Kunda Srinivasa Reddy & Ors. vs Dr Manjula Sridhar & Ors.

R. Raghunandan Rao, J

Heard Dr. P.B. Vijaya Kumar, learned Senior Counsel representing on behalf of Smt. A.V.S. Laxmi, learned counsel appearing for the appellants and Sri N. Subba Rao, learned Senior Counsel representing on behalf of Sri Devi Prasad, learned counsel appearing for the respondents.

The appellants herein and respondents 1 to 6 had formed a partnership firm, under the name and style of M/s. Visakha Medical Centre. On account of certain disputes, the firm came to be dissolved, by notice, dated 28.10.2006. Thereafter, the disputes regarding settlement of accounts etc., were referred to arbitration, by appointing the 7th respondent herein, as the Arbitrator. The 7th respondent, after hearing both sides, had passed an Award, dated 19.10.2023. In this award, the 7th respondent had held that the firm had initially purchased 3755 Sq. Feet of built up area in S.L.N. Towers, Official Colony, Maharanipeta, Visakhapatnam. The 7th respondent also found that the firm had purchased an additional extent of 610 sq. ft. in the very same building. The 7th respondent, after going through the respective averments and submissions, had recorded that the assistance of a chartered engineer had been taken, on the request of the claimants in the Arbitration Application and that the said chartered engineer had come up with a plan for allotment of shares, in the built up area of the above spaces, to the claimants in the application, as well as the present appellants. This plan was accepted by the learned Arbitrator and an Award was passed allotting separate extents of built up area in the ground, stilt and first floors of the said building to the appellants herein as well as the respondents.

Aggrieved by this Award, the appellants herein moved A.O.P.No.76 of 2014 before the Principal District Judge, Visakhapatnam, which came to be dismissed, by order, dated 22.08.2023. Aggrieved by the said order of dismissal, the appellants have moved the present civil miscellaneous appeal.

Dr. P.B. Vijay Kumar, learned Senior Counsel appearing for the appellants would contend that neither the learned Arbitrator nor the trial Court have considered the issues raised by the appellants, due to which an Award, which cannot be implemented, has been passed and the same has been upheld by the trial Court. The learned Senior Counsel would also contend that the allotment of space was not in accordance with the ratio set out in the partnership deed and the allotment of additional share, to the respondents, who had moved the claim petition, is contradictory to the partnership deed and the same would automatically fall foul of Section 34 of the Arbitration and Conciliation Act, 1996.

The essential grounds in the appeal are:-

a) About 610 sq. ft of built up area had been purchased by the company known as M/s. Visakha Imaging and Medical Private Limited, which mortgaged the said property to Allahabad Bank. However, the learned Arbitrator took a completely erroneous view and held that the said 610 sq. ft., also belongs to the firm.

b) The learned Arbitrator allotted the aforesaid 610 sq. ft., of built up area to the appellants herein and the same is an error apparent on the face of the record and such error had been committed by sheer non-application of mind. Further, this space had been alienated, under the provisions of the SARFAESI Act, in 2013 itself and was not available for distribution to the partners.

c) The Principal District Judge, Visakhapatnam, persisted in the said error despite being shown the error committed by the learned Arbitrator.

d) The learned Arbitrator, while allotting the built up area, had reduced the entitled share of the appellant by 2% and gave this 2% share to the respondents, which was not in accordance with the profit sharing ratio under the partnership deed and consequently, the action of the Arbitrator is violation of conditions set out under Section 34 of the Arbitration and Conciliation Act, 1996 and requires to be set aside.

Sri N. Subba Rao, learned Senior Counsel appearing on behalf of Sri Devi Prasad, learned counsel for the respondents would contend that the allotment of built up area was done with the knowledge of the appellants who did not raise any objection at that stage. Consequently, such an objection cannot be raised now. The contention of the appellants that the chartered engineer could not have divided the property, cannot be accepted as the learned Arbitrator had only taken the assistance of the chartered engineer for carrying out division of the properties and there is no provision which bars an Arbitrator from engaging the services of any other person to assist him in the matter.

