REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.7438  OF 2000

V. Subramaniam .. Appellant (s)

-versus-

Rajesh Raghuvandra Rao ..       Respondent (s)

J U D G M E N T

MARKANDEY KATJU, J.

1. This  appeal  by special  leave  has  been  filed  against  the  impugned

judgment of  the Bombay High Court  dated 27.9.2000 in Civil  Reference

No. 19 of 1999.

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2. Heard learned counsel for the parties and perused the record.

3. This appeal arises out of a suit filed before the Bombay City Civil

Court  instituted  by the  appellant  praying  inter  alia for  dissolution  of  an

unregistered partnership firm between the appellant and the respondent.  In

that suit a defence taken was that the suit was not maintainable in view of

sub-section  (2A)  of  Section  69  of  the  Indian  Partnership  Act,  1932

(hereinafter referred to as `the Act’).  The Bombay City Civil Court was of

the  view  that  the  said  sub-section  2A,  which  was  introduced  by  the

Maharashtra Amendment to Section 69 of the Act, being the Maharashtra

Act  no.29 of 1984 (which received assent  of the President  of India) was

unconstitutional  being  violative  of  Articles  14  and  19  (1)(g)  of  the

Constitution of India.  Hence the Bombay City Civil Court by order dated

16.8.1999 made a reference to the High Court under Section 113 of C.P.C.   

4. The High Court, however, in the impugned judgment has held that the

said sub-section 2A of Section 69 of the Act is not unconstitutional.  Hence

this appeal before us.   

5. Section 69(1) & (2) of the Partnership Act originally read as follows :

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“69. Effect of non-registration.

(1) No  suit  to  enforce  a  right  arising  from a contract  or  conferred by this  Act  shall  be instituted  in any  court  by  or  on  behalf  of  any  person  suing  as  a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm:

(2) No  suit  to  enforce  a  right  arising  from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and  the  persons  suing  are  or  have  been  shown  in  the Register of firms as partners in the firms.”

6. Sub-section  2A  which  was  introduced  by  the  Maharashtra

Amendment 1984 states as follows :

“(2A)  No  suit  to  enforce  any  right  for  the dissolution of a firm or for accounts of a dissolved firm or  any  right  or  power  to  realize  the  property  of  a dissolved firm shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the  firm  or  any  person  alleged  to  be  or  have  been  a partner in the firm, unless the firm is registered and the person  suing  is  or  has  been  shown in  the  Register  of Firms as a partner in the firm:

Provided  that  the  requirement  of  registration  of firm under this sub-section shall not apply to the suits or proceedings  instituted  by  the  heirs  or  legal representatives  of  the  deceased  partner  of  a  firm  for accounts of a dissolved firm or to realize the property of a dissolved firm.”   

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7. It may be mentioned that the Maharashtra Amendment of 1984 not

only inserted sub-section 2A in Section 69, it also substituted the original

sub-section (3)(a) to Section 69 by an altogether different sub-section (3)(a).

8. The original sub-section (3)(a) of Section 69 in the Partnership Act

read as follows :

“(3) The  provisions  of  sub-sections  (1)  and  (2)  shall apply also to  a claim of set-off or other  proceeding to enforce  a  right  arising  from  a  contract,  but  shall  not affect:-

(a) the enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm, or any right or power to realize the property of a dissolved firm.”

9. The  Maharashtra  Amendment  of  1984  substituted  clause  (a)  of

Section 69(3) of the original Act by the following sub-section (a) :

“The firms constituted for a duration of six months or with a capital upto Rs.2000/-“

10. The Maharashtra Amendment also added a proviso to Section 69(1)

which reads as follows:

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“Provided that  the  requirement  of  registration  of firm under this sub-section shall not apply to the suits or proceedings instituted by the heirs or legal representatives  of the  deceased partner  of a firm for accounts of the firm or to realize the property of the firm”

11. The English law in so far as it makes registration compulsory for a

firm and imposes a penalty for non-registration was not followed when the

Partnership Act was made in India in 1932 as it  was considered that this

step would be too drastic and would introduce several difficulties.  Hence

registration  was  made  optional  at  the  discretion  of  the  partners,  but

following  the  English  precedent,  any  firm  which  was  not  registered  by

virtue of sub-sections (1)& (2) of Section 69 disabled a partner or the firm

(as the case may be ) from enforcing certain claims against the firm or third

parties (as the case may be) in a Civil Court.

