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TMI Blog2024 (7) TMI 694X X X X Extracts X X X X X X X X Extracts X X X X ..... claim, thereby alleging manipulation of accounts by the respondents and claiming his alleged dues to the tune of Rs. 74,78,622.78 p. and his share of goodwill of the firm as on September 16, 2022, in the alternative seeking an enquiry into the accounts of the firm between April 1, 2022 and September 16, 2022 by appointment of a surveyor and/or independent auditor and also to carry out the formalities in terms of the Deed of Retirement, along with consequential reliefs. 3. The respondents filed their statement of defence with a counter claim, seeking a declaration that the stock-in-trade of the firm as on September 16, 2022 included 3,00,000 SIG semi-finished contacts and claiming sums of Rs. 12,31,553.50/- as the petitioner's share in loss of the firm as well as Rs. 8,12,63,041/- as the share of the respondent nos. 1 and 2 in the goods allegedly retained by the petitioner. 4. An independent auditor was appointed by the learned Arbitrator on the prayer of the petitioner. 5. In an application filed by the respondents under Section 17 of the Arbitration and Conciliation Act, 1996, the learned Arbitrator passed an order dated May 19, 2023 directing the claimant/petitioner to sign fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /statutory authorities within the limited scope of the arbitral proceeding. As such, the petitioner, if forced to sign on the incorrect entries, even if with objection, the petitioner would be at the mercy of the Income Tax authorities and would be exposed to their perception of whether the petitioner has violated Section 271 or 271A of the Income Tax Act and would be at the risk of penal action. The Arbitrator does not have the power to force the petitioner to do so against his will. 11. Secondly, since the allegation of erroneous entries in the balance sheet is the sub-stratum of the dispute, the impugned direction to sign the same would amount to granting the main relief sought in the counter claim. 12. Thirdly, it is argued that the said direction is beyond the reliefs claimed by the parties. The respondents have not sought the relief of specific performance of Clause 6 of the Retirement Deed, which contemplates signing of the documents, in their counter claim. Interim reliefs under Section 17 of the 1996 Act can only be granted in aid of the main reliefs. No direction regarding signing of the financial statements having been sought by either party, the impugned order is de h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd style, assets and liabilities etc. have been taken over and/or be deemed to have been taken over on and from September 17, 2022 by the remaining two partners, respondent nos. 1 and 2, who shall be entitled to carry on the said business in such manner as they may deem fit without any hindrance or objection from the retiring partner, that is, the petitioner. 20. The said clause has not been controverted by the claimant; however, he is patently flouting the same by refusing to sign the financial statements, for which returns of the firm cannot be filed within the statutory timeline, nor can the respondents carry on with the business of the firm. Such hindrance is being created by the petitioner with the ulterior motive of facilitating his competing business, it is alleged. 21. It is contended that upon the petitioner's retirement, the partnership firm remains the same and is merely reconstituted. There is no dissolution of the firm; hence there is no new firm. To substantiate the point, learned counsel relies on Sections 39 to 44 and in particular Section 42 of the Partnership Act. Therefore, the respondents can very much maintain their counter claim and interlocutory application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To elaborate the scope of such interference, learned counsel cites a coordinate Bench judgment of this Court in Concrete Developers LLP vs. Gaurav Churiwal and Others, where it was observed that the 1996 Act places the arbitral tribunal and the court at par in terms of the power to pass interim measures of protection and as such, it does not envisage a party knocking at the doors of the Court at every turn of the arbitration proceeding. The test of interference would be somewhat similar to that of an intra-court appeal, where the challenge is to be tested on the plank of perversity and jurisdictional infirmity. It was held that in view of the almost limitless powers conferred on the tribunal under Section 17 of the 1996 Act, the appeal court should take a hands-off approach. 30. Learned counsel next cites another coordinate Bench judgment of this Court in Gainwell Commonsales Private Limited vs. Minsol Limited, where the limited scope of interference with orders of the tribunal under Section 37 of the Act, even if passed under Section 17, was highlighted, drawing parallels between the considerations under Section 37 (2) (b) with Section 34. 31. The respondents further rely on Max ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustice or matters shocking to the conscience of court. 35. Although the tests of Section 34, which have been enumerated in the said Section but are conspicuously absent in Section 37, need not be read into the latter Section, fact remains that the court has to be judicious in interfering only in cases where such interference is absolutely necessary to protect the interest of justice. 