STAMP DUTY ON BUSINESS RESTRCUTURING - DEMYSTIFIED By Sanjay Buch, Advocate & Solicitor Taxation Laws in India are notoriously mysterious and ambiguous. The only thing clear is that citizens have to bear and pay taxes for the overall development of the country, the state and the society as a whole. Stamp duty is a state subject and all the states in India are empowered by the Constitution to frame their own laws for imposing tax in the nature of stamp duty on “instruments”, and not on “transactions”. Besides being payable on documents conveying or transferring immoveable property, stamp duty is also payable on all such documents or instruments that have the effect of transferring right, title or interest to or in the property. Like all central Acts, Indian Stamp Act, 1862 (the “ISA”) is the mother law pursuant to which various states have framed their own stamp laws applicable to the state. The state of Maharashtra has been the pioneer state in developing its stamp duty law being the Bombay Stamp Act, 1958 (the “BSA”). This paper deals with the subject of applicability of stamp duty in the cases of business restructuring through amalgamations, de-mergers, sale of business by slump-sale and itemised sale of assets method, conversion of entities under part IX of the Companies Act, 1956 (the “CA”). Since each of the foregoing modes involves transfer and vesting of property and capital assets, the Transfer of Property Act, 1882(the “TP Act”) and the related aspects with reference to stamp duty under the Indian Income Tax Act,1961 (the “IT Act”) are also relevant to be understood as follows: 1. STAMP DUTY ON AMALAGAMATION/ MERGER: The term Amalgamation is not defined in the CA. However, Section 2 (1B) of the IT Act defines the term “Amalgamation” as follows: “Amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that● all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; ● all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; ● shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation; ● otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the firstmentioned company”. Section 394 of the CA provides for facilitating reconstruction and amalgamation of companies and inter-alia provides as follows: “(1) Where an application is made to the High Court under section 391 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the High Court-
(a) that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and (b) that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme (in this section referred to as a “transferor company”) is to be transferred to another company (in this section referred to as “the transferee company”); the High Court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters: (i) the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company; (ii) the allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person; Section 394 (2) states that where an order under this section provides for the transfer of any property or liabilities, then, by virtue of the order, that property shall be transferred to and vest in, and those liabilities shall be transferred to and become the liabilities of, the transferee company; and in the case of any property, if the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect. Section 394 (4) provides that in this section-property” includes property, rights and powers of every description; and “liabilities” includes duties of every description.” The aforesaid provisions of the IT Act and the CA clearly states that all the properties of the Transferor/Amalgamating Company should stand transferred to and vest in the Transferee/Amalgamated Company as on the particular date. In other words, the amalgamation involves transfer of assets and property or “Conveyance” though by operation of law and not by act of the parties. Section 2 (g) of the BSA defines “Conveyance” and reads as follows: “Conveyance includes(i) a conveyance on sale, (ii) every instrument, (iii) every decree or final order of any Civil Court, (iv) every order made by the High Court under Section 394 of the Companies Act, 1956 in respect of amalgamation or reconstruction of companies; and every order made by the Reserve Bank of India under Section 44A of the Banking Regulation Act, 1949 in respect of amalgamation or reconstruction of Banking Companies; -by which property, whether movable or immovable, or any estate or interest in any property is transferred to, or vested in, any other person, inter vivos, and which is not otherwise specifically provided for by Schedule I.” The crucial test which a document must satisfy before it can be considered as falling within any of the clauses of the inclusive definition of “Conveyance” in Section 2(g) of the BSA is that by the said document property or interest in property must be transferred to or vested in any other person. There has, therefore, to be a transfer from one person to another person or vesting of property from one person in another person. Section 2(g) of the Stamp Act was amended in 1993 to provide that “conveyance” would include every order made by the High Court under Section 394 of the Companies Act in respect of amalgamation of companies. The constitutional validity of this amended provision was
challenged in the case of Li Taka Pharmaceuticals Ltd. vs. State of Maharashtra 1 , but the Bombay High Court dismissed the petition and held that an order under Section 394 is founded upon compromise between the two companies of transferring assets and liabilities and the order is an “instrument” as defined under Section 2(i) of the BSA. This judgment was challenged by Hindustan Lever Limited in the Supreme Court. While the SLP in HLL’s case was pending, Kolkatta High Court held in Gemini Silk Ltd. vs. Gemini Overseas Ltd. 2 and subsequently in the landmark judgment of Hindustan Lever vs. State of Maharashtra 3 (“HLL’s Case”), it has been categorically held that the amalgamation scheme sanctioned by the Court would be an “instrument” and the State Legislature has legislative competence to impose stamp duty on the order of amalgamation passed by a court. The transfer and vesting of a transferor company’s property and assets, etc. into a transferee company takes place by virtue of the High Court's order. Thus, the vesting of the property occurs on the strength of the order of the High Court sanctioning the scheme of amalgamation, without any further documentation being required. In HLL’s Case, it was held by the Supreme Court that Section 2 (g) of the Stamp Act is not repugnant to Section 394 of the Companies Act. It was further held that conveyance includes instrument by which properties are transferred to any other person inter vivos. “Transfer inter vivos” comprehends transfer between two juristic persons i.e. two companies pursuant to amalgamation under Section 394. The imposition of stamp duty on the Court order passed under Section 394 r.w. Section 391 of the Companies Act, sanctioning Scheme of two companies which were to be amalgamated, was held as valid. Also, as the amalgamation was based on compromise or arrangement, it was effective transfer of assets and liabilities between the parties. “The term “instrument” has been defined in Section 2(i) of the BSA to mean every document by which any right or liability is or purports to be created, transferred, limited, extended, extinguished or recorded, but does not include bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of shares, debenture proxy and receipt. Section 394 (3) provides that the certified copy of the Order of the Court has to be presented before the Registrar of Companies within 30 days for registration. And in default any officer of the company, who is in default, becomes liable to be punished and fined, which may extend up to Rs. 500/-. Section 391 (3) provides that an order made by the Court under Section 391 (2) shall not have effect till a certified copy of the order has been filed with the Registrar. On presentation of the certified copy of order, the Registrar of Companies certifies that the transferor Company stands amalgamated with the transferee Company along with all its assets and liabilities. Thus the amalgamation scheme sanctioned by the Court would be an “instrument” within the meaning of Section 2(i) of the BSA. By the said instrument, the properties are transferred from the transferor to the transferee, the basis of which is the compromise or arrangement arrived at between the two companies. The Supreme Court further held as follows: “The transfer of assets and liabilities takes effect by an order of the Court. The order also provides for passing of consideration from the transferee company to the shareholders of the transferor company. The consideration for sale in a transaction like this is the shares. The share exchange ratio is decided on the basis of number of factors including the value of net assets of 1
