2013 (8) TMI 84 - HC - Indian Laws

Lease agreement - Indemnity clause - Arbitration award - interpretation of agreement - On the issue as to whether claim made by the respondents for creation of fund would fall under clause 14 of the lease agreement or not and whether such claim was beyond the scope of clause 14 or not, the learned arbitrator held that clause 14 was wide in its scope and could not have been given any narrow interpretation as sought by the petitioners. - Held that - Respondents had initially prayed for creation of fund in view of pendency of appeal before Income Tax Appellate Tribunal filed by them - Petitioners had agreed to keep respondents indemnified against any loss or seizure of equipment under distress, execution or other legal process or destruction or damage to equipment by fire, accident or other cause - Expression all losses, damages, claims, penalties, expenses, suits or proceedings would apply only to situation where there was any damage to equipment by fire, accident, any risk or liability arisen due to death or loss of limb of any person whether employee of Lessee or any third party - it is clear that same would not apply for creation of fund arising out of dis-allowance of claim for depreciation made by Assessing Officer - Clause 14 has to be interpreted as whole to ascertain intent of parties and not few words in isolation - Decided in favour of petitioner. Whether claim made for creation of fund by respondents in statement of claim was beyond scope of reference - Held that - Arbitration agreement did not require party to state nature of claim and dispute which such party proposed to make in arbitration proceedings for which notice is issued invoking arbitration agreement, such party cannot be precluded from making any additional claim or claims not notified in such notice in arbitration proceedings - Following decision of Ms. Veena Naresh Seth vs. Seth Industries Limited 2010 (10) TMI 931 - BOMBAY HIGH COURT - Decided against petitioner. Whether cause of action as claimed in statement of claim filed by respondents survived - Held that - claim for depreciation which was disallowed by Assessing Officer and on setting aside such order by Income Tax Appellate Tribunal, there was no demand of any income tax from Income Tax Department. If respondents were entitled to invoke arbitration by virtue of Assessing Officer s disallowance of depreciation, respondents could have done so separately. Proceedings which had become infructuous by virtue of initial order of dis-allowance of depreciation having been set aside, such proceeding could not have been continued by respondents - Decided in favour of petitioner. Limitation period - Whether claim made by Respondents is time barred - Held that - payment of residual amount of 26th March, 2004 by petitioners to respondents would not extend period of limitation. Cause of action had already begun on 31st March, 1997 when Deputy Commissioner disallowed depreciation for assessment year 1994 95 and on 31st March, 1998 when said claim was disallowed for assessment year 1995 96. Merely because appeal was filed by respondents before Commissioner of Income Tax or before Income Tax Appellate Tribunal, limitation would not stop - said payment would even otherwise not extend limitation as same was not within period of three years from date of accrual of cause of action. Accord and satisfaction - partial claim accepted - whether there was any accord and satisfaction in view of respondents accepting residual amount from petitioners during pendency of appeal before Income Tax Appellate Tribunal - Held that - respondents having accepted residual value unconditionally and by issuing proforma invoice in favour of petitioners, respondents could not raise any demand subsequently based on letter of sanction/agreement against petitioners - Decided in favour of petitioner. Whether there was any ambiguity and whether principle of contra proferentem would come into operation or not - Held that - there was no ambiguity in any of terms of agreement and thus principles of Contra Proferentem would not be attracted in this case - there is no merit in submission of petitioners that there was any ambiguity and/or inconsistency in any of terms of lease agreement which would attract principles of Contra Proferentem or that benefit arising out of such ambiguity has to be given to petitioners - Decided against petitioner. Whether continuation on part of respondents to encash cheques for lease rental at old rate inspite of there being change in income tax rate would amount to waiver of its right under clause 16 of lease agreement or not - Held that - due to negative inflow in this particular transaction there may not be actual payment of income tax. Petitioner cannot plead that though depreciation claim is disallowed and that would affect over all deduction claimed by respondents unless respondents shows actual payment of income tax on individual transaction, respondents cannot raise demand - Decided against petitioner. Whether respondents could have raised demand for increased rentals or for creation of fund with view to secure claims of respondents irrespective of respondents having suffered any loss due to disallowance of depreciation by assessing officer - Held that - there is no merit in submission of petitioners on this issue that only in event of respondents paying any income tax due to disallowance of depreciation on this individual transaction, respondents could have demanded said amount from petitioners and not otherwise - Decided against petitioner. Whether claims for creation of fund so as to secure respondents from any liability which may arise due to disallowance of depreciation, respondents could claim only such amount which would be required to be paid by respondents or respondents could ask for creation of fund by claiming increase in rental with retrospective effect with interest at rate of 30% per annum in accordance with provisions of lease agreement - Held that - even if respondents could have invoked clause 14 for creation of fund, claims by invoking indemnity and for creation of security in favour of respondents could not exceed amount which respondents would be ultimately liable to pay to income tax department due to such disallowance of depreciation on equipment. - Claim of indemnity cannot be calculated based on provision for payment of revised lease rental with retrospective effect with penal interest - arbitrator failed to appreciate that by directing petitioners to pay amount calculated by respondents towards revision of lease rent deemed to in default with retrospective effect and with compound interest at rate of 30% per annum would amount to unjust enrichment in favour of respondents and against petitioners - Decided in favour of petitioner. Whether interest at rate of 30% per annum was exorbitant or not - Held that - since award of principle amount itself by arbitrator is illegal, arbitrator could not have awarded interest thereon. In any event, even if principle amount was required to be awarded for securing claim of respondents, arbitrator could not have awarded interest at rate other than what was required to be paid under Income Tax Act, 1961 and not at rate provided in agreement between parties. arbitrator also could not have awarded interest on interest and that also from 12th December, 2006 i.e. period prior to date of award. arbitrator atmost could have awarded interest on principle amount from date of award till payment at rate provided under Income Tax Act, 1961. Since award granting principal amount is set aside, award interest cannot sustain - Decided in favour of petitioner.

