De-mystifying stamp duty on amalgamation orders

India is a complex jurisdiction and often, answers are not obvious; the reasons behind those answers are rather evolved. What most businesses find aggravating, is an absence of clarity and a maze of detail. This article answers to the innocuous question – “Does an order of a scheme of amalgamation (“Court Order”) attract stamp tax”. It then seeks to explain how the law has panned out over various states

Short Answer

It (whether the order attracts stamp tax) depends inter alia on the state in which the registered office of the relevant companies are located, but in the medium term, High Courts in the various states are likely to hold that stamp duty is attracted.

The Journey So Far

The term ‘conveyance’ as defined historically includes every instrument by which property whether movable or immovable is transferred inter vivos (i.e., other than in the event of death). While the definition is not identical across states, it is broadly similar.

Some states - Maharashtra1, Karnataka2, Andhra Pradesh3 and West Bengal4 have amended the definition of “Conveyance”, so as to expressly include within the ambit of the term ‘Conveyance’, an order of scheme of amalgamation, others have not. In the states where the definition of Conveyance has been amended (Delhi and Tamil Nadu) the High Courts have taken different approaches. The Delhi High Court has held5 that an order of a scheme attracts stamp duty. Madras High Court6 (in Tamil Nadu) has held that it doesn’t.

The attempt of the state legislatures and revenue authorities to require payment of stamp duty on the order of the court sanctioning a scheme, or the revenue to recover stamp duty, has typically been challenged on the following grounds:

1. The amendment to the definition of ‘conveyance’ is unconstitutional;
2. An order made by the court after judicial scrutiny and transfer of property under such an order would not be an act of parties (i.e., is not inter vivos) to which the court puts its seal of approval;
3. An order of a court is made in exercise of its judicial functions and is not “a document” or “an instrument”; and
4. Once the court passes an order or decree, it ought to be implemented and cannot be subjected to stamp duty else the courts would become subject to interference by the revenue authorities and would not be admissible in evidence.

The Supreme Court7, had occasion to deal with these questions in the context of amendments introduced by the Bombay Stamp Act, 1958 (“BSA”).

The Supreme Court held in respect of

1. Constitutional Validity

The state legislature is within its powers under the constitution to provide that the order of the court sanctioning a scheme is a ‘conveyance’. It derives power under Entry 44 of List III8 and Entry 63 of List II9 of the Seventh Schedule;

2. Transfer Inter Vivos

The jurisdiction of the court while sanctioning the scheme is supervisory (to observe compliance with the procedure set out in the Companies Act) and the scheme is otherwise not unconscionable or against public policy. The order of amalgamation is based on an arrangement arrived at between the two companies pursuant to provisions under law that give effect to the will of the majority of the shareholders. Thus the order of the court should be treated as giving effect to the agreement of the parties.

3. ‘Document’ and ‘Instrument’

An Order would be an “Instrument” as defined under section 2(l) of the BSA. The recital in the scheme of amalgamation as well as the Order declares that, upon such order of the High Court, the undertaking of the transferor-company shall stand transferred to the transferee-company with its entire movable, immovable and tangible assets to the transferee-company without any further act or deed.

The Supreme Court has viewed that the amendment to the BSA was clarificatory and has held in unambiguous terms that an order of a court sanctioning a scheme of amalgamation is an instrument and thus operates as a conveyance. The position was followed in West Bengal in a recent case from the Calcutta High Court10 which we discuss below.

4. Interference by the revenue authorities

While the Supreme Court did not consider this issue, it was discussed by the Bombay High Court11. The Bombay High Court held that this is not the first instance where an order of a court is subjected to stamp duty. There are other instances (such as instrument of partition – including where the partition is by order of a civil court or an arbitral award) which are subject to stamp duty.

Calcutta

On the face of it there appears to be conflicting judgments from West Bengal. The Calcutta High Court (Single Judge), held in the case of Gemini Silk Limited v. Gemini Overseas Limited12 that an order sanctioning a scheme, where properties together with liabilities are transferred, has all the trappings of a sale and is a “Conveyance” as well as an “Instrument” by which property whether movable or immovable is transferred inter vivos.

