Memorandum of Entry for equitable mortgages: A Mortgage by Conduct?

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– Neha Sinha, Assistant Legal Advisor | Shraddha Shivani, Executive | corplaw@vinodkothari.com

Mortgage is a transfer of an interest in a specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an agreement, which may give rise to a pecuniary liability.

Section 58(f) of the Transfer of Property Act, 1882 (“TP Act”) provides, among other modes, for the creation of mortgage by deposit of title deeds, widely known as equitable mortgage.  Applicable to the notified towns under this provision, when a person delivers to a creditor or his agent documents of title deeds to immoveable property, with an intent to create security, then the transaction is called mortgage by deposit of title deeds.

Legally there is no document needed to create an equitable mortgage. In fact, if there is a document, it will be mortgage by instrument and not mortgage by conduct, and hence, will cease to be an equitable mortgage. The Supreme Court expounded in Rachpal Mahraj v. Bhagwandas Daruka and others[1]–

“…when the debtor deposits with the creditor the title deeds of his property with intent to create a security, the law implies a contract between the parties to create a mortgage, and no registered instrument is required under section 59 as in other forms of mortgage.”

However, in practice, a memorandum accompanies the deposit of title deeds. The lender may execute a Memorandum of Entry (“MoE”) which records the delivery of title documents for the creation of mortgage by the mortgagor to the lender. The purpose of the MoE is most intuitive – the title deeds are valuable documents, and lie with the lender or a trustee for the lender. The MoE serves as a matter of record that the borrower placed these documents of his own free will with the intention to create a charge on his property with the lender/trustee, as also serves as a safeguard if the borrower were to play mischief claiming those very title deeds having been lost.

The borrower may also give an undertaking known as Memorandum of Deposit of Title Deed (“MoDT”) which states that the borrower, at his own free will, has deposited his property’s title document with the lender in order to secure a loan by creating a mortgage.

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Stamp Duty on Assignment of Receivables

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finserv@vinodkothari.com

The table below provides the rate of stamp duty applicable on assignment of receivables in major states across India:

