Mere Status as Partner Is Not Enough to Prosecute: Madras High Court Discharges Dormant Partner in ₹68 Crore Benami Case

“Vicarious liability cannot be presumed – It must be pleaded and proved”, Madras High Court delivered a significant judgment in R. Kalaivani v. Deputy Commissioner of Income Tax (Benami Prohibition), Initiating Officer, Chennai, wherein it distinguished the scope of vicarious liability under the Prohibition of Benami Property Transactions Act, 1988 (PBPT Act) and discharged a dormant partner (A3) from prosecution, while allowing proceedings to continue against the partnership firm (A1) and its Managing Partner (A2).

This ruling marks a crucial reaffirmation that mere association or status in a firm is insufficient to attract criminal prosecution under Section 62 of the PBPT Act unless the prosecution demonstrates specific averments and material showing control, consent, or connivance in the alleged benami transaction.

Post-Demonetisation Deposits and Benami Allegations

The case arose from an investigation initiated by the Income Tax Department following large-scale cash deposits of ₹68.71 Crores into the bank account of M/s V.P.C. & Co., a partnership firm, shortly after demonetisation in 2016. The firm, along with its Managing Partner R. Ramesh (A2) and co-partner R. Kalaivani (A3), came under scrutiny for allegedly facilitating benami transactions through fictitious sales and bogus billing.

According to the prosecution, the firm’s financial records for the previous assessment years showed meagre income: ₹2.3 Lakhs in 2015–16 and ₹1.7 Lakhs in 2016–17. A sudden jump to over ₹24 Lakhs in 2017–18, followed by deposits exceeding ₹68 Crores post-demonetisation, was seen as prima facie implausible. The complaint alleged manipulation, use of fake vehicle registration numbers in invoices, and lack of credible explanation for the surge in turnover.

While the accused claimed the deposits reflected accumulated cash sales and advances, the trial court refused to discharge any of the accused under Section 239 CrPC, leading to the present criminal revisions.

Can a Partner Be Prosecuted Without Specific Averments of Responsibility?

The core legal issue was whether a partner (A3) who claimed to be dormant could be prosecuted under Section 62 of the PBPT Act, which fastens criminal liability on individuals who were “in charge of and responsible to the firm for the conduct of its business”.

Justice Sunder Mohan underscored that “vicarious liability in criminal law is not automatic” and must be grounded in clear pleadings and supporting material. Citing the Supreme Court’s ruling in Dilip Hariramani v. Bank of Baroda, (2024) 15 SCC 443, the Court observed:

“There is no presumption that every Director [or Partner] knows about the transaction. Vicarious liability can be inferred only if the complaint contains averments showing that the accused was in charge of and responsible for the conduct of the business of the firm at the relevant time.”

In this case, the complaint lacked any such allegations against A3. The petitioner had explicitly responded to the show cause notice asserting her dormant role and non-involvement in the affairs of the firm. The respondent neither issued a separate notice nor provided any material to counter her claim.

Distinguishing Managing and Dormant Partners

The Court observed that, unlike A2 (the Managing Partner), A3’s role was not established. The complaint made no reference to her being in charge of the firm's affairs or having knowledge of the alleged benami transactions. The judge emphasized:

“The petitioner cannot be equated with her husband, who was the Managing Partner… The requisite averments to invoke vicarious liability are absent in the complaint.”

Referring again to Dilip Hariramani, the Court reiterated: “Vicarious liability under Section 62 PBPT Act, like under Section 141 of the NI Act, requires either control over day-to-day affairs, or proof of personal involvement, consent or connivance. Civil liability as a partner does not automatically translate into criminal liability.”

Accordingly, the Court set aside the trial court’s order refusing discharge to A3 and discharged her from the case. However, it clarified that if evidence emerged during trial indicating her active role, the prosecution could invoke Section 319 CrPC to arraign her afresh.

Proceedings to Continue Against Managing Partner and Firm

As for the partnership firm (A1) and the Managing Partner (A2), the Court upheld the trial court’s refusal to discharge. A2 had signed key financial documents and balance sheets. The Court observed:

“Second accused is the Managing Partner without whose consent the said cash deposits would not have been made… He had also signed the Balance Sheet and other relevant documents, which indicates his knowledge and consent prima facie.”

The argument that the complaint lacked explicit averments against A2 was rejected, as his status and role made his responsibility self-evident. The judgments cited by the defence—Sanjay Dutt v. State of Haryana and Umanga Vohra v. State of Tamil Nadu—were distinguished on facts, as they pertained to different regulatory contexts and did not involve firms where the accused were de facto managing affairs.

The High Court’s decision clearly delineates the contours of vicarious liability in white-collar offences under the PBPT Act. By discharging the dormant partner (A3), the Court reinforced the settled principle that criminal liability cannot rest on assumptions arising from mere association.

At the same time, by permitting prosecution against the Managing Partner (A2) and the firm (A1), the Court signalled that individuals occupying positions of control and signing financial documents cannot escape scrutiny under the guise of technicalities.

This ruling thus strikes a balance between preventing misuse of prosecution powers and ensuring accountability in high-value financial crimes.

Date of Decision: 19 January 2026