Conversion Of Proprietorship To Private Limited Company With Family Members Does Not Amount To Subletting Under Public Premises Act: Bombay High Court

"It very often happens in the business world that when a person starts a business as a sole proprietor, he later on converts it into a partnership firm along with some family members, and thereafter the business further expands, it is incorporated as a private limited company... This is a very common feature in the business world." Bombay High Court, in a ruling dated 28 September 2026, held that the conversion of a proprietorship firm into a private limited company by the original tenant, where the control remains within the family, does not constitute "subletting" under the Public Premises (Eviction of Unauthorised Occupants) Act, 1971.

A single bench of Justice Rajesh S. Patil observed that such corporate restructuring is a standard business practice and does not signify a parting of possession in favor of a third party, particularly when the tenant retains effective control over the premises.

The petitioners were original tenants of premises owned by the Oriental Insurance Company. The tenancy, originally held by a sole proprietorship, underwent various transformations over decades, evolving into a partnership and eventually a private limited company, with the original tenant and his family members remaining the exclusive shareholders and directors. The respondent-insurance company initiated eviction proceedings under the Public Premises (P.P.) Act, alleging that the transfer of business to a private limited company amounted to unauthorized subletting.

The primary legal issue before the Court was whether the conversion of a sole proprietorship into a private limited company comprising only family members constitutes "subletting" or "parting with possession" under the P.P. Act. The Court was also called upon to determine if the 2015 amendment to Section 5 of the P.P. Act, replacing "may" with "shall," operates retrospectively to mandate eviction in pending matters.

Application of Corporate Veil Doctrine

The Court emphasized that in cases of business transformation, the "doctrine of piercing the veil of corporate personality" must be applied to determine the true nature of the transaction. Referring to the precedent in Prem Lata Bhatia v. Union of India, the Court noted that when a tenant incorporates a company and retains controlling interest alongside family members, there is no transfer of property to a third party. The owner remains, in substance, the same entity.

No Parting of Possession

The bench held that for subletting to be established, the landlord must prove both that the tenant parted with exclusive possession to a third party and that the tenant engaged in profiteering. In the present case, the Court found that no third party was inducted and the original tenant’s intent was clearly to consolidate business operations, not to sub-let.

No Subletting Detected "In the present proceedings there is no third person who is brought in the partnership firm and/or in the private limited company by the original tenant. Therefore, the intention of original tenant was clear. He did not want a third person to be inducted for whatsoever reasons, hence did not intend to create a sub-tenancy."

Rejection of Retrospective Application

The Court addressed the respondent’s argument regarding the 2015 amendment to Section 5 of the P.P. Act. The Court categorically ruled that statutory amendments are presumed to be prospective unless expressly stated otherwise. Finding no such legislative intent in the P.P. Act, the bench held that the mandatory "shall" introduced in 2015 cannot be applied retrospectively to eviction proceedings initiated prior to the amendment.

Distinguishing Precedents

 The Court distinguished this matter from M/s. Pankaj Industries v. Oriental Insurance Company, noting that in that case, the original tenant had relinquished all rights in favor of a third party. Conversely, here, the transition involved only family members, meaning the "substantial identity" of the tenant remained intact, consistent with the Supreme Court's ruling in Madras Bangalore Transport Co. (West) v. Inder Singh.

Concluding that there was no subletting and consequently no "unauthorized occupation," the Court quashed and set aside the eviction orders passed by the Estate Officer and confirmed by the City Civil Court. Furthermore, the Court allowed the petitioners' interim application, directing the return of the bank guarantees deposited by the petitioners during the pendency of the litigation.

Date of Decision: 28 September 2026