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2024 (7) TMI 694 - HC - Companies LawInvocation of arbitration clause in the Retirement Deed and appointment of an Arbitrator - alleged manipulation of accounts by the respondents. Whether the impugned order is in aid of the main relief? - HELD THAT - The tests to be applied to Section 17 are somewhat akin to those applicable to interim measures passed in a civil suit under Order XXXIX of the Code of Civil Procedure. Although Section 19 (1) of Arbitration and Conciliation Act, 1996, stipulates that the provisions of the Code are not applicable to arbitral proceedings, nevertheless, the principles thereof apply, as the nature of interim measures which can be granted under Section 17 are equivalent to that under Order XXXIX of the Code. Section 17 (1)(ii) envisages interim measures of protection in respect of certain matters, including the preservation, interim custody or sale of goods which are the subject-matter of the arbitration agreement, securing the amount in dispute in the arbitration, detention, preservation or inspection of any property etc. which may be necessary or expedient for the purpose of obtaining full information or evidence, interim injunction or appointment of receiver and such other interim measures of protection as may appear to the Arbitral Tribunal to be just and convenient. A broad analogy between interim measures under Order XXXIX of the Code and Section 37 of the 1996 Act is thus inevitable. The last part of Section 17 (1) provides that for such purpose, the arbitral tribunal shall have the same power for making orders as the Court has for the purpose of and in relation to any proceedings before it, thereby importing the governing guidelines of similar orders passed by a Civil Court. In fact, sub-section (2) of Section 17 clearly stipulates that any order so issued under Section 17 shall be deemed to be an order of the Court for all purposes and shall be enforceable under the Code of Civil Procedure in the same manner as if it were an order of the Court, further strengthening the above view. Hence, the entire focus of Section 17 is to preserve the property in statu quo till final disposal of the arbitral proceeding - this issue is decided in the negative, holding that the impugned order is not in aid of the main relief. Whether the impugned order has the effect of granting the final relief, thus rendering the arbitral proceedings infructuous? - HELD THAT - Although the impugned order is not in aid of the main relief, if it is implemented, the effect will be that the very plinth of the claimant s challenge might be rendered infructuous. In the event the claimant succeeds, the financial accounts of the firm will already be a part of the income tax returns filed by the firm, containing the claimant s signature as well. The learned Arbitrator would not have the jurisdiction to reverse such filing even if the claimant ultimately succeeds in his challenge, since the same is not only beyond the scope of the dispute before the Arbitrator but the Income Tax Authorities are not parties to the arbitration agreement. Hence, in a sense, the impugned order has the effect of rendering the arbitral proceedings infructuous. Thus, this issue is held in the positive. How far are the Accounting Standards binding on the Income Tax Authorities? - HELD THAT - A comprehensive assessment of the document relating to accounting standards issued by the Institute of Chartered Accountants of India, on which the respondents rely to support the impugned order, itself clearly enumerates that the auditors are entitled to disown their liability for the statements made therein. It is entirely the responsibility of the management for the preparation of the financial statements giving a true and fair view of the financial position and it is the management which gets the flak for inaccuracy or suppression in the same. SA 706, the Auditing Guideline, is issued by the Institute of Chartered Accountants of India and comprise of mere guidelines to its own members. Hence, those can at best guide the auditors in their functioning. In fact, there is some doubt as to how far they are binding on the auditors themselves as well. The said accounting standards cannot be stretched so far has to be binding on any third party apart from the institute and its members. Those are not even binding on the clients of the auditors, let alone the Income Tax Authorities. Hence, there is nothing in any law produced before this Court or the accounting standards themselves to indicate that they are binding in any manner on the Income Tax Authorities - the issue is decided in the negative, observing that the accounting standards are not binding on the Income Tax Authorities at all. Whether the order of the Arbitral Tribunal is binding on the Income Tax Authorities? - HELD THAT - It is well-settled that legal causes in the nature of matters in rem are not inherently arbitrable and fall beyond the pale of the Arbitration and Conciliation Act, 1996, being under normal circumstances non-arbitrable. Hence, from the perspective of the Income Tax Authorities, no order of the arbitral tribunal, which is an adjudicatory Authority of issues confined to the signatories to the arbitration agreement, can bind the said authority in any manner. The Income Tax Authorities are bound by the provisions of the statute which creates them that is the Income Tax Act, 1961 and function within the confines of the said statute - The observation of an Arbitrator, that too in an interlocutory matter in a dispute restricted to private parties who were signatories to the arbitration agreement, cannot even concern the Income Tax Authorities, let alone to be binding on them. Hence, the present issue is decided in the negative, holding that the order of the arbitral tribunal is not binding on the Income Tax Authorities at all. Whether the claimant/petitioner can be compelled to sign the financial statements at this stage despite the disputes raised by him to the accounts? - HELD THAT - The 1961 Act operates in a completely different footing, at least insofar as Sections 271 and 271A are concerned. The said provisions stipulate penalties for deliberate suppression or concealment of the real state of affairs in financial statements and in documents as well as returns and also penalize inaccurate recordings in the financial statements of a firm. Such consequences are direct and criminal in nature, whereas the evidentiary value of recordings in a balance sheet as admission, which was being considered in ASSET RECONSTRUCTION COMPANY (INDIA) LIMITED VERSUS BISHAL JAISWAL ANR. 2021 (4) TMI 753 - SUPREME COURT was merely in respect of a rule of evidence. A non-admission of a civil debt by filing of balance sheets is entirely different from penalties imposed for deliberately filing inaccurate balance sheets or concealment of the actual state of affairs in financial statements, which operate in entirely different fields - this issue is answered in favour of the claimant/petitioner and against the respondents inasmuch as the claimant/petitioner cannot be compelled to sign the financial statements at this stage, in the teeth of the disputes raised by him regarding the accounts, before adjudication of the cardinal issue of veracity of the accounts, which is the subject-matter of dispute in the main arbitral proceeding. The impugned order suffers from utter lack of jurisdiction and authority and is vitiated by a patent misreading of the provision of Section 271 and 271A of the Income Tax Act, 1961. The order is also passed beyond the authority and jurisdiction of the arbitral tribunal as well as violative of the principle embodied in Article 20 (3) of the Constitution of India and thus cannot survive judicial scrutiny. Petition allowed.
