TaxTMI 
TaxTMI 
2014 (10) TMI 368
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....t as he had failed to meet his obligations and discharge his liabilities. By a notice dated 5th October 1995 issued under Section 226(3) of the Income Tax Act, the Income Tax Department wrote to the Stock Exchange and told them that Shri Shah's membership card being liable to be auctioned, the amount realized at such auction should be paid towards Income Tax dues of Assessment Year 1989-90 and 1990-91 amounting to Rs. 25.43 Lakhs. The Stock Exchange, Bombay by its letter dated 11th October 1995 replied to the said notice and stated that under Rules 5 and 6 of the Stock Exchange the membership right is a personal privilege and is inalienable. Further, under Rule 9 on death or default of a member his right of nomination shall cease and vest in the Exchange and accordingly the membership right of Shri Shah has vested with the Exchange on his being declared a defaulter. This being the case, since the Exchange is now and has always been the owner of the membership card, no amount of tax arrears of Shri Shah are payable by it. By a prohibitory order dated 10th May 1996, the Income Tax Department prohibited and restrained the Stock Exchange from making any payment relating to Shri Sha....
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....fore and also appropriate all other securities placed with the Petitioner by Suresh d. Shah and which have vested in the Petitioner in accordance with the Rules, Bye-laws and regulations of the Petitioner; 4. The Writ Petition was finally heard and by a judgment dated 27th March 2003, most of the contentions of the Stock Exchange were rejected and the Writ Petition was dismissed. 5. A Special Leave Petition was filed against the said judgment being SLP(Civil) No. 8245 of 2003 in which, by an order dated 7th May 2003, the operation of the judgment was not stayed to the extent that it specifically directed the petitioner to make certain payments and handover securities to the Income Tax Department. However, in so far as the judgment declared law, the operation of such declaration of law was stayed. 6. As this Civil Appeal raises important questions of law both from the point of view of the Bombay Stock Exchange and the Income Tax Department, we are going into the matter in some detail. 7. Section 226 of the Income Tax Act provides for a garnishee notice in the following terms: "Section 226 3(i) The assessing officer or tax recovery officer may, at any time or fro....
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....of the said Act read as follows: "8. Power of Central Government to direct rules to be made or to make rules- (1) Where, after consultation with the governing bodies of stock exchanges generally or with the governing body of any stock exchange in particular, the Central Government is of opinion that it is necessary or expedient so to do, it may, by order in writing, together with a statement of the reasons therefore, direct recognised stock exchanges generally or any recognised stock exchange in particular, as the case may be, to make any rules or to amend any rules already made in respect of all or any of the matters specified in sub-section (2) of section 3 within a period of two months from the date of the order. (2) If any recognised stock exchange fails or neglects to comply with any order made under sub-section (1) within the period specified therein, the Central Government may make the rules for, or amend the rules made by, the recognised stock exchange, either in the form proposed in the order or with such modifications thereof as may be agreed to between the stock exchange and the Central Government. (3) Where in pursuance of this sectio....
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....e or differences paid through the clearing house; (g) the regulation, or prohibition of bundles or carry-over facilities; (h) the fixing, altering or postponing of days for settlements; (i) the determination and declaration of market rates, including the opening, closing, highest and lowest rates for securities; (j) the terms, conditions and incidents of contracts, including the prescription of margin requirements, if any, and conditions relating thereto, and the forms of contracts in writing; (k) the regulation of the entering into, making, performance, rescission and termination, of contracts, including contracts between members or between a member and his constituent or between a member and a person who is not a member, and the consequences of default or insolvency on the part of a seller or buyer or intermediary, the consequences of a breach or omission by a seller or buyer, and the responsibility of members who are not parties to such contracts; (l) the regulation of taravani business including the placing of limitations thereon; (m) the listing of securities on the stock exchange, the inclusion of any security for....
