This article is written by Akash Kumar, pursuing a Certificate Course in Advanced Commercial Contract Drafting, Negotiation & Dispute Resolution from LawSikho.com.
In our lives, on various occasions we come across promises being made to us. Often the guy in front of us will try to emphasize a point by saying something like, “Let me give it to you in writing.” But, unless some technicalities are met, such a contract is not valid in the eyes of law. One such legal technicality is stamping.
Stamp duty is a tax which is levied on documents. The act of payment of stamp duty on a document is known as stamping. Stamp duty is usually paid for transactional documents such as property transactions, etc. Only a ‘duly stamped’ instrument can be brought before a court of law as evidence of the execution of the contract. Hence, it is crucial to duly stamp a contract.
But when a document is inadequately stamped then complications can arise and the executors of the contract will have to face certain consequences. In this article, we will discuss the consequences of inadequate stamping of a contract.
[Note to the reader: In this article whenever you encounter a text inside square brackets, such as this, it should be understood as the author’s attempt to explain (or define) something which was hitherto unexplained (or undefined).]
The Indian Stamp Act, 1899 (henceforth referred to as ‘the Act’) is the law in India which deals with stamp duty. Under this act there are various sections which describe how an event of an inadequately stamped instrument is to be dealt with.
These sections are present in the chapter titled, “Instruments not Duly Stamped” (Chapter – V) of the said act. There are also some other sections present in other chapters (such as sections 61, 62, etc.) which also need to be discussed. The law put forth by these sections is described in layman’s language in this article. [The word ‘instrument’ is a legal term denoting legally executable documents such as contracts, deeds, etc. This word is properly defined in section 2(14) of the Act].
Two sections of the aforesaid chapter, namely, sections 33 and 35 are of prime importance as far as the topic of this article is concerned. In fact, they are the crux of the topic of discussion.
- Instruments which are unduly stamped will get impounded(section 33): If an instrument is brought before an authority entrusted with the duty to examine such documents and the instrument is found to be unduly stamped then they are supposed to impound the instrument.[The word ‘impound’ means the seizing of documents which infringe law in some way. Impounding is usually done by a person who has the authority to examine deeds under law. Also, the words ‘unduly’, ‘insufficiently’ and ‘inadequately’ are used synonymously in the course of this article. The legal definition of a duly stamped is present in section 2(11) of the Act.]
- Instruments not duly stamped are not admissible as evidence (section 35): Any instrument which is not duly stamped is not admissible as evidence. In order to make such an instrument admissible as evidence, the duty which is chargeable on the document will be levied or, in case of insufficient stamping, a penalty of ten times the value of duty has to be paid.
The following are the sections which help us understand the process of stamping and also list certain scenarios of inadequate stamping.
- After the agreement has been accepted as evidence, objection can’t be raised as to its admissibility (section 36): After a document/instrument has been accepted as evidence, no objection can be raised in a court proceeding questioning the insufficient stamping of the instrument except under section 61. Section 61 will be discussed eventually in the course of this article.
- State governments may make rules regarding ‘improperly’ stamped contracts(section 37): The state governments have been given the power to make rules regarding improperly stamped instruments under the Act. Any instrument which is “improperly” stamped(and not insufficiently stamped), after charging the requisite duty, may be certified as a duly stamped instrument.
- Inadequate stamping due to accident (section 41): The gist of this section is that if you realize that your instrument is not sufficiently stamped ‘by accident’ then you can approach the collector within 1 year from the date of stamping and try to pay the remaining duty for the instrument. If the collector is convinced that it was an honest mistake, he shall receive the remaining duty without impounding the instrument. [‘Collector’ referred to here can be anybody from the district collector, Deputy Commissioner or anyone the government appoints on this behalf. See section 2(9).]
- Prosecution of people trying to evade payment of stamp duty(section 43): This section basically says that if it seems that a person wanted to evade the payment of stamp duty, he shall be taken to court for offending the Stamp law.
Lastly, some other sections of the Act regarding penalty on instruments also need to be understood before we move on to make observations.
