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PETITIONER: MADRAS REFINERIES LTD.

       Vs.

RESPONDENT: CONTROLLING REVENUE AUTHORITY, BOARD OFREVENUE, MADRAS

DATE OF JUDGMENT05/01/1977

BENCH: SHINGAL, P.N. BENCH: SHINGAL, P.N. RAY, A.N. (CJ) BEG, M. HAMEEDULLAH

CITATION:  1977 AIR  500            1977 SCR  (2) 565  1977 SCC  (2) 308

ACT:             Indian Stamp Act, 1899--Loan Agreement and Deed of  Trust         and  Mortgage  executed on the same day--Payment   of  stamp         duty on which document to be paid--Tests for deciding.

HEADNOTE:             The appellant company executed .a Loan and Note Purchase         Agreement  with  a foreign bank.  Under that  agreement  the         appellant  was  to  authorise the creation and  issuance  of         secured  notes, Series A and B,  and  the  Notes were to  be         issued  under  and secured by a Deed of Trust  and  Mortgage         between  the  Company and the Bank.  The Deed of  Trust  and         Mortgage stated that as the appellant 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   therefor,         and   to  mortgage and charge its properties to  secure  the         payment  of such  Notes,  it executed the Deed of Trust  and         Mortgage as Security in accordance with the terms and condi-         tions  of  Article 2 of the Deed of Trust  and  Mortgage  to         secure the due payment of the principal and the premium,  if         any, and the interest on the Notes, and of all other  monies         for  the  time  being and from time to  time  owing  on  the         security of the indenture and on the Notes and the  perform-         ance  by the Company of all of its  obligations  thereunder.         It was also agreed that the Notes shall be secured and shall         have  the other terms and conditions provided in the  agree-         ment  and  shall  be guaranteed by the  President  of  India         pursuant  to  the  terms of the  Guarantee  Agreement.   The         Guarantee  Agreement state. that the President of India,  as         the guarantor, unconditionally guaranteed as primary obligor         and not as surety merely, the due and .punctual payment from         time  to time of the principal as well as interest stated  m         the  Agreement. The obligations of the guarantor were  abso-         lute  and unconditional under any and all circumstances  and         were not be to any extent or in any way discharged, impaired         or  otherwise  affected, except by  performance  thereof  in         accordance  with  the terms thereof.  It was  also  provided         that  each and every remedy of the Trustee shall be  cumula-         tive  and  shall be in addition to any  other  remedy  given         therein or under the mortgage or any of the other collateral

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       or  now  or  hereafter existing at law or in  equity  or  by         statute.   The Guarantee Agreement was executed on the  same         day as the Deed of Trust and Mortgage between the  President         of India and the foreign bank as a Trustee.             The High Court decided that stamp duty was chargeable on         the  Trust and Mortgage Deed under Art. 40(b) of Schedule  I         to the Act.             In appeal to this Court it was contended that it was the         Guarantee  Agreement  which was the  principal  and  primary         security  and  that  the Deed of Trust and  Mortgage  was  a         collateral or auxillary security and as such stamp duty  was         payable  under Art. 40(c) and that the  Guarantee  Agreement         was  exempt from duty under s. 3 and debentures  under  Art.         27.         Dismissing the Appeal,             HELD:  (1) It is the real and true meaning of  the  deed         of   Trust  and Mortgage and the Guarantee  Agreement  which         has to be ascertained irrespective of the description  given         by the parties.  [568 E]             (2) The Trust and Mortgage Deed was executed before  the         execution  of  the Guarantee Agreement though both  of  them         were  executed on  the  same day.  It was the Deed of  Trust         and Mortgage which was the security for the         566         loan though the loan was also guaranteed by the President in         terms  of  the Guarantee Agreement. [568 G-H]             (3) The. terms and conditions of the Guarantee Agreement         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 the primary security for the  loan. The Deed of         Trust  and Mortgage was clearly the principal or  the   pri-         mary  security  and  could not be said to  be  a  collateral         agreement.  [569-H]             (4)  The  Deed of Trust clearly stated  that  the  terms         "Collateral  Agreements" shall mean the Guarantee  Agreement         and the Undertaking.  [570 A-B]             (5)  The  Guarantee Agreement was not an  instrument  of         sale,  mortgage  or settlement and did not fall  within  the         purview of s. 4(1) of the Act.         [571 E.F]             (6)  There is no justification for the  contention  that         the  debentures were the principal instruments and  not  the         Deed  of   Trust   and  Mortgage.  The  secured  notes  were         issued under and secured by the Deed of Trust and  Mortgage.         The notes were issued in consequence of and on the  security         of the Deed of Trust and Mortgage.  [571 H, 572 A]

