By Anup P. Shah, Chartered Accountant
Laws and Business
1. Introduction :
1.1 Partnership is probably the oldest form of doing
business. Even today, a majority of the businesses in India are organised as a
‘partnership’.
1.2 Stamp duty is an important source of revenue for the
Maharashtra Government.
1.3 This article deals with some issues relating to stamp
duty, which are peculiar to partnership.
2. Charge of stamp duty :
2.1 The Bombay Stamp Act, 1958 (‘the Act’), which is
applicable to the State of Maharashtra, levies stamp duty u/s.3 of the Act,
which reads as follows :
“3. Instrument chargeable with duty
Subject to the provisions of this Act and the exemptions
contained in Schedule I, the following instruments shall be chargeable with
duty of the amount indicated in Schedule I as the proper duty therefor
respectively, that is to say :
(a) every instrument mentioned in Schedule I, which is
executed in the State . . . . . . ;
(b) every instrument mentioned in Schedule I,
which . . . . . ., is executed out of the State . . . ., relates to any
property situate, or to any matter or thing done or to be done in this State
and is received in this State :”
From the analysis of S. 3, the following points emerge :
(a) The stamp duty is leviable on an instrument and
not on a transaction.
(b) The stamp duty is leviable only on those instruments
which are mentioned in Schedule I to the Act.
(c) The stamp duty is leviable on the instrument if it is
executed in the State of Maharashtra or on the instrument which, though
executed outside the State of Maharashtra, relates to any property situate, or
to any matter or thing done or to be done in the State and is received in the
State. Hence, for example, even if the instrument of partnership is executed
outside the State of Maharashtra, but if the partnership is located in
Maharashtra, and the instrument of partnership is received in Maharashtra,
then it would be subject to stamp duty under the Act.
(d) The charge of stamp duty is subject to the provisions
of this Act and the exemptions contained in Schedule I.
2.2 Instrument :
The term ‘instrument’ is defined in S. 2(1) of the Act as
follows :
“(1) ‘instrument’ includes every document by which any
right or liability is, or purports to be, created, transferred, limited,
extended, extinguished or recorded, but does not include a bill of exchange,
cheque, promissory note, bill of lading, letter of credit, policy of
insurance, transfer of share, debenture, proxy and receipt.”
Stamp duty is leviable only on a written document which falls
within the definition of instrument.
2.3 Schedule I :
Since stamp duty is levied only on the instruments specified
in Schedule I, let us look at Schedule I. Only Article 47 of Schedule I
specifically provides for levy of stamp duty on partnership.
2.4 The term ‘instrument of partnership’ and the term
‘partnership’ have not been defined in the Act.
Hence, the term ‘partnership’ would have to be under-stood as defined in the
Indian Partnership Act, 1932.
3. Stamp duty on formation of partnership :
3.1 Stamp duty on formation of partnership is levied under
Article 47(1).
3.2 According to that Article, the stamp duty on the
instrument of partnership or the deed of partnership depends upon the capital
contribution made by the partners as explained below :
(a) If the capital contribution is made only by
way of cash, then the minimum amount of stamp duty is Rs.500. Where the
contribution brought in cash is in excess of Rs.50,000, the stamp duty is
Rs.500 for every Rs.50,000 or part thereof. However, the maximum amount of
stamp duty payable is Rs.5,000. In other words, if the capital ranges from
Rs.50,000 to Rs.500,000, the stamp duty would range from Rs.500 to Rs.5,000.
If the capital contributed in cash is in excess of Rs.500,000, then the stamp
duty payable would be the maximum amount of Rs.5,000.
(b) Where capital contributed by partners is
by way of property other than cash, then the stamp duty payable is
that leviable on a conveyance under Article 25.
3.3 Article 25 :
Since Article 25 is made applicable to partnership, the
relevant provisions of Article 25 are summarised below :
Clause (a) levies stamp duty on movable
property @ 3%.
Clause (b) levies stamp duty on immovable
property. The stamp duty depends upon the location of the property, that is,
whether it is in a rural area or in an urban area and also upon the class of
municipality. The stamp duty for the city of Mumbai, is 5%.
Clause (c) provides that if it relates to both movable
and immovable property, then stamp duty will be payable at rates specified in
clauses (a) and (b), respectively. In other words, in respect of movable
property at 3% and in respect of immovable property at the rates applicable
under clause (b).
Clause (d) has two sub-clauses and both apply only to
residential premises and provide a concessional slab-rate levy in the case
of flats in a co-operative housing society.
