The Maharashtra Tax Laws (Levy and Amendment) Act, 2013, amended the Maharashtra Stamp Act, 1958, with effect from 1 May 2013. The amendment has introduced significant obligations on banks and other financial institutions (FIs), in terms of liability to pay duty and historic forensic investigation and compliance. The legality of the amendment has been challenged by individuals and several prominent banks before Bombay High Court.
Rationale for change
Section 30A of the state’s Stamp Act, as introduced by the amendment, has three parts. First, FIs have been made liable to pay “proper” stamp duty on any document executed after 1 May 2013, either by or in favour of FIs. This requirement would not affect their “contractual” right to recover the duty from the other parties. Second, for all documents executed prior to 1 May 2013, where proper stamp duty has not been paid, the FIs must impound and forward them to the Collector. Third, if such impounding is not done, FIs will be penalized for an amount equivalent to the stamp duty on the instruments.
The stamp authority suggests that the amendment is beneficial for FIs as it is in their interest to ensure that proper stamp duty is paid on instruments created in their favour, since instruments not duly stamped are inadmissible as evidence in courts. The challenge to the amendment’s legality suggests that FIs disagree with this wisdom.
Banks (including public sector undertakings) and others have challenged the amendment primarily on constitutional grounds, stating that it unequally impacts parties, and results in great commercial hardship. The scheme of the law suggests that stamp duty is payable on an instrument, although liability for payment may be on parties to it. In this regard, Madras High Court in Subramaniam Chettiar v Revenue Divisional Officer & Anr and Madhya Pradesh (MP) High Court in Balkrishna Bihari Lal v Board of Revenue, MP and Ors have held that parties that execute instruments are jointly and severally liable to pay stamp duty.
By requiring FIs to ensure payment of duty, section 30A singles them out as a separate group of persons on whom statutory obligations have been imposed. In State of West Bengal v Anwar Ali Sarkar, the Supreme Court held that article 14 of India’s constitution allows the state to classify persons for legislative purposes only if the classification is rational, founded on an “intelligible differentia” which distinguishes “those that are grouped together from others”. Therefore the test of “intelligible differentia” must be applied before arriving at any conclusion.
In addition, the Supreme Court in Patel Gordhandas Hargovindas v Municipal Commissioner held that if a tax is so excessive as to be “confiscatory” or “impossible to sustain”, it falls. As per Gujarat High Court’s views in Crane Owners Association and Ors v Union of India and Ors, the standard to be applied would be if business “has been rendered impossible or extremely unprofitable”.
The above cases dealt with the value of tax imposed. Whether the framework of obligations under a tax statute can be invalidated on similar grounds would be a point for consideration.
Finally, under the amendment, FIs are obligated to impound and failure to do so invites penalty. The Supreme Court held in District Registrar & Collector, Hyderabad and Anr v Canara Bank Etc that possession of an insufficiently stamped document is not an offence, and that not being able to use the instrument as evidence in court is itself a penalty. Further, the amendment levies a penalty for noncompliance, and the penalty provisions are additional to the existing penal provisions under sections 31, 32A and 34.
The petitioners have not argued against the state’s right and interest in revenue collection; they have only challenged the methods adopted. While compliance with the amendment on future transactions may have found some resonance with FIs, coupling this with retrospective compliance requirements and significant penalties has led to the entire section being challenged.
Given that commerce is primarily built on the foundations of debt and equity, with the volume of debt eclipsing equity, FIs have already taken significant positions of risk to support the economy, and being singled out for such further strictures, they feel “hard done by”.
Bombay High Court has temporarily stayed the requirement to impound by 30 September 2013 in section 30A(2) and the applicability of penalty under section 30A(3). However, given the weight of the issues under consideration, whatever the outcome, there is a significant possibility that the Supreme Court will be approached to achieve final resolution.
Perhaps the state would have been better served by seeking a consensus through inclusive means to achieve the ends of revenue without alienating the commercial participants.
Disclaimer: This article was first published in the May 2014 issue of the India Business Law Journal magazine. It has been authored by Jeet Sen Gupta, who is a Partner, Deep Roy, who is an Associate Partner and Divya Srikanth, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. They can be reached at email@example.com, firstname.lastname@example.org or email@example.com for any comment or query. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. The contents of this article/update are intended for informational purposes only and do not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.