Executing Courts Cannot Impose Penalty on Insufficiently Stamped Arbitral Awards Under Karnataka Stamp Act: Karnataka High Court - 2025-09-25

Executing Courts Cannot Impose Penalty on Unstamped Arbitral Awards, Holds Karnataka High Court

Bengaluru : The Karnataka High Court, in a significant ruling, has held that executing courts lack the authority to impose a penalty on an insufficiently stamped arbitral award under the Karnataka Stamp Act, 1957. Justice M. Nagaprasanna clarified that while stamp duty is payable, the power to levy a penalty rests with the appropriate authorities under the Stamp Act, not the court, particularly when the award's finality is still being contested.

The court dismissed a writ petition filed by the State of Karnataka, which sought to impound a ₹178 crore arbitral award and compel the decree-holder, M/s. Siddharth Infotech Pvt. Ltd., to pay both stamp duty and a penalty.

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Background of the Dispute

The case originates from a contractual dispute between the Department of School Education and Literacy, Government of Karnataka, and M/s. Siddharth Infotech Pvt. Ltd. An arbitrator passed an award on May 18, 2022, directing the State to pay ₹178,98,38,525/- to the company.

The State challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, but the petition was dismissed. A commercial appeal against this dismissal is currently pending before a Division Bench of the High Court. Meanwhile, Siddharth Infotech initiated execution proceedings to enforce the award.

A key point of contention arose over the payment of stamp duty on the award. Initially, the executing court waived the stamp duty. This order was challenged up to the Supreme Court, where the decree-holder (Siddharth Infotech) volunteered to pay the requisite stamp duty of ₹46,12,096/-, subject to the final outcome of the pending commercial appeal. However, the State then filed another application demanding that the award be impounded and that a penalty also be imposed for the initial non-payment of stamp duty. The executing court rejected this application, leading to the present writ petition.

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Arguments Presented

The State of Karnataka, represented by Additional Government Advocate Sri Aditya Vikram Bhat, argued that any instrument sought to be executed must be duly stamped, and failure to do so attracts not only the duty but also a penalty. The State contended that the incorrect payment of stamp duty, without the penalty, would cause a loss to the state exchequer.

On the other hand, Sri Chintan Chinnappa, counsel for Siddharth Infotech, argued that the issue was settled by previous judgments. He submitted that an arbitral award, which is treated as a decree for enforcement, cannot be impounded and penalized in execution proceedings in the same manner as other instruments.

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Court's Reasoning and Legal Precedents

Justice M. Nagaprasanna delved into a series of judgments from the Supreme Court and coordinate benches of the Karnataka High Court to arrive at his decision. The court underscored that the question of stamping and registration is relevant only at the enforcement stage (under Section 36 of the Arbitration Act), not during the challenge stage (Section 34).

The judgment heavily relied on several key precedents:

1. Shakeel Pasha v. M/s City Max Hotels (Supreme Court, 2024): The Apex Court clarified that under the Karnataka Stamp Act, courts are not conferred with the power to direct penalty payments; this power is vested in the appropriate authorities under the Act.

2. M/s Kanyakumari Builders v. M/s Spring Borewell (Karnataka HC): A coordinate bench had previously ruled that due to the uncertainty surrounding an arbitral award (which can be modified or set aside in appeal), executing courts should not direct penalty payments. The question of penalty arises only when there is certainty about the liability, which is absent while an appeal is pending.

The court noted, "Due to the prevailing uncertainty regarding payment of stamp duty on arbitral awards, Executing Courts should not issue directions for payment of penalty...The executing courts dealing with an application under Section 36 of the Act, shall not direct payment of penalty in terms of Section 35 of the Indian Stamp Act, 1899 or under the Karnataka Stamp Act, 1957."

The court also highlighted the practical difficulty: if stamp duty and penalty are paid and the award is later modified or set aside, it creates procedural complications regarding refunds or adjustments.

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Final Decision

Upholding the order of the executing court, Justice Nagaprasanna concluded that courts cannot direct the payment of a penalty on an arbitral award during execution proceedings, especially when its finality is yet to be determined.

The court held, "On a reading of the law laid down by the Apex Court and the Co-ordinate Benches of this court, what would unmistakably emerge is that, during the pendency of the arbitration proceedings, the court cannot direct the payment of a specified amount of stamp duty and penalty over the arbitral award, particularly in execution proceedings."

The petition filed by the State of Karnataka was dismissed. The court, however, reserved liberty for the Collector/Deputy Commissioner to collect stamp duty and impose a penalty, if required, but only after the pending commercial appeal is concluded and the arbitral award attains finality.