The Conundrum of Applicable Stamp Duty vis-��-vis Execution and Enforceability

Payment of Stamp Duty & Enforceability

The Indian Stamp Act, 1899, (Indian Stamp Act) requires certain class of documents or instruments[1] to be stamped by paying the applicable stamp duty. Non-payment of adequate stamp duty does not affect the legality or validity of the document per se, but such document is inadmissible as evidence before any authority, court or tribunal.[2] An under stamped or unstamped document may be impounded by the collector for enforcing payment of adequate stamp duty.[3] Additionally a penalty of up to ten times the original stamp duty or the deficit portion of the stamp duty on the document, as applicable, may be levied by the relevant authority before admitting it as evidence.

[4] The above observations can be succinctly summed up by referring to the decision of the Apex Court in SMS Tea Estates Pvt. Ltd. vs. Chandmari Tea Company Pvt. Ltd.,[5] wherein it was held that it is the duty of every court to examine whether an instrument or document is adequately stamped, failing which the court is required to impound such instrument or document. Further, the arbitration clause of an inadequately stamped document is inoperable unless the requisite duty and / or penalty is paid in accordance with the provisions of the Stamp Act.

Again, the Apex Court, in a recent judgment in Garware Wall Ropes Ltd vs. Coastal Marine Constructions & Engineering Ltd.,[6] reaffirmed the decision in SMS Tea Estates Pvt. Ltd.[7]and opined that for a document to be acted upon by a court and admitted as evidence, it must be adequately stamped.

The Conundrum – Clash between Two States

The Constitution of India, 1950, provides that the levy of stamp duty falls under the ambit of Central Government[8] as well as State Governments[9] with respect to different types of instruments.  Accordingly, the States have amended and modified the Indian Stamp Act (“State Stamp Act”) and have fixed the rates of stamp duty applicable on the instruments executed[10] in the particular State.

As the stamp duty varies from State to State, often a document is executed in one State (State A) and brought to another State (State B) for enforcement of the rights and obligations under it. In such a scenario the executants are faced with hurdles as to whether the stamp duty of State A or State B applies to the document and whether payment of stamp duty in State A is deemed payment of stamp duty in State B.

Place of payment of stamp duty vis-à-vis execution and enforceability in different States

To answer the questions raised above, the provisions of Maharashtra Stamp Act, 1958 (“Maharashtra Stamp Act”) have been considered as an example. Stamp duty shall be charged in accordance with the Maharashtra Stamp Act if: (i) a document is executed in Maharashtra for the first time; or (ii) a document executed outside Maharashtra is received in Maharashtra for its enforcement. Provisions similar to the Maharashtra Stamp Act can also be found in other State Stamp Acts as well.

The Apex Court has decided on sufficiency of the stamp duty and interpreted the provisions of the Indian Stamp Act as amended by Uttar Pradesh Stamp Act, 1958 in New Central Jute Mills Co. Ltd. and Ors. vs. The State of West Bengal and Ors.[11] In this case, a mortgage deed was executed in Uttar Pradesh. However, the stamp duty was paid in accordance with the laws of West Bengal as the property was situated in West Bengal. The collector in Uttar Pradesh did not consider the mortgage deed to be duly stamped as stamp duty was not paid to the Uttar Pradesh government. The Supreme Court stated that the liability to pay stamp duty first arises on execution and the stamp duty has to be paid in the State where it the document is executed. Liability arising in one State cannot be discharged in another State.

Therefore, in the view of aforesaid, the stamp duty has to be paid in that State where the document is first executed (signed). The stamp duty to be paid on an instrument would depend where the instrument is to be executed and then in the State where the instrument is subsequently received.

Amount of stamp duty to be paid in cases of difference of duty between the States

If the rate of stamp duty payable is different under the stamp act of the State A (where the instrument is first executed) and State B (where the instrument is subsequently received), the relevant provisions of the State Stamp Acts, which are almost similar for the various States, provide for payment of differential stamp duty in State B, if the stamp duty paid in State A was lesser than as required in State B.[12]

The division bench of the Bombay High Court in a recent judgment, The Indian Hume Pipe Co. Ltd. and Ors. vs. State of Maharashtra and Ors.,[13] answered the question of applicability of stamp duty when the document is executed in one State and received in other State. In this case, the Petitioners had executed a mortgage deed pursuant to debenture trust deed, both of which were duly stamped and executed in Gujrat as per the Gujrat Stamp Act. However, when these documents were to be filed in Maharashtra with the Registrar of Companies, the petitioners were asked to pay the stamp duty as per in accordance with the Maharashtra Stamp Act. The Court finally held that the collector was correct in requiring the petitioners to pay the difference amount as per the Maharashtra Stamp Act as the filing was to be done in the State of Maharashtra and the document executed out of the State was subsequently brought in the State.

Moreover, the decisions of Bombay High Court in the Antifriction Bearings Corporation Limited and Ors. vs. State of Maharashtra and Ors.,[14] and Gujrat High Court in Chief Controlling Revenue Authority, Ahmedabad vs. The Nutan Mills Ltd.,[15] still holds good which stated that when a document is executed in one State and a copy or the document is brought in another State to be acted upon, the differential stamp duty, if any, has to be paid on such copy or the instrument. The judgment in The Indian Hume Pipe Co. Ltd.[16] is also aligned with the respective decisions. The aforementioned judgments and the relevant provisions, inter-alia, provide that the instruments shall be chargeable as per the State Stamp Act of State A where the instrument is first executed. Further, when the instrument is first executed in State A and the stamp duty paid in State A is lesser than the duty chargeable under the State Stamp Act of State B where the instrument is subsequently received, in such a scenario the difference amount has to be paid in State B for the instrument to be considered duly stamped.

Conclusion

The stamp duty to be paid on an instrument would depend firstly, up on the State in which the instrument is to be executed and secondly, the State in which the instrument is subsequently received. Before executing a document or an instrument the involved parties should bear in mind the place of execution and the place of enforcement.  

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal Hyderabad.

[1] Indian Stamp Act, Section 2(14) defines instrument as:

"instrument" includes--

(a) every document, by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded;

(b) a document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded; and

(c) any other document mentioned in Schedule I, but does not include such instruments as may be specified by the Government, by notification in the Official Gazette;

[2] Id., Section 35.

[3] Id., Section 33.

[4] Id., Section 35.

[5] (2011) 14 SCC 66 (Supreme Court)

. [6] Civil Appeal No. 3631 of 2019, Supreme Court, decided on April 10, 2019.

[7] Supra note 5.

[8] The Constitution of India, 1950, Seventh Schedule, Union List, Entry 91.

[9] Id., Seventh Schedule, State List, Entry 63.

[10] Indian Stamp Act, Section 2(i) states: "executed" and "execution" used with reference to instruments, mean "signed" and "signature"; [Explanation: The terms "signed" and "signature" also include attribution of electronic record as per section 11 of the Information Technology Act, 2000.]

[11] [1964] 1 SCR 535 (Supreme Court).

[12] There are similar provisions in almost all the State Stamp Acts in this respect, for instance S.7 of Maharashtra Stamp Act, S.3A of Indian Stamp Act as applicable to Delhi, S.3 of Indian Stamp Act as applicable to Andhra Pradesh and Telangana.

[13] Writ Petition Nos. 2519, 2488, 2534, 2194, 2280 of 1988 and 215 of 1989, Decided On: 09.01.2018 (Bombay High Court, Division Bench).

[14] AIR 1999 Bom 37 (Bombay High Court).

[15]AIR 1978 Guj 1 (Gujrat High Court).

[16] Supra note 14.