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....tisfied in any case that in the interest of the trade or in the public interest any bye-law should be made immediately, it may, by order in writing specifying the reasons therefore, dispense with the condition of previous publication." 8. As a number of rules of the Stock Exchange have been referred to in the course of argument, we will set down those which are relevant for the purposes of the question to be decided. "Membership a Personal Privilege 5. The membership shall constitute a personal permission from the Exchange to exercise the rights and privileges attached thereto subject to the Rules, Bye-laws and Regulations of the Exchange. Right of Nomination 7. Subject to the provisions of these Rules a member shall have the right of nomination which shall be personal and non-transferable. Right of Nomination of Deceased or Defaulter Member 9. On the death or default of a member his right of nomination shall cease and vest in the Exchange. Forfeited or Lapsed Right of Membership 10. When a right of membership is forfeited to or vests in the Exchange under any Rule, Bye-law or Regulation of the Exchange for ....
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....verning Board and Bank Deposit Receipts and securities shall be transferred to and held either in the names of the Trustees of the Exchange or in the name of a Bank approved by the Governing Board and lodged with a Bank approved by the Governing Board. Such deposit shall be entirely at the risk of the member providing the security but it shall be held by the Bank solely for and on account of the Exchange at the absolute discretion of the Exchange without any right whatever on the part of such member or those in his right to call in question, the exercise of such discretion. Change of Security 41. A member may withdraw any security provided by him if he first provides in lieu thereof other security of sufficient value to the satisfaction of the Governing Board. Lien on Security 43. The security provided by a member shall be subject to a first and paramount lien for any sum due to the Exchange or to the Clearing House by him or by the partnership of which he may be a member and for the due fulfillment of his engagements, obligations and liabilities or of the partnership of which he may be a member arising out of or incidental to any bargains, deali....
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....yself or those in my right to call in question the exercise of such discretion on any ground whatever so that you may at your absolute discretion as aforesaid apply and pay the same or the proceeds thereof (in case you shall as you shall be fully entitled to do sell the same) or cause the same to be applied and paid to or for behalf of the Exchange or the Clearing House to whom I or any partnership of which I may be a partner may be indebted or to or for behalf of any member of the Exchange to whom I or any partnership of which I may be a partner may be indebted under a claim or claims arising from any bargains, dealings, transactions and contracts made subject to the Rules, Bye-laws and Regulations of the Exchange during the continuance of my membership of the Exchange. If on the completion of all bargains, dealings, transactions and contracts entered into before the termination of my membership or on my ceasing to do business on the Exchange the said Security or proceeds thereof shall not have been required for payment of my or my said partnership liabilities as above provided the same or any balance thereof then remaining will be returned to me and a receipt signed by me that wh....
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....le right of membership) and all other assets and money of the defaulter in the Exchange or the market including the money and securities receivable by him from any other member, money and securities of the defaulter lying with the Clearing House or the Exchange, credit balances lying in the Clearing House, security deposits, any bank guarantees furnished on behalf of the defaulter, fixed deposit receipts discharged or assigned to or in favour of the Exchange, Base / Additional Capital deposited with the Exchange by the defaulter, any security created or agreed to be created by the defaulter or any other person in favour of the Exchange or the Defaulters' Committee for the obligations of the defaulter to the following purposes and in the following order of priority, viz.:- (i) First - to make any payments required to be made under Bye-law 391 and 394; (ii) Second - the payment of such subscriptions, debts, fines, fees, charges and other money as shall have been determined by the Defaulters' Committee to be due to the Securities and Exchange Board of India, to the Exchange or to the Clearing House by the defaulter; (iii) Third - the rectification or....
