Open Access Research Article
LEGAL IMPLICATIONS OF INADEQUATELY STAMPED PROMISSORY NOTES
Published Paper
Article Details
“LEGAL IMPLICATIONS OF INADEQUATELY
STAMPED PROMISSORY NOTES”
AUTHORED BY - ALIND GUPTA
Abstract
The paper
looks at the legal admissibility of a promissory note in cases where it is not
duly stamped. This is looked at particularly in light of the 2006 amendment to
the Stamp Act. Part 1 looks at the law dealing with promissory notes. It then
touches upon stamping of promissory notes in light of Section 35 of the Indian
Stamp Act 1899. Part 2 looks at the position of law before the 2006 amendment
and the problems faced by people relying on inadequately stamped promissory
notes. Part 3 highlights the change brought by the 2006 amendment in the
context of promissory notes. It also mentions the relevant judicial decisions
as well as the 178th report of the Law Commission of India which
made certain recommendations with respect to stamping of promissory notes.
1. STAMPING
OF PROMISSORY NOTE
Promissory note is defined under
Section 4 of Negotiable Instruments Act, 1881 as ‘an instrument in writing (not
being a bank-note or a currency-note) containing an unconditional undertaking
to pay’.[1] No
prescribed format is given for a document to be called a promissory note. It
has to fulfil all the requirement given under Section 4 of the Negotiable
Instruments Act, 1881. One of the most important aspects that has to be looked
upon while determining the legal status of a document is the intention of the
parties. In absence of intention to create a promissory note, a document
technically falling under Section 4 would not be treated as a promissory note.[2]
Promissory note is used as a
substitute of money due to its ability to be encashed at a prescribed time.
These are debt instruments that can help a person in getting financing
generally from an entity other than bank. Promissory note roughly lies between
IOU and loan contract in terms of its legal ramifications. While IOUs merely
acknowledge the debt, promissory note goes one step further towards loan
contract to incorporate an unconditional undertaking to pay. Even though it
closely resembles a loan contract, it lacks a specific enforcement mechanism
e.g. foreclosure in the debtor defaults, which is characteristic feature in a
loan contract.[3]The
issues relating to legal enforcement of a promissory note are discussed in the
next chapter.
One of the main reasons a promissory
note is conceptualized as ‘negotiable’ is because of its relative flexibility
in circulation. Its proximity to money makes it easily transferable and the
condition embedded in Section 4 of Negotiable Instruments Act, 1881 ensure that
promissory fulfils the essential requisite of certainty.[4] In
order that a promissory note may satisfy its purpose of a medium of exchange
and may attract public confidence due to its safety and readiness, the
certainty and the scope of contract in all material points and the whole
lineage of title must appear on the face of the instrument, and there should be
no necessity for the intrinsic enquiries on part of the potential receiver of
the negotiable instrument.[5]
By printing currency, the Government
earns a commission or profit called seigniorage in economic parlance.[6]
Higher the denomination, higher is the profit earned. Promissory notes are a
close substitute of money and are widely used in various transactions. However,
these are not issued by the Government or Reserve Bank of India (except
promissory notes payable to bearer that are issued by Bank or Central
Government by virtue of Section 31 of Reserve Bank of India Act[7]).
Since the Government earns profit on printing on money (through the Reserve Bank
of India), it is only logical that it earns some revenue on creation and usage
of promissory notes, that are in essence a substitute to Government’s currency.
Due to this practical consideration,
Indian Stamp Act, 1899, provides that a promissory note needs to be stamped in
order to be legally admissible in evidence. The purpose of this legislation was
clearly elaborated in the Supreme Court decision titled Chiranji Lal v. Hari Das[8]
which states:
“The Stamp Act is a fiscal measure enacted with an object to secure
revenue for the State on certain classes of instruments. It is not enacted to
arm a litigant with a weapon of technicality to meet the case of his opponent.
The stringent provisions of the Act are conceived in the interest of the
revenue.”
