Supreme Court: The payment of unearned increase in value payable to the lessor post a merger or amalgamation of companies upheld

The Supreme Court (“SC”), vide its judgement dated April 5, 2024, in the case of M/s. Jaiprakash Industries Limited (Presently known as Jaiprakash Associates Limited) v. Delhi Development Authority [Civil Appeal No. 8336 of 2009], upheld the payment of unearned increase in the value to the lessor post a merger or amalgamation of companies.

Facts

Four separate perpetual lease deeds were executed by the Hon’ble President of India on August 12, 1983, in favour of M/s. Jaiprakash Associates Private Limited in respect of several plots. A joint application was made by M/s. Jaiprakash Associates Private Limited and M/s. Jaypee Rewa Cement Limited in July 1986, before the Allahabad High Court, wherein both the parties prayed for amalgamation. Resultantly, the Allahabad High Court, vide its order dated July 30, 1986, sanctioned the scheme of amalgamation and directed that some of the properties mentioned in the first, second and third parts of Schedule II of the order shall stand vested in the transferee company, that is, M/s. Jaypee Rewa Cement Limited.

In September 1986, after the amalgamation, the name of M/s. Jaypee Rewa Cement Limited was changed to M/s. Jaiprakash Industries Limited which was subsequently changed to M/s. Jaiprakash Associates Limited (“Appellant”). Hence, the Appellant is a transferee company created as a result of the amalgamation of the erstwhile M/s. Jaiprakash Associates Private Limited and M/s. Jaypee Rewa Cement Limited.

The Appellant made an application to the Delhi Development Authority (“Respondent”) for a grant of permission to mortgage the said plots in favour of the Industrial Finance Corporation of India. However, vide a letter dated March 14, 1991, the Respondent demanded an unearned increase value of INR 2,13,59,511.20. The Appellant, being aggrieved by the said demand of the Respondent, made representations, which were not favourably considered by the Respondent. Therefore, the Appellant filed a writ petition before a single judge of the Delhi High Court (“Delhi HC”). The Delhi HC, vide its order dated January 30, 2003, dismissed the said petition filed by the Appellant. Being aggrieved by this decision of the Delhi HC, an appeal was preferred by the Appellant before the division bench of the Delhi HC which was also dismissed (“Impugned Judgment”).

Hence, being aggrieved by the Impugned Judgment, the Appellant filed an appeal before the SC. Prior to proceeding further, the SC, vide an order dated January, 3, 2008 (“Interim Order”), granted an interim stay to the Impugned Judgment, subject to a condition that the Appellant deposits a sum of INR 2,13,59,511.20 with the SC. The said amount as well as the interest accrued thereon was separately invested.

Issue

Whether the amalgamation of the companies and the resulting transfer of leasehold rights amount to a transfer under the lease deed, requiring payment of unearned increase value to the Respondent.

Arguments

Contentions of the Appellant:

It was contended by the Appellant that clause II(4)(a) of the lease deed puts an embargo on the lessee not to sell, transfer, assign or otherwise part with the possession of the whole or any part of the said plots, except with the previous written consent of the lessor. Additionally, the proviso to the said clause of the lease deed entitled the lessor to impose a condition of, while granting consent, payment of a portion of the unearned increase in the value, that is, the difference between the premium paid and the market value.

The Appellant submitted that the amalgamation of the lessee with another company under the orders of the Company Court would not amount to the sale, transfer or assignment of the said plots.

It was also contended by the Appellant that the amalgamation of the two companies does not involve any transfer within the meaning of the Transfer of Property Act, 1882 (“TPA”) and the assets and liabilities of the lessee had merged and devolved on the Appellant as per the operation of Section 394 (Provisions for facilitating reconstruction and amalgamation of companies) of the Companies Act, 1956 (“Companies Act”). Additionally, the Allahabad High Court’s order sanctioning the scheme of amalgamation is an order in rem, which binds everyone.

