Prohibition of Benami Property Transactions Act: An Overview

Introduction

The Prohibition of Benami Property Transactions Act, originally enacted in 1988 and substantially amended in 2016, aims to curb the practice of holding property in fictitious names. "Benami" refers to property transactions where the real beneficiary is not the person in whose name the property is purchased. The Act is crucial for addressing such properties being bought in fictitious names. These amendments, introduced through the Benami Transactions (Prohibition) Amendment Act, 2016, came into effect on November 1, 2016.

Key Provisions of the Act

1.     Definition of Benami Transaction [Section 2(9)]

o   Primary Definition [Section 2(9)(A)]: Section 2(9)(A) of the PBPT Act lays down two essential ingredients for a Benami Transaction:

• Property Transfer and Consideration: The property is transferred to or held by a person, but the consideration is provided or paid by another person.

• Benefit: The property is held for the immediate or future benefit of the person who has provided the consideration.

Example:

§  'A' purchases a piece of land but registers it in the name of his friend, 'B'.

§  The money for the purchase is provided entirely by 'A'.

§  'B' holds the property, but it is understood that 'A' will be the one who benefits from it, whether immediately or in the future.

o   Exceptions to Benami Transactions in Section 2(9)(A):

• Hindu Undivided Family (HUF) [Section 2(9)(A)(i)]: When the property is held by a Karta (head) or member of an HUF for the benefit of the family members, and the consideration is from the known sources of the HUF.

• Fiduciary Capacity [Section 2(9)(A)(ii)]: When a person holds the property in a fiduciary capacity for another, such as trustees, executors, partners, directors, or depository agents, including any other notified person by the Central Government.

• Spouse or Children [Section 2(9)(A)(iii)]: When the property is held by an individual in the name of their spouse or children, with the consideration from the known sources of the individual.

• Close Relatives [Section 2(9)(A)(iv)]: When the property is held in the name of a brother, sister, lineal ascendant (e.g., parents), or descendant (e.g., children), and both names appear as joint owners in any document, with the consideration from the individual's known sources.

o   Expanded Scope [2016 Amendment]:

• Fictitious Name [Section 2(9)(B)]: Transactions where the property is carried out or made in a fictitious name.

• Unaware Owner [Section 2(9)(C)]: Transactions where the owner is unaware of the property or denies knowledge of its ownership.

• Untraceable Consideration Provider [Section 2(9)(D)]: Transactions where the person providing the consideration is not traceable or is fictitious.

o   Exclusion from Benami Transactions:

• The explanation to this definition excludes certain transactions involving possession of property under part performance of a contract referred to in Section 53-A of the Transfer of Property Act, 1882, provided:

• Consideration by Possessor: The consideration has been provided by the person to whom possession is given, but the original owner retains ownership.

• Stamp Duty Paid: The stamp duty on the transaction has been duly paid.

• Registered Contract: The contract has been registered as per the law.

2.     Prohibition of Benami Transactions [Section 3(1)]:

• The act explicitly prohibits benami transactions [Section 3(1)] and makes them punishable with imprisonment and fines [Section 3(2)].

• The prohibition extends to the right to recover benami properties, implying that no legal proceedings can be initiated to enforce any rights in respect of benami properties [Section 4].

3.     Confiscation [Section 5]:

• Any property involved in a Benami Transaction shall be liable to confiscation by the Central Government.

4.     Benamidar and Beneficial Owner:

• Benamidar [Section 2(10)]: The person in whose name the property is held.

• Beneficial Owner [Section 2(12)]: The person who provides the consideration for the benami property and ultimately benefits from it.

5.     Adjudicating Authorities and Appellate Tribunal:

• The act establishes adjudicating authorities to determine whether a property is benami [Section 7]. As per this section, the competent authority, as authorized under subsection (1) of Section 5 of the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 (13 of 1976), shall serve as the Adjudicating Authority to exercise the jurisdiction, powers, and authority granted by or under this Act.

• It also sets up an Appellate Tribunal to hear appeals against the orders of the adjudicating authorities [Section 31]. Although the Act provides for the establishment of an appellate forum, such an appellate body has not been established yet. Currently, the appellate functions are carried out by the PMLA (Prevention of Money Laundering Act) appellate forum in view of a notification issued Section 71 of the PBPT Act.

6.     Penalties:

• Any person found guilty of entering into benami transactions faces rigorous imprisonment for a term which may extend from one to seven years [Section 53(1)] and a fine which may extend to 25% of the fair market value of the property [Section 53(2)]

7.     Authorities under the Act

• The act designates the following authorities for the purposes of this act [Section 18(1)]

• (a) the Initiating Officer;

• (b) the Approving Authority;

• (c) the Administrator; and

• (d) the Adjudicating Authority.

8.     Procedure: Section 24. Notice and Attachment of Property Involved in Benami Transaction:

• Issuance of Notice [Section 24(1)]:

• If the Initiating Officer, based on material in his possession has reason to believe that the a person holds property as a benamidar, they must document the reasons in writing and issue a notice to that person. The notice will specify a time within which the person must explain why the property should not be considered benami property.

• Provisional Attachment [Section 24(3)]:

• If the Initiating Officer believes the person in possession of the benami property might dispose of it during the notice period, they can provisionally attach the property. This requires prior approval from the Approving Authority and must be done in writing. The attachment can last up to ninety days from the last day of the month when the notice was issued.

• Further Actions Within Ninety Days [Section 24(4)]:

• After conducting inquiries and gathering relevant evidence, the Initiating Officer must, within ninety days from the last day of the month in which the notice was issued:

• (a) If the property has been provisionally attached:

• (i) Continue the provisional attachment with prior approval from the Approving Authority until the Adjudicating Authority issues an order under Section 26(3); or

• (ii) Revoke the provisional attachment with prior approval from the Approving Authority.

• (b) If the property has not been provisionally attached:

• (i) Provisionally attach the property with prior approval from the Approving Authority until the Adjudicating Authority issues an order under Section 26(3); or

• (ii) Decide not to attach the property as specified in the notice, with prior approval from the Approving Authority.

• Referral to Adjudicating Authority [Section 24(5)]:

• If the Initiating Officer continues or starts a provisional attachment, they must prepare a case statement and refer it to the Adjudicating Authority within fifteen days from the date of attachment.

9.     Section 26. Adjudication of Benami Property:

• Issuance of Notice [Section 26(1)]:

• Upon receiving a reference under Section 24(5), the Adjudicating Authority must issue a notice to the following persons, asking them to provide necessary documents, particulars, or evidence by a specified date:

• (a) The person named as a benamidar.

• (b) The person identified as the beneficial owner, if known.

• (c) Any interested party, including a banking company.

• (d) Any person who has claimed the property.

• The notice must be issued within thirty days of receiving the reference and must provide at least thirty days for the recipient to furnish the requested information.

• Consideration and Inquiry [Section 26(3)]:

• The Adjudicating Authority shall:

• (a) Consider any replies to the notice.

• (b) Conduct inquiries and gather reports or evidence as deemed necessary.

• (c) Take into account all relevant materials.

• An opportunity for a hearing will be given to the benamidar, the Initiating Officer, and any other claimant. Thereafter, the Authority will pass an order to either:

• (i) Declare the property as not benami and revoke the attachment [Section 26(3)(i)]; or

• (ii) Confirm the property as benami and uphold the attachment [Section 26(3)(ii)].

• Partial Identification [Section 26(4)]:

• If the Adjudicating Authority determines that only part of the properties in question are benami, but cannot identify which specific part, they will make a judgment to the best of their ability on which part is held benami.

• Provisional Attachment of New Properties [Section 26(5)]:

• During the proceedings, if the Adjudicating Authority suspects that another property (not referred by the Initiating Officer) is benami, they can provisionally attach this property. It will then be treated as if referred on the same date the initial reference was received under Section 24(5).

• Joining or Removing Parties [Section 26(6)]:

• At any stage, the Adjudicating Authority may, either on application or suo motu, remove or add the name of any party if it is necessary to adjudicate and settle all questions involved.

• Time Limit for Orders [Section 26(7)]:

• No order can be passed after one year from the end of the month in which the reference under Section 24(5) was received. In computing this period, any time during which proceedings are stayed by a court order is excluded. If less than sixty days remain after excluding such periods, the time limit is extended to sixty days.

• Additionally, for orders expiring between July 1, 2021, and September 29, 2021, the deadline is extended to September 30, 2021.

10.  Burden of Proof:

o   In Thakur Bhim Singh v. Thakur Kan Singh [1980] 3 SCC 72, the Supreme Court of India laid down principles governing the determination of whether a transfer is a benami transaction:

• (1) The burden of showing that a transfer is a benami transaction lies on the person who asserts that it is such a transaction.

• (2) If it is proven that the purchase money came from a person other than the person in whose favor the property is transferred, the purchase is prima facie assumed to be for the benefit of the person who supplied the purchase money, unless there is evidence to the contrary.

• (3) The true character of the transaction is governed by the intention of the person who has contributed the purchase money.

• (4) The question as to what his intention was has to be decided based on the surrounding circumstances, the relationship of the parties, the motives governing their action in bringing about the transaction, and their subsequent conduct.

Conclusion

The Prohibition of Benami Property Transactions Act is a significant legislative effort to combat black money and ensure transparency in property ownership. By defining and prohibiting benami transactions, establishing authorities for enforcement, and prescribing strict penalties for violators, the Act aims to deter the practice of holding properties in fictitious names and promote legal and transparent financial transactions in the country.

National Green Tribunal's Stay on Mining Activities in Assam: A Closer Look

On July 23, 2024, the National Green Tribunal (NGT) Eastern Zone Bench in Kolkata issued a significant order halting mining activities in several districts of Assam. This decision, grounded in the absence of required District Survey Reports (DSR), highlights the critical role of regulatory compliance in environmental governance. This blog post delves into the details of the NGT's order, the background of the case, and its implications for sustainable mining practices in India.

The case was brought to the NGT by way of an Original application which raised concerns about the ongoing mining activities in Assam without the necessary DSRs.

The "Enforcement & Monitoring Guidelines for Sand Mining (EMGSM-2020)" issued by the Ministry of Environment, Forests, and Climate Change (MoEF&CC) serve as a critical regulatory framework. These guidelines mandate that a DSR must be prepared before any mining lease or auction to ensure that environmental impacts are thoroughly assessed and mitigated.

Key Findings and Observations

1. Absence of District Survey Reports (DSR): The tribunal's critical observation was the absence of DSRs for several districts, including Goalpara and Lakhimpur. The tribunal referred to a letter from the Divisional Forest Officer (DFO), Goalpara Division, which confirmed that the DSR for Goalpara was not prepared and was still under process. Similarly, the District Commissioner of Lakhimpur admitted that the DSR for Lakhimpur was also under preparation.

2. Regulatory Requirements: The NGT emphasized the importance of the EMGSM-2020 guidelines, which clearly stipulate that no mining activity should proceed without a DSR. These guidelines are designed to ensure that environmental impacts are adequately assessed before granting any mining lease or auction.

3. State Respondents' Compliance: The tribunal expressed concern over the state respondents' failure to comply with the regulatory requirements. Despite the MoEF&CC's affidavit highlighting the necessity of DSRs, the state authorities had not completed the essential documentation.