AIR (1997) Bom 7  53 CLA 328 (Cal) 3 AIR (2004) SC 326 2
the transferor and transferee company. To arrive at this figure of net assets the liabilities have to be set off against the gross value of the assets. The share value is fixed. The properties belong to the company and the company belongs to the shareholders. Once the shareholders of the transferee company receive the consideration it would be deemed as if the owner has received the consideration.” Article 25 (da) of Schedule I to the Stamp Act lays down the stamp duty for conveyance relating to order of the High Court under Section 394 of the Companies Act and stipulates the rate of stamp duty to be as under: “… … … 10 per cent of the aggregate of the market value of the shares issued or allotted in exchange or otherwise and the amount of consideration paid for such amalgamation: Provided that, the amount of duty, chargeable under this clause shall not exceed(i) an amount equal to 5 per cent of the true market value of the immovable property located within the State of Maharashtra of the transferor company; or (ii) an amount equal to 0.7 per cent of the aggregate of the market value of the shares issued or allotted in exchange or otherwise and the amount of consideration paid for such amalgamation, whichever is higher... … …” From the provisions of Section 2 (g) and the decisions of the Courts, it is clear that every order made by the High Court under Section 394 of the Act in respect of amalgamation or reconstruction of companies by which property is transferred inter vivos, is conveyance for purpose of the Stamp Act and stamp duty is liable to be paid as per the provisions of Article 25 (da). Process of Adjudication Section 31 of the BSA provides for the adjudication of proper Stamp Duty. The applicant under this section has to submit an instrument executed or unexecuted and previously stamped or not for the purpose of opinion to the collector of stamps and for this purpose, the applicant has to pay a fee of Rs. 100/-. On receipt of the application of adjudication and the instrument, the collector has to form his opinion as regards its chargeability and then express his opinion to the applicant. Section 32(4) of the BSA provides that when the instrument is brought to the collector for adjudication within one month from the date of its execution, the person is liable to pay stamp duty within 60 days form the date of service of the notice of demand in respect of the stamp duty adjudicated by the collector. If the applicant fails to pay the said stamp duty within the stipulated period of 60 days, the person is liable to pay a penalty at the rate of two percent per month or part thereof, from the date of execution of such instrument. It is therefore necessary to pay stamp duty within 60 days from the date of the demand notice served by the collector to avoid levy of penalty. In view of the penal provision in section 32(4) of the Act, the applicant should take care to submit the unexecuted document for adjudication under section 31 of the BSA. In case of unexecuted instrument the collector has no power to levy penalty and if the applicant does not agree with the determination of Stamp Duty, he can withdraw his document from adjudication. Amalgamation of Wholly Owned Subsidiary It is clear from a plain reading of Article 25 (da) of the BSA that shares would have to be issued or allotted, or consideration paid to the shareholders of the Transferor Company for the said article to be applicable to the order of High Court in cases of merger. However, in the case of a wholly-owned subsidiary (“WOS”), there is no consideration in the nature of shares or otherwise passing from the Transferee to the shareholders of Transferor as the Transferor is a WOS of the Transferee. The shares would get cancelled and no shares would be issued. As a 4
result, provisions of Article 25 (da) would not apply in such a scenario and the machinery set up by the BSA fails. Clause (b) of Explanation III to Article 25 (da) of the BSA applies to cases where the Transferee is an unlisted company, and states that the market value of shares of the Transferee Company which is unlisted, would mean the market value of the shares of the Transferor Company or as determined by the Collector after giving the Transferee Company an opportunity of being heard. However, if there is no issue/ exchange of shares by Transferee to shareholders of Transferor and the shares of Transferor would be cancelled on account of its being a WOS of the transferee, the above Explanation does not apply to a merger involving parent and its WOS. Consequently, Explanation III (ii) to Article 25 (da) also would not apply and the stamp authorities should not levy duty by applying exchange ratio as on appointed date. It has been held in the cases of Gemini Silk Ltd. and HLL’s Case that the transfer and vesting of a Transferor Company’s property and assets takes place by virtue of the High Court’s order. The vesting of the property occurs on the strength of the order of the High Court sanctioning the scheme of amalgamation, without requirement of executing any other document. The Order of the High Court is an instrument effecting conveyance of property and would be required to be stamped as per the provisions of Article 25 (da). However, as seen above, there should be no levy of stamp duty under Article 25 (da) of the Stamp Act on the merger of a WOS. Exemption Benefits under 1937 Notification ISA: Under Schedule I to the ISA, Articles 23 and 62 deal with conveyance of properties and transfer of shares respectively. Under Section 9, the central government has been authorised to allow reduction and remissions from payment of stamp duty in certain cases. By way of Notification No.1 dated the 16th January, 1937, published in the Gazette of India 1937 Part I at page 78 (the Notification) the central government in exercise of its powers conferred by clause (a) of Section 9 of the ISA has granted remission of stamp duty chargeable under Articles 23 and 62 of Schedule I to the ISA on instruments (order of amalgamation) evidencing transfer of property between companies limited by shares as defined in the Companies Act, “in cases (i) where at least 90% of the issued share capital of the Transferee Company is in the beneficial ownership of the Transferor Company; or (ii) where the transfer takes place between a parent company and the subsidiary company one of which is the beneficial owner of not less than 90% of the issued share capital of the other; or (iii) where the transfer takes place between two subsidiary companies of each of which not less than 90% of the share capital is in the beneficial ownership of a common parent company. Provided that in each case a certificate is obtained by the parties from the officer appointed in this behalf by the local government concerned that the conditions prescribed above are fulfilled.” The claim for exemption under the Notification came up for consideration before the Punjab High Court in the case of Associated Clothiers vs. Union of India 4 where, while upholding the validity of the Notification the Court held that "the notification was designed to facilitate reconstruction of a company or amalgamation of two companies which are more or less under 4
