The Hindu Business Line : Stamped and harassed — The stamp duty administration needs to be simplified

THE IMPOSITION of stamp duty on all deals on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) even where the brokers and investors are located outside Maharashtra has predictably drawn the ire of the Finance Ministry. It has asked the State to roll back such a retrograde impost.

In a written answer to a query by a Rajya Sabha member, the Finance Minister, Mr P. Chidamabaram, remarked that the amendment to the Bombay Stamp Act, 1958, made by the State Government could adversely impact the national character of the bourses "hampering the development of capital markets in the country".

While pointing out that the amendments made by the Maharashtra government could lead to inter-State jurisdictional disputes, stoking avoidable litigation, the Finance Minister also conceded that the problem had cropped up as there are no clear rules on what sort of transactions would attract stamp duty. That stamp duty has come to signify practical difficulties in disposing of property is but a harsh reality that many have learnt to live with.

No wonder all reform-minded people oppose the idea of stamp duty which they see as curbing the potential of the country's real estate market and low-cost construction. Yet, for many a State government, the stamp duty is a crucial avenue of revenue and each tries to think up ingenious ways to tap this source, including on deals on bourses.

Even as the issue of stamp duty hangs fire, the Law Commission has come out with some clarifications to the important issues of "Verification of stamp duties and registration of arbitral awards".

In its 194{+t}{+h} report on the subject, tabled in the winter session of Parliament, the Law Commission, chaired by Mr Justice M. Jagannadha Rao, had taken up the subject suo motu, following the communication of the judgement of a Madras High Court Division Bench to the Law Commission, asking the latter to consider a legislative amendment.

A little digression is in order. So far as stamp duties are concerned, the Indian Stamp Act, 1899 applies to arbitral awards throughout India, but some States have passed separate Stamp Acts for their territories.

As far as registration of awards is concerned, the Registration Act, 1908 deals with registration of documents. Section 35 of the Indian Stamp Act, 1899 (and corresponding provisions in the State Acts) says that documents which are required to be stamped, if they are not or are inadequately stamped, would not be admissible in evidence "for any purpose". Section 35 deals with impounding of documents presented before a public authority entitled to record evidence. Hence, Sections 33 and 35 of the Stamp Act are attracted if an award is not or is insufficiently stamped.

And an award which requires to be registered, if it falls within Section 17(1)(b) of the Registration Act, 1908 and if it is not registered, is not a valid document and cannot be treated as affecting immovable property. That is the nub of the matter.

Be that as it may, the new Arbitration and Conciliation Act, 1996 says, in Section 31 (5), that the arbitral tribunal shall communicate a `signed' copy of the award to the parties. Thereafter, the parties are entitled to file applications for setting it aside, under Section 34(1), or for its enforcement, under Section 36, by annexing the copy of the arbitral award.

In its latest report, the Law Commission says that if only a copy of the award is to be filed along with the said applications under the new Act of 1996, the court will not be in a position to ascertain whether the original award is duly stamped, or where it is required to be compulsorily registration, whether it is duly registered.

It is in this context that the Madras High Court, in its judgement on the subject on December 17, 2003, formulated an interim solution under which the applicant could be directed by the Registry of the court to file fresh stamp papers in the court of the required value or to deposit the money-value of the required stamp duty, along with the application under Section 34(1) or Section 36, with a right to obtain refund in case the original is thereafter found to have been duly stamped.

The Law Commission did not find this solution satisfactory as it could cause serious hardships to the parties where the stamp duty is a heavy amount. Moreover, this solution does not solve the problem pertaining to registration.

It needs to be stated that there was no such difficulty under the Arbitration Act, 1940 (since repealed) inasmuch as the original award had to be filed in court under Section 14(2) of that Act so that a decree could be passed on the basis of the award.

But under the new Act, the award becomes enforceable as a decree straightaway after the period for filing an application to set aside the award expires.

Thus, while there was no difficulty for the court to look into and verify the original award under the1940 Act, the problem has arisen in regard to awards passed under the new Act for the simple reason that under this law, an arbitral tribunal is required to send only signed copies of the award to the parties.

Expatiating on the interim solution given by the Madras High Court on the issues, the Law Commission said the Madras High Court proposal deals only with the question whether the original award is `duly stamped' and not whether the award is `duly registered'.

Second, the Madras High Court does not require that the signed copy of the award — which is sent to the parties — should contain an endorsement of the arbitrator — under their signature — that the original award has been duly stamped and registered. Third, the view of the Madras High Court as to deposit of the requisite stamp papers or payment of cash equivalent of the stamp duty payable on the original award can cause serious hardships in several cases.

If the parties had already provided the necessary stamp papers to the arbitrator for engrossing the award on stamp papers, to ask them to deposit fresh stamp papers or cash equivalent would, in the Law Commission's view, amount to "an unnecessary burden".

Illustrating this point, it said in a case where an award was passed in Delhi in a claim of Rs 500 crore, the parties deposited stamp papers worth Rs 50 lakh and the award was indeed engrossed on such papers. If in such a case, the original award is retained with the arbitrators and one of the parties files an application under Section 34 or 36 of the new Act of 1996, to direct that party to again deposit cash of Rs 50 lakh would be a "great hardship".

After weighing several solutions, the Law Commission said one could be that after the award is passed, an amendment — by introducing a new provision in the 1996 Act — may lay down that the original award should be filed in the court, within whose jurisdiction the award is passed, that is, just as it was being done under the 1940 Act.

Because the court will then have in its possession, the original award itself and it can verify whether or not the requirements of stamp duty and registration have been complied with by the arbitrators.

Yet another solution could be that the arbitral tribunal, while signing the copy of award, should make an endorsement that the original award is duly stamped and registered, if it requires compulsory registration. This, the Law Commission recommends, is a good solution.

As the new Arbitration and Conciliation (Amendment) Bill, 2003 is pending before the Standing Committee of Parliament, the Law Commission has recommended that these two solutions be incorporated into the Amendment Bill. Even as the stamp duty requirement continues, the 1999 Act must be quickly amended to end the harassment of stakeholders.

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