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TaxTMI 
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2014 (10) TMI 368
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....arge 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 Shah to any person whomsoever otherwise than to the Inc....
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....y 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 from time to time, by notice in writing require any person from whom money is due or may beco....
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....rning 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 section any rules have been made or amended, the rules so made or amended shall be published in the Gazette of India and also in the Official Gazette or Gazettes of the State or States in whi....
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....ning, 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 the purpose of dealings and the suspension or withdrawal of any such securities, and the suspension or prohibition of trading in any specified securities; (n) the method and procedure for the settlement of claims or disputes, including settlement by arbitration; (o) the levy and recovery of fees, fines and ....
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.... 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 the time being in force it shall belong absolutely to the Exchange free of all rights, claims or interest of such member or any person claiming through such member and the Governing Board shall be entitled to deal with or dispose of such right of membership as it may think fit. Allocation in Order of Priority 16. When as provided in these Rules the Governing Board has exercised the right of nomination in respect of a membership vesting in the Exchange the consideration received therefore shall b....
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....curity 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, dealings, transactions and contracts made subject to the Rules, Bye-laws and Regulations of the Exchange or anything done in pursuance thereof. Return of Security 44. On the termination of his membership or on his ceasing to carry on business on the Exchange or on his working as a representative member or on his death all security not applied under the Rules, Bye-laws and Regulations of the Exchange shall at the cost of the member be repaid and transferred either to him or as he shall direct or in the absence of such direction to his legal representatives. Letter of Declaration 46. A member providing security und....
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....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 whatever cash, stock, shares or other securities or balance thereof is/are so returned to me is/are all to which I am entitled in terms hereof shall be final and conclusive and bar inquiry of any kind at the instance of myself or any one in my right in respect thereof. Yours faithfully, (Signature of member depositing the Security) Securities above referred to: Some bye-laws of the Stock Exchange are also relevant. These are: Defaulter's Assets 326. The Defaulters' Committee shall call in and realise the security and margin money and securities deposited by the defaulter and recover all monies, securities and other assets due, payable or deliverable to the defaulter by any....
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....riority, 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 replacement of or compensation for any bad deliveries made by or on behalf of the defaulter to any other member in the settlement in which the defaulter has been declared a defaulter or in any prior or subsequent settlement (unless the Governing Board has otherwise determined in respect of such settlement or settlements under Bye-law 394) provided the conditions of Bye-law 153 and all other applicable Rules, Bye-Laws and Regulations and instructions of the Governing Board are complied with; (iv) Fourth - the balance, if any, shall be paid into the Fund to the extent of the money paid out of the Fund (other than payments made out of Members' refundable contributions) and not recovered by the Fund and the interest payable by the defaulter to the Fund in respect thereof; (v) ....
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....r 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 circumstances of this case, the TRO was right in attaching the sale proceeds of the nomination rights of the Defaulter-Member. If not, whether the TRO was entitled to attach under Rule 26(1) of Schedule -II to the Income Tax Act, the Balance Surplus amount lying with BSE out of the sale proceeds of the nomination rights of the Defaulter-Member under rule 16(1)(iii) framed by BSE r/w the Resolution of the General Body of BSE dated 13.10.1999? (B) Whether deposits made by the Defaulting Member under various Heads such as Security Deposit, Margin Money, Securities deposited by Members and Others are attachable under Section 226(3)(i)(x) read with Rule 26(1)(a)(c) of Schedule-II to the Income Tax Act? 10. Issue A was answered by saying that though a defaulting member had no interest in a membership card and that the Income Tax Depart....
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.... 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 this point. We further direct credit balance its the Clearing House of Rs. 1,53, 538/- to be paid over to the TRO and that the TRO would be entitled to appropriate the said amount towards the dues of the Department. In short, we are directing BSE to pay a sum of Rs. 35, 60, 218/- to the TRO and in addition thereto, the TRO would be entitled to the realized value of the Securities as on the date of sale. In this case, the Prohibitory Order is before the date of insolvency of the Broker concerned. (f) In future, the principles laid down by this judgment should be followed by BSE and the TRO would to attach such Other Assets and appropriate the amounts towards its claim under the Income Tax Act." 11. Mr. Arvind Datar, learned senior counsel appearing on behalf of the Stock Exchange raised essentially three submissions. The first submission is that by virtue of the judgment in Stock Ex....
