Legal Tightrope within stamping: Analyzing admissibility of unregistered agreement in light of Paul Rubber Industries

April 08, 2023/ Bodhisattwa Majumder / Legal Industries

Bodhisattwa Majumder is a dispute resolution lawyer who has been practicing in the Bombay High Court and Company Law Tribunals in matters of Corporate Insolvency Resolution Processes, Shareholder Disputes and Domestic and International Arbitration.

To enforce the rights and liabilities under a contract before an Indian Court, it must be ensured that the contract adheres to the requirements under relevant stamping laws and laws relating to registration of a contract. In the event the contract fails to adhere to such requirements, the court in all probabilities will not take cognizance of such a document or the rights arising out of the same. Therefore, there is an impediment to the courts regarding taking cognizance of unregistered documents (which are required to be registered). However, the Hon’ble Supreme Court of India in the matter of Paul Rubber Industries v. Amit C. Mitra1, carved an exception to the general rule while holding that contents of an unregistered document can be examined by a court for a collateral purpose.   The dispute arose out of a tenancy agreement between the lessor of the property (“Defendant”) and M/s Paul Rubber Industries Private Limited (“Appellant”) who was the lessee. The initial agreement stipulated a five-year term with an option for renewal, but no such renewal was executed in this regard. Subsequently, disputes arose when the Defendant sought an increment of rent. The Appellant after receipt of a notice for increase of rent chose to stop making rent payments, citing prior collection on behalf of the landlady from a sub-tenant. The Defendant contended her need for the premises for personal and family business use, invoking a fifteen-day notice under Section 106 of the Transfer of Property Act, 1882 (“TPA).2   The Defendant thereafter filed a suit before a civil judge seeking possession and a decree for mesne profit. The Trial Court concluded that the initial lease term had expired, allowing termination with a 15-day notice. Unsatisfied with the Trial Court’s decision, the Appellant pursued an appeal before the Calcutta High Court. The High Court affirmed the Trial Court’s decision, emphasizing the inadmissibility of the unregistered agreement and placing the burden of proof on the appellant regarding the purpose of the lease for “manufacturing”. The Appellant thereafter filed an appeal against the decision of the Hon’ble Calcutta High Court, which had ruled that an unregistered lease agreement could not serve as evidence in determining transactions related to the leased property.   The primary issue before the Supreme Court was, to what extent can a court take cognizance of a clause in an agreement (specifically, lease agreement) when the same is unregistered and is required to be registered under the Registration Act, 1908 (“Registration Act). The issue arose because of the dispute between the parties related to the notice period under the TPA and for the same the purpose of the agreement was required to be established. The contention from the Defendant was, as the document was unregistered, the court cannot examine the document to determine the rights and liabilities of the parties to the document.   The Apex Court held the following:  
  1. When the lease agreement is made for the lease of immovable property for agricultural/manufacturing purposes, the notice period before termination is six months. In other cases, the termination notice period is of fifteen days.
  1. The Apex Court held that in order to determine the duration of the notice period which was to be given to the lessor under the TPA, the contents of the lease agreement were to be examined by the court.3
  1. Even if the trial court proceeds to admit an unregistered deed as evidence, the said deed cannot be admitted as evidence in Appellate stage.
  1. An unregistered agreement can be examined by a court for determining the rights of the parties if such rights form a “collateral purpose”, unrelated to the primary transaction. However, as in the present case, the determination was regarding the ‘nature and character of possession’ which was the primary purpose of the lease agreement, the same could not be examined.
  The Hon’ble Court referred the judgment in K.B. Saha and Sons Private Limited v. Development Consultant Limited to define a collateral transaction4. It emphasized that a collateral transaction must be independent of, or divisible from, the transaction requiring registration. Applying this principle, the Hon’ble Court held that the nature and character of possession contained in an unregistered lease deed could serve as a collateral purpose only when it was not the main term of the lease and did not form the primary dispute. In concurrence with the Trial Court’s findings, the Hon’ble Court affirmed that the leased premises, used for non-agricultural or non-manufacturing purposes, constituted a month-to-month lease, terminable by serving a 15-day notice. The Appellant’s failure to provide sufficient evidence supporting the claim that the premises were leased for manufacturing purposes, as required under Sections 106 read with 107 of the TPA, led the Hon’ble Court to uphold the Trial Court’s decision5.   