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2003 (3) TMI 95 - HC - Income TaxRecovery of Tax - Garnishee Proceedings - by this petition the Stock Exchange Mumbai seeks to challenge a notice under section 226(3) of the Income-tax Act 1961 dated October 5 1995 as also a prohibitory order dated May 10 1996 under section 222 of the Income-tax Act served on the petitioner whereby the stock exchange is restrained from making any payment of the debt due to Suresh Shah member-broker on the Bombay Stock Exchange (the BSE) on the ground that the said broker had failed to pay arrears of income-tax
Issues Involved:
1. Attachment of the membership card of the defaulter broker. 2. Attachment and recovery of credit balances in various accounts of the broker in the books of the Bombay Stock Exchange (BSE). Issue-wise Detailed Analysis: Issue 1: Attachment of the Membership Card of the Defaulter Broker The primary question was whether the Income-tax Department was entitled to attach the membership card of the broker. The court referenced the Supreme Court's judgment in the case of Stock Exchange, Ahmedabad v. Asst. CIT [2001] 248 ITR 209 (SC), which held that the right of membership is a personal privilege granted to a member, not transferable, and incapable of alienation except as provided in the rules and bye-laws of the stock exchange. Upon the broker being declared a defaulter, his right of membership vested in the exchange, and the sale proceeds from the auction of the nomination rights of the defaulter-member vested in the defaulters' committee of the BSE and became distributable under rule 16 of the BSE rules. The court concluded that the defaulting member had no interest in the membership card or its sale proceeds. However, the Tax Recovery Officer could attach the balance surplus amount, which came into the hands of the BSE for and on behalf of the broker during the administration of assets and allocation under rule 16(1)(iii) read with the general body resolution dated October 13, 1999. Consequently, the court directed the BSE to pay Rs. 34,06,680 to the Tax Recovery Officer. Issue 2: Attachment and Recovery of Credit Balances in Various Accounts of the Broker in the Books of the BSE The court examined whether the deposits made by the defaulting member under various heads such as security deposit, margin money, and securities deposited by the member were attachable under section 226(3)(i), (x) read with rule 26(1)(a), (c) of Schedule II to the Income-tax Act. The court found that these assets belonged to the defaulter and vested in the defaulters' committee only for the purpose of administering, distributing, and applying them in the order of priority under bye-law No. 400. Therefore, these assets were attachable and recoverable under the provisions of section 226(3)(i), (x) read with rule 26(1)(a), (c) of Schedule II to the Income-tax Act. The court further held that the Government dues had priority over the dues of the BSE, the clearing house, and other creditor members under section 73(3) of the Civil Procedure Code. The doctrine of rateable distribution under the rules and bye-laws of the BSE could not override the mandate of section 73(3) of the Civil Procedure Code, which protected the priority of Government dues. Conclusion: (a) The other assets (security deposit, margin money, securities deposited by the member) are attachable and recoverable under the provisions of section 226(3)(i), (x) read with rule 26(1)(a), (c) of Schedule II to the Income-tax Act. (b) The Government dues shall have priority over the dues of the BSE, the clearing house, and other creditor members under section 73(3) of the Civil Procedure Code. (c) The defaulters' committee must give priority to the Government dues when applying the defaulter's assets under bye-law No. 400, with any balance distributed as per bye-law No. 342 along with bye-law No. 400 of the BSE. (d) Rs. 34,06,680 representing the balance surplus from the sale proceeds of the nomination rights of the defaulter-member is attachable and must be paid to the Tax Recovery Officer. (e) The BSE must hand over the securities in the membership security deposit account to the Tax Recovery Officer, who can sell and appropriate the sale proceeds towards the Income-tax Department's claim. The BSE must also pay the credit balance with the clearing house of Rs. 1,53,538 to the Tax Recovery Officer. The total amount directed to be paid is Rs. 35,60,218 plus the realised value of the securities. (f) The principles laid down in this judgment should be followed by the BSE and the Tax Recovery Officer in future cases. The writ petition was disposed of with no order as to costs.
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