TMI Blog1963 (11) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... include. This is not a case in which the arbitrator has committed a mere error of fact or law in reaching his conclusion on the disputed question submitted for his adjudication. For the reasons set out by us in dealing with the first plea for setting aside the award, and that plea having succeeded, we do not think it necessary to enter upon the respective contentions of the parties on the second ground. Accordingly hold that the award was properly set aside by the Courts below. Appeal dismissed. - C.A. 717 OF 1963 - - - Dated:- 19-11-1963 - J.C. SHAH, A.K.SARKAR AND M. HIDAYATULLAH, JJ. For the Appellants : S.T. Desai and LN. Shroff For Respondents Nos. 1 to 3.G.S. Pathak and Remeshwar Nath For Respondents nos. 4 and 5. A. V. Viswanatha Sastri and Remeshwar Nath JUDGMENT Vrajlal Manilal Company, a firm consisting originally of four partners (1) Manilal Anandji, (2) Jivrajbhai Ujamshi Sheth, (3) Punjabhai S. Patel, and (4) Chintamanrao, has been doing business of manufacturing bidis at Sagar and Delhi since 1944. From time to time fresh partnership deeds were executed readjusting the shares of the partners admitting new partners and adjusting the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporated a clause for reference of disputes between the partners relating to the business or dissolution of the firm to arbitration. In April 1958 Jivraj and his two sons -appellants in this appeal desired to retire from the partnership, and a deed of reference was executed on April 16, 1958, appointing Ambalal Ashabhai, Becharbhai Somabhai and Chaturbhuj Jasani as arbitrators to decide the dispute. It was recited in the deed of reference that since Jivraj and his two sons had expressed a desire to retire and the remaining five partners had agreed to take over the entire business of the firm, it was "necessary to effect the final account of the retiring partners with regard to the matters mentioned below, as far possible, according to and taking into consideration the terms and conditions of the Partnership Agreement. 1. Goodwill of Trade Mark. 2. Property. 3. Credits (Udhari) 4. Dead-stock. 5. Stock-in-trade i.e. the raw material, or the finished goods invested in the business. 6. Other matters connected with these transactions. 7. Profit and Loss Account. 8. The Receipt ond Payments account of the amounts of the partners. By Paragraph 6 it was provided that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s guilty of legal misconduct in that he had in the course of arbitration proceedings admitted in his record a statement of account prepared by Jivraj and his sons without the knowledge of the other partners and without giving them an opportunity to make their submissions thereto. The retiring partners resisted the petition to set aside the award and submitted that they were entitled to have the assets of the firm in which they had a share, fixed at an amount much in excess of Rs. 32 lakhs and that the arbitrator had not overstepped his jurisdiction in fixing the value of the goodwill at Rs. 32 lakhs, and that the statement of account referred to by the applicants was prepared under the directions of the arbitrator and in his presence and it was admitted in the record of the arbitrator -to the knowledge of the remaining partners who had assented thereto. The Trial Court upheld these and certain other objections, and set aside the award. The High Court confirmed the decision of the Trial Court, insofar as it related to the two objections hereinbefore set out. The question which we propose to consider first is: whether in making the valuation of the firm" for determining the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available the purchase price as mentioned in the books was to be accepted. In all these matters the arbitrator had by cl. 4 of the arbitration agreement to make the final account of the retiring partners according to and taking into consideration the terms and conditions of the partnership agreement and had no option. It is necessary to remember that the partnership agreement does not grant to a retiring partner a share in the aggregate of the four items mentioned in cls. (a), (b), (c) (d) of paragraph-13 i.e., goodwill of the firm, outstandings, stock of raw materials including moveable and immoveable property. The partnership agreement merely provides that the "valuation of the firm" shall be made as set out therein for the purpose of settling the account of the retiring partners i.e., in ascertaining the.amount due to the retiring partners valuation of the assets in cls. (a) to (d) of paragraph-13 shall be made in the manner set out therein. The arbitrator was therefore bound to adopt the valuation prescribed by the partnership agreement, but that is not to say that the retiring partner was entitled to a share equal to the aggregate of the values of the four items mentioned i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gate would considerably exceed Rs. 32 lakhs. But this argument is founded on the fallacious assumption that the debts and liabilities of the firm have to be ignored in determining the shares of the retiring partners. Counsel for the respondent submitted that in substance the goodwill had alone to be valued by the arbitrator for the property, moveable and immoveable, stockin-trade and the outstandings of the firm were approximately equal to the aggregate of the debts and obligations of the firm. Reliance in this behalf was placed upon a balance-sheet Ext. A-13 of the assets and liabilities of the firm, showing the financial position of the firm on April 16,1958, and the value of the tangible assets, such as the stock of raw-materials, moveable and immoveable property and outstandings, according to the balance-sheet, was approximately equal to the debts and liabilities of the firm. But it is not necessary for us to decide whether the submission of the respondents is correct. The arbitrator has in his award stated that Rs. 32 lakhs is the value of the goodwill alone, and for some reason not disclosed by him he has not valued the other assets. He has also not disclosed in his award