In light of the findings, the NGT issued a stay on all mining activities in the districts of Goalpara and Lakhimpur, along with other districts that do not have duly approved DSRs. The order specifically stays the e-auction/auction of minor minerals in these districts, effectively halting any ongoing or planned mining operations until the required DSRs are prepared and approved.

The NGT's order has significant implications for sustainable mining practices in India. It reinforces the necessity of adhering to regulatory frameworks designed to protect the environment and ensure sustainable development

Click here to see the order

2016 Amendment to Section 21 of the RDDB Act - Prospective or Retrospective?

Amendments to legislative provisions often present dilemmas regarding their applicability to ongoing or past cases. A perfect example of this is the debate over the 2016 amendment to Section 21 of the Recovery of Debts Due to Banks and Financial Institutions Act (RDDB Act).

At the heart of this debate lies the pressing question: Does the amendment to Section 21 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB Act) through Act 44 of 2016, w.e.f September 1, 2016, extend its shadow backward or forward in time—is it prospective or retrospective? The first segment of this article aims to shed light on the intricate backdrop of amendment to Section 21 of the RDDB Act, setting the stage for a deeper inquiry. Then the article delves into an analysis of the decision of the Karnataka High Court in Vijay Mallya v. SBI, 2018 SCC OnLine Kar 173, juxtaposed against Supreme Court verdicts. As the discourse unfolds, it will be argued that the interpretation adopted in Vijay Mallya (supra) case is contrary to the established Supreme Court decisions. This article seeks to underscore the potential oversights in Vijay Mallya (supra) leading to the conclusion that perhaps this view requires further examination.

Background to the Amendment of Section 21

Section 21 of the RDDB provides that appellants are required to make a pre-deposit to file an appeal. Before the amendment of the Section 21, the Appellate Authority held the discretion to waive off or reduce this pre-deposit. The new mandate requires a deposit of at least 25% of the amount due, effectively removing the Tribunal’s ability to fully waive the pre-deposit requirement.

This discretion to waive off the pre-deposit amount was amended in 2016, wherein it was now made mandatory to deposit at least 25 % of the amount due for preferring an appeal. In other words, the 2016 amendment took away the power of the Appellate Tribunal to waive of the pre-deposit for filing of an appeal.

Comparison of the Pre- and Post-Amendment Section 21

Before the 2016 Amendment

21. Deposit of amount of debt due, on filing appeal. —

Where an appeal is preferred by any person from whom the amount of debt is due to a Bank or a Financial Institution or a consortium of Banks or Financial Institutions, such appeal shall not be entertained by the Appellate Tribunal unless such person has deposited with the Appellate Tribunal seventy-five per cent of the amount of debt so due from him as determined by the Tribunal under Section 19:

Provided that the Appellate Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited under this section.

Post the 2016 amendment

21. Deposit of amount of debt due, on filing appeal. —

Where an appeal is preferred by any person from whom the amount of debt is due to a Bank or a Financial Institution or a consortium of Banks or Financial Institutions, such appeal shall not be entertained by the Appellate Tribunal unless such person has deposited with the Appellate Tribunal fifty per cent of the amount of debt so due from him as determined by the Tribunal under Section 19:

Provided that the Appellate Tribunal may, for reasons to be recorded in writing, reduce the amount to be deposited by such amount which shall not be less than twenty-five per cent of the amount of such debt so due to be deposited under this section.

A comparison of the unamended and amended Section 21 would show that prior to the amendment, appellants were required to deposit 75% of the debt, with the Tribunal possessing the discretion to reduce or waive the pre-deposit for recorded reasons. Post-amendment, the requirement was reduced to 50%, with a floor limit of 25% for reduction discretion.

Interpreting the amended Section 21, the Supreme Court in Kotak Mahindra Bank (P) Ltd. v. Ambuj A. Kasliwal, (2021) 3 SCC 549 has clarified that the discretion of DRAT to reduce pre-deposit amount from 50% of debt due, is limited to reducing the pre-deposit to 25% thereof, but the pre-deposit cannot under any circumstances be reduced below 25% of the debt due. [1]

However, the question remains whether the amendments to Section 21 apply retroactively or prospectively.

View of the Karnataka High Court in Vijay Mallya Case

A single judge of the Karnataka High Court in Vijay Mallya v. SBI, 2018 SCC OnLine Kar 173 considered this very question as to whether the 2016 amendment in Section 21 of the RDDB Act is prospective or retrospective.

In this case the Petitioner had challenged an order dated 28.03.2018 [2], directing the Petitioner to deposit a sum of Rs. 3,101 Crores, in the failure of which, the appeal will be liable to be dismissed automatically. One of the grounds [3] raised by the Petitioner against this order was that the DRAT erred in basing its decision upon the amendment as the right of appeal accrued to the Petitioner when the original proceedings are instituted. In other words, the argument of the Petitioner was that the amendment was prospective in nature and the Tribunal had the discretion to waive of the pre-deposit since the original proceedings had instituted before the amendment.

On the other hand, it was argued by the Respondents that the amendment being merely procedural in nature would apply retrospectively, since no person has a vested right in procedure.

Rejecting the contentions of the Petitioner, the Single Judge held that Section 21 of the 1993 act relates not to the “right of appeal” but to the conditions subject to which the “right of becomes exercisable”[4]. The court further held that such conditions fall within the domain of procedure and cannot be said to be substantive in nature.[5] The crux of reasoning of the Karnataka High Court can be found in Para 11 as under,

“11. The 2016 Amendment to the provisions of Section 21 of the Act of 1993, in substance, relates not to the right of appeal as such, but to the condition subject to which the said right becomes exercisable; ordinarily such conditions fall within the domain of procedure especially when the alteration of said conditions is not substantial, inasmuch as even after amendment; discretion is left with the DRAT to reduce the amount of pre-deposit, although not below 25% of the decretal amount. Therefore, the law by which such conditions are varied cannot be construed to be substantive law but shall remain within the realm of procedural law….”

In coming to this conclusion, the court had relied upon the decision of Shiv Shakti Coop. Housing Society, Nagpur v. Swaraj Developers, (2003) 6 SCC 659 wherein it had been held that no person has a vested right, in a course of procedure, and such procedural amendments are assumed to be retrospective.[6]

Further the High Court had also been swayed by the reasoning that the amendment being amendment by way of substitution, must be construed as being retrospective[7] in view of the law laid down by the Full Bench of the Karnataka High court in Hassan Co-operative Milk Producers Societies Union Ltd. v. State of Karnataka, Department of Co-operative Societies, ILR 2014 KAR 4257

Critique of Vijay Mallya Case

It is submitted that the Vijay Mallya (case), marks a significant point of reference with respect to the interpretation of the nature of amendment of Section 21 of the RDDB Act. Nonetheless, the interpretation given to this Section by the Karnataka High Court is questionable for at least two three reasons. Firstly, the contention is that the Vijay Mallya (supra) judgment is per incuriam, as the High Court overlooked the decisions of the Supreme Court that have held that modifications to the terms under which the right to appeal is exercised are also deemed to have a prospective effect. Secondly, the High Court failed to consider the decisions of the Supreme Court that have held that when the substituted provisions contain any substantive provisions, then such substitution cannot be assumed to be retrospective. Thirdly, the High Court’s reliance on the decision of Shiv Shakti Coop. Housing Society (supra) is misplaced, as in that case, the Supreme Court was dealing with an amendment to the “right of revision” which is very different from the “right of appeal”.

Varying conditions of appeal affect the substantive right of appeal.

Way back in the decision of Colonian Sugar Refining Company [1905] A.C. 369, the Privy Council had held that the right to appeal is a substantive right and not merely a procedural right. The Privy Council aptly explained the rationale behind this principle as under,

“To deprive a suitor in a pending action of an appeal to a superior tribunal which belonged to him as of right is a very different thing from regulating procedure”.

Applying the above principle, the Privy Council held that Section 39(2) of the Judiciary Act, 1903 which took away the right of appeal from the Supreme Court to the Privy Council and directed that the appeal was to lie to the High Court of Australia would apply only with prospective effect and thus would not be applicable to original proceedings instituted before the introduction of this act.

In Nogendra Nath Bose v. Mon Mohan Singha Roy, 1930 SCC OnLine Cal 90, the Plaintiff had instituted a suit a suit for arrears of rent and had obtained a decree. In execution of that decree, the tenure was sold on 20-11-1928. On 19-12-1928, one of the judgment-debtors had filed an application under Order 21 Rule 90 for setting aside the sale. That application having been dismissed for default; the Petitioner preferred an appeal to the District Judge. The District Judge refused to admit the appeal on the ground that the amount recoverable in execution of the decree had not been deposited as required by the proviso to Section 174, clause (c) of the Bengal Tenancy Act as amended by an amending Act in 1928. Challenging the said order, the Petitioner argued that the amended provision which came into force on 21-2-1929, could not affect the right of appeal from a decision on an application made on 19-12-1928, for setting aside the sale.

At the outset, it must be noticed that this decision was not dealing with the “right of appeal” but with the “conditions of the exercise of such appeal”. Expanding the rule laid down by the Privy Council in Colonial Sugar Refining Company (supra), J. Graham held that since the ‘right to appeal is a substantive right, it would follow that the substantive right of appeal, which the litigant possesses must be deemed to be prejudicially affected by a new provision, which has the effect of attaching to it any clog or disability;[8]. Thus, the Calcutta High Court made it clear that since the right to appeal is a substantive vested right, any modification which introduces any ‘clog’ or ‘disability’ with this right must also be held to be prospective.

The view of the Calcutta High Court in Nogendra Nath Bose (supra) has been accepted by the Supreme Court in Hoosein Kasam Dada (India) Ltd. v. State of Madhya Pradesh AIR 1953 SC 221. In this case, a division bench of the Supreme Court was dealing with the question as to whether amendment of section 22(1) of the Central Provinces and Berar Sales Tax which introduced requirement of proof of deposit of tax before filing of an appeal was prospective or retrospective. Again, it must be noticed that the amendments did not alter the right of appeal, but merely affected the conditions in respect to which such appeal is to be exercised.

The Supreme Court reiterated that the right of appeal is not merely a matter of procedure, but is a substantive right, and such right becomes vested in a party, when proceeding the first initiated in the inferior court[9]. The court also observed that the amendment placed a substantial restriction on the right of appeal, as the amended section required the payment of the entire assist amount as a condition precedent to the admission of its appeal.[10]

Applying the law laid down in Nogenra Nath Bose (supra), the Hon'ble Supreme Court held that any new requirement which ‘touches’ the substantive right of appeal or introduces any fetter or impairs the exercise of such appeal can only be prospective in nature. The relevant extract of is as under,

31. In the first place the onerous condition may in a given case prevent the exercise of the right of appeal, for the assessee may not be in a position to find the necessary money in time. Further this argument cannot prevail in view of the decision of the Calcutta High Court in Nogendra Nath Bose v. Mon Mohan Singha Roy [Nogendra Nath Bose v. Mon Mohan Singha Roy, (1930) 34 CWN 1009 : 1930 SCC OnLine Cal 90]. No cogent argument has been adduced before us to show that that decision is not correct. There can be no doubt that the new requirement “touches” the substantive right of appeal vested in the appellant. Nor can it be overlooked that such a requirement is calculated to interfere with or fetter, if not to impair or imperil, the substantive right. The right that the amended section gives is certainly less than the right which was available before. A provision which is calculated to deprive the appellant of the unfettered right of appeal cannot be regarded as a mere alteration in procedure. Indeed the new requirement cannot be said merely to regulate the exercise of the appellant's pre-existing right but in truth whittles down the right itself and cannot be regarded as a mere rule of procedure.

