What are the tests for determining whether a lease of immovable property is granted for purpose.....manufacturing process.

Question: What are the tests for determining whether a lease of immovable property is granted for purpose of manufacturing process and on whom lies the burden to prove that the lease was for manufacturing process? [HPJS 2016]

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Answer

Under Indian law, particularly in the context of Section 106 of the Transfer of Property Act, 1882, the classification of a lease as being for a manufacturing purpose is significant because it affects the notice period required for termination of the lease. Where the lease is for manufacturing purposes, a six-month notice period is mandatory, whereas other leases require only a fifteen-day notice.

To determine whether a lease is for the purpose of manufacturing, Indian courts have laid down certain judicially recognised tests.

Tests to Determine Whether the Lease Is for a Manufacturing Purpose

1. Test of Transformation: The essential test is whether the activity carried out on the leased premises results in the transformation of raw materials into a new product that is distinct in name, character, or use.
2. Substantial Change: The process should lead to a substantial change in the raw materials, creating a commercially different product, not just a superficial or incidental change.
3. Dominant Purpose of the Lease: The primary object of the lease must be manufacturing. If manufacturing is merely incidental to the primary activity (e.g., storage or trading), the lease will not qualify as one for manufacturing purposes.
4. Intention of the Parties: Courts will consider the intention of the parties as expressed in the lease deed or agreement. Express provisions stating the purpose of use are critical.
5. Actual Use of the Property: It must be shown that the lessee has actually used the property for manufacturing during the lease period. A mere intention to manufacture, without evidence of such use, is insufficient.

The burden of proof lies on the lessee who claims that the lease is for a manufacturing purpose. This is because the lessee seeks to derive a benefit—specifically, a longer notice period under Section 106 of the Transfer of Property Act.

The lessee must prove:

• That the process conducted is a manufacturing process,
• That there is transformation of input into a new product,
• That the property was used substantially for such purpose.

In Sri Ram Chandra Mills Ltd. v. State of Madras, AIR 1961 SC 1720: The Supreme Court held that it is the responsibility of the lessee to prove that the lease was for manufacturing purposes to claim benefit under Section 106.

In Raja Mohan Manucha v. Manzoor Ahmed Khan, AIR 1967 SC 917: The Court observed that to fall within the category of manufacturing, there must be production of a new and distinct article through a process.

In Delhi Cloth & General Mills Co. Ltd. v. State of Rajasthan, AIR 1980 SC 1552: The Court reiterated that ‘manufacture’ implies bringing into existence a new and distinct commodity.

In determining whether a lease of immovable property is for the purpose of a manufacturing process, the courts apply several tests focusing on the nature of the activity, the extent of transformation involved, and the actual use of the premises. The burden of proving that the lease falls within this category rests on the lessee, who seeks to benefit from the extended notice period under the law.