The Bombay High Court has affirmed that an arbitral award computing a partner’s share upon dissolution of a firm based on verifiable sales turnover, rather than withheld financial records, is not perverse or illegal - especially when the opposing party deliberately abandons proceedings and refuses to produce audited accounts. This judgment reinforces the principle that parties cannot frustrate arbitration and later challenge outcomes on grounds they themselves caused.
Background & Facts
The Dispute
The dispute arose between two partners of M/s Saras Developers, a property development firm established under a Partnership Deed dated May 15, 1990. Alka Chandewar held an 80% share, while Shamshul Ishrar Khan held a 20% share. The firm’s primary asset was land in Malad, Mumbai, known as Gambers Estate, on which three residential buildings - Sarala Sadan and Dr. Gambers Residency Wings A, B, and C - were constructed and sold between 1994 and 2006.
Key Facts
- The last undisputed Partnership Deed was dated October 22, 1997, confirming Alka’s 80% and Khan’s 20% shares.
- Between 2002 and 2003, four deeds (First 2002 Deed, Second 2002 Deed, 2003 Deed, and Retirement Deed) purported to dilute Alka’s share to 25% and retire her, replacing her with Khan, Bathia, and Sovind.
- These deeds were never registered with the Registrar of Firms; the Registrar flagged discrepancies in Alka’s signature and address.
- Alka’s signature on the disputed deeds was later found to be forged, as confirmed by the Sessions Court and upheld by this Court.
- Alka’s husband, Sovind, filed for divorce on November 30, 2005, and Alka revoked his power of attorney dated January 6, 1994, on May 3, 2005.
- Alka discovered the fraudulent deeds only after obtaining documents via RTI Act on July 4, 2005.
- On April 24, 2008, Alka issued a Dissolution Notice invoking arbitration under the 1990 Partnership Deed.
- Khan filed no response to the Dissolution Notice and ceased participation in arbitration after four years.
- Khan claimed partnership records were destroyed in Mumbai floods of July 2005 and filed a police complaint on August 3, 2005.
- Alka’s share of profits was claimed as Rs. 28.39 crores, representing 80% of total sales proceeds.
Procedural History
- May 15, 1990: Original Partnership Deed executed.
- October 22, 1997: Last valid Partnership Deed executed, confirming Alka’s 80% share.
- July 4, 2005: Alka obtained documents via RTI Act, revealing fraudulent deeds.
- May 3, 2005: Alka revoked Sovind’s power of attorney.
- November 30, 2005: Divorce petition filed by Sovind.
- April 24, 2008: Dissolution Notice issued by Alka; arbitration invoked.
- September 22, 2008: Bombay HC dismissed Alka’s Section 9 petitions.
- October 24, 2008: Divorce decree granted.
- June 18, 2010: Sole Arbitrator appointed by Bombay HC.
- October 7, 2010: Arbitral Tribunal ordered Khan to disclose flat sales and refrain from alienating assets.
- October 14, 2010: Khan transferred five flats in violation of Tribunal’s order.
- March 26, 2012: Tribunal directed Khan to produce books of accounts, bank details, and asset disclosures within four weeks; ordered bank guarantee of Rs. 1.25 crores.
- September 2, 2013: Supreme Court dismissed Khan’s SLP, upholding Tribunal’s interim orders.
- December 8, 2014: Arbitrator dismissed Khan’s recusal application; Khan ceased participation.
- March 7, 2015: Impugned Arbitral Award passed: Alka entitled to Rs. 7,39,72,584 (80% share) with 10% interest from August 30, 2010.
- March 11, 2026: Judgment reserved by Bombay HC.
- April 2, 2026: Judgment pronounced.
The Parties' Positions
Alka’s Position: She remained an 80% partner until dissolution on April 24, 2008. The 2002 - 2003 deeds were forged. Khan deliberately withheld financial records, including audited accounts, balance sheets, and profit and loss statements. The Arbitral Tribunal’s computation based on registered sale deeds was reasonable and conservative.
Khan’s Position: Alka’s claim was barred by limitation. Her share had been lawfully diluted to 33.33% by 2003, and she retired in February 2003. The Arbitral Tribunal ignored vital evidence: Income Tax Returns, flood-damaged records, and the 1997 Retirement Deed. The computation of Rs. 7.39 crores was perverse and ignored actual costs and past distributions.
Relief Sought
In Section 34 Petition: Khan sought setting aside of the Impugned Award on grounds of patent illegality and ignoring vital evidence.
In Contempt Petition: Alka sought punishment for wilful disobedience of interim orders, including imprisonment and fine.
The Legal Issue
The central question was whether an arbitral award computing a partner’s share upon dissolution based on sales turnover, when audited financial records are deliberately withheld, constitutes patent illegality or perversity under Section 34 of the Arbitration and Conciliation Act, 1996.
