Case: Jivarajbhai Ujamshi Sheth And Others Vs. Chintamanrao Balaji And Others

1. Vrajlal Manilal and company, a firm consisting originally of four partners (1) Manilal Anandji, (2) Jivrajbhai Ujamshi Sheth, (3) Punjabhai S. Patel, and (4) Chintamanrao, has been doing business of manufacturing bidis at Sagar and Delhi since 1944. From time to time fresh partnership deeds were executed readjusting the shares of the partners admitting new partners and adjusting the shares of the partners. In 1954 Manilal Anandji retired from the firm and on January 27, 1955, Punjabhai S. Patel died.2. On February, 16, 1956, a fresh deed of partnership was executed. The firm then consisted of eight partners - Jivraj and his two sons being entitled in the aggregate to annas -/4/3 share in a rupee in the profits, Chintamanrao and his two sons to annas -/ 7 / 6 share in a rupee, and the two sons of Punjabhai S..Patel to the remaining annas -/4/3 share. By paragraph 7 the books of account were to be maintained by the managing partner, the financial year of the firm being from Diwali to Diwali, and profits and losses were to be ascertained at the close of the year and a copy of the balance-sheet with profits and loss statement was to be supplied to each partner, and if no objection regarding the accounts was raised within four months from the end of the year, the accounts were to be deemed conclusive and binding unless vitiated by fraud. By paragraph 12 it was stipulated that a partner desiring to retire from the partnership may, unless the other partners agreed to his retirement otherwise, do so after giving six months notice to all the partners in writing terminable at the end of the year i.e., the Diwali immediately following the date of the notice Paragraph 13 providedcase of retirement of any partner the valuation of the Firm will be made on the following basis for the purpose of settling the account of the retiring partner :-(a) Goodwill of the Firm : - That is, right to use the trademarks, trade labels and the name of the Firm.In making the valuation of the above the net profits of the last five years will be taken as the value of the Goodwill of the Firm.(b) Outstandings, Udhari (Recoveries) : That is loans and debts outstanding against persons other than partner will be calculated at 85 per cent. of the book value of the Firm.(c) Stock of Raw Materials:- That is, tobacco, bidis, bidi leaves, labels and other moveable property will be valued at the book value of these in the books of the Firm and all such stock and moveables, thus valued shall be given to the remaining partners.(d) Immovable Property: - Such as buildings, godowns, gardens, lands etc. will be valued at the purchase price or their book value in the books of the Firm as the case may be, and all these shall be given to the remaining partners.16 incorporated a clause for reference of disputes between the partners relating to the business or dissolution of the Firm to arbitration.3. In April 1958 Jivraj and his two sons -appellant in this appeal - desired to retire from the partnership, and a deed of reference was executed on April 16, 1958, appointing Ambalal, Ashabhai, Becharbhai, Somabhai and Chaturbhuj Jasani as arbitrators to decide the dispute. It was recited in the deed of reference that since Jivraj and his two sons had expressed a desire to retire and the remaining five partners had agreed to take over the entire business of the firm, it was "necessary to effect the final account of the retiring partners with regard to the matters mentioned below as far as possible, according to and taking into consideration the terms and conditions of the Partnership Agreement.Goodwill of Trade Mark.2. Property.3. Credits (Udhari).4. Dead-stock.5. Stock-in-trade i.e. the raw material or the finished goods invested in the business.6. Other matters connected with these transactions.7. Profit and Loss Account.8. The Receipt and Payents account of the amounts of the partners.paragraph 6 it was provided that the firm shall be continued by the remaining five partners and that those five partners shall make full payment to the retiring partners Jivraj and his two sons of such amounts, in such manner, and on such conditions, as shall be decided upon,by the arbitrators. Paragraph 7 set out the powers exercisable by the arbitrators in the matter of calling for production of account books, and documents and other information from the parties.4. The deed of reference was subsequently modified, and the panics agreed that the reference be "carried out by the sole arbitrator, Shri Jasani". Pursuant to this modified agreement, Jasani entered upon the reference and made his award on January 9, 1959. By his award he fixed the value of the goodwill of the entire firm at Rs.32 lakhs including in that amount the "depreciation and appreciation of the property, dead-stock and dues to be recovered". He also fixed the profit for the broken period of Samvat year 2014 from the commencement of the year till April 19, 1958 at Rs. 2,80,000/ - and after adjusting the personal accounts of the