TaxTMI 
TaxTMI 
1963 (11) TMI 76
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....n 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 provided: "In case of retirement of any partner the valua-, tion 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,....
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....he matter of calling for production of account books and documents and other information from the parties. The deed of reference was subsequently modified, and the parties 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 profits 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 Amritlal son of Jivraj Rs. 4,04,519.99 nP. 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,--Trade mark, 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 respo....
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....g the amounts to be awarded to the retiring partners, the authority of the arbitrator was restricted. He had, in determining the amounts due to the retiring partners, to take "final accounts with regard to the matters" set out in cl. 4, "as far as possible, according to and taking into consideration the terms and conditions of the Partnership agreement". By this direction the clauses of the partnership agreement were incorporated in the agreement of reference. The "final account" of the retiring partners with regard to the eight matters specified in cl. 4 was undoubtedly to be made, as far as possible, according to and taking into consideration the terms and conditions of the partnership agreement. The language used in the deed of reference is of compulsion, not of, option: it means that if there be in the partnership agreement any term or condition, which deals with any particular matter of which an account was to be taken under cl. 4 of the -agreement of reference, it has to be strictly followed. Use of the expression "as far as possible" did not confer any discretion upon the arbitrator to ignore the terms and conditions of the partnership agreement. In paragraph-13 of the partn....
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....by the method of valuation adopted by the arbitrator they were awarded much less than what they were under the partnership agreement entitled to. Paragraph-13 merely prescribes the valuation in respect of four out of the items which had to be considered in ascertaining the "valuation of the firm". The phraseology used in paragraph-13 in the opening part of the paragraph makes it clear beyond all doubt that the valuation of the firm had to be made on the basis specified for the purpose of settling the account of the retiring partner. The specific items in paragraph-13 do not prescribe any method of valuation of the debts and liabilities of the firm, but the debts and liabilities must be taken into account in assessing the value of the share of the retiring partners. The arbitrator had to make a valuation of the firm i.e. of all the assets of the firm and of the debts due by the firm and thereafter to settle the account of the retiring partners. We may now turn to the award made by the arbitrator. The dispute between the parties has to be resolved on a true interpretation of the following clause: "I assess the value of the goodwill at Rs. 32 lakhs. This amount includes the depreci....
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.... by him. He was not obliged in the absence of a direction in that behalf to set out in his award the valuation of the different components which aggregated to the lumpsum. The arbitrator had to "value the firm", and in doing so to abide by the specific directions, but he was not obliged to set out in the award separate valuations of all or any of the items mentioned in para 4 of the deed of reference, or in paragraph-13 of the partnership agreement, nor to set out the extent of the debts and obligations assessed by him. What then is the effect of the inclusion by the arbitrator in the valuation of Rs. 32 lakhs, of the depreciation and appreciation of the property, deadstock and dues to be recovered? Diverse arguments were submitted by counsel for the appellants in support of the plea that the inclusion of what is called the depreciation and appreciation in respect of the various items does not amount to overstepping the limits of the jurisdiction of the arbitrator. It may be re- iterated that the powers of the arbitrator were, by the terms of cl. 4 of the deed of reference, clearly restricted. He was "to take final account of the retiring partners with regard to the matters mentio....
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....that the share of a deceased partner in the assets of the partnership should be ascertained by reference to the annual account made up on April 30 next after the death, the articles were wholly silent as to the principle to be adopted in preparing a full and general account of the property. There was no usage or course of dealings between the partners from which an inference could be drawn that on the death of a partner his share shall be paid out on the footing of book value. The executors of the deceased partner claimed that his share be determined "at the fair value of the firm". At p. 138 it was observed by Lord Wrenbury. "Even if there were a usage to state an account for one purpose in one way, that is not a usage to state it for another purpose in the same way. There is a passage in Blisset v. Daniel (10 Hare, at p. 515) which is useful reading in this connection. An account stated for one purpose is not necessarily stated for another purpose. The fact is, that in this partnership an account has never been stated with a view to fitting the case of a retiring partner, or a deceased partner, or a senior partner who is going to exercise an option of taking over all the assets.....
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.... assuming that he was entitled to include, beside the value of the four items as mentioned in paragraph-13, some amount by way of appreciation in the value of those items, the arbitrator purported to set at naught the specific directions given in that behalf An award made by an arbitrator is conclusive as a judgment between the parties and the Court is entitled to set aside an award if the arbitrator has misconducted himself in the proceedings or when the award has been made after the issue of an order by the Court superseding the arbitration or after arbitration proceedings have become invalid under s.35 of the Arbitration Act or where an award has been improperly procured or is otherwise invalid: s.30 of the Arbitration Act. An award may be set aside by the Court on the ground of error on the face of the award, but an award is not invalid merely because by a process of inference and argument it may be demonstrated that the arbitrator has com- mitted some mistake in arriving at his conclusion. As observed in Chempsey Bhara and Company v. Jivraj Balloo Spinning and Weaving Company Ltd.(" at p. 331: "An error in law on the face of the award means, in their Lordships' view, that you....
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....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. It was then urged that when the arbitrator stated that he had included depreciation and appreciation of certain assets in the value of the goodwill in the award, he merely meant that such depreciation and appreciation was included as was in the circumstances permissible. But that would be ignoring the express recital in the award. In fact under the scheme of valuation envisaged by the partnership agreement and therefore the deed of reference, there was no scope for including in the valuation, appreciation of the assets. Again to argue, as was sought to be done, that even though the arbitrator stated that he had included in the amount of Rs. 32 lakhs "the depreciation and appreciation" of the property, dead-stock and dues, there being no power to include appreciation, appreciation in the property and the dead-stock could not have been included amounts to reaching a conclusion from an assumed premise of which the conclusion was a component. It was also urged that the expression depreciation and appreciation had no such meani....
