M/S Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities & Ors vs M/S Bhaskar Raju & Brothers & Ors.

Leave granted.

Heard the learned counsel for the parties.

By way of present appeal, the appellants challenge the judgment and order dated 1.12.2014, passed by the single judge of the High Court of

Karnataka at Bangalore in Civil Miscellaneous Petition No. 167 of 2013 whereby, Justice L. Sreenivasa Reddy, former judge of the High Court of

Karnataka, was appointed as Arbitrator to conduct arbitration proceedings at the Arbitration Centre, Bangalore, as per the Arbitration and Conciliation

Act, 1996 (hereinafter referred to as “the Arbitration Actâ€​) read with the Arbitration Central Rules.

The facts, in brief, giving rise to the present appeal are as under:

The appellant No.1 is a registered Charitable Trust. Rest of the appellants are Trustees of the appellant No.1 â€" Trust. The appellant No.1 â€

Trust desired to develop the land owned by it and construct a multiÂ​purpose community hall with office complex.

As such, the respondent No.1 offered to develop the said property and also to renovate the Samadhi of the founder of the Trust existing on the said

piece of land. Negotiations were held between the appellant No.1 â€" Trust and the respondent No.1.

As an outcome of the negotiations, a lease deed was executed between the appellant No.1 ÂTrust and the respondent No.1 â€" lessee for a period

of 38 years. As per the said lease deed, the respondent No.1 â€" lessee was required to pay an amount of Rs.55,00,000/ (Rupees Fifty five lakh

only) as an interest free deposit, which was to be refunded to it at the end of the period of 38 years, if the lease was not extended between the parties.

As per the terms of the said lease deed, a certain monthly ground rent was also required to be paid by the respondent No.1 â€" lessee to the appellant

No.1 ÂTrust. As per the said lease deed, the respondent No.1 â€" lessee was to construct a multiÂpurpose auditorium with minimum seating capacity

of one thousand persons. The said auditorium was to be used for marriages, etc. together with dining hall, kitchen, guest rooms, etc. The respondent

No.1 â€" lessee had also undertaken to obtain vacant possession of property mentioned in Schedule ‘B’ subject to all coÂoperations being

extended to it, by the lessor for ejectment of the existing tenants of the lessor. The said lease deed was executed on 31.5.1996 on the basis of the

resolution of the appellant No.1 â€" Trust dated 30.4.1996.

A subsequent lease deed dated 12.3.1997 came to be executed between the appellant No.1 and the respondent No.1. Most of the terms and

conditions in the subsequent/fresh lease deed dated 12.3.1997 are identical with the terms and conditions as are found in the first lease deed dated

31.5.1996.

It appears, that during the period between 1997 till 2000, there was not much progress in the development of the said project. It further appears that

in the year 2008 certain reÂnegotiations took place between the appellants and the respondents. However, the same failed to materialize. It is the

case of the appellants, that except paying initial amount of Rs.25 lakhs towards the security deposit, the balance amount towards the security deposit

was not paid by the respondents. It was also the case of the appellants that the respondents were trying to interfere with the possession of the trust

property in collusion with one of the trustees. In this background, the appellant â€" Trust filed Original Suit being O.S. No.8952 of 2010 before the City

Civil Court at Bangalore. In the said suit, it was also contended on behalf of the appellants that the respondent No.1 â€" lessee had also desecrated

the Samadhi of the founder of the Trust and had damaged part of it. It was further contended that, the respondent No.1 â€" lessee, in collusion with

the respondent No.4, was trying to get a fresh lease deed executed illegally. The following prayers were made in the said suit:

“a. Decree of permanent injunction restraining the Defendants 1 to 3, their agents, servants from interfering with the peaceful possession and

enjoyment of the 1st Plaintiff Trust over the A schedule property.

b. Permanent injunction restraining the Defendants 1 to 4 from entering into, executing or registering any lease deed or other document transaction

concerning the A schedule property or any portion of it.

c. Decree granting of costs of the case and such other relief/reliefs as the Court may deem fit in the circumstances.â€​

The City Civil Court at Bangalore, granted an interim order by directing maintaining of status quo over the Schedule property in the said suit. The

suit was contested by the respondent Nos. 1 and 2 by filing written statement.

Respondent Nos. 1 and 2, after participating in the suit proceedings for almost a period of about two years and three months, issued a notice to the

appellants on 6.9.2013 thereby, invoking arbitration clause in the lease deed dated 31.5.1996 and 12.3.1997. On 11.10.2013, the respondent Nos. 1 and

2 filed a petition under Section 11(6) of the Arbitration Act before the High Court of Karnataka. On being served with the notice, the appellants

entered their appearance and filed their statement of objections on 2.6.2014 thereby, praying for dismissal of the petition on various grounds.

