2014 (10) TMI 368 - SC - Companies Law

Priority of Crown debts - Overriding effect - Declaration of member of stock exchange as defaulter - Income Tax Department claims that it has priority over all debts owed by the defaulter member, whereas the Stock Exchange, Bombay claims otherwise - Held that - The first thing to be noticed is that the Income Tax Act does not provide for any paramountcy of dues by way of income tax. - In the present case, the common law of England qua Crown debts became applicable by virtue of Article 372 of the Constitution which states that all laws in force in the territory of India immediately before the commencement of the Constitution shall continue in force until altered or repealed by a competent legislature or other competent authority. In fact, in Collector of Aurangabad and Anr. v. Central Bank of India and Anr. 1967 (5) TMI 43 - SUPREME COURT after referring to various authorities held that the claim of the Government to priority for arrears of income tax dues stems from the English common law doctrine of priority of Crown debts and has been given judicial recognition in British India prior to 1950 and was therefore law in force in the territory of India before the Constitution and was continued by Article 372 of the Constitution In the present case, as has been noted above, the lien possessed by the Stock Exchange makes it a secured creditor. That being the case, it is clear that whether the lien under Rule 43 is a statutory lien or is a lien arising out of agreement does not make much of a difference as the Stock Exchange, being a secured creditor, would have priority over Government dues. - Decided in favour of appellant.

Issues Involved:
1. Whether the Tax Recovery Officer (TRO) was right in attaching the sale proceeds of the nomination rights of the defaulter member.
2. Whether deposits made by the defaulting member under various heads such as security deposit, margin money, and securities are attachable under the Income Tax Act.
3. Whether the Stock Exchange's lien makes it a secured creditor, thereby giving it precedence over government dues.

Detailed Analysis:

Issue 1: Attachment of Sale Proceeds of Nomination Rights
The court examined whether the TRO was entitled to attach the sale proceeds of the nomination rights of the defaulter member. It was held that a membership card is only a personal privilege and not a property right, and thus, the Income Tax Department was incorrect in attaching the sale proceeds of such a card. The court stated, "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." Consequently, the proceeds from the sale of the membership card cannot be paid to the Income Tax Department for the dues of the member, as the member does not own any property capable of attachment.

Issue 2: Attachment of Deposits Made by Defaulting Member
The court considered whether the deposits made by the defaulting member under various heads are attachable. It was determined that these deposits continue to belong to the member and are thus attachable under the Income Tax Act. The court noted, "the security provided shall be a first and paramount lien for any sum due to the Stock Exchange," indicating that these deposits are held as security and remain the property of the member. Therefore, the Income Tax Department can attach these deposits for the recovery of dues.

Issue 3: Stock Exchange's Lien as a Secured Creditor
The court addressed whether the Stock Exchange's lien under Rule 43 makes it a secured creditor, thereby giving it precedence over government dues. It was held that the Stock Exchange's lien does indeed make it a secured creditor. The court referenced the definition of "secured creditor" under various statutes and concluded that the Stock Exchange, having a first and paramount lien, is a secured creditor. As such, the Stock Exchange's claims have precedence over government dues, which only have priority over unsecured creditors. The court stated, "the Stock Exchange, being a secured creditor, would have priority over Government dues."

Conclusion:
The Supreme Court allowed the appeal of the Stock Exchange, setting aside the impugned judgment of the Bombay High Court. The court held that:
1. The sale proceeds of the nomination rights of the defaulter member are not attachable by the Income Tax Department.
2. Deposits made by the defaulting member under various heads are attachable under the Income Tax Act.
3. The Stock Exchange's lien makes it a secured creditor, giving it precedence over government dues.

The court directed the Bombay Stock Exchange to hand over the securities and credit balances to the TRO, who would be entitled to sell and appropriate the sale proceeds towards the claim of the Income Tax Department. The principles laid down by this judgment are to be followed by the BSE and the TRO in future cases.

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