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....statement of the net profits of the five years preceding the date of dissolution-which he called the price of the goodwill-for Samvat years 2009 to 2013. The aggregate of the net profits was Rs. 21,70,650/10/which he called "price of the goodwill". He then submitted a statement of the outstandings of the different shops aggregating to Rs. 9,16,366/- and the value of the goods purchased, and other property, and submitted that the total value of the goodwill of the firm by taking into account the profits of the firm for the last five years "as per the statement filed was Rs. 21,70,650/10/3 and deducting therefrom 15 % of the outstandings of the firm considered as irrecoverable, the balance was Rs. 20,33,295/12/9" and that this was the amount from which the shares of the retiring partners were to be computed. On December 2, 1958, an application was filed by Chintamanrao inviting the attention of the arbitrator to the agreement of reference and to the terms of the deed of partnership, especially paragraphs 7 and 13, and submitting that the book values of items (2) to (5) in paragraph-4 of the agreement of reference were already in the books of account and could be easily found without ....
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....sh that the expression used by him was not a mere surplusage. It is clear that the arbitrator has included in his valuation some amount which he was incompetent, by virtue of the limits placed upon his authority by the deed of reference, to include. This is not a case in which the arbitrator has committed a mere error of fact or law in reaching his conclusion on the disputed question submitted for his adjudication. It is a case of assumption of jurisdiction not possessed by him, and that renders the award, to the extent to which it is beyond the arbitrator's jurisdiction, invalid. It is, however, impossible to sever from the valuation made by the arbitrator the value of the depreciation and appreciation included by the arbitrator. The award must, therefore, fail in its entirety. 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....
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....and his two sons) owning -/4/3 share, respondents Nos. 1-3 (Chintamanrao and his two sons) owning -/7/6 share and the two remaining respondents, who are brothers, owning the balance. By agreement this retirement was to take place on April 15, 1958. In revoking the award the High Court, in concurrence with the court below, has upheld two objections-(a) that the arbitrator exceeded his jurisdiction and (b) that he was guilty of misconduct in receiving some evidence behind the back of Chintamanrao. The firm of which the several parties here were partners had a written deed of partnership executed on February 16, 1956. This deed replaced earlier deeds to which reference is not necessary. The partnership kept its accounts from Diwali to Diwali and every year it drew up a balance sheet and a profit and loss account, copies of which documents were given to all the partners. The accounts so stated were subject to objection but if none was made, they were conclusive and binding on the partners. All this was provided in the deed of partnership which also provided for the retirement of partners and its 13th paragraph laid down special terms as follows: "In case of retirement of any partner ....
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....ections, only two of which noticed above succeeded and the award was set aside. I shall therefore proceed straight to those objections of which only the first was fully argued before us. In making his award the arbitrator gave the appellants a -14/3 share from a lump amount of RS. 32 lacs which he described as "goodwill" of the firm, adjusting, in the respective shares of the three appellants in that sum, all amounts standing to their credit or debit, as the case may be, in the account books of the firm. He also assessed the "goodwill" for the period from Diwali to the date of retirement and made suitable additions. His real decision is contained in three or four lines in the award which of course contains other matters and his exact words in Hindi have given rise to some difference because they have been translated in two different ways on the record of the case. The two translations are- (1) The value of the goodwill of the whole firm 1 assess at Rs. 32,000,00,-- (Rupees thirtytwo lacs). In this sum property, dead stock and depreciation and appreciation of Udhari are also included; (2) The value of the goodwill of the whole firm 1 assess at Rs. 32,000,00/- (Rupees thirtytwo lac....
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.... have arrived at that result by totally misinterpreting Rule 52". But they were entitled to give their own interpretation to Rule 52 or any other Article, and the award will stand unless, on the face of it, they have tied themselves .down to some special legal proposition which then, when examined, appears to be unsound." Mr. Desai contends that the arbitrator might have interpreted the partnership deed wrongly but that was a matter within his jurisdiction and the error, if any, not being one of law on the face of the award, the Civil Court had no authority or jurisdiction to set aside the award. The other side contends, as has so far been held in the case, that the reference, read with the partnership deed, created an area of jurisdiction which the arbitrator has outstepped. The first point is therefore to decide what were the limits of the arbitrator's action as disclosed by the reference and the deed of partnership and then to see what the arbitrator has actually done and not what be may have stated loosely in his award. This is the only way in which the excess of jurisdiction can be found If the interpretation of the deed of partnership lies with the arbitrator, then there is ....
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.... thereof came to Rs. 137,354/13/6. The net Udhari therefore was Rs. 7,79,011/2/6. Differences really arose in the matter of valuation of raw materials and immovable properties and in this connection. the appellants asked to see an account of gross profits for the past five years which the arbitrator ordered Chintamanrao to produce. According to the appellants the value of properties given by Chintamanrao was the written down value and the right figure according to the agreement was not Rs. 6,24,369/- as stated by Chintamanrao but Rs. 16,57,000/-. In reply Chintamanrao stated that it was not the practice of the firm to prepare an account of gross profits but he added that gross profits could be calculated from the account books by the other side or by the arbitrator and he offered the services of an accountant to prepare such an account. The documents which the arbitrator is said to have received behind the back of Chintamanrao (though not some of the other respondents) are the abstracts which show the gross profits and what was excluded to reach the net profits. The net profits in these accounts and the net profits given by Chintamanrao agree. I do not refer to the dispute about th....