Maharashtra Stamp Act amended to clarify legal stand in case of mortgage deeds executed for distinct transactions

The Ordinance additionally plugs gaps on differential rates in case of different mortgages

Aanchal Kaur Nagpal

aanchal@vinodkothari.com

Introduction –

Stamp duty computation, especially in case of complex transactions involving multiple transactions being given effect vide a single instrument, received the sanctity of Hon’ble Supreme Court (SC) in a landmark judgement in case of Controlling Revenue Authority v. Coastal Gujarat Power Ltd[1], where the SC upheld payment of separate stamp duty for different transactions involved interpreting Section 5 of Gujarat Stamp Act, 1958. Following the said judgement, Maharashtra stamp authorities rolled out a circular on September 28, 2015 informing the stand taken by SC; however, no amendment was carried out in Maharashtra Stamp Act, 1958.

Further, it was observed by the stamp authorities that in view of rate difference in case of stamp duty on equitable mortgage (mortgage by deposit of title deeds) as per article 6 (1) and simple mortgage as per article 40, parties played about the same in the instruments thereby creating difficulties in adjudication of amount of proper stamp duty chargeable for them.

The Maharashtra Stamp (Amendment and Validation) Ordinance, 2021 (‘Ordinance’) dated 9^th February, 2021 amends Maharashtra Stamp Act, 1958 (‘Stamp Act’) to fill several gaps in the aforementioned provisions. The same have been discussed below –

Arbitrage in rate of stamp duty levied on equitable mortgage and simple mortgage –

Levy of stamp duty in case of mortgage is under the state list and thus the same will be governed by the respective state acts. In case of Maharashtra, the stamp duty chargeable in case of an equitable mortgage is less than that in case of a simple mortgage. Taking advantage of the said arbitrage, mortgage documents have been drafted in such a way that, even though the nomenclature of the document indicates an equitable mortgage, it attempts to cover even a simple mortgage. Thus, simple mortgages are disguised to indicate an equitable mortgage just to pay a lesser stamp duty.  Such documents create difficulties in adjudication of amount of proper stamp duty.

Further, certain towns had been notified by the State of Maharashtra under the Transfer of Property Act to enable execution of agreement relating to an equitable mortgage. However, in cases of towns not notified, a person was forced to opt for execution of simple mortgage deed instead of an equitable mortgage, where stamp duty is higher in case of the former.

Owing to the above, the Act has been amended in order to align the stamp duty chargeable on the instruments of an equitable mortgage and simple mortgage deed under the articles 6 and 40, respectively.

Amendments to stamp duty rates will be effective from the date of the notification i.e. 9^th February, 2021.

Wordplay between ‘matters’ and ‘transactions’ under section 5 –

Stamp duty is chargeable on an instrument rather than a transaction. However, the Finance Act, 2019 drew an exception to this principle in case of stamp duty on securities’ transactions, particularly in case of securities in demat form. Nevertheless, the general rule remains the same.

However, there can be a case where a single instrument embodies various matters. Section 5 of the Act deals with stamp duty in case of such instruments relating to several matters. As per the existing section, ‘any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters, would be chargeable under this Act.’

Therefore, if an instrument consists of various matters, stamp duty will be charged on such matters separately as would have been the case if such matters were executed under separate instruments. However, a lot of debates arose on what would ‘matters’ include- whether matters would only be restricted to ‘matters’ or would include ‘transactions’ as well.

The Gujarat Stamp Act, 1958, was amended to include instruments consisting of distinct transactions along with distinct matters.

The above question was also raised before the Gujarat High Court, where the Court held that that the stamp duty was payable on the instrument and not on the transactions. The High Court opined that there being only one instrument creating a mortgage by borrower in favour of the Security Trustee and since the relationship between the borrower and the Security Trustee is independent of relationship between the borrower and the lending Banks, the High Court took the view that the instrument did not involve either distinct matters or distinct transactions.

However, the Supreme Court held an opposing view  in Controlling Revenue Authority v. Coastal Gujarat Power Ltd[2], where it adjudged that instruments under section 5 of the Gujarat Stamp Act would also include instruments containing distinct transactions.

The question before the Court was whether a single mortgage executed in favour of a
the security trustee for the benefit of several syndicated lenders would be treated as a single document or as multiple documents (equivalent to the number of syndicated lenders).

