IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA. Arbitration Appeal No. : 4 of 2009 Reserved on : 05.08.2010. Decided on : 17.09.2010. ______________________________________________________________ Shri Deepak Arora and another …Appellants. Versus Shri Vijay Khanna …Respondent. Coram The Hon’ble Mr. Justice R.B. Misra, Judge. The Hon’ble Mr. Justice V.K. Sharma, Judge. Whether approved for reporting? 1 Yes. For the appellants : Mr. R.L.Sood, Senior Advocate with Mr. A.K. Sharma, Advocate. For the respondent : Mr. Bimal Gupta, Advocate. _______________________________________________________________ V.K. Sharma, Judge. The judgment dated May 8, 2009, rendered by a learned Single Judge of this Court, whereby the petition under Section 9 of the Arbitration and Conciliation Act, 1996 (in short ‘the Act’), for grant of interim measures, has been partly allowed, is under challenge in this appeal at the instance of the appellants herein, who were petitioners in the said Court and shall here-in-after be referred to as such. The respondent shall also be called as such, as there is no change in his status. 2. The petitioners prayed for grant of the following substantive reliefs vide prayer clauses (A) to (F): “A) restrain the Respondent from disposing of and/or 1 Whether reporters of the local papers may be allowed to see the judgment? 2 dissipating and/or creating any third party right and/or transferring, selling, alienating, dealing with or parting with the physical possession of the said partnership property bearing Khasra No. 172, 173, 239, 237 and 240 measuring 0-15-24 hectares situated in Mohal Kand Mauza Khanyara Tehsil Dharamshala, District Kangra operating under the name and style of M/s Snow Hermitage Resorts; B) appoint a Receiver to take possession and charge of the partnership property detailed above and to manage the same pending the arbitral proceedings; C) appoint an independent Auditor to audit the accounts of the Partnership Firm so that the returns for Income Tax, Sales Tax, Luxury Tax and other applicable taxes can be prepared and filed; D) direct the Respondent to pay arrears and current dues of statutory taxes, dues etc. E) direct the Respondent to deposit in this Hon’ble Court the FDRs issued by State Bank of India, Dharamsala for Rs. 7,40,000/- and which are in his possession and to restrain the respondent from getting the said FDR’s encashed from the pro-forma respondent Bank. F) Direct the Respondent to maintain status quo with regard to the aforementioned partnership property (being run in the name and style of M/s Snow Hermitage Resorts) and to refrain from effecting any structural changes thereto or to make any other additions/alterations therein.” 3. The petition was partly allowed as per the following operative part of the impugned judgment dated May 8, 2009, page 20-21:- “In my considered view, since the suit property did not form part of the asset of the partnership concern, hence, the respondent cannot be restrained from dealing with the same in any manner. 3 However, watching the interest of the parties, it would be only desirable that the respondent is directed to maintain status quo with regard to the Fixed Deposit Receipts lying in the Bank till the time reference is entered upon by the respondent. Thereafter, the parties shall be at liberty to move before the Arbitrator for further orders. The petitioners have not been able to identify the other assets of the partnership concern. In my considered view, no case for appointment of Receiver is made out. The present petition was filed on 20.6.2008 i.e. the date when the legal notice invoking clause 16, containing the arbitration clause, in the partnership deed was issued. The petitioners did not take steps for appointment of Arbitrator under Section 11 of the Act till 20.2.2009. According to the learned counsel for the respondent, the petitioners have no intention of having the dispute resolved by way of arbitration but the present petition was filed with mala fide intention of obtaining the order of injunction in their favour so as to financially cripple the respondent. I am not going into this aspect of the matter as I have already held that the petitioners have no right to seek relief of injunction with respect to the suit property and the super-structure built thereupon. The issue of audit of accounts, by an appropriate agency can be taken by the parties before the Arbitrator or in appropriate proceedings so as to ensure necessary compliance of statutory formalities and obligations. Mere change of bank accounts of the firm by itself would not entitle the petitioners for the relief prayed for. There is nothing on record to prove that the respondent’s conduct has been detrimental to the interest of the partners or partnership concern. For the aforesaid reasons, interim order dated 27.6.2008 is vacated and the petition is disposed of in the aforesaid terms. 