Case Note & Summary
The dispute arose from a lease agreement executed in 1997 between Borosil Glass Works Limited (lessee/petitioner) and Tata Motors Limited (lessor/respondent) for Type I and Type II equipment, with the respondent entitled to claim depreciation of 25% and 100% respectively under the Income Tax Rules. The respondent claimed 100% depreciation on Type II equipment in its income tax returns for assessment years 2000-01 and 2001-02. The Deputy Commissioner of Income Tax disallowed the depreciation claims by orders dated 28 March 2003 and 31 March 2004. The respondent appealed these disallowances to the Commissioner of Income Tax (Appeals) and informed the petitioner about the disallowance in September 2003. The petitioner provided relevant documents in November 2005. On 21 July 2005, the respondent raised debit notes aggregating Rs. 26,30,662 being the amount disallowed, which the petitioner disputed as not payable under the lease agreement. On 13 February 2007, the respondent filed a statement of claim before the arbitral tribunal seeking creation of an indemnity fund, and later amended it to include a money claim. The arbitral tribunal, by award dated 18 June 2009, directed the petitioner to create a fund of Rs. 26,30,662 with interest at 30% per annum from 21 July 2005 to 13 February 2007 and further interest at 10% per annum from 14 February 2007 until deposit, and to keep the amount in a fixed deposit until disposal of income tax appeals. The tribunal did not grant a money decree because the appeals were pending. The petitioner challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 before the Bombay High Court, contending that the indemnity clause (Clause 14) did not cover losses from disallowed depreciation and that the claim for creation of a fund was premature as the respondent's liability was not crystallized. The petitioner relied on a Bombay High Court judgment in Gujarat Urja Vikas Nigam Ltd. v. Tata Motors Ltd., which had interpreted an identical clause to exclude such indemnity. The court heard arguments, but the final decision is not available in the provided text.
Headnote
A) Arbitration - Challenge to Arbitral Award - Grounds under Section 34 - Arbitration and Conciliation Act, 1996, Section 34 - The petition challenged the arbitral award directing the lessee to create a fund in favor of the lessor to indemnify for disallowed depreciation under income tax law - The petitioner argued that the indemnity clause did not cover such losses and that the award was premature because the income tax appeals were pending (Paras 1, 18).
B) Contract Law - Interpretation of Indemnity Clause - Scope of Clause 14 of Lease Agreement - Indian Contract Act, 1872 - The lessee contended that clause 14 covered only physical loss or third-party claims, not tax depreciation disallowance - Reliance placed on Gujarat Urja Vikas Nigam Ltd. v. Tata Motors Ltd. where an identical clause was interpreted to exclude such claims (Paras 18, 19).
Issue of Consideration
Whether the arbitral award directing creation of an indemnity fund for disallowed depreciation was patently illegal and beyond the scope of the indemnity clause in the lease agreement, and whether such claim was maintainable when the income tax appeals were still pending.
Law Points
- Interpretation of indemnity clause in lease agreement
- maintainability of claim for creation of fund when liability not crystallized
- applicability of precedent on identical clause
Case Details
2015 LawText (BOM) (01) 39
Arbitration Petition No. 1005 of 2009
Mr. Pratik Seksaria, Mr. Chakrapani Mishra, Ms. Meghna Rajdhyaksha, Mr. Sairam Subramaniam i/by M/s. Khaitan & Co. for petitioner; Mr. Simil Purohit, Ms. Heta Shah i/by MDP & Partners for respondent
Borosil Glass Works Limited
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Nature of Litigation
Petition under Section 34 of the Arbitration and Conciliation Act, 1996 challenging an arbitral award.
Remedy Sought
Petitioner sought setting aside of the arbitral award dated 18 June 2009 which directed the petitioner to create a fund of Rs. 26,30,662/- plus interest in favor of respondent as indemnity for disallowed depreciation.
Filing Reason
The arbitral award was challenged on grounds that the indemnity clause did not cover such losses and that the liability had not crystallized due to pending income tax appeals.
Previous Decisions
Arbitral tribunal passed award on 18 June 2009 allowing claim for creation of fund but not money decree; counterclaim of petitioner rejected.
Issues
Whether the arbitral award was patently illegal for interpreting clause 14 of the lease agreement to cover indemnity for disallowed income tax depreciation?
Whether the claim for indemnity and creation of fund was maintainable when the income tax appeals were pending and the respondent's liability was not crystallized?
Submissions/Arguments
Petitioner argued that clause 14 of the lease agreement did not provide for indemnity in case of disallowance of depreciation by tax authorities, as it only covered loss or seizure of equipment, third-party claims, etc.
Petitioner relied on the Bombay High Court judgment in Gujarat Urja Vikas Nigam Ltd. v. Tata Motors Ltd., which interpreted an identical clause 14 to exclude such claims.
Petitioner contended that the claim for creation of a fund was premature because the income tax appeals were pending and the respondent's liability was not finally determined.
Judgment Excerpts
Clause 2.2 – Without affecting lessor's right the lessee's obligation to pay the lease rentals specified arrears of such lease rentals, such arrears of lease rentals shall carry service charges at the rate of 30% per annum on the compound basis with monthly rests from the due dates specified in Supplementary Lease Schedules attached/to be attached till date of actual payment.
Clause 14. The Lessee shall indemnity and keep indemnified the Lessor, at all times against any loss or seizure of the Equipment under distress, executing or other legal process or destruction or damage to the Equipment by fire, accident or other cause, from any claim or demand arising out of the storage, installation, use or operation of the Equipment or any risk of liability for death or loss of limb of any person whether employee of the Lessee or of third party and hold the Lessor harmless, against all losses, damages, claims, penalties, expenses, suits or proceedings of whatsoever nature made, suffered or incurred consequent thereupon...
By this petition, filed under section 34 of the Arbitration and Conciliation Act, 1996, petitioner has impugned the arbitral award rendered by the arbitral tribunal on 18th June, 2009 directing the petitioner to indemnify the respondent by creation of a fund under the control of respondent and deposit the sum of Rs.26,30,662/- and Rs.58,170/- together with interest on the sum of Rs.26,30,662/- at the rate of 30% p.a., from 21st July, 2005 till 13th February, 2007 and further interest on the sum of Rs.26,30,662/-, at the rate of 10% from 14th February, 2007 till actual deposit.
Procedural History
On 19 December 1997, parties executed a lease agreement (No. LS-361/97-98) with supplementary schedules for Type I and Type II equipment, with respondent entitled to claim 25% and 100% depreciation respectively. Respondent claimed depreciation in income tax returns for assessment years 2000-01 and 2001-02. By orders dated 28 March 2003 and 31 March 2004, the Deputy Commissioner of Income Tax disallowed the depreciation on Type II equipment. Respondent filed appeals before the Commissioner of Income Tax (Appeals). In 2003, respondent informed petitioner of the disallowance; petitioner provided documents in November 2005. On 21 July 2005, respondent issued debit notes totaling Rs. 26,30,662, which petitioner disputed. On 13 February 2007, respondent filed a statement of claim before the arbitral tribunal seeking creation of an indemnity fund. Petitioner filed counterclaim. The arbitral tribunal passed an award on 18 June 2009 directing petitioner to create a fund of Rs. 26,30,662 plus interest and costs of Rs. 5 lakhs. Aggrieved, petitioner filed the present arbitration petition under Section 34 of the Arbitration and Conciliation Act, 1996 before the Bombay High Court.
Acts & Sections
- Arbitration and Conciliation Act, 1996: 34
- Companies Act, 1956:
- Companies Act, 1913:
