PARTNERSHIP IS NOT A LEGAL ENTITY

[Mr. M. GOVINDARAJAN]

Partnership firm is covered under the Partnership Act.  According to the Act it is at the option of the firm to be registered or not registered.   But non registered firms are not having legal protection.   The liability of the partners of the firm is unlimited.  The partnership firm is not a legal entity as that of a company registered under the Companies Act.  A company is separate from its shareholders but not the said position in partnership firm.  This concept is also applicable for taxation purposes.

In ‘Tarak Nath Sen and others V. Union of India’ – AIR 1975 Calcutta 337, the High Court held that it is clear that although a firm in mercantile usage has a personality of its own, strictly in the eye of the law, it is not a legal entity like a natural person.   Therefore the rights and obligations of a firm are really rights and obligations of the individual partners of the firm.  In the instant case, according to the findings made by the Additional Collector of Customs in his adjudication order the partners 2 to 4 carrying on business as a partnership firm had contravened provisions of the Customs Act and Gold Control Rules and were liable for penalties under Section 112 of the Customs Act and under Rule 126-L (16) of the Defence of India (Gold Control) Rules.   Therefore, no exception can be taken to imposition of penalties individually upon them.   But since the firm is not a legal entity and Section 140 of the Customs Act was inapplicable to the adjudication proceedings, the Additional Collector of Customs by imposing penalties also upon the firm has really twice punished the petitioners No. 1 to 4 for the same sets of acts.  Therefore, although the High Court proposed to sustain the imposition of penalties under the Customs Act and the Defence of India (Gold Control) Rules, upon the petitioners 2 to 4, the penalties of fine imposed upon the petitioner No.4 firm should be quashed.

In ‘Vinod Kumar Gupta V. Commissioner of Central Excise’ – 2013 (287) ELT 54 (P&H) the appellant is a proprietor of M/s Asim Enterprises and partner of M/s Makhan Lal Vinod Kumar, registered dealers; the Central Excise Officers searched the business premises of M/s Asian Alloys Limited and conducted investigation.   During the investigation it was found that M/s Asian Alloys Limited availed credit on the basis of invoiced issued by the registered dealers and washer manufacturing units.   Show cause notices were issued to the appellant.  The Commissioner confirmed the demand of duty along with interest and penalty of equal mount on M/s Asian Alloys Limited and on the registered dealers and washer manufacturing units and on M/s Makhan Lal Vinod Kumar.  Penalty of Rs.50,00,000 was also imposed on the appellant being proprietor of M/s Asim Enterprises and partner of M/s Makhan Lal Vinod Kumar.

The imposition of penalty on M/s Asian Alloys Limited, the proprietorship firm has attained the finality and likewise the imposition of penalty on M/s Makhan Lal Vinod Kumar, of which the appellant is a partner, has also attained finality.  However the appellant filed appeal before the Tribunal on penalty imposed on him as partner of M/s Makhan Lal Vinod Kumar and proprietor of M/s Asim Alloys Limited.  The Tribunal observed that the appellant was settling the accounts of other registered dealers/washer manufacturing units, who had supplied invoices to M/s Asian Alloys Limited without any physical movement of the goods, confirmed the imposition of penalty on the appellant but reduced the penalty from Rs.50 lakhs to Rs.10 lakhs.

Being aggrieved against the order of the Tribunal the appellant filed appeal before the High Court.   The appellant contended before the High Court that since penalty was imposed on M/s Asim Enterprises, of which appellant is the sole proprietor, as well as on M/s Makhan Lal Vinod Kumar, of which appellant is the partner, therefore, no penalty can be imposed on the appellant separately, it would amount to imposition of double penalties, which is not permissible under the law. 

The Department contended that since appellant has actively participated in the settling of accounts of other registered dealers, who had supplied invoices to M/s Asian Alloys Limited., the proprietorship firm of the appellant without any physical movement of the goods, therefore, penalty was rightly imposed on the proprietor of M/s Asim Enterprises and partner of M/s Makhan Lal Vinod Kumar and no interference is called therein.

The High Court was of the considered opinion that proprietorship firm or proprietor thereof cannot be treated as two different legal entities.   Partnership firm is a firm in mercantile usage, however, penalty imposed on the proprietorship or partnership firms would mean penalty on the proprietor or partners thereof, therefore, imposition of penalties one on the proprietorship firm and second on the proprietor would amount to imposition of penalty twice, which cannot be sustained in the eyes of law.