Security Bonds under Article 57 Require a Distinct Surety; Self‑Mortgages by the Principal Debtor Are Mortgage‑Deeds under Article 40

Citation: 2025 INSC 1207

Case Title: M/S Godwin Construction Pvt. Ltd. v. Commissioner, Meerut Division & Anr.; with Civil Appeal No. 12552 of 2025 (arising out of SLP (Civil) No. 36434 of 2014)

Court: Supreme Court of India (Civil Appellate Jurisdiction)

Bench: Ahsanuddin Amanullah, J. and Prashant Kumar Mishra, J. (Opinion by Prashant Kumar Mishra, J.)

Date of Decision: 08 October 2025

Disposition: Appeals dismissed; High Court judgments affirmed.

Core Holding: An instrument styled “Security Bond cum Mortgage Deed” executed by the principal debtor, which transfers an interest in specified immovable property to secure performance/repayment, is a “mortgage‑deed” chargeable under Article 40 of Schedule 1‑B of the Indian Stamp Act, 1899. Article 57 applies only to instruments executed by a distinct surety (or for office-fidelity security), not to self-executed securities by the principal debtor.

Introduction

This reportable decision addresses a recurring classification dispute under stamp law: whether instruments described as “Security Bond cum Mortgage Deed” may be stamped as “security bonds” at a lower or fixed rate (Article 57 of Schedule 1‑B to the Indian Stamp Act, 1899, as applicable in Uttar Pradesh) or must be treated as “mortgage‑deeds” attracting ad valorem duty (Article 40).

Two appeals were decided together:

• Civil Appeal No. 7661 of 2014: The appellant‑developer executed a “Security Bond cum Mortgage Deed” in favour of Meerut Development Authority (MDA) to secure performance of colony development obligations and payment of external development charges, mortgaging specified plots. Stamp duty of Rs. 100 was paid under Article 57. The authorities demanded deficit duty under Article 40(b) with penalty and interest.
• Civil Appeal No. 12552 of 2025 (arising out of SLP (C) No. 36434 of 2014): The appellant executed a similarly titled instrument in favour of Allahabad Bank to secure repayment of a business loan by mortgaging immovable property. The Sub‑Registrar/Deputy Collector (Stamp) treated it as a mortgage under Article 40 and raised deficit duty.

The key issue in both appeals was the same: Is stamp duty on a “Security Bond cum Mortgage Deed” chargeable under Article 40 (mortgage‑deed) or Article 57 (security bond executed by a surety/for office)?

Summary of the Judgment

The Supreme Court reaffirmed the “substance over nomenclature” rule in stamp classification. It held that both instruments were, in substance, mortgage‑deeds within the definition in Section 2(17) of the Indian Stamp Act, 1899 because they (i) transferred/created a right over specified immovable property (ii) to secure repayment or performance of an engagement, and (iii) conferred power on the creditor (MDA/bank) to realize dues by sale of the mortgaged property upon default.

Interpreting Article 57, the Court clarified its two distinct limbs and confined its second limb strictly to instruments executed by a “surety” as understood under Section 126 of the Indian Contract Act, 1872—i.e., a tripartite guarantee relationship involving a surety, a principal debtor, and a creditor. Where the principal debtor itself executes the instrument mortgaging its own property, Article 57 is inapplicable.

On facts, the deeds were executed by the principal debtors themselves (the developer company in the MDA case; the company through its director in the bank case). There was no distinct third‑party surety. Calling the executant a “surety” in the document did not alter the legal character. Consequently, Article 40 applied and the deficit duty demands were upheld. Both appeals were dismissed.

