Reserve Bank of India vs Dhanalakshmi Funds (India) Ltd. and Anr

David Annoussamy, J.—These three revisions arise out of a common order passed by the First Additional Sessions Judge, Madras, on

March 17, 1986, in three criminal revision cases, viz., 34, 35 and 36 of 1986, on his file. Those revision peitions came before him under the

following circumstances.

As per section 45S(1) of the Reserve Bank of India Act, 1934 (2 of 1934), as it stands amended now, hereinafter referred to as ""the Act"", no

person, being an individual or a firm or an unincorporated association of individuals shall, at any time, have deposits from more than twenty-five

depositors in the case of an individual, and from more than twenty-five depositors per partner subject to a maximum of 250 depositors in all, in the

case of firm, excluding in either case depositors who are relatives of the individuals or anyu of partners. M/s. Dhanalakshmi Consolidated Finance

and Industrial Investments, 158, Commander-in-Chief Road, Madras-105, and Asian Integrated Finances and Industrial Corporation, 95, Mount

Road, Madras-2, are two partnership firms, hereinafter referred to as ""the firms"". On the belief entertained that these firms, and a few others were

accepting deposits in contracention of the provisions of section 45S of the Act, the Reserve Bank of India filed three petitions before the Chief

Metropolitan Magistrate, Egmore, for the issue of warrants for search and seizure of docure of documents and registers belonging to the firms,

which as per the information of the bank, were located in three different places. Search warrants were issued on February 28, 1986, as prayed for

by the Chief Metropolitan Magistrate. In pursuance of those warrants, several documents were sized by the police on March 1, 1986, from the

abovesaid three premises in the presence of an officer of the Reserve Bank of India. All those documents have been produced before the

Magistrate. Before the Reserve Bank of India filed an application for scrutiny of the documents seized, a third party, viz., Dhanalakshmi Funds

(India) Ltd., 158, Commander-in-Chief Road, Madras-105, a company registered under the Companies Act, hereinafter referred to as ""the

company"", filed three applications before the Chief Metropolitan Magistrate seeking return of documents and registers seized and produced before

the Magistrate. The contentio of the company was that the firms from which the documents and registers were sought to be seized by the Reserve

Bank of India had been dissolved and that the assets and liabilities had been taken over by the company. The Reserve Bank of India filed its

objections. Those objections were accepted by the Chief Metropolitan Magistrate who permitted the Reserve Bank of India to scrutinise the

documents and to complete the work within two weeks. Aggrieved by that order, the company filed revision petitions before the Sessions Court,

each revision petition pertaining to the documents seized in each of the three premises, but all the three being identical in all other respects. The

Sessions Court taking into consideration the evidence produced from both sides came to the conclusion that on January 31, 1986, the date

certified by the Registrar, both the firm were dissolved. It came also to the conclusion that the assets and liabilities of the firms have been taken

over by the company as per the resolution of its board of directors. The Sessions Court then observed that it was unfortunate that the Reserve

Bank of India has not acted under the provisions of Chapter III-B which wasopen to it has chosen to act under chapter III-C of the Act. It also

observed that, under the circumstances, the administrators of the company to whom the records now belong, would not be guilty of any

conttracention u/s 45S of the Act. On the basis of the above conclusions, taking into consideration the other cirumstamce of the case, the Sessions

Court allowed al the three revision peririons and directed that all documents and registers obtained as a result of each shall be be returned to the

company, however making it clear that the right of Reserve Bank of India under Chapter III-B of the Act well as under the Companies Act were

not affected by its order dated March 17, 1986.

