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Stamp Duty on Debt Assignment

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13th Feb, 2018

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Introduction

Assignment of debt is one of the most common forms of transactions in financial markets. It essentially entails transfer of a debt from a creditor (assignor) to a third-party (assignee). One of the biggest challenges faced in debt assignment transactions in India is the significant stamp duty implication on the deed of assignment. Considering the volume of assignment transactions undertaken generally by banks and financial institutions or by asset reconstruction companies (“ ARCs ”), the stamp duty levied becomes a significant cost in such transactions. The Constitution of India (“ Constitution ”) confers upon the Parliament and each State Legislature the power to levy taxes and other duties. The subjects on which the Parliament or a State Legislature or both can legislate are specified in the Seventh Schedule of the Constitution. The Seventh Schedule is divided into 3 (three) lists:

• Union List;
• State List; and
• Concurrent List.

The Parliament has the exclusive power to legislate on the subjects enumerated in the Union List. The State List enumerates the subjects on which each State Legislature can legislate and such laws operate within the territory of each State. The Parliament, as well as the State Legislatures, have the power to legislate over the subjects listed in the Concurrent List.

The entry pertaining to levy of stamp duty in the Union List is as follows: -

“91. Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts.”

The entry pertaining to levy of stamp duty in the State List is as follows: -

“63. Rates of stamp duty in respect of documents other than those specified in the provisions of List I with regard to rates of stamp duty.”

The entry pertaining to levy of stamp duty in the Concurrent List is as follows: -

“44. Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates of stamp duty.” [emphasis supplied]

From the aforementioned entries, it is clear that the power to legislate on the rate of stamp duty chargeable on instruments of debt assignment (since it is not covered under Entry 91 of the Union List) is with the State Legislature. However, the power to determine whether stamp duty can be charged or not on a specific instrument is in the Concurrent List. In this regard, it may be noted that pursuant to the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (“ Amendment Act ”), the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“ SARFAESI ”) and the Indian Stamp Act were amended to provide for an exemption from stamp duty on a deed of assignment in favour of an ARC.

As mentioned above, the power to legislate on whether stamp duty is payable or not on an instrument is in the Concurrent List. Therefore, the Parliament has the power to legislate on the aforesaid subject.

Pursuant to the Amendment Act, section 5(1A) was inserted in SARFAESI which provides that any agreement or document for transfer or assignment of rights or interest in financial assets under section 5(1) of SARFAESI in favour of an ARC is not liable to payment of stamp duty.

In several States, notifications have been issued for remission and/ or reduction of stamp duties on debt assignment transactions. For instance, in Rajasthan, the stamp duty chargeable on any agreement or other document executed for transfer or assignment of rights or interests in financial assets of banks or financial institutions under section 5 of SARFAESI in favour of ARCs 1 has been remitted. Further, in Maharashtra, the stamp duty on instrument of securitization of loans or assignment of debt with underlying security has been reduced to 0.1% (zero point one percent) of the loan securitized or the debt assigned subject to a maximum of Rs. 1,00,000 (Rupees one lac) 2 .

Certain State Governments, such as those of Rajasthan and Tamil Nadu have reduced the stamp duty based on the nature of the financial asset being assigned. In Rajasthan, the stamp duty has been reduced for assignment of standard assets whilst in Tamil Nadu, the stamp duty has been reduced for assignment of non-performing assets and assignment in favour of ARCs.

This paper discusses a recent decision by the Allahabad High Court in the case of Kotak Mahindra Bank Limited v. State of UP & Ors. 3 (“ Kotak case ”), where it was held that an instrument of assignment is chargeable with stamp duty under Article 62(c) (Transfer) of Schedule 1B of the Indian Stamp Act, as applicable in Uttar Pradesh (“ UP Stamp Act ”), as opposed to Article 23 (Conveyance) of Schedule 1B of the UP Stamp Act.

The stamp duty payable in various States under Article 23 or the relevant provision for conveyance is on an ad valorem basis whereas the stamp payable under Article 62(c) or relevant provision for transfer of interest secured, inter alia, by bond or mortgage deed, is a nominal amount. For instance, in Uttar Pradesh, the stamp duty payable under Article 62(c) is Rs. 100 (Rupees one hundred).

Decision in the Kotak case

In the Kotak case, Kotak Mahindra Bank Limited (“ Kotak ”) had purchased and acquired certain loans from State Bank of India (“ Assignor ”) along with the underlying securities.

The question for consideration before the full bench of the Allahabad High Court was whether the deed executed by the applicant with the underlying securities would be chargeable with duty under Article 62(c) or Article 23 of Schedule 1B of the UP Stamp Act.

The court observed that in order to determine whether an instrument is sufficiently stamped, one must look at the instrument in its entirety to find out the true character and the dominant purpose of the instrument. In this case it was observed that the dominant purpose of the deed of assignment entered into between Kotak and the Assignor (“ Instrument ”), was to transfer/ assign the debts along with the underlying securities, thereby, entitling Kotak to demand, receive and recover the debts in its own name and right.

Article 11 of Schedule 1B of the UP Stamp Act provides that an instrument of assignment can be charged to stamp duty either as a conveyance, a transfer or a transfer of lease. The court observed that since the Instrument was not a transfer of lease, it would either be a conveyance or a transfer.

The court referred to the definition of conveyance in the UP Stamp Act, which reads as follows:

““ Conveyance ”. — “Conveyance” includes a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred inter vivos and which is not otherwise specifically provided for [by Schedule I, Schedule IA or Schedule IB] [as the case may be];” [emphasis supplied]

The court held that the term conveyance denotes an instrument in writing by which some title or interest is transferred from one person to other and that the use of the words “on sale” and “is transferred” denote that the document itself should create or vest a complete title in the subject matter of the transfer, in the vendee. In this case since under the Instrument, the rights of the Assignor to recover the debts secured by the underlying securities had been transferred to Kotak, it was held that the requirement of conveyance or sale cannot be said to be satisfied.

The court further observed that debt is purely an intangible property which has to be claimed or enforced by action and not by taking physical possession thereof, in contrast to immovable and movable property. Where a transaction does not affect the transfer of any immovable or movable property, Article 23 of Schedule 1B cannot have any applicability.