Since it was the basic contention of the appellants, that the lease deed dated 12.3.1997 being insufficiently stamped had to be mandatorily

impounded under Section 33 of the Karnataka Stamp Act, 1957 and it could not be relied upon unless proper duty and penalty was paid, the single

judge of the Karnataka High Court referred the matter to the Registrar (Judicial) for determination of the said issue. The Registrar (Judicial) of the

High Court of Karnataka by a detailed report dated 25.9.2014 held, that the document in question was lease deed and not an agreement to lease and

therefore, directed the respondent Nos. 1 and 2 to pay deficit stamp duty and penalty of Rs. 1,01,56,388 /Â (Rupees One crore One lakh FiftyÂSix

thousand Three hundred and EightyÂ​Eight only).

The respondent Nos. 1 and 2 filed their objections to the report of the Registrar (Judicial). The High Court of Karnataka without consideration of

the report of the Registrar (Judicial) passed the impugned order thereby, allowing the petition filed by the respondent Nos. 1 and 2 and invoking power

under Section 11(6) of the Arbitration Act, appointed an Arbitrator to decide the dispute between the appellants and the respondents. Being aggrieved

thereby, the appellants are before this Court.

We have heard Shri Nikhil Nayyar, learned Senior Counsel appearing on behalf of the appellants and Shri Balaji Srinivasan, learned counsel

appearing for the respondents.

Shri Nikhil Nayyar, learned Senior Counsel, submits, that though clause 36 of the lease deed dated 12.3.1997 provides for arbitration between the

parties, since the said lease deed was insufficiently stamped, the same could not have been relied upon by the High Court for appointing Arbitrator. It

is further submitted, that the respondent Nos. 1 and 2 had failed to take any steps in furtherance of the lease deed dated 12.3.1997 and belatedly, after

a period of almost 16 years and only when the suit filed by the appellants was in the final stages, had invoked the arbitration clause. Learned Senior

Counsel submits, that as a matter of fact, the suit filed by the appellants already stands decreed by a judgment and decree dated 2.3.2015.

Shri Balaji Srinivasan, learned counsel appearing for the respondents, on the contrary submits, that the agreement was in effect, an agreement to

lease the property which was required to be stamped only after all the tenants were evicted and the permission to start the construction was granted

by the Corporation. It is submitted, that the respondents were, all the while, trying to negotiate with the various tenants and as such, the High Court

was right in holding, that the agreement was for developing the property immediately after the property was made vacant by evicting the tenants.

It will be apposite to reproduce Sections 33 and 34 of the Karnataka Stamp Act, 1957, which are as under: “33. Examination and impounding of

instruments. (1) Every person having by law or consent of parties authority to receive evidence, and every person in charge of a public office,

except an officer of police, before whom any instrument, chargeable in his opinion, with duty, is produced or comes in the performance of his

functions, shall, if it appears to him that such instrument is not duly stamped, impound the same.

(2) For that purpose every such person shall examine every instrument so chargeable and so produced or coming before him, in order to ascertain

whether it is stamped with a stamp of the value and description required by the law in force in the State of Karnataka when such instrument was

executed or first executed:

Provided that,â€

(a) nothing herein contained shall be deemed to require any Magistrate or Judge of a Criminal Court to examine or impound, if he does not think fit so

to do, any instrument coming before him in the course of any proceeding other than a proceeding under Chapter XII or Chapter XXXVI of the Code

of Criminal Procedure, 1898;

(b) in the case of a Judge of the High Court, the duty of examining and impounding any instrument under this section may be delegated to such officer

as the Court appoints in this behalf.

(3) For the purposes of this section, in cases of doubt, the Government may determine,â€

(a) what offices shall be deemed to be public offices; and

(b) who shall be deemed to be persons in charge of public offices.

Instruments not duly stamped inadmissible in evidence, etc. No instrument chargeable with duty shall be admitted in evidence for any purpose by

any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or

by any public officer, unless such instrument is duly stamped:

Provided that,â€

(a) any such instrument not being an instrument chargeable with a duty not exceeding fifteen naye paise only, or a mortgage of crop Article 35 (a) of

the Schedule chargeable under clauses (a) and (b) of section 3 with a duty of twentyÂfive naye paise shall, subject to all just exceptions, be admitted

in evidence on payment of the duty with which the same is chargeable, or, in the case of an instrument insufficiently stamped, or the amount required

to make up such duty, together with a penalty of five rupees, or, when ten times the amount of the proper duty or deficient portion thereof exceeds

five rupees, of a sum equal to ten times such duty or portion;

(b) where a contract or agreement of any kind is effected by correspondence consisting of two or more letters and any one of the letters bears the

proper stamp, the contract or agreement shall be deemed to be duly stamped;

(c) nothing herein contained shall prevent the admission of any instrument in evidence in any proceeding in a Criminal Court, other than a proceeding

under Chapter XII or Chapter XXXVI of the Code of Criminal Procedure, 1898;

