TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 918
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "the Act", for the sake of brevity) against the respondents. 2.1 By virtue of a partnership deed, respondent Nos.1 and 2 are partners in the partnership firm 'Mouriya Coirs' and are engaged in manufacturing and allied activities of coir products in Periyamamarthupatti, Thenkumarapalayam Post, Pollachi, Tamil Nadu. 2.2 From March 2019 to August 2019, the appellant, through banking channels as well as by cash, advanced a loan of Rs.21,00,000/- (Rupees Twenty-One Lakhs) to the respondents for business purposes. In order to discharge the debt, on 01.02.2021, respondent No.1-accused issued Cheque No.802077 for Rs. 21,00,000/-(Rupees Twenty-one Lakhs) in favour of the appellant-complainant from Account No.4393002100113025 maintained at Punjab National Bank, New Scheme Road, Pollachi, in the name of the partnership firm. Notably, the cheque issued in the name of the firm was signed only by respondent No.1. However, upon presentation of the said cheque on 02.02.2021, it was returned as dishonoured vide cheque return memo by noting that the partnership firm's account has been frozen. 2.3 As required under Section 138 of the Act, the appellant-complainant issued a statutory notice to the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... loss of the partnership firm and further, in a company, its shareholders have limited liability, whereas in a partnership firm, the partners have unlimited liability. (ii) Secondly, under Section 42 of the Partnership Act, 1932 ('Partnership Act' for short), subject to contract between the partners, a partnership firm gets dissolved on events specified in sub-sections (a) to (d) of Section 42. (iii) Thirdly, a partnership firm cannot on its own create or enter into any contract and that either those partner(s) authorized by all the partners or all the partners of the firm, must execute the contract. Further, subject to the partnership agreement, a partnership firm is made party to a contract only at the time of execution in order to make all the partners and the firm jointly and severally liable to the contract. (iv) Fourthly, though Order XXX Rules 1 and 2 of the Code of Civil Procedure, 1908 (hereinafter "CPC") allow for suing of partners in the name of the firm, it is only a convenient method for referring to the persons who constitute the firm at the time of the accruing of the cause of action and that a decree in favour of or against a firm, in the name of the firm, has....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o be added as an accused and found guilty. Further, the partners of a firm should be arraigned as accused along with the firm and such partners should be liable for punishment vicariously/constructively for the offence committed by the firm. 4.3 Learned senior counsel contended that in the absence of the firm being issued the statutory notice or arraigned as an accused in the complaint, the same was not maintainable at all. Therefore, the High Court rightly quashed the complaint and there is no merit in this appeal. Points for consideration : 5. On hearing the learned counsel for the appellant and the learned senior counsel for the respondent, the points that arise for our consideration revolve around the interpretation of the expressions, company and director in the Explanation to Section 141 of the Act in the context of the partners of a partnership firm. In other words, the questions are: (i) "Whether the High Court was right in dismissing the complaint on the ground that the name of the partnership firm was not mentioned in the statutory notice issued by the appellant / complainant to the respondents under Section 138 of the Act and was also not arraigned as an accused in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the director or any other officer of a company can be prosecuted without impleadment of the company. It was further observed that the judgment of this Court in U.P. Pollution Control Board vs. Modi Distillery, (1987) 3 SCC 684 was also restricted to its own facts. In our view, the aforesaid decisions are not applicable to the present case inasmuch as the said decisions concerned the vicarious liability of the directors of a company when the company itself was not prosecuted against or made liable. We say so for the reason that the distinction between a company and a partnership firm has to be borne in mind while approaching these cases. Hence, the judgment of this Court in Aneeta Hada is of no assistance to the respondent herein. 6.3 In Dilip Hariramani vs. Bank of Baroda, 2022 SCC OnLine SC 579 ("Dilip Hariramani"), the issues raised were (i) whether the appellant therein, being a non-signatory to the dishonoured cheque, could have been convicted under Section 138 read with Section 141 of the Act on the basis that there was vicarious criminal liability of a partner; and (ii) whether the partner could be convicted and held to be vicariously liable when the partnership firm was not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rson mentioned in sub-section (1) or (2) would not be liable and convicted as vicariously liable. Section 141 of the Act extends vicarious criminal liability to officers associated with the company or firm when the one of the twin requirements of Section 141 has been satisfied, which person(s) then, by deeming fiction, is made vicariously liable and punished. However, such vicarious liability arises only when the company or firm commit the offence as a primary offender". (underlining by us) In the above context, the appeal was allowed and the conviction of the appellant therein was set aside. 