Imposition of Penalty separately on Partner/Proprietor- whether valid?

PJ/CASE STUDY/2012-13/07

19 May 2012

PJ/Case Study/2012-13/07

CASE STUDY

Prepared By:
CA Pradeep Jain
Sukhvinder Kaur LLB [FYIC]

Introduction:-

In the case under study, the issue involved is whether separate and independent penalty can be imposed on the proprietor of a firm when penalty has been imposed on the firm itself.

Vinod Kumar Gupta v/s Commissioner of Central Excise
[2012-TIOL-324-HC-P&H-CX]

Brief Facts:-

- Appellant is proprietor of M/s Asim Enterprises and partner of M/s Makhan Lal Vinod Kumar registered dealers.

- During search and investigation conducted by Excise Officers of business premises of M/s Asian Alloys Ltd on 12.01.2001, it was found that M/s Asian Alloys Ltd had availed credit on the basis of invoices issued by the registered dealers and washer manufacturing units during the period from 01.04.2000 to 31.07.2001.

Demand was raised and confirmed by the Commissioner and penalty was imposed on M/s Asian Alloys Ltd and penalty was also imposed on various registered dealers and washer manufacturing units. Penalty of Rs. 82, 85, 894/- was imposed on M/s Asim Enterprises and separate penalty of Rs. 48, 5107/- was imposed on M/s Makhan Lal Vinod Kumar. A further penalty of Rs. 50, 00, 000/- was imposed on the appellant being proprietor of M/s Asim Enterprises and partner of M/s Makhan Lal Vinod Kumar.

- Imposition of penalty of M/s Asian Alloys Ltd, the proprietor ship firm has attained finality and imposition of penalty on M/s Makhan Lal Vinod Kumar, partnership firm has also attained finality.

- In appeal before the Tribunal, it was held that appellant was settling the accounts of other registered dealers/washer manufacturing units, who had supplied invoices to M/s Asian Alloys Ltd without any physical movement of goods and therefore, the imposition of penalty confirmed on appellant-proprietor of the firm was reduced from Rs. 50, 00, 000/- to rs. 10, 00, 000/-.

- Appellant have therefore filed appeal before the High Court.

Appellant’s Contentions:- Appellant argued that since penalty was imposed on M/s Asim Enterprises, of which appellant is the sole proprietor, as well as on M/s Makhan Lal Vinod Kumar, of which appellant is the partner, therefore, no penalty can be imposed on the appellant separately, it would amount to imposition of double penalties, which is not permissible under the law.

Respondent’s Contentions:- Revenue contended that since the appellant has actively participated in the settling of account of other registered dealers, who had supplied invoices to M/s Asim Enterprises and partner of M/s Makhan Lal Vinod Kumar and no interference is called.

Reasoning of the High Court:-

The High Court was of the view that proprietorship firm or proprietor thereof cannot be treated as two different legal entities. Partnership firm is a firm in mercantile usage, however, penalty imposed on the proprietorship or partnership firms would mean penalty on the proprietor or partners thereof, therefore, imposition of penalty twice cannot be sustained in the eye of law.

- The High Court perused the judgment of the Single Judge of the High Court in Tarak Nath Sen and others v/s Union of India and Others [AIR 1975 Calcutta 337] wherein it was observed that “Although a firm in a mercantile usage has a personality of its own, strictly in the eye of law, it is not a legal entity like a natural person. Therefore, the rights and obligations of a firm are really rights and obligations of the individual partners of the firm.

On the basis of the principle, penalties imposed on the partners in that case was set aside.

- Thus, the High Court found that a firm in mercantile usage is the firm in its own, strictly in the eye of law, it is not a legal entity like a natural person. Therefore, the rights and obligations of a firm are really rights and obligations of the individual partners of the firm, therefore, penalty imposed on the firm would amount to imposition of penalty to the proprietor or the partner, as the case may be, therefore, imposition of penalty on the proprietor independently would not be legal. Penalty imposed on appellant-partner set aside.

Decision of the High Court:-

Appeal allowed.

Conclusion:-

Thus, if penalty is imposed on the proprietorship/partnership firm then separate penalty for the same default cannot be imposed on the partners of the firm as both form a single entity and are not separate from each other.

This matter has been raised by the department many times and it has been decided every time that penalty on proprietor and proprietorship concern cannot be imposed separately.

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PJ/CASE STUDY/2012-13/07
19 May 2012

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