The order of the Sessions Court was assailed before this court by the Reserve Bank of India on several grounds, viz., the Sessions Court, acting

as a revisional authority, should not have interfered in the matter when there was no manifest illegality in the warrant; since the order of warrant was

not challenged, there was no jurisdiction for the recisional court to order return of the documents; the firms have not exist factually; the action of the

bank was fide based on materials available to it on the date of the application for issue of a search warrant; the Magistrate had before him the facts

placed by the bank justifying its belief that certain documents relating tro acceptance of deposits in contracention of the provisions of section 45S

at the Act were secreted in some place; the question as to whom the documents and registers now belonged was irrelevant; the documents were to

be considered as secreted since they were not made available to the authorities of the bank for scrutiny; the observation of the Sessions Court that

the Reserve Bank had knowledge that the company was in existence when it has chosen to apply for a search warrant under Chapter III-C instead

of invoking the procisions of Chapter III-B of the Act was ill-founded; and by virtue of the fact of the firms ceasing to exist and their assets and

liabilities being taken over by the company, the contravention of the provisions of section 45C of the Act perpetrated prior to the dissolution of

firms cannot be effaced and have instead to be dealt with in accordance with law.

Counsel for the company first respondent endeavoured to refute the cpmtentions of the revision petitioner and contended that the company was

entitled to the returned of the documents which belonged to it; that those documents could be scrutinised by the bank only in accordance with the

provisions of Chapter III-B and those of the Companies Act; that at any rate no proceeding can be institued by the bank since the firms are now

defunct.

Both parties have been heard elaborately on the point raised by them. Ultimately, the arguments centred on the point, whether any prosecution

can now be launched against the defuncts firms; if not, the whole seizure and scrutiny which the Reserve Bank wants to make would be futile and

become a harassment to the company. Learned counsel for the respodent stated that the revision pwtitions can be disposed of on this short point.

So, this is the only point taken up for consideration.

The case of the revision petitioner/bank is that once contravention has been committed, culprits cannot escape by changing their garb and that

prosecution, the documents necessary will have to be secured. In this connection, he placed reliance on two decisions of the Supreme Court, CIT

v. S. V. Angidi Chettiar [1961] 44 ITR 739 and another in C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and

Another, . He also invited the attention of his court to section 58C of the Act as per which, every person who at the time of the contravention was

responsible to the company shall be guilty and punishable. On the side of the respondents, it was contended that prosecution was possible only

against a living person and that no prosecution can be launched against a dead person, whether an individual or a firm. It was argued that from the

procisions of sections 45S read with section 58B(5A) off the Act, it was clear that the person should be in existence for the prosecution being

possible and that now the firms were defunct.

We shall now extract the relevant provisions of law for easy reference. Section 45S(1) of the Act reads as follows :

No person, being an individual or a firm or an unincorporated association of individuals shall, at any time, have deposits from more than the

number of depositors specified against each, in the table below :-

TABLE

(i) Individual ... Not more than twenty-five depositors

sitors excluding depositors who

are relatives of the individual.

(ii) Firm ... Not more than twenty-five depositors

per partner and not more than two

hundred and fifty depositors in

all, excluding, in either case,

depositors who are relatives of

any of the partners.

(iii) Unincorported

associatoni ... Not more than twenty-five depositor

of individuals per individual and nor more than

two hundred and fifty depositors

in all, excluding, in either case,

depositors who are relatives of any

of the individuals constituting the

association.

Section 58B(5A) of the Actreads as follows :

If any person contrivances any provision of section 45S, he shall be punishable with imprisonment for a term which may extend may to two years,

or with fine which may extend to twice the amount of deposit received by such person in contravention of that section to two thousand rupees,

whichever is more, with both.

Section 58C of the reads thus :

Offences by companies. - (1) Where a person committing a contravention of default referred to in section 58B is a company, every person who,

at the time the contracention or default was commkitted, every person who, at the time the contracention or default was committed, was in charge

of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of

the contracention or default and shall be liable to be proceeded against and punished accordingly : .......

Explanation 2. - For the purpose of this section, -

(a) ''a company'' means any body corporate and includes a corporation, a non-banking institution, a firm, a co-operative society or other

association of individuals.