6.5 The reason as to why relief was granted by this Court in Dilip Hariramani was because it was observed that the partnership firm was not said to have committed the offence and was not made the principal accused. In such a circumstance, there could be no vicarious criminal liability to the officers associated with the company or firm. It is necessary to note that the complainant bank in the aforesaid case had not served the notice to the appellant therein but it was served only on the authorized signatory of the firm. Hence, relief was granted by this Court to the appellant therein. On t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany for the conduct of the business shall be deemed to be guilty of the offence. 12. In determining as to whether the requirements of the above provision have been fulfilled, it is necessary to bear in mind the principle of law that a partnership is a compendious expression to denote the partners who comprise of the firm. By the deeming fiction in Explanation (a) the expression company is defined to include a firm." 6.8 While holding that Section 141 is a deeming provision, it was also observed that a partnership is a compendious expression to denote the partners who comprise the firm which means that a firm without a reference to its partners has no juristic identity in law. By a deeming fiction, in Explanation (a) to Section 141, the expression "company" has been defined to include a firm. Since the High Court had lost sight of the fact that a partnership firm has to be read within the meaning of Section 141 which uses the expression "company", the appeal filed by the complainant therein was allowed. 6.9 On considering the aforesaid judgments, we observe that even if we have to come to the conclusion that the juristic entity i.e., the partnership firm is the primary accused....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onsequence and is not recognised in law. This is because in the case of a partnership firm, the said juristic entity is always understood as a compendious term namely, the partnership firm along with its partners. Therefore, if the appellant-complainant had proceeded only against the partnership firm and not its partners then possibly the respondents would have been right in contending that the complaint was not maintainable but here the case is reversed. The complainant herein has not arraigned the firm but has arraigned the partners of the firm as accused and has also issued notice to them; therefore, we find that the defect, if any, is not significant or incurable in these circumstances. Permission is therefore to be granted to the complainant to arraign the partnership firm also as an accused in the complaint. Moreover, the cheque was issued in the name of the firm and signed by one of the partners, for and on behalf of the other also, therefore, the liability is deemed to be on both the partners of the firm. Hence permission is given to arraign the partnership firm as an accused having regard to the peculiar characteristics of a partnership firm and a company on which aspect ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Partnership Act in the defined sense of a relationship and where the partners are referred to collectively, the word "firm" is used. It is pertinent to recall that Explanation to Section 141 of the Act provides that for the purposes of that section, a company includes a firm or other association of individuals. Nevertheless, the distinction is crucial because it lends credence to the interpretation that reference in Section 141 is as much to the partners of the firm as it is to directors of a company. 7.4 According to Pollock and Mulla, 8th Edition, the definition of partnership in Section 4 of the Partnership Act contains three elements; (i) there must be an agreement entered into by all the persons concerned; (ii) the agreement must be to share the profits of a business; and (iii) the business must be carried on by all or any of the persons concerned, acting for all. All these elements must be present before a group of associates can be held to be partners. These three elements may appear to overlap, but they are nevertheless distinct. The third element shows that the persons of the group who conduct the business do so as agents for all the persons in the group and are therefo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e essential features of a company but "as a company incorporated under this Act or under any previous company law". Section 2(2), Companies Act, 2013 Keeping aside the omnibus statutory definition, several jurists have attempted to outline a definition of a company for doctrinal and precedential analysis. Lindley, a Jurist and Judge defined a company in the following terms: "A company is an association of many persons who contribute money or monies worth to a common stock and employed in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute to it or to whom it pertains are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is often more or less restricted." N. Lindley, Lindley on Partnership (12th ed, Sweet & Maxwell, 2007) Section 9 of the Companies Act, 2013 provides as follows: "9. Effect of registration From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....partners. Such is, however, not the case of a company which stands as a separate juristic entity distinct from the shareholders." 