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Monday, April 5, 2021

Judgment / Award Debtor not entitled to deduct TDS on Awarded Amount : Delhi High Court Rules

Justice Vibhu Bakhru
Judge, Delhi High Court
The Delhi High Court recently in Voith Hydro Ltd. & Ors. v. NTPC Ltd. [OMP (ENF.) (COMM.) 64/2018] decided an interesting question as to whether a judgment / award debtor is entitled to deduct TDS on the amount awarded by an arbitral tribunal, and whether the deposit of such amounts with the Income Tax Authorities constituted a discharge of their debts under the award. While holding that no tax is to be deducted on the awarded amounts, the Court held as under:

"24. As is apparent from the above, the following three principal questions fall for consideration before this Court:
(i) Whether there is any binding agreement between the parties whereby they have agreed that the amounts awarded in foreign currency would be computed at the exchange rate as prevalent on 15.09.2017? If not, the exchange rate to be applied for discharge of the amounts awarded in foreign currency.

(ii) Whether it was open for NTPC to deduct TDS on the awarded amounts and whether the deduction of the said amount and deposit of the same with the Income Tax Authorities constitutes a discharge of the amounts awarded to the aforesaid extent?

(iii) Whether Voith is entitled to charges for extending the Bank Guarantees, as claimed?

Thursday, April 1, 2021

Order Refusing to condone delay under Section 34 of the Arbitration & Conciliation Act, 1996 would be Appealable under Section 37 (1) (c) of the Act

A 3 Judge Bench of the Supreme Court recently in Chintels India Ltd. v. Bhayana Builders P. Ltd. [CA No. 4028 of 2020] has examined the legal question whether an appeal under section 37(1)(c) of the Arbitration Act, 1996 would be maintainable against an order refusing to condone delay in filing an application under section 34 of the Arbitration Act, 1996 to set aside an award. Answering the question of law in the affirmative, the Bench held as under:

5. Having heard learned counsel for the parties, it is important to first set out section 37 of the Arbitration Act, 1996 which is as follows:

“37. Appealable orders.—(1) Notwithstanding anything contained in any other law for the time being in force, an appeal shall lie from the following orders (and from no others) to the Court authorised by law to hear appeals from original decrees of the Court passing the order, namely:—
(a) refusing to refer the parties to arbitration under section 8;
(b) granting or refusing to grant any measure under section 9;
(c) setting aside or refusing to set aside an arbitral award under section 34.
(2) Appeal shall also lie to a court from an order of the arbitral tribunal—
(a) accepting the plea referred to in sub-section (2) or sub- section (3) of section 16; or
(b) granting or refusing to grant an interim measure under section 17.
(3) No second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or takeaway any right to appeal to the Supreme Court.”

6. Since we are directly concerned with section 37(1)(c), it is important to advert to the language of section 34 as well. Section 34(1) reads as follows:

“34. Application for setting aside arbitral award.— (1) Recourse to a Court against an arbitral award may be made  only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).”

7. Section 34(2) and (2A) then sets out the grounds on which an arbitral award may be set aside. Section 34(3), which again is material for decision of the question raised in this appeal, reads as follows:

“(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:
Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.”

Retrospective Operation of the Benami Laws : The Confusion Remains!

Author : Saurabh Seth
The Benami Transactions (Prohibition) Act, 1988 (“Original Act”) was enacted in the year 1988 with the object of prohibiting benami transactions. A benami transaction in simple terms refers to a transaction where a person actually purchasing a property does not do so in his own name, and does so in the name of another person, who is merely a ‘name lender’ or a ‘benamidar’. Such person who pays consideration is commonly referred to as the ‘beneficial owner’.

The Original Act contained a mere 9 sections, including the power of acquisition of such benami property by an appropriate authority and also powers to prosecute offenders. Although the Original Act empowered the Central government to make rules under Section 8, no such rules were ever framed. Therefore, the Original Act was widely regarded as a “toothless” legislation, which though empowered the state to confiscate properties, was rarely used and most importantly, no procedure, rules or mechanism was prescribed to give effect to the provisions of the Original Act.

