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Posted: Sun, Mar 14 2010. 9:06 PM IST

The dilemma of stamp
duty on orders of
amalgamation
Failure to pay stamp duty where it is
mandatorily required to be paid makes an
instrument inadmissible as evidence
Lawfully Yours | AZB and Partners
Amalgamation between two entities through an order sanctioned by a competent
court is a tried and tested method of corporate restructuring and consolidation.
Not many are aware that even upon successful completion of this (fairly long and
ponderous) procedure, a question mark can arise from an area not directly
related to the amalgamation, namely, stamp duty. In fact, the relevant
government authority can refuse the mutation of the transferors properties in
the name of the transferee post an order of the court sanctioning a scheme of
amalgamation on grounds of non-payment of appropriate stamp duty.
Failure to pay stamp duty where it is mandatorily required to be paid makes an
instrument inadmissible as evidence. In view of this, the veracity of a court order
sanctioning a scheme of amalgamation has come under the scanner quite a few
times before the judiciary. The key issue that had usually arisen before the
courts was whether an order of the court approving a scheme of amalgamation
would fall under the purview of "conveyance and hence be subject to stamp
duty as an instrument of conveyance. It is pertinent to note that under the
stamp duty statutes, stamp duty is mandatorily required to be paid on
instruments of conveyance. Besides being inadmissible as evidence, an
instrument not adequately stamped can either be held in custody, i.e.,
impounded, or calls for a penalty which is 10 times the value of the stamp duty
originally required to be paid.
Varied opinions have been
expressed by different high
courts on this issue. While the
Bombay high court (in Li Taka
Pharmaceuticals Ltd v. State of
Maharashtra & Others, 1997) has
been of the view that such orders
would fall under the definition of
conveyance, the Calcutta high
court (in Madhu Intra Ltd v.
Registrar of Companies, 2006)
has expressed a converse view.
However, the apex court has
supported the reasoning given by
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the Bombay high court (in
Hindustan Lever and another v. State of Maharashtra and another, 2004).
Consequently, as a matter of abundant caution, states such as West Bengal,
Rajasthan, Maharashtra, Karnataka, Gujarat, Madhya Pradesh, Chhattisgarh and
Andhra Pradesh have specifically included a court order approving a scheme of
amalgamation under the definition of "conveyance under the relevant
schedules/acts providing stamp duty rates. Unfortunately, states which do not
have such an explicit inclusion continue to face the dilemma. The state of Delhi,
belonging to the latter category, has very recently been subject to judicial
discussions of such nature.
The Delhi high court (in Delhi Towers Ltd v. G.N.C.T. of Delhi), on 4 December
2009 ruled that stamp duty is required to be paid on an order of the court
approving a scheme of amalgamation as it qualifies as conveyance. In this case,
Delhi Towers had obtained the order of the court approving the proposed scheme
of merger of its 15 wholly owned subsidiaries into itself. The company had
moved the court against the Delhi government as it had refused to effect the
mutation of the properties in favour of the applicant company upon the scheme
becoming effective. The reason offered by the Delhi government was that the
court order approving the said scheme was not stamped.
This backdrop certainly demands a closer scrutiny of the definition of
conveyance. Section 2(10) of the Indian Stamp Act, 1899, has defined
conveyance to include a conveyance on sale and every instrument by which
property, whether movable or immovable, is transferred inter vivos. Further, the
term "instrument has also been defined under section 2(14) of the Act to
include every document by which any right or liability is, or purports to be,
created, transferred, limited, extended, extinguished or recorded.
It is also important to understand the nature of an order approving the scheme
of amalgamation. Section 394(2) of the Companies Act, 1956, provides that by
virtue of an order of the court under section 394(1) of the Companies Act, all the
property rights and liabilities of the transferor company shall be transferred to
and vest in the transferee company. The Delhi high court has opined that an
order of the court under section 394(1) of the Companies Act is an instrument
which effects a legal and equitable transfer of the property from the transferor
company to the transferee company.
Coming back to the case in question, Delhi Towers refuted the above reasoning
of the court on the ground that since an order under section 394 of the
Companies Act has not been included in the definition of "conveyance", the
legislative intent, therefore, is to exclude it from the purview of stamping. The
company further contended that placing reliance on the Hindustan Lever case is
unjustified as it dealt with the Bombay Stamp Act, 1958, which was amended to
explicitly include an order approving a scheme of amalgamation under the
definition of "conveyance.
Rejecting the above contention, the court explained that addition of explicit
inclusions of court orders within the definition of "conveyance merely had the
effect of clarifying what was accepted in the provisions as they existed prior to
the amendment. The court observed that the definition of conveyance under the
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Stamp Act is an inclusive definition of wide import which cannot be confined to
specific instruments mentioned in the statute.
While the Delhi high court has reiterated the reasoning of the Supreme Court
and the Bombay high court, the bigger issue, which is unaddressed, relates to
the stamp duty calculation, particularly where the properties of the transferor
lies in more than one jurisdiction. In such situations, what becomes unclear is:
Which states stamp duty will apply? Another question that may arise is whether
existence of waiver or set-off provisions in such situations would be of any relief.
It remains to be seen when the judiciary or legislature will shed light on these
highly significant issues.
This column is contributed by Heena Singhvi of AZB & Partners, advocates and
solicitors.
Send your comments to lawfullyyours@livemint.com
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