Term Loan/Cash Credit/Working Capital- STAMP DUTY IMPLICATIONS

Issues involved with respect to stamp duty under Stamp Act, 1899 (herein after the Act)-

1.     What is the stamp duty payable on a term loan/cash credit/working capital loan agreement under the Indian Stamp Act 1899 (the Act)?

2.     What is the stamp duty payable on a Hypothecation Agreement?

3.     What is the stamp duty payable on a Escrow Agreement?

4.     What is the stamp duty payable on a mortgage deed or Memorandum of entry?

The Legal Provisions involved-

Section 4- Several instruments used in single transaction of sale, mortgage or settlement-

1.     Where, in the case of any sale, mortgage or settlement, several instruments are employed for completing the transaction, the principal instrument only shall be chargeable with the duty prescribed in Schedule 4[I-A], for the conveyance, mortgage or settlement, and each of the other instruments shall be chargeable with a duty of 5[two rupees] instead of duty (if any) prescribed for it in that Schedule.

2.     The parties may determine for themselves which of the instruments so employed shall, for the purposes of sub-section (1), be deemed to be the principal instrument.

Provided that the duty chargeable on the instrument so determined shall be the highest duty which would be chargeable in respect of any of the said instruments employed.

Section 5- Instruments relating to several distinct matters -Any instrument comprising, or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters, would be chargeable under this Act.

Section 6- Instruments coming within several description in Schedule I-Subject to the provisions of the last preceding section, an instrument so framed as to come within two or more descriptions in Scehdule I, shall, where the duties chargeable thereunder are different, be chargeable only with the highest of such duties.

Provided that nothing in this Act contained shall render chargeable with duty execeeding one rupee a counterpart or duplicate of any instrument chargeable with duty and in respect of which the proper duty has been paid.  

The position of Law on the point-

 In case of Santdas Moolchand Jhangiani vs. Sheodayal Gurudasmal Massand (AIR 1971 Bom 237) the Bombay High Court observed as follows:

The distinction between Sections 4, 5 and 6 of the Indian Stamp Act, 1899, which correspond in terms to Sections 4, 5 and 6 of the Bombay Stamp Act, 1958, has been brought out in the judgment of the Supreme Court in the case of Board of Revenue v. A. P. Benthall, AIR 1956 SC 85. It is observed in the said judgment that the object and scope of Sections 4 to 6 are not the same. Section 4 deals with a single transaction completed in several instruments, and Section 6 with a single transaction which might be viewed as falling under more than one category, whereas Section 5 applies only when the instrument comprises more than one transaction, and it is immaterial for this purpose whether those transactions are of the same category or of different categories. The test laid down by the Supreme Court is that in order to attract the application of Section 5, the whole question is whether the instrument comprises more than one transaction.

Application u/s 4 of the Act-

U/s 4 of stamp Act such instruments are dealt which though deal with single transaction but take several instruments to complete. But there are several requirements to be complied with to bring a transaction under the ambit of section 4, they are;

(a)   More than one instrument must be employed for completing the transaction;

(b)  Several instruments are employed to complete the same transaction;

(c)   The transaction must be either of sale, mortgage, or settlement.

A term loan agreement does not fall within these categories i.e either sale, settlement or mortgage; therefore there shall be no application of section 4 here in this document.

Application of section 5

The expression “Distinct Matters” connotes distinct transaction. The term Distinct Matters mean the matters of different kinds such as agreement for service and a lease. Similarly where a document under consideration is both an agreement for dissolution of a partnership and a bond, it is chargeable under Section 5 with aggregate duty with which two such separate instruments would be chargeable

Distinct Matters would be comprised in an instrument, if different transactions are sought to be evidenced by the same deed.Two matters are considered to be distinct if one of them is subsidiary to another contained in the same document; the test being whether one is incidental and accessory to another; they should contain distinct matter and not distinct contracts (Radha Govind Sen v. Ram Brahma Mandal, AIR 1936 Cal 814).

Application of Section 6-

Section 6 of the Act pertains to instruments coming with in several descriptions in Schedule I and the stamp duty being paid on that description which attracts the highest stamp duty. In case of Board of Revenue v. A. P. Benthall, AIR 1956 SC 85  the Court quite clearly clarified the position of law on the point which is that section 6 deals with a transaction which might be viewed as coming under more than one description as provided under Schedule I of the Act. Therefore if an instrument creates a right over an property by way of lease for the loan advanced and at the same time requires the lessor to pay some rent every month with a lock in period of 2 years i.e the property has to be utilised by lessor for at least 2 years, the nature of the instrument is both of a lease and a bond, therefore should be charged under section 6 of the Act.

Therefore:

(1)  Section 4 shall not come under this scenario as its application is limited to transactions comprising either settlement, sale, or mortgage which is not the case in term loan/cash credit/working capital loan agreement.

(2)  Section 6 starts with opening lines “subject to provision of last preceding section” i.e section 5, it talks about different descriptions that may come into effect if the matters are not “distinct matters” as provided in section 5 of the Act.