However, on appeal, a Division Bench of the same Court in Madhu Intra Limited v. ROC13, set aside the Single Judge order and held that an order of amalgamation was not subject to stamp duty. In doing so, it appears that the Division Bench did not take note of the Supreme Court pronouncement in Hindustan Lever v. State of Maharashtra14. But recently, in Re: Emami Biotech Limited15 a single judge of the Calcutta High Court, placing reliance on the unambiguous language used by the Supreme Court in paragraphs 32 and 38 of the judgment, held that the Division Bench (in Madhu Intra)16 erred in its conclusion. It did not notice the Supreme Court pronouncement in Hindustan Lever17 and the Supreme Court judgment is binding on it.

In our view, the position taken by the single judge in Emami Biotech Limited18 is the better view and is likely to be upheld.

Delhi

As discussed above, the Indian Stamp Act (applicable in Delhi), has not been amended by the State Legislature to provide explicitly for an order of a scheme of amalgamation to be stamped as a conveyance. In spite of this, in Delhi Towers v. G.N.C.T. of Delhi19, relying on the Hindustan Lever20, the Delhi High Court held that an order, is an “Instrument” and should be stamped as a conveyance.

Madras

A Division Bench of the Madras High Court while interpreting the provisions of the Sick Industries Companies (Special Provisions) Act, 1985, laid down in the case of T.T. Krishnamachari and Co v. Joint Sub-registrar I and Anr21 that any transfer of the property effected in favour of transferee company, not by the act of the parties, but by operation of law which is an involuntary act would not attract stamp duty. As soon as an order is made by the BIFR under Section 18(6A) of the Sick Industries Companies (Special Provisions) Act, 1985 approving the scheme, there is no question of executing any other instrument/document chargeable with stamp duty. The Madras High Court relied heavily upon the judgment of the Calcutta High Court in Madhu Intra22. Incidentally, Hindustan Lever23 was not referred to.

Subsequently, in Re: Automac (Madras) Pvt. Ltd.24, the Madras High Court (Single Judge) observed that specific amendments were made in the BSA to include every order and there is no parallel amendment in the stamp act application to the State of Tamil Nadu. The High Court did not rule on the issue on the grounds that it was premature at the time of sanctioning a scheme under Section 394 of the Act, to hold whether an Order is subject to stamp duty. The Tamil Nadu Government has tabled a bill proposing to amend the stamp act (as applicable to Tamil Nadu)25. The said bill proposes to amend the definition of the term “Conveyance” to include every order of the High Court under section 394 of the Companies Act, 1956 involving inter vivos transfer of property, whether movable or immovable, or any interest in any property.

What next?

We expect that individual states will sooner rather than later amend the state stamp law to provide explicitly for stamp duty on an order of amalgamation. Even in the absence of such an amendment, given the views of the Supreme Court in Hindustan Lever26, the High Courts of relevant states will have little choice but to follow the position taken by the Supreme Court.

Footnote:

Footnote: 1 Bombay Stamp (Amendment) Act, 1993, 2 Karnataka Stamp (Amendment) Act, 1999, 3 Indian Stamp Act (Andhra Pradesh Amendment) Act, 2005, 4 Indian Stamp Act (West Bengal Amendment) Act, 2003, 5 Delhi Towers Limited vs GNCT of Delhi (2009) 165 DLT 418 (Del), 6 T.T. Krishnamachari vs Jt Sub-Registrar-I (2008) 144 Comp Cas 708 (Mad), 7 Hindustan Lever v. State of Maharashtra, AIR 2004 SC 326, 8 Stamp duties other than duties or fees collected by means of judicial stamps but not including rates of stamp duty, 9 Rates of stamp duty in respect of documents other than those specified in provisions of List 1 with regard to the rates of stamp duty 10 Re:Emami Biotech Limited and Anr., (2012) 112 SCL 33(Cal) 11 Li Taka Pharmaceuticals Ltd vs State of Maharashtra, 12 2003 53 CLA 328, 13 (2006) 130 Comp Cas. 510, 14 Supra note 7, 15 Supra note 10, 16 Supra note 13, 17 Supra note 7, 18 Supra note 10, 19 Supra note 5, 20 Supra note 7, 21 Supra note 6, 22 Supra note 13, 23 Supra note 7, 24 [2010] 2 MLJ 553, 25 Indian Stamp (Tamil Nadu Second Amendment) Bill, 2012, 26 Supra note 7.

Disclaimer – The author of this article would like to thank Ms. Poornima Hariharan, Associate in Juris Corp for her assistance in writing this article.