Gujarat High Court
M/S Diamond Nation vs Deputy State Tax Commissioner on 26 June, 2019
Author: A.Y. Kogje
Bench: A.Y. Kogje
C/SCA/5230/2018 CAV JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 5230 of 2018
With
R/SPECIAL CIVIL APPLICATION NO. 5231 of 2018
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE A.Y. KOGJE Sd/-
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1 Whether Reporters of Local Papers may be allowed to No
see the judgment ?
2 To be referred to the Reporter or not ? No
3 Whether their Lordships wish to see the fair copy of the No
judgment ?
4 Whether this case involves a substantial question of law No
as to the interpretation of the Constitution of India or any
order made thereunder ?
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M/S DIAMOND NATION
Versus
DEPUTY STATE TAX COMMISSIONER
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Appearance:
MR. M.R.BHATT, LD. SENIOR ADVOCATE with KARAN G
SANGHANI(7945) for the Petitioner(s) No. 1
MR. DHAWAN JAYSWAL, AGP, (1) for the Respondent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE A.Y. KOGJE
Date : 26/06/2019
CAV JUDGMENT
Rule. Learned Assistant Government Pleader waives service of rule on behalf of respondent.
[1] These two petitions are filed by the petitioners under Article 226 of the Constitution of India against the order dated 18.11.2017 and 03.03.2018 passed by the respondent-
Page 1 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENTRegistrar of Firms. Under the impugned orders, the Registrar of Firms had refused the application filed by the petitioners for modification to add Go Green Diamonds LLP as a partner in the petitioners' firm.
[2] Both these petitions are arising out of identical facts and therefore, with the consent of parties, the petitions are taken up for joint hearing and disposal.
[3] Learned advocate appearing for the petitioners submit that the petitioners being a registered firms under the Indian Partnership Act, 1932 (for short "the Act") had desired to introduce Go Green Diamonds LLP, a firm registered under the provisions of Limited Liability Partnership Act, 2008 (for short "LLP Act") as a constituent partner of petitioners firm and for this reason, Form-E came to be filed with the respondent- Registrar of Firms in accordance with Section 63 of the Act. On 18.11.2017, the application came to be rejected citing Section 2(42) of the Act that the partnership firm under the LLP Act cannot be a partner in the partnership firm. Though extensive representation made by the petitioners, the respondent- Registrar of Firms did not consider such representation and issued yet another communication dated 13.03.2018 maintaining its stand in earlier communication dated 18.11.2017, however, not citing any reasons for the same.
[4] Learned advocate for the petitioners submit that the impugned orders are erroneous as it cites Section 2(42) of the Act, which is completely irrelevant. It is also submitted that Section 4 of the Act contemplates a legal person who can be a partner and Section 3 read with Section 2(d) of the LLP Act defines a Limited Liability Partnership to be a body corporate Page 2 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT and a legal entity and therefore, would be clearly covered under the word "person" used in Section 4 of the Act. It is therefore, submitted that the Limited Liability Partnership can be a partner in a partnership firm and there is no bar.
[4.1] It is submitted that a company registered under the Companies Act being a body corporate can be a partner in a partnership firm and in that regard, the petitioners being cited an illustration of one Shanti Developers alongwith its additional affidavit. It is also submitted that one Swapna Enterprise, a registered partnership firm was permitted to enter Jeeva Vanijya Private Limited as a partner and such constitution of partnership was duly accepted. The case of the petitioners should also be accepted on the same footing.
[4.2] It is submitted that the Hon'ble Supreme Court in the case of Dulichand Laxminarayan v/s. Commissioner of Income Tax, reported in (29 ITR 535), held that a word "partner" in Section 4 of the Act contemplates only a legal person and as per the definition in LLP, Go Green Diamonds Limited being a legal person is competent to be a partner.
