M/S KANYAKUMARI BUILDERS PRIVATE LIMITED v. M/S SPRING BOREWELL COMPANY LTD

Brief facts, shorn of unnecessary details, are that an Arbitral award was passed on 05.02.2016, awarding a sum of Rs.25 crores as damages along with interest at the rate of 18% p.a. from the date of the award till date of realization. In addition the claimant was also entitled to refund of Rs.17.50 crores along with interest at the rate of 12% p.a. from the date of receipt of the amount till date of realization. Expenses in a sum of Rs.23,09,755/- was directed to be paid by the respondents, along with interest -4- at the rate of 12% from the date of award till date of realization. Claimant was also entitled for costs of the arbitration proceedings. Execution Petition was filed on

31.05.2017 and at the first instance, the office of the Executing Court calculated stamp duty in terms of Article 11 of the Karnataka Stamp Act, 1957 and called upon the decree holder to pay Rs.12 lakhs towards stamp duty. Accordingly, a Demand Draft for a sum of Rs.12 lakhs was tendered by the petitioner on 07.06.2017 and thereafter notice was directed against the judgment debtors on

07.06.2017. However, the judgment debtors filed an application on 02.08.2017 under Section 151 of Code of Civil Procedure (for short, ‘the CPC’), seeking directions to the office to calculate proper stamp duty and thereafter direct the decree holder to pay the deficit stamp duty and penalty on the arbitral award. Objections were filed by the decree holder and memo of calculation was filed by the judgment debtors on 14.02.2019 stating that the deficit stamp duty payable is Rs.5,60,080/- and ten times the penalty would be Rs.56,00,800 in all Rs.61,60,880/- would be payable. The Executing Court passed the impugned -5- dated 23.08.2019, directing the decree holder to pay in all Rs.61,60,880/- towards deficit stamp duty and penalty.

Learned Counsel for the petitioner brings to the notice of this Court a decision of a co-ordinate Bench in the case of Mr.Shakeel Pasha and Others Vs. M/s. City Max Hotels (India) Pvt. Ltd. in W.P.No.8352/2022, clubbed with W.P.12935/2022 dated 28.07.2023. It is submitted that having considered a judgment of the Hon’ble Supreme Court in the case of M.Anasuya Devi & Ors. Vs. M Manik Reddy & Ors. (2003) 8 SCC 565 and several other judgment of this Court including Sri Dilli Babu Vs. The State of Karnataka, reported in ILR 2015 KAR. 4336, the co-ordinate bench held that after completion of the arbitration process the merits are given finality by issuing an arbitral award. By way of a legal fiction, the award is to be treated as decree. Such legal fiction is created for the limited purpose of enforcement of an award as a decree. Arbitral award is tendered in execution proceedings for enforcement of an award. Further, having regard to Sections 33 and 34 of the Karnataka Stamp Act, it -6- was held that the award stemming from arbitration is possibly misconstrued by executing court to be an instrument. It was therefore held that the executing court erred in impounding the arbitral award in executing proceedings under Section 36 of the 1996 Act. It was also held that it is agonizing to see that a decree holder who has voluntarily deposited the requisite stamp duty is saddled with 10 times penalty. It was also directed that unless rules are framed and mechanism is brought into force indicating as to how arbitral award needs stamping and at what point of time it needs stamping, the executing courts should not impose penalty under Sections 33 and 34 of the Karnataka Stamp Act on arbitral awards.

It is further submitted that the aggrieved respondents/judgment debtors therein took up the matter to the Hon’ble Supreme Court and in Civil Appeal Nos.2139- 2140/2024, which arose out of SLP (Civil) Nos.26063- 26064/2023, by order dated 12.02.2024, the Apex Court clarified that the stamp duty payable on the award will be in terms of Article 11 of the Schedule to the Karnataka Stamp -7- Act, 1957, which was brought into force w.e.f. 01.03.2014 and the award therein was made before the said date. It was also held that the executing court, in purported exercise of powers under Sections 33 and 34 of the Karnataka Stamp Act, directed penalty to be paid on account of non-payment of stamp duty, while it was found that under Karnataka Stamp Act there is no power conferred on the courts to direct payment of penalty. It was therefore held that the observations made by the coordinate bench of this Court will have to be understood in the context in which the same have been made.