The Supreme Court concluded that the agreement shall be construed separately for each syndicated lender and stamped as such (i.e. multiple documents). It was opined that

It appears from the trustee document that altogether 13 banks lent money to the mortgagor, details of which have been described in the schedule and for the repayment of money, the borrower entered into separate loan agreements with 13 financial institutions. Had this borrower entered into a separate mortgage deed with these financial institutions in order to secure the loan there would have been a separate document for distinct transactions. On proper construction of this indenture of mortgage it can safely be regarded as 13 distinct transactions which falls under Section 5 of the Act.

The above view was also taken under The Member, Board of Revenue v. Arthur Paul Benthall, 1955 SCR 84[3].

Similar question was raised before the Bombay High Court in Navi Mumbai SEZ Pvt. Ltd. v. The State of Maharashtra & Ors.[4], where it was contended that a perusal of the two statutes (Gujarat Stamp Act and the Act) would evince that the difference between the two is that whereas in the Gujarat Act the phrase ‘or distinct transactions’ follows the phrase ‘several distinct matters’ at two places where the said phrase exists, in the Maharashtra Act the said phrase ‘or distinct transactions’ does not occur.

It was highlighted that section 5 of the Indian Stamp Act, 1899 is in pari materia with Section 5 of the Stamp Act in the State of Maharashtra. Further, the Bombay High court quashed the argument that the decision of the Supreme Court in Coastal Gujarat Power Limited’s case (supra) would not be binding while interpreting Section 5 of the Stamp Act in Maharashtra for the reason the phrase ‘distinct matters’ is equivalent to the phrase ‘distinct transactions’. The names are different but the two are identical.

The Court took guide of the judgement of the Madras High Court in The Board of Revenue, Madras v. Narasimhan & Anr.[5], AIR 1961 Mad 504, (1961) 2 MLJ 538, where it was held that that where more than one of the matters or things i.e. indentures, leases, bonds or deeds, thereby charged with any stamp duty should be engrossed on one piece of vellum, the duties should be charged on every one of such matters. For example, if several landlords, each severally interested in the piece of land mentioned against his name in the Schedule were to act collectively, the instrument would be chargeable with stamp duty by treating each underlying transfer of interest and then aggregating the amount of duties as would be chargeable if separate instruments were executed.

The Madras High Court in The Board of Revenue, Madras v. Narasimhan & Anr., pertaining to a document which was a multi-purpose document or multifarious document, held that the expression ‘distinct matters’ connotes ‘distinct transactions’ and for the purposes of levy of stamp duty under the Indian Stamp Act requires the identity of the parties in respect of the underlying transaction. The importance of the said decision is that the expression ‘distinct matters’ was treated to be the same as ‘distinct transactions’.

The Allahabad High Court in Ram Sarup v. Toti & Anr.[6] AIR 1973 P H 329, with reference to Section 5 of the Indian Stamp Act, 1899 also held that the expression ‘distinct matters’ is equivalent to ‘distinct transactions’.

As per Halsbury’s Law of England, 4^th edition, volume 44, paragraph 613 at page 399:-

613. Instrument relating to several matters. Except where there is statutory provision to the contrary, an instrument containing or relating to several distinct matters is to be separately charged, as if it were a separate instrument, with stamp duty in respect of each of the matters, and an instrument made for any consideration in respect of which it is chargeable with ad valorem duty, and also for any further or other valuable consideration, is separately chargeable, as if it were a separate instrument, in respect of each of the consideration.”

Therefore, to bring the provisions in line with the Gujarat Stamp Act and the Supreme Court Order, the Ordinance amends section 5 of the Stamp Act to include distinct transactions as well to bring absolute clarity. Thus, the amended section is as below –

Instruments relating to several distinct matters or transactions –

Any instrument comprising or relating to several distinct matters or transactions shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters or transactions, would be chargeable under this Act.

The amendment to section 5 has been made effective retrospectively from 11^th July, 2015, i.e. from the date of the decree of the Supreme Court.

What does ‘distinct’ matter/ transaction mean?

The term distinct does not refer to matters or transactions that are totally different in nature. Transactions even of similar nature will be covered under section 5 as long as they are different in nature. The Supreme Court In Coastal Gujarat (supra) also held that section 5 deals only with the instrument which comprises more than one transaction and it is immaterial  for the purpose whether those transactions are
of the same category or of different categories. It was immaterial for the purpose whether the underlying transactions are of the same category or of different categories.

Stamp duty on instrument for additional security

The Ordinance has also added a new clause under article 6 which provides stamp duty in case of any instrument in the form of an equitable mortgage, pledge or hypothecation, which will be executed as a collateral or auxiliary or additional security and where the proper duty has been paid on the principal or primary security under the said article. Stamp duty in such cases will be a flat amount of Rs. 500 irrespective of the amount of security.

