PETITIONER:
MADRAS REFINERIES LTD.
Vs.
RESPONDENT:
CONTROLLING REVENUE AUTHORITY, BOARD OFREVENUE, MADRAS
DATE OF JUDGMENT05/01/1977
BENCH:
SHINGAL, P.N.
RAY, A.N. (CJ)
BEG, M. HAMEEDULLAH
CITATION:
1977 AIR 500 1977 SCR (2) 565
1977 SCC (2) 308
ACT
Indian Stamp Act, 1899--Loan Agreement and Deed of Trust
and Mortgage executed on the same day--Payment of stamp
duty on which document to be paid--Tests for deciding.
HEADNOTE
The appellant company executed .a Loan and Note Purchase
Agreement with a foreign bank. Under that agreement the
appellant was to authorise the creation and issuance of
secured notes, Series A and B, and the Notes were to be
issued under and secured by a Deed of Trust and Mortgage
between the Company and the Bank. The Deed of Trust and
Mortgage stated that as the appellant was in the process of
constructing a refinery for the refining of crude oil and
deemed it necessary to borrow money from time to time to
finance such construction and to issue its Notes therefor,
and to mortgage and charge its properties to secure the
payment of such Notes, it executed the Deed of Trust and
Mortgage as Security in accordance with the terms and condi-
tions of Article 2 of the Deed of Trust and Mortgage to
secure the due payment of the principal and the premium, if
any, and the interest on the Notes, and of all other monies
for the time being and from time to time owing on the
security of the indenture and on the Notes and the perform-
ance by the Company of all of its obligations thereunder.
It was also agreed that the Notes shall be secured and shall
have the other terms and conditions provided in the agree-
ment and shall be guaranteed by the President of India
pursuant to the terms of the Guarantee Agreement. The
Guarantee Agreement state. that the President of India, as
the guarantor, unconditionally guaranteed as primary obligor
and not as surety merely, the due and .punctual payment from
time to time of the principal as well as interest stated m
the Agreement. The obligations of the guarantor were abso-
lute and unconditional under any and all circumstances and
were not be to any extent or in any way discharged, impaired
or otherwise affected, except by performance thereof in
accordance with the terms thereof. It was also provided
that each and every remedy of the Trustee shall be cumula-
tive and shall be in addition to any other remedy given
therein or under the mortgage or any of the other collateral
or now or hereafter existing at law or in equity or by
statute. The Guarantee Agreement was executed on the same
day as the Deed of Trust and Mortgage between the President
of India and the foreign bank as a Trustee.
The High Court decided that stamp duty was chargeable on
the Trust and Mortgage Deed under Art. 40(b) of Schedule I
to the Act.
In appeal to this Court it was contended that it was the
Guarantee Agreement which was the principal and primary
security and that the Deed of Trust and Mortgage was a
collateral or auxillary security and as such stamp duty was
payable under Art. 40(c) and that the Guarantee Agreement
was exempt from duty under s. 3 and debentures under Art.
27.
Dismissing the Appeal,
HELD: (1) It is the real and true meaning of the deed
of Trust and Mortgage and the Guarantee Agreement which
has to be ascertained irrespective of the description given
by the parties. [568 E]
(2) The Trust and Mortgage Deed was executed before the
execution of the Guarantee Agreement though both of them
were executed on the same day. It was the Deed of Trust
and Mortgage which was the security for the
566
loan though the loan was also guaranteed by the President in
terms of the Guarantee Agreement. [568 G-H]
(3) The. terms and conditions of the Guarantee Agreement
cannot detract from the basic fact that the Deed of Trust
and Mortgage was executed first in point of time and was the
principal or the primary security for the loan. The Deed of
Trust and Mortgage was clearly the principal or the pri-
mary security and could not be said to be a collateral
agreement. [569-H]
(4) The Deed of Trust clearly stated that the terms
"Collateral Agreements" shall mean the Guarantee Agreement
and the Undertaking. [570 A-B]
(5) The Guarantee Agreement was not an instrument of
sale, mortgage or settlement and did not fall within the
purview of s. 4(1) of the Act.
[571 E.F]
(6) There is no justification for the contention that
the debentures were the principal instruments and not the
Deed of Trust and Mortgage. The secured notes were
issued under and secured by the Deed of Trust and Mortgage.
The notes were issued in consequence of and on the security
of the Deed of Trust and Mortgage. [571 H, 572 A]
JUDGMENT
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 709 of 1975.
(Appeal by Special Leave from the Judgment and Order
dt. 9-10-74 of the Madras High Court in Referred ease No. 4
of 1968)
P. Ram Reddy, C. Ramakrishna and A. V.V. Nair, for the
Appellant.