With the change of dispensation in Parliament, the then Finance Minister, Late Mr. Arun Jaitley, sought to “give teeth to” this “toothless” legislation by introducing the Benami Transactions (Prohibition) Amendment Act, 2016. The amendment was passed into law and came into force on 01.11.2016. The amended legislation was re-christened as the Prohibition of Benami Property Transactions Act, 1988 (“New Act”) and sought to amend the Original Act by adding as many as 72 sections and proper Rules for the effective implementation of the New Act.

But why did the government opt for amending the Original Act instead of enacting a fresh legislation? The reason is not far to see, and was explained by Late Mr. Jaitley in parliament in answer to a question where he categorically stated that:

“Anybody will know that a law can be made retrospective, but under Article 20 of the Constitution of India, penal laws cannot be made retrospective. The simple answer to the question why we did not bring a new law is that a new law would have meant giving immunity to everybody from the penal provisions during the period 1988 to 2016 and giving a 28 years immunity would not have been in larger public interest, particularly if large amounts of unaccounted and black money have been used to transact those transactions” 

But the question which arises is whether such a course is legally permissible? Can the legislature do something indirectly which it could not have done directly? The answer in my view is that such a course could not have adopted, especially given the strict provisions of the New Act, which have the effect of not only depriving a person of his property but also of initiation of criminal prosecution against a person found guilty under the New Act.

The Hon’ble Supreme Court has repeatedly held that amendment to a statute can be implemented retrospectively, however such retrospective amendment cannot defeat the substantive rights of a party. It is well recognized that generally amendments to procedural laws may be retrospective, but when substantive rights of parties are affected, can such laws be implemented retrospectively?

The New Act was notified vide Notification No. 98/2016 dated 25.10.2016, which appointed the 1st day of November, 2016 as the date on which the provisions shall come into force.

Section 1(3) remains untouched

Interestingly, the New Act keeps Section 1(3) of the Original Act untouched, which provided that:
“(3) The provisions of sections 3, 5 and 8 shall come into force at once, and the remaining provisions of this Act shall be deemed to have come into force on the 19th day of May, 1988.”
The aforesaid date of 19.05.1988 relates to the coming into force of the Presidential Ordinance whereas the date of 05.09.1988 relates to the date when the Original Act was brought into force. It is for this reason that Section 1(3) reads that Sections 3, 5 and 8 shall come into force at once.

In the New Act, Section 1(3) has been retained in its original form even though there are substantial amendments to Section 3, 5 and 8. The said provision creates an anomalous situation with the use of the words “shall come into force at once”. What date does this relate to is something that requires deep consideration particularly in view of the substantive amendments brought about to the aforesaid sections. A literal reading of the words “shall come into force at once” lends credence to the interpretation that the amendments to the said Section shall be effective only post 01.11.2016, thus making the provision prospective in its operation.