AIR 1957 (Punjab) at page 261
the same ownership so that they should be able to rearrange their affairs without being saddled with liability for payment of stamp duties". It was held further that a company wishing to claim relief from stamp duty under the provisions of this notification must satisfy the officers concerned that (1) the document evidences the transfer of property between companies limited by shares, and (2) the shares of the transferor company (subsidiary company) comprising of not less than 90% of the issued share capital are in the beneficial ownership of the transferee company (parent company). Mere beneficial ownership for the purpose of availing exemption under the Notification would be sufficient and legal ownership thereof is not necessary. While explaining the meaning of the term beneficial owner the court held that it is not susceptible of a very clear and precise definition. It however means such a right to an enjoyment of property as exists where the legal title is in one person and the right to such beneficial use or interest is in another person, and, where such right is recognised by law and can be enforced by the courts at the suit of such owner or of someone on his behalf. Citing these vary reasons the court allowed the Petitioner / Appellant to avail the benefit of the Notification. However, it is regretful to know that despite the Notification having a statutory force, except the States of Andhra Pradesh and the State of Maharashtra, all other states have recognized the grant of an exemption under the said Notification. 2. STAMP DUTY ON DE-MERGERS: De-merger is one of the most popular and tax friendly mode of corporate restructuring. Demerger is adopted so as to permit the carry forward of accumulated losses and unabsorbed depreciation from the de-merging company to the resultant company. Under this mode neither the companies involved, nor the shareholders, are subject to capital gains tax as a result of the transactions. Further, all fiscal concessions will survive for the unexpired period in the case of amalgamation and de-mergers. As per the Finance Act, 1999, certain provisions were added to the IT Act whereby amalgamation and De-merger procedures under the IT Act have been simplified. Section 19 AA of the IT Act defines “De-merger”, in relation to companies, which means a transfer pursuant to a scheme of arrangement U/s 391-394 of the Companies Act, 1956, by a Demerged company of its one or more undertakings to the resulting company in the following manner:● All the property of the undertaking, being transferred by the de-merged company, becomes the property of the resulting company; ● All the liabilities relatable to the undertakings being transferred by the de-merged, become the liabilities of the resulting company; ● The property and liabilities of the undertaking, being De-merged are transferred at book value; ● The resulting company issues shares to the shareholders of the de-merged company on a proportionate basis as a consideration for De-merger; ● The shareholders holding not less than three-fourths in value of the shares in the De-merged company, other than the shares already held therein, become shareholders of the resulting company; ● The transfer of the undertaking is on a going concern basis; and the De-merger is in accordance with the conditions, if any, notified under sub-section 72 A. For the purpose of this clause ‘undertaking’ includes a part of the undertaking or the unit or division of an undertaking or a business activity taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity. 6
Also for the purposes of this clause, liabilities include (a) liabilities which arise out of the activities or operations of the undertaking, (b) specific loans/borrowings incurred and utilised solely for the operations of the undertaking and (c) in cases other than (a) and (b) so much of the amounts of general or multi purpose borrowings, if any, of the De-merged company as stand in the same proportion with the value of the assets transferred in a De-merger bears to the total value of the assets of such De-merged company immediately before the De-merger. The expression “De-merged company” has been defined to mean a company whose undertaking is transferred, pursuant to a De-merger, to a resulting company. Furthermore the expression “Resulting company” has been defined to mean one or more companies to which the undertaking of the De-merged company is transferred in a de-merger and as a consideration whereof, the resulting company issues shares to the shareholders of the de-merged company. It further provides that the resulting company shall include any authority or body or local authority or Public Sector Company or a company established, constituted or formed as a result of De-merger. With introduction of De-merger provisions, however, there were no corresponding clarifications or amendments in the BSA to clarify whether a Scheme of De-merger would be liable to stamp duty until the year 2002 when provisions imposing stamp duty on Demerger was introduced with retrospective effect from 1st January 2000. Until then it was perceived that there would be no transfer of property upon a De-merger but only a re-arrangement of the affairs of the Company with no change of composition of shareholders as there is no consideration to be paid to any shareholder but an proportionate issue of shares on book value in the new Resulting Company. Thus it was believed that stamp duty was not payable on a order sanctioning a scheme of De-merger. Invariably therefore the question that would be asked was whether the Order of the High Court sanctioning the de-merger scheme under Section 394 of the Act can be considered as an “instrument” within the meaning of Section 2(l) of the BSA thereby attracting the provisions of the stamp laws including BSA? The raging controversy has long being well settled with the amendment of Article 25(da) of the BSA and subsequently reaffirmed by the judgment of the Supreme Court in HLL’s Case (Supra) in which it was held that “the order passed by the Court under Section 394 of the Companies Act is based upon the compromise between two or more companies. Function of the Court while sanctioning the compromise or arrangement is limited to oversee that the compromise or arrangement arrived at is lawful and that the affairs of the company were not conducted in a manner prejudicial to the interest of its members or to public interest that is to say it should not be unfair or contrary to public policy or unconscionable. Once these things are satisfied the scheme has to be sanctioned as per the compromise arrived at between the parties. It is an instrument which transfers the properties and would fair within the definition of Section 2(1) of the Bombay Stamp Act which includes every document by which any right or liability is transferred. The State Legislature would have the jurisdiction to levy stamp duty under Entry 44, List III of the seventh Schedule of the Constitution of India and prescribe rates of stamp duty under Entry 63, List II. Demergers are thus not exempt in most states from payment of stamp duty. Some states have specifically amended their local stamp Act to tax demergers but other who have not done so far are covered by HLL’s case.