State Stamp Duty
Andhra Pradesh0.1% of the loan securitized or debt assigned with underlying securities subject to maximum limit of Rs.1 Lakh. [1]
Assam8.25 percent.
Bihar0.1% of the loan securitized or debt assigned with underlying securities subject to maximum limit of Rs.1 Lakh[2].
Chhattisgarh0.1% of the loan securitized or   with underlying securities subject to maximum limit of Rs.1 Lakh[3].
Delhione rupee for every one thousand rupees or part thereof, of the loan securitized or the debt assigned with underlying securities, subject to a maximum of Rs 1 lakh.[4]
Goa8 percent.
GujaratBombay Stamps Act, 1958 (as applicable to the state of Gujarat) , No. GHM – 98-221H.STP/1096/2527/H.1. In exercise of the powers conferred by Clause (a) of Section 9 of the Bombay Stamp Act. 1958 (Bom LX of 1958), the Government of Gujarat hereby reduces the duty with which an instrument of securitisation of Loans or the Assignment of Debt with underlying securities is chargeable under Article 20(a) of Schedule 1 to the said Act, to ten paise for every rupees 100 or part thereof of the loan securitised or debt assigned with underlying securities’ subject to a maximum of rupees 1 lakh[5].
HaryanaApprox. 12.5% for conveyance amounting to sale for immovable property and 6.25% for other conveyances.
KarnatakaKarnataka Stamp Act, 1957.The Government of Karnataka, Department of Stamps & Registration have specified that that with effect from 1st April 1999, ‘Deeds relating to assignment of receivables in the process of securitisation will be charged to a reduced duty of 0.1% subject to a maximum of Rs. One Lakh.’[6]
Madhya PradeshStamp duty of 7.5% of amount of debt assigned.
Maharashtra Bombay Stamp Act, 1958. ‘Order dated 11th May 1994, No. STP. 1094/CR-369/(C)-M-1 – In exercise of the powers conferred by Clause (a) of Section 9 of the Bombay Stamp Act, 1958 (Bom. LX of 1958), the Government of Maharashtra hereby reduces with effect from 1st April 1994 the duty with which an instrument of securitisation of Loans or Assignment of Debt with underlying securities is chargeable under Clause (a) of Article 25 of Schedule 1 to the said Act, to ‘Fifty Paise’ for every rupees 500 or part thereof of the loan securitised or debt assigned with underlying securities subject to a maximum of Rs 1 lakh and in case of instrument of Assignment of Receivables in respect of use of credit cards to ‘Two Rupees and Fifty Paise for every rupees 500 or part thereof.’ subject to a maximum of Rs 1 lakh.[7]
Manipur7 percent.
Meghalayaupto Rs 50,000 – 4.6%, more than Rs 50,000 and upto Rs 90,000 – 6%, more than Rs 90,000 and upto Rs 1,50,000 – 8% , More than Rs 1,50,000 – 9.9%.
Nagaland7.5 percent.
Odisha0.1% of the amount or value of the consideration set forth in the said instrument.[8]
Punjab 3 percent.
RajasthanIn exercise of the powers conferred by sub-section (1) of section 9 of the
Rajasthan Stamp Act, 1998 (Act No. 14 of 1999) and in supersession of this department’s Notification No. F.4(4) FD/Tax/2015-230 dated March 9, 2015, the State Government, stamp duty chargeable on the instrument of debt assignment executed in respect of performing assets (standard assets) is charged at the rate of 0.15 percent of the amount of debt subject to maximum of rupees five lacs.[9]
Tamil Nadu In exercise of the powers conferred by clause (a) of sub-section (1) of], the governor of Tamil Nadu hereby reduces the duty chargeable under the said act to ten paise for every Rs 100or part thereof the market value of the property which is the subject matter of conveyance, subject to the maximum of Rs 1 lakh, in respect of the instruments providing for transfer of non-performing assets or assignment of debt with or without underlying securities whether movable or immovable or intangible. in favour of reconstruction companies under SARFAESI act ,2002. the notifications appended to this order will be published in an extraordinary issue of Tamil Nadu government gazette dated 4-3-2005.
Tripura5 percent
Uttar Pradesh0.1% subject to maximum of Rs.1 Lakh.[10]
UttarakhandThe stamp duty was reduced to 5% vide notification no. 297/XXVII (9)/2011/Stamp-61/2009 dated May 31, 2011 issued by the Department of Finance, State of Uttarakhand and is currently applicable.  However, the said exemption is applicable only upto the value of the property being 25 lakhs. In the event the value exceeds 25 lakhs, then upto 25 lakhs, the stamp payable will be reduced by 25% i.e. 3.75% of market value will be payable, and above 25 lakhs, the stamp duty will be paid at 5% of market value.
West Bengal0.1% subject to maximum of Rs.1 Lakh.[11]

[1] Notification G.O.Ms. No.305 dated 29.03.2004 issued by Registration and stamps Department,
Government of Andhra Pradesh. This shall apply to ARC’s.

[2] Notification S.O.No.-1/M1-126-2004/2904 dated 29.12.2004 issued by Department of Registration, Government of Bihar. This shall apply to ARC’s.

[3] Notification No./F10-9-2004-C.T.-(R) –V-(32) dated 28.02.2004 issued by Financial and Planning Department {Commercial Tax (Registration) Department}, Government of Chhattisgarh.

[4]http://delhi.gov.in/wps/wcm/connect/DoIT_Revenue/revenue/home/registration+acts+and+rules/manuals%2Cnotifications%2Corders/reg260209

[5] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=166

[6] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=166

[7] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=166

[8] 1.  Notification No. Stamp-6/05/35723/R. dated 31.08.2005 issued by Revenue Department, Government of Orrisa. 2. Notification No. Stamp-6/05/35723/R. dated 31.08.2005 issued by Revenue Department, Government of Orrisa.

[9] http://igrs.rajasthan.gov.in/writereaddata/Portal/Images/pdf/notification-dated-26062015.pdf

[10] Notification No.K.N.5-1023/11-2005-500(137)-2003 dated 15.03.2005 as amended by No.K.N.5-1389/11-2005-500(137)/2003 dated 29.03.2005 issued by Kar Evam Nibandhan Anubhag-5, Government of Uttar Pradesh.

[11]Notification No.2307-F.T. dated 02.07.2004 issued by Finance (Revenue) Department, Government of West Bengal.

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

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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 9th 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.

Particulars Erstwhile stamp duty Amended stamp duty Remarks
Mortgage by deposit of title deeds under article 6(1) of schedule I If amount secured by the deed is more than Rs. 5 lakhs, rate of stamp duty is 0.2% of the secured amount.

 

 If amount secured by the deed is more than Rs. 5 lakhs, rate of stamp duty is 0.3% of the secured amount.

