9911796707
TMI Blog1996 (1) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... see had not made any provision for the payment of such amounts, it was considered necessary to provisionally attach the property of the assessee described in Sch. I to the said order. This property which was provisionally attached consisted of (1) Ahmedabad stock exchange Card bearing No. 02-0419-6 in the name of Shri Rajesh Anubhai Shah, (2) Margin money kept with the stock exchange and (3) Security deposits kept with the stock exchange. The name of Smt. Dipti R. Shah, widow of Shri Rajesh A. Shah was shown as an assessee, presumably because of the provision of s. 159(3), which provides that the legal representative of the deceased shall, for the purposes of the said Act, be deemed to be an assessee. 3. The notice under s. 226(3), dt. 14th June, 1995, a copy of which is also at Annexure "A" to the petition, was addressed to the petitioner stock exchange, requiring it to pay to the authority i.e., Asstt. CIT, any amount due from the petitioner to or held by the petitioner for or an account of the deceased Rajesh A. Shah-legal heir Dipti R. Shah. It was stated in the notice that a sum of Rs. 12,24,887 was due from "Rajesh A. Shah - legal heir Dipti R. Shah". A copy of the notice w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbership vested in the exchange and that is how the exchange offered to the eligible persons his "disposable membership right" by an auction as per the Public Notice dt. 16th Feb., 1994, which was placed on record during the arguments. There was a slight improvement over the petitioner's case reflected in the petition, during the arguments when it was developed by also contending that the heirs of the deceased had shown their inability to discharge the obligation as per the rules and regulations, before the governing board passed resolution dt. 12th Feb., 1994. It appears that, even while the provisional attachment was operative by virtue of the impugned order issued under s. 281B on 15th Feb., 1994, the governing board proceeded to dispose of the membership right of the said deceased member by making a resolution on 5th Dec., 1994, after holding the open bid on 6th Oct., 1994, in favour of the UTI Securities Exchange Limited, which was informed about its being admitted as a corporate member of the stock exchange on 23rd Feb., 1995, as stated in the communication dt. 23rd Jan., 1996, addressed by the UTI Securities Exchange Ltd. to the office of the Asstt. CIT in response to letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was argued that under rr. 5 and 6, there was a prohibition on a member from assigning his right of membership or any rights or privileges attached to membership since membership was only a personal permission from the exchange to exercise the rights and privileges attached thereto. It was further argued that even the right of nomination given to a member having seven years ' standing under r. 11(a) was hedged with three important conditions namely- (a) approval of such person i.e., the nominee by the governing board for admission to the stock exchange, (b) qualifications and eligibility of the nominee, and (c) clearance of the dues of the outgoing member under rr. 15 and 50 of the said rules. It was submitted that until all this was done, such inchoate right of nomination could not be exercised. It was submitted that even in case of a deceased member, his representative's right to nominate given by r. 11(b) read with Appendix "C", was hedged by similar considerations. It was, therefore, submitted that there was no property element in such right which could be attached under the law. It was submitted that even during the lifetime of the member, right of membership was not a propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip of the stock exchange was not a mere status, but it had value in terms of money and the membership card could be sold. It was contended that the fact that even if the nomination made by a member is rejected the member had a right to make a fresh nomination under r. 12, clearly showed that right to nominate granted by r. 11 was a property right. It was further contended that when the member dies or is in default, the right of nomination goes to the governing board as a trustee in order to satisfy the outstanding dues of the creditors and the tax dues vis-a-vis the dues of the unsecured creditors will have priority and will have to be satisfied before the dues of ordinary creditors are satisfied. It was submitted that the property which was attached, namely, membership right, could not have been disposed of by the exchange during attachment and any transfer purported to have been made by such auction of the membership right of the deceased was wholly ineffective and cannot defeat the power of the Revenue to collect the taxes from the dues realised by the petitioner from the estate of the deceased. It was submitted that the impugned notice under s. 226(3) and the letter dt. 5th Oc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recognised by it. Sec. 30 of the said Act empowers the Central Government to make rules even as regards the conditions as to the admission of members of the stock exchange concerned. Accordingly, r. 8 of the Securities Contracts (Regulation) Act, 1957, provides for qualification of membership of a recognised stock exchange. The petitioner stock exchange is a recognised stock exchange having a set of its rules, bye-laws and regulations duly approved by the Government of India under the said Act. Both the sides have referred to these rules, bye-laws and regulations, copies of which are placed on the record of this petition. 