India: Draconian Penalty Under Indian Stamp Act, 1899 Not Automatic

Introduction

The Hon'ble Supreme Court in a recent decision¹ slashed the penalty imposed by the Collector of Stamps from ten times the deficiency in stamp duty to half, i.e. five times, as being sufficient to serve the ends of justice in that matter.

Facts

The trustees of the M/s. H.C. Dhanda Trust, created under the Will of Late Mr. Harish Chand Dhanda, executed a Deed of Assent in 2005, absolutely vesting in favour of the legatees, certain immovable properties forming part of the Will. The Collector of Stamps, Indore issued a notice to the trustees stating that proper stamp duty has not been paid on the Deed of Assent, pursuant to which the trustees appeared before the Collector and filed their objections. In 2008, the Collector passed an order holding the Deed of Assent as a gift deed and based on the stamp duty payable on a gift deed under the Indian Stamp Act, 1899 ("Act"), found deficit duty to the extent of Rs. 1,28,09,700/- and also imposed 10 times penalty i.e. Rs. 12,80,97,000/-.

Procedural History

The trustees filed a reference application before the Board of Revenue, Gwalior, against the Collector's order. The Board of Revenue upheld the Collector's order on the deficiency of stamp duty and imposition of the penalty. The trust thereafter, filed a writ petition² before a Single Bench of the Hon'ble High Court of Madhya Pradesh, challenging the orders of the Board of Revenue and the Collector. The Hon'ble High Court upheld the Collector's order.

The trustees filed a writ appeal before the Hon'ble High Court, which was dismissed by a Division Bench, as not maintainable. Challenging the above orders, the trustees preferred appeals before the Hon'ble Supreme Court.

Analysis

The issue before the Hon'ble Supreme Court was whether the imposition of the penalty to the extent of 10 times by the Collector of Stamps under Section 40 of the Act, was valid or not. Section 40(1)(b) of the Act, inter-alia provides that when the Collector is of the opinion that an instrument chargeable with duty is not duly stamped, it can require payment of proper duty or the amount required to make up the same together with payment of penalty of Rs. 5/- or if it thinks fit, an amount not exceeding 10 times such proper duty or deficient portion. Considering the statutory scheme of this provision, the Hon'ble Supreme Court observed that it vests the discretion in the Collector to impose a penalty not exceeding 10 times and that whenever a statutory discretion is conferred in an authority it must be exercised in furtherance of the objects of the enactment. It has also observed that this maximum penalty, is not to be imposed as a matter of force, nor can it be automatically or mechanically imposed. The Hon'ble Supreme Court also referred to its own previous decision³ wherein, in the context of Section 40 of the Act it held that it is only in very extreme situations that penalty needs to be imposed to the tune of 10 times.

The Hon'ble Supreme Court has also analysed other provisions under the Act, which provide for similar imposition of penalty and in that regard, vests discretion in the Collector. In the context of Sections 33, 35, 38 and 39 of the Act, it held that the legislative intent of these provisions is that in respect of the instrument not duly stamped, 10 times penalty is not always retained and the Collector can exercise statutory discretion under Section 39 to reduce penalty, via a refund.

The Hon'ble Supreme Court discussed the general purpose of imposing a penalty as being a deterrent and also emphasized that there is a greater responsibility on a public authority to exercise discretion with reasonableness, where the statutory discretion entrusted, is unfettered. In this context, it observed that imposition of extreme penalty, i.e. 10 times the duty or deficient portion, cannot be based on the mere fact of evasion of duty and reasons such as fraud or deceit with a view to deprive the Revenue or undue enrichment are relevant factors in deciding the extent of penalty under Section 40(1)(b).

The Hon'ble Supreme Court observed that in the instant case, neither the Collector nor the Hon'ble High Court have cited the reasons that the conduct of the trustees was dishonest or contumacious. The reason specified in the Collector's order was that the actual nature of the document was not mentioned, with intention to escape the duty and per the Hon'ble Supreme Court, the Hon'ble High Court's reason was similar and neither have cited any other reasons. While considering the reason cited by both the Collector and Hon'ble High Court, of intention to evade stamp duty, the Hon'ble Supreme Court has held that the imposition of penalty was called for. However, it held that it was satisfied that in view of the facts, circumstances and the reasons cited by the Collector, that it was not a case for imposition of extreme penalty, i.e. to the tune of 10 times.

The Hon'ble Supreme Court held that the 10 times penalty be reduced to 5 times of the deficient duty and to this extent, allowed the appeals by the trust and modified the order of the Collector.

Views

While this decision of the Hon'ble Supreme Court supplements its previous decisions cited in the judgment, it makes it undoubtedly clear that in cases of unstamped or insufficiently stamped instruments which are chargeable with duty under the Act, the imposition of the maximum penalty can neither be automatic nor mechanical. In addition, the imposition of such penalty cannot be buttressed by the mere ground of intention to evade duty, unaccompanied by factors such as fraud, deceit, dishonesty or any other 'very extreme' circumstance.

The manner in which fraud has to be shown in a court of law has been the subject matter of several decisions of the Hon'ble Supreme Court. In one matter⁴ before it, the Hon'ble Supreme Court found that there was no proof of fraud and only a bare allegation of it was made. It has observed that:

"Fraud is to be pleaded and proved. To prove fraud, it must be proved that representation made was false to the knowledge of the party making such representation or that the party could have no reasonable belief that it was true. The level of proof required in such cases is extremely high. An ambiguous statement cannot per se make the representor guilty of fraud. To prove a case of fraud, it must be proved that the representation made was false to the knowledge of the party making such representation."

In another matter⁵ where it found that fraud was neither pleaded, much less proved, it held that fraud must necessarily be pleaded and proved. Hence, in cases where the Collector seeks to impose the penalty to the tune of 10 times, on such grounds, the Collector would need clearly and unambiguously specify such element in its order and in addition, detail out the reasons and basis for arriving at such conclusion. It remains to be seen whether and if so, to what extent Collectors of Stamps will in each case before it, delve into the tedium of detailed examination of evidence in order to determine and demonstrate the existence or lack of such factors as fraud.

Separately, in corporate transactions it is usual for financial and other investors to incorporate in the transaction documents, specific indemnity obligations on the target / investee entity in cases where investors envisage high or undeterminable monetary liability, which obligations would crystalise on such liability arising. For target entities that have entered into unstamped or deficiently stamped instruments, without any fraudulent intent, deceit or dishonesty, this decision is likely to bring relief as they can expect a lower indemnification obligation, in an eventuality where such liability crystallises.

Footnote

1 Trustees of H.C. Dhanda Trust vs. State of Madhya Pradesh and Ors. [Civil Appeal Nos. 3195-3196 of 2020 (Arising out of SLP (C) Nos. 10972-10973 of 2020) decided on 17 September, 2020].

2 Writ Petition no. 8888 of 2011

3 Peteti Subba Rao v. Anumala S. Narendra [2002 (10) SCC 427]

4 A.C. Ananthaswamy & Others v. Boraiah (Dead) By Lrs. [(2004) 8 SCC 588]

5 Gayatri Devi & Ors v. Shashi Pal Singh [(2005) 5 SCC 527]

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