The decision of Hoosein Kasam Dada (supra) has been affirmed by a Constitution Bench in Garikapatti Veeraya v. N. Subbiah Choudhury 1957 SCR 488.[11]

Similarly, in State of Bombay v. Supreme General Films Exchange Ltd., AIR 1960 SC 980, the Supreme Court was dealing with the question as to whether the court fees that would be payable would be as on the date of the filing of the suit, or whether the same would be calculated as on the date of filing of the appeal Affirming the decision of Hoosein Kasam Dada (supra), the three judge bench reiterated that that any impairment of the right of appeal by putting a new restriction or imposing a more onerous condition is not matter of procedure only, but affects the substantive right of the parties, and therefore is prospective in nature[12].

The Constitution Bench in Vitthalbhai Naranbhai Patel v. CST, AIR 1967 SC 344 has affirmed the principle laid down in Hoosein Kasam Dada (supra) but has held that such rule would not be applicable where the date of commencement of the lis cannot be conclusively proved. The five-judge bench refused to apply the rule laid down in Hoosein Kasam Dada (supra), because in that case, there was no material on record to show as to when the lis had begun[13].

The above decisions were reaffirmed by the Supreme Court in Ramesh Singh v. Cinta Devi, (1996) 3 SCC 142, where the Supreme Court held that the appellant would be entitled to file the appeal without requiring to make the deposit under the proviso to Section 173 of the New Motor Vehicle Act.[14]

In Videocon International Ltd. v. SEBI, (2015) 4 SCC 33, a division bench of the Supreme Court was dealing with the right of second appeal provided under Section 15Z of the SEBI Act. By virtue of the amendment to the said section, the scope of second appeal, which was earlier maintainable on questions of law and fact, had been narrowed down to be maintainable only on questions of law. Even such restriction was held by the Supreme Court to be a clog on the right to appeal, and the amendment was held to be prospective[15].

The Supreme Court of India, in ECGC Ltd. v. Mokul Shriram EPC JV, (2022) 6 SCC 704 addressed a similar dilemma within the context of the Consumer Protection Act, holding that conditions of pre-deposit stipulated by the 2019 Consumer Protection Act would not apply to complaints filed under the 1986 Act or those pending when the 2019 Act came into force. The court held that no pre-deposit would be required for appeals in cases where the complaints were instituted under the 1986 act or when the 2019 act came into force[16]

Errors in Vijay Mallya (supra)

In view of the above case laws, it is submitted that the decision of Vijay Mallya (supra) is per incurium has it has failed to consider various Supreme Court decisions that have held any modification with respect the conditions of exercise of such appeal also fall in the realm of substantive law, and such amendments are prospective.

It should be noted that the previous version of the proviso to Section 21 allowed the Appellate Tribunal the flexibility to waive or reduce the pre-deposit based on the unique facts and circumstances of each case. However, this flexibility was subsequently eliminated, and a stringent requirement was introduced that mandated a pre-deposit of 25% of the debt owed, without taking the specifics of the case into account. This change has created a significant barrier to exercise the right to appeal. Consequently, the High Court’s stance that the 2016 amendment to Section 21 has retrospective application was arguably misguided, and it would have been more appropriate to consider the amendment as having a prospective effect.

Secondly, the rationale of the High Court that the amendment, being an amendment by way of substitution, should be considered retrospective[17] based on the precedent set by the Full Bench of the Karnataka High Court in Hassan Co-operative Milk Producers Societies Union Ltd. v. State of Karnataka, Department of Co-operative Societies, ILR 2014 KAR 4257, is flawed. The Supreme Court has firmly established that typically, when an amendment substitutes existing provisions, the original provisions are considered repealed, and the new provisions are installed from the start of that enactment. However, if the new provisions introduce substantive elements that establish new rights or obligations, or eliminate any established rights, then such substitution should not be automatically deemed retrospective. In instances where there are substantive changes, it is imperative for the legislature to explicitly state whether the substitution should be applied retrospectively or not[18].

Finally, the reliance placed by the High Court on the decision of Shiv Shakti Coop. Housing Society, Nagpur v. Swaraj Developers, (2003) 6 SCC 659 seems to be erroneous as in that case, the Supreme Court was dealing with the amendments made to the right of exercise of the remedy of ‘revision’ and not of appeal. In fact, the said decision differentiated between the right to appeal and right to revision by holding that while there is no substantive right of revision, right to appeal stands on a different footing.[19]

In conclusion, the view held by the Karnataka High Court in Vijay Mallya (supra) appears to be inconsistent with the decisions of the Supreme Court that have held similar amendments to be prospective in nature, especially when Section 21 alters the accrued rights. The position taken by the Karnataka High Court warrants further scrutiny by other High Courts and ultimately the Supreme Court to ensure that the substantive rights of litigants is protected.

[1] Para 13, Kotak Mahindra Bank (P) Ltd. v. Ambuj A. Kasliwal, (2021) 3 SCC 549

[2] Para 2, Vijay Mallya v. SBI, 2018 SCC OnLine Kar 1733

[3] Para 5, Vijay Mallya v. SBI, 2018 SCC OnLine Kar 1733

[4] Para 11, Vijay Mallya v. SBI, 2018 SCC OnLine Kar 1733

[7] Para 12, Vijay Mallya v. SBI, 2018 SCC OnLine Kar 1733

[8] Page 1010, Nogendra Nath Bose v. Mon Mohan Singha Roy, 1930 SCC OnLine Cal 90

[9] Para 24, Hoosein Kasam Dada (India) Ltd. v. State of Madhya Pradesh AIR 1953 SC 221

[10] Para 11, Hoosein Kasam Dada (India) Ltd. v. State of Madhya Pradesh AIR 1953 SC 221

[11] Para 22, Garikapatti Veeraya v. N. Subbiah Choudhury 1957 SCR 488

[12] Para 12, State of Bombay v. Supreme General Films Exchange Ltd., AIR 1960 SC 980

[13] Para 9, Vitthalbhai Naranbhai Patel v. CST, AIR 1967 SC 344

[14] Para 5, Ramesh Singh v. Cinta Devi, (1996) 3 SCC 142

[15] Para 41, Videocon International Ltd. v. SEBI, (2015) 4 SCC 33

[16] Para 38, ECGC Ltd. v. Mokul Shriram EPC JV, (2022) 6 SCC 704

[17] Para 12, Vijay Mallya v. SBI, 2018 SCC OnLine Kar 1733

[18] Para 53, Katta Sujatha Reddy v. Siddamsetty Infra Projects (P) Ltd., (2023) 1 SCC 355

[19] Para 15, Shiv Shakti Coop. Housing Society, Nagpur v. Swaraj Developers, (2003) 6 SCC 659

Navigating Jurisdiction: Evolving Perspectives on Section 14 of the Arbitration Act

In a previous article, we delved into the question of whether an application under Section 14 of the Arbitration Act could be filed before the District Court or the High Court. The author highlighted that the prevailing belief that such an application could only be made before the High Court or the Supreme Court is at odds with the plain interpretation of Section 2(1)(e) of the Arbitration Act. However, recent legal developments, notably the decision in Swadesh Kumar Agarwal v. Dinesh Kumar Agarwal, (2022) 10 SCC 235, indicate a shifting legal landscape on this issue.

Pre Swadesh Kumar Agarwal

In the previous article, we had discussed two decisions of the Delhi High Court, namely Raksha Vigyan Karamchari Sahkari Awas Samiti Ltd. v. Proto Developers and Technologies Pvt. Ltd., 2021 SCC OnLine Del 2731 and DDA v. Tara Chand Sumit Construction Co 2020 SCC OnLine Del 2501 which had taken the view that an application under Section 14 would be maintainable only before the High Court. The rationale behind this interpretation stemmed from potential conflicts between the powers of superior courts to appoint arbitrators under Section 11 and those of District Courts to substitute arbitrators under Section 14 and Section 29A.

Apart from the above two decisions, various other decisions of the High Courts had also taken the view that an application which results in the substitution of arbitrators would only be maintainable before the High Court, in case of Domestic Arbitration and the Supreme Court, in case of international commercial arbitration.  

In Nilesh Ramanbhai Patel v. Bhanubhai Ramanbhai Patel, (2019) 2 GLR 1537, the Gujarat High Court had held as under,

15. …. The Court on the other hand has vast powers for extension of the period even after such period is over. While doing so, the Court could also choose to substitute one or all of the arbitrators and this is where the definition of term ‘Court’ contained in Sec. 2(1) (e) does not fit. It is inconceivable that the Legislature would vest the power in the Principal Civil Judge to substitute an arbitrator who may have been appointed by the High Court or Supreme Court. Even otherwise, it would be wholly impermissible since the powers for appointment of an arbitrator when the situation so arises, vest in the High Court or the Supreme Court as the case may be in terms of sub-secs. (4), (5) and (6) of Sec. 11 of the Act. If therefore, there is a case for extension of the term of an arbitrator who has been appointed by the High Court or Supreme Court and if the contention of Shri Mehta that such an application would lie only before the Principal Civil Court is upheld, powers under sub-sec. (6) of Sec. 29A would be non-operatable. In such a situation, sub-sec. (6) of Sec. 29A would be rendered otiose. The powers under sub-sec. (6) of Sec. 29A are of considerable significance. The powers for extending the mandate of an arbitrator are coupled with the power to substitute an arbitrator. These powers of substitution of an arbitrator are thus concomitant to the principal powers for granting an extension. If for valid reasons the Court finds that it is a fit case for extending the mandate of the arbitrator but that by itself may not be sufficient to bring about an early end to the arbitral proceedings, the Court may also consider substituting the existing arbitrator. It would be wholly incumbent to hold that under sub-sec. (6) of Sec. 29A the Legislature has vested powers in the Civil Court to make appointment of arbitrators by substituting an arbitrator or the whole panel of arbitrators appointed by the High Court under Sec. 11 of the Act. If we, therefore, accept this contention of Shri Mehta, it would lead to irreconcilable conflict between the power of the superior Courts to appoint arbitrators under Sec. 11 of the Act and those of the Civil Court to substitute such arbitrators under Sec. 29A(6). This conflict can be avoided only by understanding the term “Court” for the purpose of Sec. 29A as the Court which appointed the arbitrator in case of Court constituted Arbitral Tribunal.