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....claims in full they shall be paid and satisfied pro rata; (viii) Eighth - the balance, if any, shall be paid into the Exchange's Customers' Protection Fund to the extent of any and all amounts paid out of the Customers' Protection Fund towards the obligations or liabilities of the defaulter and interest thereon at the rate of 2.5% per month (or such other rate as the Governing Board may specify) from the date of payment out of the Customers' Protection Fund to the date of repayment to the Fund; and (ix) Ninth - the surplus, if any, shall be paid to the defaulter. Clarification: It is clarified that this Bye-law 400 does not apply to the amount paid by the Governing Board to the Defaulters' Committee pursuant to Rule 16A in respect of the consideration received by the Governing Board for exercising the right of nomination in respect of the defaulter's erstwhile right of membership as the same does not belong to the defaulter and the defaulter has no claim, right, title or interest therein." 9. The judgment under appeal set out two main issues which according to it arose for determination. They are: (A) Whether, on the facts and c....
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....3), Civil Procedure Code, the Government dues shall have priority over other such creditors. (c) That, in the matter of application of Defaulters' Asset under bye-law 400, the Defaulters' Committee shall give priority to the debt due to the Government and the balance, if any, shall be distributed in terms of the Bye-laws 324 alongwith Bye-law 400 of the BSE. (d) That, a sum of Rs. 34,06,680 representing Balance Surplus lying with the Exchange out of sale proceeds of the nomination rights of the Defaulter-Member is attachable under the above provisions of the Income Tax Act read with Rule 16 of the BSE Rules and consequently, the said amount is directed to be paid over to the TRO under the impugned Prohibitory Order. (e) We hereby direct the BSE also to hand the securities lying in Members Security Deposit Accounts to the TRO, who would be entitled to sell and appropriate the sale proceeds towards the claim of the Income Tax Department against the Defaulting Broker-Member. If the TRO so direct, those securities could also be sold by BSE and the realized value, on the date of the sale, could be handed over to the TRO. It is for the TRO to decide thi....
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....ansferred" and this being so, the Income Tax Department cannot lay their hands on these shares or the sale proceeds thereof as the member ceases to have ownership rights of these shares. Shri Datar also argued that by virtue of Rule 43, the Stock Exchange has a first and paramount lien for any sum due to it, and that this made it a secured creditor so that in any case income tax dues would not to be given preference over dues to secured creditors. 12. Shri R.P. Bhat, learned senior counsel arguing on behalf of Revenue refuted these contentions and stated that on a conjoint reading of the Rules and the Bye-Laws a membership card may not be directly attachable but that the High Court's reading of Rule 16 is correct. Further, on a conjoint reading of the various Rules relating to member's security, it is clear that the expression "transferred" would not refer to transfer of ownership but would refer only to the delivery made of shares for the purpose of realization in case a member defaults. He further argued that the mere fact that a lien was provided in the Rules did not make such lien a statutory lien and that therefore Government dues would have a first preference over ....
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....e' of entering on the land; or, in equivalent words, X does not have a duty to stay off. Fundamental Legal Conceptions (1923) pp. 38-39) Arthur L. Corbin writes: We say that B had a right that A should not intrude and that A had a duty to stay out. But if B had invited A to enter, we know that those results would not occur. In such case we say that B had no right that A should stay out and that A had the privilege of entering. (See "Legal Analysis and Terminology", 29 Yale Law Journal 163) According to Kocourek: Privilege and inability are correlatives. Where there is a privilege there must be inability. The terms are correlatives. The dominus of a Privilege may prevent the servus of the Inability from exacting an act from the dominus (See "Jural Relations", 2nd ed., p. 24) Patton says: The Restatement of the law of Property defines a privilege as a legal freedom on the part of one person as against another to do a given act or a legal freedom not to do a certain act. (See Jurisprudence, 3rd ed. (1964), p. 256) We think that the respondent-landlord had the legal freedom as against the appellants to terminate the tenancy or not.....