In order to enforce this object,
Section 3 of the Indian Stamp Act, 1899 provides that ‘every instrument
mentioned in that Schedule (I) shall be chargeable with (stamp) duty of the
amount indicated in that Schedule’.[9] Entry
49 of Schedule I covers promissory note as defined under Section 2(22) of the
Indian Stamp Act, 1899. Section 2(22) of the Indian Stamp Act provides a wider
definition of ‘promissory note’ as compared to the definition contained in
Negotiable Instruments Act. The extended meaning only extends to a document:
i.
which
includes the promise to pay the sum named out of the particular fund and such
amount may or may not be available with the fund; or
ii.
where
promise to pay a sum depends upon happening of a condition or a contingency which
may or may not happen.[10]
This wider net aims to cover non-mercantile
promissory notes i.e. those notes that do not contain mercantile incidence of
promissory notes.[11]
Since the requirement of stamp is not
an intrinsic requirement of a promissory note but a perquisite for the purposes
of revenue creation, the promissory notes that are not stamped are legally
inadmissible in evidence. Section 35 of Indian Stamp Act 1899 provides that
‘Instruments not duly stamped inadmissible in
evidence, etc. — No instrument
chargeable with duty shall be admitted in evidence for any purpose by any
person having by law or consent of parties’ authority to receive evidence, or
shall be acted upon, registered or authenticated by any such person or by any
public officer, unless such instrument is duly stamped…’[12]
This has to be read with Section 17
which states:
‘all instruments chargeable with duty and executed by any person in India
shall be stamped before or at the time of execution’.[13]
By reading Section 35 with Section
17, we can logically conclude than a promissory note needs to be stamped before
or at the time of execution in order to be legally admissible in a court of
law. A person cannot cure this defect by later stamping the instrument because
of the clear wording of Section 17.
However, the inadmissibility of
unstamped promissory notes has far reaching implications in the economic arena.
This was aggravated due to the exception created in the proviso to Section 35
which provided that, unlike other documents, promissory notes and bills of
exchanges cannot be admissible even after stamp duty is paid along with the
penalty. The legal issues arising out this exception are discussed in the next
Chapter.
2.
BEFORE 2006 AMENDMENT - LEGAL
ISSUES DUE TO INADMISSIBILITY OF INADEQUATELY STAMPED PROMISSORY NOTE
As discussed in the previous Chapter,
promissory note is debt instrument which is a close substitute of currency. It
can be used for buying goods or availing services on credit. The confidence of
the public in such an instrument is contingent on the fact that it will be paid
according to the terms mentioned on the face of the instrument. The purpose of
law is also to ensure this confidence remains so as to ensure economic
relations in the market are discharged smoothly. However, the fact remains that
promissory note is not equivalent to currency, it is merely a substitute to it. This gap between currency and its
substitute can be manipulated to the disadvantage of the creditor who relies on
the apparent value of the promissory note.
This fact was brought out due to the
exception created in Section 35 proviso (a) which, before the amendment in
2006, read as:
‘any such instrument not being an instrument chargeable with a
duty not exceeding ten naya paise only, or a bill of exchange or promissory
note shall subject to all just exceptions, be admitted in evidence on
payment of the duty with which the same is chargeable or, in the case of an
instrument insufficiently stamped, of the amount required to make up such duty,
together with a penalty of five rupees, or, when ten times the amount of the
proper duty or deficient portion thereof exceeds five rupees, of a sum equal to
ten times such duty or portion’[14].
This exception disabled the promissory
note from being subsequently admissible in evidence even after payment of stamp
duty along with the penalty. The normal rule which cured the defect of
inadmissibility after payment of stamp duty and penalty was not applied to the
case of promissory note. This was ostensibly done to put a higher burden on
instruments seeking to be a substitute of money. However, besides leading to a
lot of practical problems, it created an inconsistency that just within the
statute but also across the statutes which lead to various conflicting judicial
decisions.[15]
This was primarily because of one
reason. Promissory note is created for the discharge of debt. The debt is what
gives rise to the promissory note. The presumption
is that the promissory note is conditional payment of the debt which is
discharged only when the promissory note is paid according to terms mentioned
in the note. The cause of action on original consideration is merely suspended
till the time the promissory note is active. However, if the promissory note is
dishonoured or is rendered unenforceable due to any reason, the creditor/payee
can fall back on the original cause of action to seek legal remedy.[16]
The above mentioned presumption is rebuttable
and in specifically these cases the law became extremely hazy. When the
promissory note is issued contemporaneously i.e. at the time of creation of
debt, and it contains all the terms of contract that give rise to the creation
of debt, the debt merges with the
instrument itself. This had serious consequences when it came to exception
created in Section 35 proviso (a) of the pre-2006 Indian Stamp Act. It was
because, legally speaking, after the debt has merged with the instrument
itself, there was no other cause of action to claim the debt.[17]
The instrument was the cause of action and when it became inadmissible by
virtue of Section 35(a) proviso (pre-2006), the creditor/payee was left
helpless due to Section 91 of the Indian Evidence Act, 1872.