3. ISSUE OF SHARES PURSUANT TO AMALGAMATION OR DE-MERGER With the introduction of DEMAT mode under Depositaries Act, 1996 (â€œDAâ€?), a new section 8A was incorporated in the ISA granting exemption from payment of stamp duty under certain circumstances. Section 8A of the ISA inter-alia provides that notwithstanding anything contained in the ISA, an issuer, by the issue of securities to one or more Depositaries shall, in respect of such issue, be chargeable with duty on the total amount of security issued by it and such shares / securities need not be stamped individually. It is also provided in this section that where an issuer issues certificate of security under section 14(3) of DA on such certificate duty shall be payable as is payable on the issue of duplicate certificates under ISA. Moreover, transfer of registered ownership of shares of a company dealt with by a Depositary is also exempt from stamp duty under Article 62 of Schedule I of ISA. It is, therefore, made clear under section 8A of the ISA that at the time of issue of shares, the issuer shall pay the stamp duty on the total amount of the shares issued by it whether through a Depositary or direct to investors even though there will be no physical shares (instrument) which can be stamped (executed) and such securities / shares shall not be required to be individually stamped. Article 19 of ISA in its application to the Silvassa, Union Territory of Dadra and Nagar Haveli requires that any certificate or other document evidencing the right or title of the holder thereof, or any other person, either to any shares, scrip or stock in or of any company, requires to be stamped at the flat rate of Two Annas per share certificate. Article 36 of ISA in its application to the Silvassa, Union Territory of Dadra and Nagar Haveli requires that every letter of allotment of shares requires to be stamped at the flat rate of Two Annas. Article 19 of ISA in its application to New Delhi, requires that any certificate or other document evidencing the right or title of the holder thereof, or any other person, either to any shares, scrip or stock in or of any company, requires to be stamped at the ad veloram duty of Rs.1 for every One Thousand or part thereof, of the value of shares. Article 36 of ISA in its application to New Delhi requires that every letter of allotment of shares requires to be stamped at the rate of Rs.1. Article 19 of ISA in its application to the State of Haryana, requires that any certificate or other document evidencing the right or title of the holder thereof, or any other person, either to any shares, scrip or stock in or of any company, requires to be stamped at the flat rate of Forty Paise per certificate. Article 36 of ISA in its application to the State of Haryana that every letter of allotment of shares requires to be stamped at the rate of Thirty Paise per certificate. Article 17 of ISA in its application to the State of Andhra Pradesh requires that any certificate or other document evidencing the right or title of the holder thereof, or any other person, either to any shares, scrip or stock in or of any company, requires to be stamped at the flat rate of 30 paise per share certificate. Article 32 of ISA in its application to the State of Andhra Pradesh deals with letter of allotment of shares and provides that letter of allotment of shares in any company shall be liable to be stamped at the flat rate of 30 paise per such letter.