V.P. Raman, A.V. Rangam and Miss A.. Subhashini, for
the Respondent.
The Judgment of the Court was delivered by
SHINGHAL J.--This appeal by special leave arises out of
the decision of the Madras High Court dated October 9,
1974, on a reference by the Chief Controlling Revenue-
authority under section 57 of the Indian Stamp Act, 1899,
hereinafter referred to as the Act. The Board of Revenue,
Madras, which was the Chief Controlling Revenue-authority,
initially stated the case raising the following questions
for decision,--
(a) Whether the decision of the Board of
Revenue that the instrument relating to the
Deed of Trust and Mortgage would attract the
levy of a Stamp Duty as laid down in Article
40(b) of Schedule I of the Indian Stamp Act
mad that the debentures would be exempted from
the levy of stamp duty is correct or not; and
(b) Whether the claim of the Respondent
herein that the
stamp duty is payable on the debenture
under Article
27(a) and on the Deed of Trust and
Mortgage under
Article 40(c) is tenable or not ?
The High Court directed the Board of Revenue to refer three
additional questions, but ultimately took the view that the
additional questions did not really arise in the case. It
answered the first question in
567
favour of the Revenue and the second question against the
Madras Refineries Limited, hereinafter referred to as the
Company. The Company feels aggrieved and has come up in
appeal to this Court. It will be enough to state those facts
which bear on the controversy before us.
The Company was incorporated under the Indian Companies
Act, 1956, as a public limited company. An agreement known
as the Loan and Note Purchase Agreement was executed be-
tween the Company and the First National City Bank and six
others on December 20, 1966, by which the Company agreed to
authorise the creation and issuance of $14,880,000 (U.S.)
principal amount of its 5% secured notes Series ’A’, and $
7,440,300 (U.S.) principal amount of its 51/2 secured
notes Series ’S’, ’and the sale of, or the borrowing to be
evidenced by such Notes in accordance with the terms and
provisions of the agreement. The Notes were to be issued
under and secured by a Deed of Trust and Mortgage between
the Company and the First National City Bank. It was a1so
agreed that the Notes shall be secured and shall have the
other terms and provisions provided in the agreement and
shall be guaranteed by the President Of India pursuant to
the terms of a "Guarantee Agreement", in the prescribed
form. We shall have occasion to refer to the relevant
clauses of the Loan and Note Purchase Agreement, the Deed of
Trust and Mortgage and the Guarantee Agreement as and when
necessary. The Deed of Trust and Mortgage and the Guarantee
Agreement were executed between the President and the First
National City Bank (as Trustee) on June 15, 1967. In the
meantime the Company made an application to the Collector
under section 31 of the Act for opinion as to the stamp duty
with which the Deed of Trust and Mortgage was. chargeable,
and the Collector referred the matter to the Board of Reve-
nue. The Board decided on June 28, 1967 that the duty was
chargeable on the Trust and Mortgage Deed under Article
40(b) of Schedule I to the Act. The Company paid Rs.
37,66,500/- as stamp duty under protest, stating that it
would move the Board for a reference of the controversy to
the High Court. The Trust and Mortgage Deed was registered
on_Jane 30, 1967, and the ’A’ series debentures were issued
the same day. The Company applied to the Board of Revenue
to state the case to the High Court. ’B’ series debentures
were issued on June 28, 1968. The case was stated on March
28, 1969 and was decided by the impugned decision of the
High Court dated October 9, 1974.
It has been argued by Mr. Ram Reddy for the appellant
Company that the Guarantee Agreement was the principal and
primary security, and the Deed of Trust and Mortgage was a
collateral or auxiliary security and that the stamp duty on
the Deed of Trust and Mortgage was payable in accordance
with article 40(c). It has been urged that Guarantee Agree-
ment was exempt from duty under section 3 of the Stamp Act
and the debentures were exempt under article 27.
The controversy centres round the question whether the
Guarantee Agreement could be said to be principal or primary
security ?
568
Mr. Ram Reddy has invited our attention to the following
passage in Sergeant on Stamp Duties and Companies Capital
Duty, sixth edition, page 6,-
"Leading and principal object.--With
reference to the stamp duty upon instruments
generally, it is a well settled rule of law
that an instrument must be stamped for its
leading and principal object, and the stamp
covers everything accessory to that object.
