Refusal To Produce Audited Financials Justifies Adverse Inference: Bombay High Court Upholds Arbitral Award

The Bombay High Court has recently refused to interfere with an arbitral award, holding that refusal by a party to produce audited financial statements justifies the drawing of an adverse inference by the arbitral tribunal.

The court remarked that a party cannot selectively rely on tax returns while withholding audited financial statements and books of account.

A bench of Justice Somasekhar Sundaresan observed:

“As such, every business enterprise would have both sets of financial information – the commercial and mercantile reality of the business as discernible from the audited financial statements, and the tax compliance and computation of tax payable being discernible from the tax returns. The extensive reference to tax returns not having been analysed in the Impugned Award, and that too by a party that was not the party that produced the returns, is unacceptable. ... The abject refusal to provide the audited financial statements would enable drawing of an adverse inference and the Learned Arbitral Tribunal has meticulously analysed the information available to assess the position.”

The case arose from a challenge filed by Shamshul Ishrar Khan against an arbitral award dated March 7, 2015 passed in favour of Alka Chandewar in a partnership dispute concerning Saras Developers. The arbitral tribunal had directed Khan to pay approximately ₹7.39 crore to Chandewar, representing her 80% share upon dissolution of the firm.

Khan challenged the award as perverse, arguing that the tribunal had overlooked the income tax returns and arrived at an incorrect computation of financial entitlements.

The court was not persuaded. It pointed out that audited financial statements capture the actual commercial and mercantile position of a business, while tax returns are prepared for determining taxable income.

What weighed more heavily was the petitioner's conduct during the proceedings. Despite directions, audited accounts and books were not produced, which, in the court's view, impeded the arbitral process. Faced with this gap, the tribunal proceeded on the material that was available, including registered sale transactions. The court found no fault in this approach, holding that drawing an adverse inference in such circumstances was justified.

Observing that the tribunal had meticulously analysed the material on record and adopted a logical approach, the court held that no ground under Section 34 was made out.

The arbitral award was accordingly upheld.