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The Stamp-Duty Conundrum

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The Stamp-Duty Conundrum

BY ARJUN GARG  & MANAS KASHIV

  • Stamp duty which is a prominent way of generating revenue for the State is first considered to originate in Holland in the early 17th In order to generate more revenue, they thought of charging duty on commercial, financial or other like transaction. Later, British adopted the idea and brought it to India. After gaining direct control in 1858 the British Parliament started enacting almost all the statutes which were earlier enacted under the Company Rule. Likewise, they enacted the Indian Stamp Act, 1899.The basic purpose of enacting the Indian Stamp Act, 1899 was to create a fiscal legislation to earn revenue and ensure the authenticity of the transaction duly stamped. Generally speaking, tax payable on certain specific documents is termed as stamp duty.
  • The Constitution of India empowers both the Parliament and the State Legislature to make provisions and laws for stamp duty within its ambit. The Indian Stamp Act, 1899 is the Central Legislation while the States have their own local Stamp Acts to deal with issues arising within that particular State. While some States have enacted their own Stamp legislation, it is still absent in many of the States, leading to peculiar issues related to the subject.
  • Stamp Duty as a subject is vast and for the present, we will discuss payment of Stamp Duty on merger and amalgamations, especially from the point of view of National Capital Territory of Delhi.
  • Matters related to amalgamation in case of Delhi were governed by 2 notifications passed on 16.1.1937 and 25.12.1937. These notifications mentioned certain conditions which the amalgamating companies had to fulfill in order to be eligible for remittance of stamp duty. If amalgamating companies did not fulfill these conditions, they will liable to pay stamp duty at the prescribed rate. The latter notification superseded the earlier one and is still applicable which was clarified by the Delhi High Court in its judgement in Delhi Towers vs. GNCT in 2009¹ and also subsequently in another judgment arising out of a reference made by the Chief Controlling Revenue Authority in 2019³.The notification of 16th January, 1937 was however, withdrawn by the Lieutenant Governor of Delhi in 2011.
  • Applicability of these notification wasn’t the only point of contention. There are numerous such problems on which Act is still not clear, such as:
  • On approval of the scheme of amalgamation from the Court, whether that order be regarded as compulsory amalgamation and be outside the purview of stamp duty?
  • If transfer of movable property is not taking place, then will the stamp duty be leviable on the transaction. If yes, then how will the stamp duty be calculated?
  • Whether transaction of amalgamation comes under the definition of ‘conveyance’?
  • Whether company fulfilling the conditions of notification of 1937 is required to pay the stamp duty?
  • Whether the transferor company ceases to exist after the amalgamation?
  • In the landmark Judgment of the Delhi High Court in Delhi Towers vs. GNCT of Delhi¹, the following conclusions were drawn:
  • It was held that the notification dated 25th of December, 1937 is applicable and binding.
  • It was held that no stamp duty would be leviable on such instrument conveying- transfer of property between such companies which fulfill the condition of the Notification of 1937.
  • Scheme would be regarded as an instrument within the definition of Indian Stamp Act and, the same would therefore be exigible to stamp duty under the Indian Stamp Act.
  • valuation under article 25(1) of Schedule I on the instrument of the amalgamation scheme sanctioned by the court, after due verification, is to be determined by the stamp authority only on the basis of the price of the shares allotted to the transferor- company or other consideration, if paid, but not by separately valuing the assets and the liabilities.

 

  • One can also refer to the judgment of the Supreme Court in Hindustan Lever and Anr. vs State of Maharashtra and Anr.² where while discussing various issues related to the Bombay Stamp Act, the Hon’ble Supreme Court held that an approved scheme of amalgamation amounts to a transfer inter-vivos between two companies who were juristic persons in existence at the time of passing of the order and sanctioning of the scheme whereby right, title and interest in the immoveable property of the transferor company are transferred to the transferee company. As per the Judgment, the transfer takes place in the present and is not postponed to any later date and is covered under the definition of conveyance under sub-section 10 of section 2 of the Stamp Act.
  • The judgement of Supreme Court in Hindustan Lever and Anr. vs State of Maharashtra² was with regard to the Bombay Stamp Act and not Indian Stamp Act, 1899. One of the stark differences between the Indian Stamp Act and Bombay Stamp Act is the definition of the term “conveyance”. As opposed to the definition in the Indian Stamp Act, the Bombay Stamp Act has clearly included amalgamation into the definition of conveyance and hence, provides greater clarity to the interested parties and leaves little room for any doubt.
  • A similar exercise is required to NCT of Delhi as well. This would be pertinent to address one more practical issue that if the amalgamating parties are fulfilling the requisite conditions of the Notification of 1937, then they must receive the benefit without any hinderance. The requirements which entitle companies for a remittance under the 1937 Notification are:
  • At least 90% of the issued share capital of the transferee company is in the beneficial ownership of the transferor company, or
  • where a transfer takes place between a parent company and a subsidiary company one of which is a beneficial owner of not less than 90% of the issued share capital of the other, or
  • Where the transfer takes place between the two subsidiary companies of each of which is not less than 90% of the share capital is in the beneficial ownership of a common parent company.

 

     Provided that the certificate is obtained by the parties to the instrument from the officer appointed in this behalf by the Chief Commissioner of Delhi that the conditions above prescribed are fulfilled.

  • The issues being faced in payment of stamp duty on an order of amalgamation need to be resolved quickly. Amalgamation is an important process for companies from various sectors who use it in order to assimilate the assets and utilize it under one name for further growth.
  • The issues mentioned above lead to a lot of uncertainty and despite the judgment of the High Court, Authorities are often reluctant to grant remittance to the partied concerned. It would be advisable that greater clarity is brought by way of statutory enactment by the competent authority.

Arjun Garg is Co-founding Partner of GSL Chambers and an Advocate on Record of Supreme Court of India. Manas Kashiv is an Associate with GSL Chambers and based at Indore.

  1. Delhi Towers judgement – https://indiankanoon.org/doc/158567768/
  2. Hindustan Lever judgement – https://indiankanoon.org/doc/1859141/
  3. Reference of CCRA – https://indiankanoon.org/doc/83606048/