[4.3] As against this, learned Assistant Government Pleader relying upon the affidavit filed on behalf of the respondent submitted that the application for change by the petitioners was rejected considering the provisions of Sections 4, 25 and 49 of the Act and it was by mistake in the impugned communication dated 18.11.2017, Section 2(42) of the Act was cited. It is submitted that the partnership firm registered under the LLP Act is incompetent to be a partner in another partnership firm registered under the Act. Emphasis is led on the issue of liability which is prescribed under Section 25 of the Page 3 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT Act and Section 49 of the Act by which each partner is made personally liable, whereas, the liability of the partners under the LLP Act is limited and therefore, it goes against very basis of joint and several liabilities of the partners and hence, a partnership firm under the LLP Act cannot be accepted as a partner in the partnership firm registered under the Act. Reliance is placed on the judgment in the case of Rasiklal & Co. v/s. Commissioner of Income Tax, reported in AIR 1977 SC 4389.
[4.4] He submitted that as far as the partnership firm is concerned, the same does not have any distinct or separate legal entity from that of its partner against which LLP is a separate legal entity. Section 3 of the LLP Act provides that a Limited Liability Partnership is a legal entity separate from that of its partner. Therefore, again when legal question would arise in future since both partnership firm as well as LLP stands on a different and distinct legal footing as one being a separate legal entity whereas the other not being a separate legal entity, the same would lead to an ambiguous situation.
[4.5] He submitted that under the Act, there is no provision with respect to the perpetual succession in the Act. it is submitted that with a death/resignation of partner, the partnership shall dissolve as per the terms of the agreement. It is submitted that as against this, there is no concept of perpetual succession in the partnership. Section 3(2) of the LLP Act make it amply clear that a Limited Liability Partnership shall have perpetual succession. It is submitted that by virtue of death/cessation of a partner, the LLP firm would not stand automatically dissolved. Therefore, in the eventuality of LLP Page 4 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT being allowed to become a partner again a question would arise with respect to the perpetual succession as under one Act there is no perpetual succession permissible whereas under
the other Ac i.e. the LLP Act, there is a perpetual succession.
[4.6] He submitted that as far as the liability is concerned, the extent of liability is also different in both partnership firm as well as LLP. It is submitted that as far as the liability of partner under the Act is concerned, the liability is unlimited and the partners are severally and jointly liable for the actions of the other partners. Sections 25 to 27 govern the aspect of liability under the Act. It is submitted that as against the unlimited liability of the partners under the Act, the liability to the extent of contribution and the partners are not personally liable. Section 28 of the Act LLP Act provides for the extent of liability of partner which provides that a partner is not personally liable directly or indirectly for an obligation under Section 27(3). Therefore, as it can be seen there is a distinction with respect to the extent of liability under both the Acts and therefore, several issues would also arise if LLP is permitted to become a partner in the partnership firm.
[4.7] He submitted that as far as the partnership firm is concerned, the foreign direct investment may not be permissible whereas under the LLP, 100% foreign direct investment is permissible and allowed. It is submitted that as per Section 7 of the LLP Act, which stipulates for one partner out of two designated partners which can be a non-resident of India and therefore, foreign direct investment can come in the LLP. It is submitted that in all possibilities and probabilities, the LLP if allowed to become a partner in the partnership firm as if Page 5 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT either of the designated partner is NRI of LLP, directly the foreign investment would come to the partnership firm which would also lead may hawala transactions.
[5] As against this, in the rejoinder, on behalf of the petitioners, it is submitted that the respondent-Registrar of Firms has travelled beyond his jurisdiction as respondent has no powers under the Act to reject the notice of change filed under Section 63 of the Act. The respondent would have power only to make record of notice in the entry relating to firm and to rectify the mistake in accordance with Section 64. Therefore, the impugned communications which are effectively an adjudication on proprietary on application, such exercise is not available to the Registrar of Firms.
[6] Considering the rival submissions of the parties and perused the documents placed on record, the issue for consideration of this Court is whether a partnership firm registered under the provisions of LLP Act can be accepted as a constituent partner of a partnership firm registered under the Act. The issue subsequently raised with regards to the jurisdiction of Registrar of Firms that under Section 63 of the Act, the respondent had no authority to passed impugned orders effectively rejecting the notice of change under Section
63. Section 4 of the Act is defined for partnership , partner, firm and firm name, which reads as under:-
"4. DEFINITION OF "PARTNERSHIP", "PARTNER", "FIRM"
AND "FIRM-NAME". "Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Persons who have entered into partnership with one another are called individually, "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm-name".