Holding of other Indian Courts Often, parties involved in lease deeds invest significant effort in negotiating various terms such as lock-in periods, renewals, and considerations, yet often overlook the crucial aspect of registration. According to the legal provisions outlined in Section 107 of the TPA, in conjunction with Section 17 of the Registration Act, 1908, it is mandatory to register Lease Deeds; otherwise, they will not be deemed admissible evidence under the Indian Evidence Act, 1872 for adjudication. Despite this legal imperative, there have been instances wherein the Hon’ble Supreme Court has deviated from such regulatory compliances and admitted unregistered lease deeds as evidence.   In the case Bharat Petroleum Corporation Limited v. Khaja Midhat Noor and Others, the court held that the lease would be considered a “month-to-month lease” falling within the ambit of Section 106 of the Transfer of Property Act, 18826. The case of Park Street Properties Pvt. Ltd. v. Dipak Kumar Singh emphasized anew that the absence of a registered instrument does not bar the courts from ascertaining the existence of tenancy and discerning the nature and character of possession through other evidence presented and the conduct exhibited by the involved parties7.   Concluding Remarks Pursuant to the recent decisions pertaining to stamping, it was laid down that the parties to the instrument may act upon it and perform their contractual obligations but would not receive protection from the state8. In effect, a Court or any authority (authorized by consent such as an arbitrator) shall not admit it as evidence or act upon it. In the event that an instrument is not stamped or sufficiently stamped, the only recourse is to pay the stamp duty along with the penalty (if any) and obtain a certificate of endorsement to that effect. Once endorsed by the appropriate authority, the document will be treated as if it had been duly stamped and can be acted upon. However, there were judgments by various High Courts of India which faced the impediment of improper stamping of the arbitration agreement and accordingly diverge views were taken to ease the plight of the parties and provide a solution to fasten the process. The Hon’ble Calcutta High Court held9 that the insufficiency of stamping can be cured by impounding the document and a distinction needs to be drawn with a document being ex facie invalid. Similarly, the Hon’ble Delhi High Court held10 that in case an objection is brought out regarding stamping, the court can collect and rule on the unpaid/deficit stamp duty to ensure that the impediment of stamping does not hinder litigation. Ultimately, the Seven Judge Bench of the Supreme Court chose to set aside the five-judge bench decision in N. N. Global v. Indo Unique Flame11 to hold that arbitration clauses in unstamped or inadequately stamped agreements are enforceable and insufficient stamping would not hinder the arbitration in the stage of reference or appointment of arbitrator12. The Apex court opined that the referral court at the stage of referring the disputes to arbitration need not ascertain the procedural validity of the document and such objection can rather be taken before the Tribunal. In the same vein, the Court in Paul Rubber emphasized the nature and character of possession within an unregistered instrument. As per Section 107 of the Transfer of Property Act, 1882, and Sections 17 and 49 of the Registration Act, 1908, such an instrument can only serve as evidence when it does not constitute the primary dispute before the Court. In this specific case, where the central question pertained to the existence of a lessor-lessee relationship between the Appellant and Defendants, the Supreme Court declined to accord significance to the unregistered lease deed. This particular case underscores the constrained relevance of unregistered lease deeds in the resolution of disputes, ensuring that rights and interests are not erroneously determined.     References:  
  1. Paul Rubber Industries Private Limited v. Amit Chand Mitra and Another, 2023 SCC OnLine SC 1216.
  1. The Transfer of Property Act, 1882, §106.
  1. Satish Chand Makhan v. Govardhan Das Byas and Ors. (1984) 1 SCC 369.
  1. B. Saha and Sons Private Limited v. Development Consultant Limited, (2008) 8 SCC 564
  1. The Transfer of Property Act, 1882, §106, 107.
  1. Bharat Petroleum Corporation Limited v. Khaja Midhat Noor and Others, (1988) 3 SCC 44.
  1. Park Street Properties Pvt. Ltd. v. Dipak Kumar Singh (2016) 9 SCC 268
  1. N. Global v. Indo Unique Flame Civil Appeal No(S). 3802-3803 of 2020
  1. Chandan Chatterjee and Ors. v. Gita Sundararaman
  1. Splendor Landbase v. Aparna Ashram Society
  1. N. Global v. Indo Unique Flame Civil Appeal No(S). 3802-3803 of 2020
  1. In Re: Interplay between arbitration agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899, Curative Petition (C) No. 44 of 2023 in Review Petition (C) No. 704 of 2021 in Civil Appeal No. 1599 of 2020