Super Diamond Tools vs K.Mohan Rao

REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 6216 OF 2012

SUPER DIAMOND TOOLS & ORS. …APPELLANT(S)

VERSUS

K. MOHAN RAO …RESPONDENT(S)

JUDGMENT

S. RAVINDRA BHAT, J.

1. The present appeal questions an order of the Madras High Court which upset

the findings of a learned single judge of that Court. The single judge had rejected

the respondent’s petition under Section 34 of the Arbitration and Conciliation Act,

1996; the Division Bench set aside the single judge’s order and appointed a fresh

arbitrator.

2. The award in this case was made, pursuant to a reference by the Madras

High Court on 28.08.1997. The dispute between the parties was in respect of

partnership accounts. The surviving partner of the appellant alleged that the first

respondent was guilty of falsification of accounts and that he had siphoned off

huge sums of money. The parties had initiated a dialogue with the idea of settling Signature Not Verified

the dispute amicably. However, there was no resolution. As a result, the respondent Digitally signed by Jagdish Kumar Date: 2023.03.17 17:21:50 IST Reason:

approached the High Court under Section 11 of the Act which culminated in the

reference.

2

3. The arbitral tribunal comprising of a sole arbitrator examined the pleadings

and evidence and concluded that the first respondent was guilty as alleged. The

appellant, interestingly, did not prefer a claim, and instead made a counter claim in

the course of the arbitration proceedings, initiated at the behest of the first

respondent. The arbitral tribunal, on the basis of its findings held that a total sum of

₹76,34,423.86/- had to be duly accounted after deducting the first respondent’s

share. The amount was ₹53,87,664.40/-.

4. The arbitrator also directed payment of interest @ 18% p.a. from 31.01.1994

till date of commencement of arbitration and future interest at the same rate. The

first respondent‘s application under Section 34 was rejected by the single judge.

He, therefore, approached the Division Bench, which by the impugned order, held

that the award could not be sustained as it was contrary to public policy. To so

conclude, the Division Bench was of the opinion that the method adopted by the

arbitrator in proceeding backwards as it were, and taking accounts for a period of

21 years, was unsustainable.

5. This Court has heard counsel for the parties. Mr. R. Anand Padmanabhan,

counsel on behalf of the appellant submitted that both parties had agreed to the

appointment of a neutral auditor. The parties were also assisted by their own

auditor and on the basis of unanimity the method adopted towards accounting was

arrived at. This material was considered objectively by the tribunal, which arrived

at the finding that the first respondent was guilty of firstly, over-invoicing and

secondly, trading surreptitiously, which resulted in loss to the partnership firm. On

the basis of this finding and and the agreed neutral auditor’s calculations, the 3

figures were accepted by the tribunal. It was argued that in these circumstances, the

first respondent could not have contended that the award was contrary to public

policy.

6. Learned counsel also relied on Section 17 of the Limitation Act, 1963 to

urge that fraud unravels all, and that in this case since fraud was alleged in the

counter claim and found by the arbitrator, fault could not have been found with the

award. Therefore, there was no error of law which amounted to its being contrary

to public policy.

7. Mr. Jose, learned counsel appearing for the first respondent, pointed out that

the appellant, in fact, did not seek a reference; rather it was the first respondent

who made that claim. More importantly, it was urged that in the facts of this case,

the appellant had knowledge of the alleged over-invoicing and other malpractices,

which resulted in the ouster of the first respondent from the partnership firm in the

year 1993.

8. He relied upon the correspondence between the parties and argued that the

demand for reconciliation was made in the second week of February, 1994.

Therefore, when the reference was made in 1997 and when the claim was made,

the appellant only then, preferred a counter claim in December, 1997. It was

therefore, submitted that even on an application of the principle underlying Section

17, the claim was time barred.

9. The impugned order was based entirely upon the fact that the award sought

to crystallize liabilities based on working of the accounts for 21 years. The

Division Bench, further, noticed that the arbitrator was appointed, pursuant to 4

which the appellant made a counter claim. The record shows that in terms of the

averments in the counter claim, the first respondent had stopped functioning as a

partner in December, 1993. Although it appears that the parting of ways took place

in early January, 1994, the fact remains that between that time and December, 1997

there was no attempt on the part of the appellant to positively enforce his claim.

Furthermore, even the pleadings in the counter claim are not specific with respect

to the allegations of fraud. The ground on which the counter claim ultimately

succeeded was over-invoicing on the one hand and diversion of raw material, such

as diamonds, into the respondent’s wife’s business which resulted in denuding the

partnership firm’s profit.

10. The allegations in the counter claim are only to the effect that the first

respondent set up a firm within 6 months of the leaving the appellant’s firm.

Section 17 of the Limitation Act is an exception to the rule that the period of

limitation commences from the date of cause of action. However, where the

condition contemplated under Section 17 - such as fraud exists, then subject to

proof of fraud (based on specific averments) the date when limitation begins to be

seen is date of knowledge of the plaintiff. The principle consistently followed by

this Court in its past decisions such as Shri Vallabh Glass Works Ltd. v. Union of

India1 and Commissioner of Sales Tax, UP v. Auriaya Chambers of Commerce,

Allahabad2 is that the date of knowledge of fraud - or such misfeasance - is the

starting point for limitation. Further, it has been held by this Court in R. Radha Bai

& Ors. v. P. Ashok Kumar & Ors.3 that Section 17 of the Limitation Act:

1 [1984] 3 SCR 180 2 [1986] 2 SCR 430 3 [2018] 12 SCR 143 5

“does not extend or break the limitation period. It only postpones or defers the limitation period. This is evident from the phrase “The period of limitation shall not begin to run.”

11. Having regard to the fact that the appellant (through its surviving partner)

made its claim beyond 3 years from the date of his knowledge of the alleged fraud,

this Court is of the opinion that the impugned order, to the extent it sets aside the

award, although in an appeal, is not in error of law.

12. For the above reasons, the appeal fails and is accordingly dismissed.

Pending application(s), if any, are disposed of.

………………………………J. (S. RAVINDRA BHAT)

………………………………J. (DIPANKAR DATTA)

NEW DELHI;

MARCH 02, 2023 6

ITEM NO.102 COURT NO.14 SECTION XII

S U P R E M E C O U R T O F I N D I A RECORD OF PROCEEDINGS

Civil Appeal No(s). 6216/2012

SUPER DIAMOND TOOLS & ORS. Appellant(s)

VERSUS

K.MOHAN RAO Respondent(s)

Date : 02-03-2023 This appeal was called on for hearing today.

CORAM :

HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE DIPANKAR DATTA

For Appellant(s) Mr. R. Anand Padmanabhan, Adv.

Mr. Pramod Dayal, AOR

For Respondent(s) Mr. P. I. Jose, AOR

UPON hearing the counsel the Court made the following O R D E R

The civil appeal fails and is accordingly dismissed in

terms of the Reportable-Judgement.

Pending application(s), if any, are disposed of.

(HARSHITA UPPAL) (MATHEW ABRAHAM) SENIOR PERSONAL ASSISTANT COURT MASTER (NSH)

(Signed reportable judgment is placed on the file)