4. Admission of partner or additional capital by
partners :
4.1 Since admission of a partner requires a fresh instrument of partnership, the question of payment of stamp duty under Article 47 would arise. However, it would be restricted only to the share of contribution brought in by the incoming partner or additional contribution brought in by the existing partners. If the incoming partner does not bring in any capital, stamp duty payable would be the minimum sum of Rs. 500.
4.2 If in an existing partnership, additional capital is brought in by one or more partners, whether it would attract stamp duty under Article 47(1) ? It is submitted that if a fresh partnership deed is not executed, then stamp duty is not payable, otherwise it would be payable only on the additional capital. The following decisions under the Income-tax Act have held that a registered document is not required when a partner introduces his immovable property into a partnership firm as his capital contribution, but a registered document is required when a partner wants to withdraw an immovable property from the firm:
a) Abdul Kareemia & Bros. v. CIT, (1984) 145 ITR 442 (AP)
b) CIT v. S. R. Uppal, (1989) 180 ITR 285 (Punj. & Har.)
c) Ram Narain & Bros. v. CIT, (1969) 73 ITR 423 (All.)
d) Janson v. CIT, (1985) 154 ITR 432 (Kar.)
e) CIT v. Palaniappa Enterprises, (1984) 150 ITR 237 (Mad.)
5. Retirement of a partner or dissolution of partnership:
5.1 Earlier there was no express provision for levy of stamp duty in the case of retirement of a partner. Now, it is expressly provided, and the stamp duty payable is the same as in the case of the dissolution discussed below.
5.2 Where on dissolution of a partnership (or on retirement of a partner), any property is taken as his share by a partner other than a partner who brought in that property as his share of contribution in the partnership, stamp duty is payable as on a conveyance under Article 25, clauses (a) to (d), on the market value of the property so taken by a partner. In any other case, the stamp duty of only Rs.200 is payable.
5.3 The implications of these provisions are as follows:
a) If a partner has introduced certain property in partnership and on dissolution of the partnership or on his retirement from that partnership, he takes that property, then the stamp duty of only Rs. 200 would be payable.
b) If a partner has introduced certain property in partnership and on dissolution of the partnership or on retirement of another partner from that partnership, that partner takes the property, then the stamp duty as is leviable on a conveyance under Article 25 would be payable. Hence, if the property is an immovable property, then the stamp duty would be 5% as explained above.
If the property is a movable property, then the stamp duty would be payable at the rate of 3%.
c) If the property acquired by the firm itself has been given to a partner on retirement or dissolution, then stamp duty of only Rs.200 is payable.
5.4 An issue arises in the case of a simultaneous admission-cum-retirement of partners done by the same deed, would the stamp duty be payable on the amount brought in by the incoming partner (gross amount) or this amount should be net of the withdrawals ? S. 5 of the Act states that if an instrument relates to several distinct matters, it shall be chargeable with the aggregate amount of duties with which separate instruments each relating to separate matters would have been chargeable under the Act. Hence, the stamp duty on the instrument of partnership should be payable with reference to the gross amount brought in by the incoming partner and should not be with reference to the net amount. In addition, the stamp duty would be payable also as on a deed of retirement, under Article 47(2).
6. Arrangements resembling a partnership:
6.1 In several cases, the owner and the builder enter into a profit-sharing arrangement, which is quite similar to that under a partnership. An issue in such a case would be, whether the arrangement is one of a Development Rights Agreement or is a partnership? The stamp duty consequences on the owner and the developer would vary depending upon the nature of the arrangement.
6.2 S. 4 of the Partnership Act defines a partnership as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.
Thus, a partnership must contain three elements:
a) there must be an agreement entered into by all the persons concerned;
b) the agreement must be to share the profits of a business; and
c) the business must be carried on by all or any of the persons concerned, acting for all.
6.3 Element of profit sharing:
Thus, sharing of profits is an essential element. The instrument must demonstrate that what is happening in effect is that the net profits are being shared and not the gross returns. Various English decisions such as J. Lyons & Co. v. Knowles (1943) 1 KB 366 (CA) have held that a mere agreement to share gross returns of any property would be very little evidence of a partnership between them and there is much less possibility of there being a partnership between them. In certain English cases such as, Cox v. Coulson (1916) 2 KB 177 (lessee of a theatre and manager of a theatrical company) French v. Styring (1892) 2 CBNS 357, (joint owners of a race horse – expenses jointly borne)]; it was held that the mere circumstance of their sharing gross returns would be very little evidence of the existence of partnership.
