ONCE STAMP DUTY IS PAID ON A DEVELOPMENT AGREEMENT, THEN NO STAMP DUTY IS PAYABLE ON A PERMANENT ALTERNATE ACCOMMODATION AGREEMENT BEING AN INCIDENTAL

INTRODUCTION:

The Bombay High Court in a recent decision in Adityaraj Builders vs The State of Maharashtra and Ors[1] observed that once a Development Agreement has been stamped, then a Permanent Alternate Accommodation Agreement is only an incidental document within the meaning of Section 4[2] of the Maharashtra Stamp Act, 1958 and need not be assessed to stamp duty.

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FACTS:??????

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In the present case, all the Petitions raised a common question of law under the Maharashtra Stamp Act, 1958 (“said Act”). All the Petitions relate to the stamp duty sought to be levied on a Permanent Alternate Accommodation Agreement (“PAAA”). Typically, PAAAs are executed by a developer with individual members of housing societies or other persons already in occupation and whose houses are being redeveloped. All PAAAs generally follow a pattern. A society enters into an agreement, called a Development Agreement (“DA”) or a Redevelopment Agreement with a developer which has two parts. One part is the construction of new homes for existing society members or occupants. The second part is the construction of free sale units which the developer can put to sale in the open market. Sometimes, but not always, individual society members also sign the DA. Equally, there are many cases where the society executes the DA with the developer, but individual members of the society do not. Such individual members are members of the society, and the society acts on their behalf.

On June 4, 2013, the State Government issued a circular that stamp duty would be chargeable on PAAAs. The value of stamp duty would be computed based on the costs of construction of the flats and the market value of the additional area, if any. On November 7, 2013, the Chief Controlling Revenue Authority of the Maharashtra State issued a circular with guidelines for charging stamp duty on PAAAs. This circular stated that the stamp duty would be computed on the costs of construction of the retained area. Where fungible Floor Space Index (“FSI”) was used, stamp duty would be computed on the construction cost and the premium paid on the fungible area.

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2015 Circular

Thereafter, on June 23, 2015, the impugned circular[3], was issued by the Chief Controlling Revenue Authority. This circular made a distinction between a cooperative society and the ‘owners’, meaning the members of the Society. The impugned circular contemplated that PAAAs between the society members and the developer were different from the DA between the society and the developer.

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This circular concerns stamp valuation at the time of allotment of areas to members in new buildings in redevelopment projects of co-operative housing societies, and concerns what are called PAAAs. These PAAAs are typically executed by a developer with either the individual members of a housing society or persons already in occupation and whose houses are being redeveloped.

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The 2015 Circular[4] sought to draw a distinction between 2 (two) scenarios, namely, where: (i) both the development agreement as well as the PAAAs (incidental agreements) were executed between the developer and the co-operative housing society (termed as the original owner); and (ii) the development agreement was executed between the society and the developer, and the agreements for transferring the tenements (PAAAs) were executed between the developer and each original member of the society.

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In the first scenario, in terms of Section 4[5] of the Stamp Act, payment of full stamp duty as prescribed would only be attracted on the principal agreement, i.e., the development agreement and all other instruments i.e., the incidental agreements/PAAAs would be subject to a duty of INR 100 (Indian Rupees one hundred).

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In the second scenario, the agreements for transfer of the tenements to the original members of the society were not to be treated as incidental agreements to the main development agreement but were instead to be regarded as independent agreements on which full stamp duty on the construction costs for the area to be transferred would have to be paid.

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2017 Circular

Another clarificatory circular[6] dated March 30, 2017, was thereafter issued by the Chief Controlling Revenue Authority. This clarificatory circular purported to specify a criterion to be complied that individual society members must compulsorily join in the execution of the original DA, i.e., that every single society member must countersign the DA. The circular further stated that only on such compliance, PAAAs with individual society members would be treated as documents incidental to the DA, attracting the application of Section 4[7] of the said Act.

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Subsequently, the 2017 Circular[8] was issued to clarify the position under the 2015 Circular[9] and?inter alia?provided as follows:

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1.????????????Where the development agreement was made between the society and the developers, and individual members were not parties to such development agreement, the provisions of Section 4[10] would not be applicable to the PAAA. Accordingly, the PAAA would not be treated as an incidental document but as an independent document, on which stamp duty would be charged on the cost of construction.

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2.????????????In cases where the following criteria were complied with, the transfer documents in favour of the individual members would be treated as PAAAs of the original development agreement and the provisions of Section 4 of the Stamp Act would be applicable:

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(a)??????the making of a tripartite agreement between society (original owner), member and developer

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(b)??????the incorporation of a provision in the development agreement to make a separate transfer document for the new flat of each individual member

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(c)??????the limited objective of transferring the built-up area in the transfer document in favour of the member in accordance with the terms and conditions of the original development agreement

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(d)??????the housing society being a consenter / confirming party in the transfer document in favour of each individual member.

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Both the circulars, i.e., circular dated June 23, 2015 and circular dated March 30, 2017 (“Impugned Circulars”), were challenged by the present Petitions. The Petitioners in the present Petitions were of the view that the Impugned Circulars overlooked a fundamental aspect, viz., that existing members and occupants were not in any sense ‘purchasers’ of the areas to which they were entitled in law on reconstruction. The existing members and occupants were only being provided new accommodation in lieu of earlier accommodation. The Petitioners were also of the view that for the purposes of assessment of stamp duty, PAAAs were never independent of the DA.

There was also no dispute that the DA was to be stamped. The issue was on the demand by the stamp authority that individual PAAAs for members or existing occupants must also be stamped on a value reckoned at the cost of construction.

ISSUE FOR CONSIDERATION:

Whether PAAAs are required to be stamped on a value estimated at the cost of construction?