Per contra, learned Counsel for the contesting respondents submitted that in M.Anasuya Devi & Ors. (supra) the Apex Court has held that the question as to whether the award is required to be stamped and registered would be relevant only when the parties would file the award for its enforcement under Section 36 of the Act. It was held that the parties can raise objections regarding its admissibility on account of non-registration and non- stamping at that stage, when the award is presented for -8- execution. It is therefore submitted that the objections raised by the respondents before the executing court was rightly considered and therefore, no fault can be found in the impugned order.

On hearing the learned Counsels and on perusing the petition papers, this Court finds that there are several loose ends in the provisions of the Act, 1996, insofar as payment of stamp duty on arbitral awards is concerned. In this regard, it would be relevant to notice the 194th Report of Law Commission on “Verification of Stamp Duties and Registration of Arbitral Awards”. The issues discussed in the Law Commission were regarding stamp duties and registration in respect of arbitral awards. The Law Commission found that so far as stamp duties are concerned, the Indian Stamp Act, 1899 applies in respect to arbitral awards throughout India, but some States have passed separate Stamp Acts to govern the stamp duties in their States. So far as registration of award is concerned, the Registration Act 1908, deals with registration of documents. It was noticed that Section 35 of the Indian -9- Stamp Act, 1899, (and corresponding provision in the State Act) says that documents which are required to be stamped, if they are not stamped or are inadequately stamped, will not be admissible in evidence ‘for any purpose’. Section 33 deals with impounding of documents presented before the public authority who is entitled to record evidence.

In the report of the Law Commission, various problems regarding payment of stamp duty and registration or the arbitral awards were discussed. The Law Commission noticed conflicting judgments and observations of the Courts that a signed copy of the award was not the same thing as the original award. It was noticed that in Rikhabdass Vs. Ballabhadas, AIR 1962 SC 551, the Hon’ble Supreme Court held that the remittal of defective award (passed under the 1940 Act), to the Arbitrators for reiterating the award on stamp paper was not correct and the proper remedy was to direct parties to take steps to cure the defect by paying the stamp duty along with such penalties as may -11- be levied. The Andhra Pradesh High Court, in Indurthi Srinivasa Rao Vs. Indurthi V.Narasimha Rao, AIR 1963 AP 193, held that the Arbitrators become functus officio as soon as the award is signed and hence they cannot rewrite the award on stamp paper.

The Madras High Court therefore gave an interim workable solution that the applicant will have to deposit the requisite stamp papers or equivalent value in cash in the Court, with a right to refund after the original award is called for and produced. The Law Commission has also discussed the problems arising under the registration laws, concerning the arbitral awards. The Law Commission concluded that in view of the provisions of Section 35 of the Stamp Act, 1899, the award which requires to be stamped is not stamped or is inadequately stamped, is inadmissible for ‘all purposes’ and an award which requires to be registered, if it falls within Section 17(1)(b) of the Registration Act, 1908, and if it is not registered, is not a valid document and cannot be treated as affecting -14- immovable property. It was noticed that whenever such problems arise in applications under Section 34(1) or application under Section 36 of the Act, 1996, initially the Court has no material before it to verify whether the original award has been duly stamped. Hence, it cannot issue notice on the applications. It was therefore concluded that this problem has arisen in the 1996 Act, in view of the fact that Section 31(5) requires the Arbitrators to send only signed copies of the award to the parties. These problems did not arise under the 1940 Act, because Section 14(2) of that Act required the filing of the original award in the Court and the parties could also apply to the Court to direct the Arbitrators to file the original award into Court. The Law Commission opined that the Madras High Court felt that this is a matter for legislative amendment and referred the matter to the Law Commission.

