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2017 (2) TMI 178 - GUJARAT HIGH COURT

2017 (2) TMI 178 - GUJARAT HIGH COURT - TMI - Prosecution against the partners - Offence punishable under Section 138 of the Negotiable Instruments Act - Held that:- Once the company is held to be an essential party and that arraigning of a company as an accused is imperative for prosecution under Section 141 of the Negotiable Instruments Act, it necessarily follows that arraigning of a partnership firm is also imperative for prosecution against the partners under Section 141 of the Negotiable I .....

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ring for the petitioner are of no avail in any manner. Thus, the first question is answered accordingly. - CRIMINAL MISC.APPLICATION (FOR QUASHING & SET ASIDE FIR/ORDER) NO. 11911 of 2015 - Dated:- 2-2-2017 - MR. J.B.PARDIWALA, J. FOR THE APPLICANT : MR AR GUPTA, ADVOCATE, ADITYA A GUPTA, ADVOCATE FOR THE RESPONDENT : DARSHAN M VARANDANI, ADVOCATE, MS SHRUTI PATHAK, APP ORAL ORDER RULE returnable forthwith. Ms.Pathak, the learned APP waives service of notice of rule for and on behalf of the resp .....

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tion 138 of the Negotiable Instruments Act. The applicant herein is one of the partners of a partnership firm running in the name of Varsani Construction Company. One another partner of the firm and an authorized signatory, namely, Rajeshbhai Varsani, issued a cheque of the amount of ₹ 1 lac dated 20th August 2014 in favour of the complainant drawn on the HDFC Bank. The said cheque came to be dishonoured. In such circumstances, the complaint came to be lodged in the court of the learned Ch .....

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ed. On the other hand, this application is opposed by Mr.Varandani, the learned counsel appearing for the complainant. He submitted that it is always open for him to either implead the partnership firm as an accused or even file a fresh complaint impleading the partnership firm as a legal entity and the authorized signatory. Having heard the learned counsel appearing for the parties and having considered the materials on record, the only question that falls for my consideration is, whether the p .....

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hat arose for disposal of the Supreme Court was whether an authorized signatory of a company would be liable for prosecution under Section 138 of the Negotiable Act without the company being arraigned as an accused. As initially there was difference of opinion between the two learned Judges regarding the interpretation of Section 138 of the Negotiable Instruments Act, a Reference was made to the Larger Bench of three Judges. While deciding the said Reference and interpreting Sections 138 and 141 .....

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nature, a strict construction of the provision would be necessitous and, in a way, the warrant. 58. Applying the doctrine of strict construction, we are of the considered opinion that commission of offence by the company is an express condition precedent to attract the vicarious liability of others. Thus, the words "as well as the company" appearing in the Section make it absolutely unmistakably clear that when the company can be prosecuted, then only the persons mentioned in the othe .....

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ining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative. The other categories of offenders can only be brought in the dragnet on the touchstone of vicarious liability as the same has been stipulated in the provision itself. We say so on the basis of the ratio laid down in C.V. Parekh (supra) which is a three-Judge Bench decision. Thus, the view expressed in Sheoratan Agarwal (supra) does not correctly lay down the law and, accordingly, is hereby ov .....

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tion to Section 141 of the Negotiable Instruments Act referred to above, this legal position needs to be automatically made applicable in case of prosecution against a partnership firm also. Therefore, it has to be held that for maintaining prosecution against a partner under Section 141 of the Negotiable Instruments Act, arraigning of partnership firm as an accused is imperative. The conclusions drawn by the Supreme Court in the case of Aneeta Hada (supra) are not based merely on the fact that .....

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ther held that the words "as well as the company" appearing in the section make it unmistakably clear that when a company is prosecuted, then only the persons mentioned in the other categories could be vicariously liable for the offence subject to the averments in the petition and proof thereof. It was further observed that the other categories of offenders like directors or partners of the firm can only be brought in the dragnet on the touchstone of vicarious liability as the same has .....

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olding that arraigning of a company as an accused is imperative, but the main basis for arriving at its conclusion was the vicarious liability which the directors or partners of the firm can have towards the company and hence without joining the company on the touchstone of vicarious liability they cannot be prosecuted. Therefore, the ratio laid down in the case of Aneeta Hada (supra) can be made equally applicable in the case of a partnership firm also. The partners are liable and sued in their .....

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ncludes any body corporate which includes a firm or other association of individuals and director in relation to a firm means a partner in the firm. On this count also, when Section 141 of the Negotiable Instruments Act and explanation thereto does not make any distinction between the company and the partnership firm, there is absolutely no reason to draw such distinction while making applicable the law laid down by the Apex Court in Aneeta Hada (supra) to the partnership firm merely because in .....

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r prosecution against the partners under Section 141 of the Negotiable Instruments Act. The prosecution launched against only one of the partners of the partnership firm, without joining the partnership firm, cannot be maintainable. In view of the specific provisions of the Act itself, it is very difficult for the Court to take a view that a partnership firm for the purpose of Section 138 read with Section 141 of the Act is not a legal entity, and therefore, it need not be made an accused in the .....