(d) nothing herein contained shall prevent the admission of any instrument in any Court when such instrument has been executed by or on behalf of

the Government, or where it bears the certificate of the Deputy Commissioner as provided by section 32 or any other provision of this Act and such

certificate has not been revised in exercise of the powers conferred by the provisions of Chapter VI.â€​

Admittedly, both the lease deeds are neither registered nor sufficiently stamped as required under the Karnataka Stamp Act, 1957. Admittedly, the

Registrar (Judicial) of the High Court of Karnataka had submitted a report to the High Court pointing out, that the document of 1997 executed/entered

into between the parties was a lease deed and not an agreement to lease and passed an order directing the respondent Nos. 1 and 2 to pay deficit

stamp duty and penalty of Rs. 1,01,56,388 / (Rupees One crore One lakh FiftyÂSix thousand Three hundred and Eighty Eight only). It is also an

admitted fact, that the respondent Nos. 1 and 2 have not complied with the said directions and have not paid the deficit stamp duty and penalty. In this

background, a question that would arise for consideration is, as to whether clause 36 in the lease deed dated 12.3.1997 could be acted upon to enforce

the arbitration clause contained therein.

The issue is no longer res integra. This Court in the case of SMS Tea Estates Private Limited vs. Chandmari Tea Company Private Limited

(2011) 14 SCC 66 had occasion to consider the provisions which are in pari materia with the provisions of the Karnataka Stamp Act, 1957. The

relevant paragraphs are as under:

“17. What if an arbitration agreement is con tained in an unregistered (but compulsorily registerable) instrument which is not duly stamped? To

find an answer, it may be neces sary to refer to the provisions of the Stamp Act, 1899 (“the Stamp Actâ€, for short). Section 33 of the Stamp

Act relates to examination and impounding of instruments. The relevant portion thereof is extracted below:

‘33.Examination and impounding of in struments.â€"(1) Every person having by law or consent of parties authority to receive evi dence, and

every person in charge of a public office, except an officer of police, before whom any instrument, chargeable, in his opinion, with duty, is produced or

comes in the perÂ​ formance of his functions, shall, if it appears to him that such instrument is not duly stamped, impound the same.

(2) For that purpose every such person shall examine every instrument so chargeable and so produced or coming before him, in order to ascertain

whether it is stamped with a stamp of the value and description required by the law in force in India when such instrument was executed or first

executed:’

Section 35 of the Stamp Act provides that instruments not duly stamped are inadmissiÂ​ ble in evidence and cannot be acted upon.

The relevant portion of the said section is exÂ​ tracted below:

‘35.Instruments not duly stamped inad missible in evidence, etc.â€"No instrument chargeable with duty shall be admitted in evi dence for any

purpose by any person having by law or consent of parties authority to re ceive evidence, or shall be acted upon, regis tered or authenticated by

any such person or by any public officer, unless such instrument is duly stamped:

Provided thatâ€

(a) any such instrument shall be admitted in evidence on payment of the duty with which the same is chargeable or, in the case of an instrument

insufficiently stamped, of the amount required to make up such duty, to gether with a penalty of five rupees, or, when ten times the amount of the

proper duty or deficient portion thereof exceeds five rupees, of a sum equal to ten times such duty or porÂ​ tion;’

Having regard to Section 35 of the Stamp Act, unless the stamp duty and penalty due in respect of the instrument is paid, the court cannot act

upon the instrument, which means that it cannot act upon the arbitration agreement also which is part of the instru ment. Section 35 of the Stamp

Act is distinct and different from Section 49 of the RegistraÂ​ tion Act in regard to an unregistered docuÂ​ ment. Section 35 of the Stamp Act, does not

contain a proviso like Section 49 of the Registration Act enabling the instrument to be used to establish a collateral transaction.

The Scheme for Appointment of Arbitra tors by the Chief Justice of Gauhati High Court, 1996 requires an application under Section 11 of the

Act to be accompanied by the original arbitration agreement or a duly certified copy thereof. In fact, such a require ment is found in the

scheme/rules of almost all the High Courts. If what is produced is a certified copy of the agreement/contract/in strument containing the arbitration

clause, it should disclose the stamp duty that has been paid on the original. Section 33 casts a duty upon every court, that is, a person having by law

authority to receive evidence (as also ev ery arbitrator who is a person having by con sent of parties, authority to receive evidence) before whom

an unregistered instrument chargeable with duty is produced, to examine the instrument in order to ascertain whether it is duly stamped. If the court

comes to the conclusion that the instrument is not duly stamped, it has to impound the document and deal with it as per Section 38 of the Stamp Act.