STAMP DUTY RATES FOR TERM LOAN IN NEW DELHI-

S.NO.	LEGAL ANTECEDENT	DUTY CHARGED	PROVISION
1.	Personal Guarantee	Same as Agreement i.e  INR 50	Article 5(c)
2.	Indemnity	Same as security Bond INR. 100	Article 34
3.	Apart from above an additional stamp duty will be paid on Principal Loan Agreement	INR 50	Article 5(c)

Thus, considering that a term loan agreement contains clauses on Indemnity (same as Security Bond u/a 34), Personal Guarantee(same as Agreement u/a 5), Security which are essential for the purpose of availing a term loan therefore these matters are subsidiary/incidental/ accessory to other and according to this reasoning, a term loan agreement should be levied with a stamp duty which is aggregate amount of duties with which these separate instruments are charged in accordance with section 5 of the Act.

Hypothecation-

The hypothecation is neither governed by any statue nor there is any law governing the same directly or indirectly. Hypothecation is understood in mercantile world as creation of charge on movables in favour of hypothecatee by hypothecator where possession of goods will remain with hypothecator. The hypothecator can be in possession of goods hypothecated and enjoy the same without causing any damage to the rights of the hypothecatee.

The courts in India have held that hypothecation not accompanied by possession confers good title upon person in whose favour it is made and law recognises the transaction as security and equity gives effect to it (Punjab National Bank v. Union of India (1983) 53 Comp Cas 542). Hypothecation Agreement needs not to be registered.

Pledge & Hypothecation-

The distinction between pledge and Hypothecation is that of possession, the hypothecate can be in possession of goods and movables hypothecated without causing any damage to the rights of Hypothecatee whereas in Pledge the pawner has to transfer the possession of movables to pawnee.

The hypothecation therefore is jus in re that is right in a thing without possession of the same, since it is charged for movables, its character for the purpose of stamp duty is more like that of a Pledge.

Meaning of Attestation:

According to Transfer of Property Act, 1882 Section 3 (interpretation clause) attested means:

"attested", in relation to an instrument, means and shall be deemed always to have meant attested by two or more witnesses each of whom has seen the executant sign or affix his mark to the instrument, or has seen some other person sign the instrument in the presence and by the direction of the executant, or has received from the executant a personal acknowledgement of his signature or mark, or of the signature of such other person, and each of whom has signed the instrument in the presence of the executant; but it shall not be necessary that more than one of such witnesses shall have been present at the same time, and no particular form of attestation shall be necessary

The Stamp Act 1899 in the state of Delhi (NCR) provides for exemption when it comes to levy of stamp duty on Hypothecation Agreement; which provides exemption U/A 6 of the Act a exemption from paying any stamp duty on an Hypothecation Agreement if it’s not attested. Therefore, Banks can choose not to get such instrument attested in order to save the stamp duty.

Therefore  -

(1)       Hypothecation agreement if attested is charged according to Article 6(Agreement relating to deposit of title Deeds, Pawn or Pledge) of Stamp Act 1899, however if a hypothecation agreement is unattested no stamp duty needs to be levied on the same.

(2)       For the same reasoning under the Bombay Stamp Act 1958, the stamp duty levied on a hypothecation agreement is levied under Article 6 of Bombay Act which is in pari materia to the Stamp Act 1899.

1.	Hypothecation(creation of security) (a)   If attested	0.5% of amount secured by such deed.	Article no. 6(a) schedule IA Indian stamp (Delhi Amendment) Act,
	(b)  If unattested	NIL	Exemption to Article 6 of the Act.

Escrow Account Agreement-

The nature of an Escrow Account agreement is that of an “Agreement” provided under Article 5 of the Act. It is because of the following reasons-

If an instrument contains certain covenant breach of which would attract damage, and such damage has to be fixed by Court of law than it is necessarily an Agreement and therefore shall be charged under Article 5 of the Act, in a case where the damage is fixed and the party obliged to pay money has to pay an ascertained amount, than the instrument shall fall in the category of a Bond under the Act; reference can be drawn from many judgments of Indian High Courts namely-

(i)              ILR 1969(1) Punj 529,

(ii)            The Bengal Paper Mills Co. Ltd. vs The Collector Of Calcutta And Ors (AIR 1976 Cal 416)

Escrow Account Agreement-

1.

Escrow Account Agreement

Same as Agreement Rs. 50

Article 5(c)

Mortgage Deed or Memorandum of Entry - Mortgage Deed if not done by deposit of title deed is charged as 3%.of the consideration amount.

By Memorandum of Entry, one enter into a Declaration with the Bank that one has handed over the original set of documents of its property for mortgaging the same as security for the loan. Creation of a mortgage by a Memorandum of Entry would attract a stamp duty.

1.	Mortgage Deed	3% according to Article 23 same as Conveyance as given in Article 40 of the Act.
2.	Memorandum of Entry .	Rs. 100 as given in Article 57(b).