Madras High Court
K.Mohan Rao vs Super Diamond Tools on 29 September, 2008
Bench: M.Chockalingam, M.Venugopal
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 29-9-2008 CORAM THE HONOURABLE MR.JUSTICE M.CHOCKALINGAM AND THE HONOURABLE MR.JUSTICE M.VENUGOPAL O.S.A.No.67 of 2007 and M.P.No.2 of 2007 K.Mohan Rao .. Appellant vs 1.Super Diamond Tools Rep. By its Partner P.Eknah Rao 25 Ramakrishnapuram 3rd Street West Mambalam, Chennai 600 033. 2.P.Eknath Rao 3.T.Vijayaraghavan 4.N.P.K.Menon Arbitrator No.8, 1st Floor, 4th Street, Nandanam Extension Chennai 600 035 .. Respondents Original side appeal preferred under Order 36 Rule 1 of O.S. Rules read with Clause 15 of the Letters Patent against the order passed by this Court in O.P.No.176 of 2000 dated 16.3.2006. For Appellant : Mr.T.Thilageswaran for M/s.Waraon & Sai Rams For Respondents : Mrs.Chitra Sampath, for Mr.S.Ravee Kumar for RR1 to 3 JUDGMENT
(Judgment of the Court was delivered by M.CHOCKALINGAM, J.) This appeal challenges an order of the learned Single Judge of this Court made in O.P.No.176 of 2000 whereby an order of dismissal of the petition seeking to set aside an arbitral award, was recorded.
2.The arbitral award under challenge came to be made under the following circumstances:
(a) The appellant/petitioner and the respondents 2 and 3 were carrying on a business in manufacturing and servicing all diamond tipped tools with the trade name Super Diamond Tools, the first respondent firm. An agreement among the partners was entered into by a deed on 27.2.1975. The said partnership deed was modified on 1.4.1992, to the effect that the second respondent should be in charge of production, the third respondent in charge of sales and the appellant should be in charge of purchase and administration. It was also agreed inter alia as found in the agreement, that each partner should be paid every year a sum of Rs.80,000/-. While the matter stood thus, dispute arose among the partners in the year 1993. After issuing lawyer's notice on 2.3.1994, the appellant came out of the firm, and the respondents 2 and 3 took possession of the firm, and they are carrying on their business in the said trade name. An estimation was made by the petitioner as to his share of profit and assets and he requested to settle his accounts to which the respondents 2 and 3 were not amenable. Under the circumstances, the appellant/petitioner filed C.S.No.1814 of 1995 whereby this Court made an order on 28.8.1997 appointing an Arbitrator namely N.P.K.Menon, a Retired District Judge, to arbitrate the dispute between the parties.
(b) Accordingly, the appellant made a claim for a sum of Rs.8,23,800/- with interest at 18% per annum. The respondents 2 and 3 made a counter claim for a sum of Rs.46.30 lakhs. The Arbitrator appointed a neutral arbitrator to get the expert's opinion. Following the same, both sides appointed the respective auditors. The auditor filed the first report on 18.6.1998, before the arbitrator. Objections were raised by both the parties to the said report. The arbitrator commenced the enquiry after framing the issues. Both the parties adduced their evidence insofar as the disputes raised. Pending the enquiry, the arbitrator with the consent of the parties, permitted the neutral auditor to verify and classify the diamonds covered under 97 bills which covered the quantity of diamonds under dispute. The neutral auditor filed the second report on 6.5.99. The arbitrator on perusal of the materials available, finally dismissed the claim of the appellant while allowed the counter claim of the respondents 2 and 3 whereby he directed the appellant/petitioner to make payment of a sum of Rs.53,87,664.40 as found in the award with interest at 18%.
3.The appellant/petitioner challenged the said award by filing O.P.No.176 of 2000 on the grounds that the award is totally arbitrary, illegal and contrary to the facts and circumstances of the case; that the arbitrator proceeded on mere assumptions and presumptions and came to the conclusion without proper application of mind; that in order to decide the dispute between the parties, legal principles should be followed; that the calculation arrived at by the arbitrator while sharing the profit and the assets among the appellant and the respondents 2 and 3 are against the guidelines of standard auditing; that the award is based on incorrect reports and without appreciation of evidence on record; that under the circumstances, the award would stand ex-facie vitiated, and hence it has got to be set aside.
