Bombay High Court Examines Challenge Under Section 34 of Arbitration Act to Arbitral Award Concerning Lease Agreement and Income Tax Depreciation Issues.

Petition under Section 34 of the Arbitration and Conciliation Act, 1996 seeking to set aside an arbitral award.

Petitioners (original respondents in arbitration) seek to set aside the arbitral award dated 19 July 2011 allowing claims of respondent and directing payment of Rs.15,76,68,108/- with interest.

The petitioners challenge the award on grounds that the arbitrator exceeded jurisdiction, misinterpreted the lease agreement, and failed to consider that the cause of action had disappeared due to remand of income tax proceedings.

The arbitrator had earlier rejected the petitioners' application for dismissal of claims, holding that the cause of action under the lease agreement remained despite remand of income tax assessment. The Income Tax Appellate Tribunal had set aside assessment orders and remanded the matter on 22 December 2005.

Whether the arbitral award is liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996?

Clause 2.2: That in the event of the Lessee being in arrears of such lease rentals, such arrears of lease rentals shall carry service charges at the rate of 30% per annum on the compounding basis with monthly rests from the due dates... Clause 2.4: The Lessor shall be entitled to vary the lease rental charges at any time during the continuance of this Agreement in the event of a change occurring on the basis of which the lease rentals charged hereby are computed... Clause 20.9: Any disputes arising under this Lease the same shall be referred to an Arbitrator to be nominated by the Lessor and the Award of the Arbitrator shall be final and binding on all the Parties concerned. The venue of such Arbitration shall be in Bombay. the learned arbitrator held that the reference to the arbitration made by the respondents was not based only on the order dated 1st April, 1998 but on their rights under the lease agreement and the lease summary schedule to increased rentals on dis-allowance of depreciation the respondents claimed 50% depreciation on the said equipments claiming to be owners thereof. By an order dated 31st March, 1997, the Deputy Commissioner of Income Tax disallowed the depreciations claimed by the respondents.

On 7 February 1994, lease agreement executed between Tata Finance (now Tata Motors) and Gujarat Electricity Board (predecessor of petitioners) for lease of equipment for 72 months. Lease rentals paid from April 1994. Respondents claimed depreciation in income tax returns for assessment years 1994-95 and 1995-96, which were disallowed by Deputy Commissioner of Income Tax on 31 March 1997 and 31 March 1998 respectively. Appeals dismissed by Commissioner of Income Tax (Appeals) on 28 February 2001 and 16 February 2001. Further appeals filed on 10 May 2001 before Income Tax Appellate Tribunal. Lease agreement expired in February 2000. On 11 November 2000, respondents raised debit notes on petitioners. On 26 March 2004, petitioners paid residual value of equipment. On 17 May 2005, respondents sent demand notice invoking arbitration under clause 20.9 for Rs.16,29,41,781/- with interest. On 14 July 2005, respondents appointed sole arbitrator. Petitioners disputed liability. Respondents filed statement of claim on 9 December 2005. On 22 December 2005, ITAT set aside assessment orders and remanded matter. In 2009, petitioners applied for dismissal of claim arguing cause of action disappeared due to remand; application rejected on 4 February 2009, arbitrator holding cause of action under lease agreement remained. Arbitrator rendered award on 19 July 2011 directing payment of Rs.15,76,68,108/- with interest. Petitioners filed present petition under Section 34 challenging the award.

• Arbitration and Conciliation Act, 1996: 34
• Income Tax Act, 1961: Section 32 (depreciation)