Bombay High Court
M/S S D Shinde And Company Through ... vs The State Of Maharashtra And ... on 12 August, 2021
Bench: M. G. Sewlikar
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IN THE HIGH COURT OF JUDICATURE OF BOMBAY
BENCH AT AURANGABAD
WRIT PETITION NO. 8804 OF 2018
M/s S.D. Shinde and Company
Ahmednagar, through its
G.P.A. Holder
Annasaheb S/o Shripati Shinde
R/o Shri Parvati, Savedi Road
Ahmednagar, Dist. Ahmednagar. Petitioner
Versus
1. The State of Maharashtra
2. Executive Engineer
Upper Penganga Project
Division No. 8
Nanded,
Under Godavari Marathwada
Irrigation Development Corporation
Aurangabad. Respondents
Mr. P.R. Katneshwarkar, Advocate for the petitioner.
Mr. A.B. Chate, AGP for respondent No. 1.
Mr. B.R. Surwase, Advocate for respondent No. 2.
CORAM : M.G. Sewlikar, J.
RESERVED ON : 20th July, 2021.
PRONOUNCED ON : 12th August, 2021.
JUDGMENT :
1. Rule. Rule made returnable forthwith.
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2. By consent of the parties, heard fnally at the stage of
admission.
3. By this writ petition under Article 227 of the Constitution
of India, petitioner is challenging order dated 18 th January, 2018,
passed below Exhibit 1 in Special Darkhast No. 14/2110 by learned
Jt. Civil Judge (S.D.), Nanded.
4. Facts leading to this petition can be succinctly stated as
under :-
Petitioner is a Contractor engaged in construction
business. He was assigned contract of construction of earth, lining
and structure in km No. 82 to 85 of Isapur Right Bank Canal, LCB
Contract No. 1987-88. There was breach of terms of contract as a
result of which, claims were raised by the petitioner. Dispute was
referred to the Arbitrator. The Arbitrator passed an award on 30 th
April, 1998. The award passed by the Arbitrator reads as under :-
Summary of the Award of Counter claims
I declare award of following sums to the
respondents on this day of 30th April, 1998.
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1) Cost of materials issued Rs. 1,72,433
2) Hire charges of Machinery 1,56,124
3) Hire charges for centering
material 5,530
4) Interest of advances Rejected
5) M.P.W.A. 27,126
6) Excess measurements Rejected
7) Extra cost of Balance work Rejected
8) Interest 3,61,213
Interest
3,61,213 x 18 x 15
----------------------
100 x 12 81,273
--------------
Total 4,42,486
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This award was challenged before the Civil Judge (S.D.),
Nanded, to make it a rule of Court, who, by his judgment and
award dated 23rd June, 2004, set aside the award passed by the sole
Arbitrator. Petitioner preferred Arbitration Appeal No. 16/2009
before this Court. This Court restored the award passed by the
Arbitrator by order dated 15th/16th December, 2009. Respondent
preferred SLP No. 13876/2010 against the judgment of this Court.
The Honourable Supreme Court, by judgment and order dated 22 nd
August, 2013, modifed the award to the extent of rate of interest.
Rate of interest was brought down to 6% per annum from 18% per
annum. Rest of the order was confrmed. The Honourable Supreme
Court modifed the award as under :-
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"In the totality of these circumstances therefore
we are inclined to reduce the rate of interest
awarded by the Arbitrator and affrmed by the
High Court from 18% to 6% recokned from
01.02.1993. The award as also the judgment of
the High Court shall to that extent stand
modifed with the condition that in case the
amount payable to the respondent contractor is
not paid within three months from today, the
contractor shall be entitled to claim interest @
10% on the principal amount of Rs. 31,16,751/-
w.e.f. the date the period of three months expire."
5. Petitioner fled Special Darkhast No. 14/2010 before Jt.
Civil Judge (S.D.), Nanded, for execution of the award modifed by the
Honourable Supreme Court. In terms of the directions of the
Honourable Supreme Court, respondent deposited Rs. 35,24,841/- in
Executing Court on 22nd November, 2013.
6. According to petitioner, the sole Arbitrator had awarded
claims to the tune of Rs. 31,16,751/-. As far as this amount is
concerned, neither of the parties has any dispute over it. According
to the petitioner, interest at the rate of 18% per annum was granted
by the sole Arbitrator which was modifed by the Honourable
Supreme Court and reduced to 6% per annum. The sole Arbitrator
had awarded interest from 1st February, 1993, till the declaration of
the award i.e. 30th April, 1998. Therefore, interest component comes
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to the tune of Rs. 9,81,776/- ( On Rs. 31,16,751/- at the rate of 6%
per annum from 1st February, 1993 to 30th April, 2018). The
aggregate of principal plus interest comes to Rs. 40,98,527/- (Rs.
