The Supreme Court of India, in a significant ruling on stamp duty law, has held that an instrument titled “Security Bond cum Mortgage Deed” executed by a principal debtor to secure its own contractual obligations is chargeable to stamp duty as a mortgage deed under Article 40 of Schedule 1-B of the Indian Stamp Act, 1899, and not as a security bond under Article 57. A bench of Justice Ahsanuddin Amanullah and Justice Prashant Kumar Mishra dismissed two appeals against judgments of the Allahabad High Court, affirming that the true nature of the instrument, rather than its title, determines the applicable stamp duty.
Background of the Cases
The judgment was delivered in two connected civil appeals with similar factual and legal questions.
In the first appeal, M/s Godwin Construction Pvt. Ltd. v. Commissioner, Meerut Division & Anr., the appellant had executed a “Security Bond cum Mortgage Deed” on December 19, 2006, in favour of the Meerut Development Authority (MDA). The deed was intended to secure the performance of obligations related to the development of a colony, including the payment of external development charges amounting to ₹1,00,44,000. The company mortgaged specific plots of land and paid a stamp duty of ₹100, treating the instrument as a security bond under Article 57 of Schedule 1-B of the Stamp Act.
However, the Deputy Commissioner (Stamps), Meerut, initiated recovery proceedings, contending that the instrument was a mortgage deed chargeable under Article 40. A deficit stamp duty of ₹4,61,660, along with a penalty and interest, was demanded. This order was upheld by the appellate authority and subsequently by the Allahabad High Court in a writ petition, leading to the appeal before the Supreme Court.
The second appeal arose from a similar situation where an appellant had secured a business loan of ₹1,66,00,000 from Allahabad Bank by executing a “Security Bond or Mortgage Deed” on a stamp paper of ₹100. The stamp authorities determined that the document was a mortgage deed under Article 40, leading to a demand for deficient stamp duty of ₹1,37,500. This was also upheld by the Allahabad High Court.
Arguments of the Parties
Learned counsel for the appellants in both cases argued that the instruments were correctly stamped under Article 57, as they were executed to secure the due performance of a contract. They asserted that the documents were not simplicitor mortgage deeds as defined under Section 2(17) of the Indian Stamp Act.
Conversely, counsel for the respondents contended that the authorities and the High Court had correctly determined that the deeds were, in substance, mortgage deeds and were therefore chargeable under Article 40 of Schedule 1-B of the Act.
Court’s Analysis and Findings
The Supreme Court began its analysis by stating a foundational principle of stamp duty law. Justice Mishra, writing for the bench, observed, “It is trite that, in matters of stamp duty, the decisive factor is not the nomenclature assigned to the instrument, but the substance of rights and obligations it embodies. The Court is duty-bound to ascertain the true legal character of the instrument.”
The Court meticulously examined the clauses of the “Security Bond cum Mortgage Deed” executed by Godwin Construction. It noted that the deed explicitly stated that the surety “hereby transfer to MDA all their interests in the property detailed in the schedule here to with intent that the same shall remain and be charged by way of mortgage.” The deed also empowered the MDA to sell the mortgaged property to realize its dues in case of default.
Juxtaposing these clauses with the definition of “Mortgage-deed” under Section 2(17) of the Stamp Act, the Court found a perfect match. It concluded that “the instrument executed by the appellant fulfils the essential characteristics of a mortgage deed. In substance and effect, the deed confers a right over specified properties in favour of the Meerut Development Authority to secure performance of an obligation.”
The pivotal question was whether the instrument could still fall under Article 57, which applies to a “SECURITY-BOND OR MORTGAGE-DEED… executed by a surety to secure the due performance of a contract”.
The Court dissected Article 57 and found that its second limb was restricted in application. It stated, “The second limb, demarcated by the words ‘or executed by a surety to secure the due performance of a contract’, is restricted in its application to the execution of security bond or mortgage deed by a surety to secure the obligations of another, and does not extend to cases where the principal itself executes the deed to secure its own obligations.”
To define “surety,” the Court referred to Section 126 of the Indian Contract Act, 1872, which defines a contract of guarantee. The bench noted that such a contract is “inherently tripartite, consisting of the surety, principal debtor, and a creditor.” Therefore, the presence of a surety distinct from the principal debtor is an essential requirement to invoke Article 57.
Applying this test to the facts, the Court found that in both cases, the deeds were bipartite agreements executed by the principal debtors themselves (the companies, acting through their directors) to secure their own liabilities. There was no third-party surety.
The Court held, “It stands beyond doubt, that the deed was not executed by a surety but by the principal debtor/appellant, the company, through its director… This firmly establishes that the properties were not mortgaged by a third party, but by the principal debtor itself, which, in our opinion, does not attract Article 57.”
The Court concluded that since the deeds did not involve a surety, they could not be termed security bonds under Article 57. Instead, they fulfilled all requirements of a mortgage deed and were rightly classified under Article 40.
The Decision
Concluding its judgment, the Supreme Court found no legal error or infirmity in the decisions of the Allahabad High Court.
“In our opinion, the impugned judgments passed by the High Court of Judicature at Allahabad do not suffer from any infirmity as to warrant interference by this Court,” the bench declared.
Both appeals were accordingly dismissed, confirming the stamp authorities’ demands for the deficient stamp duty.