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JUDGMENT:

The Bombay High Court observed that an agreement between an outsider and a society binds members of the society. Conversely, an agreement with an individual member was part and parcel of, included in, covered by or subordinate to the principal DA between the society and the developer. To substantiate its view, the Bombay High Court relied on its judgment in Girish Mulchand Mehta and Anr. vs Mahesh S Mehta and Anr[11].

The Bombay High Court in the present Petitions observed that at the time of executing a DA, the society acts for all its members, even those who may disagree, because a society is run by majority.

The Bombay High Court further observed that a PAAA may provide for other matters such as bespoke questions of the amount of transit rent, individual flat numbers, distinct flat sizes, and so on, but a PAAA was only a particularisation per member of the redevelopment contemplated by the DA itself. As a matter of fact, it is the society that goes into redevelopment, which redevelopment is governed by the DA. There could, conceivably, be a DA without a single PAAA, i.e., by adding pages and pages of annexures, but there could never be society redevelopment only based on PAAAs without a DA with the society. The segregation of the documents adopted by the society and its members was merely for convenience and done for simplicity, clearer understanding, and ease of reference of all concerned.

The Bombay High Court was of the view that the only stamp duty a member of society would be liable to pay would be for any additional area that such member would purchase for consideration.

From the perspective of a society member, such member would be getting:

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(a)??????a home in replacement of a home;

(b)??????a larger home in replacement of a smaller home; and

(c)???????the option of purchasing additional area for the replacement home.

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It is only item (c) that could ever be assessed to stamp duty. Items (a) and (b) would never liable to stamp.

Referring to Section 4(1)[12] of the said Act, the Bombay High Court observed that if PAAAs were included in the DA as annexures then there would only be one Agreement covering the whole of the DA. The question of charging stamp duty by the stamp authority would not arise as there was no method by which the stamp authority could ever levy stamp duty on every annexure to a DA.

The Bombay High Court observed that the requirement contained in the Impugned Circular dated 30th March, 2017, that every member must also sign the DA suffered from two vulnerabilities. Firstly, it was entirely beyond the jurisdictional remit of the revenue authorities to dictate what form an instrument must take. A revenue authority must take the instrument as it finds it. Secondly, there was no concept in law of a society not representing the interests of all its members.

The Bombay High Court opined that although there was no problem with the requirement contained in the Impugned Circular dated March 30, 2017, the difficulty however was the refusal to see the PAAA for what it was and to demand that there should be only one document, tripartite or multi-tripartite in nature, that everybody must sign. If everybody signed the document, then Section 4(1)[13] of the said Act which speaks of several instruments (meaning more than one document) had no application. Section 4(1)[14] of the said Act clearly contemplates more than one document and does not speak of more than one party to a single document. The stamp authorities were not entitled in law to issue such a circular or to insist on any such requirement.

In view of the above, the requirement that a society must be a consenting party to the PAAA was not a requirement in law. Such a requirement could not be imposed at all under the said Act. Such a requirement could also not be applied by means of a circular as a circular cannot do something that the parent statute does not contemplate.

The Bombay High Court inter alia passed the following order:

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(a)??????A DA between a society and a developer for development of the society’s property (land, building, apartments, flats, garages, godowns, galas) is required to be stamped

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(b)??????A DA is not required to be signed by individual members of the society

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(c)???????A PAAA between a developer and an individual society member is not required to be signed on behalf of the society. It was optional for a society to be included as a confirming party

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(d)??????Once the DA is stamped, the PAAA cannot be separately assessed to stamp duty beyond the Rs. 100/- requirement of Section 4(1)[15], only if such PAAA relates to the rebuilt or the reconstructed premises in lieu of the old premises used/occupied by the member of the society, including any additional area made available for free to such member. The PAAA is an incidental document within the meaning of Section 4(1) of the said Act.

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A PAAA between a developer and a society member is required to be additionally stamped only to the extent that it provided for the purchase by the member for actual stated consideration of additional area over and above any area that is made available to such member in lieu of the earlier premises. Accordingly, the Petitions were allowed and the Impugned Circulars were quashed and set aside.

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[1] Writ Petition No. 4575 of 2022

[2] 4 - Several instruments used in single transaction of development agreement, sale, lease, mortgage or settlement

(1)??????????Where, in the case of any development agreement, sale, lease, mortgage or settlement, several instruments are employed for completing the transaction, the principal instrument only shall be chargeable with the duty prescribed in Schedule I for the conveyance, development agreement, lease, mortgage or settlement, and each of the other instruments shall be chargeable with a duty of 5[one hundred rupees] instead of the duty (if any) prescribed for it in that Schedule.

(2)??????????The parties may determine for themselves which of the instruments so employed shall, for the purposes of sub-section (1), be deemed to be the principal instrument.

(3)??????????If the parties fail to determine the principal instrument between themselves, then the officer before whom the instrument is produced may, for the purposes of this section, determine the principal instrument :]

Provided that the duty chargeable on the instrument so determined shall be the highest duty which would be chargeable in respect of any of the said instruments employed.

[3] Circular No. K.15/Bamudat/ Margadarshak Suchana/ 621

[4] Circular No. K.15/Bamudat/ Margadarshak Suchana/ 621

[5] See Supra n 2

[6] circular?No.K.5/Stamp-17/Pra.Kr.10/13/303/17

[7] See Supra n 2

[8] circular?No.K.5/Stamp-17/Pra.Kr.10/13/303/17

[9] Circular No. K.15/Bamudat/ Margadarshak Suchana/ 621

[10] See Supra n 2

[11] 2016 SCC OnLine Bom 100

[12] See Supra n 2

[13] See Supra n 2

[14] See Supra n 2

[15]See Supra n 2