31,16,751/- + interest Rs. 9,81,776/-). According to the petitioner,
interest at the rate of 6% per annum ought to have been calculated
on Rs. 40,98,527/- from 30th April, 1998 till 16th December, 2009 i.e.
the date on which this Court had passed the award. Thus, total
comes to Rs. 69,59,860/- (Rs. 40,98,527/- + Rs. 28,68/333/-).
7. It is further contended in the petition that the sole
Arbitrator had, by allowing counter claim, awarded Rs. 3,61,213/- to
the judgment debtor - respondent herein with interest at the rate of
18% per annum. It was also modifed by the Honourable Supreme
Court and interest rate was reduced to 6% per annum. Future
interest on Rs. 3,88,304/- from 1st May, 1998 to 16th December, 2009
comes to Rs. 6,59,393/-. Thus, the amount due to petitioner by the
respondent comes to Rs. 3,88,304/-. If this amount is deducted
from Rs. 69,59,860/-, the total amount due to petitioner comes to
Rs. 63,00,467/- (Rs. 69,59,860/- - Rs. 6,59,393/-).
8. According to petitioner, respondent ought to have
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deposited Rs. 63,00,467/- within three months from the date of the
order of the Supreme Court i.e. 22 nd August, 2013 else, interest at the
rate of 10% per annum would begin. Respondent deposited only
Rs.55,24,841/-. Thus, interest at the rate of 6% per annum on
Rs. 63,00,467/- for the period from 17th December, 2009 to 22nd
August, 2013 comes to Rs. 14,87,255/-. Thus, total claim comes to
Rs. 77,87,722/- (Rs. 63,00,467/- + Rs. 14,87,255/-). Deducting the
amount deposited by the respondent, total amount due from
respondent comes to Rs. 22,62,881/- with future interest at the rate
of 10% per annum till realisation of the actual amount
(Rs.77,87,722/- - Rs. 55,24,841/- = Rs.22,62,881/-).
9. The Arbitrator had awarded refund of the amount of
security deposit held by the judgment debtor and the amount of
encashment of bank guarantee with interest at the rate of 18% per
annum from the date of encashment of bank guarantee till actual
payment, but the Executing Court has refused to refund it. It is
further contended that the Executing Court has deducted tax at
source which is impermissible having regard to Section 194C of the
Income Tax Act. On all these grounds, Special Darkhast No. 14/2010
was fled.
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10. It is further contended that learned Executing Court did
not consider any of the contentions of the petitioner and held that
the Honourable Supreme Court has held that principal amount is of
Rs. 31,16,751/-. The Honourable Supreme Court has not added
interest during trial in the principal amount. The Honourable
Supreme Court has kept separate the principal amount and interest
thereon. Therefore, in the execution petition, the decree holder is not
entitled to interest on interest as prayed. The learned Executing
Court directed tax to be deducted at source. Executing Court did not
pass any order so far as refund of security deposit and bank
guarantee is concerned. Learned Executing Court disposed of the
execution petition as fully satisfed.
11. Respondent fled affdavit-in-reply. In the affdavit-in-
reply, respondent has contended that it has calculated and worked
out interest at the rate of 6% per annum on the principal amount of
Rs. 31,16,751/- which comes to Rs. 38,46,668/-. Thus, total amount
comes to Rs. 69,63,419/-. By deducting counter claim i.e.
Rs. 7,20,402/- and income tax and VAT as per tender clause to the
tune of Rs. 7,18,177/-, the net amount of Rs. 55,24,840/- has been
deducted. Thus, the award is fully satisfed. So far as bank
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guarantee is concerned, it is contended that the bank guarantee and
security deposit amount has been forfeited against the outstanding
amount given to the contractor apart from the arbitration. Therefore,
since the award is fully satisfed, the petition deserves to be
dismissed.
12. Heard Shri Katneshwarkar, learned counsel for the
petitioner and Shri Survase, learned counsel for the respondent.