Similarly, in Cabra Instalaciones Y. Services. S.A. v. Maharashtra State Electricity Distribution Company Limited, 2019 SCC OnLine Bom 1437, the Bombay High Court had taken a view that in cases of international commercial arbitration where an application under Section 11 has to be made before the Supreme Court, the High Court has no power under Section 29A to substitute such an arbitrator and such power would lie exclusively with the Supreme Court. The relevant portions of this judgment are as under,

7. On a plain reading of Section 29A alongwith its subsections, it can be seen that for seeking extension of the mandate of an arbitral tribunal, these are substantive powers which are conferred on the Court and more particularly in view of the clear provisions of sub-section (6) which provides that while extending the period referred to in sub-section (4), it would be open to the Court to substitute one or all the arbitrators, which is in fact a power to make appointment of a new/substitute arbitrator or any member of the arbitral tribunal. Thus certainly when the arbitration in question is an international commercial arbitration as defined under Section 2(1)(f) of the Act, the High Court exercising power under Section 29A, cannot make an appointment of a substitute arbitral tribunal or any member of the arbitral tribunal as prescribed under sub-section (6) of Section 29-A, as it would be the exclusive power and jurisdiction of the Supreme Court considering the provisions of Section 11(5) read with Section 11(9) as also Sections 14 and 15 of the Act. It also cannot be overlooked that in a given case there is likelihood of an opposition to an extension application and the opposing party may pray for appointment of a substitute arbitral tribunal, requiring the Court to exercise powers under sub-section (6) of Section 29-A. In such a situation while appointing a substitute arbitral tribunal, when the arbitration is an international commercial arbitration, Section 11(9) would certainly come into play, which confers exclusive jurisdiction on the Supreme Court to appoint an arbitral tribunal.

8. Thus, as in the present case once the arbitral tribunal was appointed by the Supreme Court exercising powers under Section 11(5) read with Section 11(9) of the Act, in my opinion, this Court lacks jurisdiction to pass any orders under Section 29-A of the Act, considering the statutory scheme of Section 29-A. It would only be the jurisdiction of the Supreme Court to pass orders on such application under Section 29-A of the Act when the arbitration is an international commercial arbitration. The insistence on the part of the petitioner that considering the provisions of sub-section (4), the High Court would be the appropriate Court to extend the mandate of the arbitral tribunal under Section 29-A, would not be a correct reading of Section 29A as the provision is required to be read in its entirety and in conjunction with Section 11(9) of the Act

The Kerala High Court had also taken a similar view in Lots Shipping Company Limited v. Cochin Port Trust Board of Trustees, AIR 2020 Ker 169 as under,

9. Question to be decided is whether the term “court” contained in Section 29A(4) requires a contextual interpretation apart from the meaning contained in Section 2(1)(e)(i) of the Act. A contextual interpretation is clearly permissible in view of the rider contained in sub-section (1) of Section (2), “unless the context otherwise requires”. As argued by the counsel on either side and as submitted by the learned Amicus Curiae, a contextual interpretation is required since the power conferred on the court under Section 29A, especially under sub-sections (4) and (5), are more akin to the powers conferred on the Supreme Court and the High Court, as the case may be, under Sections 11(6), 14 & 15 of the Act, for appointment, termination of mandate and substitution of the arbitrator. It is pointed out that, the amendments introduced in the year 2015, with effect from 23.10.2015, has recognized the judgment of the Constitutional Bench of the apex court in SBP & Company v. Patel Engineering Company Ltd., (2005) 8 SCC 618 and conferred the power of appointment on the Supreme Court or the High Court. The amendment has not in any manner enhanced the power of the principal civil court, which continues only with respect to matters provided under Sections 9 and 34 of the Act. It is significant to note that the orders passed by the principal civil court of original jurisdiction under Sections 9 and 34 are made appealable under Section 37 of the Act. So also, order if any passed refusing to refer the parties to arbitration under Section 8 of the Act, was also made appealable under Section 37(1)(a) of the Act. Section 29A was introduced to make it clear that, if the arbitration proceedings is not concluded within 18 months, even if the parties have consented for an extension, it cannot be continued unless a judicial sanction is obtained. The power to grant extension by the court is introduced under an integrated scheme which also allows the court to reduce the fees of the arbitrator or to impose cost on the parties and/or to substitute the arbitrator(s). The power of extension is to be exercised on satisfying “sufficient cause’ being made out. In all respect, such power conferred under Section 29A for permitting extension with respect to the proceedings of arbitration, is clearly akin to the powers conferred under Sections 14 & 15 of the Act. The absence of any provision for an appeal with respect to the exercise of such power under Section 29A, in the nature as mentioned above, would indicate that the power under Section 29A is not to be exercised by the principal civil court of original jurisdiction. Otherwise, it will create anomalous situation of identical powers being exercised in a contrary manner, prejudicial to the hierarchy of the courts. In a case where appointment of an arbitrator is made under Section 11(6) of the Act by the High Court or the Supreme Court, as the case may be, it would be incongruous for the principal civil court of original jurisdiction to substitute such an arbitrator or to refuse extension of the time limit as provided under Section 29A, or to make a reduction in the fees of the Arbitrator. Therefore, a purposive interpretation becomes more inevitable.

The Allahabad High Court while dealing with a similar issue remarked in Lucknow Agencies v. U.P. Avas Vikas Parishad, 2019 OnLine ADJ 0169 as under,

34. Thus, the power to substitute the arbitrator as mandated in sub-section (6) of Section 29A vest only with the Court. This provision cannot be read in isolation but with Section 11, which provides for appointment of arbitrator.

35. Once the appointment of arbitrator or arbitral Tribunal has been made by the High Court or the Supreme Court exercising power under sub-sections (4), (5) and (6) of Section 11 then the power to substitute the arbitrator or the Arbitral Tribunal only vest with the said appointing authority i.e. High Court or Supreme Court, as the case may be.

36. The argument raised from the side opposite that the word ‘Court’ occurring in Section 2(1)(e) means the principal Civil Court and not the High Court cannot be accepted, as once the appointment was made by the High Court exercising power under Section 11, the power to substitute an arbitrator cannot vest under sub-section (6) of Section 29A with the principal Civil Court.

Finally, the Calcutta High Court while dealing with this decision in Amit Kumar Gupta v. Dipak Prasad, 2021 SCC OnLine Cal 2174 also took a similar view as under,

“17. The meaning of the word “court” as ascribed in Section 2(1)(e) of the Act of 1996 is subject to the requirement of the context. In the context of Section 29A of the Act of 1996 which has prescribed a substantive provision for completion of the arbitral award and the time limit to do so, the meaning of the word “court” as used therein has to be understood. Under sub-section (6) of Section 29A of the Act of 1996, the Court has been empowered to substitute the arbitrator or the arbitrators in reconstituting the arbitral tribunal if so required. The power of appointment of an arbitral tribunal has been prescribed in Section 11 of the Act of 1996. Section 11 of the Act of 1996 has prescribed two appointing authorities given the nature of the arbitration. In the case of an international commercial arbitration, the authority to appoint an arbitrator, has been prescribed under Section 11 of the Act of 1996 to be the Supreme Court. In the case of a domestic arbitration, Section 11 of the Act of 1996 has prescribed that the appointing authority shall be the High Court.

18. In my view, the word “court” used in Section 29A of the Act of 1996 partakes the character of the appointing authority as has been prescribed in Section 11 of the Act of 1996 as, the Court exercising jurisdiction under Section 29A of the Act of 1996 may be required to substitute the arbitrator in a given case. Such right of substituting can be exercised by a Court which has the power to appoint. The power to appoint has been prescribed in Section 11. Therefore, the power to substitute should be read in the context of the power of appointment under Section 11

Swadesh Kumar Agarwal v. Dinesh Kumar Agarwal, (2022) 10 SCC 235 – A perceptible change in Law

The decision in Swadesh Kumar Agarwal v. Dinesh Kumar Agarwal, (2022) 10 SCC 235, suggests a shift in the legal landscape. In this case, the parties had filed applications under Section 14(1)(a) of the 1996 Act before the District court concerned to terminate the mandate of the sole arbitrator on the ground of delay in concluding the arbitration proceedings. The other party had filed objections to the application under Section 14, which had been dismissed by the District Court. Aggrieved by the orders of dismissal, the parties had preferred a writ petition before the Hon’ble High Court[1].

Furthermore, during the pendency of the Section 14 application before the District Judge, one of the parties had filed an application for appointment of arbitrator under Section 11 of the arbitration act, and in that application had specifically requested to terminate the mandate of the sole arbitrator and to appoint a fresh arbitrator[2].

While hearing a Special Leave Petition against the decision of the High Court, the Division Bench of the Supreme Court framed the following six issues:

(i) Whether the High Court in exercise of powers under Section 11(6) of the 1996 Act, can terminate the mandate of the sole arbitrator?

(ii) Whether in the absence of any written contract containing the arbitration agreement, the application under Section 11(6) of the 1996 Act would be maintainable?

(iii) Is there any difference and distinction between sub-section (5) of Section 11 and sub-section (6) of Section 11 of the 1996 Act?

(iv) Whether the application under sub-section (6) of Section 11 shall be maintainable in a case where the parties themselves appointed a sole arbitrator with mutual consent?

(v) Whether in the facts and circumstances of the case the High Court was justified in terminating the mandate of the sole arbitrator on the ground that there was undue delay on the part of the sole arbitrator in concluding the arbitration proceedings which would lead to the termination of his mandate, in an application under Section 11(6) of the 1996 Act?

(vi) Whether in the facts and circumstances of the case, the learned trial court was justified in dismissing the application submitted by the appellant, submitted to reject the application under Section 14(2) of the 1996 Act in exercise of powers under Order 7 Rule 11CPC?

While dealing with the scheme emerging from sections 13, 14 and 15 of the arbitration act, the Hon’ble Supreme Court went on to make the following observations,

21. Therefore, on a conjoint reading of Sections 13, 14 and 15 of the Act, if the challenge to the arbitrator is made on any of the grounds mentioned in Section 12 of the Act, the party aggrieved has to submit an appropriate application before the Arbitral Tribunal itself. However, in case of any of the eventualities mentioned in Section 14(1)(a) of the 1996 Act and the mandate of the arbitrator is sought to be terminated on the ground that the sole arbitrator has become de jure and/or de facto unable to perform his functions or for other reasons fails to act without undue delay, the aggrieved party has to approach the “court” concerned as defined under Section 2(1)(e) of the 1996 Act. The court concerned has to adjudicate on whether, in fact, the sole arbitrator/arbitrators has/have become de jure and de facto unable to perform his/their functions or for other reasons he fails to act without undue delay. The reason why such a dispute is to be raised before the court is that eventualities mentioned in Section 14(1)(a) can be said to be a disqualification of the sole arbitrator and therefore, such a dispute/controversy will have to be adjudicated before the court concerned as provided under Section 14(2) of the 1996 Act.

An examination of the aforementioned remarks reveals that the Hon’ble Supreme Court elucidated that an application under Section 14 would be admissible before the court as delineated in Section 2(1)(e).  

While it may be argued that the observations of the Supreme Court are in the nature of obiter dicta since none of the issues specifically dealt with the maintainability of the application under Section 14 is maintainable before the District Judge, it would be useful to remember that even the obiter of the Hon’ble Supreme Court would certainly be binding on the various High Courts[3].