The firm, viz., M/s. Visakha Medical Centre had been operating and was in existence from March 2001 when the firm purchased immoveable property totaling to 3755 sq. ft., of built up area under five different deeds of sale. The firm was reconstituted in the year 2004, on the retirement of one of the partners. Thereafter, there was a slight reorganization of the firm as one of the partners Dr. P. Dayakar Reddy sold away 5% of the partnership firm to Sri K. Subba Reddy and Smt. Kunda Usha Durga. Sri Kunda Subba Reddy is the father of the 1st appellant herein and Smt. Kunda Usha Durga is the 2nd appellant, and wife of the 1st appellant. The last deed of partnership accepted by all the partners is dated 15.11.2005, which provides that the 1st appellant would be entitled to 18% of the profits and losses while the 2nd appellant would be entitled to 2% of the profits and losses. The appellants were entitled to 20% of shares in the profits or losses of the firm.

Thereafter, the firm came to be dissolved, by notice, dated 28.10.2006. As there were some differences in the appointment of arbitrator, for resolving all the subsequent disputes, an arbitration application has been filed before the High Court of Andhra Pradesh, which referred the matter to arbitration and appointed the 7th respondent herein as the Arbitrator, by order dated 13.04.2010. Various disputes were raised by the parties, before the learned Arbitrator, including the question of whether the extent of 610 sq. feet had been purchased in the same building as in the earlier purchase of 3755 sq. feet of land. The objection raised against clubbing this built up area in the assets of the firm was that the built up area was actually purchased in the name of the company known as M/s. Visakha Imagings and Medical Pvt. Limited and that the learned Arbitrator, after considering the contentions raised on both sides, appears to have formed an opinion that the appropriate manner of distributing the assets of the firm would be to obtain the assistance of a chartered engineer for the purpose of demarcating the entire extent of land which was taken to be 4365 sq. feet. Thereafter, the chartered engineer had come up with a plan for demarcation of the built up area and for allotment of shares to the partners. Under this plan, the appellants ended up that 18% of the built up space whereby they had lost 2% of their share.

Dr. P.B. Vijay Kumar, learned Senior Counsel, apart from raising the issue of loss of share, without any adequate reason, would also contend that the manner in which the built up area has been split up, makes it impractical in as much as the appellants do not have any access to the built up area given to them.

Consideration of the Court:

The facts relating to this case have already been set out above and are not being repeated here. The learned Arbitrator, in the award, has also recorded these facts.

The claim considered by the learned Arbitrator was rendition of accounts; a claim for Rs. 24,50,176/- against the managing partner of the firm, on the ground that he had not distributed the rents received by the firm to all the partners and the aforesaid sum was the share of the claimants; claim of Rs. 8,90,400/-against “Visakha MRI centre” , as damages for unauthorized use; claim for physical vacant possession of the firm’s property, in proportion to the share of the claimants and claim for right to use the name of the firm exclusively by the claimants.

There was a dispute as to the extent of built up area that was purchased, as an extent of 610 square feet, of built up area, claimed by the claimants to be belonging to the firm, was actually purchased by another company M/s VIMPL. The learned Arbitrator, took the view that though M/s VIMPL was mentioned in the sale deed, the said space was purchased by the firm itself and that the property belonged to the firm. The learned Arbitrator, agreed with the claimants that the firm had received Rs. 43, 89, 600/- as rent and that the claimants would be entitled to their share, in the said rent, as per their respective shares in the firm, from the managing partner of the firm. The learned Arbitrator did not give any findings or directions, in relation to the claim made against “Visakha MRI centre” . As far as the claim for allotment of built up area is concerned, the learned Arbitrator took the assistance of a chartered engineer, and drew up a plan showing the allotment of built up space to partners in the firm and passed an award, dated 19.10.2023. It may also be noted, that the learned Arbitrator had to pass an award, without hearing the appellants, as they had not appeared before him, after filing their pleadings.

The appellants herein, being aggrieved by this award, filed A.O.P.No.76 of 2014, before the Principal District Judge, Visakhapatnam, under Section 34 of the Arbitration and Conciliation Act, 1996. The Principal District Judge, dismissed the A.O.P., on the ground that the requirements of Section 34 have not been made out.

The appellants have now approached this court, by way of this appeal. As recorded above, the primary grounds raised by the appellants are that the Award gives the appellants only 18% of the built up area, when they were entitled to 20%; the appellants have been allotted space, in such a way that they do not have access to their own space and would have to depend upon the respondents for accessing their built up space; and the appellants have been allotted 610 square feet of space, which had already been sold by the mortgagee bank, in SARFAESI proceedings, in 2013 itself.

