The Maharashtra 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 an analysis of section 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.
INSTRUMENT
The term ‘instrument’ is defined in section 2(1) of the Act to include every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. However, it 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. If there is no instrument, then there is no duty.
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 a partnership.
The term ‘instrument of partnership’ and the term ‘partnership’ have not been defined in the Act. Hence, the term ‘partnership’ would have to be understood as defined in the Indian Partnership Act, 1932.
Stamp duty on formation of partnership
Stamp duty on formation of partnership is levied under Article 47(1). According to this 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 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. 5,00,000, the stamp duty would range from Rs. 500 to Rs. 5,000. If the capital contributed in cash is in excess of Rs. 5,00,000, then the stamp duty payable would be the maximum amount of Rs. 5,000.
(b) Where capital contributed by the partners is by way of property other than cash, then the stamp duty payable is that leviable on a conveyance under Article 25.
Article 25 on Conveyance
Since Article 25 is made applicable to an instrument of partnership, the relevant provisions of Article 25 are summarised below:
* It levies a stamp duty on movable property @ 3% of the value of the property;
* It levies a 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%. Further, this duty is based on the stamp duty ready reckoner value of the property.
ADMISSION OF PARTNER OR ADDITIONAL CAPITAL BY PARTNERS
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.
If in an existing partnership additional capital is brought in by one or more partners, would it 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. vs. CIT [1984] 145 ITR 442
(AP)
(b) CIT vs. S.R. Uppal [1989] 180 ITR 285 (Punj & Har)
(c) Ram Narain & Bros. vs. CIT [1969] 73 ITR 423 (All)
(d) Janson vs. CIT [1985] 154 ITR 432 (Kar)
(e) CIT vs. Palaniappa Enterprises [1984] 150 ITR 237
(Mad)
RETIREMENT OF A PARTNER OR DISSOLUTION OF PARTNERSHIP
Earlier, there was no express provision for levy of stamp duty in the case of retirement of a partner. Now, it is expressly provided for and the stamp duty payable is the same as in the case of dissolution as discussed below.
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, stamp duty of only Rs. 500 is payable.
The implications of these provisions are as follows:
(a) If a partner has introduced certain property in a 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. 500 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 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. 500 is payable.
An issue arises in the case of 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? Section 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).
ARRANGEMENTS RESEMBLING
A PARTNERSHIP
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 a partnership. The stamp duty consequences on the owner and the developer would vary depending on the nature of the arrangement.
Section 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.
ELEMENT OF PROFIT-SHARING
Sharing of profits is an essential element of a partnership. The instrument must demonstrate that what is happening in effect is that it is the net profits that are being shared and not the gross returns. Various English decisions such as Lyons vs. Knowles, 1863 3 B&S, 556 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 vs. Coulson (1916) 2 KB 177 (lessee of a theatre and manager of a theatrical company), French vs. Styring [1857] Eng R 509 (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 a partnership.
In Sutton & Co. vs. 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 a partnership between S and G as no partnership was intended and that the agreement was merely to divide gross returns and not the profits of a common business.
Further, section 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 I – 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 or 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.’
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 section 6 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.
MUTUAL AGENCY CONCEPT
Mutual agency is also a key condition of a 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.
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 the 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.
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 parties concerned 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.
LLP
To incorporate a Limited Liability Partnership, the partners need to execute an LLP agreement. This agreement would lay down the respective capital contributions, whether they would be in the form of cash or property, etc. This Act has now been amended for an express provision of levying stamp duty on an LLP agreement. Article 47 of Schedule I to the Act now even applies to an instrument of an LLP.
AOP Deed
If, instead of a partnership, an association of persons is selected as an entity for the development business, then the above discussion would apply to the same. The law now contains an express provision that stamp duty on joint venture agreements would be also governed by Article 47.
Conversion of firm into company
The conversion of a firm into a company under Chapter XXI of the Companies Act, 2013 / Part IX of the Companies Act, 1956 should not attract any incidence of stamp duty, as there is a statutory vesting of the assets of the firm in the company and there is no transfer. This view is supported by the decision in the cases of Vali Pattabhirama Rao 60 Comp Cases 568 (AP) and Rama Sundari Ray vs. Syamendra Lal Ray, ILR (1947) 2 Cal 1 which state that under Part IX of the Companies Act there is a statutory vesting of the assets of the firm in the company and there is no transfer. Therefore, there is no conveyance and hence there should not be any incidence of stamp duty.
CONCLUSION
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.
