Querist: RTSU Pvt. Ltd.

A partnership firm in the name and style of M/s RST was constituted by several persons vide a deed of partnership in the year 2005 in the state of Maharashtra. The firm owned factory premises at New Delhi against security of which it had borrowed funds from the lenders including bank. The firm also owned several movable properties and was responsible for the liabilities contracted for the purposes of business.

Under a deed of reconstitution, six partners were admitted to the said partnership firm and the name of the firm was changed to M/s RTSU. Subsequently, one of the partners retired from the said firm and the remaining seven partners continued the business of the firm.

The firm applied for registration as a company under Part IX of the Companies Act, 1956 vide an application made to the Registrar of Companies, Maharashtra, Mumbai, together with the Memorandum and Articles of Association duly executed and stamped under the provisions of the Bombay Stamp Act, 1958. The said Registrar, in the month of March, 2009 approved the application of the firm and issued the Certificate of Incorporation.

On the above facts, the querist has presented the following queries for our consideration.

1. Whether the conversion of the partnership firm into a company will be termed as transfer of assets under the provisions of the relevant Stamp Act and the Stamp Duty will be payable on the same? If yes, on which document the Stamp Duty will be paid?

2. Whether the company is required to execute a new Mortgage/Hypothecation documents with the lenders for the limits sanctioned to the firm and now transferred to the company?

We have examined the facts and the queries and the relevant law on the subject. We have the benefit of discussion with C. A. of the Company who have entrusted the case, for opinion, to us.

A charge for payment of Stamp Duty under the Bombay Stamp Act, 1958 or the Indian Stamp Act, 1899 is attracted on the execution of an instrument. The charge is created in the relevant state or place where such instrument is executed. Accordingly, the laws governing the place or state in which the instrument is executed determines the liability for payment of the Stamp Duty.
Under the Constitution of India, the power to levy Stamp Duty is vested with the states. The respective states within the Union have separate legislations. While a few states including Maharashtra have enacted separate Stamp Duty legislations, the rest of the states including the State of Delhi adopted the Indian Stamp Act, 1999 for the purposes of levying Stamp Duty at the rates prescribed by the said Act. Some of the states including the State of Delhi have adopted amended schedules as provided by the state legislatures for prescribing alternative rates of duty while accepting and retaining the governing statute as the Indian Stamp Act.

The charge for payment of Stamp Duty arises with respect to such instruments which are prescribed in the respective schedules. Once the charge is attracted, the duty becomes payable at the rates prescribed by the relevant schedule against respective Articles or Entries defining the relevant instrument.

The primary charge is attracted on execution of the instrument and the place of execution determines the liability to Stamp Duty as noted earlier. In the scheme of Stamp Duty, the location of property is not primarily relevant. However a secondary liability for payment of Stamp Duty may be created in the event where the instrument, first executed in one state, is later brought into another state, where the property is located.

In the case of the querist, as noted, the only instruments that have been executed, in the context, are the Memorandum and Articles of Association. These instruments have been executed in the State of Maharashtra. These instruments do not effect any transfer of assets from the firm to any person. The objective of these instruments has been to declare that the business of the firm and its administration & management would be governed by the provisions of the Companies Act, 1956. For obtaining registration under the said Act, it became quintessential for the firm to subject itself to the provisions of the Companies Act including the provisions that require a registered company to define its main objects and other objects specifically and to adopt a specific capital and issue shares within the prescribed limit of such capital. It also became necessary for the firm to specifically provide for the rules and regulations governing various subjects defined in the Articles of Association. All this is made apparently clear by the preamble in the Memorandum of Association executed by the firm. The Bombay Stamp Act, 1958 provide for levy of Stamp Duty on Articles and Memorandum of Association vide Articles 10 & 39 respectively. The duty provided therein have been duly paid by the company. In the circumstances, no other duty is payable on these instruments. As these instruments are unrelated to any property, it will not attract any duty even where they are received in the state of Delhi. In any case, the duty payable under the Indian Stamp Act, 1999 being less than the duty already paid, no duty would become payable in that state.

At this point, it maybe worthwhile to examine whether there arose any “conveyance” on registration of the firm as a company. The term “conveyance” has been defined by sec. 2(g) of the Bombay Stamp Act, 1958. The said reads as under :

“Conveyance” includes,—

(i) a conveyance on sale,

(ii) every instrument,

(iii) every decree or final order of any Civil Court,

(iv) every order made by the High Court under section 394 of the Companies Act, 1956 in respect of amalgamation or reconstruction of companies; and every order made by the Reserve Bank of India under section 44A of the Banking Regulation Act, 1949 in respect of amalgamation or reconstruction of Banking Companies

On a reading of the above, while examining its application to the case of the querist, it is noted that the instruments executed by the firm do not transfer any property or vest any property in any other person, nor such instruments could be said to be inter vivos i.e. executed by the two parties of which one is the transferor and the other is the transferee. Further even within the expanded meaning of Article 25 of the said Act, the execution of the said instruments could not have been treated as a “conveyance”.

Under the Registration Act, an issue had arisen in the past whereunder the Courts were required to examine whether on incorporation of a partnership firm as a company under Part IX of the Companies Act, there arose any liability to register an instrument under the said Act. The Andhra Pradesh High court in the case of Valli Pattabhi Rao vs Ramanuja Ginning and Rice Factory (P) Ltd. 60 Comp Cases 568 (AP), held that no liability arose under the Registration Act on incorporation under Part IX of the Companies Act.

Recently, the courts were required to address an issue as to whether there arose any “transfer” on registration of a firm as a company under the Income tax Act, 1961. The Bombay High Court in the case of Texspin Engineering & Manufacturing Works, 263 ITR 345 held that there was no transfer of assets on such incorporation. The ITAT also in the cases of Well Pack Packaging, 78 TTJ 448 (Ahd.) and Krishna Ind. 82 TTJ 575 (Del) held that no transfer arose on such registration.

In light of the above discussion, the question raised by the querist are answered as under:

1. The incorporation of the firm as a company under Part IX of the Companies Act will not be termed as a conveyance (transfer of assets) under the Bombay Stamp Act or the Indian Stamp Act. The Stamp Duty was payable on Articles and Memorandum of Association which has been duly paid by the querist.

2. No stamp duty would become payable under the relevant Stamp duty laws prevailing in the State of Delhi under that Article dealing with conveyance either on registration of company in the State of Maharashtra or on receipt of Memorandum of Association and Articles of Association in the State of Delhi.

3. The Novato documents if at all executed for renewal of Mortgage and Hypothecation by the Company there should be documents for reconfirming the existing Mortgage and Hypothecation created in the past by the firm under such instruments on which duty has already been paid. Accordingly, the querist is advised to execute a Deed of Confirmation with the lenders for providing adequate comfort to the lenders. If advised, the querist may recite the facts of incorporation in the said deed and may also provide that the said deed is a supplementary deed and that the necessary Stamp Duty has been paid in the instruments on Mortgage and Hypothecation.

We shall be pleased to clarify any of the observations made by us on request.