4 Any expression made hereinabove shall have no bearing in the final adjudication of the claims/counter claims before the appropriate authority. I have also not gone into the question of default/breach of reciprocal promises and obligations as stipulated under the partnership deed. Who defaulted, in what manner and to what extent is an issue, which is to be adjudicated, if raised, in appropriate proceedings, in accordance with law.” 4. The background facts are evident even from the deed of partnership, dated 26.3.2003, entered into between the parties, which contains the following relevant clauses:- “Whereas the partner of the first part is the absolute owner in possession of land comprised in Khasra Nos. 172, 173, 239, 237 and 240, total land measuring 0-15-24 Hects, situated in Mahal Kand Mauza Khanyara, Tehsil Dharamsala, District Kangra, vide Jamabandi for the years1996-97 and that the partner of the first part has raised a Hotel Building over the above mentioned land under the name and style of Messers SNOW HERMITAGE RESPORTS, at Dharamsala-Khanyara Road, Mahal Kand Mauza Khanyara, Tehsil Dharamsala, District Kangra, and is carrying out the abovementioned Hotel business under his sole Proprietorship. WHEREAS the partner of the first part has invited the partners of the second and third parts to become partners in the entire Hotel Project, namely, M/S Snow Hermitage Resorts, including the land and building and that the partners of the second and third parts have agreed to enter as partners in the said property and business. WHEREAS the partner of the first part has also agreed to sell and that the partners of the second and third parts to this deed have agreed to purchase the 50% share of ownership of the aforesaid overall Hotel Project including Land, Building structure, Furniture and Fixtures etc. with all basic amenities like Electricity/ Water/lift and complete furniture and fixtures for which all legal formalities including execution of 5 documents/permission in respect of transfer of the said ownership in favour of the partners of the second and third parts are being done and are in process under Section 118 of the H.P. Land and Tenancy Act. ….” “1. That the partnership business is and shall be that of running Hotel and/or some other business as the parties may agree upon and shall be carried on under the name and style of Messers Snow Hermitage Resorts, on Dharamsala-Khanyara Road at Village Kandi, Tehsil Dharamsala, District Kangra, H.P. and or at any other place or places as the parties may from time to time decide by mutual agreement.” “2. That the business of the partnership firm shall be carried on under the name and style of MESSERS SNOW HERMITAGE RESORTS.” “4. That the profit and loss of the business of the firm shall be divided or borne between the partners in the following ratio. Sr.No. Name of Partners Profit Loss 1. Shri Vijay Khanna 50% 50% 2. Shri Jatinder Bir Singh 25% 25% 3. Shri Deepak Arora 25% 25% 5. That the capital of the firm shall be contributed by the partners as may be mutually agreed upon from time to time. The firm shall pay interest @ 12% P.A. to the partner on the amount of Capital contribution or loan advanced by each of them respectively and the profit or loss of the business of the firm shall be arrived at after the accounting for the interest so payable as a business expenditure of the partnership. Such interest shall be payable on the amount standing to the credit of the account of the partners and such interest shall be credited to the account of each partner at the close of the accounting year. In case of loss or lower profits, Lower rate of interest or no interest can be allowed as agreed mutually by the partners. 6. That all the partners to this Deed are working partners 6 and shall be entitled to draw salary to be decided mutually. However, the first partner to this deed has agreed himself to keep actively engaged in conducting the day to day affairs of the business, being managing partner and shall be responsible for the entire matters relating to the smooth running of the business of the said Hotel.” “13. That the parties to this deed shall be held responsible for the assets, liabilities, debt and credit money of the firm/business in their respective shares and on the dissolution of the partnership business/firm all the partners shall be entitled to claim in any right or share in goodwill, name, quota, licence, permits, tenancy rights of the firm in their respective profit sharing ratio.” “15(a). That the capital investment of the incoming partners in this partnership business shall be as per their Ratio of Shares.” 