Section 91 of Indian Evidence Act,
1872 bars the production of oral evidence for documents in which terms of
contract are contained. It reads as:
“91. Evidence of terms of contracts, grants and other dispositions of
property reduced to form of document. –– When the terms of a contract,
or of a grant, or of any other disposition of property, have been reduced to
the form of a document, and in all cases in which any matter is required by
law to be reduced to the form of a document, no evidence shall be given in
proof of the terms of such contract, grant or other disposition of
property, or of such matter, except the document itself, or secondary
evidence of its contents in cases in which secondary evidence is admissible
under the provisions hereinbefore contained.
Exception 1. ––When a public officer is required by law to be appointed
in writing, and when it is shown that any particular person has acted as such
officer, the writing by which he is appointed need not be proved.
Exception 2. –– Wills 3 [admitted to probate in 4 [India]] may be proved
by the probate.
Explanation 1. ––This section applies equally to cases in which the
contracts, grants or dispositions of property referred to are contained in one
document and to cases in which they are contained in more documents than one.
Explanation 2. –– Where there are more originals than one, one original
only need be proved.
Explanation 3. –– The statement, in any document whatever, of a fact
other than the facts referred to in this section, shall not preclude the
admission of oral evidence as to the same fact.”[18]
Further to make it clear,
illustration (b) exemplifies:
“(b) If a contract is contained in a bill of exchange, the bill of
exchange must be proved.”
This section precluded the creditor
from bringing any oral evidence to prove the existence of debt when the debt
merged with the instrument itself. This bar of oral evidence was made clear by
the Supreme Court in these words:
'if the parties choose to reduce the contract to writing, the implication
is excluded by their express bargain, and the document will be the sole
evidence of its terms'.[19]
In order to save the creditors from
getting duped of their money, the courts started employing different statutory
constructions in order to ensure the debt remains alive. One of the most
prominent approach was that of ‘money had and received’ or Section 70 of the
Indian Contract Act, 1872. The courts interpreted that if the contract cannot
be proved, the plaintiff can fall back on the principle of implied promise to
claim the debt.[20]However,
this approach essentially negated the effects of Section 91 of the Indian
Evidence Act, 1872 and pre-2006 Section 35 proviso (a).[21]
What also complicated the matters
further was the investigation into the nature of promissory note. The fact
whether the debt merged with the promissory note was highly contested. This was
because the question of absolute or conditional satisfaction of debt was not a
question of law but of facts which required looking at the intention of the
parties.[22]
The legal complexities around the
above-mentioned issue were extensively dealt by 7 judge bench of Andhra Pradesh
High Court in the case of Lothamasu Rao v
Balakotiah AIR 1973 AP 342. In this case, the court had to adjudicate upon
the legal consequences of inadmissibility of a promissory note which contained
the terms of the contract and was issued contemporaneously. The court, after
dealing with multitude of case laws, held that when unstamped promissory note
is not the basis of debt, the plaintiff can rely upon the original
consideration to claim the money and Section 91 of the Indian Evidence Act
would not operate as a bar. However, when the debt is claimed on the foot of an
unstamped promissory note, there is no recourse for the plaintiff as then
Section 91 of the Indian Evidence Act would prevent the plaintiff from
producing any oral evidence in regard to the debt.[23]
3.
CHANGE IN LAW- 2006 AMENDMENT
The previous Chapter highlighted the
difficulties faced by the judiciary in establishing the rights and liabilities
of parties in cases involving an inadequately stamped promissory note. In order
to save the creditors from the rigors of law, the judiciary had to rely on
different approaches like ‘money had and received’[24],
original consideration/oral evidence[25],
etc. in order to reconstruct his claim to debt. By doing so, it created a lot
of inconsistencies and uncertainty with respect to the scope of rights and
liabilities of parties dealing in an inadequately stamped promissory note. All
this was solely because of the exception created in favour of promissory notes
in proviso (a) of Section 35 of Indian Stamp Act, 1899.[26]
This was echoed by various judgements and reports.
The court in Lothamasu Rao v Balakotiah (AIR 1973 AP 342), after going through a
plethora of cases remarked on the need to amend Section 35 of the Indian Stamp
Act, 1899. It stated:
“Before parting with this case, we would like to observe that, if any
provision in any enactment requires an amendment, there cannot be a better one
than the provisions of Section 35 of the Stamp Act so as to incorporate a
proviso to make an insufficiently stamped promissory note, admissible in
evidence by directing the person relying upon it to make the deficit stamp duty
and subjecting him to such penalty as the Legislature may deem fit to impose.