12. An exception to this disability with regard to an unregistered firm was

made  in  sub-section  (3)(a)  to  Section  69,  and  this  clause  enabled  the

partners in an unregistered firm to sue for the dissolution of the firm or for

accounts or for realizing the property of the dissolved firm.

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13. This  exception  in  clause  (a)  of  Section  69(3)  was  made  on  the

principle that while registration of a firm is designed primarily to protect

third parties, the absence of registration does not mean that the partners of

an unregistered firm lose all rights in the said firm or its property and hence

cannot sue for accounts or for its dissolution or for realizing their property

in the firm.  

14. It  may  be  mentioned  that  a  partnership  firm,  unlike  a  company

registered under the Indian Companies Act, is not a distinct legal entity, and

is only a compendium of its partners. Even the registration of a firm does

not mean that it becomes a distinct legal entity like a company.  Hence the

partners  of  a  firm  are  co-owners  of  the  property  of  the  firm,  unlike

shareholders in a company who are not  co-owners of the property of the

company.   

15. Till  the  Maharashtra  Amendment  of  1984  came  into  force  on

1.1.1985,  a  partner  in  a  firm  could  file  a  suit  for  dissolution  of  an

unregistered  partnership  firm or  for  accounts  of  the dissolved  firm or  to

recover  the properties  of  the  dissolved firm.  However,  in  view of  sub-

section  2A  of  Section  69,  since  1.1.1985  a  partner  in  an  unregistered

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partnership firm in the State of Maharashtra cannot file a suit for dissolution

or for accounts of a dissolved firm or realize properties of a dissolved firm,

unless the duration of the firm was only six months or it’s capital is upto

Rs.2000/-.  The question before us is whether sub-section 2A of Section 69

inserted by the Maharashtra Amendment is constitutionally valid.         

16. In  our  opinion  sub-section  2A  of  Section  69  inserted  by  the

Maharashtra  Amendment  violates  Articles  14,  19(1)(g)  and  300A of  the

Constitution of India.

17. It has already been mentioned above that a partnership firm, whether

registered  or  unregistered,  is  not  a  distinct  legal  entity,  and  hence  the

property of the firm really belongs to the partners of the firm.  Sub-section

2A virtually deprives a partner in an unregistered firm from recovery of his

share in the property of the firm or from seeking dissolution of the firm.

18. Article 300A of the Constitution of India states :

“No person  shall  be  deprived  of  his  property  save  by authority of law.”

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19. It is by now well settled that a law to be valid has to be non arbitrary

vide  the  7-Judge  Bench  decision  of  this  Court  in  Maneka Gandhi  vs.

Union of India and another AIR 1978 SC 597.

20. Sub-section 2A virtually deprives a partner of a firm from his share in

the property of the firm without any compensation. Also, it  prohibits him

from seeking dissolution of the firm although he may want it dissolved.

21. Deprivation  of  property  may take  place  in  various  ways,  such  as

`destruction’ vide this Court’s decision in  Chiranjit Lal Chowdhuri  vs.

Union of India AIR 1951 SC 41 or `confiscation’ vide this Court’s decision

in Ananda Behera  vs.  State of Orissa AIR 1956 SC 17, or revocation of a

proprietary right granted by a `private proprietor’ vide this Court’s decision

in Virendra Singh  vs.  State of U.P. AIR 1954 SC 447, `seizure of goods’

vide this Court’s decision in Wazir Chand  vs.  State of H.P. AIR 1954 SC

415 or `immovable property’ vide this Court’s decision in Virendra Singh

vs.  State of U.P. (supra) from the possession of an `individual’ vide this

Court’s decision in Wazir Chand  vs.  State of H.P. (supra) or `assumption

of control of a business’ vide this Court’s decision in Virendra Singh  vs.

State of U.P. (supra) in exercise of the `police power’ of a State.  Thus,

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there is a `deprivation’ where a municipal authority, under statutory power,

pulls down `dangerous premises’ vide decision in  Nathubhai Dhulaji  vs.