JUDGMENT:         CIVIL APPELLATE JURISDICTION: Civil Appeal No. 709 of 1975.             (Appeal  by Special  Leave from the Judgment  and  Order         dt. 9-10-74 of the Madras High Court in Referred ease No.  4         of 1968)             P. Ram Reddy, C. Ramakrishna and A. V.V. Nair, for   the         Appellant.             V.P.  Raman, A.V. Rangam and Miss A..  Subhashini,   for         the Respondent.         The Judgment of the Court was delivered by             SHINGHAL J.--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 of the Indian Stamp  Act,  1899,         hereinafter  referred to as the Act. The Board  of  Revenue,         Madras,  which was the Chief Controlling  Revenue-authority,

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       initially  stated the case raising the  following  questions         for decision,--                           (a)  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 not ?         The High 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         567         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 before us.             The Company 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 duty         with  which the Deed of Trust and Mortgage was.  chargeable,         and the Collector referred the matter to the Board of  Reve-         nue.   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_Jane 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.

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           It  has been argued by Mr. Ram Reddy for  the  appellant         Company  that the Guarantee Agreement was the principal  and         primary  security, and the Deed of Trust and Mortgage was  a         collateral or  auxiliary security and that the stamp duty on         the  Deed  of Trust and Mortgage was payable  in  accordance         with article 40(c). It has been urged that Guarantee  Agree-         ment  was exempt from duty under section 3 of the Stamp  Act         and the debentures were exempt under article 27.             The  controversy centres round the question whether  the         Guarantee Agreement could be said to be principal or primary         security ?         568         Mr.  Ram  Reddy has invited our attention to  the  following         passage in Sergeant on Stamp Duties  and  Companies  Capital         Duty, sixth edition, page 6,-                             "Leading  and  principal   object.--With                       reference  to the stamp duty upon  instruments                       generally,  it is a well settled rule  of  law                       that  an  instrument must be stamped  for  its                       leading  and principal object, and  the  stamp                       covers everything accessory to that object.                       In Limeer Asphalte Paving Co. v. 1. R.C.C)  it                       was stated                       "In  order  to determine whether any,  and  if                       any,  what  stamp duty is chargeable  upon  an                       instrument the legal rule is that the real and                       true meaning of the instrument is to be ascer-                       tained;  that the description  of it given  in                       the instrument itself by the parties is  imma-                       terial,  even although they may have  believed                       that its effect and operation was to create  a                       security mentioned in the Stamp Act, and  they                       so declare?’             This appears to be a correct statement of the law.    We         have  therefore to determine the real  and true meaning   of         the  Guarantee Agreement and to decide whether it  could  be         said to be the principal and primary security.             The  Loan and  Note  Purchase  Agreement  was   executed         on  December  20, 1966, between the Company  and  the  first         National  City Bank and others.   Under that agreement,  the         Company   was  to  authorise the creation  and  issuance  of         secured  notes, series A and B, referred to above,  and  the         notes  were to be "issued under and secured’by the  Deed  of         Trust and Mortgage between the Company and the first Nation-         al  City  Bank".   It was then stated in the Loan  and  Note         Purchase Agreement as follows,--                             "The  Notes shall be dated,   shall  ma-                       ture,  shall  bear interest, shall be payable,                       shall  be  secured and shall have  such  other                       terms and provisions as provided in the  Mort-                       gage and shall be guaranteed by the  President                       of India Pursuant to the  terms   of a   Guar-                       antee   Agreement  (the  "Guarantee     Agree-                       ment) in the form attached  hereto as   Exhib-                       it 3."         It  would  thus  appear that it was the Deed  of  Trust  and         Mortgage which was the security for the loan,  although  the         loan  was  also guaranteed by the President in terms of  the         Guarantee-Agreement.             As  has  been stated, the Guarantee Agreement  was  made         between  the President of India and the first’National  City         Bank.   It  was clearly stated in that  agreement  that  the         First  National  City Bank executed it "As Trustee  under  a         Deed  of  Trust and Mortgage dated as June 15,  1967."   The         Trust and Mortgage Deed was thus executed before