Issues Involved:
1. Whether the impugned order is in aid of the main relief. 2. Whether the impugned order has the effect of granting the final relief, thus rendering the arbitral proceedings infructuous. 3. How far are the Accounting Standards binding on the Income Tax Authorities. 4. Whether the order of the Arbitral Tribunal is binding on the Income Tax Authorities. 5. Whether the claimant/petitioner can be compelled to sign the financial statements at this stage despite the disputes raised by him to the accounts. Issue-wise Detailed Analysis: Issue (i): Whether the impugned order is in aid of the main relief The reliefs sought by the petitioner in the arbitral proceeding include a claim for Rs. 74,78,622.78 along with interest, his share of goodwill, and an enquiry into the accounts for the period from April 1, 2022, to September 16, 2022. The respondents' counterclaim includes a declaration regarding the stock-in-trade and claims for sums of money. The impugned order directs the petitioner to sign the financial statements, which is argued to be necessary for the firm's current business operations and tax filings. However, the court found that the reliefs sought in the main arbitral proceeding primarily pertain to the period up to September 16, 2022, and not the current business operations. Thus, the impugned order is not directly in aid of the main relief sought in the arbitral proceeding. The court concluded that the impugned order is not in aid of the main relief. Issue (ii): Whether the impugned order has the effect of granting the final relief, thus rendering the arbitral proceedings infructuous The petitioner argued that the impugned order compels him to sign the financial statements, which he disputes. The court noted that the core of the dispute is the veracity of the accounts, and the impugned order directs the petitioner to sign the accounts despite his objections. If implemented, the order could render the arbitral proceedings infructuous because the financial statements, once signed and filed, would be beyond the scope of the arbitrator's jurisdiction to reverse. The court held that the impugned order has the effect of granting the final relief, thus rendering the arbitral proceedings infructuous. Issue (iii): How far are the Accounting Standards binding on the Income Tax Authorities The court examined the Accounting Standards issued by the Institute of Chartered Accountants of India, particularly SA 706, which deals with "matter paragraphs" in the auditor's report. The court found that these standards are guidelines for auditors and do not bind the Income Tax Authorities. The standards emphasize that the management is responsible for the preparation of financial statements, and the auditor's "matter paragraphs" are merely explanatory and do not absolve the management of liability. Thus, the court concluded that the Accounting Standards are not binding on the Income Tax Authorities. Issue (iv): Whether the order of the Arbitral Tribunal is binding on the Income Tax Authorities The court noted that the Income Tax Authorities are governed by the Income Tax Act, 1961, and are not bound by any order of the arbitral tribunal unless the matter directly concerns the actions of the Income Tax Authorities. The arbitral tribunal's orders are confined to the signatories of the arbitration agreement and do not extend to third parties like the Income Tax Authorities. The court held that the order of the arbitral tribunal is not binding on the Income Tax Authorities. Issue (v): Whether the claimant/petitioner can be compelled to sign the financial statements at this stage despite the disputes raised by him to the accounts The court examined Sections 271 and 271A of the Income Tax Act, 1961, which penalize concealment of income and furnishing inaccurate particulars. The petitioner argued that the financial statements prepared by the respondents are inaccurate and that signing them would expose him to penal action. The court found that the petitioner's objections to the accounts are central to the dispute and that compelling him to sign the statements would violate Article 20(3) of the Constitution of India, which prevents self-incrimination. The court held that the petitioner cannot be compelled to sign the financial statements at this stage, given the disputes raised by him. Conclusion: The impugned order was found to suffer from a lack of jurisdiction and authority, misreading of Sections 271 and 271A of the Income Tax Act, 1961, and violation of Article 20(3) of the Constitution of India. The court allowed the appeal, setting aside the impugned order dated May 19, 2023, and disposing of the related application.
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