8. The rules of the petitioner stock exchange, inter alia, provide for membership and nomination in rr. 5 to 16; election of new members in rr. 17 to 35; membership security in rr. 36 to 46, termination of membership in rr. 47 to 52, and, default and readmission to membership in rr. 53 to 66. 9. The source of power of association to demarcate the nature of the rights and privileges of its members, is the contract on the basis of which they become members. An individual possessing the prescribed qualifications and desiring to be a member of the petitioner stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is described therein as a "personal and non-transferable" right. This right of nomination cannot be exercised by an expelled member or a member who has ceased to be such member under the Rules, as provided by r. 8. Under r. 9, on death or default of a member, his right of nomination ceases and vests in the Stock Exchange. A member with less than seven years' standing will have no right to nominate a person for admission in his place except his own son who is eligible, that too with the sanction of the board. However, once a member completes seven years' standing as a member, he is under r. 11(a) given an important right to nominate any eligible person in his place when he desires to resign. This right to nominate a person in his place is re-enforced by r. 12, which empowers him to make a fresh nomination when his nominee is rejected by the governing board. The nomination form is prescribed in Appendix "B" under r. 13, by which the member nominates the eligible person to be named therein as his successor and under which he tenders the resignation of his membership in his favour. This right to nominate the successor on resignation by the member is, however, not an absolute right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In cl. (vi), which is relevant, it is provided that "in any other event the governing board shall, subject to the rules of the exchange relating to the qualifications of candidates, have an absolute discretion to make the nomination in favour of any person it may think fit". Thus, though the right to nomination of a deceased member vests in the stock exchange under r. 9, it can be exercised by his heirs mentioned in Appendix "C" under r. 11(b) with the sanction of the board and if there be no recommendation by such heirs, the right to nominate which has vested in the stock exchange can be exercised by the governing board in its absolute discretion subject to the rules of the exchange relating to qualifications. Thus, the right of nomination of a deceased member vesting in the stock exchange is by r. 11(b), allowed to be exercised by the heirs of such member with the board's sanction and in absence of the heirs availing of it, by the board itself in its absolute discretion. When this event empowering the board to exercise the right to nomination of a deceased member occurs as per cl. (vi) of Appendix "C", there would remain no right of the heirs to nominate with board's consent a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nomic thing. Economic advantage to the person entitled to this "thing" i.e., the right to nominate a successor to membership for a price is the object of the right. This would be a "thing" in economic conception just as there are physical things. This is because there is an element of wealth in the right. The economic view has prevailed in the legal science for recognising intangible rights as proprietory rights. The test would be, is there a legally guaranteeable value? The right to nomination to whatever extent granted under the rules of the petitioner stock exchange, clearly answers this test and would in our view be a property right since it has economic value. 15. Membership of stock exchange also called "seats", are bought and sold on the basis of the to nomination which brings in the successor member in place of the member who sells his 'seat'. In the New York Stock Exchange "memberships are transferable with the approval of the exchange, and a member wishing to retire, may sell his privilege of membership to a purchaser who must, however, be approved for membership by the board of governors before the transfer may become effective. The character and previous conduct of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r r. 11(b) starts operating on the default of the heirs in making nomination, as per that provision r/w cls. (i) to (v) of Appendix "C" to the rules. The attachment of membership card, therefore, in substance was attachment of the aforesaid property right to nominate as recognised by the rules of the stock exchange. The words "any property" under s. 281B of the Act are in our opinion, words of widest amplitude and would include such property also. 18. The contention that the right of membership being inalienable under r. 6 and the right of nomination being non-transferable under r. 7, even if any property element is traced in the right it cannot be attached, is based on the ground that a property which cannot be sold, cannot be attached. It was submitted that under r. 10 of Sch. II to the IT Act relating to procedure for recovery of tax, all such property, as is by the CPC exempt from attachment and sale in execution of a decree of a Civil Court, shall be exempt from attachment and sale under Sch. II. From the proviso to s. 60(1) of the CPC which enumerates the items which will not be liable to attachment or sale, no exception was shown to us in which the property of the nature i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was referred to by the petitioner's counsel during his arguments and it was pointed out that the deceased was treated as a "deemed defaulter" and his membership rights were resolved to be disposed of by inviting offers for which the minimum floor price of Rs. 25 lakhs was fixed. Pursuant to this resolution, the petitioner issued a public notice on 16th Feb., 1994, in "Sandesh" inviting the