Stamp Duty on Debentures in India: Constitutional Allocation, Statutory Framework and Jurisprudential Developments

Stamp Duty on Debentures in India: Constitutional Allocation, Statutory Framework and Jurisprudential Developments

1. Introduction

Debentures constitute a principal mode of corporate borrowing in India. Every physical or dematerialised debenture certificate, trust deed or mortgage executed to secure a debenture series attracts ad valorem or fixed stamp duty. The subject has acquired renewed relevance after the amendments to the Indian Stamp Act, 1899 (“ISA”) through the Finance Act, 2019 (effective 1 July 2020) which centralise collection for securities market instruments. The present article critically analyses the constitutional allocation of legislative competence, the statutory scheme, and the jurisprudence that has shaped the law on stamp duty applicable to debentures, drawing upon leading authorities such as Chief Controlling Revenue Authority v. Maharashtra Sugar Mills Ltd.[1], Greaves Cotton & Co. Ltd. v. State of Maharashtra[2], and other decisions referenced below.

2. Constitutional Framework

Legislative competence is bifurcated between the Union and the States by the Seventh Schedule to the Constitution. Entry 91 of List I empowers Parliament to prescribe “rates of stamp duty in respect of … debentures”, whereas Entry 63 of List II enables States to prescribe rates in respect of documents other than those specified in List I. The charging power itself (as distinct from the power to fix rates) flows from Entry 44 of List III, which covers “stamp duties other than duties or fees collected by means of judicial stamps”[3].

The Supreme Court in Hindustan Lever v. State of Maharashtra upheld the validity of State amendments levying duty on Court-sanctioned amalgamation orders and reiterated that, while the charge emanates from Entry 44 (Concurrent), the rate of duty on instruments expressly enumerated in Entry 91—debentures included—is exclusively within Parliament’s domain[4]. More recently, LIC v. State of Rajasthan reaffirmed the exclusivity principle, striking down a State attempt to regulate the rate of duty on insurance policies, and by parity of reasoning confirms the central prerogative in relation to debentures as well[5].

3. Statutory Scheme

3.1 The Indian Stamp Act, 1899

Section 3 ISA is the charging provision. Article 27 of Schedule I (as substituted periodically) specifically deals with “Debenture, whether a mortgage debenture or not” and prescribes a fixed duty per rupee value or a percentage depending upon the State and the period concerned. Two core interpretive rules govern the levy:

  • Duty is attracted to the instrument, not the underlying transaction (S.N. Mathur v. Board of Revenue)[6].
  • Where an instrument can be classified under multiple descriptions the highest duty is payable, but one duty alone is chargeable (s.6 ISA).

3.2 Definition of Debenture

Section 2(30) of the Companies Act, 2013 defines “debenture” expansively to include “debenture stock, bonds or any other instrument of a company evidencing a debt”. For stamp purposes, courts have consistently treated convertible as well as non-convertible debentures as falling within Article 27 until conversion actually occurs. In Greaves Cotton the Bombay High Court quashed a demand for duty on fully convertible debentures (“FCDs”) after conversion, holding that once no separate certificate was issued the occasion to levy duty had ceased[2].

3.3 State Variations

Though rates are centrally prescribed, several States have adopted separate stamp codes (e.g., Maharashtra Stamp Act 1958) which replicate Article 27 with local modifications. Maharashtra historically fixed a nominal duty (Rs 1 per Rs 1000) but prescribes ad valorem duty on debenture trust deeds under Article 40(b). In V. Guruswamy Naidu & Co. the Madras High Court sustained a large additional levy where mortgaged debentures secured company property, applying Article 40(b) rather than Article 27[7].

4. Instrument versus Transaction: The Foundational Doctrine

The principle that stamp duty is a tax on written instruments is settled since Alcock, Ashdown & Co. and was restated in Greaves Cotton and Life Insurance Corporation of India v. Dinanath Tembhekar[8]. Thus the mere borrowing of money or allotment of debentures does not trigger duty unless evidenced by an instrument chargeable under the Act.

“…duty is levied on documents and not on transactions.” (Greaves Cotton, ¶9)

This doctrinal clarity often resolves disputes where authorities endeavour to tax corporate events (e.g., automatic conversion of FCDs, electronic allotments) in the absence of a fresh instrument.

5. Incidence of Duty on Issue, Re-Issue and Transfer

5.1 Initial Issue

Duty becomes payable at the time the debenture certificate (or Letter of Allotment where so treated by State amendments) is executed and is ordinarily borne by the issuing company. Section 35 ISA renders an unstamped or insufficiently stamped debenture inadmissible in evidence and incapable of being acted upon by a public officer.

5.2 Re-issue

Section 120 of the Companies Act, 2013 (analogous to s.118 of the 1956 Act) permits re-issue of redeemed debentures. As held in CIT v. Shree Rajasthan Syntex Ltd., each re-issue is treated as a “new debenture” for stamp duty purposes[9], although the lender may rely on the instrument in evidence if it appears duly stamped.