Municipal Corporation AIR 1959 Bom. 332 or an insolvent is divested of

his  `property’ vide decision in  Vajrapuri Naidu, N. vs.  New Theatres,

Carnatic Talkies Ltd.  1959(2) MLJ 469.

22. The appellant challenges the Amendment as violative of Articles 14

and 19(1)(g) of the Constitution.  Article 14 guarantees the right to equality

and states that “The State shall not deny to any person equality before the

law or the equal protection of the laws within the territory of India.”  Equal

protection means the right to equal treatment in similar circumstances.  In

other words there can be classification for legitimate purposes, but it is well

settled that the classification must be reasonable i.e.  based on intelligible

differentia  and having nexus between the basis  for  classification  and the

object of the legislation.   

23. Under Article 19(1)(g) of the Constitution all persons have the right

to practice any profession or to carry on any occupation, trade or business.

Clause (6) of that Article enables the State to make any law imposing, in the

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interest of general public, reasonable restrictions on the exercise of the right

conferred under sub-clause (g) of Article 19(1).   

24. In Chintamanrao and another  vs.  The State of Madhya Pradesh

AIR 1951 SC 118 this Court observed :

“The  phrase  `reasonable  restriction’  connotes  that  the limitation imposed on a person in enjoyment of the right should not be arbitrary or of an excessive nature, beyond what is required in the interest of the public.  The word `reasonable’  implies  intelligent  care  and  deliberation, that  is  the  choice  of  a  course  which  reason  dictates. Legislation which arbitrarily or excessively invades the right  cannot  be  said  to  contain  the  equality  of reasonableness  and  unless  it  strikes  a  proper  balance between the freedom guaranteed in Article 19(1)(g) and the social control permitted by clause (6) of Article 19, it must be held to be wanting in that quality.”      

25. Similarly in  M.C.V.S. Arunachala Nadar  vs.  State of  Madras

and  others AIR  1959  SC  300  where  the  constitutional  validity  of  the

Madras  Commercial  Crops  Markets  Act  was  challenged,  as  violative  of

Article 19(1)(g), while considering the test of reasonableness to be applied

this Court observed as under :

“It has been held that in order to be reasonable, a restriction  must  have  a  rational  relation  to  the  object which the legislature seeks to achieve and must not go in excess of that object (Chintamanrao and another  vs.

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The State of Madhya Pradesh (supra).   The mode of approach  to  ascertain  the  reasonableness  of  restriction has  been  succinctly  stated  by  Patanjali  Ssastri,  C.J.  in State of Madras  vs.  V.G. Row AIR 1952 SC 196 :

“It  is  important  in  this  context  to  bear  in mind  that  the  test  of  reasonableness,  wherever prescribed,  should  be  applied  to  each  individual statute  impugned,  and  no  abstract  standard,  or general pattern of reasonableness can be laid down as applicable to all cases.  The nature of the right alleged  to  have  been  infringed,  the  underlying purpose of the restrictions imposed, the extent and urgency of the evil sought to be remedied thereby the disproportion of the imposition, the prevailing conditions  at  the  time,  should  all  enter  into  the judicial verdict.”         

26. The  primary object  of  registration  of  a  firm is  protection  of  third

parties  who  were  subjected  to  hardship  and  difficulties  in  the  matter  of

proving as to who were the partners.  Under the earlier law, a third party

obtaining a decree was often put to expenses and delay in proving that a

particular  person  was  a  partner  of  that  firm.   The  registration  of  a  firm

provides protection to the third parties against false denials of partnership

and the evasion of liability.  Once a firm is registered under the Act the

statements recorded in the Register regarding the constitution of the firm are

conclusive  proof  of  the  fact  contained  therein as  against  the  partner.   A

partner whose name appears on the Register cannot deny that he is a partner

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except  under  the  circumstances  provided.   Even  then  registration  of  a