Post Swadesh Kumar Agarwal – View of the High Courts

Subsequent to the Swadesh Kumar Agarwal decision, various High Courts have acknowledged the shift in legal stance. In National Highways Authority of India v. Third Rock Consultants (P) Ltd., 2023 SCC OnLine Del 444, a single judge of the Delhi High Court expressly rejected the argument that an application under Section 14 of the Arbitration Act is not maintainable before the District Court citing the decision of Swadesh Kumar Agarwal (supra) as under,

12. Mr. Bishnoi contends that the question raised by him here, namely, whether the High Court alone can consider a petition under Section 14 of the Act, did not arise for consideration before the Supreme Court in Swadesh Kumar Agarwal. Although the questions formulated by the Court in paragraph 9 of the judgment do not expressly contain a question to this effect, it is evident from the extracts quoted above that the Supreme Court has considered the question of jurisdiction under Section 14(2) of the Act, and expressly held that the Court under Section 2(1)(e) of the Act can entertain such a petition.

14. I find this submission of Mr. Bishnoi entirely unmerited. While the definitions in Section 2(1)(e) do, to some extent, depart from the rules of pecuniary jurisdiction applicable to suits, the concept is not jettisoned altogether. At least in the context of arbitrations other than international commercial arbitration, Section 2(1)(e)(i) vests jurisdiction in the principal civil courts of original jurisdiction as well as in High Courts which exercise ordinary original civil jurisdiction, where applicable. The question of whether a particular case to be filed in one or the other of these two courts, is answered by the qualifying phrase, “…having jurisdiction to decide the question forming the subject-matter of the arbitration if the same had been the subject matter of a suit…”. This answer must, in my view, be determined with reference both to aspects of territorial and pecuniary jurisdictions. I am unable to find any textual or contextual justification to hold that all proceedings under the Act must be exercised by the High Court, if the High Court has ordinary original civil jurisdiction, even if the value of the dispute falls below the pecuniary jurisdiction of the High Court.

The issue has also been considered in detail by the Calcutta High Court in Gammon Engineers & Contractors (P) Ltd. v. State of W.B., 2023 SCC OnLine Cal 2326. While dealing with the decision of the Swadesh Kumar Agarwal (supra), the Calcutta High Court specifically held that the court would mean the District Judge at Jalpaiguri. The relevant observations are as under,

21. The ratio of the judgment in Swadesh Kumar Agarwal (supra) must be kept in mind, wherein the court has categorically held in paragraph 32 that once an appointment is made under Section 11, the arbitration agreement cannot be invoked for the second time under Section 11. The procedure prescribed in the Act for termination of an arbitral tribunal's mandate is as per Sections 14 and 15 of the Act. The argument raised by the petitioner that a petition can be filed under Section 14 read with Section 15 and Section 11(6) is an argument in sophistry and is superfluous. This is quite evident from the ratio of the judgment in Swadesh Kumar Agarwal (supra), which has been specifically delineated in paragraph 32 of the said judgment and pointed out by me in the preceding paragraphs. In the present case, a Section 9 application was already made to the District Judge at Jalpaiguri, which is, for all purposes, the ‘court’ under Section 2(1)(e) of the Act. Therefore, the bar under Section 42 would lie and all applications to be made to a ‘court’ must be made to the District Judge at Jalpaiguri. An application under Section 14(1)(a) for termination of an arbitrator's mandate, being required to be made before a ‘court’ as under Section 2(1)(e) and 42 of the Act, has to presented before the District Judge at Jalpaiguri. In light of the above, A.P. 785 of 2022 is disposed of for not being maintainable before the High Court at this stage. I make it clear that the findings with regard to merits of the case in the preceding paragraphs are tentative in nature and the appropriate court shall decide the Section 14 application in accordance with law

Conclusion:

In conclusion, the Swadesh Kumar Agarwal (supra) decision has brought about clarity in the interpretation of Section 14 of the Arbitration Act. While the legal landscape continues to evolve, it is evident that recent developments have unsettled earlier views of the High Courts, which may now be considered impliedly overruled. This decision contributes to ensuring consistency and predictability in arbitration proceedings and underscores the need for a nuanced understanding of arbitration law. It is hoped that the Supreme Court will further elucidate and affirm this position, providing additional guidance and solidifying the evolving legal framework surrounding arbitration law. 

References

[1] Para 3, Swadesh Kumar Agarwal v. Dinesh Kumar Agarwal, (2022) 10 SCC 235

[2] Para 4, Swadesh Kumar Agarwal v. Dinesh Kumar Agarwal, (2022) 10 SCC 235

[3] Para 26, Oriental Insurance Co. Ltd. v. Meena Variyal, (2007) 5 SCC 428; Para 11, Peerless General Finance & Investment Co. Ltd. v. CIT, (2020) 18 SCC 625; Para 76, Secundrabad Club v. CIT, 2023 SCC OnLine SC 1004

DETERMINATION OF PLACE OF EFFECTIVE MANAGEMENT UNDER INCOME TAX ACT, 1961

Introduction

The concept of Place of Effective Management [hereinafter “POEM”] is essential for determining the residency of a company for the purposes of Income Tax, which. The concept finds mention in Section 6(3) of the Income Tax Act, 1961 (‘IT Act’) which provides that a company is deemed to be a resident in India in any previous year if i) it is an Indian Company[1] or if ii) its ‘Place of Effective Management is located within the country’ during the previous year[2].

The Explanation to Section 6(3) of the IT Act further provides the definition of POEM as under,

Explanation.— For the purposes of this clause “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.

Adding further granularity to this statutory framework, the Ministry of Finance has issued a circular on 24th January 2017 [3], elucidating the Guiding Principles for the determination of Place of Effective Management (POEM) of a Company.

This blog post seeks to provide succinct insights into the statutory provisions and guidelines, aiming to assist companies with global operations in navigating the intricacies of POEM for compliance and strategic decision-making.

Determination of Place of Effective Management

In establishing the POEM, the regulatory emphasizes on ‘Substance over Form’ [4]. This determination, analogous to residence, occurs on an annual basis. The crux lies in a company's engagement in 'Active Business Outside India,' reflecting the intent to recognize entities actively conducting significant operations beyond India.

§  Presumption of POEM Outside India: A key presumption of POEM outside India arises when a majority of board meetings are held outside the country during the fiscal year[5]. This determination is fact-specific, emphasizing the practical aspects of decision-making in tandem with the economic substance of a company's activities.

§  Impact of Board's Exercise of Powers: Notably, if the Board of Directors is observed to be relinquishing its managerial powers, with such powers exercised by the holding company in India, an executive committee or other individuals/entities resident in India, the Place of Effective Management will be deemed to be in India[6]. This provision aims to deter superficial relocation of board meetings without a substantive shift in management control.

§  Guiding Principles for Determining POEM: Three key principles guide the determination of POEM[7]:

o   Place of Management Decisions: Focus on where critical management decisions are made by the Board of Directors.

o   Location of Senior Management: Consider the location of senior management if the board has delegated authority, whether de-facto (by actions) or de-jure (by way of shareholder agreements).

o   Company's Head Office: Examine the location of the company's head office as a relevant factor. The ‘Head Office’ is typically considered to be the place where the company's senior management and their direct support staff are permanently or pre-dominantly located.

In essence, the evaluation of POEM necessitates a nuanced analysis of decision-making venues, board meeting locations, and the actual exercise of managerial powers. Ensuring alignment with the guiding principles is crucial for companies navigating the complexities of POEM determination. The subsequent section will delve into the presumption of POEM outside India concerning the concept of 'Active Business Outside India.'

Understanding Active Business Outside India

Central to determining a company's POEM is the criterion of 'Active Business Outside India.' This criterion, gauged against four key indicators, reflects the regulatory intent to recognize entities engaged substantially in active business operations beyond Indian borders.

Key Criteria for Active Business Outside India:

a.     Passive Income Less than 50%: Passive income includes transactions with associated enterprises or income from sources such as royalty, dividends, and capital gains. Income computation aligns with the laws of the country of incorporation. Passive income must be less than 50% of the total income.

b.     Less than 50% Assets in India: Asset computation follows the laws of the country of incorporation. Less than 50% of total assets should be situated in India.

c.      Less than 50% Employees in India: Employees encompass both directly employed personnel and those performing tasks similar to employees. Less than 50% of employees should be situated or resident in India.

d.     Payroll Expenses in India Less than 50%: Payroll expenses comprise salaries, wages, bonuses, and all other employee compensation and social costs. Payroll expenses incurred on employees in India should be less than 50% of the total payroll expenses.

Aligning with these criteria is essential for companies aspiring to establish a POEM outside India. Rigorous adherence to the laws of the country of incorporation in calculating income, assets, employees, and payroll expenses is imperative. Meeting these benchmarks ensures that the company is recognized as actively conducting business operations outside India, thereby contributing to a favorable POEM determination. The subsequent section will address housekeeping recommendations to fortify compliance and strategic alignment.

Guidance for Corporate Compliance

For corporations with offshore parent companies, managing POEM becomes a nuanced endeavour, especially when some employees and senior management are based in India, and revenue is generated within the country.

The following tailored housekeeping recommendations are essential for ensuring both compliance and strategic alignment:

a.     Strategic Management Decisions:

o   Carefully structure and strategically plan key management decisions to demonstrate effective decision-making outside India, in line with guiding principles.

o   Periodically assess the location of significant management decisions to align with business objectives and maintain POEM outside India.

 b.     Thorough Documentation and Record-Keeping:

o   Maintain meticulous documentation highlighting the decision-making process emphasizing the active involvement of offshore entities.

o   Establish a robust record-keeping system that evidences the offshore decision-making structure and involvement of senior management based outside India.

c.      Continuous Monitoring and Adaptation:

o   Conduct regular reviews to ensure adherence to the 'Active Business Outside India' criteria while recognizing the presence of employees and senior management in India.

o   Adapt strategies in response to changes in business dynamics, safeguarding against inadvertent shifts in POEM determinants.

Conclusion

In conclusion, corporations with offshore parent companies, employees, and revenue streams in India must navigate the POEM landscape judiciously. By actively managing decision structures, adhering to 'Active Business Outside India' criteria, and implementing robust documentation practices, these corporations can not only maintain compliance but also strategically position themselves for sustained success in the dynamic Indian regulatory environment. As the regulatory landscape evolves, continued vigilance and strategic planning will be essential for a seamless and effective POEM determination process.
————————————————————————————————————————————————————-

[1] Section 6(3)(i), Income Tax Act, 1961

[2] Section 6(3)(ii), Income Tax Act, 1961

[3] Circular No. 6 dated 24.01.2017

[4] Para 6, Circular No. 6 dated 24.01.2017

[5] Para 7, Circular No. 6 dated 24.01.2017

[6] Clause 8.2, Circular No. 6 dated 24.01.2017

[7] Clause 8.2, Circular No. 6 dated 24.01.2017

Allahabad HC: Licensing Authority under the Arms Act shall cancel arms license of any person carrying arms in Court Premises

In a significant order, the Allahabad High Court issued a slew of directions addressing the serious issue of lawyers and litigants carrying arms inside court premises.

The directions were issued by a single judge bench of J. Pankaj Bhatia while hearing a Writ Petition against the order of the Licensing Authority, which had cancelled the arms license of the Petitioner, an advocate, for carrying arms in court premises.

Carrying Arms is not a Fundamental Right

The bench, relying upon the Full Bench decision of Kailash Nath and Ors. versus State of U.P. & Ors AIR 1985 ALL 291 held that arms license is merely a privilege granted by the State and is not a Right and right to carry arms is not a fundamental right under Article 21 of the Constitution.

