Report No. 67
30.8. Distinction between hypothecation and pledge.-
We have adverted to the distinction between hypothecation and pledge. This has been noted in a few Indian decision1, and is of importance for the stamp law, the precise charging article being different in the case of a hypothecation without delivery of possession. Thus in an Allahabad case2, it was contended that the instrument in question was a hypothecation of movable property, falling within the notification3 remitting the duty on an unattested deed of hypothecation, and not a pledge falling within Article 6. The contention was, however, negatived on the ground that the goods were handed over to the Bank in whose favour the document was executed, and there was, therefore, a pledge and not a mere hypothecation.
1. (a) Nadar Bank Ltd. v. Canada Bank Ltd., AIR 1961 Mad 326.
(b) Simla Banking Co. v. Pritams, AIR 1960 Punj 42.
2. Harish Chandra v. Punjab National Bank Ltd., AIR 1958 All 864.
3. See para 30.11, infra.
30.9. History of the article.-
This distinction has figured in the history of the Act also. In the corresponding Article 29 of the Stamp Act of 1879, the word "hypothecation" was used, while in the present article the words "pawn or pledge" occur. The article in the 1879 Act could, on its language, be applicable even where possession was not delivered. But a Calcutta case1 took the view that the word "hypothecation" was used only in the sense of a pledge, and hence, in the absence of a provision for delivery of possession, that article would not apply. The words "pawn or pledge" were substituted in Article 6 when the Act was revised in 1899. Thus, a hypothecation of movable property, where possession is not given to the creditor, does not fall under Article 6 though it may fall under "mortgage" (Article 40).
1. Ko Shway Aung v. Strang Steel & Co., 1894 ILR 21 Cal 244.
30.10. Security for future Loans-Amendment of 1904.-
An amendment of 1904, relevant to another point under Article 6, may also be noticed. Article 6(2) (as amended in 1904) includes not only loans which are contemporaneous with the agreement (as held to be the case under1 the original article where the words "loan made" were used), but applies also to the case where the security is for money to be advanced in future. The effect of the amendment is to place all such instruments on the same footing, whether or not their execution is simultaneous with the loan advanced. On this point, of course, no modification of the article is required.
1. Queen Empress v. Dehendra Krishna Mdter, 1890 ILR 27 Cal 187.
30.11. Effect of reductions and remissions.-
For a complete statement of the position relevant to Article 6, the effect of certain reductions and remissions should also be taken into account, though they ostensibly relate to Article 40. The levy of duty on hypothecation under "mortgage" (Article 40) created hardship and Government had to issue certain remissions and reductions, now consolidated in a notification of 1931. The following reductions and remissions should, therefore, be noted1:-
"98. Attested instrument evidencing an agreement relating to the hypothecation of movable property where such hypothecation has been made by way of security for the repayment of money advanced or to be advanced by way of loan, or of an existing or future debt-Duty reduced to the amount chargeable on a bill of exchange under Article 13(b) of Schedule I of the Stamp Act, 1899, for the amount secured, if such loan or debt is repayable on demand or more than three months from the date of the instrument; and to half that amount if such loan or debt is repayable not more than three months from the date of the instrument.
99. Unattested instrument evidencing an agreement relating to the hypothecation of movable property, where such hypothecation of movable property, has been made by way of security for the repayment of money advanced or to be advanced by way of loan of an existing or future debt.".2
1. Government of India, Notification of 1931, items 98-99.
2. Duty remitted.
30.12. Effect of the notification.-
The notification deals with two cases. In the first case, the duty is reduced, while in the second case, it is remitted. The net result of these reductions and remissions is that an instrument of hypothecation, without delivery of possession, though ostensibly under the article relating to mortgage1-(i) if attested, is leviable with the duty on a pledge-that is the practical effect, since the terms of Article 6 are identical with the terms as in the notification mentioned above; (ii) if unattested, is totally exempt by virtue of the notification. In other words, a person concerned with an attested instrument of hypothecation has first to read Article 40, and then to read the notification referred to above, and then he virtually comes back to Article 6. Such instruments are nominally chargeable under Article 40, but actually under Article 6. This is a somewhat complicated position (An unattested instrument of hypothecation without delivery is exempt from duly).
1. Article 40.
30.13. Recommendation to add instrument of hypothecation in Article 6.-
To simplify the position, we recommend that-(a) an instrument of hypothecation without delivery of possession should be added to Article 6, (b) an instrument of hypothecation without delivery of possession, if unattested should be added in the exemption under Article 6. If attested, it should be chargeable as in the notification. No change of substance will result from such an amendment, which will merely help the citizen by enabling him to ascertain the law from one place.
We, therefore, recommend that, after the words "pawn or pledge", the words "or hypothecation" be added at four places (three places) in the main article, and one in the Exemption. Consequential charges1 will be needed in Article 40. Exemption (2), and it may even be advisable to provide expressly in that article that hypothecation of movables shall not be charged as a mortgage. We may mention that the suggested amendment has been favoured by most of the replies to our Questionnaire2.
1. Article 40 to be amended.
2. Question 79.