Civil Appeal No. 4354 of 2003. Case: The Stock Exchange Vs V.S. Kandalgaonkar. Supreme Court (India)
| Case Number | Civil Appeal No. 4354 of 2003 |
| Judges | R.M. Lodha, C.J.I., Kurian Joseph and Rohinton Fali Nariman, JJ. |
| Issue | Income Tax Act - Sections 125, 226, 226(3), 281B, 433, 529; Companies Act, 1956; Saurashtra Act - Section 13(1); Securities Contracts (Regulation) Act, 1956 - Sections 3(2), 7A, 8, 9, 14(1), 30, 30(3); Arbitration Act, 1940;; Provincial Insolvency Act, 1920 - Section 2; Securitisation and Reconstruction of Financial Assets and Enforcement of ... |
| Judgement Date | September 25, 2014 |
| Court | Supreme Court (India) |
Judgment:
Rohinton Fali Nariman, J.
1. The present matter arises as the result of a member of a Stock Exchange being declared a defaulter. The Income Tax Department claims that it has priority over all debts owed by the defaulter member, whereas the Stock Exchange, Bombay claims otherwise.
2. The facts necessary to appreciate the controversy are as follows:
By a notice dated 29th June 1994, the Stock Exchange, Bombay declared Shri Suresh Damji Shah as a defaulter with immediate effect as he had failed to meet his obligations and discharge his liabilities. By a notice dated 5th October 1995 issued Under Section 226(3) of the Income Tax Act, the Income Tax Department wrote to the Stock Exchange and told them that Shri Shah's membership card being liable to be auctioned, the amount realized at such auction should be paid towards Income Tax 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 membership right of the Exchange is a personal privilege and is inalienable. By a letter dated 27th December 1996, the Tax Department wrote back to the Bombay Stock Exchange refusing to recall its prohibitory order. Meanwhile, Shri Shah applied to be re-admitted to the Stock Exchange which application was rejected by the Stock Exchange on 13th February, 1997.
3. The Stock Exchange then filed a Writ Petition being Writ Petition No. 220 of 1997 dated 24th December 1996 in which the following reliefs were claimed:
(a) that this Hon'ble Court may be pleased to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction under Article 226 of the Constitution of India calling for the records in relation to the recovery proceedings initiated by the Respondents against Mr. Suresh D. Shah and after going through the same and examining the legality and validity thereof to quash and set aside the impugned notice dated 5th October, 1995 and the impugned order dated 10th May 1996, Impugned Notice/ letter dated 27th December 1996 being Exhibits "D", "F" and "H" hereto;
(b) that this Hon'ble Court may be pleased to issue a writ of mandamus or any other appropriate writ, order or direction under Article 226 of the Constitution of India ordering and directing the Respondents to withdraw forthwith the recovery proceedings initiated against in respect of the dues of Mr. Suresh D. Shah and ordering and directing the Respondents to withdraw forthwith the impugned notice dated 5th October, 1995 and the impugned notice dated 5th October, 1995 and the impugned prohibitory Order dated 10th May, 1996, Impugned Notice/letter dated 27th December 1996 being Exhibits "D", "F" and "H" hereto;
(c) that this Hon'ble Court be pleased to permit the Petitioner to exercise the right of nomination in respect of the membership right of Suresh D. Shah in favour of such person as the Petitioner may decide and to apply the consideration received therefore and also appropriate all other securities placed with the Petitioner by Suresh D. Shah and which have vested in the Petitioner in accordance with the Rules, Bye-laws and Regulations of the Petitioner;
4. The Writ Petition was finally heard and by a judgment dated 27th March 2003, most of the contentions of the Stock Exchange were rejected and the Writ Petition was dismissed.
5. 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 Assessee, 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 or is held) so much of the money as is sufficient to pay the amount due by the Assessee in respect of arrears or the whole of the money when it is equal to or less than that amount.
Under Sub-section (x), if the person to whom a notice is sent fails to make payment in pursuance thereof he shall be deemed to an Assessee in default. Rule 26 of Schedule II of the Income Tax Act then provides:
26. Debts and Shares, etc. - (1) In case of-
a) a debt not secured by a negotiable instrument,
b) a share in a corporation, or
c) other movable property not in the possession of the defaulter except property deposited in, or in the custody of, any court, the attachment shall be made by a written order prohibiting, -
(i) in the case of the debt - the creditor from recovering the debt and the debtor from making payment thereof until the further order of the tax recovery officer;
(ii) in the case of the share - the person in whose name the share maybe standing from transferring the same or receiving any dividend thereon;
(iii) in the case of the other movable property (except as aforesaid) - the person in possession of the same from giving it over to the defaulter.
(2) A copy of such order shall be affixed on some conspicuous part of the office of the tax recovery officer, and another copy shall be sent, in the case of the debt, to the debtor, in the case of the share, to proper officer of the corporation, and in the case of the other movable property (except as aforesaid), to the person in possession of the same.
(3) A debtor prohibited under Clause (i) of Sub-rule (1) may pay the amount of his debt to the tax recovery officer, and such payment shall discharge him as effectually as payment to the party entitled to receive the same.
Sections 8 and 9 of the Securities Regulation Act, 1956 deal with Rules, Regulations and Bye-Laws to be made in respect of Stock Exchanges. Sections 8 and 9 of the said Act read as follows:
8. Power of Central Government to direct rules to be made or to make rules-
(1) Where, after consultation with the governing bodies of stock exchanges generally or with the governing body of any stock exchange in particular, the Central Government is of opinion that it is necessary or expedient so to do, it may, by order in writing, together with a statement of the reasons therefore, direct recognised stock exchanges generally or any recognised 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 force, have effect, as if they had been made or amended by the recognised stock exchange or stock exchanges, as the case may be.
9. Power of recognised stock exchanges to make bye-laws.-
(1) Any recognised stock exchange may, subject to the previous approval of the Securities and Exchange Board of India, make bye-laws for the Regulation and control of contracts.
(2) In particular, and without prejudice to the generality of the foregoing power, such bye-laws may provide for-
(a) the opening and closing of markets and the Regulation of the hours of trade;
(b) a clearing house for the periodical settlement of contracts and differences there under, the delivery of and payment for securities, the passing on of delivery orders and the Regulation and maintenance of such...
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