5. The following arbitration clause also formed part of the partnership deed between the parties:- “All the differences and disputes relating to the partnership or its dissolution or arising out of this Deed shall be resolved by arbitrator under the Arbitration Act or any other Act or law prevailing in its place at that time and the decision of the arbitrator shall be final and binding on all the partners.” 6. The facts giving rise to filing of the petition as pleaded by the parties and noticed by the learned Single Judge are as follows. 7. The case set up by the petitioners was that in terms of deed of partnership dated 26.3.2003 petitioners and the respondent became partners (Shri Deepak Arora -25%, Shri Jatinder Bir Singh – 25% and Shri Vijay Khanna – 50%) in the entire hotel project set up by the respondent. All the partners were given the status of working partners and were entitled to draw salary. The respondent, however, was given the responsibility of actively conducting the day to day working of the 7 business and smooth running of the hotel project. In terms of deed of partnership, the respondent had to sell to the petitioners, 50% share in the hotel project including land, super structure, furniture and fixtures thereupon. The respondent failed to comply with the statutory formalities of taking permission under Section 118 of the H.P. Tenancy and Land Reforms Act, 1972 (hereinafter referred to as the Tenancy Act). The petitioners have put in money in the project, the respondent is acting in breach of terms and conditions of the partnership deed and his conduct is detrimental to the rights and interest of the petitioners. He had been siphoning off huge amount of money received by him from various sources in cash. Since June, 2006 the petitioners have not received any profit or salary or remuneration from the partnership business. The respondent had borrowed Rs.32 lacs from the State Bank of India, Dharamshala Branch in which the petitioners became co-borrowers and the suit property along with the hotel/super structure was also mortgaged. With the efforts of the petitioners, the entire amount stood paid but now the respondent is attempting to take back the documents of title with dishonest intention of alienating the suit property which in fact is the asset of the partnership concern. Vide letter dated 24.8.2007 petitioners informed the Bank and requested them not to release the documents of title to the respondent. The respondent has transferred funds from the partnership account and got prepared FDRs amounting to Rs.7,40,000/- from the State Bank of India. The petitioners having been left with no option dissolved the partnership vide letter dated 26.5.2008 and vide legal notice dated 20.6.2008, Clause 16 of the partnership deed containing an arbitration clause was invoked. 8 8. It was further pleaded that the respondent has failed to (a) file statutory returns under the income tax, sales tax, luxury tax laws etc. (b) siphoned off funds received from the travel agent and further attempted to remove the already appointed travel agent with a person convenient to him (c) the Income Tax authorities have taken cognizance of the transaction entered into by the respondent in cash and as such issued notice dated 25.4.2008 (d) the affairs of the partnership business is being carried out in a manner which are detrimental to the interest of partners. The same is evident from the fact that three cheques issued by the respondent stood dishonoured resulting into initiation of criminal prosecution (d) the actions of the respondent are detrimental to the affairs of the partnership as also the partners, hence there is urgent need to issue necessary directions as prayed for. 9. The petition was contested by the respondent on preliminary objections regarding maintainability, the petitioners were not entitled for the discretionary relief prayed for on account of mala fides and concealment of “material and important facts” and estoppel. On merits, it was averred that the respondent had desired to set up a hotel at Dharamshala for which purpose he sought expert opinion and advice and got prepared a project report. The land was identified and in January/February, 1998 agreement to sell was entered into with the then owners. Thereafter with the compliance of all formalities, necessary statutory permission under Section 118 of the Tenancy Act, was accorded by the State Government on 24.5.1999 in favour of the respondent. On 3.6.1999, sale deed was registered. To set up a hotel under the name and style of M/s Snow Hermitage Resorts 9 on November, 2000 the respondent took loan of Rs.25 lacs from the State Bank of India, Dharamshala branch. The respondent set up a hotel comprising of 20 rooms along with facility of conference hall, restaurant, kitchen, lift, lobby, staff quarters, parking lot and lush green fully developed lawns for the hotel and complete two bed rooms, dinning, drawing with kitchen set for exclusive use of the respondent. The hotel was made functional on 9.12.2002. 