Arguments Presented
For the Appellant/Petitioner (Khan)
Khan contended that the Arbitral Tribunal ignored vital evidence, including Income Tax Returns showing profit distributions to Alka up to Assessment Year 2003 - 04, and the 1997 Retirement Deed which stated accounts were settled. He argued that the Tribunal’s use of a flat 30% cost deduction from total sales was arbitrary and ignored actual construction costs, TDR expenses, and tenant rehabilitation costs disclosed in his affidavit. Khan further claimed the claim was barred by limitation under Section 43 of the Act and Section 3 of the Limitation Act, as Alka’s claim related to profits earned before April 24, 2005. He asserted that the Tribunal’s failure to apply Section 48 of the Indian Partnership Act, 1932, rendered the award illegal.
For the Respondent/State (Alka)
Alka argued that Khan’s non-participation after four years of arbitration amounted to deliberate frustration of proceedings. The Income Tax Returns were not audited financial statements and could not override the commercial reality of the firm’s operations. Khan’s claim of flood-damaged records was implausible, as he filed a police complaint yet never produced any evidence of destruction. The Tribunal’s use of registered sale deeds - confirmed by Khan himself as a matter of record - was a reasonable best-judgment assessment. The claim for dissolution and accounts was governed by Article 5 of the Limitation Act, which runs from the date of dissolution, not the date of accrual. Khan forfeited his right to challenge the award by refusing to produce books of accounts.
The Court's Analysis
The Court found Khan’s conduct to be a deliberate attempt to obstruct the arbitral process. His withdrawal after four years of participation, refusal to produce audited financial statements, and violation of interim orders - including transferring flats in breach of the October 7, 2010, and March 26, 2012, directions - were not mere procedural lapses but acts of contumacious defiance.
"It would not lie in the mouth of Khan, who undermined justice delivery in the matter by refraining from producing the audited financial statements and books of accounts... to try to pick holes in the approach."
The Court emphasized that tax returns are compliance documents, not commercial records. The Tribunal was under no obligation to rely on them when the party in possession of the true books - Khan - refused to produce them. The Tribunal’s use of registered sale deeds, confirmed by Khan’s own admission that sales figures were a matter of record, was a legitimate and conservative method of estimation.
The Court rejected Khan’s limitation argument, holding that a claim for dissolution and rendering of accounts is governed by Article 5 of the Limitation Act, which runs from the date of dissolution - not from the date of accrual of profits. The notion that a partner loses rights to profits earned more than three years prior to dissolution is legally untenable.
"Every year, every partner would be considered to have lost the right to make any claims to accruals that have earned for the period prior to the preceding three years. This would be absurd."
The Court also dismissed Khan’s claim that the 1997 Retirement Deed settled accounts, noting that such settlement applied only to the retiring partner (Ramesh), not to the accumulated profits of the continuing partnership. The Tribunal’s application of a 30% cost deduction was not arbitrary but a prudent adjustment to account for construction expenses, given the absence of actual books.
The Court concluded that the Arbitral Tribunal’s findings were neither perverse nor illegal. The award was a reasonable best-judgment assessment forced upon the Tribunal by Khan’s refusal to cooperate. The Court declined to act as an appellate forum and reaffirmed the limited scope of judicial review under Section 34.
The Verdict
The Section 34 Petition was dismissed. The Impugned Arbitral Award dated March 7, 2015, was upheld. Khan was directed to deposit the entire awarded amount of Rs. 7,39,72,584, along with interest at 10% per annum from August 30, 2010, until the date of deposit, with the Registry of the Bombay High Court within six weeks. Failure to comply would result in the Contempt Petition proceeding to framing of criminal charges. Costs in the Section 34 Petition and Contempt Petition were deferred for consideration after compliance.
What This Means For Similar Cases
Withholding Financial Records Forfeits Right to Challenge Arbitral Awards
- Practitioners must advise clients that deliberate non-production of books of accounts, balance sheets, or profit and loss statements during arbitration forfeits the right to later challenge the award on grounds of inaccurate computation.
- Tribunals are empowered to rely on verifiable external records (e.g., registered sale deeds, RTI-obtained data) to make best-judgment assessments when parties obstruct disclosure.
- Courts will not entertain challenges based on evidence that was within the respondent’s control but never produced.
Limitation in Partnership Dissolution Claims Runs from Dissolution Date
- Claims for dissolution and rendering of accounts are governed by Article 5 of the Limitation Act, not by the date of profit accrual.
- A partner’s right to claim accumulated profits survives beyond three years prior to dissolution.
- Arguments that limitation bars claims for profits earned more than three years before arbitration are legally invalid in partnership dissolution contexts.
Arbitral Tribunals May Use Conservative Estimations When Records Are Withheld
- Tribunals may apply reasonable, conservative deductions (e.g., 30% for construction costs) when actual financials are unavailable due to party obstruction.
- Such estimations are not perversity but a necessary tool to prevent injustice caused by bad faith conduct.
- Courts will uphold such awards unless the methodology is demonstrably irrational or arbitrary.
Contempt in Arbitration Is Not a Technicality - It Is a Serious Breach
- Wilful disobedience of interim orders under Section 17 of the Arbitration Act constitutes criminal contempt.
- Courts may suspend punishment contingent on full compliance with the arbitral award.
- An apology alone is insufficient; actual deposit of the awarded amount is required to purge contempt.
