The dilemma of stamp duty on orders of amalgamation
The dilemma of stamp duty on orders of amalgamation
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 transferor’s 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.
Illustration: Jayachandran/Mint
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 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 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 state’s 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.
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