- Penalty shall be charged if you try to execute an inadequately stamped document(section 62): In this section, a person who tries to execute a document/instrument which is not duly stamped, shall be liable to pay a fine of upto 500 rupees.
- Penalty for trying to defraud the government(section 64 & 27): This section actually deals with penalty for not complying with section 27. Section 27 says that the duty calculated from the value of the consideration in the transaction has to be truly mentioned. Otherwise, it shall be considered an attempt to defraud the government. So, even if a document is unduly stamped, it can be charged with a penalty under section 64. A fine upto 5000 rupees is payable under this section.
Some Noteworthy Observations
Now that we’ve gained an understanding of the provisions, sections and the law itself, we can list certain observations which would help us understand the gravity of inadequate payment of stamp duty.
Some of the observations are as follows :
- When we talk about instruments not duly stamped by accident, it is to be observed that such an accident is only taken into account after the instrument has already been stamped and brought before the collector for the second time. This means that even if an honest accidental mistake was made(in calculation of duty), such a mistake will be assumed to be an ‘insufficient payment of stamp duty’ and the instrument shall be impounded (and penalty levied). Hence, it is a good idea to consult the collector beforehand (as mentioned in section 31 of the Act) regarding how much stamp duty should be paid on the instrument.
- As per Adv. B. Chugh’s observation of section 36, a fact of crucial importance is to be understood. That fact is that the inadmissibility of an unduly stamped instrument has to be brought to notice in front of the court at the earliest. Otherwise, we might not be given a chance to question the legitimacy of the contract except under section 61.
- Coming back to the discussion on section 37, ‘Improper’ and ‘insufficient’ stamping are two different things. A document can be stamped sufficiently (in relation to amount) but with a wrong ‘description’. Moreover, the section is actually a suggestion to the state governments on making such a rule. For example, there is a certain rule no. 19 under chapter IV of the Madhya Pradesh Stamp Rules of 1942 which is in concurrence with section 37.
Judgements and Precedents in relation to Inadequate Stamping
Let’s discuss some of the judgements/case laws from the honourable Supreme court of India and even some of the high courts.
Judgements which have explained the law present in the Act
- Omprakash v. Laxminarayan: In this judgement of the Supreme Court, the Hon’ble court clarified the section 35 of the Indian Stamp Act, 1899. The court held that a person who is an authority for receiving evidence shall not admit a document unless it is duly stamped. Such a document will only be accepted as evidence when the requisite duty is paid. Or, in case of an insufficiently stamped document, a penalty of ten times the amount of deficient duty shall be charged on the instrument.
- Javer Chand And Others vs Pukhraj Surana: This is another important judgement given by the Hon’ble Supreme Court. In this judgement, the court held that whenever an objection has been raised during a court case as to the inadmissibility of a document as evidence on the basis of it being not duly stamped, this objection needs to be dealt with first before doing anything else. In other words, objection for an insufficiently stamped document is different in comparison to other types of objections which are recorded and only brought in discussion when the evidence has been verified.
- Bipin Shantilal Panchal vs. State of Gujarat: In this judgement of the Supreme court, the court basically reiterated what was said in the Javer Chand case as discussed in the previous point. [Author’s comment: It needs to be understood that an inadequately stamped contract can lead to serious consequences. A document which is unduly stamped will be set aside on a single objection of the opposite party in a court case.]
- Jageshar Naik vs Collector Of Jaunpur: In this case the Allahabad High Court helped in clarifying section 61. Previously, we discussed section 36 and postponed the description of this section. This is because in this Allahabad HC judgement, section 61 is lucidly explained. The court held that according to this section, the court either on its own motion or on an application submitted by the collector, can take into consideration an order if made by the Additional Civil Judge admitting the instrument in evidence as if it were duly stamped.
Judgements regarding arbitration clauses present in unduly stamped instruments
- SMS Tea Estates (P) Ltd Vs Chandmari Tea Co (P) Ltd: In this judgement, the Hon’ble Supreme Court held that when an arbitration agreement is present in a document which is not duly stamped, it cannot be acted upon. Such an instrument will be impounded under and will not be executable unless the necessary duty or penalty is paid.
