9911796707
TMI Blog2014 (10) TMI 368X X X X Extracts X X X X X X X X Extracts X X X X ..... ax 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 Income Tax Department. The amount claimed in the prohibitory order was stated to be Rs. 37.48 Lakh plus interest. On 18th July 1996, the Solicitors of the Stock Exchange, Bombay wrote to the Income Tax Department calling upon them to withdraw the prohibitory order dated 10th May 1996 in view of the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 become due to the assessee or any person who holds or may subsequently hold money for or on account of the asssessee, to pay the assessing officer or tax recovery officer either forthwith upon the money becoming due or being held or at or within the time specified in the notice (not being before the money becomes due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised 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 which the principal office or offices of the recognised stock exchange or exchanges is or are situate, and, on the publication thereof in the Gazette of India, the rules so made or amended shall, notwithstanding anything to the contrary contained in the Companies Act, 1956 (I of 1956), or in any other law for the time being in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts, 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 penalties; (p) the regulation of the course of business between parties to contracts in any capacity; (q) the fixing of a scale of brokerage and other chargers; (r) the making, comparing, settling and closing of bargains; (s) the emergencies in trade which may arise, whether as a result of pool or syndicated operations or cornering or otherw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght 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 be applied to the following purposes and in the following order of priority namely - Dues of Exchange and Clearing House i. first-the payment of such subscriptions, debts, fines, fees, charges and other monies as shall have been determined by the Governing Board to be due to the Exchange, to the Clearing House by the former member whose right of membership vests in the E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under the provisions of these Rules shall sign a Letter of Declaration in the form prescribed in Appendix F to these Rules or in such other form as the Governing Board may from time to time prescribe. APPENDIX F Member's Security Declaration Form No. 1 (Rule 46) The Governing Board, The Stock Exchange, Bombay. Gentlemen, Having been admitted as a member of the Stock Exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided 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 other member in respect of any transaction or dealing made subject to the Rules, Bye-laws and Regulations of the Exchange and such assets shall vest in the Defaulters' Committee for the benefit and on account of the creditor members. Payment to Defaulters' Committee 327. All monies, securities and other assets due, payable or deliverable to the defaulter must be paid or delivered to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) Fifth - the balance, if any, shall be paid into the Fund to the extent of the money paid out of the Fund out of the refundable contributions of members (other than the refundable contribution of the defaulter) and not recovered by the Fund and the interest payable by the defaulter to the Fund in respect thereof; (vi) Sixth - subject to the Rules, Bye-Laws and Regulation of the Exchange, including in par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 Department was not right in attaching the sale proceeds of such card, still money which is likely to come in the hands of the garnishee, that is the Bombay Stock Exchange, for and on behalf of the assessee is attachable because the requisite condition is the subsistence of an ascertained debt in the hands of the garnishee which is due to the assessee, or the existence of a contractual relationship between the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 Exchange, Ahmedabad v. Asstt. Commisioner of Income Tax, Ahmedabad, 2001 (3) SCC 559, the sale proceeds of a membership card and the membership card itself being only a personal privilege granted to a member cannot be attached by the Income Tax Department at any stage. The moment a member is declared a defaulter all rights qua the membership card of the member cease and even his right of nomination vests in the Stock E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etters 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 be given subject to Rules, Bye-Laws and Regulations of the Exchange. Further, the moment a member is declared a defaulter, his right of nomination shall cease and vest in the Exchange because even the personal privilege given is at that point taken away from the defaulting member. The matter is no longer res integra. 15. In Isha Valimohamad and Anr. v. Haji Gulam Mohamad & Haji Dada Trust 1975 (1) SCR 720 the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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, the rules and the bye-laws also make this clear. Under Rule 16(iii), whenever the Governing Board exercises the right of nomination in respect of a membership which vests in the Exchange, the ultimate surplus that may remain after the membership card is sold by the Exchange comes only to the Exchange - it does not go to the member. This is in contrast with bye-law 400 (ix) which, as has been noted above deals with the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (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 paramount lien for any sum due to the Stock Exchange and Rule 44 deals with the return of such security under certain circumstances. On a conjoint reading of these Rules what emerges is as follows: (i) The entire Chapter deals only with security to be provided by a member as the Chapter heading states; (ii) The security to be furnished can be in various forms. What is important is that cash is in the form of a deposit and sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner (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 possibly lead to a conclusion that cash lodged, being only a deposit, continues to belong to the member, whereas Bank Deposit Receipts and securities, being "transferred" would belong to the Stock Exchange. In Bombay Stock Exchange v. Jaya Shah, 2004 (1) SCC 160, this Court was confronted with a claim made by a non-member against a member which had fructified into an arbitration award under the 1940 Arbitration Act which was then m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 revive to the defaulting member. The awardees, however, so long as the assets remain under the control of the Defaulters' Committee would be entitled to get their claim on a pro rata basis and not in its entirety. 58. If it is held that despite the fact that claims, having regard to the priority clause contained in Rule 16, remain in the hands of the Defaulters' Committee and an order of attachment would be enforceable, the same wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;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 right of the subject is complete and perfect before that of the King commences, the rule does not apply, for there is no point of time at which the two rights are at conflict, nor can there be a question which of the two ought to prevail in a case where one, that of the subject, has prevailed already. In Giles v. Grover [(1832) 131 ER 563 : 9 Bing 128] it has been held that the Crown has no precedence over a pledgee of goods. In Bank of Biha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 leads us to the question as to what right is available to the applicant-company, as the holder of lien. That again takes us to the question as to what is meant by "lien". The word "lien" is defined in the Law Lexicon by Ramanatha Iyer as: "A lien may be defined to be a charge on property for the payment of a debt or duty, and for which it may be sold in discharge of the lien.........A lien, in a limited and technical sense, signifies the right b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall 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 (F.B.). A similar view was taken by the Oudh Chief Court in B. Anand Bihari Lal v. Dinshaw & Co. [1944] 12 Comp. Cas. 137 (Oudh). Thus, according to section 529, the provisions of the insolvency law are applicable to debts provable in the winding up of an insolvent company. That takes us to the question as to what are the provisions of the insolvency law that are applicable to a debt covered by a lien. The provincial Insolvency Act, 1920, and the Preside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities 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 shall be without prejudice to the validity of anything previously done under the rule. " 21. It will be seen that whether a rule is made under section 7-A, Section 8 or Section 30, all rules made under the Act are to be laid before Parliament, making it clear thereby that rules made under each of these provisions are statutory in nature. The fact that the Stock Exchange makes these rules under Sections 7A and 8 as opposed to the Central Government making them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 extinguished or the vessel sold by any other authority under the directions of the court or otherwise, unless the harbour authority consents to such sale. Thus, in the case of Ashok Arya v. M.V. Kapitan Mitsos, the Bombay High Court relied upon the decision in The Emilie Millon (infra) and held that the lien given by statute to a dock or harbour authority cannot be extinguished by court unless it be done with the authority's express or implied consent. 13. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of goods. 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 (3) SCR 855 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 (at page 861, 862). 25. 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 cre ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