claimants to put up their claims before the defaulter committee. It was submitted that since the member was declared as a "deemed defaulter" on 12th Feb., 1994, under rr. 9 and 53, his right of nomination and membership vested in the exchange. Rules 53 to 63A deal with default and readmission to membership. Under bye -law 316 of the stock exchange, a member is to be declared a defaulter by the board or the president, if he fails to fulfil his obligations as mentioned in that bye-law. Under bye-law 325, the defaulters' committee is required to make a strict enquiry into the dealings of the defaulter and report to the board. A defaulter can apply for re -admission under r. 58 and can be readmitted under r. 62 on conditions mentioned therein. A defaulter shall not be required to obtain a nomination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e paid up before the nomination could be approved. This and this alone was the right of the heirs of the deceased member, which could be attached under the impugned provisional attachment order while attaching the membership card of the deceased member. The impugned attachment order cannot, therefore, be said to have been made without jurisdiction. 21. In the above view of the matter, the decisions on which reliance is placed on behalf of the petitioner cannot assist the petitioner. It will be noted that the decision of the Privy Council in Official Assignee vs. Shroff (supra) was rendered in the context of a defaulting member. The defaulting member lost all interest both in the property of the Association and in his card and in that context, the Privy Council held that there was no interest reserved in the defaulter's card except to members of the Association who had suffered by his lapse or to the Association itself. In the present case, as noted above, there was no scope for declaring the deceased member as a defaulter and the heirs of the deceased member came into picture by virtue of the provisions of r. 11(b) r/w Appendix "C", as regards the right to nominate which interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of votes of the governing board in the election by ballot, failed on the ground that the decision of the governing board arrived at bona fide for not granting membership to the petitioner did not violate fundamental right guaranteed by Art. 19(1)(g) of the Constitution. Much reliance was placed on the observations made by the Court in para 10 of the judgment in which, while referring to the rules similar to those of the petitioner stock exchange relating to its membership, it was observed that the membership under those rules was not a transferable right and that there was no property in membership. It is obvious that while referring to the provisions relating to membership in para 10, the Hon'ble Court only indicated that transfer inter vivos was not permissible and, therefore, there was no property which could be transferred inter vivos in that membership. In fact, in para 14 of the judgment in the context of the governing board's power, it was observed that if a decision is not bona fide or is based on ill-informed prejudice, it can be challenged as a mala fide exercise of discretion. There was no question involved in that case about the power of the Revenue to attach the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... June, 1995, a copy of which is on record. In that statement made under s. 226(3)(vi) of the said Act, it is stated that the sum demanded or any part thereof was not due by the exchange to Rajesh A. Shah or his legal heir Smt. Dipti R. Shah and that the stock exchange, Ahmedabad, does not hold any monies for or on account of the said party or his heirs. It will be noted that in the letter dt. 5th Oct., 1995, while justifiably getting upset over the stock exchange overreaching the Department by disposing of the property which was under provisional attachment, the Asstt. CIT overlooked the significance of the filing of a statement on oath under s. 226(3)(vi) of the Act. It will be noted from the provisions of cl. (vi) of sub-s. (3) of s. 226 of the said Act that where such statement on oath is filed objecting against the notice issued under s. 226(3) on the ground that the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for or on account of the assessee, then nothing contained in sub-s. (3) of s. 226 shall be deemed to require such person to pay any such sum or part thereof, as the case may be, but if it is discovered that such statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be deemed to be an assessee -in-default in respect of the amount specified in the notice and further proceedings may be taken against him for the realisation of the amount as if it were an arrear of tax due from him, in the manner provided in s. 222 to 225, and the notice shall have the same effect as an attachment of a debt by the TRO in exercise of his powers under s. 222. Therefore, since the statement on oath has been filed by the petitioner objecting against the notice, no such drastic action can be taken against the petitioner unless an adequate enquiry is made by the concerned authority and an appropriate decision reached in accordance with law. The notice under s. 226(3) has, in our view, been issued in lawful exercise of the powers of the concerned authority and cannot be said to have been issued without jurisdiction as sought to be contended on behalf of the petitioner. It will be open for the petitioner to take its objections against the said notice and the concerned authority will make the necessary enquiry following the principles of natural justice and take its own decision. The challenge against the notice at this stage would, therefore, be premature so far as t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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