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....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 all the dues of the Stock Exchange. 13. Mr. Datar also handed over during the course of argument certain annual reports and letters to buttress his argument that in point of fact shares were actually transferred by the member under the direction of the Stock Exchange to the Bank of India who actually became owner of the shares and was treated as such. The fact that dividends were to be paid to the member concerned was only because of an internal arrangement between the Exchange and the member, and that in fact the right to the dividend as well as the right to vote all belonged to the Bank of India who was to act as a trustee for the Stock Exchange. 14. We will deal with each one of the contentions seriatim. Re.: (1) A reading of Rules 5 and 9 lead to the conclusion that a membership card is only a personal permission from the Stock Exchange to exercise the rights and privileges that may b....
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....o 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. The appellants had no right or claim that the respondent should not terminate the tenancy and the respondent had, therefore, the privilege of terminating it on the ground that appellants had sub-let the premises. This privilege would survive the repeal. But the problem would still remain whether the respondent had an accrued right or privilege to recover possession of the premises under Section 13(1) of the Saurashtra Act on the ground of the sub-letting before the repeal of that Act. The fact that the privilege to terminate the tenancy on the ground of sub-letting survived the repeal does not mean that the landlord had an accrued right or privilege to recover possession under Section 13(1) of that Act as that right or privilege could arise only if the tenancy had been validly terminated before the repeal of the Saurashtra Act." (at Pages 725, 726) It is clear therefore that no accrued right to property was ever vested in the defaulting member. 16. Further,....
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....t." 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 of Rule 16 (iii) is incorrect as such member at no point owns any property capable of attachment, as has been held in the Ahmedabad Stock Exchange case. On this point therefore Shri Datar is on firm ground and must succeed. Re: (2) Rules 36 to 46 belong to a Chapter in the Rules entitled "Membership Security". Rule 36 specifies that a new member shall on admission provide security and shall maintain such security with the Stock Exchange for a determined sum at all the times that he carries on business. Rule 37 deals with the form of such security and states that it may be in the form of a deposit of cash or deposit receipt of a Bank or in the form of security approved by the Governing Board. Rule 38 deals with how these securities are held. Rule 41 enables the member to withdraw any security provided by him if he provides another security in lieu thereof of sufficient value to the satisfaction of the Governing Board. Rule 43 states that the security provided shall be a first and par....
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....ibly 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 the Rules. This again shows that what is sought to be withdrawn is a security which the member owns; (vii) By Rule 43 a lien on securities is provided to the Stock Exchange. Such lien is only compatible with the member being owner of the security, for otherwise no question arises of an owner (the Stock Exchange, if Shri Datar is right) having a lien on its own moveable property; (viii) Therefore, when Rule 44 speaks of repayment and transfer it has to be understood in the above sense as the security is being given back to the member under the circumstances mentioned in the Rule; (ix) Bye-law 326 and 330 also refer to securities that are "deposited" by the defaulter and recovery of securities and "other assets" due. Obviously, therefore, securities which are handed over to the exchange continue to be assets of the member which can be liquidated on default. (x) Shri Datar's argument would also create a dichotomy between "cash lodged" and Bank Deposit Receipts and securities "transferred". The form a particular security takes cannot po....
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....Committee takes in its custody the amount realised from other assets not as an owner thereof and the vestment thereof would, thus, be coterminous with the satisfaction of the claims of the member. It, as soon as the purpose of Bye-law 326 is satisfied, comes to an end. 48. The assets of a defaulting member can broadly be divided into two categories, namely, card membership and other assets. 57. There cannot, however, be any doubt that so long as the claims of the awardees, both of members as also non-members, are dealt with by the Defaulters' Committee, the Exchange or the Defaulters' Committee would not be a debtor in relation to an awardee. But once the Defaulters' Committee determines such claims and a surplus is available in the hands of the Defaulters' Committee, as the surplus amount would become payable to the defaulting members, the same would become an asset of the defaulting member. In other words, other assets continue to remain assets of the defaulting members subject to the vesting thereof for the purposes mentioned in Bye-law 326 and as soon as the purpose is satisfied, the ownership which was under animated suspension or eclipsed would again reviv....