10. The further averments are that since the respondent was facing financial hardship in meeting the running expenses of the hotel, he ventured out to raise funds from various sources. The matter was discussed with his friend, Shri Jitender Bir Singh, petitioner No.2, who in turn introduced Shri Deepak Arora, petitioner No.1 to him. Petitioner No.1 expressed his desire to purchase the suit property, value of which was assessed at Rs.1.865 Crores. After few deliberations, it was suggested that an arrangement by way of partnership be entered into between the parties, to run the hotel till the time the property was purchased by the petitioners. It was in this background that the partnership dated 26.3.2003 was entered into between the parties. The ownership of the suit property continued to be that of the respondent and the partnership was only for the purposes of running the hotel. 11. According to the respondent between the year 2003 and June, 2006 even though the management of the property was with the petitioners but they managed the affairs of the Hotel only from Delhi. The petitioners appointed their own man as a travel agent who directly did the bookings of the rooms from Delhi. The petitioners directly received the booking amount in Delhi and neither accounted for nor 10 deposited the same in the partnership account at Dharamshala. He has denied having received any amount in cash from Mr. Vinit Jain of M/s Timeless Travels, Delhi allegedly appointed by the petitioners. Except for a sum of Rs.22,50,000/- the petitioners never contributed any amount towards the partnership business. 12. It was further averred that the petitioners did not pay any amount towards sale of 50% share in the suit property or the super structure built thereupon to the respondent. The suit property was used by the partnership firm without payment of any rent, maintenance charges. The respondent has not received anything for the same either from the petitioners or from the partnership firm. After dissolution of the firm, the suit property as also the super structure is being exclusively used as owner thereof by the respondent. The petitioners have no right, title and interest in the same. It is not an asset of the partnership, hence the petitioners have got nothing to do with the same. The petitioners have neither obtained statutory permission nor paid anything towards the sale consideration. 13. The petitioners also did not contribute any amount towards repayment of the loan. They have misled the Court by falsely stating that the petitioners had become co-borrowers in the suit land. On 3.6.2008 and 9.6.2008, the petitioners visited Dharamshala and not only took away the entire cash/sale proceeds but also all books, therefore, statutory returns could not be filed. 14. It was lastly averred that in order to set up a lift in the hotel, he had entered into an agreement with one Shri Vijay Kumar Dhawan, who was to take the loan for installing the lift, which in turn was to be repaid by the respondent. In order to secure his interest, said Shri Vijay 11 Kumar Dhawan had obtained blank cheques. The account from which the said cheques were issued was later on closed and a new bank account was opened. The petitioners were in the know of the same, but, however, said Shri Vijay Kumar Dhawan connived with the petitioners and manipulated the presentation of the said blank signed cheques through one Shri Muthaswamy. 15. It was, however, admitted by the respondent that FDRs in the name of partnership concern were got prepared by him for the reason that the money lying in the C.C. account was not bearing any interest. 16. A rejoinder refuting the stand taken by the respondent and reiterating the averments set up in the petition, was filed by the petitioners. 17. We have heard the learned counsel for the parties at length and have perused the records. 