Article 22 of ISA in its application to the State of Andhra Pradesh deals with counter part or duplicate of any instrument, chargeable with duty and in respect of which the proper duty has been paid if the duty with which the original instrument is chargeable does not exceed Rs.10/then the duplicate is liable to be stamped with the same duty as payable on the original. Stamping of Share Certificates and BSA Stamp Duty payable on Share Certificates is a State subject and consequently falls under the State List in the Seventh Schedule to the Constitution of India. Every issue of shares under a letter of allotment or certificate or other document evidencing title thereto is required to be stamped in accordance with the provisions of law prevailing in the State in which it is issued. Where the shares are issued from different states, the provisions of the local Stamp Act will be required to be complied with. Section 2(h) of BSA defines the term “duly stamped” as under: “Duly stamped” as applied to an instrument means that the instrument bears an adhesive or impressed stamp of not less than the proper amount and that such stamp has been affixed or used in accordance with the law for the time being in force in the State. Section 2 (l) of BSA defines the term “instrument” as analyzed earlier. A document or a writing which does not create a right or liability is not an instrument. Once a writing or a document is decided to be an instrument, it must be seen in what category it falls and what stamp duty if attracts. Instrument is specie of document. Document as defined in Evidence Act means only matter expressed or described upon substance by means of letters, figures or marks or by more than one of those means intended to be used or which may be used for the purpose of recording that matter. For the purpose of evidence, document could be broadly classified as primary document and others, whilst for the purpose of stamp duty broadly the classification is between principal and other “Instruments”. In the State of Maharashtra stamp duty on issue of share certificates is 0.1 per cent on the value of the share certificate inclusive of premium, if any, under Article 17 of Schedule I to BSA. On the other hand, under Article 37 of Schedule I to BSA, a letter of allotment of shares in any company requires to be stamped at one rupee if executed in the State of Maharashtra. The stamp duty is much lower (only on the face value of the shares) in some other States in India. Under DA, the investors have been granted an option of holding shares and other securities in a physical or DEMAT form. All rights with respect to the shares held in the Depositary lie with the investor who is the ultimate beneficial owner, the Depositary acts as a registered owner only. When transacting through a Depositary, it is provided that the investor will not be required to pay stamp duty on transfer of shares. If the issue of shares by the issuer/Transferee /Amalgamated Company is in the DEMAT form that is to be made from a state other than Maharashtra, Section 8A of ISA read with Articles 17, 19, 22, 32 and/ or 36 of ISA in its application to such State would be relevant for the purpose of determining the proper duty payable in case of issue of shares in the DEMAT form and otherwise. Under section 8A(a) of ISA, the issuer/Transferee /Amalgamated Company when issuing shares to one or more Depositaries is required, in respect of such issue of shares, to pay a stamp duty only on the total amount (read total value) of shares issued by it notwithstanding anything contained in the ISA.
Section 8A of ISA contains overriding provisions and supersedes all other provisions contained therein. It is a special provision and will have its application over all general provisions. Therefore, even if Article 17, 19, and 32 of ISA requiring to pay stamp duty on per certificate and per letter of allotment basis respectively, the issuer would be exclusively governed by the provisions of Section 8A of the ISA and, accordingly, appropriate stamp duty will only be payable on the aggregate value of the shares so issued under one share certificate. As no physical certificate is issued in the case of DEMAT form either to the shareholder or to the depository, any communication between the Company and the concerned depository that provides details of shares allotted to the successful applicants could be considered as an instrument for the purpose of stamping and accordingly be stamped at appropriate value as stated earlier. Since what is to be stamped is the document evidencing the issue of shares to the Depository. In my view, since a depository merely holds shares for their owners, there is, in equity, no justification for charging any duty when what has been held in the investor's name is held by a depository for him in its own name. The situation is the same when an investor withdraws a share from the depository and what has been beneficially held by him through the depository is registered in his own name. There is no liability for duty in either case. Moreover, subsequent to the option being exercised by the beneficial owner to opt out in respect of DEMAT security, the issuer/Transferee /Amalgamated Company shall be required within 30 days of receipt of intimation from the Depositary to issue the certificate of shares to such beneficial owner or the transferee, as the case may be, in the physical form as required under the provisions of section 14(3) of DA and consequently, the stamp duty payable on such share certificates in the physical form shall be the same duty as is payable on the issue of duplicate certificate under the ISA, as required under section 8A(b) of the ISA. As stated earlier, Article 22 of ISA in its application to the State of Andhra Pradesh, provides that counterpart or duplicate of any instrument, chargeable with duty and in respect of which the proper duty has been paid, if the duty with which the original instrument is chargeable does not exceed 10 Rupees, then the same duty is liable to paid as is payable on the original. 4. SALE OF BUSINESS ASSETS OR ITEMISED SALE OF ASSETS: The acquisition of the assets and liabilities in India can be effected either through: (a) slump sale process, in which the undertaking as a going concern will be transferred by the Seller to the Purchaser for a lump sum consideration, or (b) through a court approved scheme of reconstruction under section 394 of the Companies Act and section 44 of the Banking Regulation Act under which all the assets and liabilitieswill be transferred from the Seller to the Purchaser, or (c) individual transfer of assets and liabilities by the Seller to the Purchaser. Typically, the assets which will be transferred under all of the abovementioned processes will comprise of: (i) Movable Property (i.e., furniture, fixtures, systems, machines, fittings, etc.); (ii) Immovable Property – freehold, leasehold and licensed premises; (iii) Unsecured loans (i.e., monies which provided as a loan to the customer which the bank has to recover from the customer, which are unsecured). (iv) Advances/deposits (i.e., advances of monies by the bank to the customer, which the bank has to recover from the customer). (v) Contracts with suppliers; and (vi) Interests under secured loans – mortgage, pledge and hypothecation. Prior to the introduction of Section 2(42C) vide the Finance Act, 1999 that defined the term “Slump Sale”, the Business was sold and transferred either as sale of “Undertaking” as whole along with all related assets and liabilities under section 293(1) (a) of the Companies Act, 1956 10