In Limeer Asphalte Paving Co. v. 1. R.C.C) it
was stated
"In order to determine whether any, and if
any, what stamp duty is chargeable upon an
instrument the legal rule is that the real and
true meaning of the instrument is to be ascer-
tained; that the description of it given in
the instrument itself by the parties is imma-
terial, even although they may have believed
that its effect and operation was to create a
security mentioned in the Stamp Act, and they
so declare?’
This appears to be a correct statement of the law. We
have therefore to determine the real and true meaning of
the Guarantee Agreement and to decide whether it could be
said to be the principal and primary security.
The Loan and Note Purchase Agreement was executed
on December 20, 1966, between the Company and the first
National City Bank and others. Under that agreement, the
Company was to authorise the creation and issuance of
secured notes, series A and B, referred to above, and the
notes were to be "issued under and secured’by the Deed of
Trust and Mortgage between the Company and the first Nation-
al City Bank". It was then stated in the Loan and Note
Purchase Agreement as follows,--
"The Notes shall be dated, shall ma-
ture, shall bear interest, shall be payable,
shall be secured and shall have such other
terms and provisions as provided in the Mort-
gage and shall be guaranteed by the President
of India Pursuant to the terms of a Guar-
antee Agreement (the "Guarantee Agree-
ment) in the form attached hereto as Exhib-
it 3."
It would thus appear that it was the Deed of Trust and
Mortgage which was the security for the loan, although the
loan was also guaranteed by the President in terms of the
Guarantee-Agreement.
As has been stated, the Guarantee Agreement was made
between the President of India and the first’National City
Bank. It was clearly stated in that agreement that the
First National City Bank executed it "As Trustee under a
Deed of Trust and Mortgage dated as June 15, 1967." The
Trust and Mortgage Deed was thus executed before
(1) (1872) I.R. 7 Ex. 211.
569
the execution of the Guarantee Agreement, even though both
of them were executed on the same day, namely, June 15,
1967.
It is true that it has been stated in the Guarantee
Agreement that the President of India, as the guarantor,
unconditionally guaranteed "has primary obligor and not as
surety merely, the due and punctual payment from time to
time" of the principal as well as the interest etc. stated
in the agreement. And it was for that purpose that the
guarantor agreed to "endorse upon each of the Notes at or
before the issue and delivery thereof by the Company its
guaranty of the prompt payment of the principal interest and
premium thereof and of the other indebtedness." It is also
true that as stated in paragraph 10 of the Guarantee Agree-
ment, the obligations of the guarantor were "absolute and
unconditional under any and all circumstances, and shall
not be to any extent or in any way discharged, impaired or
otherwise affected, except by performance thereof in
accordance with the terms thereof." We have also noticed
the further stipulation that "Each and every remedy of the
Trustee shall, to the extent permitted by law, be cumulative
and shall be in addition to any other remedy given hereunder
or under the Mortgage or any of the other collateral or now
or hereafter existing at law or in equity or by statute."
Mr. Ram Reddy has relied heavily on these averments in
the Guarantee Agreement, but they cannot detract from the
basic fact that the Deed of Trust and Mortgage was executed
first in point of time and was the principal or primary
security for the loan according to the terms and conditions
of the agreement between the parties. It was that document
which constituted the First National City Bank as the Trus-
tee, and enabled it to enter into the Guarantee Agreement
with the President, and the President guaranteed the due
performance of the obligations undertaken by the Company
thereunder.
The Deed of Trust and Mortgage, which was executed
between the Company and the First National City Bank as a
national banking association incorporated and existing under
the laws of United States of America, stated that as the
Company was in the process of constructing a refinery for
the refining of crude oil and deemed it necessary to borrow
money from time to time to. finance such construction and to
issue its notes therefor and to "mortgage and charge its
properties hereinafter described to secure the payment of
such notes" it executed the Deed of Trust and Mortgage as
security in accordance with the terms and conditions of
Article 2 of the Deed of Trust and Mortgage to secure the
due payment of the principal of and the premium, if any, and
the interest on the Notes and of all other moneys for the
time being and from time to time owing on the security of
that Indenture and on the Notes and the performance by the
Company of all of its obligations thereunder. The Deed of
Trust and Mortgage was therefore clearly the principal or
the primary security and could not be said to be a "collat-
eral agreement". The parties in fact clearly
570
stated in Article I, section 1.01 of the Deed of Trust and
Mortgage as follows,--
"Collateral Agreements:
The term "Collateral Agreements" shall
mean the
Guarantee Agreement and the Undertaking,
hereinfater
defined."
It was therefore specifically agreed between the parties
that the Deed of Trust and Mortgage was not a collateral
agreement.