7.11 The partnership name being only a compendious method of describing the partners, it stands to reason that a reference to the partners in their capacity as partners of the firm will be sufficient to impute liability on the partners themselves, whereas directors of a company are made liable vicariously through the company, upon whom falls the primary liability. Thus, the partners and the partnership firm are one and the same. Unlike a company, a partnership firm has no independent corporate existence and has no distinct legal persona independent of its partners. Similarly, the partners of a firm are co-owners of the property of the firm unlike shareholders in a company who are not co-owners of the property of the company. This principle was also explained by the Calcutta High Court in Re: The Kondoli Tea Co. Ltd., (1886) ILR 13 Cal 43 where the transferors of a tea estate claimed that they were eligible to claim exemption from payment of ad valorem duty because the transferee was a company in which they themselves were shareholders. Negativing this c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat despite noting these relaxations in the rigid rules of procedure, this Court observed in Dulichand that 'a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership'. Any relaxations, either aforementioned or not, borne out of commercial convenience or otherwise, do not deviate from the settled position that the name of a partnership firm is a convenient manner of referring to its partners. 7.15 We need not further dilate in extenso on this subject than to simply revisit the following erudite words of Krishna Iyer, J. in CIT vs. R.M. Chidambaram Pillai, (1977) 1 SCC 431 which also engage and follow this Court's view in Dulichand: "5. First principles plus the bare text of the statute furnish the best guidelight to understanding the message and- meaning of the provisions of law. Thereafter, the sophisticated exercises in precedents and booklore. Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes of personality. Partnership is a certain relation between persons, the product of agreement to share the profits of a business. "Firm" is a coll....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h as well as Indian, has, for some specific purposes, some of which are referred to above, relaxed its rigid notions and extended a limited personality to a firm. Nevertheless, the general concept of a partnership, firmly established in both systems of law, still is that a firm is not an entity or 'person' in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. In other words, a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership. According to the principles of English jurisprudence, which we have adopted, for the purposes of determining legal rights 'there is no such thing as a firm known to the law as was said by James, L.J., in Ex parte Corbett : In re Shand [(1880) 14 Ch D 122, 126 : 42 LT 164 : 28 WR 569] . In these circumstances to import the definition of the word 'person' occurring in Section 3(42) of the General Clauses Act, 1897, into Section 4 of the Indian Partnership Act will, according to lawyers, English or Indian, be totally repugnant to the subject of partnership law as they know and understand it t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s under : "25. Liability of a partner for acts of the firm.-Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. 26. Liability of the firm for wrongful acts of a partner.-Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefor to the same extent as the partner." Section 25 provides that every partner is liable jointly with all the other partners and also severally for all acts of the firm done by the partner. Since a firm is not a legal entity but only a collective name for all the partners, it does not have any legal existence apart from its partners. Therefore, any liability of a firm has the same effect of a liability against the partners. This is because, the partners remain liable jointly and severally for all acts of the firm, vide Dena Bank vs. Bikhabhai Prabhudas Parekh and Co., (2000) 5 SCC 694. 7.20 Moreover, the partners of a firm have unlimited liability to the creditors of the firm. This is as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... firm, unlike a company registered under the Indian Companies Act or a limited liability partnership registered under the Limited Liability Partnership Act, 2008, is not a distinct legal entity and is only a compendium of its partners. Even the registration of a firm does not mean that it becomes a distinct legal entity like a company. Hence, the partners of a firm are co-owners of the property of the firm, unlike shareholders in a company who are not co-owners of the property of the company. 8.1 According to Lindley and Banks on Partnership, 21st Edition, it is important to identify the precise significance of a firm name since it represents an attribute which tends to encourage the commercial rather than the legal view of a firm. According to Lindley, "......the name under which a firm carries on business is in point of law a conventional name applicable. Only to the persons who on each particular occasion when the name is used, are members of the firm." 8.2 The firm name is thus a convenient method of describing a group of persons associated together in business at a certain point of time: no more or no less. If a number of people carry on business under such name or style, an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly: Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence. Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this chapter. (2) Notwithstanding anything contained in sub- section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and pu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h the company, can escape punishment (i) if he can prove that the offence was committed without his knowledge; or (ii) that he had exercised all due diligence to prevent the commission of such an offence. Hence, by way of a proviso to sub-section (1) to Section 141 of the Act, two defences are provided for the category of persons named in sub-section (1) of Section 141. 9.2 The second proviso to sub-section (1) of Section 141 is an exception for a person who is a director of the company who shall not be liable for prosecution under Chapter XVII of the Act. The second proviso is not relevant for the purpose of this case as the said proviso refers to ex-officio directors representing the Central Government or state governments or a financial corporation owned or controlled by the Central Government or the state government, as the case may be. 9.3 Sub-section (2) of Section 141 begins with a non- obstante clause. It extends the scope of categories of persons associated with the company who could also be deemed to be guilty of an offence under Section 138 of the Act and shall be liable to be proceeded against and punished accordingly. Sub-section (2) of Section 141 states that where ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....roceeded against only when there is proof that the offence under Section 138 was committed by the company with their consent or connivance or due to negligence on their part. The standard of proof is higher under sub-section (2) of Section 141 vis-à-vis the category of persons mentioned therein with regard to their specific role in the commission of the offence under Section 138. This implies that the primary liability of the company is transferred to the above categories of persons who are deemed to be guilty vicariously having regard to the deemed penal nature of the offence under Section 138 of the Act. 9.5 The Explanation to Section 141 has two clauses. Clause (a) defines a company to mean any body corporate and includes a firm or other association of individuals. The expression "company" encompasses, inter alia, a body corporate which refers to a company incorporated under the provisions of the Companies Act or a statutory body. The expression "company" is inclusive inasmuch as it includes a firm, meaning thereby a partnership firm, as per the provisions of the Partnership Act, as well as a limited liability partnership or other association of individuals. Clause (b) o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s Act, and also include a firm or other association of individuals within the definition of company. Similarly, under clause (b) of the explanation, the expression "director", in relation to a firm, means a partner in the firm. 9.7 This also demonstrates the fact that while a director is a separate persona in relation to a company, in the case of a partnership firm, the partner is not really a distinct legal persona. This is because a partnership firm is not really a legal entity separate and distinct as a company is from its directors but can have a legal persona only when the partnership firm is considered along with its partners. Thus, the partnership firm has no separate recognition either jurisprudentially or in law apart from its partners. Therefore, while a director of a company can be vicariously liable for an offence committed by a company, insofar as a partnership firm is concerned, when the offence is committed by such a firm, in substance, the offence is committed by the partners of the firm and not just the firm per se. Therefore the partners of the firm are liable for the dishonour of a cheque, even though the cheque may have been issued in the name of the firm and t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Section 223 of the BNSS), such a complaint is maintainable. 9.10 Thus, when it is a case of an offence committed by a company which is a body corporate stricto sensu, the vicarious liability on the categories of persons mentioned in sub-section (1) and sub-section (2) of Section 141 of the Act accordingly would be proceeded against and liable for the offence under Section 138 of the Act. In the case of a partnership firm on the other hand, when the offence has been proved against a partnership firm, the firm per se would not be liable, but liability would inevitably extend to the partners of the firm inasmuch as they would be personally, jointly and severally liable with the firm even when the offence is committed in the name of the partnership firm. 9.11 To reiterate, when the partnership firm is only a compendious name for the partners of the firm, any offence committed under Section 138 read with Section 141 of the Act would make the partners of the firm jointly and severally liable with the firm. If, on the other hand, the Parliament intended that the partners of the firm be construed as separate entities for the purpose of penalty, then it would have provided so by expressly....