36. Examining the matter at hand from the said focal point, we are to ascertain the validity of the impugned order. 37. In order to decide the present application, the following issues are required to be decided: (i) Whether the impugned order is in aid of the main relief; (ii) Whether the impugned order has the effect of granting the final relief, thus rendering the arbitral proceedings infructuous; (iii) How far are the Accounting Standards binding on the Income Tax Authorities; (iv) Whether the order of the Arbitral Tribunal is binding on the Income Tax Authorities; (v) Whether the claimant/petitioner can be compelled to sign the financial statements at this stage despite the disputes raised by him to the accounts. Issue: (i) Whether the impugned order is in aid of the main relief 38 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erim prayer made in the application under Section 17 of the 1996 Act is the loss being suffered regularly by the partnership firm currently, whereas the reliefs sought by both parties in the main arbitral proceeding primarily pertain to the period up to September 16, 2022. Hence, the relief cannot be said to be in aid of the main relief sought in the arbitral proceeding. The tests to be applied to Section 17 are somewhat akin to those applicable to interim measures passed in a civil suit under Order XXXIX of the Code of Civil Procedure. Although Section 19 (1) of the 1996 Act stipulates that the provisions of the Code are not applicable to arbitral proceedings, nevertheless, the principles thereof apply, as the nature of interim measures which can be granted under Section 17 are equivalent to that under Order XXXIX of the Code. Section 17 (1)(ii) envisages interim measures of protection in respect of certain matters, including the preservation, interim custody or sale of goods which are the subject-matter of the arbitration agreement, securing the amount in dispute in the arbitration, detention, preservation or inspection of any property etc. which may be necessary or expedient for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atement of Claim. In paragraph no. 19 of the Statement of Claim, the claimant alleges that there are glaring flaws in the books of accounts and the accountants of the firm, under the aegis of the respondents, have manipulated the numbers and figures in a way so as to ensure that the books of accounts reflect an alleged loss of the business of the partnership firm. The details of such alleged irregularities have also been set out in the sub-clauses of paragraph 19. For example, although the respondent no. 1 claims that there has been no production on and from March 31, 2022, the book value of the stock-in-trade was close to Rs. 3,00,00,000/- and market value close to Rs. 4,00,00,000/- and above, which has not been accounted for in the closing stock as on September 16, 2022. 47. It has been alleged further that the respondents have deliberately added up gratuity benefits for employees who have not yet completed the statutory period of employment for availing gratuity benefits in the firm, thus showing expenses and payments whereas there were no documents to support the same. Hence, the very premise of the claim is alleged manipulation of the financial accounts of the firm by the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the Guidelines issued by the Institute of Chartered Accountants and its sub-clauses clearly state that the Standards on Auditing deals with additional communication in the Auditor's report when the auditor considers it necessary to draw the users' attention to certain matters which are relevant to the users' understanding of the audit. All through the relevant provisions of the Accounting Standards (SA 706) in respect of emphasis on "matter paragraphs", which are relied on by the respondents, the common refrain is that the emphasis on matter paragraphs in the auditor's report is basically explanatory material, primarily relevant to the users' understating of the audit and also intended to explain why it is not possible for the auditor to resign from the engagement and/or otherwise. 54. Clause A10 of the said document provides that the content of Other Matter Paragraphs should reflect clearly that such other matter is not required to be presented and disclosed in the financial statements. An Other Matter Paragraph does not include information that the auditor is prohibited from providing by law. More importantly, an Other Matter Paragraph also does not include information that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to accounting standards issued by the Institute of Chartered Accountants of India, on which the respondents rely to support the impugned order, itself clearly enumerates that the auditors are entitled to disown their liability for the statements made therein. It is entirely the responsibility of the management for the preparation of the financial statements giving a true and fair view of the financial position and it is the management which gets the flak for inaccuracy or suppression in the same. 60. Moreover, the accounting standards are merely guidelines for the auditors to prepare the reports in a certain way and have no manner of applicability to the conduct of the management. It is entirely the responsibility of the management to give a true and fair picture of the financial status by the company/firm and the management is not absolved at all from such liability by whatever Matter Paragraph is introduced by the auditor in his/her report. 