Detailed Analysis

Statutory Framework and the Court’s Doctrinal Anchors

• Section 2(17), Indian Stamp Act, 1899: A “mortgage‑deed” includes every instrument whereby, for securing money advanced or an existing/future debt, or the performance of an engagement, one person transfers or creates in favour of another a right over specified property. The Court highlighted the breadth of this definition, especially its express inclusion of instruments securing the “performance of an engagement,” not only loans.
• Schedule 1‑B (Uttar Pradesh) – Article 40: Deals with “MORTGAGE‑DEED” (excluding security bonds under No. 57). It contemplates ad valorem duty, with different rates depending on whether possession is given/agreed to be given. The chapeau’s exclusion of “Security Bond (No. 57)” underscores the need to classify documents correctly before computing duty.
• Schedule 1‑B (Uttar Pradesh) – Article 57: “SECURITY‑BOND OR MORTGAGE‑DEED, executed by way of security for the due execution of an office, or to account for money/property received by virtue thereof; or executed by a surety to secure the due performance of a contract.” This provision has two limbs: (i) office/fidelity security; (ii) surety‑executed security for contract performance.
• Section 126, Indian Contract Act, 1872: Defines “contract of guarantee,” “surety,” “principal debtor,” and “creditor.” A guarantee is a promise to discharge the liability of a third person in case of default—necessarily tripartite.

The Court’s reasoning turns on harmonizing these provisions: If an instrument is executed by the principal debtor and creates a right in specified property to secure an obligation, it falls within Section 2(17) and Article 40. Article 57’s second limb is reserved for true surety‑executed instruments (or office‑security under its first limb).

Precedents Cited

The judgment proceeds primarily on statutory text and first principles. While the Court notes that “in matters of stamp duty, the decisive factor is not the nomenclature … but the substance,” it does not cite specific prior case law. The decision therefore functions as a clear, self‑contained restatement and application of that settled classification principle to the facts at hand, alongside a precise construction of Article 57 through Section 126 of the Contract Act.

Legal Reasoning Applied to the Two Appeals

Civil Appeal No. 7661 of 2014 (Meerut Development Authority)

Key facts:

• Developer (M/s Godwin Construction Pvt. Ltd.) obtained MDA approval to develop “Global City, Abdullahpur, Meerut.”
• Executed a “Security Bond cum Mortgage Deed” dated 19.12.2006; mortgaged specified plots totaling 2,934.45 sq. m.; paid Rs. 100 stamp duty under Article 57.
• Deed expressly “transferred all interest” in scheduled property to MDA “with intent that the same shall remain and be charged by way of mortgage,” authorizing MDA to sell the mortgaged property upon default to realize Rs. 1,00,44,000; developer had also deposited Rs. 15,00,000 in advance.

Findings:

• Despite the “security bond” label and references to “sureties,” there were only two parties: MDA and the developer company. No third‑party surety appeared on the instrument.
• The instrument squarely met Section 2(17): a right over identified immovable property was created in favour of MDA to secure contract performance and liabilities.
• Article 57’s second limb could not be invoked absent a distinct surety within the meaning of Section 126 of the Contract Act. A company acts through its director; the director’s signature in a representative capacity does not transform the company into a surety for itself.
• Hence, the instrument is a mortgage‑deed chargeable under Article 40 (not Article 57), and the deficit duty, penalty (Rs. 100), and interest at 1.5% per month from execution until recovery were upheld.

Civil Appeal No. 12552 of 2025 (arising out of SLP (C) No. 36434 of 2014) – Allahabad Bank

Key facts:

• The appellant sought a business loan of Rs. 1.66 crore from Allahabad Bank.
• Executed a “Security Bond or Mortgage Deed” on 04.12.1995 mortgaging plot No. 122‑M (0.202 hectares) to secure repayment; stamped at Rs. 100 under Article 57; the Sub‑Registrar/Deputy Collector flagged a stamp deficit, classifying it as a mortgage under Article 40.
• Authorities held the instrument chargeable at mortgage rates (e.g., Rs. 62.50 per thousand referenced in administrative orders), sustained on revision and by the High Court.

Findings:

• Substantively, the instrument created a security interest in immovable property to secure loan repayment—paradigmatic Section 2(17) mortgage‑deed.
• Although a clause suggested the mortgagor would be “personally liable to repay,” the deed was executed by the director in his capacity on behalf of the company (the principal debtor), not by him in his individual capacity as a separate surety.
• Without a distinct surety, Article 57 was inapplicable. Article 40 therefore governed.