 

 Rate of stamp duty has been increased from 0.2% to 0.3% in case of secured amount above Rs. 5 lakhs.

 

In case of secured amount below 5 lakhs, rate of stamp duty has not been changed.

 
Pledge, hypothecation of movable property under article 6(2) of schedule I If amount secured by the deed is more than Rs. 5 lakhs, rate of stamp duty is 0.2% of the secured amount.

 

 If amount secured by the deed is more than Rs. 5 lakhs, rate of stamp duty is 0.3% of the secured amount.

 

 Rate of stamp duty has been increased from 0.2% to 0.3% in case of secured amount above Rs. 5 lakhs.

 

In case of secured amount below 5 lakhs, rate of stamp duty has not been changed.

 
Simple mortgage under article 40(b) of schedule I

 

When possession is not given or agreed to be given as aforesaid.

 

 0.5% of the amount secured by such deed.

Minimum duty – Rs. 100

Maximum duty – Rs. 10 lakhs

 If the amount secured – less than Rs. 5 lakhs –0.1% of the amount secured. Minimum – Rs. 100.

 

If the amount secured is more than Rs. 5 lakhs – 0.3% of the amount secured. Maximum- Rs 10 lakhs

 

 While the minimum and maximum amount of stamp duty has been kept the same, the ad valorem rate of duty has been divided into two instances.

 

Amendments to stamp duty rates will be effective from the date of the notification i.e. 9th 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, 4th edition, volume 44, paragraph 613 at page 399:-

  1. 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 11th 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/

Amendments in the Stamp Act: Highlighting the issues and need for further clarification

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-Richa Saraf (richa@vinodkothari.com)

The Government had been intending to facilitate ease of doing business and bring in uniformity in the rates of the stamp duty on securities across States and thereby build a pan-India securities market. In this regard, the Central Government, after due deliberations and consultations with the States, through requisite amendments in the Indian Stamp Act, 1899 and Rules made thereunder, has created the legal and institutional mechanism to enable States to collect stamp duty on securities market instruments at one place by one agency (through Stock Exchange or Clearing Corporation authorized by it or by the Depository) on one instrument.

While the relevant provisions of the Finance Act, 2019 amending the Indian Stamp Act, 1899 and the Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 were notified simultaneously on 10th December, 2019 and these were to come into force from 9th January, 2020, due to lockdown, the effective date was later extended to 1st July, 2020 vide notification dated 30th March, 2020 .

In this article, the author tries to highlight two major areas in which there is need for clarity.

Stamp duty in case of issuance of shares:

Article 246 of the Indian Constitution stipulates that Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (“Union List”), and the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (“State List”).

Entry 91 of the Union List provides the Central Government with the power to prescribe the rate of stamp duty on issue and transfer of debentures, transfer of shares and bill of exchange. Further, as per Entry 63 of the State List, the State Government has power to prescribe rate of stamp duty in respect of documents other than those specified in the provisions of List I. Therefore, the power to levy stamp duty on issuance of shares vests with the respective State Governments.

The amended stamp duty rate prescribed by the Finance Act, 2019 stipulates that for issue of security other than debenture, a stamp duty of 0.005% shall be payable . As per Section 2(23A) of Indian Stamp Act, the term “securities” shall include securities as per Section 2(h) of Securities Contracts (Regulation) Act, 1956 , i.e. the following:

(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ii) Derivative;
(iii) Units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(iv) Security receipt as defined under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(v) Units or any other such instrument issued to the investors under any mutual fund scheme;
(vi) Government securities;
(vii) Instruments as may be declared by the Central Government;
(viii) Rights or interest in securities.

In accordance with the provisions of the Constitution of India, the Central Government does not have the power to levy stamp duty on issue of shares. However, considering the aforesaid definition, it can be said that the Central Government has prescribed stamp duty rates for the “issue of security other than debenture”, including for “issue of shares”, which shall be chargeable with stamp duty of 0.005%.

This is susceptible to constitutional challenge and may be declared as ultra vires the Constitution.

Stamp Duty on Secured Debentures:

Prior to the Finance Act, 2019, as per erstwhile Article 27 of the Indian Stamp Act, only debentures which qualified as “marketable securities” were liable to be stamped under Article 27 of the Indian Stamp Act. Now, pursuant to the Finance Act, 2019, Article 27 provides an ad-valorem rate of duty of 0.005% on issue of “debentures”, and the term has been defined as follows:

Section 2(10A) “debenture” includes-
(i) debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not;
(ii) bonds in the nature of debenture issued by any incorporated company or body corporate;
(iii) certificate of deposit, commercial usance bill, commercial paper and such other debt instrument of original or initial maturity upto one year as the Reserve Bank of India may specify from time to time;
(iv) securitised debt instruments; and
(v) any other debt instruments specified by the Securities and Exchange Board of India from time to time.