Page 6 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT[7] From the definition, the partnership is the relation between persons who have agreed to share profits of business carried on by all or any of them acting for all. Accordingly, necessary ingredients of partnership are that (i) there must be an agreement entered into by all the persons concerned, (ii) such agreement must be to share profits of the business and
(iii) the business must be carried on by all or any of the persons concerned acting for all. Section 25 of the Act pertains to liability of a partner for acts of the firm, which reads as 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."
[8] Section 49 which is for the payment of firm's debt and of separate debts reads as under:-
"49.PAYMENT OF FIRM'S DEBTS AND OF SEPARATE DEBTS. Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall he applied first in the payment of his separate debts, and the surplus (if any) in payment of the debts of the firm."
[8] The notes on clauses by the special committee for Section 25 of the Act is as under:-
"Notes on clauses by the Special committee-Clause 25: This is the general statement of the liability of a partner for the liabilities of the firm. Sections 249 and 250 of the Indian Contract Act, 1872, merely provides that each partner is liable for all the liabilities of the firm, but does not say that the partner are all liable jointly and severally. Section 9 of the English Act makes the partners liable Page 7 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT jointly for contractual liabilities, and section 12 makes them joint and severally liable for tortious liabilities. Section 43 of Indian Contract Act makes joint promisors generally liable jointly and severally, and this general principle has been applied to partnership liabilities in India (6 Bom.706, 17 Bom. 6). The clause expresses this principle. The liability relates to both contracts and torts."
[9] The 7th report of Law Commission of India on the Act was presented on 13.07.1957. The commission had occasion to examine the suggestion for introducing the limitedly partnership, but the same was not accepted with the following observations:-
"Suggestion for introducing limited partnership-not accepted-It has been suggested that partnerships with limited liability should be recognized in India either by a special enactment or as a part of the Partnership Act. A concrete suggestion made by the Iron, Steel and Hardware Merchant' Chamber of India in this respect may be noted:
"Considering the recent amendment in the Indian Companies Act, we feel that a provision should be made in the Indian Partnership act, 1932 by which limited liability partnerships can be entered into on the lines of the Limited Partnership Act. The Indian Companies Act has become so cumbersome that for a small business it is impossible to comply with all the provisions unless a full-time Secretary is engaged. Before the amendment was introduced in the Indian Companies Act, two or three partners used to find it convenient to register a Private Limited Company and carry on the work. Now there are so may restrictions on taking loans by the directors or shareholders even in private limited companies that people will prefer to enter into a partnership instead of forming a limited liability company. That risk can only be minimised by introducing limited liability partnership."
We have carefully considered this suggestion and have come to the conclusion that having regard to the conditions prevailing in India, the inherent shortcomings of limited liability partnerships, and the fact that even in England, notwithstanding legislation permitting such partnerships, not may such partnerships have been actually formed, it is neither necessary nor expedient to make provision for Page 8 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT limited liability partnerships in India. The suggestion, if accepted, it also likely to result in rendering ineffective the provisions of the Indian Companies Act which have been recently made stricter."
[10] Upon the 7th report of Law Commission of India, the provisions relating to liability of a partner in the partnership form appears to have remained unchallenged, thereby the suggestion of the Law Commission of India in not accepting the proposal for limited liability of a partners is accepted.
[11] The relevant provisions of the LLP Act needs to be recorded as under:-
"2-Definitions:- In this Act, unless the context otherwise requires,-
(d) "body corporate" means a company as defined in section 3 of the Companies Act, 1956 (1 of 1956) and includes--
(i) a limited liability partnership registered under this Act;
(ii) a limited liability partnership incorporated outside India;
and
(iii) a company incorporated outside India, but does not include--
(i) a corporation sole;
(ii) a co-operative society registered under any law for the time being in force; and
(iii) any other body corporate (not being a company as defined in section 3 of the Companies Act, 1956 (1 of 1956) or a limited liability partnership as defined in this Act), which the Central Government may, by notification in the Official Gazette, specify in this behalf;
3.Limited liability partnership to be body corporate.