The court’s view was that since debt along with underlying securities is an interest secured by bonds and/ or mortgages, transfer of such debt would be chargeable under Article 62(c).

The court further clarified that under the Instrument, merely the right under the contract to recover the debts had been transferred. Since the borrower(s) had never transferred the title in the immovable property given in security to the Assignor, the Assignor could merely transfer its rights i.e. mortgagee's rights in the property to recover the debts. It was further observed that the Assignor never had any title to the underlying securities and that it merely had the right to enforce the security interest upon default of the borrower(s) in repayment. The right transferred to Kotak was primarily the right to recover the debts, in accordance with law, by proceeding against the underlying security furnished by the bonds/ mortgage deed(s).

Therefore, the court held that the Instrument was chargeable with stamp duty under Article 62(c) of Schedule 1B of the UP Stamp Act.

Whilst coming to the conclusion that assignment of debt would not constitute a conveyance, the court referred to the definition of conveyance to state that debt is an intangible property which has to be claimed or enforced by action and not by taking physical possession thereof, in contrast to immovable and movable property.

In this regard, it may be noted that there are various judicial precedents 4 , where it has been held that an interest (including mortgage interest) in immovable property is itself immovable property.

However, even assuming assignment of debt with underlying securities over immovable property amounts to a conveyance, it

may be pertinent to refer to the definition of conveyance in the UP Stamp Act which specifically excludes a conveyance which is otherwise provided for by the Schedule to the UP Stamp Act.

Article 62(c) of the UP Stamp Act reads as follows:

“62. Transfer (whether with or without consideration) – … (c) of any interest secured by a bond, mortgagedeed or policy of insurance--”

In view of the above, transfer of any interest secured by a mortgage deed, which is covered under Article 62(c), would be excluded from the meaning of conveyance and would be chargeable to stamp duty under Article 62.

In this regard it may be pertinent to refer to the definitions of ‘bond’ and ‘mortgage deed’ under the UP Stamp Act, which is as follows:

“" Bond " includes

(a) any instrument whereby a person obliges himself to pay money to another, on condition that the obligation shall be void if a specified act is performed, or is not performed, as the case may be;

(b) any instrument attested by a witness and not payable to order or bearer, whereby a person obliges himself to pay money to another; and

(c) any instrument so attested, whereby a person obliges himself to deliver grain or other agricultural produce to another

“" Mortgage-deed ". — "mortgage-deed" includes every instrument whereby, for the purpose of securing money advanced, or to be advanced, by way of loan, or an existing or future debt, or the performance of an engagement, one person transfers, or creates, to, or in favour of another, a right over or in respect of specified property;”

In view of the above, where a debt secured by a bond or a mortgage deed is assigned under a deed of assignment, the stamp duty payable on such deed of assignment will be under Article 62(c) of the UP Stamp Act or corresponding provisions of the Stamp Act of other States.

However, in cases of unsecured loans or loans secured by an equitable mortgage (where there is no mortgage deed), the deed of assignment would attract ad valorem stamp duty chargeable on conveyance, since the same will not get covered under Article 62(c) or similar provisions in other states.

The market practice until now has been to stamp the deed of assignment of debt under the relevant article for Conveyance in the applicable Stamp Act. In fact, in States such as Maharashtra, the State Government has issued notifications for reduction of stamp duty on a deed of assignment under the article for Conveyance.

The judgment passed by the Allahabad High Court in the Kotak case may prove to be a welcome step in reducing the incidence of stamp duty on debt assignment transactions. However, it would need to be seen whether in other States a similar view is taken by stamp duty authorities.

This update has been prepared by Aastha (Partner), Debopam Dutta (Managing Associate) and Abhay Jain (Associate).

1 Notification No. F4(3)FD/Tax/2017-110 dated March 8, 2017 issued by Finance Department (Tax Division) Government Of Rajasthan.

2 Notification No.Mudrank-2002/875/C.R.173-M-1 dated May 6, 2002 issued by Revenue & Forests Department, Government of Maharashtra.

3 Reference Against MISC. Acts. No. 1 of 2016, order dated February 9, 2018.

4 Bank of Upper India Ltd. (in liquidation) v. Fanny Skinner and Ors., AIR 1929 All 161. See also Prahlad Dalsukhrai and Ors. v. Maganlal Muljibhai Tewar, AIR 1952 Bom 454 and Harihar Pandey v. Vindhayachal Rai and Ors., AIR 1949 Pat 170.

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Understanding the Assignment of Mortgages: What You Need To Know

3 minute read • Upsolve is a nonprofit that helps you get out of debt with education and free debt relief tools, like our bankruptcy filing tool.  Think TurboTax for bankruptcy. Get free education, customer support, and community. Featured in Forbes 4x and funded by institutions like Harvard University so we'll never ask you for a credit card.  Explore our free tool

A mortgage is a legally binding agreement between a home buyer and a lender that dictates a borrower's ability to pay off a loan. Every mortgage has an interest rate, a term length, and specific fees attached to it.

Written by Attorney Todd Carney .  Updated November 26, 2021

If you’re like most people who want to purchase a home, you’ll start by going to a bank or other lender to get a mortgage loan. Though you can choose your lender, after the mortgage loan is processed, your mortgage may be transferred to a different mortgage servicer . A transfer is also called an assignment of the mortgage. 

No matter what it’s called, this change of hands may also change who you’re supposed to make your house payments to and how the foreclosure process works if you default on your loan. That’s why if you’re a homeowner, it’s important to know how this process works. This article will provide an in-depth look at what an assignment of a mortgage entails and what impact it can have on homeownership.

Assignment of Mortgage – The Basics

When your original lender transfers your mortgage account and their interests in it to a new lender, that’s called an assignment of mortgage. To do this, your lender must use an assignment of mortgage document. This document ensures the loan is legally transferred to the new owner. It’s common for mortgage lenders to sell the mortgages to other lenders. Most lenders assign the mortgages they originate to other lenders or mortgage buyers.