Accordingly, it can be inferred that irrespective of the fact that the debentures are marketable or not, stamp duty shall be payable on issuance as well as transfer of debentures.

Another important change to be noted is that earlier w.r.t. mortgage debentures there was a specific exemption that provided that if the mortgage-deed was stamped and registered appropriately (which mortgage would be subject to relevant State stamp legislations), the debentures were exempt from stamp duty. However, pursuant to the Finance Act, 2019, the said exemption has been omitted, which brings us to another major question with respect to payment of stamp duty on issue of secured debentures- whether the security documents viz. deed of hypothecation or mortgage deed will be required to be additionally stamped or not.

In terms of the Finance Act, 2019, Section 4(3) has been inserted in the Indian Stamp Act, which stipulates that in case of any issue, sale or transfer of securities (which again includes debentures), where the duty has been paid on the principal instrument chargeable under Section 9A i.e. instrument chargeable with duty for transactions in stock exchanges and depositories, no stamp duty shall be required to be charged on any other instrument relating to such transaction.

Further, as per Section 9A(3), the State Government cannot charge or collect stamp duty on any note or memorandum or any other document, electronic or otherwise, associated with transactions mentioned in Section 9A(1). This implies that in case secured debentures are being issued in dematerialised form, or are traded over the stock exchange, then the security documents are not required to be separately stamped. In this regard, it is also relevant to cite the case of the Chief Controlling Revenue vs. the Madras Refineries Ltd. AIR 1975 Mad 362 wherein the issue of exemption on payment of stamp duty on incidental documents in case the principal document has already been stamped was discussed at length.

However, there is lack of clarity in case of transactions that do not involve stock exchanges and depositories, such as physical issuances. The question remains whether there will be double incidence of stamp duty- i.e. (i) on issue of debentures; as well as (ii) on mortgage deed or other relevant security documents. While this does not seem to be the intent of the Legislature, a clarification, in this regard, is definitely required.

Our write- up on the Amendments in the Stamp Act can be accessed from the link below:

http://vinodkothari.com/2019/03/single-point-collection-of-stamp-duty/

Our FAQs on the Amendments in the Stamp Act can be accessed from the link below:
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Deferral of applicability of amendments in the Indian Stamp Act, 1899

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STAMP DUTY IMPLICATIONS ON E-AGREEMENTS

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– Ishika Agrawal (corplaw@vinodkothari.com)

I.        Introduction

The way businesses are done, has evolved with the evolution of technology. Now-a-days, business transactions and business contracts are mostly executed electronically in order to save time and expenses. However, this also raises concerns on enforceability of e-agreements in courts and the stamp duty implications on such agreements. In this article, we have tried to broadly discuss the acceptance of e- agreements as evidence in courts and the stamp duty implications on such agreements.

II.     Whether E-agreement is to be stamped?

In India, stamp duty is levied under Indian Stamp Act, 1899 [1](“Stamp Act”) as well as various legislation enacted by different States in India for the levy of stamp duty[2]. Every instrument under which rights are created or transferred needs to be stamped under the specific stamp duty legislation. There is no specific provision in the Stamp Act that specifically deals with electronic records and/or the stamp duty payable on execution thereof.

Section 3 of Stamp Act is the charging section which provides for the levy of stamp duty on specified instruments upon their execution. Relevant provision of section 3 is reproduced below:

3. Instruments chargeable with duty- Subject to the provisions of this Act and the exemptions contained in Schedule I, the following instruments shall be chargeable with duty of the amount indicated in that Schedule as the proper duty therefore respectively, that is to say—

(a) every instrument mentioned in that Schedule which, not having been previously executed by any person, is executed in India on or after the first day of July, 1899;

(b) every bill of exchange payable otherwise than on demand or promissory note drawn or made out of India on or after that day and accepted or paid, or presented for acceptance or payment, or endorsed, transferred or otherwise negotiated, in India; and

(c) every instrument (other than a bill of exchange, or promissory note) mentioned in that Schedule, which, not having been previously executed by any person, is executed out of India on or after that day, relates to any property situate, or to any matter or thing done or to be done, in India and is received in India.

