Looking Through the Prism of the Bombay High Court Judgment in Chief Controlling Authority v. RIL: An Analysis of the Issue of Stamp Duty

Looking Through the Prism of the Bombay High Court Judgment in Chief Controlling Authority v. RIL: An Analysis of the Issue of Stamp Duty.

[Gauri Nagar]

The author is a third-year student at Ram Manohar Lohiya National Law University, Lucknow.

A recent celebrated decision of the Bombay High Court in Chief Controlling Revenue Authority v. Reliance Industries Limited (“RIL“) (judgment dated 31st March, 2016) has essentially ignited a debate among corporate lawyers over whether stamp duty is payable on the order permitting a scheme of amalgamation where the transferor company and the transferee company have their respective registered offices in two distinct states in India. In the case of J.K. (Bombay) Pvt. Ltd v. M/s Kaiser-I-Hind Spinning & Weaving Co. Ltd., the Supreme Court’s view was that the particular scheme of amalgamation was obligatory in nature and had a force equivalent to that of a statute. The creditors and the shareholders could not, therefore, dissent to it. Moreover, the scheme could be altered only by the court’s sanction irrespective of the shareholders’ and the creditors’ acquiescence to the alteration.

An important thing that should be known is that the Indian Stamp Act, 1899 was enacted as a central legislation in order to impose stamp duties across the nation, but states have the requisite power to incorporate amendments in the Act. Further, states have an exclusive right to design their stamp duty laws in accordance with List II and List III of Schedule VII of the Constitution. States like Maharashtra, Karnataka, and Kerala have their own legislations pertaining to the subject matter of stamp duty. When the Bombay Stamp Act, 1958 was enacted, it had similar provisions as those in the Indian Stamp Act, 1899. Section 2(g) of the Act was amended subsequently. Pertaining to ‘conveyance,’ the provision states, “every order made by the High Court under Section 394 of the Companies Act, in respect of amalgamation of companies; by which property, whether movable or immovable, or any estate or interest in any property is transferred to, or vested in, any person, inter vivos, and which is not otherwise specifically provided for by Schedule I.” The definition of ‘instrument’ as given under section 2(l) of the Act serves as a point of guidance. An instrument means “any document by which any right or liability is created and transferred.” In the case of Hindustan Lever v. State of Maharashtra (judgment dated 18th November, 2003), the Supreme Court held that an instrument would encapsulate within its fold every court’s order (also an order of an industrial tribunal), and that it would be subjected to a stamp duty. The order under section 394 would come within the periphery of section 2(l) of the Bombay Stamp Act that includes all documents through which any right or liability has been transferred. The transfer is sanctioned by the court’s order due to which the “sanctioning order” becomes an instrument to transfer properties.

However, a completely different stance was adopted by a division bench of the Calcutta High Court in the case of Madhu Intra Limited & Anr. v. Registrar of Companies & Ors.(judgment dated 22nd January, 2004) wherein the Court did not take into consideration the viewpoint adopted by the Bombay High Court in the Li Taka Pharmaceuticals (judgment dated 19th February, 1996) and ruled that the process of transferring assets and liabilities by the transferor company to transferee company occurs only on an order made under sub-section (1) of section 394 due to applicability of sub-section (2) of section 394. This is the reason why a court’s order that sanctions a scheme cannot tantamount to be an instrument due to the reason that such transfer is only through the operation of law.

The same issue cropped up in the case of Delhi Towers Ltd v. GNCT of Delhi (judgment given in December, 2009), wherein it was ruled by the Delhi High Court that the Supreme Court judgment on this issue stands to be consistent and that the scheme of amalgamation is well within the definition of instrument. On the other hand, the High Court of Delhi was on the same page with the Supreme Court (in Hindustan Lever case) and opposed the view of the Calcutta High Court. Also, at that time, Delhi did not have its own stamp law that had similar provisions as that in the Bombay Act. The intention of the legislature was to include a court’s order under section 394 within the term instrument and that extended to the Indian Stamp Act, 1899 as well.

Registered Offices in Different States within India

If an instrument is subjected to a stamp duty and that an order passed under section 394 is an instrument, it can be inferred that such order would attract a stamp duty. If the amalgamating parties are present in the same state, they would have to pay the stamp duty of that certain state only. The RIL case basically dealt with a circumstance wherein the two amalgamating companies were present in two different states. The Court suggested that sections 391 and 394 should be read collectively and that an order sanctioning the amalgamation scheme should be obtained by both the transferor as well as by the transferee company.  It is obligatory for both the companies to obtain such order from their respective high courts that have the required jurisdiction and should pay the stamp duty that is pertinent to their respective states. The amalgamation scheme is supposed to bind the dissenting members and creditors of both the companies and should not merely be used for transferring property, assets, etc.

Two Schemes and Stamp Duty Being Paid Twice: Can a Claim for Rebate Exist?

If an execution of a scheme occurs outside State A but is eventually given to the stamping authorities in State A, the party has to pay the stamp duty in the state in which it was executed. Not only this, it also has to pay the stamp duty in the state where the certified copy of the instrument had been received. Also, the party can ask for differential payment in the state wherein the certified copy of the instrument has been received.  Section 19 of the Bombay Stamp Act deals with a situation wherein an instrument is executed outside the state but is later on received in Maharashtra; in such a situation, the party can pay a differential amount as stamp duty. However, the Court in RIL ruled that this section does not specifically talk about a rebate. By virtue of section 394, the Companies Act requires the scheme to be sanctioned in every state and this is the reason why stamp duty is to be paid in each state.  The RIL case did not satisfy the conditions envisaged under section 19 due to which differential payment as to the stamp duty could not be paid. This was due to the fact that in this case, the order for one of the merging parties originated in Maharashtra. Pursuant to the order, the company in Maharashtra, in a scheme of arrangement as per the Companies Act, 1956 would not be able to avail any rebate (with regards to the stamp duty being paid on the scheme in another state) whatsoever.

It is pertinent to note that the instrument of amalgamation/scheme is one wherein the orders that sanction such a scheme/compromise are incidental as the computation and valuation of the stamp duty is completely based on the scheme. Once the order is passed by the Court is the scheme is said to become operational and effective. The valuation of the stamp duty does not make the scheme alone chargeable to stamp duty (the order being the instrument). With respect to the point of valuation for the objective of stamp duty, the RIL case does not give a clear viewpoint. However, some clear indication on this issue can be seen in the case of Hanuman Vitamins Foods Pvt Ltd v. State of Maharashtra (judgment dated 20th July, 2000), wherein the Court opined that transfer takes place of a “going concern” not of its assets and liabilities distinctly. The value of the property has to be taken into consideration and this is the reason why the valuation is simply on the basis of the “share exchange ratio.” More so, the Court in the Hindustan Lever case opined that shares serve as the consideration for sale in any transaction. The share exchange ratio is determined depending upon a number of factors that include the value of the net assets of the transferor and the transferee companies. The liabilities must be set off against the gross value so as to arrive at the figure of the net assets. As soon as the transferee company gets the consideration, it will be deemed as if consideration has been received by the owner.  The RIL decision is pending for hearing before the Supreme Court.

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