Inadequate or Unstamped Contracts — Long Term Impact on Disputes

The process of stamping is not merely a revenue generating mechanism for the government, it makes the document valid and authentic which holds evidentiary value in a court of law. If you want to understand the basic notion behind stamp duty and the obligations imposed under the Indian Stamp Act, 1899 (“Act”) for interstate transactions please refer to our previous blog. Also, stamping and its relevance has been discussed in our previous blog and stamping requirements of e-contracts have been discussed in our previous blog

This Post aims to assess key provisions of the law of stamping in India and thereafter, highlight and discuss the impact of inadequately stamped documents, particularly on disputes. 


Stamp duty is usually levied upon transactional documents which are crucial in nature and evidence special business relationships. Only a duly stamped document will be admitted as evidence by an Indian court. Therefore, where a contract is subject to Indian laws and is subject to enforcement in India, the Indian party will be required to ensure adequate stamping of the document as per the relevant stamp law to save time and penalties should the requirement to submit such document to evidence arise in future.

The Indian Stamp Act, 1899

The Act relates to consolidation of the rules on payment of stamp duty on commercial transactions. Being a fiscal legislation, the Act provides for a levy of stamp duty on certain instruments and allows the collection of same by the central government and state governments. The Act prescribes rates of stamp duties that can be charged on different instruments such as for example, property documents, agreements with monetary value (defined and undefined), indemnity bonds, sale, and purchase agreements, leave and license agreements and leases to name a few. Lawyers may often find themselves in a difficult situation when the document is put in court without proper stamping or a document that is under stamped. For such instances, the Act also covers the aspects when a document is ‘under stamped’ and provides with provisions regarding how the inadequately stamped instruments would be dealt with. It provides with various penalties and other process.

Chapter IV of the Act covers the aspects related to “Instruments not duly stamped”. The sections dealing with examination and impounding of the instruments[1] and instruments not duly stamped inadmissible in evidence[2], are the noteworthy provisions as far as the impact on the disputes is concerned. As per the Act, “duly stamped”, as applied to an instrument, means that the instrument bears an adhesive or impressed stamp of not less than the proper amount and that such stamp has been affixed or used in accordance with the law for the time being in force.[3]

According to the Act, if the inadequately stamped instrument is produced before any person/authority which by law or by consent of the parties have authority to receive evidence, or any other person in charge of a public office (expect police officers), before whom any instrument, is produced or comes under the performance of his/her function then such person may impound the instrument. Moreover, any instrument which is not duly stamped is not admissible as evidence. In order to make such an instrument admissible as evidence, the duty which is chargeable on the document will be levied or, in case of insufficient stamping, a penalty will be charged.[4]

Indian Stamp Act: Inconsistency of Application

Discussed below are certain instances of disarray with regards to application of Indian Stamp Act:

  • Triviality of Penalty: Over time, exceptional cases have been created through judicial pronouncements and such instruments have come to be accepted as evidence where courts and arbitrators have admitted documents which are unstamped or deficiently stamped on payment of proper duty and penalty. 
  • Lack of Due Diligence: There lacks certain due diligence or rules for the authorities in terms of scrutiny of the stamping of instrument. An unstamped receipt is admissible only against the person on whose fault the receipt was not stamped on payment of penalty of one rupee.[5]
  • Avoidance of Proper Duty: When a contract has two letters attached and any one of those letters are stamped then in that case the contract will be treated as it is completely stamped.[6] However, if a party intentionally tries to evade payment of proper stamp duty, then such party must be prosecuted.

Other instances of inadequate stamping:

  • Once the instrument is admitted as evidence then such admission shall not be questioned.[7]
  • If any person tries to execute an inadequately stamped instrument, then penalty shall be charged in the nature of a fine up to INR 500/-.[8]
  • Any such considerations which affect the chargeability of any instrument with duty, or the amount of the duty with which it is chargeable, shall be fully and truly set forth therein. Otherwise, it must be considered that there was an intent to defraud the government which is punishable with a fine which may extend to INR 5000/-.[9]

Judicial Position Explained

The issue pertaining to dispute resolution in case of unstamped or inadequately stamped instruments is an oft — debated question, subject to judicial review since decades. This post presents the transition in the thought process of courts considering the pre – 2021 position and the present view on the issue as it stands today. 

  1. Prior Position 

Whenever an objection has been raised during a court case as to the inadmissibility of a document as evidence on the basis of it being not duly stamped, this objection needs to be dealt with first before undertaking anything else.[10] In other words, objection for an insufficiently stamped document is different in comparison to other types of objections which are recorded and only brought in discussion when the evidence has been verified. Moreover, the inadmissibility of an unduly stamped instrument has to be brought to notice in front of the court at the earliest. Otherwise, the party might not be given a chance to question the legitimacy of the contract/instrument except under Section 61 of the Act in order for the court to determine that such instrument should have been admitted as evidence without the payment of duty and penalty under section 35.[11]