Home Loan Documents

When you get a loan for a home or real estate, there will usually be two mortgage documents. The first is a mortgage or, less commonly, a deed of trust . The other is a promissory note. The mortgage or deed of trust will state that the mortgaged property provides the security interest for the loan. This basically means that your home is serving as collateral for the loan. It also gives the loan servicer the right to foreclose if you don’t make your monthly payments. The promissory note provides proof of the debt and your promise to pay it.

When a lender assigns your mortgage, your interests as the mortgagor are given to another mortgagee or servicer. Mortgages and deeds of trust are usually recorded in the county recorder’s office. This office also keeps a record of any transfers. When a mortgage is transferred so is the promissory note. The note will be endorsed or signed over to the loan’s new owner. In some situations, a note will be endorsed in blank, which turns it into a bearer instrument. This means whoever holds the note is the presumed owner.

Using MERS To Track Transfers

Banks have collectively established the Mortgage Electronic Registration System , Inc. (MERS), which keeps track of who owns which loans. With MERS, lenders are no longer required to do a separate assignment every time a loan is transferred. That’s because MERS keeps track of the transfers. It’s crucial for MERS to maintain a record of assignments and endorsements because these land records can tell who actually owns the debt and has a legal right to start the foreclosure process.

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Assignment of Mortgage Requirements and Effects

The assignment of mortgage needs to include the following:

The original information regarding the mortgage. Alternatively, it can include the county recorder office’s identification numbers. 

The borrower’s name.

The mortgage loan’s original amount.

The date of the mortgage and when it was recorded.

Usually, there will also need to be a legal description of the real property the mortgage secures, but this is determined by state law and differs by state.

Notice Requirements

The original lender doesn’t need to provide notice to or get permission from the homeowner prior to assigning the mortgage. But the new lender (sometimes called the assignee) has to send the homeowner some form of notice of the loan assignment. The document will typically provide a disclaimer about who the new lender is, the lender’s contact information, and information about how to make your mortgage payment. You should make sure you have this information so you can avoid foreclosure.

Mortgage Terms

When an assignment occurs your loan is transferred, but the initial terms of your mortgage will stay the same. This means you’ll have the same interest rate, overall loan amount, monthly payment, and payment due date. If there are changes or adjustments to the escrow account, the new lender must do them under the terms of the original escrow agreement. The new lender can make some changes if you request them and the lender approves. For example, you may request your new lender to provide more payment methods.

Taxes and Insurance

If you have an escrow account and your mortgage is transferred, you may be worried about making sure your property taxes and homeowners insurance get paid. Though you can always verify the information, the original loan servicer is responsible for giving your local tax authority the new loan servicer’s address for tax billing purposes. The original lender is required to do this after the assignment is recorded. The servicer will also reach out to your property insurance company for this reason.  

If you’ve received notice that your mortgage loan has been assigned, it’s a good idea to reach out to your loan servicer and verify this information. Verifying that all your mortgage information is correct, that you know who to contact if you have questions about your mortgage, and that you know how to make payments to the new servicer will help you avoid being scammed or making payments incorrectly.

Let's Summarize…

In a mortgage assignment, your original lender or servicer transfers your mortgage account to another loan servicer. When this occurs, the original mortgagee or lender’s interests go to the next lender. Even if your mortgage gets transferred or assigned, your mortgage’s terms should remain the same. Your interest rate, loan amount, monthly payment, and payment schedule shouldn’t change. 

Your original lender isn’t required to notify you or get your permission prior to assigning your mortgage. But you should receive correspondence from the new lender after the assignment. It’s important to verify any change in assignment with your original loan servicer before you make your next mortgage payment, so you don’t fall victim to a scam.

Attorney Todd Carney

Attorney Todd Carney is a writer and graduate of Harvard Law School. While in law school, Todd worked in a clinic that helped pro-bono clients file for bankruptcy. Todd also studied several aspects of how the law impacts consumers. Todd has written over 40 articles for sites such... read more about Attorney Todd Carney

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What Is a Stamp Duty?

Understanding a stamp duty.

• History of Stamp Duties in the U.S.

What is a transfer tax?

Are stamp taxes tax deductible, are tax stamps collectible.

• Government & Policy

Stamp Duty: Meaning, History in the U.S., FAQs

A stamp duty is a tax that governments place on legal documents, usually involving the transfer of real estate or other assets. Governments can impose stamp duties, also known as stamp taxes, on documents that are needed to legally record those types of transactions, as well as on documents recording marriages, military commissions, copyrights, patents, and so forth.

Historically, governments have used stamp taxes as a way to raise money to fund their activities. Stamp duties are thought to have originated in Spain in the early 17th century. They were called “stamp” duties because a physical stamp was put on the document as proof that it had been officially recorded and the tax liability had been paid.

Key Takeaways

• A stamp duty—also known as a stamp tax or documentary stamp tax—is a tax that a government levies on documents that are required to legally record certain types of transactions.
• Governments have imposed stamp duties on a variety of documents, including those related to the sale or transfer of real estate, patents, securities, and copyrights.
• Governments use these taxes as a source of revenue to fund government programs and activities. In some cases, they are referred to as revenue stamps.

The stamp duty is also known as a documentary stamp tax. Governments around the world levy these taxes on a variety of legally recorded documents.

Before income and consumption taxes provided governments with a substantial tax base, they raised revenue primarily through property taxes , import duties , and stamp duties on financial transactions. 

As income and consumption have grown, it might have made sense to do away with stamp duties. So why do we still have them in many places? Simply put, they provide a steady stream of income for governments.

Today, however, stamp duties apply to far less than the broad category of “financial transactions.” They do remain on properties, though. They are often levied when real estate is transferred or sold; additionally, many states impose taxes on mortgages and other instruments securing loans against real estate.

While the United States once imposed stamp taxes on a variety of transactional documents, there is no federal stamp tax today, except in very limited circumstances. One is a tax on the transfer of certain firearms and accessories that are subject to the National Firearms Act.

The U.S. Fish and Wildlife Service also requires waterfowl hunters age 16 or older to purchase Federal Duck Stamps, which serve as both a hunting license and a free pass for any national wildlife refuge that otherwise charges an entry fee. The agency says that “nearly all of the proceeds are used to conserve habitat for birds and other wildlife, birders, nature photographers, and other outdoor enthusiasts.” Some states also issue their own versions of duck stamps for similar conservation purposes.

