TaxTMI 
TaxTMI 
2024 (7) TMI 694
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....after the petitioner filed his statement of claim, thereby alleging manipulation of accounts by the respondents and claiming his alleged dues to the tune of Rs. 74,78,622.78 p. and his share of goodwill of the firm as on September 16, 2022, in the alternative seeking an enquiry into the accounts of the firm between April 1, 2022 and September 16, 2022 by appointment of a surveyor and/or independent auditor and also to carry out the formalities in terms of the Deed of Retirement, along with consequential reliefs. 3. The respondents filed their statement of defence with a counter claim, seeking a declaration that the stock-in-trade of the firm as on September 16, 2022 included 3,00,000 SIG semi-finished contacts and claiming sums of Rs. 12,31,553.50/- as the petitioner's share in loss of the firm as well as Rs. 8,12,63,041/- as the share of the respondent nos. 1 and 2 in the goods allegedly retained by the petitioner. 4. An independent auditor was appointed by the learned Arbitrator on the prayer of the petitioner. 5. In an application filed by the respondents under Section 17 of the Arbitration and Conciliation Act, 1996, the learned Arbitrator passed an order dated May 19,....
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....ion or authority to pass binding directions on third parties/statutory authorities within the limited scope of the arbitral proceeding. As such, the petitioner, if forced to sign on the incorrect entries, even if with objection, the petitioner would be at the mercy of the Income Tax authorities and would be exposed to their perception of whether the petitioner has violated Section 271 or 271A of the Income Tax Act and would be at the risk of penal action. The Arbitrator does not have the power to force the petitioner to do so against his will. 11. Secondly, since the allegation of erroneous entries in the balance sheet is the sub-stratum of the dispute, the impugned direction to sign the same would amount to granting the main relief sought in the counter claim. 12. Thirdly, it is argued that the said direction is beyond the reliefs claimed by the parties. The respondents have not sought the relief of specific performance of Clause 6 of the Retirement Deed, which contemplates signing of the documents, in their counter claim. Interim reliefs under Section 17 of the 1996 Act can only be granted in aid of the main reliefs. No direction regarding signing of the financial statement....
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....eed, which provides that the entire business of the firm with its trade name and style, assets and liabilities etc. have been taken over and/or be deemed to have been taken over on and from September 17, 2022 by the remaining two partners, respondent nos. 1 and 2, who shall be entitled to carry on the said business in such manner as they may deem fit without any hindrance or objection from the retiring partner, that is, the petitioner. 20. The said clause has not been controverted by the claimant; however, he is patently flouting the same by refusing to sign the financial statements, for which returns of the firm cannot be filed within the statutory timeline, nor can the respondents carry on with the business of the firm. Such hindrance is being created by the petitioner with the ulterior motive of facilitating his competing business, it is alleged. 21. It is contended that upon the petitioner's retirement, the partnership firm remains the same and is merely reconstituted. There is no dissolution of the firm; hence there is no new firm. To substantiate the point, learned counsel relies on Sections 39 to 44 and in particular Section 42 of the Partnership Act. Therefore, the re....
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....es that the scope of interference in orders passed by the arbitral tribunal is extremely limited. To elaborate the scope of such interference, learned counsel cites a coordinate Bench judgment of this Court in Concrete Developers LLP vs. Gaurav Churiwal and Others, where it was observed that the 1996 Act places the arbitral tribunal and the court at par in terms of the power to pass interim measures of protection and as such, it does not envisage a party knocking at the doors of the Court at every turn of the arbitration proceeding. The test of interference would be somewhat similar to that of an intra-court appeal, where the challenge is to be tested on the plank of perversity and jurisdictional infirmity. It was held that in view of the almost limitless powers conferred on the tribunal under Section 17 of the 1996 Act, the appeal court should take a hands-off approach. 30. Learned counsel next cites another coordinate Bench judgment of this Court in Gainwell Commonsales Private Limited vs. Minsol Limited, where the limited scope of interference with orders of the tribunal under Section 37 of the Act, even if passed under Section 17, was highlighted, drawing parallels between t....
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....is a palpable illegality, perversity, or patent jurisdictional error, apart from cases of unconscionable injustice or matters shocking to the conscience of court. 35. Although the tests of Section 34, which have been enumerated in the said Section but are conspicuously absent in Section 37, need not be read into the latter Section, fact remains that the court has to be judicious in interfering only in cases where such interference is absolutely necessary to protect the interest of justice. 36. Examining the matter at hand from the said focal point, we are to ascertain the validity of the impugned order. 37. In order to decide the present application, the following issues are required to be decided: (i) Whether the impugned order is in aid of the main relief; (ii) Whether the impugned order has the effect of granting the final relief, thus rendering the arbitral proceedings infructuous; (iii) How far are the Accounting Standards binding on the Income Tax Authorities; (iv) Whether the order of the Arbitral Tribunal is binding on the Income Tax Authorities; (v) Whether the claimant/petitioner can be compelled to sign the financial ....