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.... find out what was the cut off date for purposes of limitation. 19. Though this judgment has no direct application to the facts before us it does hold that after the assets of the defaulting member are pooled together and amounts are realized, the payments that would be made from such pool would be from the assets of the defaulting member. To that extent, therefore, the aforesaid judgment reinforces what we have stated above. Mr. Datar's second contention must therefore fail. Re: (3) It is settled law that Government debts have precedence only over unsecured creditors. This was held in Dena Bank v. Bhikabhai Prabhudas Parekh Co., 2000 (5) SCC 694 as follows: "10. However, the Crown's preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors. The common law of England or the principles of equity and good conscience (as applicable to India) do not accord the Crown a preferential right for recovery of its debts over a mortgagee or pledgee of goods or a secured creditor. It is only in cases where the Crown's right and that of the subject meet at one and the same time that the Crown is in general preferred. Where the rig....
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....;, 'general lien', 'partners lien', etc. etc. in Halsbury's Laws of England, Fourth Edition, Volume 28 at page 221, para 502 it is stated : In its primary or legal sense "lien" means a right at common law in one man to retain that which is rightfully and continuously in his possession belonging to another until the present and accrued claims are satisfied." Similarly, in K.S. Saradambal v. Jagannatham K Brothers, (1972) 42 Companies Case 359, the Madras High Court held: "It would be sufficient only to refer to the following observation in Halsbury's Laws of England, third edition, volume 24, at page 143: "A legal lien differs from a mortgage and a pledge in being an unassignable personal right which subsists only so long as possession of the goods subsists. A mortgage is an assignable right in the property charged and does not depend on possession. A pawn or pledge gives a special assignable interest in the property to the pawnee. A lien is, however, included in the definition of mortgage in the Law of Property Act, 1925. There an equitable mortgage is created by deposit of title deeds, the mortgagee has a legal lien on the deeds deposited." This le....
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....rred by the liquidator (including provisional liquidator, if any), for the preservation of the security before its realization by the secured creditor". Though the expression "insolvent company" is not defined, obviously it refers to a company which has been ordered to be wound up on a petition founded upon section 433(c), that is, the company being unable to pay its debts. According to section 529, in the winding up of such a company, the same rules shall prevail and be observed with regard to debts provable as are in force for the time being under the law of insolvency with respect to the estates of the persons adjudged insolvent. The question is whether only the insolvency rules are applicable or all the relevant provisions of the insolvency law are applicable to a case of winding up of an insolvent company. The intention underlying section 529 is that all the provisions of the insolvency law are applicable to the case of winding up of an insolvent company with regard to matters enumerated in section 529. That was also the view taken by a full bench of the Allahabad High Court in Hans Raj v. Official liquidators, Dehradun, Mussorie Electric Tramway Co. Ltd. AIR 1929 All 353 ....
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....g to Stock Exchanges generally including membership thereof; and rules to carry out the purposes of the Securities Contracts (Regulation) Act respectively. Whereas, the rules made under Section 7A and Section 8 are made by recognized Stock Exchanges with the approval of the Central Government and published in the Official Gazette, rules made under Section 30 are made by the Central Government itself for purposes of carrying into effect the objects of the Securities Contracts (Regulation) Act. Sub-section (3) of Section 30 is material. "Section 30 sub-section (3): Every rule made under this Act shall be laid, as soon as maybe after it is made, before each House of Parliament, while it is in session for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the sessions immediately following the sessions or the successive sessions aforesaid, both Houses agree in making any modification in the rule or both Houses agree that the rule should not be made, the rule shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any modification or annulment ....
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....Board may cause the vessel so distrained or arrested to be sold. The proceeds of such sale shall satisfy such rates or penalties and costs including the costs of sale remaining unpaid. The surplus, if any, is to be rendered to the master of such vessel on demand. 9. The statutory right under Section 64 embodies this overriding right of the harbour authority over the vessel for the recovery of its dues. This right stands above the rights of secured and unsecured creditors of a company in winding up - in the present case, the shipping company which owns the vessel. The harbour authorities allow ships -national or foreign to anchor and avail of the services provided by them. For payment they look to the vessel. The owner may be foreign or even unknown to the harbour authority. The latter's right to recover its dues is not affected by any pending proceedings against the owner in any court - whether in winding up or otherwise. The harbour authority can arrest the vessel while it is anchored in the harbour and recover its dues in respect of that vessel by sale of the vessel if the dues are not paid. This lien of the harbour authority over the vessel is paramount. The lien cannot be....