Otherwise, only state and local governments currently impose stamp taxes in the United States. In addition to various legal documents, “48 states and the District of Columbia, Guam, and Puerto Rico currently require a tax stamp affixed to tobacco products,” according to the Centers for Disease Control and Prevention.

History of Stamp Duties in the United States

By the 17th century, governments had introduced stamp duties throughout Europe. Over the next century, they became a common form of taxation in the Netherlands, France, Denmark, Prussia, and England. 

In 1765, the British parliament passed a stamp tax to be imposed on American colonists, requiring them to pay tax on all printed papers, such as licenses, newspapers, ships’ papers, and even playing cards. The British government said the funds collected from stamp duties were needed to pay for positioning troops in certain locations of America and to pay for the massive war debt it had incurred during the Seven Years’ War.

American colonists were outraged by the imposition of the taxes, which they believed were a deliberate attempt by Britain to control commerce and curtail colonial independence. The Stamp Tax was enacted without the knowledge of or input from the colonies, becoming a prime example of taxation without representation . The Stamp Act led to the first concentrated effort by the colonists to resist British authority and became a milestone event leading up to the American Revolution.

Stamp taxes have endured much longer in Britain itself. Today, the United Kingdom imposes a stamp duty land tax (SDLT) on home purchases, although homes under a certain value are not subject to it. For example, the current threshold for residential properties is £125,000. However, first-time homebuyers get a break—their threshold is £500,000.

A transfer tax is a type of stamp tax that some state and local governments impose when the deed or title to a home or other property changes hands. It is often included in the long list of closing costs .

Not directly, although the law does offer a tax break on some of them. As the Internal Revenue Service (IRS) explains, in the case of home purchases, “You can’t deduct transfer taxes and similar taxes and charges on the sale of a personal home. If you are the buyer and you pay them, include them in the cost basis of the property. If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale.”

Yes, some postage stamp collectors also collect tax stamps, often referred to in the hobby as “revenue stamps.”

The Bottom Line

A stamp duty, also known as a stamp tax, is a tax imposed on certain transactions, typically by state or local governments. In many cases, a stamp duty will represent a charge for recording the transfer of real estate or other assets from seller to buyer, but it can also be levied on other types of documents and even some products, such as cigarettes. Stamp taxes were a major factor leading to the American Revolution.

Library of Congress. “ United States Code: Machine Guns, Destructive Devices, and Certain Other Firearms, 26 U.S.C. §§ 5801–5872 (Suppl. 5 1964). ”

PwC, Worldwide Tax Summaries. “ United States: Corporate—Other Taxes .”

U.S. Fish and Wildlife Service. “ Duck Stamps .”

U.S. Centers for Disease Control and Prevention. “ STATE System Tax Stamp Fact Sheet .”

Gilder Lehrman Institute of American History. “ The Stamp Act, 1765 .”

Gov.UK. “ Stamp Duty Land Tax .”

Internal Revenue Service. “ Publication 530: Tax Information for Homeowners ,” Page 4.

Linn’s Stamp News. “ Revenue Stamps Pay Tax Instead of Postage .”

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Assignment of mortgage

ADIS Code -  MASS

An assignment of mortgage is a transfer of the mortgage debt and conveyance of the legal estate of the mortgagee in the mortgaged property. It vests the debt and estate in the assignee, together with all the rights, powers and remedies of the mortgage.

The assignor is the mortgagee who is disposing of the mortgage.

The assignee is the mortgagee acquiring the mortgage.

The original mortgage is required.

Application form

An assignment of mortgage may be drawn in the short form as set out in Schedule 5 Part 5 Conveyancing Act 1919 . The mortgagor may be a party to the assignment.

Lodgment requirements

Stamp duty -  Required if dated before 1.1.1983. If not marked Registration insisted upon , is prohibited. Not required if dated on or after 1.1.1983.

Registration copy - Required. If unacceptable, Registration insisted upon  is prohibited.

Statement of Title Particulars form  - Not required.

NOS form  - Not required.

Index Particulars form (completion)

(A) Lodging Party - Must be completed.

(B) Instrument -  Mortgage - Transfer / Assignment of

(C) Locality -  Not required.

Link Conveyance - Not required.

Principal Deed - The registered affected mortgage.

(D) Indexing -  The mortgagor and the assignee.

(E) Certification -  Required.

Document requirements 

Date: must be dated with the date of execution. If not dated advise the lodging party. If a date is not furnished, indicate Registration insisted upon  and include the reason.

Name: the full names (initials are acceptable) of the assignor and the assignee (and the mortgagor if included) are required. Advise the lodging party of any discrepancies in names.

Operative clause:   "... hereby assigns...".

Principal Deed:   the number of the affected mortgage as stated in the assignment must be identical to the number stated on the IPF.

Execution:   by the assignor and the assignee (and the mortgagor if included).  A power of attorney must be registered.

Attestation: required. Must be witnessed by a person of 18 years of age or older who is not a party to the document.

IPF: must be completed.

Staff processing information

An assignment of an unregistered mortgage must be entered in the General Frame, ie code G, with a Noting: "Assignment of unregistered mortgage dated ... affecting [description of land]". Enter the mortgagor and the mortgagee as Vendors entries.

Assignment included in the mortgage

Where the assignment is included in or is endorsed on the original mortgage and is drawn in the short form set out in Schedule 5 Part 5 Conveyancing Act 1919 :

• the registration copy is of the assignment only
• check the Book and No. of the mortgage and the appropriate parties and
• write Assignment above the Registered seal.

CA Not required

Locality:   nil.

Link Conveyance:   nil.

Principal Deed: required. The registered affected mortgage.

Noting: "Affecting [description of land]".

If the assignment affects:

• an interest, state: "interest in" (or Noting Code: "I"
• a share, state: "[fraction] share"
• part of the land, state: "[affected land description]"
• the land description relies on an attached plan, state: "see attached plan" (or Noting Code: "PL").

