Deciphering Stamp Duty: Analyzing the Supreme Court’s Verdict on Share Capital Augmentation - MMJC

Introduction.

When it comes to interpretating   the law and resolving any confusion related to legal provision, the court’s judgement play a crucial role., The judiciary’s fundamental duty is to interpret the law to ensure justice. Consequently, court judgments serve as the most authoritative interpretations of legal principles. Landmark judgments set by courts are considered precedents and are followed when adhering to the law. In the context of the Supreme Court of India, its judgments are regarded as the paramount interpretations of the law and carry the same binding force as legislation.

In this article, we delve into a notable judgment delivered by the honourable Supreme Court of India on April 5, 2024. The Court analysed Article 10 of Schedule 1 of the Bombay Stamp Act, 1958, in conjunction with Sections 31(2) and 97 of the Companies Act, 1956. The objective was to determine the stamp duty payable by a company following an increase in its authorized share capital.

Facts of the case.

• Company: National Organic Chemical Industries
• Initial Authorized Capital: Rs. 36 Crores
• Increase in 1992: Authorized capital raised to Rs. 600 Crores (Stamp duty paid: Rs. 1.2 Crores)
• Amendment in 1994: Maharashtra government inserted a maximum cap of Rs. 25 Lakhs on stamp duty for share capital increases. At that time, the relevant provision stated:

Description of Instrument	Proper Stamp Duty
Articles of Association of a Company (where the Company has no share capital or nominal share capital or increased share capital)	One thousand rupees for every rupees 5,00,000 or part thereof

• In 1994, the Maharashtra state government amended the Stamp Act to introduce a maximum cap of Rs. 25 Lakhs on stamp duty payable by companies upon an increase in share capital. The amendment read as follows:

“In exercise of the powers conferred by clause (a) of Section 9 of the Bombay Stamp Act, 1958, the Government of Maharashtra, having satisfied that it is necessary to do so in the public interest, hereby reduces, with effect from the 1st August, 1994, the maximum duty chargeable on Articles of Association of a Company under Article 10 of Schedule-I to the said Act, to Rs. Twenty Five Lakhs.”

• Further Amendment in 1995: Company increased capital to Rs. 1200 Crores (Stamp duty paid: Rs. 25 Lakhs)
• However, the company realized that this payment was inadvertent because the maximum stamp duty of Rs. 25 Lakhs payable on Articles of Association had already been paid by them in 1992. Consequently, the company sought a refund of the stamp duty from the Deputy Superintendent of Stamps, Maharashtra.

The honourable High Court ruled in favour of the company, ordering the refund of the duty along with interest. However, the State of Maharashtra challenged this decision before the Supreme Court.

State of Maharashtra’s Argument:

• Section 14A of the Bombay Stamp Act stipulates that any material modification to an instrument necessitates fresh payment of stamp duty.
• The state contended that each increase in share capital constitutes a new taxing event, even if the stamp duty had already exceeded the maximum cap.
• Further emphasized that the stamp duty exceeding the cap was paid before the amendment that introduced the limit, and therefore, the amendment should not have retrospective effect.

Company’s Counterargument:

• The company asserted that Form-5, which serves to notify the Registrar of Companies (ROC) about the increase in share capital, is not an instrument as per the Bombay Stamp Act.
• Furthermore, the company argued that an increase in share capital does not qualify as a material modification to the instrument.
• The company cited a precedent from the Allahabad High Court in the case of New Egerton Woollen Mills, In re, 1899 SCC OnLine All 22. The Allahabad High Court had addressed a similar question regarding stamp duty payable on a document that altered Articles of Association.

Looking at these arguments, the Court formed 2 questions of law. They are as follows:

1. whether the notice sent to the Registrar in Form No.5 is an “instrument” as defined under Section 2(l) of Bombay Stamp Act? And

• whether the maximum cap on stamp duty is applicable every time there is an increase in the share capital or it is a one-time measure.

Supreme Court’s Decision:

• The honourable Supreme Court concurred with the Allahabad High Court’s ruling.
• According to the Supreme Court, Form No. 5 serves as a prescribed method for sending notice of an increase in share capital or members to the Registrar within 30 days of passing such a resolution.
• The Registrar then records the increase in share capital or members and carries out necessary alterations in the articles.
• Stamp duty is affixed to Form No. 5 for practical convenience because a company cannot independently carry out alterations and record share capital changes in its Articles of Association.
• Ultimately, it is the articles themselves that qualify as an “instrument” within the meaning of Section 2(l) of the Stamp Act, and they are specifically mentioned in Article 10 of Schedule-I of the Stamp Act
• The Bombay Stamp Act is a fiscal statute and must be construed strictly. The court analyzed Article 10 and its placement in the schedule.  Column 1 describes the instrument on which stamp duty is levied.  Column 2 prescribes the stamp duty payable.
• Three situations are described in Column 1: “where the company has no share capital or nominal share capital or increased share capital” . The effect of adding “increased share capital” is that stamp duty will be charged on subsequent increases in the authorised share capital, subject to the maximum cap.
• In other words, the ceiling of Rs. 25 lakhs in Column 2 is applicable on Articles of Association and the increased share capital therein, not on every increase individually. In case stamp duty equivalent to or more than the cap has already been paid, no further stamp duty can be levied.”

As a result, the court in its order upheld the order of the lower court and ordered the state government to refund the stamp duty mistakenly paid by the company.

Position as on date:

As of the present date, the Supreme Court has provided clarity regarding the payment of stamp duty on increases in share capital. Although the case in question pertains to events from 1992 and 1994, it remains relevant today.

In 2015, the Bombay Stamp Act underwent an amendment through the Bombay Stamp Amendment Act 2015. This amendment introduced the term “increase” into Column 2 of Article 10 in Schedule I of the original Act. Consequently, the provision now stipulates that stamp duty should be paid on articles of association at a rate of 0.2% or a maximum of 50 lakhs for each individual increase in share capital1.

This legal development ensures greater clarity and consistency in the application of stamp duty provisions for companies undergoing changes in their authorized capital.

This article is published in Taxmann. The link to the same is as follows: –

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000023905/deciphering-stamp-duty-analyzing-the-supreme-courts-verdict-on-share-capital-augmentation-experts-opinion

This article is written by CS Vrushali Bhave – Senior Manager – RND Team – vrushalibhave@mmjc.in and Ms Rutuja Umadikar – Research Associate – RND Team – rutujaumadikar@mmjc.in