Substantive amendments in the New Act

Substantive changes have been made to various provisions of the Original Act, and there is no doubt that such amendments are not mere procedural amendments. In fact, substantive changes affecting the vital rights of persons have been made to the New Act, thus warranting a prospective operation. Some of these substantive changes are:
  • Section 2(9) of the New Act expands the definition of “Benami Transaction” and brings within its fold certain transactions, which were hitherto not considered Benami. This certainly qualifies as a substantive change of the scope and operation of the New Act.
  • Section 3 of the New Act seeks to make a distinction between transactions entered into prior to the New Act, by providing for a lesser punishment under Section 3(2) for past acts and a higher punishment under Chapter VII of the New Act for acts done after 01.11.2016. Such cases are covered by Section 3(3) of the New Act. This also leads us to the inevitable conclusion that the applicability of the new regime and punishment thereunder is only prospective.
  • Section 5 read with Chapter IV of the New Act provide for attachment, adjudication and confiscation of the properties under the New Act. Under the Original Act, though the provision for confiscation was present, however, the same was to be undertaken in terms of the procedure and rules prescribed. It is an admitted position that no rules were ever framed or brought into force for the said purpose.
  • Thus even though the substantive provision for confiscation was present under the Original Act, the absence of rules framed thereunder would certainly militate against the prescription of the detailed procedure now laid down [and rules framed] under the New Act. This, some may argue, is directly contrary to Article 20 of the Constitution of India, 1950 as Section 5 (without rules) of the Original Act was the “law in force” for transactions prior to 01.11.2016.
  • Even Chapter IV of the New Act tends to disturb various vested rights of persons, as it gives the Initiating Officer under the New Act the power to provisionally attach properties even before adjudication proceedings.
  • Various levels of the adjudication have been introduced under the New Act, which never existed earlier. Though these changes may be termed as “procedural”, the fact remains that creating layers of appeals, which were non existent earlier, certainly represents substantive amendment affecting vested rights of parties.
  • Chapter VII of the New Act prescribes penalties, which were non existent under the Original Act. These penalties cannot by any stretch of imagination be applied retrospectively, and any such misadventure would fall foul of Article 20 of the Constitution of India, 1950.
Interpretation by the High Courts

The question of whether the amendments brought about in the form of the New Act are to be applied prospectively or retrospectively have vexed various High Courts throughout the Country. So far there is unanimity of judicial opinion [barring one] that the provisions of the New Act are to be applied prospectively. Some of these decisions are being noted hereunder:

1. Joseph Isharat v. Rozy Nishikant Gaikwad 2017 (5) ABR 706, where the Bombay High Court held:
“7. What is crucial here is, in the first place, whether the change effected by the legislature in the Benami Act is a matter of procedure or is it a matter of substantial rights between the parties. If it is merely a procedural law, then, of course, procedure applicable as on the date of hearing may be relevant. If, on the other hand, it is a matter of substantive rights, then prima facie it will only have a prospective application unless the amended law speaks in a language “which expressly or by clear intention, takes in even pending matters.”. Short of such intendment, the law shall be applied prospectively and not retrospectively.
“8. As held by the Supreme Court in the case of R. Rajagopal Reddy vs. Padmini Chandrasekharan, Section 4 of the Benami Act, or for that matter, the Benami Act as a whole, creates substantive rights in favour of benamidars and destroys substantive rights of real owners who are parties to such transaction and for whom new liabilities are created…These observations clearly hold the field even as regards the present amendment to the Benami Act. The amendments introduced by the Legislature affect substantive rights of the parties and must be applied prospectively.”
[Note: SLP [C] No. 12328 of 2017 against this judgment was dismissed by the Hon’ble Supreme Court by its order dated 28.04.2017]