In all these facts and circumstances it is futile to
contend that the Deed of Trust and Mortgage was not the
principal or primary security. As was stated in Article 9 of
that document, that security became enforceable in case of
any or more "events of default", and it cannot be said that
merely because the Guarantee Agreement contained the stipu-
lation that the President, as the Guarantor, uncondition-
ally guaranteed .the due and punctual payment of principal
and interest etc. "as primary obligor and not as surety
merely" that agreement become the principal or the primary
security. It is the real and true meaning of the Deed of
Trust and Mortgage and the Guarantee Agreement which has to
be ascertained, and this leaves no room for doubt that the
view taken by the High Court in this respect is correct and
does not call for interference. Mr. Ram Reddy relied on
some decisions to support his argument that the Guarantee
Agreement was the security for the loan and was the princi-
pal or the primary document, but those cases were decided on
different facts and have no real bearing on the controversy
before us.
The Guarantee Agreement was executed for and on behalf
of the president by his Authorised Representative, and no
stamp duty was chargeable for it by virtue of the proviso to
section 3 of the Act. That in fact appears to be the reason
why counsel for the appellant strenously argued that we
should hold it to be the principal instrument, for he has
next argued that the case falls within the purview of sec-
tion 4 (1) of the Act and the "Principal instrument" only
would be chargeable with the duty prescribed in Schedule I,
and deed of any trust and mortgage would be chargeable with
a duty of Rs. 4.50 p. instead of the duty prescribed for it
in that Schedule. We find however that there is no merit in
this argument also. Sub-section (1) of section 4 of the Act
reads as follows,--
"4. Several instruments used in single
transaction of sale, mortgage or
settlement.--(1) Where, in the case of any
sale, mortgage or settlement several instru-
ments are employed for completing the
transaction, the principal instrument only
shall be chargeable with the duty prescribed
in Schedule I, for the conveyance, mortgage or
settlement, and each of the other instruments
shall be chargeable with a duty of four rupees
fifty naye paise instead of the duty (if any)
prescribed for it in that Schedule."
571
It is nobody’s case that the Guarantee Agreement was an
instrument of sale-, for it did not transfer the ownership
of anything in exchange for a price paid or promised or
part-paid and part-promised. It was also not an instrument
of mortgage because it is no boly’s case that there was any
transfer of an interest in specific immovable property for
the purpose of securing the payment of money advanced or to
be advanced by way of loan or an existing or a furture debt
or the performance of an engagement which could give rise to
a pecuniary liability. The expression "settlement" has
been defined in clause (24) of section 2 of the Act as
follows :--
"Settlement" means any non-testamentary
disposition in writing, of movable or immova-
ble property made---
(a) in consideration of marriage,
(b) for the purpose of distributing
property of the settlor among his family or
those for whom he desires to provide, or
for the purpose of providing for some person
dependent on him, or
(c) for any religious or charitable purpose;
and includes an agreement in writing to make
such a disposition and where any such dispo-
sition bas not been made in writing, any
instrument recording, whether by way of decla-
ration of trust or otherwise, the terms of any
such disposition) ."
The term "disposition" has been defined in Strouds Judicial
Dictionary as a devise "intended to comprehend a mode by
which property can pass, whether by act of parties or by an
act of the law" and "includes transfer and charge of proper-
ty". As the Guarantee Agreement did not have any such
effect, it did not constitute a "settlement" also. That
document was not therefore an instrument of sale, mortgage
or settlement and did not fall within the purview of sub-
section (1) of section 4 of the Act.
It was the Deed of Trust and Mortgage which was a
"Mortgage deed" within the meaning of clause (17) of sec-
tion 2 of the Act, and it was therefore clearly chargeable
with stamp duty at the rate prescribed in article 40(b) of
Schedule I to. the Act.
We have examined the other argument of Mr. Ram Reddy
that even if the Guarantee Agreement was not the principal
instrument, within the meaning of sub-section (1) of section
4 of the Act, we should hold that the debentures which were
issued by the Company were the principal and primary securi-
ty, and that the Deed of Trust and Mortgage was the "other
instrument" within the meaning of that sub-section and was
chargeable with a duty of Rs. 4.50 p. instead of the duty
prescribed for it in the Schedule. This argument is also
futile for we find that the secured Notes (Series A and B)
were issued under and were secured by the Deed of Trust and
Mortgage. As
572
such, the Notes were issued in consequence and .on the
security of the Deed of Trust and Mortgage and there is no
justification for the contention that the debentures were
the principal instruments, and not the Deed of Trust and
Mortgage.
As the High Court has rightly answered both the ques-
tions, we find no force in this appeal and it is dismissed
with costs.
P.B.R. Appeal dismissed.
573