This Article has been authored by Suman Kumar Jha (Founder & Managing Partner), Afnaan Siddiqui (Co-Founder & Partner) & Visakha Raghuram (Associate)
Introduction
This judgment has been passed by the Hon’ble High Court of Madras in a Writ Appeal filed by the State Government against orders passed in Writ Petitions before the Hon’ble Court. The Petitioners in the writ petition are companies who are aggrieved by the apprehension of levy of higher stamp duty on the orders sanctioning schemes of amalgamation/reconstruction. This case is a discussion on the aspect of stamp duty applicable upon sanction of a scheme of amalgamation/reconstruction, thereby reiterating an otherwise settled position of law.
Background of the case:
- The Inspector General of Registration, State of Tamil Nadu, clarified by way of a circular issued on 20.11.2018, that a sanctioned scheme of merger, amalgamation or reconstruction under the Companies Act, 2013 would fall under the definition of ‘conveyance’ stated in Schedule-I of the Indian Stamp Act, 1899 and such court orders would be subject to payment of stamp duty upon being presented for registration.
- The State of Tamil Nadu through the Principal Secretary to Government, Commercial Taxes and Registration Department issued G.O.(Ms.) No.29 dated 01.03.2019 ordered that instruments of transfer of property relating to amalgamation or reconstruction of companies to two percent of the market value of the immovable property or 0.6 percent of the aggregate of the market value of the shares, whichever is higher.
- Subsequently, the State of Tamil Nadu through the Principal Secretary to Government, Commercial Taxes and Registration Department issued G.O.(Ms.) No.47 dated 19.02.2020 wherein retrospective effect was given to the above order from 01.04.1956, so all the schemes relating to amalgamation/reconstruction became eligible for stamp duty reduction granted in the said notification.
- Under these circumstances, a batch of writ petitions were filed either apprehending that the order of the tribunal sanctioning a scheme of arrangement will be treated as an instrument and stamp duty will be demanded or aggrieved by the actual orders passed, demanding stamp duty and registration charges.
Issues and its consideration
- Will the order of the court sanctioning the scheme of amalgamation/restructuring be deemed as an “instrument”?
The Hon’ble Court, while answering in the affirmative, reiterated the definition of instrument stated in Section 2(14) of the Indian Stamp Act, 1899. The said definition encompasses every document which creation, transfer, limiting extension, extinguishment or record of any right or liability is an instrument. The Hon’ble Court also relied on the judgments of the Hon’ble Supreme Court in Hindustan Lever v. State of Maharashtra & Anr. wherein it was held that stamp duty is leviable on the ‘instrument’ by which the property is transferred legally and equitably holding that an amalgamation scheme is an ‘instrument’ and in Ruby Sales and Services (P) Ltd. v. State of Maharashtra & Ors. wherein a consent decree was held to be an ‘instrument’ as the ‘label’ of a document is not an important factor, but the transfer of property is the decisive factor to determine if a document is an instrument.
- Will a scheme of amalgamation/restructuring fall within the category of transfer inter vivos, consequently falling within the meaning of “conveyance”?
This Court while citing the case of Hindustan Lever, observed that this question has already been authoritatively decided. The Court held that it would be qualify as a transfer inter vivos. Given the inclusive definition of ‘conveyance’, an order of the court/tribunal sanctioning a scheme of amalgamation/reconstruction is deemed to be an instrument of conveyance, making it subject to stamp duty.
- If the second question is affirmative, then whether the levy in the present manner i.e. prescribing the rate through a government notification valid?
This Court referred to Section 9(1) of the Indian Stamp Act, 1899 which states the power of the government to reduce or remit the stamp duty. Since the government order purported to reduce the stamp duty, it was held that the government is well within its powers to do so.
- If so, is the mode of computation, i.e., ‘2 % of the value of the immovable property or 0.6 % of the net value of the shares transferred whichever is higher’, correct?
The Court answered this issue in the negative. It was held that while the government is within its powers to reduce the rate of stamp duty from 5% to 2% of the market value of the property, the introduction of a new mode of computation i.e. ‘0.6% of market value of shares’ without a legislative action is a colourable exercise of power. Although, computation of stamp duty on the basis of market value of shares is a valid mode, it can only be effectuated if there is a legislative act allowing the same.
Therefore, the second part of the government order prescribing the rate of duty i.e. ‘0.6% of market value of shares’ was held to be illegal and is omitted.
- Whether the retrospective application of the impugned Government Order with effect from 01.04.1956, by way of G.O.Ms.No.47 dated 19.02.2020 is valid?
The Court held that the impugned government order is merely clarificatory in nature and the government is within its power to introduce retrospective applicability.
- Whether the stamp duty paid in other States, while registering the amalgamation orders are liable to be taken into account and set off as against the duty payable, while presenting the document for registration in the State of Tamil Nadu?
The Court answered this issue in the affirmative. Section 19-A of the Indian Stamp Act, 1899 states that the amount of duty payable shall be the amount chargeable on it under Schedule I less the amount of duty, if any, already paid on it in that part. Reliance was placed on the judgment of the Hon’ble Supreme Court in New Central Jute Mills Co. Ltd. And Ors v. State of West Bengal and Ors. wherein it was held that when presenting a document stamp duty is calculated as per that state’s prevailing rates and if the duty is paid in another state which exceeds that of the first state, no further additional duty is exigible. Furthermore, if the duty paid elsewhere is less, the differential amount is set off against the duty payable in the second state.
Judicial Examination of Stamp Duty on Amalgamation Schemes: Insights and Implications
Various courts, while deciding on the aspect of stamp duty often delve into the aspect of interpretation of statutes and delegated legislations. While upholding the applicability of stamp duty on schemes of mergers/reconstruction, the Hon’ble High Court of Madras in this case has discussed the aspect of colorable legislation and powers exercisable by revenue authorities.
While certain states have explicitly stated a rate of stamp duty applicable on a scheme of amalgamation/reconstruction sanctioned by the court/tribunal, most states do not have an explicit entry in the respective stamp acts delineating a clear rate of duty. This gives lee-way to revenue authorities to issue notifications, circulars, clarifications etc. which may give them room to legislate on the subject, leading to overreach and potential litigations such as the present case.