partnership firm is not made compulsory under the Act.  A partnership firm

can come into existence and function without being registered.  However,

the Maharashtra Amendment effects such stringent disabilities on a firm as

in our opinion are crippling in nature.  It lays down that an unregistered firm

cannot enforce its claims against third parties.  Similarly, a partner who is

not registered is unable to enforce his claims against third parties or against

his fellow partners.  An exception to this disability was a suit for dissolution

of a firm or a suit for accounts of a dissolved firm or a suit for recovery of

property  of  a  dissolved  firm.   Thus  a  partnership  firm  can  come  into

existence,  function  as  long  as  there  is  no  problem,  and  disappear  from

existence  without  being  registered.   This  is  changed  by  the  1984

Amendment extending the bar of the proceedings to a suit for dissolution or

recovery  of  property  as  well.   The  effect  of  the  Amendment  is  that  a

partnership  firm is  allowed  to  come into  existence  and  function  without

registration but it cannot go out of existence (with certain exceptions).  This

can result into a situation where in case of disputes amongst the partners the

relationship of partnership cannot be put an end to by approaching a court

of  law.   A dishonest  partner,  if  in  control  of  the  business,  or  if  simply

stronger,  can successfully deprive  the  other  partner  of  his  dues  from the

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partnership.  It could result in extreme hardship and injustice.  Might would

be right.  An aggrieved partner is left without any remedy whatsoever.  He

can neither file a suit  to compel the mischievous partner to cooperate for

registration,  as  such  a  suit  is  not  maintainable,  nor  can  he  resort  to

arbitration  if  any,  because  the  arbitration  proceedings  would  be  hit  by

Section 69(1) of the Act (Jagdish Chandra Gupta  vs.  Kajaria Traders

(India) Ltd. AIR 1964 SC 1882).

27. In our opinion the restrictions placed by sub-section 2A of Section 69

introduced by the Maharshtra Amendment Act, for the reasons given above,

are arbitrary and of excessive nature and go beyond what is in the public

interest.  Hence the restrictions cannot be regarded as reasonable.   

28. In the Constitution bench decision of this Court in Maneka Gandhi

vs.  Union of India and another (supra) it has been held that arbitrariness

and unreasonableness violates Articles 14 and 19(1)(g) of the Constitution.

The said provision is clearly unreasonable and arbitrary since by prohibiting

suits for dissolution of an unregistered firm, for accounts and for realization

of the properties of the firm, it creates a situation where businessmen will be

very reluctant to enter into an unregistered partnership out of fear that they

will not be able to recover the money they have invested in the firm or to get

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out of the firm if they wish to do so.  As already stated above there is no

legal  requirement,  unlike in  England,  which makes registration  of  a firm

compulsory, rather in India it is voluntary.  Both registered and unregistered

are legal though of course registration and non registration have different

legal consequences as stated above.

29. The High Court was of the view that the object of the Maharashtra

Amendment was to induce partners to register and it was intended to protect

third party members of the public.  We cannot see how sub-section 2A of

Section 69 in any way protects the third party members of the public.  It

makes it virtually impossible for partners in an unregistered firm to dissolve

the firm or recover their share in the property of the firm.  Hence it is totally

arbitrary.   

30. It  is  true  that  it  has  been  held  by  this  Court  in  Government  of

Andhra Pradesh & Others  vs.  P. Laxmi Devi AIR 2008 SC 1640 that

the Court  should not  lightly declare a statute to be unconstitutional  as it

expresses  the  will  of  the  people  through  its  elected  representatives.

However,  that  does  not  mean  that  a  statute  can  never  be  declared  as

unconstitutional.  In fact the aforesaid decision this Court has held that in

some circumstances a statute can be declared as unconstitutional, namely,

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where it clearly violates some constitutional provision.  Since in our opinion

sub-section 2A of Section 69 as introduced by the Maharashtra Legislature

clearly violates Articles 14, 19(1)(g) and 300A of the Constitution, it is in

our  opinion  ultra  vires and  is  hence  declared  unconstitutional.

Consequently  

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this appeal is allowed and impugned judgment of the Bombay High Court is

set aside.  The suit can now proceed ignoring sub-section 2A which we have

declared invalid.  No costs.  

…….. ………………… …..J.

(Markandey Katju)

……………………………J. (G.S. Singhvi)

New Delhi; March 20, 2009

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