Stamp duty and registration of instruments has always been a complex and talked about issue. Several questions are usually asked by people, such as:
“Why do we need to pay stamp duty on instruments?”
“Why should one get lease agreements registered?”
We have come across several cases where individuals and corporate entities choose to ignore the requirements of payment of proper stamp duty and the registration of such instruments in accordance with applicable law. The circumvention of these mandatory laws often leads to serious complications at a later date, either when disputes arise between the parties or when the instrument is impounded by a government authority on account of a deficit in payment of stamp duty.
In this article, we have endeavoured to address certain important aspects in respect of the payment of stamp duty and the registration of leases and the risks involved in failing to do so.
- When does a lease agreement attract stamp duty?
For the execution of any lease agreement, stamp duty needs to be paid in the manner prescribed under the relevant stamp laws of the State in India where the property is situated. Stamp duty on such instruments is a ‘State Subject’ under the Constitution of India and therefore, the applicable stamp duty / rate may differ from State to State. Generally, stamp duty is chargeable on the basis of the tenure of the lease, the amounts of rent, premium and / or any other form of rent and premium which may be mentioned in the lease agreement proposed to be executed. In some Indian States, minimum circle rates have also been specified by respective State Governments. In such States, one is required to pay stamp duty either on the actual rent / premium amounts shown in the lease agreement or the minimum circle rates issued by the relevant state government – whichever is higher. For leases which are for a long term, stamp duty may be chargeable under the same category as a conveyance or sale of such property. Stamp duty is mandatorily payable on instruments mentioned in the Schedules of the applicable Stamp Acts of various States, unless specifically exempted by the relevant authority.
- Who has to bear the stamp duty?
If it has not been specifically agreed to in the lease agreement between the parties executing it, it is the responsibility of the lessee to pay the applicable stamp duty.
- What happens if one does not pay the requisite stamp duty?
If proper stamp duty is not paid on lease instruments, any government authority competent to take evidence on oath can impound it and send it to the jurisdictional Collector of Stamps for adjudication and payment of proper stamp duty, along with a penalty which may extend up to ten times of the deficient stamp duty amount. Further, if in court proceedings, the court comes to the conclusion that the instrument is not properly stamped with applicable duty, it would not be admissible as evidence until the stamp duty (with penalties) as adjudicated by the Collector of Stamps is fully paid.
- When and why should a person register a lease agreement?
In terms of the Transfer of Property Act, 1882 and the Registration Act, 1908, leases of immovable properties from year to year or for any term exceeding twelve months or reserving a yearly rent requires mandatory registration at the office of the Sub Registrar of Assurances having jurisdiction over the location where the property to be leased is situated. In terms of the Registration Act 1908, an instrument which requires mandatory registration, should be registered within a period of four months from the date of its execution. An extension of an additional four months may be granted by the aforementioned Registrar, at his discretion, by levying a penalty of up to ten times the registration fee, provided such non-presentation of the instrument within first four months of execution was due to genuine reasons or unavoidable circumstances.
- What would happen if a lease agreement which requires registration is not registered?
If a lease agreement which requires mandatory registration is not registered by the parties, it cannot be received as evidence of any of the agreed terms and conditions affecting the leased property contained therein, whatsoever, except for certain limited purposes including, inter alia in suits for specific performance or merely as evidence of a collateral or correlated transaction.
- Would it make any difference if a lease agreement contains an arbitration clause?
If a lease agreement contains an arbitration clause, it would, as held by the Supreme Court of India in various judgements, be treated as a separate agreement between the lessor and lessee and the process of arbitration can be invoked by either party to such lease agreement as an arbitration agreement does not require any registration. However, the arbitrator would not rely on an unregistered lease deed for enforcement of any of the terms and conditions contained therein, except as evidence of contract in a claim for specific performance, or evidence of any collateral transaction which does not specifically require registration.