The Supreme Court has observed that the penalty of 10 times prescribed under section 40 (1)(b) of the Indian Stamp Act cannot be mechanically imposed. The three-judge bench of the Supreme Court comprising of Justice Ashok Bhushan, M R Shah, and R. Subhash Reddy observes that the reason for the tenth time prescribed penalty is fraud or deceit in order to deprive or undue enrichment to arrive at a decision under Section 40 (1)(b).
According to Section 40 (1) (b) of the Indian Stamp Act, 1899 if the collector is of the opinion that such instrument is chargeable with duty and is not duly stamped he shall require the payment of the proper duty on the amount required to make up the same a together with a penalty of 500 rupees; or if things with an amount not exceeding 10 times the amount of the proper duty or of deficient portion thereof. This particular case while impounding the documents the collector has imposed 10 times penalties (Rs 12,80, 97,000/-) on the ground that “the party has not mentioned the actual nature of document with the intension to escape the duty".
Referring to Section 40 and other sections of the Indian Stamp Act, 1899 where statute transfer discretion to an authority, the discretion is to be an exercise in the furtherance of the object of the enactment. Section 35 of the Indian Stamp Act, 1899 talks about when 10 times the amount of proper duty of or deficient portion thereof exceed 500 rupees, of a sum equal to the 10 times such duty or portion is required to be deposited and under Section 39 of Indian Stamp Act, 1899 is empowered to refund the penalty if it is in excess.
The Court observed, "The purpose of penalty generally is deterrence and not retribution when a description is given to a public authority. Such public authorities should exercise at discretion reasonably and not in an oppressive manner. The responsibility to exercise discretion in a reasonable manner lies more in a case where discretion vested by the statute is an infected imposition of extreme penalty 10 times of the duty or deficit portion thereof cannot be based on the mere factum of evasion of duty. The reason such as fraud or deceit in order to deprive the revenue or undue enrichment is relevant factor to arrive at a decision as to what should be the extent of penalty under section 40(1) (b)"
The Court's attention was drawn to its judgment in Gangtappa and another v. Fakkirappa (2019)3 SCC 788, which deals with a similar issue. The bench has categorically said that in an extreme situation where penalty needs to be imposed at the extent of 10 times. In this particular case, the bench noted that the conduct of the party was not found to be dishonest. Further taking note of the facts of the case the bench allowed the appeal and reduce the penalty imposed to the extent of half i.e. 5 times of deficiency in the stamp duty (Rs 6,40,48,500/-).