Law as a profession does not require guns

The bench also rejected the argument of the petitioner that law profession is typical and challenging, which requires the carrying of fire arms. Condemning the argument raised by the Petitioner, the bench lamented the lack of systematic training provided through chamber affiliations and held,

“It is a common knowledge that ever since historical times never has a lawyer relied upon anything other than his sharp knowledge of law, hard work and the power that flows from his pen to make mark in the legal profession. The young professionals entering the Bar like the petitioner herein, needs serious counseling to get over such mistaken notion that he carries while entering the legal profession. This also highlights that the legal profession is being crowded by persons who are not undergoing any systematic training, which was earlier provided informally through chamber affiliations; this aspect is within the domain of Bar Council and the Bar Council is advised to redress this aspect through effective ways and means after discussion”.

Interpretation of Section 17(3) of the Arms Act

Relying upon the decision of Sardar Govindrao v. State of M.P., 1964 SCC OnLine SC 93, Official Liquidator v. Dharti Dhan (P) Ltd. (1977) 2 SCC 166, N.D. Jayal v. Union of India [(2004) 9 SCC 362] and D.K. Basu v. State of W.B., (2015) 8 SCC 744, the bench interpreted that the word ‘may’ in Section 17(3)(b) is a power coupled with duty, which implies that once the existence of the conditions laid down in Section 17(3)(b) are shown to exist, the licensing authority has to necessarily suspend or revoke the arms license.

‘Public Safety’

The Bench noted that Rule 614-A of The General Rules (Civil) as well as Rule 32 of the Rules, 2016, prohibit the carrying of arms in the Court premises. Holding that access to justice is a Fundamental Right under Article 21 of the Constitution, the bench held permitting the lawyers or any litigant other than the member of the armed forces on duty to carry arms would be clearly a threat to public peace or public safety in the Court premises, which not only has an adverse affect on the litigants frequenting the District Courts but also has the affect of adversely affecting the credibility of the administration of justice.

Directions

Noticing that the directions issued by the Allahabad HC in PIL No.2436 of 2019 are not being followed in letter and spirit, the bench issued the following directions:

1. All the District Judges and all the Judicial Officers working in the entire State of Uttar Pradesh shall take steps for registration of the cases under The Arms Act against any person whether it is a litigant or a lawyer carrying arms within the Court premises and shall forward a request to the District Magistrate/Licensing Authority of the concerned area for taking immediate steps for cancellation of the arms license.

2. The District Judges and the Judicial Officers as well as the Security In-Charge of the District Courts are bound to take steps for registration of FIRs/complaints against the person carrying arms within the Court premises as defined under Explanation II to Rule 614-A of The General Rules (Civil) and to forward such report to the Licensing Authority for taking immediate steps for cancellation of the arms license.

3. The Licensing Authority under the Arms Act shall stake steps for cancellation of the arms license in respect of a person found or alleged to be carrying arms.

4. Any person found carrying ‘Arms’ in the entire Court premises including common areas, Court rooms, lawyers’ chambers, Bar Associations, Canteens and other public areas within the entire Court premises would be deemed to be constituting breach of ‘public peace’ or ‘public safety’ for the purpose of exercise of powers under Section 17(3)(b) of the Arms Act.

You can read the judgment here: WRIT - C No. - 2461 of 2023

Resolving The Conundrum Of Enforceability Of Unstamped Arbitration Agreements

In a recent groundbreaking decision, a seven judge bench decision of the Hon’ble Supreme Court, has delivered a significant ruling that the Court can appoint arbitrators even on unstamped or inadequately stamped agreements. The seven bench decision titled as “In Re Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 And The Indian Stamp Act 1899” has disagreed with the 5 judge bench in NN Global (2) which which had held that the courts cannot appoint arbitrators on unstamped arbitration agreements.

There are two opinions in this decision: the majority opinion, delivered by J. DY Chandrachud, and a concurring opinion, delivered by Justice Khanna, marks a pivotal moment in the legal and commercial landscape.

Key Conclusions:

The comprehensive conclusions reached by the majority view are as follows [1]:

• Agreements lacking proper stamping are deemed inadmissible under Section 35 of the Stamp Act, but they are not automatically void, void ab initio, or unenforceable.

• Non-stamping or inadequate stamping is merely a curable defect.

• Objections related to stamping should be addressed by the arbitral tribunal, and not by the court under Section 8 or Section 11 of the Arbitration Act

• NN Global Mercantile Pvt Ltd v Indo Uniqie Flame Ltd (2023) 7 SCC 1 (‘NN Global 2’) and SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd., (2011) 14 SCC 66 (‘SMS Tea Estates’), have been overruled.

• Paras 22 and 29 of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 (‘Garware Wall Ropes’) have been overruled.

Maintainability of the Petition:

The court, in determining the maintainability of the petition, relied upon the exception laid down in the case of Central Board of Dawoodi Bohra Community v. State of Maharashtra (2005) 2 SCC 673 (‘Dawoodi Bohra’) that ‘if the matter has already come up before a bench of larger quorum, and that bench itself feels that the view of the law taken by a bench of lesser quorum requires reconsideration, then by way of exception and not as a rule and for reasons given by it, it may proceed to hear the case’[2]

The majority held that the interpretation and application of arbitration law in India, which in turn has implications for business and commerce in the country merits reliance upon the exception laid down in Dawoodi Bohra (supra)[3]

Inadmissibility vs. Voidness:

The crux of the court's reasoning lies in distinguishing between inadmissibility and voidness[4].

Dealing with Para-109 of NN Global 2 (supra), the court held that the 5 judge bench was erroneous as it conflated the distinction between enforceability and admissibility [5].

The majority held that:

• Merely because an agreement is void, does not impact its admissibility in evidence.[6]

• While Section 35 of the Stamp Act renders a document inadmissible, it does not render the underlying agreement void.

• Section 2(j) of the contract act is not attracted when an instrument is rendered inadmissible under Section 35 of the Stamp Act, and the result of the latter is not to render an unstamped agreement unenforceable[7].

Separability Principle and Jurisdiction under Section 16:

The issue of stamping was considered a preliminary jurisdictional matter falling within the arbitral tribunal's purview.

The court underscored the separability principle under Section 16 of the Arbitration Act, asserting that the arbitration agreement remains valid independently of the underlying contract's validity[8].

The majority expressly held that the reasoning given by NN Global 2 (supra) that the separation principle was not applicable to Section 33 and 35 of the Stamp Act is against the separable presumption incorporated under Section 16 of the arbitration act[9].

Affirming the decision of Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., (2020) 2 SCC 455, (‘Northern Coal Field’), the majority held that the scope of an arbitral tribunal’s authority under Section 16 is wide enough to comprehend all preliminary issues affecting jurisdiction, including the sufficiency of adequacy of stamping.[10]

The court also relied upon the principle of negative kompetenz-kompetenz to support the reasoning.[11]

Section 11(6A) and Examination of Arbitration Agreements

Examining the scope of Section 11(6A) of the arbitration act, the court clarified that Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 (‘Vidya Drolia’) is erroneous to the extent that it proceeded on the premise that Section 11(6A) has been omitted, even when this omission was not really notified [12]

Elaborating more on this Section, it was held that the scope of examination under this Section must be confined to the existence of an arbitration agreement on the basis of Section 7 and that the validity of an arbitration agreement in view of Section 7 should be restricted to the requirement of formal validity such as the requirement that the agreement be in writing [13]

Harmonious Construction of Laws:

Relying upon Hindustan Steel Ltd. v. Dilip Construction Co., (1969) 1 SCC 597 (‘Hindustan Steel’), the court held that the purpose of the Stamp Act is not to arm a litigant with the weapon of technicality to meet the case of his opponent, but is to merely secure the revenue of the State[14].

On the other hand, the primary principles on which the Arbitration and Conciliation Act, 1996 is based are the principles of party autonomy[15] and the principle of minimum judicial interference[16] which are specifically incorporated under Section 5 of the Arbitration Act. Thus, the majority held that every provision of the arbitration act ought to be construed in view of the objects of Section 5 of the act, which is to minimise judicial intervention[17].

The majority held that the arbitration act will have primacy over the Stamp Act and contract act[18]. This was done relying upon two rules of interpretation:

• Firstly, the court relied upon the doctrine of Generalia specialibus non derogant to hold that the Arbitration Act which is a special law, will prevail over the Indian Contract Act and Stamp Act, which are general laws[19].

Thus, the court held that that sections 35 and 33 could not be allowed to operate in the proceedings under Section 11 or Section 8 and held that the interpretation of NN Global 2 (supra), rendered Section 5 otiose[20].

• Secondly, the court relied upon the fact that the Parliament was aware of the Stamp Act when it enacted the arbitration act and held that the Stamp Act does not specify stamping as a pre-condition to the existence of a valid arbitration agreement.[21]

The court contrasted the phrase ‘existence of the arbitration agreement’ appearing in Section 11(6-A) of the Arbitration Act  with Section 33(2) of the Stamp Act which also uses the word “examine.”[22]

Harmonizing the three statutes, the court held that the issue of stamping being decided under Section 16 of the Arbitration Act by the Arbitral Tribunal would take care of objects of both the acts, since the object of realisation of stamp duty is not really defeated, and at the same time, arbitration proceedings are not stalled[23].

It also held that allowing such an objection to be taken at the time of Section 8 or Section 11 application, would defeat the intention of the arbitration act as the question whether the stamp has not been paid or has been underpaid is a question that can only be decided after adducing strong enough evidence[24]

Further, the interests of revenue are not jeopardised in any manner because the duty chargeable must be paid before the agreement in question is rendered admissible and the lis between the parties is adjudicated[25]

Certified copy of the Arbitration Agreements

Finally, the majority also clarified the law laid down in Jupudi Kesava Rao and Hariom Agrawal to hold that an arbitration agreement certified copy is not rendered void or unenforceable only because it is unstamped or insufficiently stamped[26], and thus the referral court under Section 11 is not required to examine whether a certified copy of the agreement/ instrument/ contract discloses the fact of payment of stamp duty on the original[27]

Conclusion

This landmark decision clarifies the long standing debate as to whether unstamped arbitration agreements can be acted upon. It also establishes a harmonious framework for the interplay between the Arbitration Act, Stamp Act, and Contract Act. The legal community has grappled with uncertainties regarding the fate of such agreements, and this decision provides much-needed clarity. At the same time, this decision leaves open other questions as to interplay between Section 9 and Section 17 of the arbitration act and the Stamp Act, which may be hopefully resolved by a future bench.

