Dormant Partner Cannot Face Criminal Liability Without Proof Of Control Over Firm: Madras High Court

The Madras High Court has held that a dormant partner cannot be fastened with criminal liability in the absence of specific allegations showing that she was in charge of or responsible for the conduct of the firm's business.

A Bench of Justice Sunder Mohan was considering criminal revision petitions filed by a firm, its managing partner, and another partner, challenging the trial court's order that had refused to discharge them from criminal proceedings initiated under the Prohibition of Benami Property Transactions Act, 1988 (PBPT Act).

Justice Mohan held:

“Although a firm is not a juristic person, a partner could not be liable unless one of the twin requirements to make him/her vicariously liable is satisfied. In the PBPT Act, the twin requirements are stipulated in Section 62,”

The prosecution named the first accused as the partnership firm, M/s V.P.C. & Co.; the second accused as its managing partner, S. Manuraj, who actively conducted the business; and the third accused as his wife, shown as a partner in the firm.

The Department alleged that during the financial year 2016-17, the firm deposited Rs. 68.71 crore in cash into its bank accounts despite having negligible income in prior years. It claimed that the firm failed to explain the source of the deposits, relying instead on bogus sales invoices and fabricated transport documents, leading to criminal proceedings under Section 53 of the PBPT Act.

The Court declined to interfere with the continuation of proceedings against the firm and its managing partner, holding that questions regarding the genuineness of cash deposits, turnover claims, and supporting documents could not be examined at the discharge stage and must be tested during trial. It held:

“Under Section 2(9)(D) of the PBPT Act, 'Benami Transactions' include the transaction in respect of the property where the person providing the consideration is not traceable or is fictitious. Therefore, the fact that the beneficial owner has not been identified would not be a ground for discharge,”

However, the Court granted relief to the third accused, the wife of the managing partner, who claimed to be only a dormant partner.

The Bench held that mere status as a partner is insufficient to attract criminal liability. The complaint contained no specific averments showing that she was in charge of or responsible for the firm's business, which is a mandatory requirement under Section 62 of the PBPT Act for vicarious criminal liability.

Accordingly, the High Court set aside the trial court's order refusing discharge insofar as it related to the third accused and discharged her from the criminal proceedings, while permitting the Income Tax Department to proceed against the firm and its managing partner.

For Petitioner: Senior Counsel, R.John Sathyan, for S.Manuraj

For Respondent: Special Public Prosecutor M.Sheela