Normally, there will be some intervals of time between the date of the commission of the offence, the date of the prosecution and the date of

conviction. If a human being has committed any contracention and dies before the prosecution or the conviction, the prosecution comes necessarily

to an end. Similarly, where a company has committed an offence, if the company alone is liable, the protection and the conviction would also come

to an end with the dissolution of the company. But, if along with the company human beings constituting the company are also liable, then the

prosecution and the conviction would be possible, even after the dissolution of the company, as against the members of the company. The

members who will be held responsible are those who were in charge of and were responsible to the company for the conduct of the business of the

company. If fact, as per section 58C of the Act, the company as the persons who were in charge of and were responsible to the company for the

conduct of the business of the company at the time the contracention or degault was committed are liable. IN this case, it is not alleged that the

individuals who formed the two firms are no more. It is only alleged that the firms have become defunct. Therefore, as per section 58C, the person

who will be found to have been in charge of, or responsible to, the company for the conduct of the business of the company are liable are to be

proceeded against and punished accordingly.

Learned counsel for the first rdspondent points out that ptosecution u/s 58C of the Act is possible for a contracention or default referred to in

section 58B of the Act, that the relevant sub-section of of section 58B of the Act is sub-s. (5A) which deals with contracention of any provision of

section 45S of the Act invoked the bank and that as per section 45S, a person is defined as being an individual, or a firm, or an unincorported

association of individuals. Then, he argues that the word ""being"" denotes a continuous existence to the firm till the time of prosecution and that

when the existence of the firm has come an end, there cannot be any p[rosecution. This contention is obviously fallacious. In the first place, the

word ""being"" used in section 45S of the Act is only to enumerate the categories of persons in respect of which the limitation of acceptance of

deposits is indicated in the table appearing in that section. ""Being"" is not a progressive form which would indicate necessarily a continuance for a

period. It is only a present participle indicating, the state, the position and the action, the duration of which will depend on the circumstances of

each case. Secondly, section 45S of the Act deals with the time of the offence. As per that section, each category, as long as it belongs to that

category, should not have deposits from more than the number of depositors specified against the category in the table indicated in that section.

Therefore, before launching any prosecution, the Reserve Bank of India would have only to ascertain to which category the person accepting

deposits belong and whether those deposits were in excessof the statutory limit prescribed for that category. If at the time of accepting deposits,

there is excess as per section 45S of the Act, there will be liability to punishment as per section 58B(5A) of the Act and the human being who was

in charge of, and was responsible to, the company will be liable as per section 58C, even if the company is not available for prosecution, for the

reason that the prosecution against the persons who were in charge of and were responsible to the company, does not become extinct. This is the

ratio of two decisions of the Supreme Court relied upon by the learned counsel for the petitioner. In Commissioner of Income Tax, Madras, and

Another Vs. S.V. Angidi Chettiar, it is observed as follows.

The penalty procisions u/s 28 would, therefore, in the event of the default contemplated by clause (a), (b) or (c) be applicable in the course of

assessment of a registered firm. If a registered firm. If a registered firm is exposed to liability of paying penalty, by committing any of the defaults

contemplated by clause (a),(b) or (c) by virtue of section 44, notwithstanding the dissolution of the firm, the assessment proceedings are liable to

be continued against the registered firm, as if it has not been dissolved.

In C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, , the relevant portion at page 431 reads as

follows :

It is implicit in the contention of the appellant that it is open to the partners of a firm guilty of conduct exposing them to penalty u/s 28 to evade

penalty by the simple expedient of discontinuing the firm. This plea may be accepted only if the court is compiled, in view of unambiguous language,

to hold that such was the intention of the Legislature.

In the Act, there is no provision exempting the partner of the firm from any liability after the dissolution of the firm. Therefore, if it is decided

that once the firm has been dissolved, there can be no prosecution against any one for any contravention or offence committed by a firm, that

would be an invitation for the firm to resort to dissolution and to reappear in some other form in order to evade prosecution. It is thus clear that the

prosecution against persons who would be found to have been responsible to the defunct firms is possible and legal. Such being the conclusion

arrived at on the only point for consideration, the revision petitions have necessarily to be allowed.

In the result, the revision petitions are allowed. The order of the learned Sessions Judge is set aside. The order of the learned Chief

Metropolitan Magistrate, Egmore, is restored. The fortnight''s time specified therein shall run from today.