As per the above provision, broadly, two things are required for chargeability of stamp duty:

  • There must be an instrument as mentioned in the schedule I of Stamp Act.
  • The instrument must be executed.

What is Instrument?

The word ‘instrument’ is defined in section 2(14) of Stamp Act. There has been certain ambiguousness in the interpretation of definition of Instrument. Recent amendments have been made in the Stamp Act by Finance Act, 2019 which will come in force from 1st April, 2020.

Prior to the amendment, section 2(14) read as:

2(14) “Instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded”.

However, after the amendment, the scope of the definition given in section 2(14) has been widened by the inclusion of clause (b) and clause (c) which states that:

(14) “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;

The aforesaid amendment is only with respect to the electronic document created for a transaction in a stock exchange or depository, but (a) of the aforesaid section is unaltered. Therefore, it may appear that the term “document” in clause (a) does not include electronic documents – however, such interpretation will not be in spirit of law. The Information Technology Act has already accorded legal recognition to electronic records. Therefore, the word “document” shall be read so as to include electronic documents as well.

Apart from the Indian Stamp Act, many states have their own legislation w.r.t. stamp duty. Majority of state specific stamp duty laws also do not specifically include electronic records within their ambit, however, some state stamp duty laws do refer to electronic records. For instance, Section 2(l) of the Maharashtra Stamp Act, 1958 [3] defining instrument, specifically refers to electronic records. It states that:

“instrument includes every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded, but does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of share, debenture, proxy and receipt;

Explanation. – The term “document” also includes any electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000.”

This makes clear that, Maharashtra Stamp Act imposes stamp duty on electronic agreements as well. This justifies that even electronic agreements come under the scope of Stamp Act, thus need to be stamped.

What is execution?

Section 2(12) of Stamp Act defines the terms “executed” and “execution”, which is also widened by the recent amendment[4] to take into account, attribution of electronic records. It states that:

“2(12). “Executed and execution”- executed and execution used with reference to instruments, mean signed and signature” and includes attribution of electronic record within the meaning of section 11 of the Information Technology Act, 2000.”

Thus the execution means putting signature on the instrument by the party to the agreement. Attribution[5] of electronic record will also be treated as execution. It can be concluded from the above definition that, the specific instrument would attract payment of stamp duty upon their execution i.e. when it is signed or bears a signature, even if the execution takes place electronically.

III.   Time and Manner of Stamping

As discussed, an e-agreement is required to be stamped according to State specific stamp laws. Section 3 of the Indian Stamp Act and the stamp legislation of several other States in India specify that an instrument to be chargeable with stamp duty must be “executed”.

Section 17 of Stamp Act stipulates when an instrument has to be stamped. It states that:

17. Instruments executed in India- All instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution.

Thus, the stamp duty is to be paid before or at the time of executing the e- agreement and cannot be paid after execution.

However, one may also refer to section 17 of the Maharashtra Stamp Act which allow payment of stamp duty on the next working day following the day of execution.

There are some of the e-agreements such as click wrap agreements where execution does not takes place by the customer. Click-wrap agreements are the agreements where the customer accepts the terms and conditions of the contract by clicking on “OK” or “I agree” or such other similar terms. In case of such e-agreements, while the agreement can be said to be executed by the originator (by way of attribution), there is no signature of the customer which means such agreement does not get executed. Since, execution does not takes place, such agreements need not be stamped. However, another view can be derived that in such click wrap agreements there is acknowledgement of receipt of the electronic record by the customer. Such “acknowledgment” of receipt of electronic record u/s 12 of IT Act may be treated as deemed “execution” [6] by the customer. However, there are no clear provisions in the Stamp Act dealing with eligibility of stamp duty to click-wrap agreements.

As regards the manner of stamping, same can be done in three ways:-

  1. E-stamping: Some states like Maharashtra provides specific provisions for e-stamping. In such case, both the party can digitally sign the document and get it stamped electronically on the same day. For instance, Maharashtra E-Registration and E-Filing Rules, 2013[7] facilitates online payment of stamp duty and registration fees. Rule 10 of the said rules states that:

Rule 10. For online registration, Stamp duty and registration fees shall be paid online to Government of Maharashtra through Government Receipt Accounting System (GRAS) (Virtual Treasury) by electronic transfer of funds or any other mode of payment prescribed by the Government.

