Dharmaratnakara Rai Bahadur & Ors. v. Bhaskar Raju Brothers & Ors

Bench: Hon’ble The Justice, B.R. Gavai, Surya Kant

Facts:

Appellant No. 1 – A charitable trust – and Respondent No. 1 entered into a lease deed agreement for 38 years for constructing a multipurpose auditorium on a piece of land owned by the appellant. For the same, refundable interest-free security deposit of Rs. 55,00,000/- was to be paid by the respondent. The respondent had also undertaken the responsibility of the eviction of tenants from the appellant’s land. A subsequent yet similar lease deed was executed between the parties in 1997. After some insignificant progress, certainly failed renegotiations took place between the parties. Except for paying initial amount of Rs. 25 lakhs towards the security deposit, the balance amount towards the security deposit was not paid by the respondents. Owing to the same, the appellants filed an Original Suit in the Bangalore City Civil Court in 2010. The Court granted an interim order of maintaining the status quo, and the same was challenged by the respondents.

After contesting for more than 2 years, in 2013 the respondents invoked the arbitration clause in the lease deed and issued a notice to the appellants. Subsequently, they filed a petition under Section 11(6) of the Arbitration Act before the High Court of Karnataka. The Court referred the matter to the Registrar (Judicial), who decided that the document in question was a lease deed and not an agreement to lease and therefore, directed the Respondent Nos. 1 and 2 to pay the deficit stamp duty and penalty of Rs. 1,01,56,388/- .

The respondents further filed their objections before the Karnataka High Court, which, without consideration of the Registrar’s report, passed the impugned order allowing the petition filed by the respondent Nos. 1 and 2 and invoking power under Section 11(6) of the Arbitration Act, appointed an Arbitrator to decide the dispute between the appellants and the respondents. Being aggrieved thereby, the appellants went before the Supreme Court.

Issues:

The main issues within the case were:

1. Whether the deed was a lease deed or an agreement to lease.

2. Whether it was insufficiently stamped.

3. If so, whether the Karnataka High Court was right in relying on an insufficiently stamped deed.

4. Whether clause 36 in the lease deed dated 12.3.1997 could be acted upon to enforce the arbitration clause contained therein.

Judgment:

The appeal was allowed. The impugned judgment and the order passed by the High Court of Karnataka was quashed and set aside. The petition/application filed by the respondents under Section 11 of the Arbitration Act was rejected. There was no order as to costs.

Ratio:

The Court observed that admittedly, both the lease deeds were neither registered nor sufficiently stamped as required under the Karnataka Stamp Act, 1957. Further, as per the Registrar’s report, the document of 1997 executed entered into between the parties was a lease deed and not an agreement to lease.

The Court placed reliance on its judgment in the case of SMS Tea Estates Private Limited vs. Chandmari Tea Company Private Limited 1 [(2011) 14 SCC 66] and held that when a lease deed or any other instrument is relied upon as containing the arbitration agreement, the Court is required to consider at the outset, whether the document is properly stamped or not. It was also held that even when an objection on that behalf is not raised; the Court must consider the issue.

It was further held, that if the Court concludes, that the instrument is not properly stamped, it should be impounded and dealt with, in the manner specified in Section 38 of the Stamp Act, 1899. It has also been held, that the Court cannot act upon such a document or the arbitration clause therein. However, if the deficit duty and penalty is paid in the manner set out in Section 35 or Section 40 of the Stamp Act, 1899, the document can be acted upon or admitted in evidence. Thus, the Court concluded that the lease deed containing the arbitration clause which is required to be duly stamped, was not sufficiently stamped and though the Registrar (Judicial) had directed the respondent Nos. 1 and 2 to pay deficit stamp duty and penalty the respondents failed to do so. Hence, the High Court erred in relying on the said lease in its judgment.

On account of invoking the Arbitration clause, the Court duly noted that the respondents were seeking to invoke the clause only after the appellants had filed a suit for injunction against the respondents, which they had contested for 2 years 3 months. The respondents were seen to be taking contradictory stands – treating the document as a lease deed before the City Civil Court, and as an agreement for developing the property after the property is made vacant by evicting the tenants – with respect to clause 5 of the document, which states, “The tenure of the lease shall be 38 years commencing from the date of signing of this lease deed.” It became clear from the same that the lease deed was for 38 years after its signing.

The Court further noted that the respondents had taken on the responsibility of obtaining and securing a vacant position of the land as well as sanctioning the building plans. They had also agreed on the non-effect of any tenant’s approach to the Court of law on the lease deed’s time period. Thus, as per the Court, no terms of the lease clarified the document as an agreement which was to be registered only after all the tenants were evicted and the building plans were sanctioned. Overall, the Court held that the High Court had erred in relying on the lease deed which was found to be insufficiently stamped and in brushing aside the report of the Registrar (Judicial) when the respondents had failed to pay the insufficient stamp duty and penalty as determined by the Registrar (Judicial) of the High Court of Karnataka.

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