R. Kalaivani Vs DCIT – Madras High Court clarifies vicarious liability of dormant partners under PBPT Act

Background of the dispute

The Madras High Court in R. Kalaivani Vs DCIT examined whether a dormant partner in a partnership firm can be prosecuted for offences under the Prohibition of Benami Property Transactions Act, 1988 (“PBPT Act”) in the absence of clear pleadings and material showing her responsibility for the firm’s affairs.

The prosecution arose from substantial cash deposits made after demonetisation in the bank account of a partnership firm (arrayed as Accused No.1). The Department alleged that these deposits represented benami funds and that the firm as well as its two partners (Accused Nos.2 and 3) were jointly liable.

Two separate Criminal Revision Cases were filed before the Madras High Court:

  • Crl.R.C.No.872 of 2023 – by Accused No.3 (wife of Accused No.2, claimed to be a dormant partner)
  • Crl.R.C.No.956 of 2023 – by Accused No.1 (firm) and Accused No.2 (Managing Partner)

The revisions challenged the trial Court’s refusal to discharge them from prosecution under Section 53 of the Prohibition of Benami Property Transactions Act, 1988 (as amended by Act 43 of 2016).

Core facts as alleged by the prosecution

Cash deposits post-demonetisation

The respondent (Income Tax Department) alleged:

  • In the year 2017, after demonetisation, cash amounting to Rs.68.71 Crores was deposited into the bank account of the partnership firm (Accused No.1).
  • Accused Nos.2 and 3 were the partners of this firm.
  • According to the Department, neither the firm nor its partners had sufficient legitimate sources to justify such large cash deposits.
  • Past income-tax records showed very low income in earlier years, and the sudden spike in declared profits was alleged to be unrealistic and inconsistent with the firm’s financial position.
  • On this basis, the Department treated the deposits as being involved in a benami transaction and sought to prosecute:
    • the firm (Accused No.1),
    • the Managing Partner (Accused No.2), and
    • the other partner (Accused No.3).

Proceedings before the trial Court

The accused moved discharge applications before the trial Court on several grounds, including lack of material, absence of specific averments, and sufficiency of lawful income.

The trial Court:

  • Dismissed the discharge petitions,
  • Held that, at the stage of framing charge, it is not permissible to conduct a detailed evaluation of evidence, and
  • Found that the complaint and materials on record disclosed a prima facie case warranting trial.

Aggrieved by this refusal to discharge, the accused approached the Madras High Court in revision.

Arguments on behalf of Accused No.3 (dormant partner)

Counsel for Accused No.3 (petitioner in Crl.R.C.No.872 of 2023) contended:

  1. Dormant partner with no role in management

    • Accused No.3 was only a dormant partner in the firm.
    • All day-to-day affairs and business decisions were handled exclusively by her husband, Accused No.2 (Managing Partner).

  2. Reply to show-cause notice

    • Though a separate show-cause notice was not addressed to her, she sent a reply in response to the notice issued in the matter.
    • In that reply, she clearly asserted that she had no active role in the conduct of the firm’s business.

  3. No investigation into her role

    • Even after this stand was disclosed, the Department did not gather any specific evidence linking her to the firm’s management or to the disputed cash deposits.

  4. Absence of requisite averments under Section 62 of PBPT Act

    • Section 62 of the PBPT Act embodies the concept of vicarious liability of officers/partners of a firm or company.
    • The complaint did not contain the necessary pleadings that Accused No.3:
      • was “in charge of” and
      • “responsible to” the firm for the conduct of its business at the relevant time.
    • In the absence of such basic allegations, she could not be proceeded against vicariously.

On these grounds, it was urged that her continuation in the case would be an abuse of process and she should be discharged.

Arguments on behalf of the firm and Managing Partner (Accused Nos.1 and 2)

Counsel appearing for the firm and Managing Partner (petitioners in Crl.R.C.No.956 of 2023) submitted:

  1. Sufficient means and genuine business turnover