--
Page 9 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT(1) A limited liability partnership is a body corporate formed and incorporated under this Act and is a legal entity separate from that of its partners.
(2) A limited liability partnership shall have perpetual succession.
(3) Any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership.
4.Non-applicability of the Indian Partnership Act, 1932.--
Save as otherwise provided, the provisions of the Indian Partnership Act, 1932 (9 of 1932) shall not apply to a limited liability partnership.
5. Partners.--Any individual or body corporate may be a partner in a limited liability partnership:
Provided that an individual shall not be capable of becoming a partner of a limited liability partnership, if--
(a) he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
(b) he is an undischarged insolvent; or
(c) he has applied to be adjudicated as an insolvent and his application is pending"
[12] The statement of objects and reasons of Limited Liability Partnership Bill, 2008, Clause-4 relates to silent features of limited liability partnership deed and relevant for our purpose being sub-clause (ii) and (iii), which reads as under:-
"(ii) the mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between partners or between the LLP and the partners subject to the provisions of the proposed legislation. The Bill, if enacted, would provide flexibility to devise the agreement as per their choice. In the absence of any such agreement, the mutual rights and duties shall be governed by the provisions of proposed legislation;Page 10 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT
(iii) the LLP will be a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP which may be of tangible or intangible nature or both tangible and intangible in nature. No partner would be liable on account of the independent of unauthorised actions of other partners or their misconduct. The liabilities of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP."
[13] It would be necessary to enumerate distinguishing features of relevant provisions under the LLP Act and the Act which are provided in tabular manner as under:-
Details Partnership Firm LLP Definition of Partner Section 4: Section 2(q): 'partnership, 'partner' in relation 'partner', 'firm' and to a limited liability 'firm name'. partnership means Partnership is any person who relation between becomes a partner 'persons' who have in LLP in agreed to share the accordance with profits of a business LLP agreement. carried on by all or any of them acting for all. Nature of Partnership LLP-strictly in agreement agreement can be accordance with oral and written LLP agreement. both. Registration Not necessary to be Registration to be registered. done before the However, if Registrar of registered, companies. M registration before the Registrar of Firms. Section 58 provides for application for registration. Page 11 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT Whether a separate No. it is not a LLP is a separate and distinct legal separate legal legal entity. Section entity? entity. 3 of the Act provides that it is a separate legal entity from that of its partners. Perpetual There is no Yes, there is a succession provision for perpetual perpetual succession. By succession in the virtue of Partnership Act with death/ceasation of the partners, the LLP death/resignation of firm would not the partner. The stand automatically partnership shall dissolved. dissolve as per the terms of agreement. Provision with Foreign investment Foreign investment
respect to foreign is not permissible. is permissible.
investment
Extent of liability Unlimited liability. Limited to the
Partners are extent of
severally and jointly contribution.
liable for actions of Partners are not
other partners. personally liable.
Sections 25 to 27. Section 28 of the
LLP Act.
[14] The Apex Court in the case of Rasiklal and Co. (supra) has held as under:-
8. In the case of Dulichand Laxminaraya v. Commissioner of Income Tax, 29 ITR 535, it was held by a Bench of three Judges of this Court that a firm is not a "person" and as such was not entitled to enter into a partnership with another firm or an HUF or an individual. In that case, an individual, a joint family and three firms purported to enter into a partnership.
