Supreme Court outlines the procedure of impounding of unstamped documents under the Karnataka Stamp Act

Recently, in the case of Seetharama Shetty v. Monappa Shetty, the Supreme Court of India has provided clarity on the procedure of impounding an unstamped / insufficiently stamped instrument under the Karnataka Stamp Act (“Stamp Act”). The Supreme Court explained the difference between the process and the authority in relation to the determination and collection of stamp duty and penalty under section 34 and section 39 of the Stamp Act.

Brief Facts:

Seetharama Shetty sought an injunction to prevent Mr. Monappa’s interference with their peaceful enjoyment of a property in Mangalore under the agreement of sale (“Agreement”) entered between Seetharama Shetty and Mr. Monappa Shetty. Mr. Monappa challenged the validity of the Agreement on the ground that it is insufficiently stamped and thus inadmissible in evidence under the Stamp Act.

The trial court, following the provisions of section 33 of the Stamp Act, impounded the Agreement and forwarded it to the District Registrar for determination of the appropriate stamp duty and penalty. However, the District Registrar returned the Agreement, citing the absence of the village name where the property is located, which hindered the assessment of the stamp duty shortfall. In response, Seetharama Shetty submitted a memo clarifying the village name, but the trial court rejected it. Seetharama Shetty then filed a writ petition, and the Karnataka High Court (“High Court”) directed the trial court to forward the memo to the District Registrar for proper action on the stamp duty calculation.

The District Registrar subsequently determined a deficit stamp duty of Rs. 71,200 (USD 850.55). However, the trial court further imposed a penalty of tenfold the amount of this deficit under Section 34 of the Stamp Act, totalling to a payment of INR 783,200 (USD 9356) payable by Seetharama Shetty. The trial court’s order was upheld by the High Court. Aggrieved by this decision, Seetharama Shetty challenged the High Court’s order before the Supreme Court.

Ruling of the Supreme Court of India:

The Supreme Court distinguished between the jurisdiction under section 34 and section 39 of the Stamp Act. The Supreme Court considered the issue of whether the tenfold penalty imposed by the trial court instead of sending the agreement to the District Registrar for determination and collection of penalty is legal.

The Supreme Court also observed that the parties have an option to initiate the impounding process and pay stamp duty and penalty either under section 34 before the court or under section 39 before the District Registrar. Under section 34 of the Stamp Act, the court is vested with the jurisdiction to admit into evidence, documents that are unstamped / insufficiently stamped, after collecting deficit stamp duty and imposing a penalty of ten times the amount of such stamp duty. The Supreme Court observed that the court has no discretion except to levy and collect ten times the penalty of deficit stamp duty under section 34 of the Stamp Act.

Further, the Supreme Court observed that under section 39 of the Stamp Act, the District Registrar has the authority to determine the stamp duty deficit, and unlike section 34, the District Registrar also has the discretion to impose a penalty that is up to ten times the deficit amount. Relying on earlier precedents, the Supreme Court further observed that penalty of tenfold the deficit amount is an extreme penalty and the highest limit, which must be levied in extreme cases of fraud, or undue enrichment, and not for mere evasion of payment of stamp duty.

In this regard, the Court has emphasized that the parties have the liberty to select between the processes under section 34 and section 39. However, this option must be exercised before the court initiates the procedure under section 34.

In the facts of the present matter, the Supreme Court held that Mr. Monappa required the trial court to impound the agreement and send the agreement to the District Registrar for determination of the deficit stamp duty and penalty under section 39 of the Stamp Act. Therefore, the trial court could not have exercised its jurisdiction under section 34 of the Act to impose the mandatory 10 times penalty. The Supreme Court held that the trial court’s imposition of a penalty under section 34 was illegal. The Supreme Court set aside the trial court’s order directing the payment of a ten-times penalty and directed the trial court to send the Agreement to the District Registrar to determine the deficit stamp duty and also the penalty payable, after payment of which the Agreement would be admissible in evidence.