not merely acquires an adoptive mother but also acquires other relationships in the adoptive family, unless there is anything to the contrary in the Hindu Adoptions and Maintenance Act.

This position is reinforced by section 14(4) which sets out that where a widow or an unmarried woman adopts a child, any husband whom she marries subsequently shall be deemed to be the step-father of the adopted child. In other words, the family relationship gets crystalised as at the date of adoption. The child will be deemed to be the child of the parent who adopts the child and the existing or deceased spouse of that parent (as the case may be), if any, will be considered the child’s father or mother. A spouse subsequently acquired by the adoptive parent becomes the step-parent of the adopted child. The adopted child, however, cannot divest any person of any property already vested in that person [section 12(c)].”

The Supreme Court in Smt. Sitabai v. Ramchandra, AIR 1970 SC 343, referred to the scheme of the Hindu Adoptions and Maintenance Act and held:

“………. the child adopted is tied with the relationship of sonship with the deceased husband of the widow. The other collateral relations of the husband would be connected with the child through that deceased husband of the widow. For instance, the husband’s brother would necessarily be the uncle of the adopted child. The daughter of the adoptive mother (and father) would necessarily be the sister of the adopted son, and in this way, the adopted son would become a member of the widow’s family, with the ties of relationship with the deceased husband of the widow as his adoptive father.”

The Act also empowers the adoptive parents to dispose of their property either by way of sale, gift, exchange, etc., or by way of a will. Thus, merely because they have made an adoption that by itself is no bar on them from disposing of their properties in any manner as they deem fit.

Adoption and other Acts

Under the Income-tax Act, 1961, the definition of a child expressly includes an adopted child. Hence, clubbing provisions applicable to a minor child would also apply to an adopted child. An interesting issue would arise u/s.56(2)(vii), viz. would a gift of money/ property received by an adopted child from his or her parents be exempt? Would an adopted child be a lineal descendant of an adoptive parent? The Andhra Pradesh High Court had an occasion to consider a similar issue in the context of the Estate Duty Act, 1953, in the case of Estate of Nuli Lakshminarayana, 116 ITR 739 (AP). The Court held that the expression ‘lineal descendant’ takes in an ‘adopted son’. It is submitted that the ratio of this decision should be extended to section 56(2)(vii) also.

Section 6 and Schedule IA to the Companies Act, 1956 define the term relatives. The Schedule states that the term ‘son’ includes a step-son. However, it is silent as to whether an adopted son is included. The Department of Company Affairs in a clarification given at a meeting with Chamber of Commerce has stated that on adoption a person cannot be regarded as a relative of the persons who are relatives in his natural family. A corollary to this should mean that an adopted son is a son for Schedule IA.

The Bombay Stamp Act, 1958 provides a concessional rate of stamp duty @ 2% in case of a gift to any lineal ascendant/descendant of the donor. Again the term ‘lineal ascendant/descendant’ has not been defined. It is submitted that reliance may be placed on the decision of the Andhra Pradesh High Court explained above for concessional duty in case of a gift to/by an adopted child.

The definition of the term ‘immediate relative’ in the SEBI (Issue of Capital & Disclosure Requirement) Regulations and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 state that the term includes the child of a person. However, it does not expressly state whether an adopted child is included. It is submitted that in the light of the above discussion, an adopted child should also be treated as an immediate relative of a person.

How can a CA help?

Normally, an Auditor/CA is not directly involved with succession issues. Nevertheless, he can provide a lot of value -added services to his clients if he is aware of the law in this respect. Disputes on inheritance impact the operations of a corporation even in case of listed companies, especially, where an adopted child is to become the successor to the business/properties. A CA can be of great assistance to his clients in cases of such family feuds and on succession planning.