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....the partnership firm, the current business of the firm is being hampered. The reconstitution of the firm cannot take effect in the absence of such signature and the partnership firm cannot file its income tax returns for the same reason. Hence, the plinth of the interim prayer made in the application under Section 17 of the 1996 Act is the loss being suffered regularly by the partnership firm currently, whereas the reliefs sought by both parties in the main arbitral proceeding primarily pertain to the period up to September 16, 2022. Hence, the relief cannot be said to be in aid of the main relief sought in the arbitral proceeding. 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 the 1996 Act 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, inc....
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....rator tantamounts to grant of the final relief, since it is the veracity of the financial statement of the firm which i ins dispute before the Arbitrator. The relief sought by the claimant/petitioner in the arbitral proceeding is encapsulated in paragraph nos. 19 and 27 of the Statement of Claim. In paragraph no. 19 of the Statement of Claim, the claimant alleges that there are glaring flaws in the books of accounts and the accountants of the firm, under the aegis of the respondents, have manipulated the numbers and figures in a way so as to ensure that the books of accounts reflect an alleged loss of the business of the partnership firm. The details of such alleged irregularities have also been set out in the sub-clauses of paragraph 19. For example, although the respondent no. 1 claims that there has been no production on and from March 31, 2022, the book value of the stock-in-trade was close to Rs. 3,00,00,000/- and market value close to Rs. 4,00,00,000/- and above, which has not been accounted for in the closing stock as on September 16, 2022. 47. It has been alleged further that the respondents have deliberately added up gratuity benefits for employees who have not yet comp....
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....s. Thus, this issue is held in the positive. Issue: iii) How far are the Accounting Standards binding on the Income Tax Authorities; 53. Coming to the question of accounting standards, the documents in support of the arguments of the respondents are to be looked into. The very first clause of the Guidelines issued by the Institute of Chartered Accountants and its sub-clauses clearly state that the Standards on Auditing deals with additional communication in the Auditor's report when the auditor considers it necessary to draw the users' attention to certain matters which are relevant to the users' understanding of the audit. All through the relevant provisions of the Accounting Standards (SA 706) in respect of emphasis on "matter paragraphs", which are relied on by the respondents, the common refrain is that the emphasis on matter paragraphs in the auditor's report is basically explanatory material, primarily relevant to the users' understating of the audit and also intended to explain why it is not possible for the auditor to resign from the engagement and/or otherwise. 54. Clause A10 of the said document provides that the content of Other Matter Paragraphs should refle....
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....al statements that are free from material misstatement, whether due to fraud or error. The auditors' responsibility, on the other hand, is restricted to express an opinion on such financial statements furnished by the management, based on their audit. 59. Hence, 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. 60. Moreover, the accounting standards are merely guidelines for the auditors to prepare the reports in a certain way and have no manner of applicability to the conduct of the management. It is entirely the responsibility of the management to give a true and fair picture of the financial status by the company/firm and the management is not absolved at all from such liability....
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....servation 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. 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. 64. In a sense, this issue is the central point of adjudication in the present matter. The claimant has objected to being compelled to sign the financial statement in the teeth of his objection to the same. To properly appreciate the merits of such objection, we are required to look into the provisions of Sections 271 and 271A of the 1961 Act. Section 271 provides the consequences of failure to furnish returns, comply with notices, concealment of income, etc. Sub-section (1) (c) confers power on the Assessing Officer or Commissioner (Appeals)or the Principal Commissioner or Commissioner to penalise any person who has concealed the....
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....ns in Sections 271 and 271A of the 1961 Act or any exemption on such count. The "matter paragraphs" referred to by the learned Arbitrator are authored by the auditor, as per whose own accounting standards, the management is responsible for a fair and true picture being given in respect of the financial accounts which are depicted in the auditor's report. Hence, there is no nexus whatsoever between any recording of objection or other Matter Paragraphs used by the auditor with the liability of the petitioner, as a partner of the firm at the relevant point of time, in respect of the concealment of particulars, if any, and/or furnishing inaccurate particulars and/or improper keeping of the books of account. The matter paragraphs, thus, would do scant little or nothing at all to mitigate the criminal liabilities of the petitioner under Section 271 and 271A of the Income Tax Act. 70. The spirit enshrined in Article 20 (3) of the Constitution of India, which prevents any person from being compelled to incriminate himself, is thoroughly violated by the impugned order inasmuch as it compels the petitioner, knowingly, to incriminate himself by signing on financial statements which contain....
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....g inaccurate statements deliberately in the balance sheet itself. 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 (supra) was merely in respect of a rule of evidence. 75. Hence, no parity can be drawn between the ratio of the said cited judgments and a violation of Section 271/ 271A. 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. 76. Similar view was expressed in Reliance Asset Reconstruction Company (supra) where the Supreme Court went on to obs....