It was further submitted by the Appellant that no sale consideration or consideration for transfer was present in the scheme of amalgamation and by virtue of the scheme of amalgamation, the transferor personality ceased to exist and merged with the transferee.

Contentions of the Respondent:

The Respondent, while relying upon the order of the Allahabad High Court wherein the said amalgamation was sanctioned, contended that clause (1) of the order provides that the transferor company’s properties, rights and powers in respect of the property described in the first, second and third parts of schedule II shall be transferred without any further act or deed to the transferee company. Therefore, the Respondent submitted that the demand for unearned increase was lawful.

Observations of the SC

The SC took into consideration clause (II)(4)(a) incorporated in all four perpetual leases and observed that the second proviso to the clause clarifies that the Respondent, which has stepped into the shoes of the lessor, would be entitled to recover a portion of the unearned increase in the value. It was noted by the SC that all the categories of transfers are covered within the ambit of clause II(4)(a), including the involuntary transfers. However, the SC observed that the present case is not one of an involuntary transfer, as the transfer was made based on a petition filed by the lessee and the transferee seeking amalgamation.

It was also noted by the SC that clause (II)(4)(a) covers transfers as well as parting with possession, so the transfer contemplated by the said clause is much wider than what is defined under Section 5 (“Transfer of property” defined) of TPA. Further, Section 5 of the TPA clarifies that nothing contained therein shall affect any law for the time being in force in relation to the transfer of property to or by companies. Thus, the SC stated that Section 5 of the TPA would not be of any assistance to the Appellant.

The SC also emphasised on clause (1) of the Allahabad High Court’s order sanctioning the scheme of amalgamation which states that the said plots stand transferred from the original permanent lessee to the Appellant.

Decision of the SC

The SC found nothing illegal about the Impugned Judgment and accordingly dismissed the appeal filed by the Appellant. Further, the SC allowed the Respondent to withdraw the principal amount along with the interest which was deposited by the Appellant pursuant to the Interim Order.

VA View:

The present judgment of the SC is a significant judicial pronouncement as the SC has rightly held that any merger or amalgamation of two companies resulting in transfer of a property may lead to payment to the lessor of an unearned increase in the value of the assets being leased, subject to the contractual arrangement between the lessor and lessee. The SC has also examined the scope of Section 5 of the TPA vis-à-vis the terms of the perpetual lease deeds in the present case which provided for the recovery of a portion of the unearned increase in the value of the assets at the time of sale, transfer, assignment, or parting with the possession.

Additionally, SC by the virtue of this judgement provided clarity which could be used as a precedent in respect to similarly placed lease or arrangements which is commercial in nature and where an entity enters into such commercial arrangement with a government entity, being the lessor.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Supreme Court: Stamp duty not applicable on every individual increase in the authorised share capital once the cap amount is paid

The Supreme Court (“SC”), vide its judgement dated April 5, 2024, in the case of State of Maharashtra and Another v. National Organic Chemical Industries Limited [2024 SCC OnLine SC 497], has held that stamp duty is not required to be paid on every individual increase in the authorised share capital of the company and the maximum cap as provided under the law is applicable as a one-time measure.

Facts

National Organic Chemical Industries Limited (“Respondent”) was incorporated with an initial authorised share capital of INR 36 crores. In 1992, it increased its authorised share capital to INR 600 crores and accordingly paid a stamp duty of INR 1,12,80,000 as per erstwhile Article 10 (Articles of Association of a company) of Schedule-I (Stamp duty on Instruments) of the Bombay Stamp Act, 1958 (“Stamp Act”) which provided for a stamp duty of INR 1,000 for every INR 5,00,000 or part thereof on the Articles of Association (“AoA”) of a company where the company has no authorised share capital or nominal share capital or increased share capital.