three retiring partners awarded to Jivraj Rs. 3,46,223.58 nP., to Amratlal son of Jivraj Rs. 4,04,519.99 UP., and to Bhagwandas son of Jivraj Rs. 3,86,019.14 nP., and directed that the ownership over the assets of the firm i.e. property - moveable and immoveable Trademark, labels, stock-in-trade, long-term leases and contracts etc. shall remain with the remaining partners subject to the liabilities of the firm, the retiring partners not being responsible for the liabilities of the firm, nor having any interest in the firm or its business. This award was filed in the Court of the Additional District Judge, Sagar, under S.14 (2) of the Indian Arbitration Act, 1940.5. Chintamanrao and his sons then applied for an order setting aside the award on diverse grounds. In this appeal by the retiring partners, two heads of objections only survive for determination and we propose to refer only to those two heads, vizThat the arbitrator in making his award travelled outside his jurisdiction delimited by the agreement of reference in that in fixing Rs. 32 lakhs as the value of the divisible assets of the firm he included therein the depreciation and appreciation of the property, dead-stock and outstanding, which he was by the terms of the reference incompetent to include.(2) That the arbitrator was guilty of legal misconduct in that he had in the course of arbitration proceedings admitted in his record a statement of account prepared by Jivraj and his sons without the knowledge of the other partners and without giving them an opportunity to make their submissions thereto.The retiring partners resisted the petition to set aside the award and submitted that they were entitled to have the assets of the firm in which they had a share, fixed at an amount much in excess of Rs. 32 lakhs and that the arbitrator had not overstepped his jurisdiction in fixing the value of the goodwill at Rs. 32 lakhs, and that the statement of account referred to by the applicants was prepared under the directions of the arbitrator and in his presence and it was admitted in the record of the arbitrator to the knowledge of the remaining partners who had assented thereto.7. The Trial Court upheld these and certain other objections, and set aside the award. The High Court confirmed the decision of the Trial Court, in so far as it related to the two objections hereinbefore set out.

Court's reasoning:
In the case before us there is no dispute that the duty of the arbitrator was to make "valuation of the firm" subject to paragraph 13 of the partnership agreement and it may even be granted that in arriving at that valuation he was not bound by paragraph 7, but on this question we express no opinion. But the values as mentioned in the different clauses had to be accepted in making up the partnership account in respect of the four matters specifically enumerated. The principle of Cruikshanks case, (1922) 93 LJ Ch 136 did not apply, because the partnership agreement in this case itself provides that the book value in the books of the firm shall be accepted.It was next urged that the depreciation or appreciation which had been entered in the assessment of the book value were "other matters connected with" the "transactions" mentioned in the deed of reference. But manifestly those other matters were apart from the valuation of the goodwill, property, outstandings and the dead-stock.In this view of the case, we do not think it necessary to consider whether the plea raised by the remaining partners that the award is vitiated on the ground that the arbitrator accepted from the retiring partners documents prepared from the books of account without giving an opportunity to the remaining partners to explain those documents. It was the case of Chintamanrao that these documents were prepared and handed over to the arbitrator without giving any notice to him. It was the case of the retiring partners that the documents consisted merely of extracts of entries in the books of account, and that in any event Chintamanrao had assented to those documents being included in the record of the arbitrator. For the reasons set out by us in dealing with the first plea of setting aside the award, and that plea having succeeded, we do not think it necessary to enter upon the respective contentions of the parties on the second ground.Counsel for the retiring partners submitted that on the view taken by us, the award should be remitted to the arbitrator under O. 16 of the Arbitration Act, 1940. No such request, was, however, made by them in the Trial Court or in the High Court, and we will not be justified in the circumstances of the case in acceding to the request. We may observe that we have not heard counsel on the question whether in the circumstances of the case and on the conclusion recorded, we have the power under S. 16 to remit the award to the arbitrator. The retiring partners have also not asked for an order for supersession of the arbitration agreement in exercise of the powers of the Court under S. 19. We have, therefore, refrained from considering that question also.