2. Mangathai Ammal [Died] through LRs & Ors. Vs. Rajeshwari & Ors. [2019 SCC OnLine SC 717] dated 09.05.2019, where Hon’ble Supreme Court observed:
“12. It is required to be noted that the benami transaction came to be amended in the year 2016. As per Section 3 of the Benami Transaction [Prohibition] Act 1988, there was a presumption that the transaction made in the name of the wife and children is for their benefit. By Benami Amendment Act, 2016, Section 3 [2] of the Benami Transaction Act, 1988 the statutory presumption, which was rebuttable, has been omitted. It is the case on behalf of the respondents that therefore in view of omission of Section 3[2] of the Benami Transaction Act, the plea of statutory transaction that the purchase made in the name of wife or children is for their benefit would not be available in the present case. Aforesaid cannot be accepted. As held by this Court in the case of Binapani Paul [supra] the Benami Transaction Act would not be applicable retrospectively?”
3. Niharika Jain V. Union of India & Ors. 2019 SCC On Line Raj 1640, dated 12.07.2019, wherein the Rajasthan High Court observed:
“93. … this Court has no hesitation to hold that the Benami Amendment Act, 2016, amending the Principal Benami Act, 1988, enacted w.e.f. 1st November, 2016, i.e. the date determined by the Central Government in its wisdom for its enforcement; cannot have retrospective effect.
94. It is made clear that this Court has neither examined nor commented upon merits of the writ applications but has considered only the larger question of retrospective applicability of the Benami Amendment Act, 2016 amending the original Benami Act of 1988. Thus, the authority concerned would examine each case on its own merits keeping in view the fact that amended provisions introduced and the amendments enacted and made enforceable w.e.f. 1st November, 2016; would be prospective and not retrospective.”
4. M/s Ganpati Delcom Private Limited v. Union of India & Anr. (APO no. 8 of 2019 with WP no. 687 of 2017, decision dated 12.12.2019), wherein the Hon’ble Calcutta High Court held as under:
“In Canbank Financial Services Ltd vs Custodian & Others reported in (2004) 8 SCC 355 the Supreme Court specifically held in paragraph 67 that the said Act of 1988 had not been made workable as no rules under Section 8 of the said Act for acquisition of benami property had been framed. These two cases were also cited by Mr. Khaitan. Section 6(c) of the General Clauses Act, 1897 is most important. It lays down that repeal of an enactment, which necessarily includes an amendment, would not affect “any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed”, unless a different intention is expressed by the legislature. Without question, the omission on the part of the government to frame rules under Section 8 of the 1988 Act rendered it a dead letter and wholly inoperative. Assuming that the appellant had entered into a benami transaction in 2011, no action could be taken by the Central government, in the absence of enabling procedural rules. It is well within the right of the appellant to contend that the Central government had waived its rights. It could also contend that no criminal action could be initiated on the ground of limitation. Now, these rights which had accrued to the appellant could not, in the absence of an express provision be extinguished by the amending Act of 2016. In other words, applying the definition of benami property and benami transaction the Central government could not, on the basis of the 2016 amendment allege contravention and start the prosecution in respect of a transaction in 2011.”
[Note: The Hon’ble Supreme Court in SLP (C) No. 2784 of 2020 has stayed the said the above judgment. The SLP remains pending.]

Contrary view of Chhattisgarh High Court

5. Tulsiram & Manki Bai V. ACIT (Benami Prohibition) & Ors. (W. P. No. 3819/2019), dated 15.11.2019, wherein the Chhattisgarh High Court held:
“20. … It can also not to be said that provisions of the Amended Act of 2016 could not have been made applicable in respect of properties, which were acquired prior to 01.11.2016. The whole Act of 1988 as it stands today inclusive of the amended provisions brought into force from 01.11.2016 onwards applies irrespective of the period of purchase of the alleged Benami property. Amended Act of 2016 does not have an existence by itself. Without the provisions of the Act of 1988, the amended provisions of 2016 has no relevance and the amended Provisions are only laying down the proceedings to be adopted in a proceeding drawn under the Act of 1988 and the penalties to be imposed in each of the cases taking into consideration the period of purchase of Benami property.”

The amendments made by way of the New Act, in my view, are clearly substantive and not procedural in nature, and hence cannot be applied retrospectively. The New Act expands the scope of the law, casts a negative burden / onus on a person to prove that a property is not “benami property”, creates disabilities such as immediate attachment and subsequent confiscation and most importantly attracts criminal action. All these aspects lead to the inescapable conclusion that the New Act cannot and should not be applied retrospectively.

The golden words of the Hon’ble Supreme Court in Commissioner of Income Tax (Central)- I, New Delhi vs. Vatika Township Private Limited (2015) 1 SCC 1 that “The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of the day in force and not tomorrow’s backward adjustment to it. Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset”, are clearly applicable to the present situation.

The views taken by the various High Courts as highlighted above correctly lay down this position of law, and now all eyes will be on the Hon’ble Supreme Court to take a final view on this issue – once and for all. Till then the confusion remains!