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er : 9 Before I proceed to answer the first question, let me look into the decisions relied upon by the learned counsel in that regard. In Munshi Ram (supra), the appellants before the Supreme Court were partners of a firm, Bharat Industries, Chheharta. By a Notification, 15th May, 1946, the Chheharta Municipal Committee levied a profession tax under Section 61(1)(b) of the Punjab Municipal Act, 1911. The appellants filed a suit for permanent injunction restraining the defendant committee from r .....

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levying the tax on the individual partners had exceeded its statutory powers under Section 61 (1)(b) of the Municipal Act. 9.1 The trial Court dismissed the suit, on appeal by the plaintiffs, the Additional District Judge, Amritsar, reversed the judgment of the trial Court and decreed the suit. The Municipal Committee carried a further appeal to the High Court. The learned Single Judge, who heard the appeal, affirmed the judgment and decree of the first appellate Court. The matter reached upto t .....

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.......... (b) a tax on persons practising any profession or art or carrying on any trade or calling in the municipality. Explanation. - A person in the service or person holding an office under the State Government or the Central Government or a local or other public authority shall be deemed to be practicing a profession within the meaning of this sub-section." 9.2 The Supreme Court proceeded to observe in paras 15, 16 and 18 as under: 15. From a plain reading of the extracted provision, .....

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carrying on any trade or calling in the municipality. 16. There can be no dispute that the appellants are "person" and, as such, satisfy the first condition. Even the learned counsel for the appellants has candidly conceded that the individual partners are also "persons" within the meaning of the said clause (b). Controversy thus becomes narrowed down into the issue: Whether persons collectively doing business in partnership in the municipality, fulfill the second condition? .....

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a compendious description of the individuals who compose the firm. The crucial words in the definition of 'partnership' are those that have been underlined. They hold the key to the question posed above. They show that the business is carried on by all or any of the partners. In the instant case, admittedly, all the plaintiff-appellants are carrying on the business in partnership. All the six partners are sharing the profits and losses. All the partners are jointly and severally responsi .....

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of Section 61 or the scheme of the Municipal Act which warrants the construction that persons who are carrying on a trade in association or partnership with each other cannot be individually taxed under clause (b) of Section 61 (1). On the contrary, definite indication is available in the language and the scheme of this statute that such partners can be taxed as persons in their individual capacity. As noticed already, clause (b) makes it clear in no uncertain terms that this is a tax on 'p .....

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n the municipality from being taxed as individuals. To attract liability to a tax under this clause, it is sufficient that the person concerned is carrying on a trade in the municipality, irrespective of whether such trade is being carried on by him individually or in partnership with others. Thus, both the conditions necessary for levying a tax under clause (b) of sub-section (1) of Section 61 of the Municipal Act existed in this case. The appellants are "persons" and they are carryin .....

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gistered partnership firm. In para 11, the Court observed as under: 11. The crucial question, therefore, is whether the appellant is the owner of the machinery and plant in the relevant assessment year 1962-63. Acquisition of ownership is a condition precedent to avail of the development rebate under S. 33(1) of the Act.It is now fairly clear from the statement of facts that the old and the new partnership firms are separately registered under the Act and the old one was doing its business at Ca .....

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firm registered thereunder is neither a person nor a legal entity. It is merely a-collective name for the individual members of the partnership. A firm as such cannot be a partner in another firm though its partners may be partners in another firm in their individual capacity. Either under the repealed Act or the Act, a firm is liable to be separately assessed to tax as well as all its partners in their capacity as individuals if they have taxable income. The appellant is separately registered u .....

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f the repealed Act). Section 33(1) gives right to development rebate only to the owner who has acquired the ship or installed the machinery or plant. The necessary implication is that the assessee who claims development rebate should continue to remain to be the owner of the ship or plant or machinery during the relevant previous assessment year/ years and the owner alone is entitled to the development rebate till it becomes nil in the relevant previous assessment year or the succeeding assessme .....

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ment invited applications from the firms of the Chartered Accountants for the purpose of empanelment for audit of the government companies. The respondent therein had submitted an application for enrollment on the panel, but the same was rejected on account of the fact that his firm was not a partnership firm, but a proprietary concern. Aggrieved, the respondent filed a writ application under Article 226 of the Constitution of India challenging the exclusion of the proprietary concerns from thei .....

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e eligible for being brought on the panel for audit of public sector undertakings or Government concerns. The audit work of public sector undertaking, no doubt, is to be done by the qualified and efficient Chartered Accountants. Once a person is qualified, experienced and efficient, it is difficult to understand how he could be discriminated against only for the reason that he has chosen to act alone in the professional career and has not been able to form a partnership firm. The efficiency, as .....

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y cases that some of the partners of the partnership firm are sleeping partners with no professional duties to discharge. A partnership concern is not a legal entity like company; it is a group of individual partners. In a partnership firm, it is the partner who will be assisted in carrying out the work but quite remains the eligible Chartered Accountant. It is the same situation as in a proprietary concern where a Chartered Accountant would be carrying on audit work all-in-one. Merely because s .....

