Stamp Duty On Loan Assignment To ARC Must Be Based On Debt Assigned, Not Property Value: MP High Court

The Madhya Pradesh High Court has recently ruled that stamp duty on the assignment of loans to an Asset Reconstruction Company (ARC) under the state government's March 7, 2005 Notification must be calculated at 0.1% of the loan securitised or debt assigned and not on the market value of the mortgaged property.

Holding that the notification links stamp duty to the loan securitised or debt assigned rather than the value of the secured property, Justice Maninder S. Bhatti observed,

"A perusal of the Notification clearly reflects that the said Notification nowhere speaks about the immovable property or value thereof. The Stamp duty as per the provisions of the Notification dated 07-03-2005 is not charged considering the value of the land which is mortgaged in order to secure the land. On the contrary, the percentage of duty is quantified qua loan securitized or debt assigned. Hence, the market value of the property is not a consideration for the purposes of assessment of 0.1% of Stamp Duty for the purposes of the transaction where a loan is securitized or debt assigned to a reconstruction or a securitization company."

The court set aside an order of the Collector of Stamps, Raisen, directing Reliance Asset Reconstruction Company Ltd. to pay ₹1.42 crore as deficit stamp duty on a deed of assignment executed after it acquired the loan account from Union Bank of India.

The dispute arose after Reliance ARC acquired the loan account of D.A. Rubber Industries Ltd., which had an outstanding liability of ₹53.77 crore, through a Deed of Assignment. It paid ₹4.75 crore as consideration for the transaction and ₹13.30 lakh as stamp duty under the March 7, 2005, notification.

An audit objection later prompted the Collector of Stamps to demand an additional ₹1.42 crore as deficit stamp duty. The audit relied on Section 75 of the M.P. Panchayat Raj Evam Gram Swaraj Adhiniyam, 1993, and Section 161 of the M.P. Municipalities Act, 1961, taking the view that additional stamp duty was payable in respect of the immovable property covered by the transaction.

Reliance ARC argued that the deed of assignment only transferred the lender's rights and did not create a fresh mortgage over the secured properties. Since stamp duty had already been paid when Union Bank created the original mortgage, it contended that no additional duty was payable beyond what was prescribed under the March 7, 2005, notification.

The State, however, maintained that the audit objection and the resulting demand were valid under the relevant statutory provisions.

After examining the Deed of Assignment, the court found that Reliance ARC had merely stepped into the shoes of Union Bank of India by taking over its rights and interests in the loan. The assignment, it observed, did not create a fresh mortgage or any new charge over the secured property.

The assignment did not create a fresh mortgage or any new charge or encumbrance over the immovable property.

The court noted that the Panchayat and Municipalities Acts impose additional stamp duty when a deed or conveyance relating to immovable property is executed.

"Meaning thereby, when any deed or conveyance is being executed in regard to immovable property situated within the Panchayat area or the Municipal area, stamp duty at a certain rate is required to be charged. Thus, the very transaction becomes leviable with duty as provided under the Act as well as Guidelines made thereunder.", the court ruled

In the present case, however, the mortgage had already been created when Union Bank advanced the loan, and the applicable stamp duty had been paid at that stage.

Since the assignment deed neither created a fresh mortgage nor imposed any new charge or encumbrance over the secured property, the court held that no additional stamp duty could be levied under those provisions.

Referring to the March 7, 2005 notification, the court observed that it specifically provides for stamp duty at 0.1% of the loan securitised or debt assigned with underlying securities where the securities are immovable properties.

The notification, it noted, does not make the market value of the mortgaged property the basis for calculating stamp duty.

The court also found that the audit authorities overlooked the fact that stamp duty had already been paid when the original mortgage was executed. It observed that the collector accepted the audit objection without appreciating that the assignment deed was not a transaction creating a mortgage over the borrower's immovable property.

Accepting the audit objection, the court observed, would effectively result in the State recovering the same stamp duty twice. It held that charging the same duty again after it had already been paid on the original mortgage would amount to unjust enrichment.

Holding that there cannot be dual liability for the same stamp duty merely because the lending institution has changed, the court set aside the Collector's order. It clarified that no amount beyond the ₹13.30 lakh already charged towards stamp duty was payable.

For Petitioner: Advocate Rahul Diwaker, 

For State: Advocate Prabhanshu Shukla,