Kiran Raj

The Kerala High Court has set aside the certification of stamp duty compliance issued by the District Registrar under Section 41(1) of the Kerala Stamp Act, 1959. The court directed the District Registrar to reassess the issue of stamp duty and penalty after granting a fair hearing to all involved parties. The judgement canters on an agreement executed between two private parties that was alleged to be insufficiently stamped, leading to a legal challenge over the authority of the Registrar to certify compliance without due process.

The dispute originated from an agreement executed between the petitioners, who are directors of M/s Saj Holdings Pvt. Ltd., and the third and fourth respondents. The agreement, dated January 22, 2022, pertained to the sale of shares in the company. It contained an arbitration clause stipulating that any dispute arising from the agreement would be resolved through arbitration. The third and fourth respondents alleged that they were owed specific sums by the petitioners and the company under the terms of the agreement. Consequently, they invoked the arbitration clause and filed AR No. 150/2023 before the Kerala High Court, requesting the appointment of an arbitrator.

The petitioners, in response, contended that the agreement in question was insufficiently stamped under the Kerala Stamp Act, 1959, and therefore, it could not be relied upon in arbitration proceedings. They argued that the document should first be impounded and subjected to proper stamp duty assessment before any further legal proceedings.

The High Court, considering this contention, appointed Justice (Retd.) T.R. Ramachandran Nair as the sole arbitrator. The arbitrator then issued notices to the parties, initiating the arbitration process. The petitioners subsequently filed an application seeking a direction to the third and fourth respondents to produce the original agreement, impound it, and follow the procedure prescribed under the Stamp Act before proceeding with the arbitration.

Initially, the third and fourth respondents submitted only a photocopy of the agreement. However, they later produced the original agreement on July 18, 2024, bearing a certificate issued on July 17, 2024, by the District Registrar (the second respondent), stating that the deficit stamp duty of ₹1,50,000/- and a penalty of ₹10,000/- had been paid.

The petitioners challenged this certification, arguing that it had been improperly issued without affording them an opportunity to be heard. They claimed that the District Registrar had no authority to accept an insufficiently stamped document from a party, adjudicate its sufficiency in the absence of the opposing party, and then certify that the deficit had been rectified. They further contended that since the arbitrator was already seized of the matter, the District Registrar should not have intervened in the issue without judicial oversight.

The Kerala High Court examined multiple provisions of the Kerala Stamp Act, 1959, to determine the legality of the certification issued by the District Registrar. It considered Sections 31, 33, 39, 40, and 41, which outline the procedures for dealing with instruments that are insufficiently stamped.

The court noted that under Section 33, any insufficiently stamped instrument must be impounded before it can be acted upon. Section 34 states that such an instrument is inadmissible in evidence unless the deficit stamp duty and penalty are paid. Section 40 permits an individual to voluntarily present an insufficiently stamped document for adjudication, but only within one year of its execution. Since the agreement in question was executed on January 22, 2022, and the certification was issued on July 17, 2024, it exceeded the one-year statutory limit under Section 40.

The court further examined the scope of Section 41(1), under which the District Registrar had issued the certification. It held that the District Registrar, as an appointed authority under the Stamp Act, had the power to impound documents under Section 33 and issue certifications under Section 41(1). However, it stated that these powers must be exercised with due process and procedural fairness.

The court found that the petitioners had raised objections regarding the sufficiency of stamp duty before both the arbitrator and the High Court. Given these objections, the District Registrar was obligated to notify the petitioners and provide them with an opportunity to present their case before certifying compliance with the Stamp Act.

The court referred to the judgment in Ramachandran K.P v. District Registrar (General) and Others, 2019 (3) KHC 136, which held that when an instrument is impounded for insufficient stamp duty, the competent authority must issue notice to all parties before determining the liability and penalty. The judgment stated: "Since the petitioners were executants of Ext.P5 agreement and they have specifically challenged the same on the ground that it was insufficiently stamped, the 2nd respondent ought to have given notice to them and heard them before exercising the power under Sections 33, 39, and 41."

Additionally, the court examined whether the arbitrator, rather than the District Registrar, should have addressed the sufficiency of stamp duty. Referring to the Supreme Court’s decision in In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899 [2023 SCC OnLine SC 1666], the court observed that the issue of insufficient stamping could be determined in arbitration, but the prescribed legal procedures had to be followed.

The Kerala High Court quashed the certification dated July 17, 2024, issued by the District Registrar under Section 41(1) of the Kerala Stamp Act, citing procedural irregularities. It directed the District Registrar to reassess the issue of stamp duty and penalty only after affording the petitioners and respondents a full opportunity to be heard. The decision must be rendered within two months from the date of receipt of the judgment.

Case Title: Sajan Varghese & Anr. v. State of Kerala & Ors.
Case Number: WP(C) No. 28359 of 2024
Bench: Justice Dr. Kauser Edappagath

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