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.... the Rules on fulfilment of conditions provided therein. The nomination wherever provided for is also not automatic. It is hedged by Rules. On right of nomination vesting in the Stock Exchange under the Rules, that right belongs to the Stock Exchange absolutely. The consideration received by the Stock Exchange on exercise of the right of nomination vesting in it, is to be applied in the manner provided in Rule 16. 13. In the present case Rule 16 was properly applied by the Stock Exchange. The membership right in question was not the property of the assessee and, therefore, it could not be attached under Section 281-B of the Income Tax Act. No amount on account of Rajesh Shah was due from or held by the Stock Exchange and, therefore, Section 226(3) could not be invoked. We are unable to sustain the judgment under appeal holding that in substance the right of membership or membership card was a right of property which could be attached under Section 281-B of the Income Tax Act." It is clear therefore that the conclusion of the High Court that the proceeds of a card which has been auctioned can be paid over to the Income Tax Department for the dues of the member by virtue ....
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....Pranlal Jayanand Thakur & Ors., 1975 (2) SCR 534 at 541, a share transfer can be accomplished by physically transferring or delivering a share certificate together with a blank transfer form signed by the transferor. The transfer of shares in favour of the Stock Exchange is only for the purposes of easy liquidity in the event of default. (iv) The expression "transferred" must take colour from the expression "lodged" in Rule 38 when it comes to deposits of cash. Understood in this sense, transfer only means delivery for the purposes of holding such shares as securities; (v) This is also clear from the language of Rule 38 when it says "such deposit shall be entirely at the risk of the member providing the security ..........." Obviously, first and foremost the cash lodged and the shares transferred are only deposits. Secondly, they are entirely at the risk of the member who provides the security making it clear that such member continues to be the owner of the said shares by way of security for otherwise they cannot possibly be at the member's risk; (vi) Under Rule 41 a member may withdraw any security provided by him if he satisfies the conditions of t....
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....he hands of the Defaulters' Committee. But as would appear from the discussions made hereinafter the application thereof would be separate and distinct. 40. In terms of the Bye-laws, a Defaulters' Committee is to be constituted which is a Standing Committee consisting of six members of the Exchange. Such a Committee is constituted in terms of Rule 170(a)(ii) of the Stock Exchange Rules, Bye-laws and Regulations, 1957. It is not a juristic person. It is merely an association of persons. 46. Vesting of such assets of the defaulter in the Defaulters' Committee is not absolute. The Defaulters' Committee is merely a trustee. It holds the said amount vested in it for the benefit and on account of the creditor members. Once the liabilities of the creditors from the defaulters are paid to the members, in terms of Rule 44, the assets devolve upon the Defaulters' Committee in terms of Bye-law 326 for a limited purpose and as contradistinguished from the Rules in terms whereof the card may vest in the Exchange, do not vest in it absolutely. 47. The Defaulters' Committee takes in its custody the amount realised from other assets not as an owne....
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....ed, the same must be disbursed having regard to the priority clause contained in Rule 16, in which event, upon discharge of the dues of the Exchange and clearing house, the same has to be distributed according to the dues of members and non-members. It bears repetition to state that there does not exist any distinction between a member and a non-member in terms of Rule 16 and in the event the amount of the card money available in the hands of the Exchange is not sufficient to satisfy all the claims, the same has to be distributed on a pro rata basis. However, any amount remaining surplus even thereafter would be subject to a decision of the Governing Board. The Governing Board may in a given situation, having regard to the hardship which may be faced by the members and non-members in realising their dues, may direct that such amount would be available for disbursement towards the said dues. It, however, we may hasten to add, is free to apply the surplus for a different purpose which, evidently cannot be dehors the purpose and object for which the Exchange has been constituted." 18. Ultimately, the matter was remanded to find out what was the cut off date for purposes of limitati....