13. Shri Katneshwarkar submitted that the expression
'Principal sum adjudged' means principal amount and interest
awarded on it. He submitted that in the case of Hyder Consulting
(UK) Limited vs. Governor, State of Orissa, reported in (2015) 2
Supreme Court Cases 189, the Honourable Supreme Court has held
that sum means principal plus interest if it is awarded by the Arbitral
Tribunal. In the case at hand, principal amount is Rs. 31,16,751/-
plus interest at the rate of 6% per annum (as reduced by the
Honourable Supreme Court to 6% per annum) will be the principal
sum adjudged. He argued that the Honourable Supreme Court has
nowhere stated that petitioner is entitled to interest at the rate of 6%
per annum on the principal sum adjudged. It is only observed that
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interest is reduced to 6% per annum. Penal interest at the rate of
10% per annum is awarded if the entire amount is not deposited
within three months. Therefore, Executing Court ought to have
determined principal sum adjudged as principal plus interest from 1 st
February, 1993 to the date of award i.e. 30 th April, 1998. In terms of
29 of Arbitration Act, 1940, petitioner will be entitled to interest on
this i.e. principal plus interest from the date of award till the date of
actual payment. He submitted that respondent has deposited Rs.
22,62.881/- less. Therefore, petitioner is entitled to receive Rs.
22,62,881/- with penal interest at the rate of 10% per annum. He
submitted that respondent should not have deducted tax at source.
He further submitted that respondent did not refund bank guarantee
and security deposits. He, therefore, prayed for allowing the petition.
He placed reliance on the cases of Hyder Consultation (UK) Limited
vs. Governor, State of Orissa (supra), Associated Cement Companies
Limited vs. Commissioner of Income Tax, Bihar reported in 1993 AIR
(SC) 2281 and Madhusudan Shrikrishna vs. M/s Emkay Exports and
others in Execution Application No. 187/2004 in Summary Suit No.
3835/2003 decided on 18th January, 2010.
14. Shri Surwase submitted that the Honourable Supreme
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Court has held that principal amount is Rs. 31,16,751/- and
therefore, interest is to be calculated on Rs. 31,16,751/- only. He
submitted that respondent has rightly calculated interest on
Rs.31,16,751/-. He submitted that calculation is correctly made and
interest could not be calculated against the directions of the
Honourable Supreme Court. He submitted that there was a clause in
the contract that interest would not be awarded on the amount
payable to the contractor. Therefore, the Arbitral Tribunal could not
have awarded interest. He further submitted that income tax was
deducted at source in terms of Section 194C of Income Tax Act. He
submitted that the Executing Court has correctly disposed of the
petition as fully satisfed. He, therefore, prayed for dismissal of the
petition.
15. Arbitration started by notice dated 3rd December, 1994.
Till the year 1996, Arbitration Act, 1940 was in force. Thereafter,
Arbitration and Conciliation Act, 1996 came to be promulgated. There
is no dispute between the parties that arbitration is governed by
Arbitration Act, 1940. Relevant date for commencement of
arbitration proceedings is service of notice by one party to the
another for appointment of Arbitrator. This has been held in the case
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of Milkfood Ltd. vs. M/s GMC Ice Cream (P) Ltd. reported in 2004 AIR
SCW 2235. In the case at hand, notice of arbitration was served on
the other party before promulgation of Arbitration and Conciliation
Act, 1996. In the award itself it is mentioned by the sole Arbitrator
that he was appointed by letter No. IRBC/82 to 85/LCB 11/'Claims
dated 26.10.95' dated 26th October, 1995. The Act of 1996 was
enforced on 25th January, 1996. Therefore, the arbitration is
governed by Arbitration Act, 1940.
16. The seminal issue is "which is the principal adjudged ?"
In terms of Section 29 of the Arbitration Act, 1940, the Court is
empowered to award interest from the date of decree on the principal
sum adjudged. Section 29 of the Act reads thus :-
29. Interest on awards - Where and in so far as
an award is for the payment of money the Court
may in the decree order interest, from the date of
the decree at such rate as the Court deems
reasonable, to be paid on the principal sum as
adjudged by the award and confrmed by the
decree.
This provision indicates that Court can award interest
from the date of the decree on the principal sum adjudged by the
award and confrmed by decree.
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17. Learned counsel Shri Katneshwarkar submitted that
the principal sum adjudged is amount of Rs. 31,16,751/- with
interest awarded by the sole Arbitrator from 1 st February, 1993 till the
date of award i.e. 30th April, 1998. To buttress his submission, he
placed reliance on the case of Hyder Consultation (UK) Limited vs.
Governor, State of Orissa (supra). The Honourable Supreme Court
held as under :-
"26. Section 31(7)(a) of the Act deals with grant of
pre-award interest while clause (b) of Section 31(7)
of the Act deals with grant of post-award interest.