Such an amendment in our view, would not only bring about uniformity in the
law in the various States, but also avoid unnecessary litigation and save quite
a lot of judicial time.”
Similar concerns were by the Law
Commission of India in its 178th report. The Law Commission lamented
the fact that due to the rigid procedure applied exclusively to bills of
exchange and promissory notes, many debtors were allowed to escape liability
unjustly. It continued to remark the failure of the Indian courts to provide
justice in cases involving an inadequately stamped bill of exchange or
promissory note. This was especially facilitated by Section 91 of the Indian
Evidence Act, 1872 which precluded oral evidence and left plaintiff remediless.
The disoriented approach employed by the courts only led to unending litigation
and unnecessary costs.[27]In
light of these facts, the Law Commission of India suggested to amend Section 35
of the Indian Stamp Act, 1899 in order to ensure that inadequately stamped
promissory notes and bills are admissible in evidence after paying stamp duty
and penalty.
Besides the legal difficulties as
elaborated above, the proviso (a) of Section 35 of the Indian Stamp Act, 1899
also went against the object of the legislation. Indian Stamp Act was enacted
to increase the revenue of the government
(Chiranji Lal v. Hari Das[28]) and not to create technicalities that could
potentially defeat the rights and liabilities of parties. The said Section
precluded the government from getting additional revenue through the subsequent
payment of stamp duty and penalty on promissory notes and bills of exchange.
Instead, it increased the burden on government exchequer by leading to unending
litigation.
Therefore, in light of the
abovementioned reasons the Indian Stamp Act was amended in 2006 to incorporate
the suggestions of the 178th report of the Law Commission of India.
Now, inadequately stamped promissory notes and bills of exchange can be
admitted into evidence if stamp duty is paid along with the prescribed
penalty.
CONCLUSION
The legal implications of an
unstamped promissory notes have gone paradigm shift after the 2006 amendment to
the Indian Stamp Act, 1899. The change was facilitated by many case laws that
pointed to the unwanted consequences of the provision, specifically Lothamasu Rao v Balakotiah AIR 1973 AP
342.[29]
The judgement tried to provide clarity to the legal conundrum by dealing with
cases across various jurisdictions and differentiating between the legal value
of unstamped promissory notes in which the debt had merged and those notes
which were merely conditional payment of the debt. The issues revolving around Section
70 of the Indian Contract Act, 1872 and Section 91 of the Indian Evidence Act
1872 were also given much need attention. Despite going through multitude of
case laws, commentaries and foreign sources the court expressed its inability
to protect the creditor’s rights due to bar imposed on oral evidence by Section
91 of the Indian Evidence Act, 1872. This prompted the court to highlight the
need to amend Section 35 of the Indian Stamp Act, 1899.
The Law Commission of India also, in
its 178th report, stressed on the need to amend Section 35 of the
Indian Stamp Act, 1899.[30]
It placed emphasis on the inconsistent approaches adopted by the courts while
dealing with inadequately stamped promissory notes. This, according to the Law
Commission, gave rise to uncertainty and helped escape many debtors from their
liability. The Government of India responded to the cue from Law Commission by
amending Section 35 in 2006.
What is striking in this ordeal is
the laxity shown by the law makers in responding to the much needed change. The
Andhra Pradesh High Court in 1973 presented an accurate picture of the legal
inconsistencies due to Section 35. The repercussions on rights of parties were
clearly evident from the judgment. Still, it took the Law Commission of India
around 27 years to take cognizance of this fact and the Legislature another 4-5
years to effectuate a change during the course of which many creditors lost
their money and the Government too lost on an important source of revenue. This
presents us with a lesson to be vigilant about rights and liabilities of
parties because change in order to be meaningful has to be prompt.
BIBLIOGRAPHY
STATUTES
1. Indian Stamp Act, 1899.
2. Negotiable Instruments Act, 1881.
3. Indian Contract Act, 1872.
4. Indian Evidence Act, 1872.
CASES
1. Lothamasu Rao v Balakotiah AIR 1973 AP 342
2. Kundan Lal v Sahu Bhikhari Das AIR 1929 All 254.
3. Chiranji Lal v. Hari Das (2005) 10 SCC 746.
4. Rachpal Maharaj v Bhagwandas 1950 AIR 272.
5. Laxman Krishanji Mustilwar v Ramesh Amarchand Agrawal (2002) 1 BC
406.