5.3 Transfer & Assignment

Section 56(1) of the Companies Act, 2013 prohibits registration of a transfer of debentures unless accompanied by a proper instrument of transfer “duly stamped”. The National Company Law Tribunal in Rizwana Anjum v. Hira Multi Construction reiterated that stamping is mandatory, even though deficiency can be cured, and an instrument marked without objection cannot later be impugned on that ground[10].

6. Administrative Architecture and Remedies

The enforcement of the stamp law rests with State Collectors and Chief Controlling Revenue Authorities (“CCRAs”). In the leading case Chief Controlling Revenue Authority v. Maharashtra Sugar Mills Ltd. the Supreme Court held that a CCRA’s power under section 57 ISA to refer questions of law to the High Court is coupled with a duty; refusal can be corrected by writ[1]. The decision underscores the importance of expeditious adjudication of duty disputes.

Similarly, in Kotak Mahindra Bank v. State of U.P. the Allahabad High Court, acting on a reference, classified a deed of assignment of secured debts, distinguishing it from mortgage deeds, thereby guiding duty computation[11]. These authorities ensure doctrinal consistency and investor confidence in capital markets.

7. Selected Allied Issues

7.1 Tax Deductibility of Stamp Duty

In CIT v. Mahindra Ugine & Steel Co. Ltd. the Bombay High Court accepted stamp duty on a debenture issue as a deductible preliminary expense under section 35D of the Income-tax Act, 1961[12]. The ruling signals the revenue recognition of duty as a cost of raising finance.

7.2 Debenture Trust Deeds and Collateral Mortgages

Where debentures are secured by a mortgage or charge over immovable property, a separate debenture trust deed (“DTD”) is executed. The duty on such DTD is typically levied under Article 40(b) (mortgage without possession). Judicial review of classifications—e.g., Aadhar Housing Finance (Madras HC)[13]—turns on whether multiple instruments cover “distinct matters” (s.5 ISA) or a single integrated transaction.

7.3 Enforceability of Stamped Instruments under the Insolvency Code

The NCLT in Vistra ITCL India Ltd. v. Satra Properties held that debentures are exempted under Article 27 of the Maharashtra Act and refused to dismiss an insolvency petition on the plea of unstamped securities, distinguishing authorities on unregistered arbitration agreements[14].

8. Reform Trajectory and Policy Considerations

The 2019 amendments introduced a unified mechanism whereby stock exchanges or depositories collect duty on secondary market transfers of debentures on an all-India basis (s.9A ISA). The measure addresses the asymmetry of multi-State duty rates and prevents double incidence. While rates remain central, revenue is apportioned to the State where the buyer resides. Early empirical data suggest enhanced compliance and administrative simplicity, albeit at the cost of transitional ambiguity with respect to off-market transfers and pledge releases.

9. Conclusion

The jurisprudence on stamp duty governing debentures reflects a balance between fiscal exigencies of States and the constitutional mandate vesting rate-fixing power in Parliament. Courts have consistently safeguarded the doctrine that duty is leviable only on written instruments and have invalidated attempts to expand the tax base through creative characterisation. Post-2019 reforms indicate a policy shift towards centralised, technology-driven collection—a prerequisite for deepening India’s bond markets. Continued vigilance by revenue authorities in adhering to procedural fairness (Maharashtra Sugar Mills) and by corporates in ensuring proper stamping at each stage of a debenture’s lifecycle will remain pivotal to minimizing litigation and fostering ease of doing business.

Footnotes

  1. Chief Controlling Revenue Authority & Superintendent of Stamps v. Maharashtra Sugar Mills Ltd., AIR 1950 SC 218.
  2. Greaves Cotton & Co. Ltd. v. State of Maharashtra, 2004 (Bombay HC).
  3. Constitution of India, Seventh Schedule, List III Entry 44.
  4. Hindustan Lever & Anr. v. State of Maharashtra, (2004) 9 SCC 438.
  5. Life Insurance Corporation of India v. State of Rajasthan & Ors., (2024) SC (pending citation).
  6. S.N. Mathur v. Board of Revenue, (2009) 11 SCC 661.
  7. V. Guruswamy Naidu & Co. v. Inspector General, (2022) Mad HC.
  8. Life Insurance Corporation of India v. Dinanath Mahadeo Tembhekar, 1976 Mh LJ 369.
  9. Commissioner of Income-tax v. Shree Rajasthan Syntex Ltd., (2003) 264 ITR 174 (Raj).
  10. Rizwana Anjum v. Hira Multi Construction Ventures Pvt. Ltd., NCLT Mumbai, 2022.
  11. Kotak Mahindra Bank Ltd. v. State of Uttar Pradesh, 2018 (Allahabad HC).
  12. Commissioner of Income-tax v. Mahindra Ugine & Steel Co. Ltd., 2000 (242) ITR 314 (Bom).
  13. M/s Aadhar Housing Finance Ltd. v. Joint Sub-Registrar, 2021 (Mad HC).
  14. Vistra ITCL India Ltd. v. Satra Properties India Ltd., NCLT Mumbai, 2020.