Further, as per Rule 3 of The Maharashtra ePayment of Stamp Duty and Refund Rules 2014[8], the stamp duty required to be paid under the act, may be paid online into the Virtual Treasury through Government Revenue and Accounting System (GRAS).

  1. Franking: There is also the concept of franking in some of the states, in which case, document may be printed and stamped by the way of franking before the parties have affixed their signature. For instance, in case of Maharashtra Stamp Act, 1958, section 2(k) which defines “Impressed stamp” also includes impression by franking machine.
  2. Physical Stamping: Where the facility of e-stamping or franking is not available, a print of the e-agreement may be taken and the same may then be adequately stamped with adhesive stamps or impressed stamps before or on the date of execution by the parties as per section 10 of Indian Stamp Act.

However, the liability to pay stamp duty will be upon either of the party to contract as per the agreement entered between them. In the absence of any such agreement, liability to pay stamp duty shall be upon such person as may be determined under section 29 of the Indian Stamp Act.

IV.   Consequences of Non- stamping

Non-payment of stamp duty in respect of documents would attract similar consequences for both physical instruments as well as electronic instruments, unless specific consequences have been prescribed for electronically executed instruments under the respective stamp duty laws.

Inadmissibility as an evidence:

In terms of the Indian Stamp Act and most State stamp duty laws, instruments which are chargeable with stamp duty are inadmissible as evidence in case appropriate stamp duty has not been paid. Section 35 of Indian Stamp Act deals with the consequences of non-stamping of documents. It states that:

  1. Instruments not duly stamped inadmissible in evidence, etc.-No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped.

However, the inappropriately stamped instruments may be admissible as evidence upon payment of applicable duty, along with prescribed penalty.

Other Liability:

Every person who executes or signs, otherwise than as a witness, any instruments which is not duly stamped but the same was chargeable with stamp duty, can be held liable for monetary fines. In case of an intentional evasion of stamp duty, criminal liability can also be imposed.

V.      Conclusion

When all the applicable laws are taken and interpreted in conjunction with one another, it can be understood that, e-agreements being a valid agreements are also liable for stamp duty on execution. However, the same levy will be as per the respective State laws. Where the State legislation provides for the facility of e-stamping, the same shall be availed in order to move towards the goal of paperless economy. Whereas, some States are yet to recognize the importance and validity of e-agreements and e-stamping. It is looked forward on the part of state as well as central government to make specific provisions for e-agreements and e-stamping in order to save time and money and to provide an ease for doing business.

Our write-up on the legal validity of e-agreements can be viewed here.

[1] https://indiacode.nic.in/bitstream/123456789/2331/1/a1899____2.pdf

[2] The Central Government and the State Government (s) have been empowered under the Union List and the State list (respectively) to levy stamp duty on instruments specified therein.

[3] http://igrmaharashtra.gov.in/SB_PUBLICATION/DATA/acts/THE_MAHARASHTRA_STAMP_ACT-2016-revised_sections.pdf

[4] The amendment was brought by the Finance Act, 2019, which by Notification of Ministry of Finance dated 8th January, 2020 are to be effective from the 1st day of April, 2020”

[5] Section 11 of the IT Act provides for attribution of electronic record as follows –

“11. Attribution of electronic records.–An electronic record shall be attributed to the originator–

(a) if it was sent by the originator himself;

(b) by a person who had the authority to act on behalf of the originator in respect of that electronic record; or

(c) by an information system programmed by or on behalf of the originator to operate automatically.”

[6] For instance, Article 7 of the UNCITRAL Model Law on E-Commerce states that where the law requires a signature of a person, that requirement is met in relation to a data message if a method is used to identify that person and to indicate that person’s approval of the information contained in the data message; and that method is as reliable as was appropriate for the purpose for which the data message was generated or communicated, in the light of all the circumstances, including any relevant agreement. This way of putting “signature” is not explicitly recognized in relevant Acts, however, the Courts may take a liberal view in this regard.

Read more – http://vinodkothari.com/wp-content/uploads/2020/11/All-about-Electronic-contracts.pdf

[7] http://igrmaharashtra.gov.in/SB_PUBLICATION/DATA/rules/Registration/Maharashtra%20%20e-Registration%20&e-Filing%20Rules,%202013%20.pdf

[8] http://igrmaharashtra.gov.in/SB_PUBLICATION/DATA/rules/STAMPS/4_e-Payment_Rules.pdf

Faqs on recent amendments in Indian Stamp Act, 1899

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Updated as on 1st July, 2020