In Chapter III of the report of the 194th Report of the Law Commission, interim workable solution suggested by the Madras High Court was discussed. It was suggested by the Madras High Court that the difficulty faced -15- to find out whether stamp duty has been collected or not can be resolved by a simple amendment to Section 31(1) of the 1996 Act. It was proposed that Section 31(1) should be substituted as, ‘an arbitral award shall be made in writing, duly stamped and shall be signed by the members of the Arbitral Tribunal.’ Subsequently, by other orders, the Madras High Court directed that it is open to the party either to pay necessary stamp duty or to deposit the sum of money equivalent to the value of the stamp duty, in the Registry and it is also open to the Registry to recover the amount in cash.

After discussing the different solutions, the Law Commission recommended as a first alternative that Section 31(1) should be modified in terms of Section 14(2) of the Arbitration Act, 1940. As a second alternative, it was suggested that Sections 31(1) and 31(5) could be amended to state that the Arbitral Tribunal shall have to get the award duly stamped and in addition provide that if the award requires compulsory registration under Section 17(1)(b) of the Arbitration Act, 1908, to have it duly -16- registered. A provision is necessary that the photocopies of the award shall be sent to the parties with an endorsement that the award is duly stamped and wherever it requires compulsory registration, that it has been so registered. It was also noticed that the word ‘duly stamped’ can create some doubts and it will be difficult for the Court in which the copy is filed by the parties with such an endorsement, to find out if the stamp papers on which the original is engrossed are sufficient in value according to the law applicable. It was therefore recommended that the new provision must further require that the Arbitral Tribunal should specify in that endorsement, the value of the stamp duty paid on the original award.

Despite the recommendations made by the Law Commission, the provisions of the Act, 1996, have not been amended suitably. It is therefore not surprising that the problem persists and there is no proper guidance to the court, the lawyers and the litigant public. This court also finds that unlike other instruments/documents which require payment of stamp duty and registration, there is certainty, -17- but, an award passed by the arbitrator, under the Arbitration and Conciliation Act, remain uncertain, till it attains finality. The successful party has to await and anticipate an appeal being filed by the aggrieved party, under Section 34 of the Act. The chances of the award being modified or varied, is also not ruled out. If stamp duty is paid by a party and thereafter, the award is modified, either reducing or increasing the value, then again the problem of payment of additional stamp duty or seeking refund of the stamp duty would arise. Moreover, question of levy of penalty would arise when there is certainty and yet stamp duty is not paid. Having regard to the uncertainty prevailing regarding payment of stamp duty on arbitral awards, Courts should not issue directions for payment of penalty. Rules in this regard, is therefore required at the earliest.

In the light of the discussion hereinabove, this Court is of the considered opinion that the executing courts dealing with an application under Section 36 of the Act, shall not direct payment of penalty in terms of Section 35 of the -18- Indian Stamp Act, 1899 or under the Karnataka Stamp Act. This Court deems it necessary to reiterate that the Hon’ble Apex Court, in the case of Shakeel Pasha and others Vs. M/s. City Max Hotels, in Civil Appeal Nos.2139- 2140/2024 (supra) has recently held that under the Karnataka Stamp Act (more particularly Section 33) there is no power conferred on the courts to direct payment of penalty and such powers are conferred only on the appropriate authorities under the Karnataka Stamp Act to impose penalty.

It is also noticeable that the petitioner herein paid Rs.12 Lakhs, towards stamp duty, in terms of the calculation made by the office. A Demand Draft for the said sum of Rs.12 Lakhs was tendered by the petitioner on

07.06.2017. This Court would therefore hold, unhesitating that no fault can be found with the petitioner for payment of stamp duty, as directed by the office/registry.