Therefore, when a lease deed or any other instrument is relied upon as contending the arbitration agreement, the court should con sider at the

outset, whether an objection in that behalf is raised or not, whether the doc ument is properly stamped. If it comes to the conclusion that it is not

properly stamped, it should be impounded and dealt with in the manner specified in Section 38 of the Stamp Act. The court cannot act upon such a

docu ment or the arbitration clause therein. But if the deficit duty and penalty is paid in the manner set out in Section 35 or Section 40 of the Stamp

Act, the document can be acted upon or admitted in evidence.â€​

It can thus clearly be seen, that this Court has in unequivocal terms held, that when a lease deed or any other instrument is relied upon as

containing the arbitration agreement, the Court is required to consider at the outset, whether the document is properly stamped or not. It has been held,

that even when an objection in that behalf is not raised, it is the duty of the Court to consider the issue. It has further been held, that if the Court

comes to the conclusion, that the instrument is not properly stamped, it should be impounded and dealt with, in the manner specified in Section 38 of

the Stamp Act, 1899. It has also been held, that the Court cannot act upon such a document or the arbitration clause therein. However, if the deficit

duty and penalty is paid in the manner set out in Section 35 or Section 40 of the Stamp Act, 1899, the document can be acted upon or admitted in

evidence. It is needless to state, that the provisions that fell for consideration before this Court are analogous with the provisions of Sections 33 and 34

of the Karnataka Stamp Act, 1957. In this view of the matter, we are of the considered view, that in view of the law laid down in the case of SMS

Tea Estates Private Limited (supra), that the lease deed containing the arbitration clause which is required to be duly stamped, was not sufficiently

stamped and though the Registrar (Judicial) had directed the respondent Nos. 1 and 2 to pay deficit stamp duty and penalty of Rs.1,01,56,388/Â‐

(Rupees One crore One lakh fiftyÂsix thousand Three hundred and EightyÂeight only), the respondents failed to do so, the High Court has erred in

relying on the said lease dated 12.3.1997.

Though the appellants deserve to succeed only on the aforesaid question of law, we find, that even on equity the respondents are not entitled to

any relief.

After lease deed was executed in the year 1996Â1997, though the respondent Nos. 1 and 2 have placed on record some settlement deeds with

tenants executed in 1998, except one bald statement, that last of the tenants was evicted in the year 2010, nothing has been placed on record. It

appears, that only after the appellants had filed a suit for injunction against the respondents which was duly contested by the respondents by filing

written statement on 18.6.2011, the respondents after participating in the suit proceedings for a period of about 2 years and 3 months, filed the present

application before the High Court under Section 11(6) of the Arbitration Act. It is further to be noted, that if in the pursuit of the respondents, the lease

deed dated 12.3.1997 was legal and valid document and it could be relied on for referring the dispute to arbitration in view of clause 36 thereof,

nothing precluded them from filing an application under Section 8 of the Arbitration Act before the City Civil Court at Bangalore in O.S. No.8952 of

2010 at the earliest opportunity available. It appears, that the respondent Nos. 1 and 2 are taking selfÂcontradictory stands. In the written statement

before the City Civil Court at Bangalore, they have admitted, that the document was a lease deed, whereas before the High Court they have taken a

stand, that the document was an agreement for developing the property after the property is made vacant by evicting the tenants. The stand is also

totally contrary to the terms expressed in the lease deed. It will be relevant to refer to clause 5 of the lease deed dated 12.3.1997, which reads thus:

“5. The tenure of the lease shall be 38 years commencing from the date of signing of this lease deed.â€​

It can thus clearly be seen, that the tenure of the lease deed was to be 38 years from the date of signing of the lease deed.

A perusal of the clauses of the lease deed dated 12.3.1997 would also reveal, that the lessee had undertaken all the responsibility of obtaining

vacant possession of Schedule ‘B’ property and to secure vacant possession by ejecting the unauthorised occupants. Responsibility of

sanctioning the building plans was also undertaken by the respondents. It would further reveal, that it was also agreed between the parties, that in the

event of any of the tenants approaching a court of law, such period of litigation shall not in any manner affect the agreed tenure of the lease deed of

38 years.

In that view of the matter, the submission made by Shri Balaji Srinivasan, learned counsel for the respondents, that the agreement was to be

registered only after all the tenants were evicted and the building plans were sanctioned is not supported by any of the terms in the lease deed dated

12.3.1997.

In that view of the matter, we find, that the High Court has totally erred in relying on the lease deed dated 12.3.1997, which was found to be

insufficiently stamped and brushing aside the report of the Registrar (Judicial), when the respondents had failed to pay the insufficient stamp duty and

penalty as determined by the Registrar (Judicial) of the High Court of Karnataka.

In the result, the appeal is allowed. The impugned judgment and order dated 1.12.2014 passed by the High Court of Karnataka in CMP No.167 of

2013 is quashed and set aside. The petition/application filed by the respondents under Section 11 of the Arbitration Act is rejected. There shall be no

order as to costs.