Appellant No. 1, is a registered Charitable Trust, intended to develop the land owned by it. The Respondent No. 1 offered to develop the said property, pursuant to which some negotiations took place between the parties, and a lease deed was executed between the Appellant No. 1 Trust and the Respondent No. 1 lessee on 31st May 1996. Thereafter, another lease deed dated 12th March 1997 was executed between the same parties.
Disputes arose between the Appellants and the Respondents on the delay in the progress of the project and the non-payment of the entire security deposit on the part of the Respondents. The Appellant Trust then filed a suit before the City Civil Court at Bangalore. An interim order for maintaining the status quo was passed by the City Civil Court. The Respondent Nos. 1 and 2, after participating in the suit proceedings for more than two years, issued a notice to the Appellants invoking the arbitration clause in the lease deed dated 31st May 1996 and 12th March 1997. The Respondent Nos. 1 and 2 further filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 before the Karnataka High Court.
The Appellants objected to the Section 11(6) petition by contending that the lease deed dated 12th March 1997 being insufficiently stamped was required to be compulsorily impounded under Section 33 of the Karnataka Stamp Act, 1957 and it could not be relied upon unless proper duty and penalty were paid. The Single Judge of the High Court then referred the matter to the Registrar (Judicial) of the High Court for determination of the said issue.
The Registrar (Judicial) vide a detailed report held that the document in question was a lease deed and directed the Respondent Nos. 1 and 2 to pay deficit stamp duty and penalty amounting to Rs. 1,01,56,388/-.
Objections to the report of the Registrar (Judicial) were filed by the Respondent Nos. 1 and 2. However, the High Court without consideration of the report passed the impugned order, thereby permitting the petition under Section 11(6) of the Arbitration Act and appointed an arbitrator to decide the disputes between the Appellants and the Respondent.
In the present case, the question which arose for consideration was whether an arbitration clause contained in a lease deed which was insufficiently stamped can be relied upon by the court for appointing an arbitrator.
The Supreme court observed that admittedly, both the lease deeds are neither registered nor sufficiently stamped as required under the Karnataka Stamp Act, 1957. Further, the Respondent Nos. 1 and 2 have not paid the deficit stamp duty and penalty.
While relying on the decision in SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited, (2011) 14 SCC 66 the court stated 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.
In the SMS Tea Estates case, it was held that the court is required to consider if an instrument is produced before it, whether it is properly stamped or not, even if an objection in that behalf is not raised. If the court comes to the conclusion that the instrument is not properly stamped, it should be impounded and dealt with in the manner specified in the Stamp Act. However, if the deficit duty and penalty are paid as per the provisions of the Stamp Act, the document can be acted upon or admitted in evidence.
The Supreme Court held that the lease deed containing the arbitration clause was not sufficiently stamped and the High Court erred in relying on the lease deed dated 12th March 1997.
Accordingly, the appeal was allowed and the impugned judgment and order of the High Court was set aside.