Clearing the pandemonium over unstamped arbitration agreement, the court in case of SMS Tea Estates (P) Ltd Vs Chandmari Tea Co (P) Ltd[12] (“Chandmari Case”) held that an arbitration agreement in an unregistered and unstamped lease deed, which required compulsory registration under Sections 17 and 19 of the Registration Act 1908, was valid and enforceable. The Court interpreted Section 35 of the Act and held that an arbitration agreement in an unstamped contract cannot be acted upon unless and until the stamp duty and penalty due upon such document are paid. The Chandmari Case has been time and again upheld and an arbitration clause contained in contracts, becomes a contract only if the same is enforceable by law as defined under the Indian Contract Act, 1872. An arbitration clause in an unstamped contract is not an agreement enforceable by law and hence, would not exist in such agreements.[13]

As regards the critical question pertaining to the power of a court to grant any interim or ad – interim relief under Section 9 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) in the case of unstamped or insufficiently stamped documents, was answered in the affirmative based on the reasoning that the rationale of Section 9 of the Arbitration Act is to protect the matters set out specifically therein, and denial of interim relief on ground of inadequacy of stamp duty would defeat the purpose of interim reliefs. Such kind of a defect in instruments is curable in nature which can be rectified on payment of requisite amount of penalty under the Maharashtra Stamp Act, 1958.[14]  

  • Present Position

The most recent position of the Court on the arbitrability of disputes in the event of underlying contract being unstamped is highlighted in NN Global Mercantile Pvt. Ltd. Vs Indo Unique Flame Ltd.[15] (“NN Global Case”). The Court here dealt with an unstamped work order which was challenged due to an attempt of one of the parties to commence arbitration proceedings for disputes which arose under such work order. The Court (while overruling the SMS Tea Estates case) ruled that an arbitration agreement within a contract has an independent existence of its own and would not be considered invalid or unenforceable in the event of non – payment or inadequate payment of stamp duty as the same is not chargeable for payment of stamp duty under the stamping law. The Court ruled the issue to be “a deficiency which is curable on the payment of the requisite Stamp Duty.”

Practicalities of Stamping

Under circumstances where Parties are faced with difficulties in stamping documents, the practical solution to overcome the issue would be to procure stamp paper as soon as possible even though the document may already be executed by the parties. The parties executing such contracts may firstly explore the options of paying stamp duty through government run portals such as Government Receipts Accounting System (GRAS) as available in Maharashtra State which has allowed payments of online stamp duty for smaller amounts as well during the phase of state — wide lockdowns. Another method for stamp duty payment lies in the Electronic Secure Bank and Treasury Receipt system for stamp duty collection (eSBTR) where a person goes to a bank, fills up an application form and makes payment to a designated officer. The officer, after entering the details in online database, issues an eSBTR which acts as a proof of payment and can be used just like a stamp paper. For the remaining states in the country, stamp duty (on non-judicial instruments such as contracts) and court fees may be paid online through the portal created by Stock Holding Corporation of India Limited and e-stamp certificates can also be generated therein as proof of payment.

In Sum

It needs to be understood that an inadequately stamped contract can lead to serious consequences. A document which is inadequately stamped will be set aside on a single objection of the opposite party in a court case unless appropriate measures to duly pay the duties are taken. This only consumes time of the court / evidence taking authority and also takes effort of the party seeking to rely on the document. Hence, in such a manner the disputes can be affected with unnecessary delays. Though the NN Global Case culls out a way ahead to come to a closure on the issue of arbitrability versus unstamped documents, the judgment does not in any manner condone or accept the practice of avoiding stamp duty altogether or paying less than the actual amount of stamped duty. It would thus be extremely important to ensure that commercial contracts entered into are stamped with appropriate duty as per the law applicable to state in which the document is entered into. Another problem posed during the ongoing COVID – 19 pandemic is the frequent unavailability of stamp papers and unavailability of online portals for payment of smaller amounts of stamp duty. Practical solutions are available as discussed above. 

Sanjana Buch (Senior Associate)

[1] Section 33 of Indian Stamp Act, 1899

[2] Section 35 of Indian Stamp Act, 1899

[3] Section 2(11) of Indian Stamp Act, 1899

[4] Section 35 of Indian Stamp Act, 1899

[5] Section 35(b) of Indian Stamp Act, 1899

[6] Section 35(c) of Indian Stamp Act, 1899

[7] Section 36 of Indian Stamp Act, 1899

[8] Section 62 of Indian Stamp Act, 1899

[9] Section 27 read with Section 64 of Indian Stamp Act, 1899

[10] Javer Chand and Others vs. Pukhraj Surana 1962 SCR (2) 333 reiterated in Bipin Shantilal Panchal vs. State of Gujarat AIR 2001 SC 1158

[11] Jageshar Naik vs. Collector of Jaunpur AIR 1966 All 392

[12] (2011)14SCC 66

[13] Garware Wall Ropes Ltd v. Coastal Marine Construction & Engineering Ltd AIR2019SC 2053

[14] In Gautam Landscapes Pvt. Ltd. v. Shailesh Shah AIR2019Bom149

[15] Civil Appeal Nos. 3802-3803/2020 (Arising out of SLP (Civil) Nos. 13132-13133 of 2020) passed on 11th January 2021

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