Why Article 57 Does Not Apply: The Court’s Two‑Limb Reading

• First limb: Instruments executed “by way of security for the due execution of an office, or to account for money or other property received by virtue thereof.” This is the classic office/fidelity bond context—unrelated to either appeal here.
• Second limb: Instruments “executed by a surety to secure the due performance of a contract.” The Court ties “surety” to Section 126 of the Contract Act. This requires:
  • A tripartite relationship: surety, principal debtor, creditor;
  • An undertaking to discharge the principal debtor’s liability in case of default;
  • Execution by someone other than the principal debtor.

Accordingly, an instrument executed by the principal debtor itself—even if labeled a “security bond,” even if it contains personal liability language, and even if the signatory is a director of a company—does not fall within Article 57. It is a mortgage‑deed if it creates a right over specified property to secure the obligation.

Substance Over Nomenclature and Corporate Agency: Key Clarifications

• Substance over form: The Court reiterates that stamp duty classification turns on the operative rights and obligations created, not the title or drafting labels. This prevents evasion by mis‑labeling instruments as “security bonds.”
• Company through directors: A company is a juristic person and can act only through human agents. A director signing for the company, without more, does not become a separate surety; the company remains the principal debtor. To engage Article 57’s second limb, a distinct individual or entity must expressly assume the role of surety for the principal debtor’s obligation.

Administrative Context: Impounding, Appeals, Penalty, and Interest

• Section 33 (impounding/examination): The Deputy Commissioner (Stamps) invoked Section 33(4) to initiate recovery of deficit duty. The process illustrates the statutory machinery for re‑classification and recovery when instruments are under‑stamped.
• Section 56(1)(b) (appeal): The appellant’s stamp appeals were considered by the Chief Controlling Revenue Authority and dismissed, leading to writ proceedings before the High Court, and eventually to the Supreme Court.
• Consequences: The orders imposed a relatively nominal penalty (Rs. 100) but a significant interest component—1.5% per month from the date of execution until recovery—underscoring the serious financial exposure when duty is underpaid at execution.

Impact and Practical Implications

This decision crystallizes the boundary between Articles 40 and 57, with significant compliance and transactional implications:

• Real estate development and urban planning: Development authorities often require “security” for external development charges and performance covenants. If the developer itself mortgages its property to the authority, the instrument is a mortgage‑deed under Article 40, not a security bond under Article 57.
• Banking and finance: Where a borrower company mortgages its own property to secure its loan, Article 40 applies—even if documentation is styled as a “security bond.” To legitimately invoke Article 57, a third‑party surety must execute the instrument to secure the borrower’s performance/repayment.
• Directors’ signatures and guarantees: A director signing in a representative capacity for the company does not create a surety relationship. If a director intends to act as a personal guarantor/surety, that must be explicit, and he/she should execute a separate guarantee/security instrument in an individual capacity. Even then, whether Article 57 applies will depend on whether the instrument is indeed a surety‑executed security under its terms.
• Revenue protection and drafting discipline: The ruling curbs attempts to obtain lower duty through nomenclature. Drafters should align the instrument’s form and parties with its legal substance and intended stamp category. Ambiguity will likely be resolved against attempts to avoid ad valorem mortgage duty.
• Legacy documents and risk exposure: Parties with legacy “security bond” documents where the principal debtor mortgaged its own property face exposure to deficit duty, penalty, and steep interest from the date of execution. Proactive adjudication under stamp law may be prudent.
• State variations: The case proceeds under Schedule 1‑B as applicable to Uttar Pradesh. While the interpretive principle (surety must be distinct; substance governs) is generally applicable, duty rates and specific schedule wording may vary across States. Parties should verify the local schedule and any amendments.