6. Maung Chit v Roshan
N.M.A. Kareem Oomer 1934 Rang 389.
BOOKS/REPORTS
1. Bhasyam and Adiga, The Negotiable Instruments Act (19th
edn, Bharat Law House 2014).
2. Corpus Juris Secundum (vol 10, West Publishing Company).
3. Khergamvala, Negotiable Instruments Act (21st
edn, Lexis Nexis Butterworths 2013).
4. Law Commission of India, Recommendation for amending various
enactments, both criminal and civil (178th report, December
2001) < http://10.21.88.204/lawcommissionofindia/reports/178rptp1.pdf>
accessed 9 November 2019.
[1] Negotiable Instruments Act 1881,
s4.
[2] Laxman Krishanji Mustilwar v Ramesh Amarchand Agrawal (2002) 1 BC
406.
[3] Adam Barone, ‘Promissory Note’
(Investopedia) <https://www.investopedia.com/terms/p/promissorynote.asp>
accessed 9 November 2019.
[4] Bhasyam and Adiga, The Negotiable Instruments Act (19th
edn, Bharat Law House 2014) 60.
[5] Corpus Juris Secundum (vol 10, West Publishing Company) 519.
[6] ‘All you wanted to know about
seigniorage’ (Hindu Business Line, September 2017) <https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-seigniorage/article9844554.ece>
accessed 9 November 2019.
[7] Reserve Bank of India Act 1934,
s31 < https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIAM_230609.pdf>
accessed 9 November 2019.
[8](2005) 10 SCC 746.
[9] Indian Stamp Act 1899, s3.
[10] Khergamvala, Negotiable Instruments Act (21st edn, Lexis Nexis
Butterworths 2013) 21.
[11] Adiga (n4) 93.
[12] Indian Stamp Act 1899, s35.
[13] ibid s17.
[14] Indian Stamp Act 1899, s35.
[15] YS Rao, ‘Promissory Notes in
India’ (Legal Service India) < http://www.legalservicesindia.com/article/1590/Promissory-Note-in-India.html>
accessed 9 November 2019.
[16] Maung Chit v Roshan N.M.A. Kareem Oomer 1934 Rang 389 < http://document.manupatra.com/Other%20Courts/Rangoon/Pre1950/1930-1939/R340144.htm>
accessed 9 November 2019.
[17] Law Commission of India, Recommendation for amending various
enactments, both criminal and civil (178th report, December
2001) < http://10.21.88.204/lawcommissionofindia/reports/178rptp1.pdf>
accessed 9 November 2019
[18] Indian Evidence Act 1872, s 91.
[19] Rachpal Maharaj v Bhagwandas 1950 AIR 272.
[20] Kundan Lal v Sahu Bhikhari Das AIR 1929 All 254.
[21] Lothamasu Rao v Balakotiah AIR 1973 AP 342.
[22] Halsbury’s Laws (3rd edn) vol 8, 212.
[23] ibid.
[24] Kundan Lal v Sahu Bhikhari Das AIR 1929 All 254.
[25] Lothamasu Rao v Balakotiah AIR 1973 AP 342.
[26] YS Rao, ‘Promissory Notes in
India’ (Legal Service India) < http://www.legalservicesindia.com/article/1590/Promissory-Note-in-India.html>
accessed 9 November 2019.
[27] Law Commission of India, Recommendation for amending various
enactments, both criminal and civil (178th report, December
2001) < http://10.21.88.204/lawcommissionofindia/reports/178rptp1.pdf>
accessed 9 November 2019.
[28](2005) 10 SCC 746.
[29] YS Rao, ‘Promissory Notes in
India’ (Legal Service India) < http://www.legalservicesindia.com/article/1590/Promissory-Note-in-India.html>
accessed 9 November 2019.
[30] Law Commission of India, Recommendation for amending various
enactments, both criminal and civil (178th report, December
2001) < http://10.21.88.204/lawcommissionofindia/reports/178rptp1.pdf>
accessed 9 November 2019.
Article Information
LEGAL IMPLICATIONS OF INADEQUATELY STAMPED PROMISSORY NOTES
Authors: ALIND GUPTA
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/12/27
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
All research articles published in International Journal for Legal Research and Analysis are open access and available to read, download and share, subject to proper citation of the original work.
Disclaimer: The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of International Journal for Legal Research and Analysis.