Before adverting to the contentions raised, by the appellants, it is necessary to remember that the scope of intervention, under section 34 of the Act, which reads as follows:

Section 34. Application for setting aside arbitral award.—

(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only if—22 (a) the party making the application 1 [establishes on the basis of the record of the arbitral tribunal that—

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) the Court finds that—

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

Explanation 1.—For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,—

(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2.—For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute. 2(2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award: Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal: Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.

(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the 1. Subs. by Act 33 of 2019, s. 7, for “furnishes proof that” (w.e.f. 30-8-2019). 2. Subs. by Act 3 of 2016, s. 18, for the Explanation (w.e.f. 23-10-2015). 3. Ins. by s. 18, ibid. (w.e.f. 23-10-2015). 23 arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award. 3 (5) An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.

(6) An application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon the other party.

The allotment of 18% of the built up area, against the 20% share of the appellants, prima facie, is not in line with the terms of the partnership deed. However, this difference, would not amount to a total transgression of the terms of the partnership agreement as there is a minor difference, which could have occurred, in the course of the allotment of the built up space.

The appellants have placed, before this court, the registered sale certificate, dated 23.03.2013, under which 610 sq feet of built up area, belonging to VIMPL had been transferred to an auction purchaser. This sale had been conducted under the provisions of the SARFAESI Act. The very same built up area had been allotted to the appellants, under the impugned award, dated 19.10.2023. The manner in which the allotment has been made also requires to be seen. The relevant extract of the award, is extracted:

“In as much as the firm stood dissolved as admitted by both sides naturally the partners would be entitled to the ownership and possession of the premises including the one purchased under Ex.A8. The claimants therefore, sought the assistance of a Chartered Engineer who was also an approved valuer to demarcate the area to which they would be entitled to. They have filed the plan prepared by the said valuer on the basis of their entitlement at 56% of the total plinth area of 4365 Sq. Feet. Part A of the plan shown in yellow colour shows the extent of the area in the premises that can be allotted to the Claimants and the area shown as Part B in Orange colour can therefore be allotted to the Respondents put together as they are entitled only to 44% of the assets of the firm. In as much as, the rights of the parties in a claim of this type, should necessarily be finally settled, I am of the opinion that the plans prepared by the valuer are to be accepted and the Claimants and the Respondents are to be allotted Part A and Part B of the area shown in the plan prepared by the said valuer. The said plans are therefore appended to this award and the Claimants and the Respondents are allotted the shares as mentioned in the Part A and Part B of the plan respectively. Apart from the same, each of the Claimants would be entitled to recover the following sums from the 1st respondent who admittedly was the Managing Partner.”

It is clear that the entire scheme of allotment is prepared by the respondent/claimants and accepted by the learned Arbitrator without any further thought. The appellants have also filed the copy of a lawyer’s notice, dated 08.05.2013. This notice was issued by the advocate of the claimant/respondents assailing the aforesaid sale of the area allotted to the appellants under the impugned award. Thus, the claimants/ respondents were fully aware of the sale of the area which was allotted to the appellants and had still prepared a scheme of allotment, whereby the sold area was included in the share of the appellants. This fact was not brought to the notice of the learned Arbitrator, who appears to have accepted the scheme of allotment in good faith. It may also be noticed that the learned arbitrator had recorded in the award, that the counsel appearing for the appellants had abstained from the proceedings and the learned arbitrator deemed it appropriate to continue with the arbitral proceedings, in their absence.

Though the learned Arbitrator may have passed the award, without being aware of the said sale of property, the fact remains that the appellants are deprived of a large part of their share and are effectively being thrown out without any meaningful share being allotted to them. This is in conflict with the basic notions of Justice and consequently opposed to the public policy of India.

Though, this court does not find any error in the award entitling the claimants to recover the sums mentioned in the award, the entire award would have to be set aside, as a part of the award has to be set aside. This view is fortified by the judgment of the Hon’ble Supreme Court in Gayatri Balasamy vs. Isg Novasoft Technologies Limited. 2025 INSC 605, dated 30.04.2025.

Accordingly, the Civil Miscellaneous Appeal is allowed setting aside the award, dated 19.10.2013, as well as the order of the Principal District Judge, Visakhapatnam, dated 22.08.2023, in A.O.P.No.76 of 2014, leaving it open to the respondents and the appellants to avail of their remedies under law.

There shall be no order as to costs. As a sequel, pending miscellaneous applications, if any, shall stand closed.