Subsequently in 1994, the State of Maharashtra (“Appellant”) amended Article 10 of the Stamp Act and introduced a maximum cap of INR 25 lakhs. Thereafter, the Respondent passed a resolution for a further increase in its authorised share capital to INR 1,200 crores and paid INR 25 lakhs as stamp duty when it filed its notice in Form No. 5 (Notice of consolidation, division, etc. or increase in share capital or increase in number of members) pursuant to Section 97 (Notice of increase of share capital or of members) of the Companies Act, 1956 (“Companies Act”). However, according to the Respondent, this was done inadvertently as it was soon realised that stamp duty was not liable to be paid by it since the maximum stamp duty of INR 25 lakhs payable on AoA as per the provisions of the Stamp Act had already been paid by them in 1992. Consequently, the Respondent wrote a letter to Deputy Superintendent of Stamps, Maharashtra (“DSS”), seeking a refund of INR 25 lakhs.

DSS rejected the request stating that whenever the authorised share capital of a company is increased, stamp duty is payable on each such occasion at the time of filing Form No. 5 and it is not a one-time measure. Aggrieved, the Respondent filed a writ petition before the Bombay High Court (“Bombay HC”) challenging the aforesaid order and seeking refund of stamp duty with interest. The Bombay HC concluded that Form No. 5 is not an instrument as defined by Section 2 (Definitions) of the Stamp Act and that stamp duty can only be charged on AoA, where the maximum duty, payable as per the amendment, has already been paid by the Respondent. The Bombay HC allowed the writ petition and directed the Appellant to refund stamp duty of INR 25 lakhs along with interest @ 6% per annum.

Aggrieved by the order of the Bombay HC, the Appellant filed an appeal in the SC.

Issues

• Whether the notice sent to the Registrar of Companies (“RoC”) in Form No. 5 is an “instrument” as defined under Section 2(l) of the Stamp Act.

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

Arguments

Contentions of the Appellant:

The Appellant contended that Form No. 5 records or purports to record the right or extension of the right of a company to increase its authorised share capital as recorded in its AoA and thus would be considered as an ‘instrument’ under the Stamp Act.

The Appellant submitted that every time a company increases its authorised share capital, it is a separate taxing event and stamp duty is liable to be paid irrespective of whether the maximum amount payable under the Stamp Act has previously been paid. The Appellant stated that increase in the authorised share capital of the Respondent, from INR 600 crores to INR 1,200 crores, materially altered the character of the AoA. It also relied on Section 14A (Alterations in instruments how to be charged) of the Stamp Act to contend that any material or substantial alteration in the character of an instrument requires a fresh stamp duty according to its altered character.

The Appellant also contended that the maximum cap or upper ceiling of INR 25 lakhs was introduced after the payment of stamp duty of INR 1,12,80,000/-. Therefore, the stamp duty paid earlier cannot be taken into consideration in any case.

Contentions of the Respondent:

The Respondent submitted that it was only the AoA of a company which is chargeable to stamp duty under Article 10 of the Stamp Act. Form No. 5, which is being contended by the Appellants to be a separate instrument, is completely alien to the Stamp Act as it serves a very limited purpose of giving notice to the RoC that a company has increased its authorised share capital beyond its current authorised share capital. It was also argued that increase in the authorised share capital of a company does not materially or substantially alter the character of the AoA so as to fall within the ambit of Section 14A of the Stamp Act. The Respondent referred to Section 31 (Alteration of articles by special resolution) of the Companies Act to submit that any alterations made to the AoA are valid and are to be taken as if originally contained therein.

The Respondent, through a catena of judgements, also submitted that fiscal statutes have to be construed strictly and in case of any ambiguity in the charging provision, the same has to be resolved against the department.

Observations of the SC

The SC observed that any increase in the authorised share capital by a company is neither required to be confirmed by the court, as per Section 94(2) (Power of limited company to alter its share capital) of the Companies Act, nor does the RoC exercise any discretion, provided that Form No. 5 is duly filed. The SC stated that filing of Form No. 5 is only a method prescribed, whereby “notice” of increase in authorised share capital of a company has to be sent to the RoC, and the RoC has to record such increase in authorised share capital and carry out the necessary alterations in the AoA.