or by itemized sale of a certain cherry picked assets (minus the liabilities) relating to the Business of a company. In both these cases, while there was no clarity to get Income/capital gains tax benefits, the obligation to pay stamp duty nevertheless arose on at least the document conveying immovable assets and, in some case where the transaction involved assignment of intangible assets like Trademarks, book debts or similar actionable claims. In so far as transfer of tangible moveable assets is concerned, since the transfer of same does not require an “instrument” but title can pass by manual delivery, question of payment of stamp duty does not arise. Insofar as the sale and transfer of tangable movable property is concerned, under the provisions of TP Act read with Section 17 and 18 of the Registration Act, the transfer can be effected by handing over/physical delivery of such movable property by obtaining a suitable receipt to that effect recording and/or acknowledging the passage of title in movables from one party to the other. Such a transfer of movables physical deliver does not require registration or stamping. On the other hand, if sale and transfer of intangible movable property such as Trade Marks, Goodwill, Book Debts is proposed to be affected, then in such a case, it would be advisable to execute separate instrument in the nature of Deed of Assignment of Trade marks and/or Deed of Assignment of Book Debts for the purposes of payment of Stamp Duty as, the sale, transfer, assignment and conveyance of intangible movable property under a written instrument signed by the parties attracts the Stamp Duty of 3 per cent under the provisions of Section 2(g) read with Article 25 of Schedule I to the BSA. 5. SALE OF BUSINESS UNDERTAKING ON SLUMP SALE BASIS: With the introduction of the concept of “Slump Sale” under the IT Act, itemized sale of a certain cherry picked assets (minus the liabilities) relating to the Business of a company has been made taxable with a higher rate, and thus is being discouraged. In order to better plan the stamp-duty liability arising upon the sale of Business or Undertaking it is necessary to understand the provisions of Section 2(42C) of the IT Act that defines the term “Slump Sale” to mean “the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Explanation 1.For the purposes of this clause, “undertaking” shall include any part of undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Explanation 2. For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.” If it is proposed to sell the business undertaking on a going concern basis by way of a Slump Sale as defined under Section 2(42C) above, and for that purpose an “instrument” in the nature of “Business Transfer Agreement” (“BTA”) is executed in the State of Maharashtra in respect of immovable properties situated and/or located in the State of Maharashtra, then BTA would operate as a “Conveyance” and shall be chargeable with a Stamp Duty at the rate of 5 percent on the true market value of the immovable property being subject matter of the “Conveyance” under BTA as provided in Sections 2(g) and 3 read with Article 25 of Schedule I to the BSA. In this connection attention of the readers is also drawn to Article 5(h)(A) contained in Schedule I to the BSA. Article 5(h)(A) (I) to (V). This Article generally seeks to bring in all instruments/ 11
contracts relating to advertisements on mass media including Agreements, contracts where specific performance is sought for in case of value of such contract exceeds Rs.1 Lakh as also a contract which creates any obligation, right or interest having monetary value and assignment of copyrights, is liable to be stamped in accordance with the New Article 5(h) (A). Ironically, Article 5 (h) (B) is still retained and deals with all other miscellaneous categories of instruments/ contracts which are not otherwise provided for in the entire Article 5. In that sense, Article 5 (h) (B) overrides all the other sub-articles of Article 5(A) including Article 5(h)(A) of Schedule attached to the BSA and seeks to levy stamp duty on such miscellaneous categories of contracts with a fix rate rather than ad-veloram. Now which agreement does not create any obligation, right or interest having monetary value is a question to be asked to the Revenue? All contracts would create some form of right or interest and will also have monetary value and thus covered by Article 5(h)(A). In this view of the matter, retention of a residuary category in terms of Article 5 (h) (B) in my opinion is superfluous. In my view therefore, the words “….. creation of any obligation, right or interest having monetary value….” appearing in sub-Article (IV) of the Article 5(h) (A) should be read only in relation to or in connection with and arising out of contracts. In conclusion, any kind of agreement or a memorandum which will create a right, title or interest in a person and has a monetary value will attract stamp duty under Article 5(h)(A). A BTA is not defined under the BSA or any other statute and is not otherwise covered by any entry of the Schedule to the BSA therefore, an argument can be made that it thus falls in a residuary Article 5 (h) (B) of the BSA and is thus chargeable with a Stamp Duty of only Rs.100/-. However, the Revenue may contend otherwise and seek to impose duty under Article 5(h) (A) (iv). Further, if sale of undertaking on a going concern basis under a BTA includes and covers sale and transfer of immovable properties with or without movable properties, then it may be contended by Revenue that it operate as a “Conveyance” under Section 2(g) of the BSA read with Article 25 of the Schedule I. The plant and machinery though movable in character, can be treated as immovable property and accordingly be made liable to stamp duty. Section 2 (ja) of BSA defines the term “immovable property” which includes land, benefits to arise out of land, and things attached to the earth, or permanently fastened to any thing attached to the earth. Section 2 (pa) of BSA defines the term “movable property” which includes standing timber, growing crops, grass, fruit upon and juice in trees and property of every other description, except immovable property, by which any right or liability is or is purported to be created, transferred, limited, extended, extinguished or recorded. Section 3 of the “TP Act” interprets the term “attached to the earth” to mean rooted in the earth, as in the case of trees and shrubs, imbedded in the earth, as in the case of walls or buildings or attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached. The omission of standing timber, growing grass etc. from the definition in Section 2 (ja) of BSA clearly means that while imposing the Stamp Duty these items shall not be excluded from the definition for the purposes of the BSA. In other words, immovable property is that which is not a movable property. Therefore, anything which is capable of being removed from earth, but permanently fastened to the earth when in use, is held not to be chargeable to stamp duty, as in the nature of things such properties could not be treated s immovable property. The Court,
