M/S Imperial Arms Co. Gun Factory, Munger, through one of the partners namely Rajan Kumar Sharma and Rajan Kumar Sharma, s/o late Nand Lal Sharma, resident of Mohalla-Puraniganj, P.S.-Kasim Bazar, District-Munger V. The Union Of India, through the Secretary, Ministry of Labour, Government of India, New Delhi and Employees Provident Fund Organization, through the Central Provident Fund Commissioner, New Delhi and The Assistant Provident Fund Commissioner, Employees Provident Fund Organization, Sub-Regional Office, Adampur Chowk, Bhagalpur, Bihar

CWJC/7217/2007

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The case involves M/S Imperial Arms Co. Gun Factory and its partner Rajan Kumar Sharma challenging an order that imposed a liability under the Employees Provident Fund and Miscellaneous Provisions Act, 1952. The dispute centered on whether partners in a firm could be considered employees under the Act, which would necessitate contributions to the Employees Provident Fund. The court examined the definitions and roles of partners under the Partnership Act and the Income Tax Act, concluding that partners are not employees of the firm merely because they receive remuneration or salary. The court referenced several precedents, including decisions from the Supreme Court and various High Courts, to support its findings.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 803467 (HC-PATNA)
• Appeal Type: Others
• Pronouncement Date: 17-08-2012
• Assessment Year: misc
• Other Referred Cases: Om Roller Flour Mill vs Union of India, Regional Director, Employees State Insurance Corporation, Trichur vs. Ramanuja Match Industries
• Laws Referred To: Employees Provident Fund and Miscellaneous Provisions Act, 1952, Partnership Act, 1932, Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: R S PRADHAN
• Assessee Lawyers: BRISKETU PANDEY; S P PATHAK; A K JHA
• Keywords: Employee Definition; Employees Provident Fund; Legal interpretation; Partnership; Judicial Standards
• Section: 7A

Judgement Text

"IN THE HIGH COURT OF JUDICATURE AT PATNA Civil Writ Jurisdiction Case No.7217 of 2007 ====================================================== 1. M/S Imperial Arms Co.Gun Factory, Munger, through one of the partners namely Rajan Kumar Sharma 2. Rajan Kumar Sharma, s/o late Nand Lal Sharma, resident of Mohalla-Puraniganj, P.S.-Kasim Bazar, District-Munger .... .... Petitioners Versus 1. The Union Of India, through the Secretary, Ministry of Labour, Government of India, New Delhi. 2. Employees Provident Fund Organization, through the Central Provident Fund Commissioner, New Delhi. 3. The Assistant Provident Fund Commissioner, Employees Provident Fund Organization, Sub-Regional Office, Adampur Chowk, Bhagalpur, Bihar .... .... Respondents ====================================================== Appearance : For the Petitioner/s : Mr. Brisketu Sharan Pandey, Advocate Mr. S.P. Pathak, Advocate Mr. A. K. Jha, Advocate For the Respondent/s : Mr. R.S.Pradhan, Sr. Advocate ====================================================== CORAM: HONOURABLE MR. JUSTICE AJAY KUMAR TRIPATHI ORAL ORDER 4 17-08-2012 Mr. Paritosh Kumar appears in person today as directed by this Court on 07.08.2012. The object behind his presence was to give him a personal opportunity to justify the order passed by him on 15.07.2004 which had created a liability upon the petitioners in a proceeding initiated under Section 7A of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (hereinafter referred to as the ‘Act”). Prima facie after hearing the submission of learned counsel for the petitioners and having perused annexure-1, the Patna High Court CWJC No.7217 of 2007 (4) dt.17-08-2012 2 order under challenge, the court came to a considered opinion that the recovery made from the petitioners was patently illegal and based on a wrong interpretation to the provisions of Partnership Act, against all established cannons of interpretation. An affidavit duly sworn by him has been filed. Stand has been taken that adjudication has been made by him under the powers conferred under the Act but he has no explanation to offer as to how salary or remuneration paid to a partner will bring them within the definition of an employee and for whom contributions are required to be made while complying with the provisions of the Act. Both under the Partnership Act as well as the Income Tax Act partners are entitled to draw remunerations as well as share of profits to the extent of contribution of their capital but that will not bring them down to the level of an employee from the position of an employer. There is no ambiguity in law. By no stretch of imagination such an interpretation could be given. However, the assessing authority has done just that by giving a go by