Stamp Duty on Instruments and the RBI Act Restriction on Bearer Instruments

Two statutes outside the Negotiable Instruments Act regularly decide the fate of instruments. The Indian Stamp Act, 1899 requires promissory notes and bills of exchange to be stamped, and an unstamped note may be useless in court. The Reserve Bank of India Act, 1934 forbids private persons to issue instruments that could circulate as money. This note explains both.

1. Stamp Duty: The Constitutional Scheme

Union rates: under Entry 91 of the Union List, Parliament fixes the rates of stamp duty on bills of exchange, cheques, promissory notes and certain other instruments. Rates on other documents are a State subject (Entry 63, State List).
State collection: under Article 268, these duties are levied by the Union but collected and appropriated by the States.
Where the rates appear: in Schedule I of the Indian Stamp Act, chiefly Article 13 (bills of exchange) and Article 49 (promissory notes).

2. Which Instruments Are Chargeable

Promissory notes: chargeable, whether payable on demand or otherwise. The Stamp Act's definition includes a note payable on demand or at a time, and certain notes not strictly within the NI Act definition.
Bills of exchange and hundis: the Stamp Act's definition of "bill of exchange" includes a hundi, and both are chargeable.
Cheques: the Stamp Act's definition of bill of exchange does not include a cheque, and cheques do not attract stamp duty.

3. Consequences of Not Stamping

Inadmissible (Section 35, Stamp Act): an instrument chargeable with duty but not duly stamped cannot be admitted in evidence or acted upon.
No cure by penalty for notes and bills: most documents may be admitted on payment of the deficient duty and a penalty, but the proviso to Section 35 excludes bills of exchange and promissory notes from that relief. An unstamped or under-stamped note cannot be validated later.
Suit on the original consideration: where the lender can prove the loan independently of the note, for example by other evidence of payment, he may sue on the underlying debt. Where the note is the only record of the transaction, the claim usually fails.
Admitted without objection (Section 36): once an instrument has been admitted in evidence, its admission cannot later be questioned on the ground of insufficient stamping.

4. The RBI Act Restriction (Section 31)

Section 31, Reserve Bank of India Act, 1934

(1) No person in India other than the Bank, or, as expressly authorised by this Act the Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand, or borrow, owe or take up any sum or sums of money on the bills, hundis or notes payable to bearer on demand of any such person: Provided that cheques or drafts, including hundis, payable to bearer on demand or otherwise may be drawn on a person's account with a banker, shroff or agent.

(2) Notwithstanding anything contained in the Negotiable Instruments Act, 1881, no person in India other than the Bank or, as expressly authorised by this Act, the Central Government shall make or issue any promissory note expressed to be payable to the bearer of the instrument.

Sub-section (1): no private person may issue a bill, hundi, note or engagement payable to bearer on demand, or borrow on such instruments.
Proviso: cheques and drafts, including hundis, drawn on an account with a banker, shroff or agent, may be payable to bearer on demand.
Sub-section (2): no private person may issue any promissory note payable to bearer, whether on demand or at a future time. This overrides the reference to bearer notes in Section 4 of the NI Act.
Reason: an instrument payable to bearer on demand passes from hand to hand like a currency note. The section protects the Reserve Bank's monopoly of note issue (Section 22, RBI Act).
Penalty: contravention is punishable with a fine extending to the value of the instrument (Section 32, RBI Act).

⚠ Key point

Stamp duty on bills of exchange (including hundis) and promissory notes is fixed by Parliament (Entry 91, Union List) and collected by the States (Article 268), under Articles 13 and 49 of the Stamp Act; cheques are not chargeable. An unstamped note or bill is inadmissible and, unlike other documents, cannot be validated by paying a penalty (Section 35 proviso), though a suit on the original consideration may lie. Section 31(1) of the RBI Act bars private bills, hundis and notes payable to bearer on demand, except cheques and drafts on an account; Section 31(2) bars any private promissory note payable to bearer, protecting the RBI's currency monopoly.

5. Related Topics and Provisions

Object, scope and scheme: Section 1 (Topic 1)
Hundis (Topic 5)
Promissory note (Topic 6)