 —————————————————————-

[1] Para 224

[2] Para 27

[3] Para 28, In Re Arbitration

[4] Para 44, In Re Arbitration

[5] Para 47, In Re Arbitration

[6] Para 45, In Re Arbitration

[7] Para 53, In Re Arbitration

[8] Para 112, In Re Arbitration

[9] Paras 113 – 114, In Re Arbitration

[10] Para 126, In Re Arbitration

[11] Para 132, In Re Arbitration

[12] Para 152, In Re Arbitration

[13] Para 154, In Re Arbitration

[14] Para 60, In Re Arbitration

[15] Para 64 – 68, In Re Arbitration

[16] Paras 69 – 82, In Re Arbitration

[17] Para 82, In Re Arbitration

[18] Para 166, In Re Arbitration

[19] Para 167, In Re Arbitration

[20] Para 175, In Re Arbitration

[21] Para 177, In Re Arbitration

[22] Para 177, In Re Arbitration

[23] Para 184, In Re Arbitration

[24] Para 185, In Re Arbitration

[25] Para 195, In Re Arbitration

[26] Para 217, In Re Arbitration

[27] Para 218, In Re Arbitration

Indian Constitutional Law - Essential Sources of Study

Indian Constitutional Law is a complex and captivating field that forms the bedrock of India's Legal System. For anyone seeking a deeper understanding of the Indian Constitution, exploring the right sources becomes crucial. In this blog post, we will delve into the significant sources one can utilize to study Indian Constitutional Law. By leveraging these resources, you can embark on a comprehensive journey of legal knowledge and gain insights into the intricate fabric of India's constitutional framework.

The Indian Constitution:

The Indian Constitution itself serves as the primary and most authoritative source for studying Indian Constitutional Law. Familiarizing yourself with the Constitution's text, including its preamble, articles, and schedules, is essential. The Indian Constitution serves as the supreme law of the land in India. Our comprehensive constitution provides the framework for governance, outlines the rights and responsibilities of citizens, and establishes the structure and powers of the government.

Constituent Assembly Debates

To comprehend the original intent of the founding fathers and gain insights into the thought process behind the provisions of the Constitution, the Constitution Assembly Debates contained in 12 Volumes hold significant importance. The deliberations and discussions that took place during the assembly sessions provide valuable context and rationale for the various constitutional provisions.

The Constitution Assembly Debates serve as a comprehensive record of the conversations, arguments, and negotiations among the members of the Constituent Assembly. These debates shed light on the diverse perspectives, ideologies, and considerations that influenced the drafting and shaping of the Constitution.

An excellent source containing the debates can be found here

General Textbooks and Commentaries:

Textbooks and commentaries authored by renowned legal scholars offer comprehensive and in-depth analysis of Indian Constitutional Law. These resources provide a systematic interpretation of constitutional provisions, landmark judgments, and evolving legal principles. The following books are widely used in law schools and provide valuable insights into various dimensions of Indian Constitutional Law:-

• D.D. Basu, Shorter Constitution of India (15th ed., 2018)

• H.M. Seervai, Constitutional Law of India (4th ed.)

• M. P. Singh, V. N. Shukla’s Constitution of India (13th ed., 2019)

• S. Choudhry, M. Khosla, and P.B. Mehta, The Oxford Handbook of the Indian Constitution, Oxford Handbooks (Oxford University Press, 2016), https://books.google.co.in/books?id=d0knDAAAQBAJ.

• Udai Raj Rai, Fundamental Rights and their Enforcement (2011)

Other Notable Readings

• G. Austin, The Indian Constitution: Cornerstone of a Nation (Clarendon P., 1966), https://books.google.co.in/books?id=0y6OAAAAMAAJ.

• Granville Austin, Working a Democratic Constitution: A History of the Indian Experience (Delhi: Oxford University Press, 2003), https://doi.org/10.1093/acprof:oso/9780195656107.001.0001.

• B Shiva Rao et al., The Framing of India’s Constitution. (New Delhi: Indian Institute of Public Administration; [distributors: N.M. Tripathi, Bombay, 1966).

Case Laws

Studying landmark judgments and analyzing their implications is indispensable in understanding the practical application of constitutional principles. Case law plays a crucial role in shaping and interpreting constitutional provisions. Websites such as Indian Kanoon, Supreme Court Cases (SCC), and the Supreme Court of India's official website (E-SCR) provide access to a vast collection of Indian constitutional case law.

Case Material of Law Faculty, Delhi University pertaining to Constitutional Law can be found here: Constitutional Law

Legal Publications and Legal Blogs

Legal publications offer valuable scholarly articles, research papers, and analysis of the Indian Constitutional Law. Legal Blogs and journals provide critical insights into emerging legal issues, recent judgments, and academic discourse. Subscribing to these journals or accessing them through online databases will keep you updated on the latest developments and scholarly debates.

The following are some recommended legal publications pertaining to the Indian Constitution:-

• G. Bhatia, The Transformative Constitution: A Radical Biography in Nine Acts (HarperCollins India, 2019), https://books.google.co.in/books?id=zK2FDwAAQBAJ.

• G. Bhatia, Offend, Shock, or Disturb: Free Speech under the Indian Constitution (OUP India, 2016), https://books.google.co.in/books?id=fIM8DwAAQBAJ.

• T. Singh, Sixteen Stormy Days: The Story of the First Amendment of the Constitution of India (Penguin Random House India, 2020), https://books.google.co.in/books?id=qt9dzQEACAAJ.

• A. Chandrachud, Republic of Religion: The Rise and Fall of Colonial Secularism in India (Penguin Random House India Private Limited, 2020), https://books.google.co.in/books?id=AmnLDwAAQBAJ.

• R. De, A People’s Constitution: The Everyday Life of Law in the Indian Republic, Histories of Economic Life (Princeton University Press, 2020), https://books.google.co.in/books?id=q3TTDwAAQBAJ.

'Indian Constitutional Law and Phil Blog - Focuses on admin and constitutional law', curated by Adv. Gautam Bhatia, stands out as an exemplary blog in the field of constitutional law. For exploring various topics pertaining to administrative and constitutional law, this blog is an invaluable resource. In addition to this, 'Bar & Bench - Journalism' and 'Livelaw' are two reputable sources that offer comprehensive coverage of the latest developments in the legal field. These sources provide a wealth of information, ensuring readers stay well-informed about the law and it’s evolving landscape.

Judge’s Lectures:

Lectures delivered by sitting and retired judges can provide invaluable insights into Indian Constitutional Law. One distinguished judge in this regard is Rohingtan Nariman. It is advisable to stay updated by regularly checking law school websites, professional associations, and online learning platforms. These platforms often host lectures by esteemed judges, providing an excellent opportunity to deepen one's understanding of Indian Constitutional Law.

Implications for High Court Autonomy and Tipping the balance of Power

The Allahabad High Court, while hearing a regular bail application, recently passed an order on 23.05.2023 directing the Head of Astrological Department, Lucknow University to submit a report examining the ‘kundli’ of the girl in order to determine whether the girl is ‘mangali’ or not. [1]

The Supreme Court, vide order dated 03.06.2023 took suo motu cognizance of the above decision of the High Court and stayed the directions passed by the High Court [2]

The aim of this post is to analyze the approach taken by the Supreme Court in handling the order passed by the Allahabad High Court, rather than evaluating the merits of the order itself. Specifically, this post seeks to highlight that while such intervention may appear innocuous if treated as precedent, it may potentially have significant and wide-ranging consequences of taking away the autonomy of the High Courts and tipping the scales of balance too much in favor of the Supreme Court. [3]

The first anomaly that comes to mind is the blazing urgency in dealing with the said matter on a Saturday, a non-working day when other issues of public importance have been neglected. The order passed by the High Court was stayed at the request of the Solicitor General who appeared for the state and argued that the order was ‘disturbing’. The issue becomes increasingly convoluted when it is seen that the decision to take suo motu cognizance was taken at the behest of the Chief Justice of India who was traveling abroad at the time[4].

The more concerning aspect of this incident was the casual way in which the Supreme Court exercised its jurisdiction to stay the orders issued by the High Court. It would be crucial to go back to the basics and to recall that the power to take suo motu cognizance emanates from Article 32 of the Constitution, only in cases where a constitutional right of a determinate class of persons is threatened and such class of persons, by way of reason of poverty, helplessness or disability or socially or economically disadvantaged position, is unable to approach the court for relief.[5]

Presumably, the only relevant writ that could have been employed by the Supreme Court was the Writ of Certiorari to quash the order passed by the High Court. If so, it is seriously contended that the Supreme Court did not have jurisdiction under Article 32 of the Constitution to take suo motu cognizance of the order passed by the High Court. This is so because of the following reasons:

First and foremost, it is worth mentioning that previous Constitution benches of the Supreme Court have established that a writ of certiorari cannot be invoked against an order issued by the High Court. The sole recourse available in such cases is to challenge the said order under the Supreme Court's appellate jurisdiction as provided by Article 136 of the Constitution of India.

An illustrative example is the case of Naresh Shridhar Mirajkar & Ors. vs. State of Maharashtra (1966) 3 SCR 744, in which an order issued by a Division Bench of the Bombay High Court under Article 226 of the Constitution was contested before the Supreme Court under Article 32 of the Constitution of India. The contention raised was that the High Court's order resulted in a violation of Article 19(1)(a) and Article 19(1)(g) of the Constitution. One of the issues framed by the nine-judge bench was whether a judicial order passed by the High Court prohibiting the publication in newspapers of evidence given by a witness pending the hearing of the suit is amenable to be corrected by a Writ of Certiorari issued by the Supreme Court under Article 32(2) [6]

While eight of the nine judges held that the judicial order passed by the High Court cannot be corrected under Article 32 of the Constitution of India, J. Hidayatullah in his dissenting view held that a writ of certiorari can be passed against the orders of the High Court if there is a gross violation of Fundamental Rights.[7]

The majority view of Naresh Shridhar Mirajkar (supra) was affirmed by another five-judge bench of the Supreme Court in Rupa Ashok Hurra v. Ashok Hurra, (2002) 4 SCC 388 wherein it has been held as under,[8]

“Though, the judgments/orders of High Courts are liable to be corrected by the Supreme Court in its appellate jurisdiction under Articles 132, 133 and 134 as well as under Article 136 of the Constitution, the High Courts are not constituted as inferior courts in our constitutional scheme. Therefore, the Supreme Court would not issue a writ under Article 32 to a High Court. Further, neither a smaller Bench nor a larger Bench of the Supreme Court can issue a writ under Article 32 of the Constitution to any other Bench of the Supreme Court”

Furthermore, it is argued that the reason why such an order could not have been issued is due to a well-established principle that writs under Article 32 are enforceable only against the ‘State’ as defined under Article 12 of the Constitution. The Supreme Court has consistently affirmed that "courts," while engaged in their judicial functions, do not fall within the ambit of Article 12 of the Constitution of India. They are deemed to fall under the definition of 'State' only when they are acting solely in an administrative capacity. [9]

In conclusion, while the High Court's order may have been unconventional and inappropriate, this incident reflects a broader trend that undermines the autonomy of the High Court. Additionally, it gives another illustration of the unchecked and arbitrary powers of the master of the roster [10] to potentially exert administrative control over the judicial decisions passed by the High Courts. It is crucial for the Supreme Court to remain mindful of the intent of the founding fathers to preserve the delicate balance of independence between the Supreme Court and the High Court and to avoid ‘tipping the scales of balance’ [11] by usurping the powers of the High Court.