61. In fact, SA 706, the Auditing Guideline, is issued by the Institute of Chartered Accountants of India and comprise of mere guidelines to its own members. Hence, those can at best guide the auditors in their functioning. In fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitral tribunal is not binding on the Income Tax Authorities at all. Issue: (v) Whether the claimant/petitioner can be compelled to sign the financial statements at this stage, despite the disputes raised by him to the accounts. 64. In a sense, this issue is the central point of adjudication in the present matter. The claimant has objected to being compelled to sign the financial statement in the teeth of his objection to the same. To properly appreciate the merits of such objection, we are required to look into the provisions of Sections 271 and 271A of the 1961 Act. Section 271 provides the consequences of failure to furnish returns, comply with notices, concealment of income, etc. Sub-section (1) (c) confers power on the Assessing Officer or Commissioner (Appeals)or the Principal Commissioner or Commissioner to penalise any person who has concealed the particulars of his income or furnished inaccurate particulars of such income. 65. Thus, there are two components of such violation - deliberate concealment of such particulars of income and furnishing inaccurate particulars. In case of concealment of particulars, there may be an element of mens rea in deliberately doing so b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auditor's report. Hence, there is no nexus whatsoever between any recording of objection or other Matter Paragraphs used by the auditor with the liability of the petitioner, as a partner of the firm at the relevant point of time, in respect of the concealment of particulars, if any, and/or furnishing inaccurate particulars and/or improper keeping of the books of account. The matter paragraphs, thus, would do scant little or nothing at all to mitigate the criminal liabilities of the petitioner under Section 271 and 271A of the Income Tax Act. 70. The spirit enshrined in Article 20 (3) of the Constitution of India, which prevents any person from being compelled to incriminate himself, is thoroughly violated by the impugned order inasmuch as it compels the petitioner, knowingly, to incriminate himself by signing on financial statements which contain accounts and entries which are, in his own opinion, not only inaccurate but fraudulent, having been based on manipulated books of accounts. Hence, such component of the impugned order is against the fundamental principles of law in India and militates against notions morality and justice on which, even a final arbitral award could be set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and also penalize inaccurate recordings in the financial statements of a firm. Such consequences are direct and criminal in nature, whereas the evidentiary value of recordings in a balance sheet as admission, which was being considered in Asset Reconstruction Company (India) Limited (supra) was merely in respect of a rule of evidence. 75. Hence, no parity can be drawn between the ratio of the said cited judgments and a violation of Section 271/ 271A. A non-admission of a civil debt by filing of balance sheets is entirely different from penalties imposed for deliberately filing inaccurate balance sheets or concealment of the actual state of affairs in financial statements, which operate in entirely different fields. 76. Similar view was expressed in Reliance Asset Reconstruction Company (supra) where the Supreme Court went on to observe that the balance sheet cannot be treated as an acknowledgement of liability. The context of the same was also the interplay between Section 18 of the Limitation Act and Section 7 of the Insolvency and Bankruptcy Code, where it was held that the balance sheet of the corporate debtor does not constitute any acknowledgement of liability. The same l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in upsetting the order of an arbitral tribunal at the interlocutory stage. Frequent interference by courts has been deprecated and a non-interventionist approach is undoubtedly the norm in arbitral proceedings. However, Section 5 of the 1996 Act merely provides that judicial authorities shall not intervene except where so provided in this part. The functioning of a court under Section 37 falls in the penumbra region of the statute, the modality and the parameters of exercise of such jurisdiction having not been provided specifically. 82. Even going by the standard of strict and restrictive interference, the tests of intervention are amply made out in the present case in view of the palpable illegality and exercise beyond its authority by the arbitral tribunal. Thus, this is a fit case where such interference is justified. Section 5 cannot be interpreted in such an absurd manner that the same prevents interference under any circumstance, meaning thereby that the court would shut its eyes even to gross jurisdictional errors or legal violations which are contrary to the fundamental principles of justice and Constitutional morality. 83. In such view of the matter, A.P.O. No. 98 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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