therefore, held in the case of Board of Revenue, Chepauk, Madras Vs. Venkataswamy 5 , that “permanence of the fixture, in the context, is therefore, of a relative character”. The issue whether fixed assets comprising of plant and machinery would be treated as immovable property or not has also been dealt with by the Supreme Court in the case of Dunccans Industries Ltd. vs. State of UP and others 6 , wherein it has been held that when there is an intention to transfer the entire business undertaking on an as-is-where-is basis including plant, machinery and other assets, the machinery which formed the fertilizer plant were permanently embedded to the earth with an intention of running the fertilizer factory. Further, it was held that the machinery was not embedded to the earth with an ultimate intention to dismantle the same for the purpose of sale as part of the machinery or scrap. Therefore, it was held by the Apex court that the machinery is to be treated as “immovable property”. The Supreme Court also observed that the description of the plant and machinery as contained in the Schedule to the instrument of transfer showed without doubt that they were set up permanently in the land in question with a view to operate a fertilizer plant and the same was not embedded with an intention to dismantle and remove the same for the purpose of sale as machinery at that point of time. Hence, the contention that the impugned plant and machinery should be treated as movable property was not accepted by the Supreme Court. The Court also held that it cannot be said that the plant and machinery could have been transferred by manual delivery of possession on any date prior to the date of conveyance of title to the land.” In the case of AP State Finance Corporation Vs. Board of Revenue, Andhra Pradesh 7 , it was held that “where a Deed of Conveyance recites that the movables have already been transferred, the movables are not transferred to the purchaser by the Deed and cannot be taken into consideration for the purposes of imposing stamp duty”. In the case of The Chief Controlling Authority Vs. The Canara Industrial & Banking Syndicate Limited 8 the full bench of the Madras High Court held that "a person sold his properties, rice and floor mill together with their accessories to another and the transaction was put through under a receipt written on plain paper bearing a revenue stamp of 10 paise. The land and the buildings in which the rice and floor mills and the machinery were installed were separately sold between the same persons by the registered sale deed of the same date of the receipt. The properties sold were embedded and attached to the earth and the instrument "receipt" really related to the sale of immovable properties. The Court held that the document was liable for the stamp duty under Article 25 of the Schedule I to the Act as a conveyance. It would be possible to argue that no stamp duty is payable on movable properties if they are transferred by physical delivery. In such a case, it would be possible to reduce the total levy under the BSA by contending that there should be no duty on movable property, if the same are not transferred by executing a “document”. 6. CONVERSION OF A NON-CORPORATE ENTITY UNDER PART IX OF THE CA: Part IX of the Companies Act deals with registration of companies and states what kind of business entities can be registered under the CA and the relevant provisions therein. Also, section 575 of the CA, prescribes the provisions for the vesting of property upon registration of a company. It states that as on the date of registration, the property vesting in the company shall pass to and vest in the company as incorporated under this Act. Effectually, the vesting and 5
AIR (1955) Mad. at page 620 AIR 2000 SC at 355 7 AIR (1957) All. 391 8 AIR (1969) Mad.1 (FB) 6
divesting of the property is automatic under this section. There is no requirement for a registered instrument of transfer since this vesting is prescribed by statute and not by any act of parties. It is interesting to note that Part IX of the CA already permits companies, associations, societies or partnership firms constituted in pursuance of any other law in force in India to register themselves as companies and avail the facilities under the Companies Act. Under section 568 in Part IX of the Companies Act, any entity can be registered as a company as it is open to partnerships formed pursuant to Acts of the Parliament. In a landmark judgment of the Bombay High Court; in CIT v/s M/s Texspin Engg. & Mfg. Works 9 , it was held that when a firm registers as a company as per the procedure prescribed under Part IX of the Companies Act, no capital gains tax arises to the firm. When a partnership firm is treated as a limited company, under Part IX of the Companies Act, the properties of the erstwhile firm vests in the limited company as they exist, there is no dissolution. Hence, neither section 45(4) nor section 45(1) of the Income Tax Act is applicable. Also, in Vali Pattabhirama Rao v Shri Ramaniya Ginning & Rice Factory (P) Ltd 10 , the Court has held that there is no transfer under general law if the constitution of the firm is changed into that of company by registering it under Part IX of the Companies Act. As there shall be statutory vesting of title of all the properties of the firm in the newly incorporated company without any need for a separate conveyance, section 5 of the Transfer of Property Act, 1882 is not attracted and Stamp Duty cannot be levied. Issue of New Shares on Conversion: Once the new company is formed, the business acquisition agreement would be entered between the Partnership Firm and the newly incorporated company and the same will have to be adopted by the Board after incorporation as per section 286 of the CA for the acquisition of business of the firm by the company. Once adopted the entire business of the firm along with all its assets and liabilities stands transferred to the company. In consideration thereof, the company may issue shares or other securities to the Partner of the firm. Question that often arise is whether the conversion of the partnership firm into a company will be termed as transfer of assets under the provisions of the relevant Stamp Act and the Stamp Duty will be payable on the same? If yes, on which document the Stamp Duty will be paid? A charge for payment of Stamp Duty under the BSA or the ISA is attracted on the execution of an instrument. As explained earlier, the charge is created in the relevant state or place where such instrument is executed. Accordingly, the laws governing the place or state in which the instrument is executed determines the liability for payment of the Stamp Duty. The charge for payment of Stamp Duty arises with respect to such instruments which are prescribed in the respective schedules. Once the charge is attracted, the duty becomes payable at the rates prescribed by the relevant schedule against respective Articles or Entries defining the relevant instrument. The primary charge is attracted on execution of the instrument and the place of execution determines the liability to Stamp Duty as noted earlier. In the scheme of Stamp Duty, the location of property is not primarily relevant. However a secondary liability for payment of Stamp Duty may be created in the event where the instrument, first executed in one state, is later brought into another state, where the property is located. The objective of signing instruments is to declare that the business of the firm and its administration & management would be governed by the provisions of the CA. For obtaining 9
