2017 (3) TMI 1800 - HC - Income Tax

Recovery proceedings - sale proceeds of the membership rights of the defaulting members - Petitioner's claim that the sale proceeds of the membership rights of the defaulting members, is subject to their prior rights in view of the income tax dues payable to it by Respondent No.2 (Mr. Khona and Mr. Dalal) and it is the case of the Respondent No.1 Exchange that the aforesaid amounts are in the nature of ex-gratia payments, being made to defaulting members - HELD THAT - Provisions to Section 226(3) would not apply as it is neither a debt due from Respondent No.1 Exchange to the defaulting members (Mr. Khona and Mr. Dalal) nor according to them, is the Respondent No.1 Exchange holding the money on account of Respondent No.2 (Mr. Khona and Mr. Dalal). As further submitted that the payments are being made to the defaulting members, consequent to a resolution dated 13th October, 1999. This very resolution dated 13th October, 1999, was subject of consideration by the Apex Court in Bombay Stock Exchange v/s. B. S. Kandalgaonkar Others 2014 (10) TMI 368 - SUPREME COURT and the said amounts payable under the resolution, were held to be not attachable by the Income Tax Department. n the above view, interim relief in terms of prayer clause (c), in respect of which, all parties are adidem. Respondents are directed to deposit the amounts of ₹ 1,60,58,253 and ₹ 1,60,46,276/with the Prothonotary and Senior Master, High Court, Bombay, within a period of two weeks from today.

Summary

Issues: Challenge to communications by Exchange regarding refund of surplus to defaulting members, interpretation of ex-gratia payments, applicability of Section 226(3) of the Act, consideration of previous resolution by the Apex Court.

Analysis:
The High Court of Bombay heard two petitions challenging communications issued by the Exchange to defaulting members regarding the refund of surplus from auction proceeds of membership rights. The Petitioners claimed that the sale proceeds were subject to their prior rights due to income tax dues, while the Exchange argued that the amounts were ex-gratia payments and not debts owed to the defaulting members. The Exchange contended that Section 226(3) of the Act did not apply in this case as the payments were made based on a resolution from 1999, which was previously considered by the Apex Court in a different case. The Apex Court had ruled that the amounts payable under the resolution were not attachable by the Income Tax Department.

The Court granted interim relief as requested by all parties involved. The Respondents were directed to deposit the specified amounts with the Prothonotary and Senior Master of the High Court of Bombay within two weeks. The Prothonotary and Senior Master were further instructed to invest the deposited amounts in Fixed Deposit for an initial period of one year, with subsequent renewals until the resolution of the two petitions.