4.The respondents 1 to 3 filed a counter stating that during the course of the enquiry, it was found that the disputes related to the period from 1975 onwards; that it was only with reference to the accounts, stocks, etc.,; that the appellant/petitioner never questioned the procedure adopted by the arbitrator; that everything was done by the arbitrator with the consent of parties; that the arbitrator has decided only the actual dispute that arose for consideration between the partners; that full and more opportunity were given to the appellant; that under the circumstances, the entire arbitration proceeding was in accordance with law; that only after hearing both the parties and their respective auditors and after application of full mind, the arbitrator has passed the award; that the same cannot be set aside merely because the findings given by the arbitrator, were adverse to the appellant, and hence, the petition was to be dismissed.
5.The learned Single Judge on enquiry, dismissed the petition. Aggrieved over the same, the petitioner therein has brought forth this appeal before this Court.
6.The only question that would arise for consideration in this appeal is whether the award is liable to be set aside for the reasons stated by the appellant/petitioner.
7.The learned Counsel appearing for the appellant would submit that the award passed by the arbitrator has got to be set aside, since it is opposed to public policy of India; that the legal principles and guidelines set by the Supreme Court in 2003(5) SCC 705 (ONGC LIMITED V. SAW PIPES LIMITED) have got to be applied; that taking the accounts for 21 years is hopelessly barred by limitation and against the provisions of the Indian Limitation Act; that the arbitrator has traversed beyond the scope of the arbitration; that as per Sec.48 of the Partnership Act, the procedure for settling the accounts in respect of a firm after dissolution, must be from and out of the entire assets of the firm including the entire amount contributed by the partners; that the value of the stock alone was taken by the arbitrator for sharing of the account among the partners, and all other assets including the machineries, cash in hand, etc., were not considered or subjected for division among the partners; that the procedure adopted by the arbitrator is nothing but a clear violation of the provisions of the substantive law; that the arbitrator has also not followed the procedures as contemplated under Sec.145 of the Income Tax Act; that the arbitrator has not decided the actual dispute which was referred under the referral order by this Court; that under the circumstances the award passed by the arbitrator has to be necessarily interfered with by the Court for the purpose of rectification of the errors committed by the arbitrator, which has not been done by the learned Single Judge; that the arbitrator has miserably failed in arriving the exact quantity of rough diamonds for the purpose of division; that the value of the diamonds has to be arrived only as per the purchase bills; that apart from that, the non-consideration of the goodwill for the purpose of division is intentional, arbitrary and against the principles, norms and guidelines followed by the auditors for the purpose of dividing the share among the partners while dissolution of the partnership firm; that for these reasons, the award is liable to be set aside, and hence the order of the learned Single Judge has got to be set aside.
8.The Court heard the learned Counsel for the respondents on the above contentions, paid its anxious consideration on the submissions made and looked into all the materials and in particular, the order of the learned Single Judge.
9.The petitioner who is the appellant herein, a partner of an unregistered firm Super Diamonds Tools, the first respondent herein, pursuant to the dispute that arose among himself and the other two partners, who are the respondents 2 and 3, filed C.S.No.1814 of 1995, thereby this Court appointed a sole arbitrator to arbitrate the disputes between the plaintiff on the one hand and the defendants 2 and 3 on the other in the business run under the name and style of the first respondent. In the said order, the parties were directed to submit their claim petition as well as the counter claim petition within one month from the date of the receipt of the notice from the arbitrator appointed. Accordingly, the petitioner made the claim for a sum of Rs.8,23,800/- along with interest. For making such a claim he has averred in paragraph 12 of the claim petition which runs as follows:
"12.That the claimant after having a detailed study of the audited financial statement for the year ended 31.3.1990, 31.3.1991, 31.3.1992, the trial balance, profit and loss account and the Balance Sheet for the period from 1.4.1993 to 31.3.1994, the statement of claim affairs as on 31.1.1994, calculation of goodwill, statement of fixed assets, statement of stock and statement of profit and loss account has arrived the following calculations and claiming a sum of Rs.8,23,000.00."