V:   the mortgagor, and the assignee, deceased estates or trusts, and any variations thereof.

NSW Land Registry Services Office of the Registrar General Accessibility Sitemap Privacy Access to information Copyright Disclaimer Contact us

• Practical Law

Is a transfer of loan notes subject to stamp duty and if so, can section 42 relief be claimed?

Practical law resource id 3-530-7946  (approx. 4 pages).

• Share Capital - Structure, Allotment and Transfers
• Share Acquisitions - Private
• Stamp Duty and SDRT

Maharashtra Stamp Act amended to clarify legal stand in case of mortgage deeds executed for distinct transactions

The Ordinance additionally plugs gaps on differential rates in case of different mortgages

Aanchal Kaur Nagpal

[email protected]

Introduction –

Stamp duty computation, especially in case of complex transactions involving multiple transactions being given effect vide a single instrument, received the sanctity of Hon’ble Supreme Court ( SC ) in a landmark judgement in case of Controlling Revenue Authority v. Coastal Gujarat Power Ltd [1] , where the SC upheld payment of separate stamp duty for different transactions involved interpreting Section 5 of Gujarat Stamp Act, 1958. Following the said judgement, Maharashtra stamp authorities rolled out a circular on September 28, 2015 informing the stand taken by SC; however, no amendment was carried out in Maharashtra Stamp Act, 1958.

Further, it was observed by the stamp authorities that in view of rate difference in case of stamp duty on equitable mortgage (mortgage by deposit of title deeds) as per article 6 (1) and simple mortgage as per article 40, parties played about the same in the instruments thereby creating difficulties in adjudication of amount of proper stamp duty chargeable for them.

The Maharashtra Stamp (Amendment and Validation) Ordinance, 2021 (‘Ordinance’) dated 9 th February, 2021 amends Maharashtra Stamp Act, 1958 (‘ Stamp Act ’) to fill several gaps in the aforementioned provisions. The same have been discussed below –

Arbitrage in rate of stamp duty levied on equitable mortgage and simple mortgage –

Levy of stamp duty in case of mortgage is under the state list and thus the same will be governed by the respective state acts. In case of Maharashtra, the stamp duty chargeable in case of an equitable mortgage is less than that in case of a simple mortgage. Taking advantage of the said arbitrage, mortgage documents have been drafted in such a way that, even though the nomenclature of the document indicates an equitable mortgage, it attempts to cover even a simple mortgage. Thus, simple mortgages are disguised to indicate an equitable mortgage just to pay a lesser stamp duty.  Such documents create difficulties in adjudication of amount of proper stamp duty.

Further, certain towns had been notified by the State of Maharashtra under the Transfer of Property Act to enable execution of agreement relating to an equitable mortgage. However, in cases of towns not notified, a person was forced to opt for execution of simple mortgage deed instead of an equitable mortgage, where stamp duty is higher in case of the former.

Owing to the above, the Act has been amended in order to align the stamp duty chargeable on the instruments of an equitable mortgage and simple mortgage deed under the articles 6 and 40, respectively.

Amendments to stamp duty rates will be effective from the date of the notification i.e. 9 th February, 2021.

Wordplay between ‘matters’ and ‘transactions’ under section 5 –

Stamp duty is chargeable on an instrument rather than a transaction. However, the Finance Act, 2019 drew an exception to this principle in case of stamp duty on securities’ transactions, particularly in case of securities in demat form. Nevertheless, the general rule remains the same.

However, there can be a case where a single instrument embodies various matters. Section 5 of the Act deals with stamp duty in case of such instruments relating to several matters. As per the existing section, ‘any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters, would be chargeable under this Act .’

Therefore, if an instrument consists of various matters, stamp duty will be charged on such matters separately as would have been the case if such matters were executed under separate instruments. However, a lot of debates arose on what would ‘matters’ include- whether matters would only be restricted to ‘matters’ or would include ‘transactions’ as well.

The Gujarat Stamp Act, 1958, was amended to include instruments consisting of distinct transactions along with distinct matters.

The above question was also raised before the Gujarat High Court, where the Court held that that the stamp duty was payable on the instrument and not on the transactions. The High Court opined that there being only one instrument creating a mortgage by borrower in favour of the Security Trustee and since the relationship between the borrower and the Security Trustee is independent of relationship between the borrower and the lending Banks, the High Court took the view that the instrument did not involve either distinct matters or distinct transactions.

However, the Supreme Court held an opposing view  in Controlling Revenue Authority v. Coastal Gujarat Power Ltd [2] , where it adjudged that instruments under section 5 of the Gujarat Stamp Act would also include instruments containing distinct transactions .

The question before the Court was whether a single mortgage executed in favour of a the security trustee for the benefit of several syndicated lenders would be treated as a single document or as multiple documents (equivalent to the number of syndicated lenders).

The Supreme Court concluded that the agreement shall be construed separately for each syndicated lender and stamped as such (i.e. multiple documents). It was opined that

It appears from the trustee document that altogether 13 banks lent money to the mortgagor, details of which have been described in the schedule and for the repayment of money, the borrower entered into separate loan agreements with 13 financial institutions. Had this borrower entered into a separate mortgage deed with these financial institutions in order to secure the loan there would have been a separate document for distinct transactions. On proper construction of this indenture of mortgage it can safely be regarded as 13 distinct tran sactions which falls under Section 5 of the Act.

The above view was also taken under The Member, Board of Revenue v. Arthur Paul Benthall , 1955 SCR 84 [3] .

Similar question was raised before the Bombay High Court in Navi Mumbai SEZ Pvt. Ltd. v. The State of Maharashtra & Ors . [4] , where it was contended that a perusal of the two statutes (Gujarat Stamp Act and the Act) would evince that the difference between the two is that whereas in the Gujarat Act the phrase ‘or distinct transactions’ follows the phrase ‘several distinct matters’ at two places where the said phrase exists, in the Maharashtra Act the said phrase ‘or distinct transactions’ does not occur.