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argument before the Supreme Court was that the possession of the shareholders in a company was analogous to that of partners inter se. While holding the analogy is wholly inaccurate, the Supreme Court observed, in para 9, as under: 9. It was argued that the position of shareholders in a company is analogous to that of partners 'inter se.' This analogy is wholly inaccurate. Partnership is merely an association of persons for carrying on the business of partnership and in law the firm' .....

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or other interest of any member in a company are personal estate transferable in the manner provided by its articles, and are not of the nature of real estate". 13 In V. Subramaniam (supra), the appeal before the Supreme Court arose of a suit filed before the Bombay City Civil Court instituted by the appellant praying for dissolution of an unregistered partnership firm between the appellant and the respondent. In that suit, a defence was taken that the suit was not maintainable in view of .....

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onstitutional. The appeal came up before the Supreme Court. After noticing Section 69(1) and (2) of the Partnership Act as well as Sub-section (2A) introduced by the Maharashtra Amendment 1984, the Court observed in paras 14 and 17 as under: 14. It may be mentioned that a partnership firm, unlike a company registered under the Indian Companies Act, 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 le .....

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property of the firm or from seeking dissolution of the firm. 14 What is discernible from a conspectus of the authorities referred to above is that a partnership firm, unlike a company registered under the Indian Companies Act, is not a distinct legal entity or a juristic person, but is only a compendium of its partners. Even the registration of a firm would not make it a distinct legal entity like a company. The partners of a firm are co-owners of the proprietary firm, unlike the shareholders .....

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duct of the business of the company, as well as the company, shall 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 comp .....

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butable 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 punished accordingly. Explanation. - For the purposes of this section.- (a) "company" means any body corporation and includes a firm or other association of individuals; and (b) "director", in relation to a firm, means a part .....

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. He alone would have been the offender thereunder if the Act did not contain other provisions. It is because of section 141 of the Act that penal liability under section 138 is cast on other persons connected with the company. Three categories of persons can be discerned from the said provision who are brought within the purview of the penal liability through the legal fiction envisaged in the section. They are: (1) The company the principal offender which committed the offence, (2) Every one w .....

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provides that where any offence under this Act has been committed by a company and it is provided 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 punished accordingly. The Explanation to the section defines com .....

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company, a firm or an association of individuals, but only those directors, partners, or officers can be held responsible for the offence punishable under Section 138 of the Act, who are responsible to the company firm for the conduct of its business. 18 The Legislature has thought fit to provide an explanation in Section 141 of the Act and the plain reading of the expression company as used in Sub-clause (a) of the explanation appended to Section 141 of the Act shows that it is an inclusive of .....

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t of body corporate and partnership firms. The principal of ejusdem generis gets attracted in such a case. Therefore, a sole proprietary concern is not a company within the meaning of company as defined under the explanation to Section 141 of the Act. 19 The Explanation to Section 141 makes it clear that wherever there is a reference under Section 141 to a company it has to be substituted by the word firm where the accused is a partnership firm and the provision has to be read as if it refers to .....

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e issued by a firm both the firm as well as its partners have to be compulsorily impleaded. In other words a complaint in which only the firm is made an accused and the partners are not would not be bad in law for that reason. Clearly that is not the intention of the Parliament. 20 A partnership firm is a separate legal entity in terms of the Indian Partnership Act 1932 and it is answerable in law in that capacity. That is how under various statutes like the Income Tax Act 1961, the Central Exci .....

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in proceeding against the partners apart from the firm. 21 It is now well settled that an Explanation added to a statutory provision is not a substantive provision in any sense of the term but as the plain meaning of the word itself shows it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision. Sarathi in 'Interpretation of Statutes' while dwelling on the various aspect of an Explanation observes as follows: "(a) The object of an .....

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nction of an explanation is to make plain or elucidate what is enacted in the substantive provision and not to add or subtract from it. Thus an explanation does not either restrict or extend the enacting part; it does not enlarge or narrow down the scope of the original section that it is supposed to explain.......... The Explanation must be interpreted according to its own tenor; that it is meant to explain and not vice versa ." 23 Bindra in 'Interpretation of Statutes' (5th Edn.) .....

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d. An 'explanation' must be interpreted according to its own tenor." 24 The principles laid down by the aforesaid authors are fully supported by various authorities of the Supreme Court. In Burmah Shell Oil Storage and Distributing Co. of India Ltd. v. Commercial Tax Officer [(1961) 1 SCR 902 : (AIR 1961 SC 315)], a Constitution Bench decision of the Supreme Court observed thus : "Now, the Explanation must be interpreted according to its own tenor, and it is meant to explain cl .....

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al Rattanlal etc. v. State of U.P. [(AIR 1973 SC 1034)], the Supreme Court observed thus : "On the basis, of the language of the Explanation this Court held that it did not widen the scope of clause (c). But from what has been said in the case, it is clear that if on a true reading of an Explanation it appears that it has widened the scope of the main section, effect be given to legislative intent notwithstanding the fact that the legislature named that provision as an Explanation. " 2 .....

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ions." 28 Thus, from a conspectus of the authorities referred to above, it is manifest that the object of an Explanation to a statutory provision is - (a) to explain the meaning and intendment of the Act itself, (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve, (c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purpose .....

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