10.For the said claim, the respondents 2 and 3 filed their counter whereby not only they have averred that the claim made by the petitioner/appellant was unsustainable, but also they have stated in paragraphs 13, 15 and 19 of the counter as follows:
"13.During the period the claimant was a partner in the 1st respondent firm, the claimant was found to have created, fabricated, manipulated and forged many documents with evil intention to defraud these respondents, and misappropriated firms money for his personal benefit. These respondents feel that the matter involves large number of documents and complicated questions, which can be decided only in a civil court.
...
15.On a conservative working of the materials taken away by the claimant, a sum of Rs.46.30 lakhs is payable by the claimant to these respondents.
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19.The respondents also reserve the right to file an additional counter once the entire accounts for 21 years is completely scrutinized and a statement is prepared."
11.From the very reading of the above, it would be quite clear that this claim of Rs.46.30 lakhs was not made on the materials available with the respondents 1 to 3 but taken away by the claimant. Needless to say, the arbitral proceedings cannot travel beyond the disputes referred to the same for redressal. In the instant case, the appellant has made the claim for the period ending with 31.3.1990, 31.3.1991 and 31.3.1992 and also for the period from 1.4.1993 to 31.3.1994 where he has specifically spoken about the actual statement of fixed assets, statement of stock and statement of profit and loss account. As could be seen from the counter by the respondents 1 to 3 making a counter claim of Rs.46.30 lakhs, it would refer to the acts committed by him during that period. Nowhere they have stated in the course of the counter that the claim of Rs.46.30 lakhs which they made, was for the entire period i.e., from the commencement of the partnership firm till the appellant walked out of the business. It is not in controversy that the partnership business was commenced in the year 1972. A partnership deed was executed on 27.2.1975. The averments made by the appellant that the partnership was modified by a deed executed on 1.4.1992, whereby it was stipulated that the second respondent should be in charge of production; that the third respondent should be in charge of sales, and the petitioner should be in charge of purchase and administration were never denied by the respondents 1 to 3 in their counter, and hence there is nothing to indicate that the petitioner was in charge of the purchase and administration from the commencement of the partnership firm. In the absence of the denial of such averments and in the absence of specific claim made by the respondents 1 to 3 that their counter claim was made on the acts alleged to have been committed by the appellant during the period of 21 years, there was no need or necessity that arose for opening the accounts for 21 years from the commencement of the business as done by the arbitrator. Nowhere in the entire materials, it could be seen that the appellant apart from the claim made for these years namely 1990 to 1994, came forward with the opening of the account which could be made for these 21 years. Under such circumstances, reopening of the accounts from the time of inception of the business was actually beyond the scope of the reference made to the arbitrator.
12.It was contended by the learned Counsel for the respondents 1 to 3 that the law of limitation for rendering accounts for a period of 3 years cannot be applied to the present facts of the case for the reason that the appellant has agreed for opening of the accounts from the commencement, and it has been rightly done by the arbitrator. The arbitrator has categorically recorded that it was a partnership at WILL, and hence when the appellant walked out of the partnership firm, it has to be taken as a firm dissolved. It would be quite clear that on that footing the arbitrator has proceeded to decide the claims made by the parties. If to be so, it was a fit case where the law applicable to settling of accounts in respect of the firm after dissolution as found under Sec.48 of the Partnership Act, should have been applied.
13.The arbitrator has proceeded with the dispute relating to the period from 1975 onwards, and it was only with reference to the accounts, stocks, etc., which, in the considered opinion of the Court, is not proper. When the accounts of the partners in a dissolved firm as one in the instant case were to be settled, the entire assets should be taken into consideration. It is not in controversy that in the year 1993 when the appellant walked out of the partnership firm, the business, actual machineries and other fittings, fixtures, furniture, etc., which were available in the factory were all handed over to the respondents 2 and 3. Regarding the quantity of the diamonds handed over, the respondents 1 to 3 did not put forth any dispute. At this juncture, it is pertinent to point out that the business was commenced in 1972, and a partnership deed was executed in 1975 and a modification deed was made in 1992, whereby it was clearly understood that the appellant should be in charge of purchase. Hence there is nothing to indicate contra i.e., the appellant was responsible for purchase, maintaining of stock and also the sales prior to the modification deed. When there was a modification deed made in 1992, the arbitrator has not taken into consideration the effect of the terms mentioned therein; but, he has proceeded on the footing as if the claimant was responsible for the custody from the very commencement of the business in 1975. Admittedly, there was no stock taking or any records therefor, or there was any stock register maintained during the entire period. It is not the case of the respondents1 to 3 that during the period in between the first deed in the year 1975 and the second deed in the year 1992, they did not participate in the purchase or sales, nor they did not get their share of profits every year.
