Digamber Balasaheb Bamane vs. Mangal Babu Nirmale And Ors.

Held

The Court noted that Section 69(2) of the Partnership Act bars suits to enforce rights arising from a contract by an unregistered firm against a third party. The Supreme Court in Eskay Hospitality Services India Pvt. Ltd. & Ors. Vs. M/s. Sterling Hospitality held that if a firm is unregistered, a suit is barred by Section 69(2), but this bar does not apply if the transaction is not of a contract. The plaint indicated the Plaintiff discovered fraud on January 8, 2019, and paid the tax amounts by selling his property. Crucially, the Partnership Firm was also a Plaintiff (Plaintiff No. 2). The Court observed that the issue of Plaintiff No. 2 being an unregistered firm and whether the suit arose from a contract, thus attracting Section 69(2), was not raised in the application under Order 7 Rule 11 CPC nor considered by the Trial Court. Therefore, the impugned order was quashed and set aside, and the matter was remanded to the Trial Court to decide the application afresh, specifically considering whether the suit is barred under Section 69 of the Indian Partnership Act in view of Plaintiff No. 2 being a partnership firm.

Facts

The Applicant, Defendant No. 3 in the original suit, filed an application under Order 7 Rule 11 of the Civil Procedure Code (CPC) seeking rejection of Special Civil Suit No. 222 of 2020. The grounds for rejection were a bar under Section 69(2) of the Partnership Act due to the firm being unregistered, and the existence of an arbitration clause in the Partnership Deed. The Plaintiff alleged that Defendant No. 1, a Chartered Accountant, siphoned off amounts totaling Rs. 1,23,10,701/- towards VAT/GST and Rs. 5,23,320/- towards Income Tax, which the Plaintiff later paid by selling his property after receiving a recovery notice. The Plaintiff claimed this fraud was discovered on January 8, 2019. The Trial Court rejected the Applicant's application.

Key Issues

1. Whether the suit filed by the Plaintiff is barred under Section 69(2) of the Indian Partnership Act, 1932, due to the Partnership Firm (Plaintiff No. 2) being unregistered, and the suit arising from a contract. Arguments: Petitioner (Applicant): The suit is for recovery of amounts allegedly deposited towards VAT/GST and Income Tax, which arise from a contract. Since the Partnership Firm is unregistered, Section 69(2) of the Partnership Act expressly bars such a suit. Furthermore, an arbitration clause existed in the Partnership Deed, providing an alternate remedy. Therefore, the suit is not maintainable. Respondent (Plaintiff): The suit is primarily against the Chartered Accountant (Defendant No. 1) for siphoning funds, and the Plaintiff discovered the fraud after receiving a recovery notice. The subject matter is not a matter arising solely out of the contract of the Partnership Firm, making the suit maintainable. The Trial Court correctly rejected the application under Order 7 Rule 11 CPC.