18. It was vehemently argued by the learned senior counsel for the petitioners that though the learned Single Judge has partly allowed the petition and even though if it is admitted for a moment for the sake of argument that no fault can be found with other part of the impugned judgment dated May 8, 2009, declining some of the reliefs prayed for, yet it is manifest from a bare perusal of the said judgment that the same is in the nature of a final verdict on the respective rights and claims of the parties, albeit a clarification to the contrary that any expression made there-under shall have no bearing on the final adjudication of the claims/counter claims before the appropriate authority. The learned senior counsel submits that it amounts to a decision on merits in an application for interim 12 protection under Section 9 of the Act. Such a course was not open to the learned Single Judge as it fell within the domain of the Arbitrator to be adjudicated during the arbitration proceedings. Thus, in essence it is submitted that since the impugned judgment dated May 8, 2009, is in the nature of final adjudication of the respective rights and claims of the parties, it would bind the hands of the Arbitrator and as such cannot be allowed to stand. 19. Conversely, it was submitted by the learned senior counsel for the respondent that the matter with regard to grant of interim measures under Section 9 of the Act is in the nature of an ad interim injunction order falling within the ambit of Order 39 Rules 1 and 2 CPC and the pre-requisites for grant of such discretionary relief are - existence of a prima facie good case and balance of convenience and likelihood of irreparable loss and injury, which cannot otherwise be compensated in terms of money, if the relief prayed for is not granted. While considering such ingredients the Court is necessarily required to go into the merits of the case to some extent and it being so no fault can be found with the impugned judgment. 20. In support of their submissions the parties have relied upon the following case law. 21. Authorities relief upon by the petitioners: 1. Addanki Narayanappa and another v. Bhaskara Krishnappa (dead) and thereafter his heirs and others, AIR 1966 Supreme Court 1300. 2. Commissioner of Income-tax v. Dewas Cine Corporation, AIR 1968 Supreme Court 676. 13 3. Arjun Kanoji Tankar v. Santram Kanoji Tankar, 1969 (3) Supreme Court Cases 555. 4. The Chief Controlling Revenue Authority, Gujarat State, Ahmedabad v. Chaturbhuj and another, AIR 1977 Gujarat 1 Special Bench. 5. Tilak Chand Jain v. Darshan Lal Jain and another, AIR 1985 Jammu and Kashmir 50. 6. Manzoor Ahmed Magray v. Ghulam Hassan Aram and others, (1999) 7 Supreme Court Cases 703. 7. Deepak Mitra v. District Judge, Allahabad and others, AIR 2000 Allahabad 9. 8. Firm Ashok Traders and another v. Gurumukh Das Saluja and others, (2004) 3 Supreme Court Cases 155. 9. Ashok Kumar Mittal v. Ashwani Kapoor and another, AIR 2005 Delhi 323. 10. Arvind Constructions Co. (P) Ltd. v. Kalinga Mining Corporation and others, (2007) 6 Supreme court Cases 798. 11. GAIL India Limited v. Bal Kishan Agarwal Glass Industries Limited, (2008) 8 Supreme Court Cases 161. 12. Rahul Bhargava v. Vinod Kohli and others, 2008 (1) Shim. LC 385. 22. Judgments cited by the respondent: 1. Uttar Pradesh Co-operative Federation Ltd., v. Sunder Bros., Delhi, AIR 1967 Supreme Court 249. 2. Vellakutty v. Karthyayani and another, AIR 1968 Kerala 179. 3. Wander Ltd. and another v. Antox India P. Ltd., 1990 (Supp) Supreme Court Cases 727. 4. M/s Ranjit Commercial Enterprises v. P.R. Ashokanand s/o late P. Ramachandra Rao, AIR 1996 Karnataka 11. 5. R. Rathinavel Chettiar and another v. V. Sivaraman and others, (1999) 4 Supreme Court Cases 89. 14 6. Adhunik Steels Ltd. v. Orissa Manganese and Minerals (P) Ltd., (2007) 7 Supreme Court Cases 125. 23. Out of the above case law the following authorities have been cited by both the sides:- 1. Arjun Kanoji Tankar v. Santram Kanoji Tankar, 1969 (3) Supreme Court Cases 555. 2. Firm Ashok Traders and another v. Gurumukh Das Saluja and others, (2004) 3 Supreme Court Cases 155. 3. Arvind Constructions Co. (P) Ltd. v. Kalinga Mining Corporation and others, (2007) 6 Supreme court Cases 798. 24. We have carefully considered the ratio laid down in the aforesaid authorities relied upon on behalf of the parties. However, taking into consideration the peculiar facts and circumstances of the present case, we need not to enter into elaborate discussion of the same. However, the principles of law laid down therein are being borne in mind and shall be applied accordingly. 25. Since the impugned judgment dated May 8, 2009, which is under challenge in this appeal was passed in an application under Section 9 of the Act, it shall be appropriate to notice the provision of law, which is as under:- “9. Interim measures etc. by Court.- A party may, before, or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36, apply to a court- (i) for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or (ii) (ii) for an interim measure of protection in respect of any of die following matters, namely:- (a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement; 15 (b) securing the amount in dispute in the arbitration; (c) the