Saurabh Seth, the author, is a practicing advocate in the Delhi High Court. The views expressed are personal to the author.

Friday, August 16, 2019

Amendment Conundrum

The President of India recently gave his assent to the Arbitration and Conciliation (Amendment) Bill, 2019 which was passed by the Rajya Sabha on July 18, 2019 and the Lok Sabha on August 01, 2019.

Though the amendment seeks to implement sweeping changes to the existing enactment (“1996 Act”), the most controversial insertion is Section 87, which reads as under;
87. Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 shall— (a) not apply to–– (i) arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015; (ii) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015; (b) apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.”.
The aforesaid provision seeks to nullify the effect of the judgment rendered by the Hon’ble Supreme Court in the matter of Board of Control for Cricket in India v. Kochi Cricket P. Ltd. & Ors. [C.A. No. 2879-2880 of 2018] (“BCCI Judgment”) and restore the position of law as decided by a Division Bench of the Delhi High Court in Ardee Infrastructure P. Ltd. v. Ms. Anuradha Bhatia [FAO (OS) No. 221/2016] (“Ardee”).

The central issue concerning the Court in Ardee (supra) was the interpretation of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 which provided that “nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.”. 

While interpreting the said provision, the Hon’ble Division Bench categorically ruled that the Arbitration and Conciliation (Amendment) Act, 2015 would not apply to arbitration and court proceedings, if the invocation of arbitration in terms of Section 21 of the 1996 Act was done prior to October 23, 2015 i.e. the date of coming into force of the Arbitration and Conciliation (Amendment) Act, 2015. As a result, in relation to awards passed in such arbitrations, there would be an automatic stay on the enforceability of an award once objections under S. 34 of the 1996 Act were filed.

The Hon’ble Supreme Court however in BCCI (supra) reversed the position and held that the Arbitration and Conciliation (Amendment) Act, 2015 would apply retrospectively insofar as court proceedings are concerned, and hence there would be no automatic stay of an award upon mere filing of objections under S. 34 of the 1996 Act.

On the basis of the above position, various courts in the country have retrospectively applied the provisions of the Arbitration and Conciliation (Amendment) Act, 2015 and directed parties to deposit monies awarded under arbitral awards whilst seeking stay of the operation of an award. 

With the present amendment, the legislature has once again hit the ‘reset’ button and taken us back to the position of law as prevailing at the time Ardee (supra) was pronounced. As a result of the amendments brought about by the Arbitration and Conciliation (Amendment) Bill, 2019, any arbitration invoked prior to October 23, 2015 shall be governed by the unamended 1996 Act and would mean that upon filing of objections under S. 34 of the unamended 1996 Act, the award passed would be rendered unenforceable. 

But the question remains, what would happen to cases where the parties have been directed to deposit monies or where such monies have been released to award holders under orders of the court in terms of BCCI. Are such judgment debtors now entitled to move courts for reconsideration of the orders passed? 

The Hon’ble Supreme Court had ‘advised’ the legislature to refrain from bringing the proposed amendment in the form of S. 87 on the ground that it would put all important amendments made by the Arbitration and Conciliation (Amendment) Act, 2015 on the ‘back burner’ and would defeat the object and purpose of the Arbitration and Conciliation (Amendment) Act, 2015.

The legislature has obviously not paid heed to the observations of the Hon’ble Supreme Court and it would be interesting to see how the Hon’ble Supreme Court deals with a constitutional or vires challenge, if so mounted in the future.

The legislature ought to have put in more thought into the amendment, and ought to have harmonized the findings of the Hon’ble Supreme Court in BCCI (supra) while passing the bill into law. The legislature has ensured that Courts in this country will now be flooded with fresh round(s) of litigation in relation to the amendment, in an attempt to ‘unscramble the scrambled egg’. 

Saurabh Seth, the Author, is a practicing advocate in the Delhi High Court and specialises in commercial dispute resolution.

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