In an important decision delivered on 3 December 2012, the Gujarat High Court in the matter of Coastal Gujarat Power Limited v Chief Controlling Revenue Authority has clarified that in case of a mortgage between a borrower and security trustee (appointed to hold security on behalf of a number of lenders), the mortgage deed would be treated as a single transaction between the borrower and the security trustee only (and not separate transactions between the borrower and each lender on whose behalf the security trustee is holding security).
This decision effectively counters the current practice of the Gujarat stamp authorities to levy multiple incidence of stamp duty on a security document between a borrower and a security trustee based on the number of lenders that the security trustee represents, i.e. instead of paying stamp duty once on the value of the document, borrowers were required to pay a multiple of the duty payable for each lender.
BACKGROUND AND FACTS OF THE CASE
In 2007, Section 5 of the Act was amended to introduce the words "or distinct transactions" as follows:
Any instrument comprising or relating to several distinct matters or distinct transactions shall be chargeable with the aggregate amount of the duties with which several instruments, each comprising or relating to one of such matters or distinct transactions would be chargeable under this Act.
Pursuant to this amendment, a number of officers in the Gujarat revenue department and the Registrar's office began taking a view that when a security trustee enters into a security document and holds security in trust for the benefit of multiple lenders, the security is in effect created for the benefit of each lender and which would constitute distinct matters/ distinct transactions in terms of Section 5 of the Act. Consequently, even though stamp duty on a mortgage deed/hypothecation/pledge agreement is capped in Gujarat, increasingly stamp duty on such security documents was being paid as a multiple of the capped amount and the number of lenders that the security trustee would represent. This view had made security creation in Gujarat expensive, prohibitively so in case of syndicated deals with a high number of banks.
In the present case Coastal Gujarat Power Limited (CGPL) was faced with a similar situation. CGPL had secured financing from a consortium of lenders to build an ultra mega power plant in Gujarat and had appointed one of the lenders, the State Bank of India (SBI) as the security trustee, under a separate security trustee agreement. CGPL had executed an indenture of mortgage in favour of SBI by paying the capped stamp duty under the Act. However, the Chief Controlling Revenue Authority (CCRA) took the view that the stamp duty paid was insufficient and demanded that a total of INR 54, 62,000 duty be paid instead, which amount was affirmed by the Deputy Collector and upheld in a 'revisional application' filed by CGPL. As a result, CGPL initiated proceedings before the Gujarat High Court.
DECISION AND REASONING OF THE COURT
The Gujarat High Court held that where a mortgage is created in favour of a security trustee (holding security in trust for multiple lenders) it should be treated as a single transaction (and not distinct transactions, as contented by the state) irrespective of the fact that such security trustee holds such mortgage for the benefit of multiple lenders. Consequently, the Court held that such a mortgage deed constitutes a single instrument relating to a single transaction and therefore would be charged with the duty payable for a single mortgage and not with an aggregate duty payable as if there were multiple mortgages.
In the Court's opinion the relationship between the borrower and the security trustee is independent of the relationship between the borrower and the lenders. The Court therefore held that the mortgage deed was a separate instrument, under which rights of a mortgagee were created only in favour of the security trustee. As a result, no separate or distinct transactions were created under the mortgage deed, either by way of legal fiction or otherwise.
Further, on a plain reading of the provisions of the Act, Section 5 of the Act does not empower the State to charge revenue on an entire transaction as contemplated outside the scope of the instrument in question. Like all fiscal statues, stamp duty laws should be interpreted strictly on an unambiguous reading of the provisions of the law and not on the basis of the State's understanding of the intention of the legislature.
The Court's decision is a positive development as it has brought much needed clarity on the payment of stamp duty on security documents in Gujarat especially in syndicate lending transactions. However, it would be worthwhile to wait and watch whether the case goes into appeal or if any legislative changes are brought in by the State government that directly address this decision.