- Garware Wall Ropes Ltd v. Coastal Marine Construction & Engineering Ltd: In this judgement, the court held that, section 11 (6A) of the Arbitration and Conciliation Act, 2015 does not in any way bypass what was held in the aforesaid SMS Tea Estates judgement. Thus, an unduly stamped contract containing an arbitration clause cannot be executed unless the same is impounded and the required duty or penalty is paid. This leads to consequences such as inability to appoint arbitrators and not being able to grant interim relief under section 9 of the Arbitration and Conciliation Act.
- Gautam Landscapes Pvt. Ltd. v. Shailesh Shah: This judgement is one which was overruled by the previous Garware judgement. This judgement held that under an application under section 9 or 11 (6) of the Arbitration and Conciliation Act, 1996 an unduly stamped document can be executed. We are discussing this judgement because after it was overruled, the case has reached the Supreme Court. Therefore, it is a good idea to keep an eye on this case, especially for arbitration lawyers.
Other useful judgements
- HINDUSTAN STEEL LTD. vs. DILIP CONSTRUCTION CO.: This is quite a useful precedent in the sense that it helps us understand the true purpose of the Stamp duty legislation. It was held in this judgement that the true intention behind stamping a contract is to secure a ‘revenue stream’ for the government. As such the technicalities of the law should not be used as an arsenal against your opponent in case of an unduly stamped contract. A party shall not be defeated in a court of law solely on the basis that their contract was not duly stamped.
- Chilakuri Gangulappa v. RDO, Madanpalle and Ors.: In this judgement, the court gives a step by step procedure of how an instrument is impounded in case it is found to be unduly stamped.
Thus, after going through the aforementioned article, it is clearly understood that stamping plays a crucial role in successfully executing a contract. The technicality of an instrument being not adequately stamped can lead to grave complications. We discussed how in specific areas of practice, such as arbitration, in the current situation, an unduly stamped contract can lead to unnecessary delays. Hence, it is vitally important to pay the correct stamp duty on an instrument. This way we can avoid unnecessary hassle.
- Sagar, F.A., Shinde, A. and Mirani, S. 2020, Invoking Arbitration Agreements in Unstamped Documents – A Case Comment on Garware Wall Ropes v. Coastal Marine Constructions & Engineering, viewed 27 September 2020, <https://corporate.cyrilamarchandblogs.com/2020/01/invoking-arbitration-agreements-in-unstamped-documents-a-case-comment-on-gareware-wall-ropes-v-coastal-marine-constructions-engineering/>.
- Misra, C., Lobo, K. and Narayan, S. 2019, Validity Of An Unstamped/Insufficiently Stamped Agreement In Relation To Section 11(6a) Of The Arbitration And Conciliation Act, 1996, viewed 27 September 2020, <https://www.mondaq.com/india/arbitration-dispute-resolution/803192/sc-validity-of-an-unstampedinsufficiently-stamped-agreement-in-relation-to-section-116a-of-the-arbitration-and-conciliation-act-1996>
- Dhamija, A 2017, Validity of agreement or document which is not duly stamped, viewed 27 September 2020, <https://tilakmarg.com/answers/validity-of-agreement-or-document-which-is-not-duly-stamped/>.
- Kumar, R 2020, Validity of Under-Stamped or Unstamped instrument/document, viewed 27 September 2020, <https://taxguru.in/corporate-law/validity-under-stamped-non-stamped-instrument-document.html>
- Chugh, B 2017, Stamping of insufficiently stamped documents and procedure of impounding by Court, viewed 27 September 2020, <https://bharatchugh.in/2017/08/05/on-the-admissibility-of-insufficientlyunstamped-documents-and-procedure-of-impounding-by-the-court/>
- Shah, A 2011, Effect of not Duly Stamped Instrument, viewed 27 September 2020, <http://www.legalservicesindia.com/article/1333/Effect-of-not-Duly-Stamped-Instrument.html>.
- The Indian Stamp Act, 1899 available at: <https://www.indiacode.nic.in/handle/123456789/15510?sam_handle=123456789/1362>
- Indian Kanoon, [Website] <https://indiankanoon.org/>
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