The agreement of partnership was signed by the individual partner, the Karta of the joint family and one partner each of the three firms. The firm applied for registration under Section 266 of the Income Tax Act. The application was Page 12 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT signed by the aforesaid five individuals. This Court held that there could no question of granting registration to a partnership purporting to be one between three firms, an HUF and an individual. In coming to this conclusion, this Court relied on the provisions of Indian Partnership Act wherein, 'partnership', 'partner', 'firm' and 'firm name' were defined in the following manner:
"4. Definition of "partnership", "partner", "firm" and "firm name" :
"Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Persons who have entered into partnership with one another are called individually "partners" and collectively "a firm", and the name under which their business is carried on is called the "firm name"."
S.R. Das, C.J. speaking for the Court observed :
"This Section clearly requires the presence of three elements, namely, (1) that there must be an agreement entered into by two or more persons; (2) that the agreement must be to share the profits of a business; and (3) that the business must be carried on by all or any of those persons acting for all. According to this definition "persons" who have entered into partnership with one another are collectively called a "firm"
and the name under which their business is carried on is called the "firm name". The first question that arises is as to whether a firm as such can enter into an agreement with another firm or individual. The answer to the question would depend on whether a firm can be called a "person"."
9. Das, C.J., thereafter, went on to examine the meaning of the word "person" in the Partnership Act. It noted that "person" had not been defined in the Partnership Act. However, the General Clauses Act, 1897, had defined 'person' in Section 3(42) as under:
"Person" shall include any company or association or body of individuals whether incorporated or not."
10. After referring to the definition of 'person' in the General Clauses Act, Das, C.J. observed that the firm was not a company but was certainly an association or body of individuals.
11. The Court, however, after examining the scheme of the Partnership Act and the corresponding provisions of the English Law on the subject, held that the definition given to Page 13 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT "person" by the General Clauses Act could not be extended to the Partnership Act having regard to the various provisions of that Act. The Court concluded :
"It is clear from the foregoing discussion that the law, English 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 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."
12. The view of this Court is that when Section 4 of the Partnership Act spoke of "persons" who had entered into partnership with one another it could only be individuals and not a body of persons. A body of persons like a firm could not enter into partnership with other individuals. "
[15] To this Court, the basic difference in the two Acts is pertaining to the liability, as seen earlier, Section 25 of the Act holds the partners to be jointly and severally liable with all the other partners and also severally liable for the acts of the firm done, of which such person is a partner. Whereas the provisions regarding the liability of the partnership firm under the LLP Act is restricted to the contents of the LLP agreement. Meaning thereby, under the LLP Act, the liability of the partner would be restricted only to the extent as provided in the agreement which runs against the purpose for which Section 25 of the Act is enacted.
[15.1] Moreover, if the argument of the petitioners is to be accepted that the partnership firm under the LLP Act to be treated as a partner and be permitted to join as a partner in a partnership firm considering the definition under Section 4, then it would upon a way for a partnership firm under the Act which may have all the constituent partners to be partnership Page 14 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019 C/SCA/5230/2018 CAV JUDGMENT firm registered under the LLP Act, thereby completely frustrating the purport of Sections 25 and 49 of the Act. This in the opinion of the Court, cannot be the purport of the legislation when under the statute, clear provision under Section 4 of the LLP Act excludes the application of Indian Partnership Act to the LLP Act.
[16] In view of the aforesaid incohesiveness, in the provisions of two acts, the Court is not inclined to accept the argument of the petitioners that partnership firm under the LLP Act merely being a person or body corporate necessarily must be accepted as a partner in a partnership firm constituted under the Act.
[17] The second submission regarding power of the Registrar of Firms under Section 63, this Court is of the view that the power to act under Section 63 will have always be to act in consonance with the provisions of the Act and does not expect that the Registrar should act dehors the provisions of the Act. When this Court has held that a partnership firm under the LLP Act is not competent person to be included as a partner in the partnership firm under the Partnership Act, 1932, the Court consequently must hold that the act on the part of the respondent-Registrar of Firms in not entertaining the changes made by an application under Section 63, has not committed any illegality.
[18] With the aforesaid, the present petitions are not entertained and hence, are hereby dismissed. Rule is discharged.
(A.Y. KOGJE, J) Siddharth Page 15 of 15 Downloaded on : Thu Jul 11 03:58:18 IST 2019