(2003) 180 CTR(Bom) 497 (1986) 60 Comp. Cases 568 (AP)
registration under the CA, it became quintessential for the firm to subject itself to the provisions of the CA including the provisions that require a registered company to define its main objects and other objects specifically and to adopt a specific capital and issue shares within the prescribed limit of such capital. It also became necessary for the firm to specifically provide for the rules and regulations governing various subjects defined in the Articles of Association. All this is made apparently clear by the preamble in the Memorandum of Association executed by the firm. The BSA provides for levy of Stamp Duty on Articles and Memorandum of Association vide Articles 10 & 39 of the BSA, respectively. The duty provided therein is paid by the company at the time of incorporation. In the circumstances, in my view, no other or further duty is payable on such instruments. As these instruments are unrelated to any property, it will not attract any duty. In Will Pack Packaging Vs. Dy. CIT 11 also taken the view that, corporatisation of the firm under the part IX route did not attract liability to Capital Gains in the hands of the firm. In Vali Pattabhiram Roa v Shri Ramaniya Ginnning & Rice Factory (P) Ltd., 60 Comp Cases 568 (AP); the Court has held that there is no transfer under general law if the constitution of the firm is changed in to that of company by registering it under part IX of the CA, as there shall be statutory vesting of title of all the properties of the firm in the newly incorporated company without any need for a separate conveyance, section 5 of the Transfer of Property Act is not attracted, and stamp duty is not leviable. Under the Registration Act, an issue had arisen in the past whereunder the Courts were required to examine whether on incorporation of a partnership firm as a company under Part IX of the CA , there arose any liability to register an instrument under the said Act. The Andhra Pradesh High court in the case of Valli Pattabhi Rao vs Ramanuja Ginning and Rice Factory (P) Ltd., held that no liability arose under the Registration Act on incorporation under Part IX of the CA. Thus, the conversion into or incorporation of the firm as a company under Part IX of the CA, should not be termed as a conveyance (transfer of assets) under the BSA or the ISA. Further, in my view, so long as conversion of an entity does not involve issues of fresh capital or certificates reflecting the change, no stamp duty is payable. However, if new share certificates to the Partners or owners are issued then the same could be treated as issue of an â€œinstrumentâ€? thereby attracting stamp duty under Article 17 of the BSA dealing with issue of certificate by a company. 7. STAMP DUTY UPON REDUCTION OF SHARE CAPITAL Section 100 of the CA empowers a company limited by shares or limited by guarantee and authorized by its articles to reduce its share capital by passing a special resolution. The section further states that this power of reduction of share capital is subject to the confirmation by the Court. Section 101 of the CA prescribes the procedure of securing sanction of the Court for reduction of capital and Section 102 therefore provide for the power and discretion of the Court to pass order for sanction the Scheme of reduction of Capital. Section 103 of the CA provides that the certified copy of the order along with the minute approved by the court has to be furnished to the registrar for registration. 103. Registration of order and minute of reduction. (1) The Registrar (a) on production to him of an order of the Court confirming the reduction of the share capital of the company; and (b) on the delivery to him of a certified copy of the order and of a minute approved by the Court showing, with respect to the share capital of the company as altered by the order, (i) the amount of the share capital (ii) the number of shares into which it is to be divided, (iii) 11
(2003) 78 TTJ (Ahd.) 448
the amount of each share, and (iv) the amount, if any, at the date of the registration deemed to be paid-up on each share;shall register the order and minute. (2) On the registration of the order and minute, and not before, the resolution for reducing share capital as confirmed by the order shall take effect. (3) Notice of the registration shall be published in such manner as the Court may direct. (4) The Registrar shall certify under his hand the registration of the order and minute, and his certificate shall be conclusive evidence that all the requirements of this Act with respect to reduction of share capital have been complied with, and that the share capital of the company is such as is stated in the minute. (5) The minute when registered shall be deemed to be substituted for the corresponding part of the memorandum of the company, and shall be valid and alterable as if it had been originally contained therein. (6) The substitution of any such minute as aforesaid for part of the memorandum of the company shall be deemed to be an alteration of the memorandum within the meaning and for the purposes of section 40. Effective date of reduction of share capitalClause 2 of the section 103 states that on registration of the order and minute, and not before, the resolution for reducing share capital as confirmed by the order shall take effect. The minute together with the copy of the order, has to be delivered to the Registrar, who registers it and gives certificate under his hand or authenticated by his seal. The date of filing of the return with the Registrar of Companies is the effective date of reduction of share capital 12 . Therefore in view of the law stated above, the scheme for reduction of capital will be effective from the date of filing of the order along with the minute to the Registrar of Companies and not before that. In my view since, reduction of capital does not involve issue of fresh capital or certificate reflecting the change, no stamp duty is payable. However, if new share certificates (to the holders of shares in physical form) are sent then the same could be treated as issue of â€œinstrumentâ€? thereby attracting stamp duty. In some cases though it can be argued that since stamp duty has already been paid on the higher number of shares, no stamp duty is payable on reduction of value of the share. Also, a combined reading of section 103 (5) and (6) clearly suggests that the minute when registered shall be deemed to be substituted for the corresponding part of the memorandum of the company, and shall be valid and alterable as if it had been originally contained therein and the substitution of any such minute as aforesaid form part of the memorandum of the company shall be deemed to be an alteration of the memorandum within the meaning and for the purposes of section 40 of CA. In other words, alteration of the capital clause takes effect by operation of law pursuant to the court order and registration of minute and, thus no stamp duty is payable in such a case. ++++++++
CIT v. Industrial Credit and Dev Syndicate Ltd. (1989) 3 Comp L J 266
This Article was written and contributed by me in the September 2010 issue of the Income Tax Review Journal vol. XXXIV No.6. Hope it clarifi...