to all cannons of interpretation or the principles of law. Counsel for the petitioner has produced a judgment rendered in similar circumstances in the case of Om Roller Flour Mill vs Union of India disposed of on 22nd June, 2001 by Calcutta Patna High Court CWJC No.7217 of 2007 (4) dt.17-08-2012 3 High Court reported in 2002(94) FLR 908. In addition to that the decision rendered by Hon’ble Supreme Court in the case of Regional Director, Employees State Insurance Corporation, Trichur vs. Ramanuja Match Industries reported in 1985 (1) SCC 218 is also an authority. The legal position has been laid down in unambiguous terms in para 4 to 9 are reproduced below:- 4. It is appropriate that at this stage we refer to the position of a partner qua the firm. Section 4 of the Partnership Act, 1932, defines „partnership‟ and one of the essential requisites of a partnership is that there must be mutual agency between the partners. A Full Bench of the Patna High Court in Seth Hira Lal v. Sheikh Jamaluddin rightly emphasized upon the position that an important element in the definition of partnership is that it must be carried on by all or any one of the partners acting for all. Section 18 of the Partnership Act statutorily declares every partner to be an agent of the firm for the purposes of the business of the firm and Section 19 states that an act of a partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. A partnership firm is not a legal entity. This Court in Champaran Cane Concern v. State of Bihar, pointed out that in a partnership each partner acts as an agent of the other. The position of a partner qua the firm is thus not that of a master and a servant or employer and employee which con-cept involves an element of subordination but that of equality. The partnership business belongs to the partners and each one of them is an owner thereof. In common parlance the status of a partner qua the firm is thus different from employees working under the firm, it may be that a partner is being paid some remuneration for any special attention which he devotes but that would not involve any change of status and bring him within the definition of Patna High Court CWJC No.7217 of 2007 (4) dt.17-08-2012 4 employee.(emphasis mine ) 5. Learned counsel for the appellant strongly relied on a case of the Rajasthan High Court in Regional Director, E.S.I. Corporation, Jaipur v. P.C. Kasliwal. The learned Single Judge has taken the view that a partner can be employed by the firm and if he draws emoluments within the prescribed limits for the work of the factory, he would be an employee under Section 2(9) of the Act. In the same decision it has also been held that a sleeping partner drawing a monthly allowance merely because he is a partner would not come within the ambit of the Act as an employee and contribution in respect of such partner would not be payable. As against this view there is a Division Bench decision of the Kerala High Court in Regional Director of E.S.I. Corporation v. Oosmanja Tile Works, Alwaye, where it has been held that a managing partner of a firm is not an employee if merely he receives salary or other remuneration. Strong reliance has been placed by the Kerala High Court on the position that such managing partner is not an employee who is working under a contract of service. In fact, in the present case support has been drawn from this decision of the High Court as a precedent and following the ratio of that decision, the High Court has decided against the appellant. The Rajasthan High Court has obviously not been alive to the definition of the term „employee‟ in Section 2(9) of the act though the definition has been extracted in extensor. The status of a partner qua the firm with reference to the provisions of the Partnership Act, the concept of “employer” and “employee” and the importance of the definition of “wages” have also been lost sight of in adjudicating whether a partner is an employee. We are, therefore, not inclined to accept the view of the Rajasthan High Court. On the other hand, the view taken by the Kerala High Court seems to be the correct one and fits in with the position of a partner qua his firm and the jurisprudential approach to the matter. 