h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip agreement, and the arbitrator in taking into consideration that depreciation has not acted outside his jurisdiction. It would be difficult to regard the method of valuation as prescribed in respect of the outstandings as "including depreciation". Even assuming that the reduction of the outstandings of the firm from persons other than the partners by 15 % as directed in cl. (b) of paragraph-13 of the partnership agreement be regarded as depreciation of the assets, inclusion of depreciation and appreciation in respect of the other assets was not permitted by the deed of partnership. In valuing the moveable property including the stock of raw materials, the arbitrator could not adopt any valuation other than that mentioned in cl. (c) of paragraph -1 3 of the partnership agreement, namely, the book value as given in the books of the firm. Similarly, in the valuation of immoveables such as buildings, godowns, gardens, lands etc., he had to accept the book value as mentioned in the books of account of the firm and if no book value was available the. purchase price as mentioned in the books was to be accepted. The arbitrator had no power to make any adjustment in respect of those item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the books of the firm shall be accepted. The expression "book value" in the context in which it occurs in the partnership agreement means, the value entered in the books of account. Adoption of the book value is therefore obligatory and there is no scope. of any adjustment in the value in the light of any depreciation or appreciation of the property, outstandings, stock-in-trade or dead-stock, apart from what may actually be included in the book value, in the books. It is the book value alone which has to be taken. If the depreciation or appreciation has been taken into account by the partners in assessing the book value, that was evidently part of the book value as entered in the books of account. If there was no book value entered in respect of any immoveable property, the decisive value was to be the purchase price. It was then urged that it was for the arbitrator to adjudicate upon the true meaning of the partnership agreement and to give effect thereto, and if in making a "valuation of the firm" he was of the opinion that depreciation and appreciation in respect of certain items of assets should be included for the purpose of making up the account of the partners, the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to cases set out in s. 30. It is not open to the Court to speculate, where no reasons are given by the arbitrator, as to what impelled the arbitrator to arrive at his conclusion. On the assump- tion that the arbitrator must have arrived at his conclusion by a certain process of reasoning, the Court cannot proceed to determine whether the conclusion is right or wrong. It is not open to the Court to attempt to probe the mental process by which the arbitrator has reached his conclusion where it is not disclosed by the terms of his award. But the arbitrator has in the present case expressly stated in his award that in arriving at his valuation, he has included the depreciation and appreciation of the property, outstandings and dead-stock, and in so doing in our judgment the arbitrator has travelled outside his jurisdiction and the award is on that account liable to be set aside. The question is not. one of interpretation of paragraph-13 of the partnership agreement but of ascertaining the limits of his jurisdiction. The primary duty of the arbitrator under the deed of reference in which was incorporated the partnership agreement, was to value the net assets of the firm and to award t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in the valuation of the goodwill, as a mere surplusage, especially having regard to the orders made by him insisting upon the production of documentary evidence and certain books of account from Chintamanrao. It may be pointed out that by cl. 7 of the deed of reference very wide powers were conferred upon the arbitrator to call upon the disputing parties to produce the accounts etc. which the arbitrator desired and to produce any other papers or documents which the arbitrator would like to inspect, and to reply to any enquiry verbal or written of any sort or in any connection and in any form the arbitrator wanted. The orders passed by the arbitrator in exercise of these powers tend to indicate that in his view he was competent to ascertain and include in the valuation of the firm the depreciation and appreciation on the various items which were taken into account in arriving at the valuation. By order dated September 16, 1958, the arbitrator gave direction, amongst others, to Chintamanrao to file a statement of houses etc. of immoveable property, valuation of the same as shown in the books of account, i.e. figures regarding it, and "also the approximate value statement as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and granted amounted to re-opening of the accounts for the last five years which were closed with the consent and to the knowledge of all the partners and which could not in law be re-opened. On De- cember 23, 1958, an application was made by Amrat Lal son of Jivraj (one of the retiring partners) submitting that the arbitrator had to value the goodwill and this had to be done by ascertaining the value of the profits of the five years, and for that purpose the arbitrator was entitled to ascertain yearly profits by scrutinising the account books and finding out the yearly net profits. On these applications on December 25, 1958 the arbitrator gave a direction that Chintamanrao do produce the papers mentioned in item No. 2 in the order dated September 16, 1958, namely, the gross and net profits of the last five years, and that he do produce the other papers which were ordered to be produced by the order dated September 16, 1958. Thereafter on January 9, 1959, the arbitrator made his award. The insistence of the arbitrator upon production of the gross and net profits of the last five years indicate that it was the opinion of the arbitrator that he was entitled to take into consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or in the High Court, and we will not be justified in the circumstances of the case in acceding to that request. We may observe that we have not heard counsel on the question whether in the circumstances of the case and on the conclusion recorded, we have the power under s. 16 to remit the award to the arbitrator. The retiring partners have also not asked for an order for supersession of the arbitration agreement in exercise of the powers of the Court under s. 19. We have, therefore, refrained from considering that question also. The appeal fails and is dismissed with costs in one set. HIDAYATULLAH, J.