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....ines "secured creditor" under Section 2(e) as follows: (e) "Secured creditor" means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor;" Similarly, the Securitisation and Reconsruction of Financial Assets and Enforcement of Security Interest Act, 2002 in Section 2 (z)(f) defines "security interest" as follows: "Section 2(zf) "security interest" means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in Section 31" In Triveni Shankar Saxena v. State of U.P. & Ors., 1992 Suppl. 1 SCC 524 at para 17 in an instructive passage the Supreme Court held as follows: "17. We shall now examine what the word 'lien' means. The word 'lien' originally means "binding" from the Latin ligamen. Its lexical meaning is "right to retain". The word 'lien' is now variously described and used under different context such as 'contractual lien', 'equitable lien', 'specific lien', 'general li....
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.... and it is either particular or general". Having regard to the foregoing definitions the question arises whether the holder of a lien, as the applicant company in the instant case, can be considered to be a secured creditor under the company law. Section 529 of the Act is important and it reads: "529. Application of the insolvency rules in winding up of insolvent companies.- (1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to - (a) Debts Probable; (b) The valuation of annuities and future and contingent liabilities; and (c) The respective rights of secured and unsecured creditors; As are in force from the time being under the law of insolvency with respect to the estates of persons adjudged insolvent. (2) All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section. Provided that if a secured creditor instead of relinquishing his security and proving for his ....
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....ing a lien on the property of a debtor is a secured creditor. In dealing with the question as to who a secured creditor is in company law, it is observed in Palmer's Company Law, 21st edition, at page 765.: "Secured creditor is one, who has some mortgage, charge or lien on the company's property.......A solicitor who holds a lien on documents of a liquidating company for his costs against the company is a secured creditor, and must mention his lien in his proof." On a consideration of Section 529 read with the relevant provisions of the insolvency law, I come to the conclusion that the holder of a statutory lien or the holder of a lien created by contract and registered as required by Section 125 is a secured creditor in the matter of winding up of the insolvent company with regard to, among other things, debts provable in the winding up proceedings. The applicant-company being the holder of a statutory lien is thus in the position of a secured creditor....." 20. In the present case, the first and paramount lien given to the Stock Exchange is by Rule 43 of the Rules made under Section 8 of the Securities Contract Act. Sections 7A, 8 and 30 of the Securi....
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.... 22. Mr. Bhat argued that only a lien that flows from the statute itself can be considered as a statutory lien and referred us to two judgments, one by the Bombay High Court and one by the Supreme Court. The Bombay High Court held in the case of Forwarding P. Ltd. and another v. Trustees, Port of Vizagapatnam, and Anr., [1987] 61 Company Cases 513 that the power of arrest and sale of vessel belonging to a company in winding up by the port authorities emanates directly from section 64 of the Major Port Trusts Act, 1963 and hence the question of obtaining leave of the company court under section 446 of the Companies Act, 1856 will not arise when an authority exercises independent statutory rights. This judgment was quoted with approval in Board of Trustees, Bombay v. Indian Oil Corporation, 1998 (4) SCC 302 where the Supreme Court set out Section 64 of the Major Port Trusts Act and held as under: "8. The Port authorities have a paramount right to arrest a vessel and detain the same until the amounts due to it in respect of extending the port facilities and services to the vessel are paid. Under Sub-section (2), in case any part of the said rates, charges, penalties or ....
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....tors including secured creditors, the appellant has a right to arrest the vessel and sell it. Without the consent of the appellant, this right cannot be transferred to the sale proceeds of the vessel." It is no doubt true that the Supreme Court held that the statutory lien of a Harbour authority over a vessel is a paramount lien which overrides the claim of all other creditors including secured creditors. The question, however, in the present case is somewhat different. The question is whether the lien exercised under Rule 43 by the Stock Exchange can be said to be a superior right to income tax dues which may become payable by virtue of the Stock Exchange being a secured creditor. 23. It was argued that Black's Law Dictionary 5th Edition defines "statutory lien" as follows: "Statutory lien: A lien arising solely by force of statute upon specified circumstances or conditions, but does not include any lien provided by or dependent upon an agreement to give security, whether or not such lien is also provided by or is also dependent upon statute and whether or not the agreement or lien is made fully effective by Statute." Based on this it was further argued that ....