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       (1) (1872) I.R. 7 Ex. 211.         569         the  execution of the Guarantee Agreement, even though  both         of  them  were executed on the same day,  namely,  June  15,         1967.             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 and         premium thereof and of the other indebtedness."   It is also         true that as stated in paragraph 10 of the Guarantee  Agree-         ment,  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 National City Bank as the  Trus-         tee,  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  Company         thereunder.             The  Deed  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 therefor 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  "collat-         eral agreement".  The parties in fact clearly         570         stated  in Article I, section 1.01 of the Deed of Trust  and         Mortgage as follows,--                       "Collateral Agreements:                         The  term  "Collateral   Agreements"   shall                       mean  the                         Guarantee  Agreement  and the   Undertaking,                       hereinfater

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                       defined."         It  was  therefore specifically agreed between  the  parties         that  the  Deed of Trust and Mortgage was not  a  collateral         agreement.             In  all  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  stipu-         lation that the  President, as the  Guarantor,  uncondition-         ally  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 for interference.  Mr. Ram Reddy  relied  on         some  decisions to support his argument that  the  Guarantee         Agreement was the security for the loan and was the  princi-         pal or the primary document, but those cases were decided on         different facts and have no real bearing on the  controversy         before us.             The  Guarantee Agreement was executed for and on  behalf         of  the president by his Authorised Representative,  and  no         stamp duty was chargeable for it by virtue of the proviso to         section 3 of the Act. That in fact appears  to be the reason         why  counsel  for the  appellant strenously argued  that  we         should  hold it to be the principal instrument, for  he  has         next  argued that the case falls within the purview of  sec-         tion  4 (1) of the Act and the "Principal  instrument"  only         would be chargeable with the duty prescribed in Schedule  I,         and deed of any trust and mortgage would be chargeable  with         a duty of Rs. 4.50 p. instead of the duty prescribed for  it         in that Schedule.  We find however that there is no merit in         this argument also.  Sub-section (1) of section 4 of the Act         reads as follows,--                             "4.  Several instruments used in  single                       transaction     of    sale,    mortgage     or                       settlement.--(1)   Where, in the case  of  any                       sale,  mortgage or settlement several  instru-                       ments    are  employed  for   completing   the                       transaction,  the  principal  instrument  only                       shall  be chargeable with the duty  prescribed                       in Schedule I, for the conveyance, mortgage or                       settlement, and each of the other  instruments                       shall be chargeable with a duty of four rupees                       fifty naye paise instead of the duty (if  any)                       prescribed for it in that Schedule."         571         It  is  nobody’s case that the Guarantee  Agreement  was  an         instrument  of sale-, for it did not transfer the  ownership         of  anything  in exchange for a price paid  or  promised  or         part-paid and part-promised.  It was also not an  instrument         of mortgage because it is no boly’s case that there was  any         transfer  of an interest in specific immovable property  for         the purpose of securing the payment of money advanced or  to         be advanced by way of loan or an existing or a furture  debt         or the performance of an engagement which could give rise to         a  pecuniary  liability.  The  expression  "settlement"  has         been  defined  in  clause (24) of section 2 of  the  Act  as         follows :--                              "Settlement" means any non-testamentary                       disposition in writing, of movable or  immova-

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                     ble property made---                       (a) in consideration of marriage,                              (b)  for  the purpose  of  distributing                       property  of the settlor among his  family  or                       those   for  whom  he  desires to provide,  or                       for  the purpose of providing for some  person                       dependent on him, or                       (c) for any religious or charitable purpose;                       and  includes an agreement in writing to  make                       such a disposition and where any such   dispo-                       sition   bas  not  been made in  writing,  any                       instrument recording, whether by way of decla-                       ration of trust or otherwise, the terms of any                       such disposition) ."         The term "disposition" has been defined in Strouds  Judicial         Dictionary  as  a devise "intended to comprehend a  mode  by         which property can pass, whether by act of parties or by  an         act of the law" and "includes transfer and charge of proper-         ty".   As  the  Guarantee Agreement did not  have  any  such         effect,  it  did not constitute a  "settlement"  also.  That         document  was not therefore an instrument of sale,  mortgage         or  settlement and did not fall within the purview  of  sub-         section (1) of section 4 of the Act.             It  was  the  Deed of Trust and  Mortgage  which  was  a         "Mortgage  deed" within the meaning of clause (17) of   sec-         tion  2 of the Act, and it was therefore clearly  chargeable         with  stamp duty at the rate prescribed in article 40(b)  of         Schedule I to. the Act.             We  have  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 securi-         ty,  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 Trust  and         Mortgage.  As         572         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.             As  the High Court has rightly answered both  the  ques-         tions,  we find no force in this appeal and it is  dismissed         with costs.         P.B.R.                             Appeal dismissed.         573