Complex Concepts Simplified

• Mortgage‑Deed (Section 2(17), Stamp Act): Any instrument that creates a right over specified property to secure repayment of money or performance of an obligation. Typical features: identification of property; creation of a charge/right; creditor’s power to sell on default; no necessity of possession transfer for classification as a mortgage under stamp law.
• Security Bond (Article 57): Two types:
  • Security for due execution of an office/fidelity (e.g., a bond by an officer accountable for public money/property).
  • Security executed by a surety to guarantee the performance of a contract by a principal debtor. Requires a third‑party surety relationship under the Contract Act.
• Surety vs Principal Debtor vs Creditor (Section 126, Contract Act):
  • Principal debtor: the person whose obligation is being secured.
  • Surety: a different person who promises to perform if the principal debtor defaults.
  • Creditor: the person in whose favour the obligation is owed.
  A document executed by the principal debtor is not a surety instrument.
• Article 40 rate structure: Ad valorem duty typically depends on the amount secured; different sub‑clauses for possession given/not given. Classification under Article 40 can thus yield substantially higher duty than the fixed or lower duties often associated with Article 57.
• Substance over nomenclature: Courts look at what the instrument does, not what it is called. Calling a mortgage a “security bond” does not change its legal nature for stamp duty.
• Impounding and recovery (Section 33): Authorities can examine and impound under‑stamped instruments; deficit duty, penalty, and interest may be recovered. Appeals lie to the Chief Controlling Revenue Authority (Section 56) and judicial review to the High Court.

Practical Classification Checklist

• Identify the executant:
  • If the principal debtor executes and mortgages its property, default classification is Article 40 (mortgage‑deed).
  • If a distinct person executes to secure someone else’s obligation (surety), consider Article 57—subject to the instrument’s terms.
• Examine the rights created:
  • Creation of a right/charge over specified property with a power of sale on default strongly indicates a mortgage under Section 2(17).
• Check for tripartite structure:
  • Are there three roles—surety, principal debtor, creditor—clearly delineated? If not, Article 57’s second limb likely does not apply.
• Scrutinize the capacity of signatories:
  • Director signing “for and on behalf of” a company is not a separate surety. A separate personal guarantee/security by the director in his/her individual capacity would be needed to invoke Article 57.
• Confirm possession terms (for Article 40 rate computation):
  • Ascertain whether possession is given/agreed to be given to apply the correct sub‑clause rate under Article 40.
• When in doubt, seek adjudication under stamp law before execution/registration to avoid onerous interest on deficits.

Open Boundaries and Cautionary Notes

• Composite instruments: The judgment does not address instruments that, in a single deed, combine (i) a mortgage by the principal debtor and (ii) a separate surety’s obligation. In such situations, classification may engage Section 6 of the Stamp Act (instruments coming within several descriptions) and the highest duty principle, depending on the deed’s structure and drafting.
• State‑specific schedules: While principles of classification are general, exact duty rates and schedule wording vary by State amendments. Parties should verify the locally applicable Schedule 1/1‑A/1‑B and rules.
• Terminology traps: Using words like “surety” or “security bond” within a two‑party document where the executant is the principal debtor will not attract Article 57 if the substance shows a mortgage securing the executant’s own liability.

Conclusion

The Supreme Court’s decision delivers crisp guidance on stamp duty classification in security transactions. It confirms that Article 57 is not a general refuge for lower duty whenever a security instrument is labelled a “security bond.” Rather, Article 57’s second limb is narrowly tailored to genuine surety‑executed instruments—where a third party undertakes responsibility for a principal debtor’s performance. When the principal debtor mortgages its own property to secure its obligations—whether development covenants to a statutory authority or loan repayment to a bank—the instrument is a mortgage‑deed under Section 2(17) and chargeable under Article 40.

Equally significant is the Court’s reiteration that a company’s actions through its directors do not create a distinct suretyship; representative execution by a director does not convert a self‑mortgage into a surety bond. Parties should align drafting, party roles, and execution with the intended legal outcome and applicable stamp head. Failure to do so risks substantial deficit duty, penalties, and high interest from the date of execution. The judgment thus strengthens doctrinal clarity, enhances revenue certainty, and promotes disciplined documentation in real estate development and finance transactions across jurisdictions applying the Indian Stamp Act.