-This appeal arises out of an arbitration award which was set aside by the Additional District Judge, Sagar on the objection of the respondents. The judgment of the Additional District Judge was confirmed on appeal by the High Court and the present appeal has been filed on a certificate granted by the High Court under Art. 133 (1)(c) of the Constitution. The arbitration was without the intervention of the Court. Previously it proceeded before three arbitrators but the authority of two of the arbitrators was revoked by the Additional District Judge, Sagar, at the agreed request of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, godowns, gardens, lands etc. will be valued at the purchase price or their book value in the books of the firm as the case may be, and all these shall be given to the re- maining partners." As a result of an arrangement reached aliunde by which the businesses of these partners, which were in different firm names and various places, were to be divided between the appellants on the one hand and the respondents on the other, the parties desired an arbitration to separate the shares of the appellants as partners retiring from the firm Virajlal Mannilal Co. A deed of reference was executed by them on April 16, 1958. After the usual recitals, it provided that a final account of the partners should be taken with regard to eight matters- as far as possible according to and taking into consideration the terms and conditions of the partnership agreement." The eight matters were: 1. Goodwill of Trade Mark. 2. Property. 3. Credits (Udhari). 4. Dead Stock. 5. Stock-in-trade i.e., the raw material or the finished goods invested in the business. 6. Other matters connected with these transactions. 7. Profit and Loss Account. 8. The Receipt and Payments account of the amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty which was successfully claimed by the respondents in the High Court and the Court below to be not open to him? In this appeal it was contended on behalf of the appellants that the deed of partnership as well as the order of reference left the arbitrator a free hand and even if the arbitrator wrongly interpreted the deed of partnership and did add back the depreciation and/or appreciation, no question of jurisdiction could arise. Reliance is placed upon the observations of the Judicial Committee in the well-known case of Chamsey Bhara Co. v. Jivraj Balloo Spg. Wvg. Co.( I.L.R. 47 Bom. 578 at 586.) where it was observed: "An error in law on the face of the award means, in their Lordships' view, that you can find in the award or a document actually incorporated thereto, as for instance, a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous. It does not mean that if in a narrative a reference is made to a contention of one party that opens the door to seeing first what that contention is, and then going to the contract on which the parties' rights depend to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds underlined are in the recitals but they do show that the parties desired a division in accordance with the terms of the partnership agreement. The words "as far possible" show some latitude in one sense, but the force of those words is to be discovered with the aid of the other words "according to and taking to consideration etc." which lay down that the terms of the partnership agreement must prevail over personal opinion. The partners appointed the arbitrators to decide the eight matters and to enable them to give their decision undertook by cl. 7 of the reference to furnish all accounts, documents and information which the arbitrators might require of them. Now the deed of partnership which was to prevail as far as its terms were applicable provided that to settle the final account of the retiring partners four items of assets should be valued in a particular way. These directions were contained in cl.' 13 of the deed already set out earlier. Thus goodwill was equal to five years' net profits; debts due to the firm were to be taken not at their book value but at 85 % of that value; stocks of raw materials were to be valued at book value; and immovable properties at purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e five years and it may be taken that the value of Udhari, raw materials and immovable properties is offset by the liabilities. Nothing remains except a very petty sum as profit to be carried over for addition to the goodwill. The duplicated depreciation does not in fact account for the increase from Rs. 21 lacs to Rs. 32 lacs. The conclusion is therefore inescapable that the arbitrator meant what he said when he spoke of including appreciation and depreciation in the valuation of the properties etc. For this reason he must be held to have exceeded his jurisdiction and it is not a question of his having merely interpreted the partnership agreement for himself as to which the Civil Court on authority could have had no say, unless there was an error of law on the face of the award. Reliance is placed upon the case of Cruickshank and others v. Suiherland -and others'-" that if accounts in the past were not prepared to meet the contingency of retiring partners, the accounts must be recast for this special purpose and the arbitrator must necessarily have freedom to value property in his own way and not by accepting old accounts already made by the partners. The intention here was tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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