Summary

Issues Involved:
1. Applicability of Clause 14 of the Lease Agreement for Claim Creation of Fund.
2. Scope of Reference in Arbitration and Jurisdiction of Arbitrator.
3. Prematurity and Limitation of Claims.
4. Accord and Satisfaction by Acceptance of Residual Amount.
5. Nature of Agreement: Finance Transaction vs. Lease.
6. Calculation Errors and Formula for Lease Rentals.
7. Application of Contra Proferentem Principle.
8. Waiver of Rights under Clause 16.
9. Impact of Disallowance of Depreciation on Claim.
10. Rate of Interest Awarded.

Detailed Analysis:

1. Applicability of Clause 14 of the Lease Agreement for Claim Creation of Fund:
The learned arbitrator held that Clause 14 was wide in scope and could not be given a narrow interpretation. It provided indemnity against all losses, damages, claims, penalties, expenses, suits, or proceedings of whatsoever nature made, suffered, or incurred. The arbitrator concluded that the claim for the creation of a fund was covered by such an indemnity clause. However, the court found that Clause 14 did not apply to the creation of a fund arising out of a disallowance of a depreciation claim by the Assessing Officer, as it was intended to cover losses related to the equipment's physical condition or legal issues arising from its use.

2. Scope of Reference in Arbitration and Jurisdiction of Arbitrator:
The arbitrator held that the creation of a fund arose under the same agreement and out of the same set of circumstances as the demand for money. The arbitration clause did not stipulate that only demands specified in the notice invoking arbitration could be referred to arbitration. The court agreed that the arbitration clause did not require a party to state the nature of the claim in the notice invoking arbitration, allowing the respondents to claim for the creation of a fund in the statement of claim despite not mentioning it in the notice.

3. Prematurity and Limitation of Claims:
The arbitrator held that each successive order disallowing depreciation gave a fresh cause of action, and thus the claim was not barred by limitation. The court, however, found that the cause of action arose when the depreciation was disallowed by the Assessing Officer in 1997 and 1998, and the notice invoking arbitration issued on 17th May 2005 was beyond the limitation period. The court concluded that the claims were time-barred.

4. Accord and Satisfaction by Acceptance of Residual Amount:
The arbitrator rejected the petitioners' claim that the acceptance of the residual amount constituted an accord and satisfaction. The court found that the respondents accepted the residual value unconditionally during the pendency of the appeal, which amounted to an accord and satisfaction, and thus the respondents could not subsequently raise a demand based on the lease agreement.

5. Nature of Agreement: Finance Transaction vs. Lease:
The arbitrator concluded that the transaction was a lease, not a finance transaction, based on the terms of the written agreement and the conduct of the parties. The court agreed with the arbitrator's finding that the petitioners had always treated the transaction as a lease and had not claimed ownership of the equipment.

6. Calculation Errors and Formula for Lease Rentals:
The arbitrator rejected the petitioners' claim of calculation errors, stating that the petitioners were given ample opportunity to present an alternative calculation formula but failed to do so. The court upheld the arbitrator's decision, finding no merit in the petitioners' claim of calculation mistakes.

7. Application of Contra Proferentem Principle:
The arbitrator held that the principle of Contra Proferentem was not applicable as there was no ambiguity in the lease agreement. The court agreed, finding that the lease agreement was clear and unambiguous, and the principle of Contra Proferentem did not apply.

8. Waiver of Rights under Clause 16:
The arbitrator found that the respondents were willing to pass on the benefits of the change in tax rates to the petitioners, but the petitioners failed to provide the necessary figures. The court upheld the arbitrator's finding that the respondents' willingness to adjust the lease rentals did not amount to a waiver of their rights under Clause 16.

9. Impact of Disallowance of Depreciation on Claim:
The arbitrator rejected the petitioners' claim that the respondents suffered no loss due to the disallowance of depreciation. The court agreed with the arbitrator's finding that the disallowance of depreciation had an overall financial impact on the respondents, even if no additional tax was paid.

10. Rate of Interest Awarded:
The arbitrator awarded interest at the rate of 30% per annum from 12th December 2006 on the principal amount. The court found that the interest rate was exorbitant and that the arbitrator had awarded interest on interest. The court concluded that the award of interest was not justified and set it aside.

Conclusion:
The court found several patent illegalities in the award, including the misapplication of Clause 14, the allowance of time-barred claims, and the award of exorbitant interest. Consequently, the court set aside the impugned award dated 19th July 2011 in its entirety.