[1] Allahabad HC Directs Lucknow University To Determine If Rape Victim Is A 'Mangali' As Accused Refused To Marry Her On This Ground (livelaw.in)

[2] Supreme Court Stays Allahabad HC Direction To Examine If Rape Victim Is A 'Mangalik' (livelaw.in)

[3] Tirupati Balaji Developers (P) Ltd. v. State of Bihar, (2004) 5 SCC 1

[4] After CJI’s intervention, SC stays Allahabad HC order seeking answer on rape victim’s ‘manglik’ status | India News,The Indian Express

[5] Para 17, SP Gupta v. Union of India, 1981 Supp SCC 87

[6] Para 18, Naresh Shridhar Mirajkar & Ors. vs. State of Maharashtra (1966) 3 SCR 744

[7] Para 123, J. Hidayatullah, Naresh Shridhar Mirajkar & Ors. vs. State of Maharashtra (1966) 3 SCR 744

[8] Para 7, Rupa Ashok Hurra v. Ashok Hurra, (2002) 4 SCC 388

[9] See Para 168, Riju Prasad Sarma v. State of Assam, (2015) 9 SCC 461

[10] Default Bail, Personal Liberty, and the Master of the Roster – Indian Constitutional Law and Philosophy (wordpress.com)

[11] Para 16, Tirupati Balaji Developers (P) Ltd v State of Bihar (2004) 5 SCC 1

Section 37(2)(b) - Grounds of appeal against interim measures

This article seeks to examine the grounds on which an interim order under Section 17 of the Arbitration and Conciliation Act, 1996 (‘the act’) can be challenged in an appeal under Section 37 of the act. Specifically, the article seeks to examine whether unilateral appointment of sole arbitrator is a valid ground to set aside a Section 17 order.

Section 17 - Interim measures ordered by arbitral tribunal

Section 17 of the Arbitration Act deals with the interim measures that can be ordered by the Arbitral Tribunal. Section 17(1) provides that any party may apply to the arbitral tribunal for the following interim measures:-

• Appointment of guardian of minor for the arbitral proceedings [S. 37(1)(i)]

• Preservation, interim custody or sale of goods [S. 37(1)(ii)(a)]

• Securing the amount in dispute [S. 37(1)(ii)(b)]

• Detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration [S. 37(1)(ii)(c)]

• Interim Injunction or Appointment of receiver [S. 37(1)(ii)(d)]

• Any other relief [S. 37(1)(ii)(e)]

While Section 9 of the act deals with the Interim Measures, etc. by the court, Section 17 deals with the interim measures by the arbitral tribunal. Before the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”), there was a stark distinction between the two sections which has been noted by the Supreme Court in Managing Director, Army Welfare Housing Organisation v. Sumangal Services (P) Ltd., (2004) 9 SCC 619. Examining the nature of power provided by Section 17, the court in MD Army Welfare Housing (supra) held that ‘an Arbitral Tribunal is not a court of law. Its orders are not judicial orders’[1], and that the power under Section 17 is a limited one[2]

The above position has been overturned by the 2015 Amendment with the insertion of S. 17(2) which provides that “any order issued by the arbitral tribunal under this section shall be deemed to be an order of the Court for all purposes”, thus bringing Section 9 and Section 17 at par[3].

Section 37 - Appealable Orders

S. 37 of the act deals with ‘Appealable Orders’. S. 37(1) which starts with a non-obstante clause provides that an appeal shall lie from the order enumerated in the Section (and from no others) to the Court authorized by law to hear appeals from original decrees of the Court passing the order.

S. 37(2)(b) specifically provides that an appeal shall lie to the court from an order of the arbitral tribunal ‘granting or refusing to grant an interim measure’ under Section 17 of the act.

While S. 37 specified that an appeal would be maintainable against an order passed by the arbitral tribunal under Section 37, it is silent on the grounds which such an appeal can be filed. This gap has led to the various high courts laying down the scope of this section when the appellate court is faced with an interim order passed under Section 17 of the Arbitration Act.

First Restriction – Party to the arbitration agreement

It is to be noted that the first restriction posted in the section is explicitly mentioned in S. 17 itself. S. 17(1) allows only a ‘party’ to approach the arbitral tribunal for interim measures. A ‘Party’ has been defined under S. 2(1)(h) of the Act to mean a party to the arbitration agreement. Arbitration Agreement has been defined under Section 7(1) of the Arbitration Act to mean ‘an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not’.

Thus, it is has been held in Mashreq Bank PSC v. Indian Overseas Bank, 2021 SCC OnLine Guj 2678 in the context of S. 9(1) which is pari materia to S. 17(1), that a relief under Section 9 cannot be granted to a person who is not a party to the arbitration agreement. The principle has been expanded subsequently to hold that not only can a party apply to the arbitral tribunal for interim relief, such interim relief can not be granted against a third party[4].

This rule, however, would be subject to the exceptions laid down by the Supreme Court in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 wherein arbitration has been allowed in the cases of implied consent, third-party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights[5]

Second Restriction – ‘Wander v Antox’ Principle

The second way in which the courts have dealt with Section 17 orders is to treat it how an appellate court would while dealing with appeals against interim injunctions passed under Order XXXIX Rules 1 and 2 or Order XXXVIII Rule 5. It is to be noted that the power under Section 17 is to be guided by the exercise of Order 39 Rules 1 and 2 or Order XXXVIII Rule 5 as provided in the CPC[6].

In the case of civil suits, the classic proposition as to how the appellate courts are to deal with challenges to an interim order has been laid down by the Supreme Court in Wander Ltd. v. Antox India (P) Ltd. 1990 Supp SCC 727 as under,

14. The appeals before the Division Bench were against the exercise of discretion by the Single Judge. In such appeals, the appellate court will not interfere with the exercise of discretion of the court of first instance and substitute its own discretion except where the discretion has been shown to have been exercised arbitrarily, or capriciously or perversely or where the court had ignored the settled principles of law regulating grant or refusal of interlocutory injunctions. An appeal against exercise of discretion is said to be an appeal on principle. Appellate court will not reassess the material and seek to reach a conclusion different from the one reached by the court below if the one reached by that court was reasonably possible on the material….If the discretion has been exercised by the trial court reasonably and in a judicial manner the fact that the appellate court would have taken a different view may not justify interference with the trial court's exercise of discretion.

The principle has been adopted in the context of arbitration by the Delhi High Court in the case of Shiningkart Ecommerce Pvt. Ltd. v. Jiayun Data Limited, 2019 SCC OnLine Del 11464, wherein it has been held the appellate court should not interfere with such discretion if the view taken by the Tribunal is a plausible view and does not suffer from any ‘perversity’[7]

‘Perversity’ as a ground for setting aside the interim order

While Wander (supra) and Shiningkart (supra) specifically imported perversity as a ground for setting aside the Section 17 order, the phrase has been vastly expanded by subsequent judgments.

In Sanjay Arora v. Rajan Chadha, (2021) 3 HCC (Del) 654, the Delhi High Court was dealing with a challenge to an order passed under Section 17. While dealing with the scope of interference under Section 37(2)(b) of the Act, the court not only applied[8] the principle laid down in Wander (supra) but went ahead to apply Dinesh Gupta v. Anand Gupta, 2020 SCC OnLine Del 2099 and Augmont Gold (P) Ltd. v. One97 Communication Limited, (2021) 4 HCC (Del) 642 and to hold that “the considerations guiding exercise of appellate jurisdiction under Section 37(2)(b) are, fundamentally, not really different from those which govern exercise of jurisdiction under Section 34 of the 1996 Act”

Further, in World Window Infrastructure (P) Ltd. v. Central Warehousing Corpn., (2021) 3 HCC (Del) 731, the Delhi High Court similarly held that the considerations which apply to Section 34 would also apply to Section 37(ii)(b)[9]

The above mentioned dicta suggests that it would be possible to challenge the order passed under Section 17 on the ground that the Arbitrator was unilaterally appointed by one of the parties in contravention of Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.

Another case of the Kerala High Court - Hedge Finance v Bijish Joseph[10] also suggests that such an approach would indeed be possible. The Kerala High Court has taken a different approach to come to the conclusion that a challenge to the jurisdiction of the arbitrator could be raised in any collateral proceedings. The Ld. Single Judge of the Kerala High Court was dealing with a challenge to the Section 17 order raised during execution proceedings under Section 17(2) of the Act and framed the issue as to whether “an interim award passed by an ineligible Arbitrator be enforced through a Court under Section 17 (2) of the Act”[11]

Answering the question in the negative, the court applied Chiranjilal Shrilal Goenka v Jasjit Singh, (1993) 2 SCC 507 wherein it has been held that since an order passed by a court without jurisdiction would be a nullity and the challenge to such an order could be raised even at the stage of execution and even in collateral proceedings, and held that a Section 17 order can be set aside in execution proceedings since once “the infrastructure collapses, the superstructure is bound to collapse”.

Conclusion

A perusal of the above case law would suggest that the grounds that can be taken in appeal under Section 37 when an order passed under Section 17 are as under:

·       That the party who has filed the application is not a party to the arbitration agreement

·       Principles of Wander v Antox – that the order is arbitrary, capricious and perverse

·       Grounds specified under Section 34 of the act

Thus, it can be safely concluded that the scope of S. 37 has been expanded and now the grounds that would be available under Section 34 of the act can also be taken in an appeal under Section 37 of the act. The views of various High Courts also suggests that it is possible to raise the ground of unilateral appointment of an arbitrator even at the stage of appeal under Section 37 to an interim order under Section 17 of the Act.

It is submitted that the above approach is welcome and is consistent with the objects of the arbitration act as such an approach would also iron and smooth out the issues with respect to jurisdiction at the beginning of the arbitration itself whenever an order under Section 17 is challenged. Such an approach would also prevent multiplicity of proceedings as such a plea can be raised even before the filing of a petition under Section 14 of the Act, and would act as a check on the power of an arbitrator appointed illegally.

References 

[1] Para 43, Managing Director, Army Welfare Housing Organisation v. Sumangal Services (P) Ltd., (2004) 9 SCC 619

[2] Para 58, Managing Director, Army Welfare Housing Organisation v. Sumangal Services (P) Ltd., (2004) 9 SCC 619

[3] The position and the background for adding S. 17(2) has been examined by the Supreme Court in Paras 70 – 72, Amazon.com NV Investment Holdings LLC v. Future Retail Ltd., (2022) 1 SCC 209

[4] Para 53, Mashreq Bank PSC v. Indian Overseas Bank, 2021 SCC OnLine Guj 2678

[5] Para 103.1, Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641

[6] Para 29, Shiningkart Ecommerce Pvt. Ltd. v. Jiayun Data Limited, 2019 SCC OnLine Del 11464; Para 16, Sanjay Arora v. Rajan Chadha, (2021) 3 HCC (Del) 654

[7] Para 40, Shiningkart Ecommerce Pvt. Ltd. v. Jiayun Data Limited, 2019 SCC OnLine Del 11464

[8] Para 8, Sanjay Arora v. Rajan Chadha, (2021) 3 HCC (Del) 654

[9] Para 67, World Window Infrastructure (P) Ltd. v. Central Warehousing Corpn., (2021) 3 HCC (Del) 731

[10] https://www.casemine.com/judgement/in/632e88ad66c77f7b4ff23313; https://www.legaleraonline.com/pdf_upload/hedge-finance-pvt-ltd-v-bijish-joseph-765787.pdf

[11] Para 23, Hedge Finance v Bijish Joseph (supra)