Case: Madras Refineries Ltd Vs. Controlling Revenue Authority, Board Ofrevenue, Madras

This appeal by special leave arises out of the decision of the Madras High Court dated October 9, 1974, on a reference by the Chief Controlling Revenue authority under section 57 ofthe Indian Stamp Act, 1899, hereinafter referred to as the Act. The Board of Revenue, Madras, which was the Chief Controlling Revenue-authority, initially stated the case raising the following questions for decision,Whether the decision of the Board of Revenue that the instrument relating to the Deed of Trust and Mortgage would attract the levy of a Stamp Duty as laid down in Article 40(b) of Schedule I of the Indian Stamp Act mad that the debentures would be exempted from the levy of stamp duty is correct or not; and (b) Whether the claim of the Respondent herein that the stamp duty is payable on the debenture under Article 27(a) and on the Deed of Trust and Mortgage under Article 40(c) is tenable or notHigh Court directed the Board of Revenue to refer three additional questions, but ultimately took the view that the additional questions did not really arise in the case. It answered the first question in favour of the Revenue and the second question against the Madras Refineries Limited, hereinafter referred to as the Company. The Company feels aggrieved and has come up in appeal to this Court. It will be enough to state those facts which bear on the controversy beforeCompany was incorporated under the Indian Companies Act, 1956, as a public limited company. An agreement known as the Loan and Note Purchase Agreement was executed be- tween the Company and the First National City Bank and six others on December 20, 1966, by which the Company agreed to authorise the creation and issuance of $14, 880, 000 (U.S.) principal amount of its 5% secured notes Series A, and $ 7, 440, 300 (U.S.) principal amount of its 51/2 secured notes Series S, and the sale of, or the borrowing to be evidenced by such Notes in accordance with the terms and provisions of the agreement. The Notes were to be issued under and secured by a Deed of Trust and Mortgage between the Company and the First National City Bank. It was a1so agreed that the Notes shall be secured and shall have the other terms and provisions provided in the agreement and shall be guaranteed by the President Of India pursuant to the terms of a "Guarantee Agreement", in the prescribed form. We shall have occasion to refer to the relevant clauses of the Loan and Note Purchase Agreement, the Deed of Trust and Mortgage and the Guarantee Agreement as and when necessary. The Deed of Trust and Mortgage and the Guarantee Agreement were executed between the President and the First National City Bank (as Trustee) on June 15, 1967. In the meantime the Company made an application to the Collector under section 31 of the Act for opinion as to the stamp du ty with which the Deed of Trust and Mortgage was. chargeable, and the Collector referred the matter to the Board of Revenue. The Board decided on June 28, 1967 that the duty was chargeable on the Trust and Mortgage Deed under Article 40(b) of Schedule I to the Act. The Company paid Rs. 37, 66, 500/- as stamp duty under protest, stating that it would move the Board for a reference of the controversy to the High Court. The Trust and Mortgage Deed was registered on June 30, 1967, and the A series debentures were issued the same day. The Company applied to the Board of Revenue to state the case to the High Court. B series debentures were issued on June 28, 1968. The case was stated on March 28, 1969 and was decided by the impugned decision of the High Court dated October 9, 1974.

Court's reasoning:
It is true that it has been stated in the Guarantee Agreement that the President of India, as the guarantor, unconditionally guaranteed "has primary obligor and not as surety merely, the due and punctual payment from time to time" of the principal as well as the interest etc. stated in the agreement. And it was for that purpose that the guarantor agreed to "endorse upon each of the Notes at or before the issue and delivery thereof by the Company its guaranty of the prompt payment of the principal interest an d premium thereof and of the other indebtedness." It is also true that as stated in paragraph 10 of the Guarantee Agreement, the obligations of the guarantor were "absolute and unconditional under any and all circumstances, and shall not be to any extent or in any way discharged, impaired or otherwise affected, except by performance thereof in accordance with the terms thereof." We have also noticed the further stipulation that "Each and every remedy of the Trustee shall, to the extent permitted by law, be cumulative and shall be in addition to any other remedy given hereunder or under the Mortgage or any of the other collateral or now or hereafter existing at law or in equity or by statute."Mr. Ram Reddy has relied heavily on these averments in the Guarantee Agreement, but they cannot detract from the basic fact that the Deed of Trust and Mortgage was executed first in point of time and was the principal or primary security for the loan according to the terms and conditions of the agreement between the parties. It was that document which constituted the First Nat ional City Bank as the Trustee, and enabled it to enter into the Guarantee Agreement with the President, and the President guaranteed the due performance of the obligations undertaken by the CompanyDeed of Trust and Mortgage, which was executed between the Company and the First National City Bank as a national banking association incorporated and existing under the laws of United States of America , stated that as the Company was in the process of constructing a refinery for the refining of crude oil and deemed it necessary to borrow money from time to time to. finance such construction and to issue its notes therefore and to "mortgage and charge its properties hereinafter described to secure the payment of such notes" it executed the Deed of Trust and Mortgage as security in accordance with the terms and conditions of Article 2 of the Deed of Trust and Mortgage to secure the due payment of the principal of and the premium, if any, and the interest on the Notes and of all other moneys for the time being and from time to time owing on the security of that Indenture and on the Notes and the performance by the Company of all of its obligations thereunder. The Deed of Trust and Mortgage was therefore clearly the principal or the primary security and could not be said to be a "collateralall these facts and circumstances it is futile to contend that the Deed of Trust and Mortgage was not the principal or primary security. As was stated in Article 9 of that document, that security became enforceable in case of any or more "events of default", and it cannot be said that merely because the Guarantee Agreement contained the stipulation that the President, as the Guarantor, unconditionally guaranteed .the due and punctual payment of principal and interest etc. "as primary obligor and not as surety merely" that agreement become the principal or the primary security. It is the real and true meaning of the Deed of Trust and Mortgage and the Guarantee Agreement which has to be ascertained, and this leaves no room for doubt that the view taken by the High Court in this respect is correct and does not call forhave examined the other argument of Mr. Ram Reddy that even if the Guarantee Agreement was not the principal instrument, within the meaning of sub-section (1) of section 4 of the Act, we should hold that the debentures which were issued by the Company were the principal and primary security, and that the Deed of Trust and Mortgage was the "other instrument" within the meaning of that sub-section and was chargeable with a duty of Rs. 4.50 p. instead of the duty prescribed for it in the Schedule. This argument is also futile for we find that the secured Notes (Series A and B) were issued under and were secured by the Deed of T rust and Mortgage. As such, the Notes were issued in consequence and .on the security of the Deed of Trust and Mortgage and there is no justification for the contention that the debentures were the principal instruments, and not the Deed of Trust and Mortgage.