Pre-award interest is to ensure that arbitral
proceedings are concluded without unnecessary
delay. Longer the proceedings, the longer would be
the period attracting interest. Similarly, post-award
interest is to ensure speedy payment in compliance
with the award. Pre-award interst is at the
discretion of the Arbitral tribunal, while the post-
award interst on the awarded sum is mandate of
the statute - the only difference being that of rate of
interest to be awarded by the Artibral Tribunal. In
other words, if the Arbitral Tribunal has awarded
post-award interest payable from the date of award
to the date of payment at a particular rate in its
discretion then it will prevail else the party will be
entitled to claim post-award interest on the
awarded sum at the statutory rate specifed in
clause (b) of Section 31(7) of the Act i.e. 18%. Thus,
there is a clear distinction in time period and the
intended purpose of grant of interest.
27. Section 31(7)(a) employs the words ".... the
Arbitral Tribunal may include in the sum for which
the award is made interest....". The words "include
in the sum" are of utmost importance. This would
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mean that Arbitral Tribunal decides to award
interest at the time of making the award, the
interest component will not be awarded separately
but it shall become part and parcel of the award.
An award is thus made in respect of a "sum" which
includes within the "sum" component of interest, if
awarded.
28. Therefore, for the purposes of an award, there
is no distinction between a "sum" with interest, and
a "sum" without interest. Once the interest is
"included in the sum" for which the award is made,
the original sum and the interest component
cannot be segregated and be seen independent of
each other. The interest component then loses its
character of an "interest" and takes the colour of
"sum" for which the award is made.
29. There may arise a situation where, the
Arbitral Tribunal may not award any amount
towards principal claim but award only "interest".
This award of interest would itself then become the
"sum" for which an award is made under Section
31(7)(a) of the Act. Thus, in a pre-award stage, the
legislation seeks to make no distinction between the
sum awarded and the interest component in it.
30. Therefore, I am inclined to hold that the
amount award under Section 31(7)(a) of the Act,
whether with interest or without interest,
constitutes a "sum" for which the award is made.
This decision of the Honourable Supreme Court cannot
be applied to the facts of this case as this decision is under
Arbitration and Conciliation Act, 1996. As already indicated, this
case is covered by Arbitration Act, 1940.
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18. The question that is to be answered is what is the
principal sum adjudged. Admittedly, the matter had gone upto the
Honourable Supreme Court. The Honourable Supreme Court has
adjudged the principal sum. The Honourable Supreme Court has
observed thus :-
"In the totality of these circumstances we do not
consider it proper to interfere with the award made
by the Arbitrator or the order passed by the High
Court affrming the same insofar as the principal
amount of Rs. 31,16,751/- is concerned. To that
extent the award as also the judgment of the High
Court are affrmed leaving the questions raised at
the Bar by learned counsel for the appellant as to
the procedure that may be followed in making such
references and the persons who can be nominated
as Arbitrators on a true and correct interpretation
of clause 52 open to be determined in an
appropriate case. Needless to say that the reasons
recorded by the High Court in affrming the award
made by the Arbitrator would also not constitute a
procedure for the future.
In the totality of these circumstances
therefore we are inclined to reduce the rate of
interest awarded by the Arbitrator and affrmed by
the High Court from 18% to 6% recokned from
01.02.1993. The award as also the judgment of the
High Court shall to that extent stand modifed with
the condition that in case the amount payable to
the respondent contractor is not paid within three
months from today, the contractor shall be entitled
to claim interest @ 10% on the principal amount of
Rs. 31,16,751/- w.e.f. the date the period of three
months expire."
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From these observations, it is clear that the Honourable
Supreme Court has adjudged principal sum to be Rs. 31,16,751/-.
The Honourable Supreme Court has also awarded penal interest at
the rate of 10% per annum on the principal sum of Rs. 31,16,751/-
with effect from the date the period of three months expires. From
these observations it can be seen that principal amount adjudged is
Rs. 31,16,751/-. Since the Honourable Supreme Court has
crystalised the principal sum adjudged, arguments of learned
counsel Shri Katneshwarkar that principal sum adjudged should be
amount of Rs.31,16,751/- plus interest from 1 st February, 1993 to 30th
April, 1998 cannot be accepted. Learned Executing Court,
therefore, did not commit any error in holding that the principal sum
adjudged is Rs. 31,16,751/-/.
19. The next point raised by the petitioner is that the
judgment debtor deducted 2% of the amount due towards tax
deducted at source. This deduction was made in terms of provisions
of Section 194C of the Income Tax Act.