It was highlighted that section 5 of the Indian Stamp Act, 1899 is in pari materia with Section 5 of the Stamp Act in the State of Maharashtra. Further, the Bombay High court quashed the argument that the decision of the Supreme Court in Coastal Gujarat Power Limited’s case (supra) would not be binding while interpreting Section 5 of the Stamp Act in Maharashtra for the reason the phrase ‘distinct matters’ is equivalent to the phrase ‘distinct transactions’. The names are different but the two are identical.

The Court took guide of the judgement of the Madras High Court in The Board of Revenue, Madras v. Narasimhan & Anr . [5] , AIR 1961 Mad 504, (1961) 2 MLJ 538 , where it was held that that where more than one of the matters or things i.e. indentures, leases, bonds or deeds, thereby charged with any stamp duty should be engrossed on one piece of vellum, the duties should be charged on every one of such matters. For example, if several landlords, each severally interested in the piece of land mentioned against his name in the Schedule were to act collectively, the instrument would be chargeable with stamp duty by treating each underlying transfer of interest and then aggregating the amount of duties as would be chargeable if separate instruments were executed.

The Madras High Court in The Board of Revenue, Madras v. Narasimhan & Anr ., pertaining to a document which was a multi-purpose document or multifarious document, held that the expression ‘distinct matters’ connotes ‘distinct transactions’ and for the purposes of levy of stamp duty under the Indian Stamp Act requires the identity of the parties in respect of the underlying transaction. The importance of the said decision is that the expression ‘distinct matters’ was treated to be the same as ‘distinct transactions’.

The Allahabad High Court in Ram Sarup v. Toti & Anr . [6] AIR 1973 P H 329, with reference to Section 5 of the Indian Stamp Act, 1899 also held that the expression ‘distinct matters’ is equivalent to ‘distinct transactions’.

As per Halsbury’s Law of England, 4 th edition, volume 44, paragraph 613 at page 399:-

• Instrument relating to several matters. Except where there is statutory provision to the contrary, an instrument containing or relating to several distinct matters is to be separately charged, as if it were a separate instrument, with stamp duty in respect of each of the matters, and an instrument made for any consideration in respect of which it is chargeable with ad valorem duty, and also for any further or other valuable consideration, is separately chargeable, as if it were a separate instrument, in respect of each of the consideration.”

Therefore, to bring the provisions in line with the Gujarat Stamp Act and the Supreme Court Order, the Ordinance amends section 5 of the Stamp Act to include distinct transactions as well to bring absolute clarity. Thus, the amended section is as below –

Instruments relating to several distinct matters or transactions –

Any instrument comprising or relating to several distinct matters or transactions shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters or transactions , would be chargeable under this Act.

The amendment to section 5 has been made effective retrospectively from 11 th July, 2015, i.e. from the date of the decree of the Supreme Court.

What does ‘distinct’ matter/ transaction mean?

The term distinct does not refer to matters or transactions that are totally different in nature. Transactions even of similar nature will be covered under section 5 as long as they are different in nature. The Supreme Court In Coastal Gujarat (supra) also held that section 5 deals only with the instrument which comprises more than one transaction and it is immaterial  for the purpose whether those transactions are of the same category or of different categories. It was immaterial for the purpose whether the underlying transactions are of the same category or of different categories.

Stamp duty on instrument for additional security

The Ordinance has also added a new clause under article 6 which provides stamp duty in case of any instrument in the form of an equitable mortgage, pledge or hypothecation, which will be executed as a collateral or auxiliary or additional security and where the proper duty has been paid on the principal or primary security under the said article. Stamp duty in such cases will be a flat amount of Rs. 500 irrespective of the amount of security.

Similar provision already exists under article 40, where every instrument executed as a collateral or auxiliary or additional security, where stamp has already been paid on the principal security, is chargeable with a stamp duty of Rs. 200.

Impact on debentures secured by a mortgage or hypothecation

The Finance Act, 2019 inserted section 4(3) in the Indian Stamp Act, 1899, which provides that –

Notwithstanding anything contained in sub-sections (1) and (2), in the case of any issue, sale or transfer of securities, the instrument on which stamp-duty is chargeable under section 9A shall be the principal instrument for the purpose of this section and no stamp-duty shall be charged on any other instruments relating to any such transaction.

Thus, there lies an exemption if issue of securities is charged with stamp duty, then any other instrument relating to such transaction will be exempt to stamp duty. The exemption was erstwhile specifically mentioned in case of debentures secured by way of a mortgage deed, where stamp duty on debentures was exempt if the same had been paid on the mortgage deed. On an understanding of the exemption, in case secured debentures have been allotted against a collateral in the form of a mortgage deed, stamp duty may be paid only at the time of issue of debentures on the allotment list (principal instrument) providing for allotment of secured debentures and not on the security deed. However, companies do not avail this benefit and pay stamp duty on both the transactions/ matters considering it as distinct transactions.

Thus, increase in stamp duty on mortgage deed/ hypothecation may not have an impact on issue of debentures in demat mode due to exemption under section 4(3). However, section 4(3) does not make reference to section 9B (issue of securities in case of physical securities/ debentures) and thus the exemption may not be enjoyed by such debentures and they would feel the burden of the additional stamp duty on the security documents. (Maharashtra Stamp Act will not apply since levy of stamp duty in case of debentures is governed by the Central List and therefore Indian Stamp Act).

Validation clause

The Ordinance also clarifies that any stamp duty paid under section 5 and articles 6 and 40 of schedule I in accordance with any decree/judgement, will be deemed to be validly levied and collected as if the said provisions as amended by the Ordinance were continuously in force. Any suit or proceedings initiated against the stamp authorities for refund of excess stamp duty paid and no court can direct refund of such excess duty.

Conclusion –

These amendments to the Stamp Act mainly relate to stamp duty in case of mortgage deeds, executed in case of consortium lending as a single instrument.

• The law now explicitly provides that in case of a common instrument consisting of multiple transactions, such transactions should be levied with separate stamp duty. This will have an impact on instruments where stamp duty is paid in the following manner–
• Where stamp duty is of a fixed amount on an instrument – since the transactions will be charged as separate instruments, the amount of stamp duty will be multiplied by the number of transactions,
• Where stamp duty is on an ad valorem basis along with a maximum cap,

This will not have an impact where the rate of stamp duty is on an ad valorem basis with no maximum cap since the amount of stamp duty will any way be calculated on the total value of secured amount. However, making the amendment to section 5 effective retrospectively seems oppressive and burdensome to parties of such instruments. In case the instruments are not stamped in accordance with the said provisions, it may be required to be impounded before admitting as an evidence, where required.