In Sutton & Co. v. Gray, (1894) 1 QB 285, S a share-broker entered into an agreement with G, a sub-broker, that G should introduce his clients to S, receive half the brokerage in respect of the transactions of such clients put through on the exchange by S and should bear the losses in respect thereof; it was held that this did not create partnership between Sand G as no partnership was intended, and that the agreement was merely to divide gross returns and not profits of a common business.
b) Further, S. 6 of the Partnership Act is also relevant. It provides that the sharing of profits or of gross returns arising from property by persons holding a joint or common interest in the property does not of itself make such persons partners.
The relevant extracts are given below:
“6. Mode of determining existence of partnership. In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.
Explanation 1. – The sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners.
Explanation II. – the receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business; and, in particular, the receipt of such share or payment
a) by lender of money to person engaged or about to engage in any business,
b) by a servant or agent as remuneration,
c) by the widow or child of a deceased partner, as annuity, or
d) by a previous owner or part-owner of the business, as consideration for the sale of the goodwill or share thereof,
does not of itself make the receiver a partner with the persons carrying on the business.
c) A relevant case in this respect is the decision of the Madras High Court in the case of Vijaya Traders, 218 ITR 83 (Mad). In this case, a construction partnership was entered into between two persons, wherein one partner S contributed land while the other was solely responsible for construction and finance. S was immune to all losses and was given a guaranteed return as her share of profits. The other partner who was the managing partner was to bear all losses. The Court held that the relationship is similar to the Explanation 1 to S. 5 and there were good reasons to think that the property assigned to the firm was accepted on the terms of the guaranteed return out of the profits of the firm and she was immune to all losses. The relationship between them was close to that of lessee and lessor and almost constituted a relationship of licensee and licensor and was not a valid partnership.
d) The profit sharing need not always be a percentage share in the profits and it can also be a fixed sum payable to some of the partners. This would not invalidate the concept of a valid partnership. The shares do not always need to be stated in proportion to the profits. – Raghunandan Nanu Kotharev. Hormasji Bamji, AIR 1927 Born. 187 and CIT v. J. K. Doshi and Co., 176 ITR 371 (Born).
6.4 Mutual agency concept:
6.4.1 Mutual agency is also a key condition of the partnership. Each partner is an agent of the firm and of the other partners. The business must be carried on by all or any partner on behalf of all.
6.4.2 What would constitute a mutual agency is a question of fact. For instance, in the case of K. D. Kamath & Co., 82 ITR 680 (SC), the Court held that control and management of the business of the firm can be left by agreement between the parties in the hands of one partner to be exercised on behalf of all the partners.
Consequently, in the case of M. P. Davis, 35 ITR 803 (SC), it was held that the provisions of the deed taken along with the conduct of the parties clearly indicated that it was not the intention of parties to bring about the relationship of partners, but they only intended to continue under the cloak of a partnership the pre-existing and real relationship of master and servant. The sharing of profits or the provision for payment of remuneration contingent upon the making of profits or varying with the profits did not itself create a partnership.
6.4.3 The Bombay High Court in the case of Sanjay Kanubhai Patel, 2004 (6) Bom C.R. 94 had an occasion to directly deal with this issue. The Court after reviewing the Development Rights Agreement, held that it is settled law that in order to constitute a valid partnership, three ingredients are essential. There must be a valid agreement between the parties, it must be to share profits of the business and the business must be carried on by all or any of them acting for all. The third ingredient relates to the existence of mutual agency between the concerned parties inter se. The Court held that merely because an agreement provided for profit sharing, it would not constitute a partnership in the absence of mutual agency.
6.5 AOP v. Partnership:
If, instead of a partnership, an association of persons is selected as an entity for the development business, then there could be some issues from a stamp duty perspective. The Bombay Stamp Act (Article 47) contains an express provision for levying stamp duty on introduction of property in the firm by way of capital contribution by a partner. However, there is no provision for introduction of property by way of capital contribution in an AOP by a member. The moot point which arises in this case is, whether Article 25 levying stamp duty (@5%) on a conveyance would apply or Article 5(h)(B) would apply under which the stamp duty would be Rs.100 only.
6.6 From the above discussions, it would be clear that a proper structuring of the transaction and a proper drafting of the relevant documents is essential to achieve the desired results.
