Hypothecation Agreements Attract Stamp Duty As General Agreements, Not Pledge Or Mortgage: Kerala High Court

The Kerala High Court has held that a hypothecation agreement executed to secure a loan attracts stamp duty as a general agreement under Article 5(g) of the Kerala Stamp Act and not as a pledge or mortgage, which attracts higher duty.

Clarifying the position, the court said Article 6 of the Act applies only to pledges. “Article 6 of the Act will get attracted only if the instrument in question is a 'pledge'. On a conspectus reading of the agreement of hypothecation, it is evident that the possession of the vehicle is still with the borrower. If that be so, it passes one's comprehension as to how the deed of hypothecation will qualify as an instrument of pledge"

A single-judge bench of Justice Easwaran S was dealing with a petition filed by Kerala Gramin Bank challenging an order of the Munsiff Court, Manjeri, which had impounded a hypothecation agreement on the ground that it was insufficiently stamped.

The dispute arose from a vehicle loan availed in 2014 by the predecessor-in-interest of the defendants. As security for the loan, the borrower executed a hypothecation agreement in favour of the Bank along with a guarantee agreement.

During trial, the defendants objected to the admissibility of the hypothecation agreement, contending that it had not been properly stamped. Accepting the objection, the trial court impounded the document while taking the guarantee agreement on record and posting the matter for further evidence.

Challenging this, the Bank approached the High Court, arguing that although hypothecation is a species of pledge, it cannot be treated as a pledge in the strict sense since possession of the vehicle remains with the borrower, and therefore Article 6 of the Act would not apply.

Agreeing with the bank, the court emphasized the distinction between a pledge and hypothecation.

“It cannot be disputed that 'hypothecation' is a species of 'pledge'. But the essential difference between them is that in case of hypothecation the possession is with the loanee, whereas in the case of a pledge, the pledgee retains the possession,” the bench observed.

The court also rejected the contention that the document would fall under Article 37 relating to mortgage deeds. It held that stamp duty under Article 37 is attracted only where the loan itself is advanced through a mortgage deed containing the terms and conditions of such advancement.

In the present case, the court noted that the hypothecation agreement was executed after the loan had already been sanctioned and merely evidenced the creation of security for the credit facility. As such, it would not fall within the scope of Article 37.

Holding that the correct provision applicable was Article 5(g), the court noted that the required stamp duty for such agreements was Rs. 100 at the relevant time, later amended to Rs. 200 with effect from April 1, 2015. Since the agreement in question bore a Rs 100 adhesive stamp, it was duly stamped.

“In Ext.P3, an adhesive stamp for Rs.100/- is affixed and therefore it is a properly stamped document in terms of Article 5(g) of the Act,” the Court held.

Accordingly, the High Court allowed the petition, set aside the order impounding the hypothecation agreement, and directed the Munsiff Court, Manjeri, to receive the document in evidence and proceed with the trial

For Petitioner: Advocates Jawahar Jose and Safeer Bawa A.S