• Rates in case of equitable and simple mortgage have been aligned to prevent taking undue advantage of loopholes. Also, it will now be favourable for parties to execute a simple mortgage over an equitable mortgage since the former not only can be executed in all areas and not just in notified towns but also is a better mode of security.
• However, stamp duty in case of additional collateral has been kept at a low rate of Rs. 500. Further, in case of multiple securities for a single loan, securities in the form of a pledge/ pawn/ equitable mortgage and such other securities under section 6, may be termed as additional security.

[1] https://indiankanoon.org/doc/178953244/

[2] https://indiankanoon.org/doc/178953244/

[3] https://indiankanoon.org/doc/1553487/

[4] https://bombayhighcourt.nic.in/generatenewauth.php?bhcpar=cGF0aD0uL3dyaXRlcmVhZGRhdGEvZGF0YS9jaXZpbC8yMDE5LyZmbmFtZT1XUDIwMDg5MTkxMTA5MTkucGRmJnNtZmxhZz1OJnJqdWRkYXRlPSZ1cGxvYWRkdD0xNi8wOS8yMDE5JnNwYXNzcGhyYXNlPTExMDIyMTE1MTUwMg ==

[5] https://indiankanoon.org/doc/1937173/

[6] https://indiankanoon.org/doc/1046533/

Our other resources on similar topic –

• http://vinodkothari.com/2020/11/sebis-stringent-norms-for-secured-debentures/
• http://vinodkothari.com/2020/07/amendments-in-the-stamp-act-issues-and-need-for-further-clarification/

Is the amendent being retrospectively applicable valid?

Sir, XYZ Bank has sanctioned (1) Working Capital Facility /Cash Credit Limit of Rs 15.00 Lakh ;(2) Bank Guarantee of Rs. 60.00 Lakh Total loan/facility of Rs. 75.00 Lakh the Name of proprietary firm M/S ABCD For security of above loan, borrower is offering • Primary Security- in the form of Hypothecation Cum Loan Agreement (Creation of charge by way of hypothecation over entire current assets, both present and future, of the firm including stock, book debts and other current assets.) And • Collateral Security- Creation of equitable mortgage of Non-agricultural industrial land We are executing collateral security by way of Equitable Mortgage under Article-6 (Hypothecation). Article 6(3) and Primary Security (Hypothecation Cum Loan Agreement) And the proper duty being paid on the Primary Security (Hypothecation Cum Loan Agreement) What will be stamp duty required for Equitable Mortgage

in case of additional loan on same property how much amount of stamp duty it attracts? 500 or 0.3%?

Hi I want to know that if Mortgage agreement is already executed with the loan providing NBFC in Jan 2021 , now while filling the details in IGR , the increased stamp duty is coming on web portal, on raising with NBFC they are saying that SD is increased from .2 to .3 % , there should be any impact on earlier agreements for which they have paid eSBTR on 12th Jan already.

thy are asking me to pay additional amount now on IGRAS , is this not injustice to comman man ? Can I raise this legally.

Hello Sandeep,

i had similar issue, could you please let me know if your issue is resolved and if yes what are steps. it will help a lot .

My question is as follows stamp duty as per 0.2% was paid on equitable mortgage before December 2020 in Mumbai Now rate is enhanced to0.3% and above document can be executed now and registered on which stamp duty was paid at old rate

What is this change of 0.2% of the secured amount to 0.3% related to, is it the franking charges which bank takes on loan amount? And from when it is effective?

I have raised similar question

Sir my query is related to stamp duty on instrument for additional security. For ex a working capital loan of Rs.1000000 was secured by EM of property X. The stamp duty on EM of property X was paid on the entire loan amount of Rs.1000000. In the next year the financial institution had asked for additional security of property Y as EM for the same loan amount of Rs.1000000/-. Please note that there has been no increase in loan amount which remains at Rs1000000 and on which stamp duty has been paid at the time of EM of property X.

In our opinion now at the time of EM of property Y the stamp duty to be paid will be Rs.500/- only. Kindly advise if my understanding is correct

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Nigeria: Payment Of Stamp Duties On Loan Agreements – Implication Of The Finance Act 2019

Introduction

The Finance Act 2019 (“the Finance Act”) made significant changes to the tax regime in Nigeria, with broad implications for doing business, investment strategies and tax planning in Nigeria. Changes introduced by the Finance Act include those made to the Stamp Duties Act, Cap. S8, L.F.N. 2004 (“SDA”), amongst others.

This article examines some of the changes introduced to the SDA and their impact on cross-border loan agreements.

Relevant Amendments by the Finance Act

The SDA provides that stamp duties are to be charged on various ‘instruments' at the rates prescribed by the Schedule to the SDA 1 unless exempted. Section 4(1) of the SDA provides that the competent authority to impose, charge and collect stamp duties on instruments between a corporate body and another party is the Federal Inland Revenue Service (“the FIRS”). Stamp duties on instruments between individuals are payable to the relevant tax authority in a state.

The definitions for the words ‘stamp', ‘stamped' and ‘instruments' were amended by the Finance Act to include the following:

Stamp - an electronic stamp or an electronic acknowledgement for denoting any duty or fee;

Stamped - instruments and materials digitally tagged with an electronic stamp or notional stamp on an electronic receipt ; and

Instruments - electronic documents .

These amendments imply that stamp duty will now apply to both written and electronic documents that are dutiable. It is therefore necessary to examine what implications these amendments would have on cross-border loan transactions with Nigerian counterparties, especially when the loan agreements are signed outside Nigeria.

The Position of the FIRS

On 29 April 2020, the FIRS published an Information Circular titled 'Clarifications on the Provisions of the Stamp Duties Act' ("the Information Circular") to guide the public, taxpayers and tax practitioners on the implementation of the extant tax laws.