20. Learned counsel Shri Katneshwarkar submitted that this
being a decretal amount, it partakes the character of a judgment
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debt. Once it acquires the status of judgment debt, tax cannot be
deducted at source on the amount of judgment debt. For this
purpose, he placed reliance on a the case of Islamic Investment
Company vs. Union of India and another reported in 2002(3) Mh.L.J.
555. Learned Single Judge of this Court held thus :
"9. ..... However, as observed by the Supreme
Court when such amounts becomes part of a
judgment debt they lose their original character
and assume the character of a judgment debt.
Once such an amount assumes the character of a
judgment debt, the decree passed by the Civil
Court must be executed subject only to the
deductions and adjustments permissible under the
Code of Civil Procedure. The learned Counsel for
the Food Corporation of India has not been in a
position to point out any provision under the
Income-Tax Act or under section 195 in particular
or under the Code of Civil Procedure where the
amount of the interest payable under a decree is
deductible from the decretal amount on the ground
that it is an interest component on which tax is
liable to be deducted at source.
From this decision, it is clear that once the amount
assumes character of judgment debt, deduction under Section 194 of
the Income Tax is not permissible.
21. Relying on this judgment, learned Single Judge of this
Court in the matter of Madhusudan Shrikrishna vs. M/s Emkay
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Exports and others (supra) held as under :-
"5. ..... Therefore, in my view, once a decree is
passed, it is a judgment and order of the court
which culminates into fnal decree being passed
which has to be discharged only on payment of the
amount due under said decree. The judgment
debtor, therefore, cannot, in my view, deduct tax at
source since it is an order and direction of the
court and, as such, would not be liable for penal
consequences for non-deduction of the tax due.
Tax, if payable, can be decided by the Income-tax
Offcer after the amount is paid to the decree
holder. Defendants, therefore, in my view, are not
entitled to withhold the payment on the pretext
that it has to be deducted as tax at source.
Defendants may, therefore, pay the said amount to
the plaintiff and for that purpose they would not
be liable for non-deduction of tax at source as that
issue has to be decided by the Income-tax
authorities and if tax is payable the same may be
paid by the plaintiff."
22. From these two decisions of this Court, it is clear that
deduction under Section 194C of Income Tax Act is not permissible
as it acquires the status of judgment debt. Once it becomes a
judgment debt, it does not fall within the purview of Section 194C of
the Income Tax Act. Therefore, the Executing Court has committed
error in allowing deduction at source at the rate of 2% per annum.
Petitioner is entitled to this amount. Learned Executing Court
committed error in recording fnding that petitioner can claim refund
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from Income Tax Department. In this view of the matter, petitioner is
entitled to the amount which was withheld by the judgment debtor.
23. Learned counsel Shri Katneshwarkar submitted that the
award of the Arbitrator indicates that the amount of security deposit
held by the judgment debtor - respondent shall be refunded to the
petitioner after adjudication of its claim and counter claim with
interest at the rate of 6% per annum from the date of encashment of
bank guarantee till the date of actual payment. There is nothing on
record to show that the amount of security deposit and encashed
bank guarantee has been refunded to the petitioner by the judgment
debtor. In view of this, petitioner is entitled to the same.
24. In view of what is discussed hereinabove, it is clear that
the learned Executing Court did not commit any error in rejecting the
claim of petitioner so far as principal sum adjudged is concerned.
However, it has committed error in granting deduction of tax at
source under Section 194C of the Income Tax Act. Petitioner is,
therefore, entitled to the same with interest at the rate of 6% per
annum till actual payment of the entire amount. Petitioner is also
entitled to the amount of security deposit and bank guarantee with
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interest at the rate of 6% per annum. In view of this, following order
is passed:-
ORDER
i) Petition is partly allowed.
ii) Claim of petitioner to the extent of
amount of Rs. 22,62,881/- with interest at the
rate of 10% per annum from 22 nd November,
2013 till actual realisation of the amount is
rejected.
iii) Petitioner is entitled to the amount of tax
deducted at source with interest at the rate of
6% per annum from 1st February, 1993 till
expiry of three months from the date of
judgment of the Honourable Supreme Court
and thereafter at the rate of 10% per annum till
actual payment of the entire amount.
iv) Petitioner is also entitled to bank
guarantee and security deposit of Rs.
2,08,000/- with interest at the rate of 6% per
annum from 1st February, 1993 till expiry of
three months from the date of judgment of the
Honourable Supreme Court till actual
realisation of the amount.
v) Parties to bear their own costs.
vi) Rule made absolute in above terms.
( M. G. SEWLIKAR )
Judge
dyb