6. The respondent did not choose to appear in this Court to support the order of the High Court. We have, however, come across several judicial Patna High Court CWJC No.7217 of 2007 (4) dt.17-08-2012 5 opinions of American and English courts taking the view that a person cannot be the employee of the firm of which he is a partner. In Words and Phrases ( Permanent Edition) Vols. 14 and 14-A ( 1974 reprint), several such decisions of the American State Courts have been referred to in support of the view that a partner cannot be an employee of his firm and we propose to refer to some of the more apt ones. In Dube v. Robinson, it has been held that in partnership each partner is an agent of the others as well as a principal; but he is not in hire as an employee and that he may perform labour even with the employees of the partnership and of the same kind as they perform does not make him an employee of the other partners or of the partnership, and hence such partner cannot be counted to constitute one of the workmen necessary for application of the Employers‟ Liability and Workmen‟s Compensation Act to the partnership business. In Unites States Fidelity & Guarantee Company v. Neal, it has been held that a partner is not an employee of the partnership within the Compensation Act though at the time of the injury he was performing special services under contract with his partner, separate and independent from the articles of partnership, and is being paid compensation therefore in addition to his share in profits. Again, in Le clear v. Smith, it was held that a partner, though he received a salary in addition to his share of the profits, was an employer and not an employee entitled to compensation under the Workmen‟s Compensation Law, where the insurer did not insure the employers. In Berger v. Fidelity Union Casualty Co., Texas, it has been held that a member of an employer firm cannot be an employee thereof. In Weaver v. Weinberger, it was held that “employee” is a person who renders service to another, usually for wages, salary or other financial consideration, and who, in performance of such service, is entirely subject to the direction and control of the other, such other being the employer. Crooks v. Glena Falls Indemnity Co., is an authority for the view that an employee is one who is subject to the absolute control and direction of Patna High Court CWJC No.7217 of 2007 (4) dt.17-08-2012 6 the employer in regard to any act, labour or work to be done in course and scope of his employment. In Morici Corporation v. U.S.D.C. California, the Court held that the test to determine whether one person is another‟s employee, is whether or not he is subject to control of the other person. In Burker v. Friedman, it was held that partners cannot be regarded as employees rather than as employers who own and manage operation of business, and, hence, cannot be included as employees. Wright v. Dearete took the view that partners were not employees for purposes of requirement that compensation law be complied with when there are three or more employees. Though we have not come across any decision of the U.S. Supreme Court on the point, these authorities under various legislations are clearly indicative of the principle that a partner who belongs to the class of employer cannot rank as employee because he also works for wages for the partnership. Undoubtedly the term employee is the co-relative of employer. (emphasis mine) 7. We may usefully refer here to an English decision. The Court of Appeal in Ellis v. Joseph Ellis & Co., was called upon to decide whether a partner of a firm could be its employee. The short facts relevant for our purpose available in the judgment of Collins M.R. are : The deceased appears to have been a skilled workman and, by agreement with his partners, he worked at the mine, sometimes on the surface and sometimes underground, for wages; and, while working underground, he met with an accident which occasioned his death. His representative thereupon claimed compensation under the Workmen‟s Compensation Act, 1897, on behalf of herself and his children. The question is whether, having regard to his position as one of the partners, he can be regarded as a workman in the employ of the partnership, and the partners as his employers within the meaning of the Act. When one looks at the provisions of Patna High Court CWJC No.7217 of 2007 (4) dt.17-08-2012 7 the Act they do not appear to be applicable to a case like the present. The supposition that the deceased man was employed, within the meaning of that term as used in the Act (not very different from the definition here), would appear to involve that he, as one of the partners must be looked upon as occupying the position of being one of his own employers. It seems to me that, when one comes to analyse an arrangement of this kind, namely, one by which a partner himself works, and receives sums which are called wages, it really does not create the relation of employers adjusting the amount that must be taken to have been contributed to the partnership assets by a partner who has made what is really a contribution in kind, and does not affect his relation to the other partners, which is that of co-adventurer and not employee. Lord Justice Mathew pithily but with emphasis added : The argument on behalf of the applicant in this appeal appears to involve a legal impossibility, namely, that the same person can occupy the position of being both master and servant, employer and employed. Lord Justice Cozens-Hardy also spoke in the same strain : All that our decision in this case amounts to, I think, is that the Act only applies where there is on one side an employer, and on the other side, a workman, who are different persons. This is in complete accord with out view. 8. F.C.Bock and F.F. Manix in their book, the Australian Income Tax Law and Practice (1960 Edn., Vol. 3, page 3092) have said : The decision of the High Court in Rose v. Federal Commissioner of Taxation established that there is nothing in the relevant income-tax legislation to warrant treating a Patna High Court CWJC No.7217 of 2007 (4) dt.17-08-2012 8 partnership as a distinct legal entity. A partner cannot, therefore, also be an employee of the partnership, for a man cannot be his own employer……. 9. It is thus clear that in the United States, Great Britain and Australia, a partner is not treated as an employee of his firm merely because he receives a wage or remuneration for work done for the firm. This view is in complete accord with the jurisprudential approach. In the absence of any statutory mandate, we do not think there is any scope for accepting the view of the Rajasthan High Court. (emphasis mine) The submission of the counsel representing the petitioners that yet another aberration was committed in the order of adjudication by including the part time Accountant as a permanent employee of the firm. This also does not have any basis for the reason that it is not unknown in the small time business circle not to have a permanent or a full time Accountant as it is not a viable option nor is there adequate work for them. Part time arrangement and one Accountant being used by many establishments on a token payment depending on the volume and nature of work taken from him is a common practice. However, the officer in his youthful enthusiasm to serve the system has passed the order and created liability by ignoring all these aspects and treating him as a permanent employee without evidence. Learned Sr. counsel representing the Provident Fund Patna High Court CWJC No.7217 of 2007 (4) dt.17-08-2012 9 Authorities tried to justify the decision on the ground that it is the petitioners who had supplied certain inputs which has been annexed as annexure-A to the affidavit filed today. This is the extract of the profit and loss account for the year ending 31.03.2003. This shows remuneration to the partners to the extent of Rs. 1,31,889/- in addition to salary to the partners. According to him since there was non-compliance despite profit being made by the firm, the order in question came to be passed. The court is at a loss to understand the logic of such a stand being taken on behalf of the respondent, since he cannot become an assessing authority under the Income Tax Act. The profit and loss and the income generated by the firm has no bearing in the manner in which an establishment is required to be assessed under Section 7-A. It is a strange way of adjudicating the liability under Section 7A of the Act by bringing persons under zone of assessment to swell up the numbers. The impugned order dated 15.07.2004 does not meet the judicial standards as well as is not based on sound principles of law. The Court wanted to take a very strong view of the matter in the manner in which a citizen had been harassed in the garb and name of enforcement of the law and the power vested in the Provident Fund Authority. However, on remorse and regret Patna High Court CWJC No.7217 of 2007 (4) dt.17-08-2012 10 being expressed by the officer as well as blame being put on his in-experience with exposure of only four years in the service, when such order came to be passed, the Court may like to take a magnanimous view of the matter. However, impugned order stands quashed. The respondent Provident Fund Authorities are directed to refund the amount so collected from the petitioners within a period of six weeks from today. This amount will carry interest from the date of recovery till the date of refund at the rate of 12 % duly compounded per year. If there is any delay in payment beyond the period of six weeks, petitioners may be entitled to claim interest at the rate of 18 %. Before parting, this Court would like to caution the Provident Fund Authorities that in garb of enforcement of law the power must not be misused or used in such a manner which amounts to illegal harassment of a citizen, which is the case in the present writ application. Writ application stands allowed in terms of the order as above. Ashwini/- (Ajay Kumar Tripathi, J) "