The Information Circular clarified some of the amendments made to the SDA by the Finance Act and how the FIRS will interpret these amendments, such as the inclusion of ‘ electronic documents ' as instruments and provision for electronic stamping on electronic document and electronic denoting on instruments.

The Information Circular is particularly important because, for example, though the Finance Act had amended the definition of ' instruments' to include ‘ electronic documents' , there was no definition of electronic documents in the Act to guide what type of documents will be classified as such.

The Information Circular iterated that all dutiable written, printed or electronic instruments must be stamped (such as electronic media content, electronic documents or files, emails, instant messages, short message service ‘sms', any internet-based messaging service, documents on websites or cloud-based platforms, etc.), including any form of electronic acknowledgement of money for dutiable transactions. The examples provided by the FIRS illustrate that stamp duties are payable on dutiable transactions conducted and executed electronically even with no physical documents evincing the same 2 .

About electronic documents received in Nigeria, the Information Circular states that an electronic document executed offshore is 'received' in Nigeria if it is retrieved or accessed in or from Nigeria, it or an electronic copy is stored on a device and brought into Nigeria, or it or an electronic copy is stored on a device or computer in Nigeria. Such instruments must be stamped within the period allowed in the SDA once they are deemed to be received in Nigeria.

An important question to consider here is whether this duty to stamp documents accessed in Nigeria depends on the person accessing the document. For example, consider where an electronic facility agreement is obtained through nefarious means from a company's servers stored offshore by a hacker in Nigeria. Would the obligation to stamp the document arise just because the document has been accessed in Nigeria? Unfortunately, the Information Circular does not address this expressly; however, we opine that the obligation to pay stamp duty should arise when the document is accessed by a person to which the benefit of the document enures (including their representatives and their advisors) for the purpose the document was created.

The Information Circular also clarified that stamp duty may be denoted by direct electronic printing or impression on an instrument, electronic tagging, stamp duty certificates or any other form of acknowledgement of payment for stamp duties adopted by the FIRS.

Payment of Stamp Duties and Penalty for Failing to Stamp an Instrument.

Save for the duty payable on bank transfers and receipts as amended by the Finance Act, the rate of stamp duty payable on instruments remains the same, as contained in the Schedule to the SDA.

Generally, any instrument signed in Nigeria or relating to any property situated or to any matter or thing done or to be done in Nigeria must be duly stamped at the time when it was first executed, otherwise, it will not be available for any purpose or be given in evidence except in criminal proceedings 3 (subject to any subsequent stamping and exception in the SDA 4 ).

This has been iterated in case law, for example, in Princewill Asuquo & Ors vs. Grace Eyo & Ors 5 where it was held by Uzo I. Ndukwe-Anyanwu, J.C.A that an unstamped instrument or document required to be stamped “ will not suffice to be used as that instrument before it is stamped and penalties paid ”. The Court of Appeal in the same case reiterated that, Generally, evidence, including documents, that is relevant to a case or proceeding is admissible in court, however, there are exceptions which render certain documents inadmissible because they to fail to meet certain conditions set by law, such as:

• “unregistered instrument required by law to be registered
• unsigned deed of grant or copy thereof
• unstamped instrument or document requiring to be stamped unless it may legally be stamped after execution and the duties and penalties are paid .” (emphasis ours)

 Instruments are to be stamped within 40 days from the date of execution on payment of the applicable stamp duty. Otherwise, a penalty of twenty Naira must be paid before it will be stamped. Where the duty payable exceeds N20, as a further penalty, interest at the rate of 10% per annum of the unpaid duty shall accrue on the stamp duty until when the interest becomes equal to the unpaid duty 6 .

Meanwhile, an instrument liable to ad valorem duty must be stamped before the expiration of 30 days after it was first executed in Nigeria while instruments executed outside Nigeria must be stamped within 30 days after it is first received in Nigeria 7 .

Also, section 23(4) of the SDA provides that, except where the SDA makes other express provision about any particular instrument, any unstamped or insufficiently stamped instrument which was first executed outside Nigeria may be stamped or up stamped, at any time within 30 days after it is first received in Nigeria, on payment of the unpaid duty.

Save for some instruments specified in the SDA, all the parties to an instrument liable to stamp duty would be liable to the penalty for failing to stamp the instrument.

In other words, facility agreements with Nigerian counterparties, though executed outside Nigeria, will be deemed to be received in Nigeria once the documents are accessed from within Nigeria, either electronically or otherwise. Thus, the obligation to stamp the facility agreement will arise as soon as the dutiable instrument - the executed document - is retrieved or assessed in Nigeria (for example, downloaded to a device in Nigeria or assessed in Nigeria from cloud storage) and the stamp duties must be paid within the period stipulated by the SDA to avoid any liability to pay penalties.

This amendment decidedly curbs previous market practice on cross-border transactions where physical copies of executed documents are kept outside Nigeria to avoid stamp duties.

Stamp duties are payable on applicable instruments. It is important to note that as the definition of instruments now includes electronic documents, the provisions of section 23(4) of the SDA, which provides that an instrument first executed outside Nigeria must be stamped at any time within 30 days after the instrument is first received in Nigeria, will also apply to documents received by electronic means in Nigeria.

We note that the administration of the changes to the SDA in this regard is unclear in terms of how the tax authority will audit and determine when an electronic document is received in Nigeria. Thus, we advise that where the loan is with a Nigerian borrower, all required stamp duties are paid on the finance documents and all perfection requirements by Nigerian law fulfilled as this impacts enforcement of the loan and justiciability of the facility agreement in a Nigerian court.

It is also essential to get the opinion of a Nigerian legal practitioner on the tax obligations arising from a financial transaction as the facts and peculiarities of each transaction may differ.

1 Section 3 of the SDA

2 Paragraph 3.0 of the Information Circular.

3 S22(4) of the SDA.

4 For example, s 91 of the SDA provides for instances where an unstamped receipt may be admitted as evidence in any legal proceedings, depending on the illiteracy and ignorance of the person admitting the evidence.

5 (2013) LPELR – 20199 (CA)

6 S23 of the SDA.

7 S23(3)(a) of the SDA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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