With respect to the first issue, the SC noted that the stamp duty is affixed on Form No. 5 as a matter of practical convenience because a company itself cannot carry out the alterations and record the increase in authorised share capital in its AoA. It is only the AoA which is an instrument within the meaning of Section 2(l) of the Stamp Act and accordingly has been mentioned in Article 10 of Schedule-I of the Stamp Act.

The SC observed that the Companies Act provides for the origin, purpose and scope of articles. In this regard, the Companies Act is the special law and the Stamp Act is the general law, and in case of conflict between two laws, the general law must give way to the special law.

The SC referred to the case of M. Swaminathan v. Chairman and Managing Director [1987 SCC OnLine Mad 438], where the Madras High Court had held that Section 31(2) of the Companies Act was introduced with the intention to confer validity on any alterations to the AoA as if they were originally contained therein. Therefore, any increase in the authorised share capital of the company also shall be valid as if it were originally there when the AoA were first stamped. The SC also noted that there is no concept of a company having new AoA and thus, Section 14A of the Stamp Act would not be of any help to the Appellant.

In respect of the second issue, the SC added that Article 10 of Schedule-I of the Stamp Act provides that stamp duty is to be charged on AoA, inter alia, on increase in the authorised share capital of a company. Thus, in spite of Section 31(2) of the Companies Act, stamp duty will be payable on increased authorised share capital. If there is no specific provision for charging the increase, then no stamp duty is payable for any increase in the authorised share capital of a company. The SC referred to the case of S.E. Investments Limited v. Union of India [2011 SCC OnLine Del 1867], wherein the Delhi High Court held that “in the absence of a specific provision that permits the levy of stamp duty on the increase in authorized share capital, it would not be open to the respondents to insist upon the petitioner having to pay stamp duty for the increased authorized share capital.”. The SC noted that the Stamp Act is in the nature of a fiscal statute which has to be interpreted strictly. The SC observed that the ceiling of INR 25 lakhs in Article 10 of Schedule-I of the Stamp Act is applicable on AoA and the increased authorised share capital therein, and 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.

The SC also made a reference to the Maharashtra Stamp (Amendment) Act, 2015 which amended Article 10 of Schedule-I of the Stamp Act and added the words “increased share capital” which meant that the cap will now be applicable on each individual increase. The SC observed that the amendment made in 1994 does not have a retrospective effect, however since the instrument ‘AoA’ remains the same, and the increase was initiated by the Respondent after the cap was introduced, the duty already paid on the AoA will be considered. It is not a fresh instrument which has been brought to be stamped, but only the increase in authorised share capital in the original document, which has been specifically made chargeable by the legislation.

Decision of the SC

The SC dismissed the appeal and upheld the order of the Bombay HC and directed the Appellant to refund INR 25 lakhs paid by the Respondent along with interest @ 6% per annum.

VA View:

Through this notable judgement, the SC has provided clarity regarding the payment of stamp duty on increases in authorised share capital. The SC has provided consistency in the calculation of stamp duty by carefully examining established legal principles and statutory provisions, and correctly ruled that the stamp duty is not required to be paid on every individual increase in the authorised share capital of the company and is subject to the maximum cap as provided under the law.

The SC further noted that the amendment made in 1994 does not have a retrospective effect, however since the instrument ‘AoA’ remains the same, and the increase in authorised share capital in this case was initiated after the cap was introduced, the duty already paid on the increased authorised share capital in the AoA will be considered.

While penning down the judgment, SC also reinforced the established legal principle that a special act prevails over a general act. The SC held that the Companies Act is the special law and the Stamp Act is the general law concerning the AoA.

For any query, please write to Mr. Bomi Daruwala at [email protected]