Reserve Bank of India, Bangalore vs Dhanalakshmi Funds (India) Ltd., Madras and Another

These three revisions arise out of a common order passed by the First Additional Sessions Judge, Madras on 17-3-1986 in three criminal revision cases, viz., 34, 35 and 36 of 1986 on his file. These revision petitions came before him

under the following circumstances.

As per S. 45-S(1) of the Reserve Bank of India Act, No. 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 25 depositors in the case of an individual, and from more than 25 depositors per partner subject to a maximum of 250 depositors in all, in the case of a firm, excluding in either case depositors who are

relatives of the individual or any of the partners. Messrs. Dhanalakshmi Consolidates Finance and Industrial Investments, 158 Commander-in-chief Road, Madras 105, and Asian Integrated Finance and Industrial Corporation, 95 Mount

Road, Madras 2 are two partnership firms, hereinafter referred to as the Firms. On the belief entertained that those firms and few others were accepting deposits in contravention of the provisions of S. 45-S 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 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 28-2-1986, as prayed for, by the Chief Metropolitan Magistrate. In pursuance of these warrants, several documents were seized by the police on 1-3-1986, 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. 138 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 the documents and registers seized and produced before the Magistrate. The contention 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 the revision petition 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 31-1-1986, date

certified by Registrar, both the firms 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 as 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 was open to it and 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 contravention under S. 45 of the Act. On the basis of the above conclusions, taking into consideration the other

circumstances of the case, the Sessions Court allowed all the three revision petitions and directed that all documents and registers obtained as a result of search shall be returned to the company, however making it clear that the rights of

the Reserve Bank of India under Chap III-B of the Act as well as under the Companies Act were not affected by its order dt. 17-3-1986.

3-4. 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 revisional court to order return of the documents; the firms have not ceased to exist factually; the action of the Bank was

bona fide and based on materials available to it on the date of the application for issue of search warrant; the Magistrate had before him the facts placed by the Bank justifying its belief that certain documents relating to acceptance of

deposits in contravention of the provisions of S. 45-S of the Act were secreted in some place; the question as to whom the documents and registers now belonged were irrelevant, the documents were to be considered as secreted since

they were not made available to the authorities of the Bank for scrutiny; the observations of the Sessions Court that the Reserve Bank had knowledge that the Company was in existence when it has chosen to apply for search warrant

under Chap. III-C instead of invoking under Chap. 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 S. 45-S of the Act perpetrated prior to the dissolution of the firms cannot be effaced and have instead to be dealt with in accordance with law.

The counsel for the Company - first respondent endeavoured to refute the contentions of the revision petitioner and contended that the company was entitled to the return of documents, which belonged to it; that these documents could

be scrutinised by the Bank only in accordance with the provisions of Chap. III-B and those of the Companies Act; that at any rate no proceeding can be instituted by the Bank since the firms are now defunct.

Both parties have been heard elaborately on the points raised by them. Ultimately, the arguments centred on the point, whether any prosecution can now be launched against the defunct firms; if not, the whole seizure and scrutiny which

the Reserve Bank wants to make would be futile and a harassment to the company. The learned counsel for the respondent stated that the revision petitions can be disposed of on the 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 the prosecution was still possible and for that prosecution, the documents necessary will

have to be secured. In this connection, he placed reliance on two decisions of the Supreme Court; one in Commissioner of Income Tax, Madras, and Another Vs. S.V. Angidi Chettiar, and another in C.A. Abraham, Uppoottil,

Kottayam Vs. The Income Tax Officer, Kottayam and Another, . He also invited the attention of this court to S. 58-C 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 persons and that no prosecution can be launched against a dead person, whether an individual or a firm. It was

argued that from the provisions of S. 45-S read with S. 58-B(5A) of the Act, it was clear that the person should be in existence for the prosecution being possible and that now the firms were difficult.

We shall now extract the relevant provisions of law for easy reference, S. 45-S(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 excluding depositors who are relatives of the individual.

(ii) Firm .. Not more than twenty five depositors, per individual 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) Unincorporated .. Not more than twenty-five association of depositors per individual individuals and not 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 58-B(5A) of the Act reads as follows -

If any person contravenes any provision of Section 45-S, he shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of deposit received by such person in

contravention of that section, or two thousand rupees, whichever is more, or with both.

Section 58-C of the Act reads thus -

Offences by Companies :- (1) Where a person committing a contravention or default referred to in S. 58-B is a company, every person who, at the time the contravention 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 contravention or default and shall be liable to be proceeded against and punished accordingly ......

Explanation 2 - For the purpose of this section (1) ''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 interval 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 contravention and dies before the prosecution

or conviction, the prosecution comes necessarily to an end. Similarly, where a company has committed an offence, if the company alone is liable, the prosecution 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 discussion 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. In fact, as per S. 58-C of the Act, the company as well 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 contravention or default was committed are liable. In this case, it is not alleged that the individual who

formed the two firms are so more. It is only alleged that the firms have become defunct. Therefore, as per S. 58-C, the persons who will be found to have been in charge of and were responsible to the company for the conduct of the

business of the company are liable to be proceeded against and punished accordingly.

The learned counsel for the first respondent points out that prosecution under S. 58-C of the Act is possible for a contravention or default referred to in S. 58-B of the Act that the relevant sub-section of S. 58B of the Act is (5-A)

which deals with contravention of any provision of S. 45-S of the Act invoked by the Bank and that as per S. 45-S a person is defined as being as individual; or a firm, or an unincorporated association of individuals. Then he argues that

the word ''being'' denotes a continuous existence of the firm till the time of prosecution and that when the existence of the firm has come to an end, there cannot be any prosecution. This contention is obviously fallacious. In the first place,

the word ''being'' used in S. 45-S 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, the action, the duration of which will depend on the circumstance of each case. Secondly, S. 45-S of the Act

deals with the time of the commission 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 belongs the person accepting deposit and whether those deposits were in excess of the

statutory limit prescribed for that category. If at the time of accepting deposits there is excess as per S. 45-S of the Act, there will be liability to punishment as per S. 58-B(5A) of the Act and the human being who was in charge of and

was responsible to the Company will be liable as per S. 58-C, 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 the 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, reads as follows

:

The penalty provisions under 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 is exposed to liability of paying

penalty by committing any of the defaults contemplated by Clause (a)(b), or (c) by virtue of S. 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 in para 6 at p. 612, 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 under S. 28 to evade penalty by the simple expedient of discontinuing the firm. This plea may be accepted

only if the court is compelled. In view of the 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 for 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 of 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 time specified therein shall run from

today.

Petition allowed.