Similar provision already exists under article 40, where every instrument executed as a collateral or auxiliary or additional security, where stamp has already been paid on the principal security, is chargeable with a stamp duty of Rs. 200.

Impact on debentures secured by a mortgage or hypothecation

The Finance Act, 2019 inserted section 4(3) in the Indian Stamp Act, 1899, which provides that –

Notwithstanding anything contained in sub-sections (1) and (2), in the case of any issue, sale or transfer of securities, the instrument on which stamp-duty is chargeable under section 9A shall be the principal instrument for the purpose of this section and no stamp-duty shall be charged on any other instruments relating to any such transaction.

Thus, there lies an exemption if issue of securities is charged with stamp duty, then any other instrument relating to such transaction will be exempt to stamp duty. The exemption was erstwhile specifically mentioned in case of debentures secured by way of a mortgage deed, where stamp duty on debentures was exempt if the same had been paid on the mortgage deed. On an understanding of the exemption, in case secured debentures have been allotted against a collateral in the form of a mortgage deed, stamp duty may be paid only at the time of issue of debentures on the allotment list (principal instrument) providing for allotment of secured debentures and not on the security deed. However, companies do not avail this benefit and pay stamp duty on both the transactions/ matters considering it as distinct transactions.

Thus, increase in stamp duty on mortgage deed/ hypothecation may not have an impact on issue of debentures in demat mode due to exemption under section 4(3). However, section 4(3) does not make reference to section 9B (issue of securities in case of physical securities/ debentures) and thus the exemption may not be enjoyed by such debentures and they would feel the burden of the additional stamp duty on the security documents. (Maharashtra Stamp Act will not apply since levy of stamp duty in case of debentures is governed by the Central List and therefore Indian Stamp Act).

Validation clause

The Ordinance also clarifies that any stamp duty paid under section 5 and articles 6 and 40 of schedule I in accordance with any decree/judgement, will be deemed to be validly levied and collected as if the said provisions as amended by the Ordinance were continuously in force. Any suit or proceedings initiated against the stamp authorities for refund of excess stamp duty paid and no court can direct refund of such excess duty.

Conclusion –

These amendments to the Stamp Act mainly relate to stamp duty in case of mortgage deeds, executed in case of consortium lending as a single instrument.

• The law now explicitly provides that in case of a common instrument consisting of multiple transactions, such transactions should be levied with separate stamp duty. This will have an impact on instruments where stamp duty is paid in the following manner–
• Where stamp duty is of a fixed amount on an instrument – since the transactions will be charged as separate instruments, the amount of stamp duty will be multiplied by the number of transactions,
• Where stamp duty is on an ad valorem basis along with a maximum cap,

This will not have an impact where the rate of stamp duty is on an ad valorem basis with no maximum cap since the amount of stamp duty will any way be calculated on the total value of secured amount. However, making the amendment to section 5 effective retrospectively seems oppressive and burdensome to parties of such instruments. In case the instruments are not stamped in accordance with the said provisions, it may be required to be impounded before admitting as an evidence, where required.

• Rates in case of equitable and simple mortgage have been aligned to prevent taking undue advantage of loopholes. Also, it will now be favourable for parties to execute a simple mortgage over an equitable mortgage since the former not only can be executed in all areas and not just in notified towns but also is a better mode of security.
• However, stamp duty in case of additional collateral has been kept at a low rate of Rs. 500. Further, in case of multiple securities for a single loan, securities in the form of a pledge/ pawn/ equitable mortgage and such other securities under section 6, may be termed as additional security.

[1] https://indiankanoon.org/doc/178953244/

[2] https://indiankanoon.org/doc/178953244/

[3] https://indiankanoon.org/doc/1553487/

[4]https://bombayhighcourt.nic.in/generatenewauth.php?bhcpar=cGF0aD0uL3dyaXRlcmVhZGRhdGEvZGF0YS9jaXZpbC8yMDE5LyZmbmFtZT1XUDIwMDg5MTkxMTA5MTkucGRmJnNtZmxhZz1OJnJqdWRkYXRlPSZ1cGxvYWRkdD0xNi8wOS8yMDE5JnNwYXNzcGhyYXNlPTExMDIyMTE1MTUwMg==

[5] https://indiankanoon.org/doc/1937173/

[6] https://indiankanoon.org/doc/1046533/

Our other resources on similar topic –

1. http://vinodkothari.com/2020/11/sebis-stringent-norms-for-secured-debentures/
2. http://vinodkothari.com/2020/07/amendments-in-the-stamp-act-issues-and-need-for-further-clarification/