14.In the instant case, though so many complaints were made in the counter claim, it has got to be borne in mind that the claim was made only by the appellant, and thus the respondents 1 to 3 from the year 1993 when he walked out of the firm, till the counter claim was made, had not raised their little finger; but, it was the plaintiff who filed the suit in C.S.No.1814 of 1995, and the Court referred the matter for arbitral proceedings, and till the time, the respondents 2 and 3 did not make any murmur. Even in taking the closing stock for the purchase and valuation, the arbitrator has followed a random method which, in the considered opinion of the Court, should not have been done.
15.It is pertinent to point out that though it was an unregistered firm, the firm had its auditor, and the returns were submitted to the department for the purpose of taxation. All those returns were signed by all the three persons namely the appellant and the respondents 2 and 3. There is no reason pointed out by the arbitrator for not considering those assessments, which would naturally bind all the three partners. Thus, it would be quite clear that the arbitral proceeding was beyond the scope of the reference made in directing for reopening of the accounts for 21 years. In the absence of any written consent by the appellant for doing so, that should not have been ordered. The fact that the appellant did not raise any objection for doing so cannot be a reason to do so. Even assuming the circumstances warranted for the reopening of accounts, taking into consideration the accounts and stocks alone were the subject matter under dispute without referring to any other matter, the same should not have been done. Apart from that, having recorded that it was a dissolved firm, the settling of accounts was not done as contemplated under the substantive law namely Sec.48 of the Partnership Act. In such circumstances, arriving at a conclusion that the appellant was liable to pay Rs.53,87,664.60 has got to be termed only as arbitrary.
16.Speaking on the jurisdiction or power of the arbitral tribunal and what the term arbitral proceedings would mean, the Supreme Court has held in (2003) 5 SCC 705 (OIL & NATURAL GAS CORPORATION LTD. V. SAW PIPES LTD.) "31.Therefore, in our view, the phrase "public policy of India" used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term "public policy" in Renusagar case it is required to be held that the award could be set side if it is patently illegal. The result would be - award could be set aside if it is contrary to:
(a)fundamental policy of Indian law; or
(b)the interest of India; or
(c)justice or morality, or
(d)in addition, if it is patently illegal.
Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void."
17.A scrutiny of the award wherein all narrated above were noticed, would indicate that it has got to be declared as one against public policy since the illegality noticed is not of a trivial nature, but it goes to the root of the matter. In the considered opinion of the Court, the arbitral tribunal has travelled beyond the scope of the matter under reference and has not strictly followed the substantive law both as to the limitation and also as to the settlement of accounts of the dissolved firm, and hence it has got to be termed as unfair and unreasonable. The learned Single Judge has not considered the above aspects of the matter, and hence the order of the learned Single Judge has got to be set aside. Accordingly, it is set aside.
18.In the instant case, the sole arbitrator was appointed for the purpose of resolving the disputes between the parties by an order of this Court in C.S.No.1814 of 1995, on the claim and counter claim to be made. But, the arbitral award, for the reasons stated above, is liable to be set aside and accordingly, set aside. However, this Court is of the opinion that it is a fit case where the matter has got to be remitted to an arbitrator appointed by this Court to solve the dispute put forth by the parties in their respective claims, by applying the necessary provisions of the relevant Acts on the factual position and take a correct decision in accordance with law. For that purpose, The Hon'ble Justice K.P.Sivasubramaniam, No.46, Pulla Avenue, Shenoy Nagar, Chennai 30, is appointed as sole arbitrator, and is required to complete the arbitral proceedings within a period of six months herefrom.
19.In the result, this original side appeal, is accordingly, ordered. No costs.
(M.C.,J.) (M.V.,J.) 29-9-2008 Index: yes Internet: yes nsv/ M.CHOCKALINGAM, J.
AND M.VENUGOPAL, J.
nsv/ OSA No.67 of 2007 Dt: 29-9-2008