STOCK EXCHANGE MUMBAI Vs. V S KANDALGAONKAR

JUDGEMENT

(1.) BY this Petition, Stock Exchange Mumbai seeks to challenge Notice under Section 226(3) of the Income -tax Act dated 5th October 1995 as also a prohibitory Order dated 10th May, 1996 under Section 222 of the Income -tax Act served on the petitioner whereby the Stock Exchange is restrained from making any payment of the debt due to Suresh D. Shah, Member - Broker on the Bombay Stock Exchange [BSE] on the ground that the said Broker had failed to pay arrears of income -tax amounting to Rs. 37,48,651.00. In other words, Bombay Stock Exchange is the Garnishee who is prohibited from making payment of the debt to the assessee in default - Suresh D. Shah. Under the said Prohibitory Order dated 10th May, 1996, Stock Exchange Membership Card allotted to the broker for doing business and his accounts in the Books of BSE were attached/frozen. Being aggrieved by the aforestated two Orders, the Stock Exchange has filed this Petition. Facts

(2.) PETITIONER is a Stock Exchange recognized by the Central Government under Securities Contracts (Regulation) Act, 1956 and constituted with the main object of protecting, in public interest the status of brokers, dealers and investors and in order to assist, regulate and control, in public interest, dealings in securities in order to ensure fair dealing, integrity and to protect equitable principles of trade and business. Respondent No. 1 is the Assessing Officer having jurisdiction over income -tax assessment of the Broker who was a Member of the Stock Exchange upto 29th June 1994, when he was declared a 'Defaulter' under the Rules. Suresh D. Shah was declared insolvent on 4th November 1997. Respondent No. 5 is the Official Assignee of the estate and effects of the Broker. Respondent No. 2 is the TRO who has issued the above -mentioned Prohibitory Order dated 10th May 1996, which is impugned in this petition. The prohibitory Order has been issued pursuant to Certificates forward to the Broker under Section 222 of the Income -tax Act. The said Broker failed to pay arrears of income -tax due from him under Certificate dated 29th March 1996, amounting to Rs. 37,48,651.00. Since the Broker had failed to meet his obligations and discharge his liabilities, the Governing Board of the Stock Exchange declared Suresh Shah a defaulter at a meeting held on 29th June 1994. On 28th December 1994, Suresh Shah made an application for re -admission as a Member. Along with his application, he forwarded to the Stock Exchange, a Demand Draft for Rs. 30 lakhs towards his dues to the Stock Exchange, dues to the Clearing House, dues to his clients and dues in respect of Arbitration allowance. The Petition was filed around 24th December 1996. Apart from the Demand Draft of Rs. 30 lakhs, on the date when Suresh Shah was declared a Defaulter, a sum of Rs. 1,41,241.00 was laying in the Petitioner's Defaulters' Committee Account. It may be noted that investigations were carried out by the Defaulters' Committee of the Stock Exchange, both in respect of the conduct of the broker and his application for re -admission and during the interregnum, out of Rs. 30 lakhs, Rs. 9,93,594.00 were appropriated towards Broker's liability for Vallan and general charges and a sum of Rs. 18,65,165.00 was paid to Members on account of arbitration allowance obtained by them against the broker. On the date of the filing of the Petition, therefore, Rs. 1,41,241.00 remained to be appropriated against dues on account of arbitration awards obtained by Members, claim of Members pending in arbitration, arbitration awards obtained by the clients of the said broker and claims of the clients pending in arbitration. In short, as against Rs. 1,41,241.00 and securities valued at Rs. 95,435.00 lying with the Stock Exchange, arbitration awards to the extent of Rs. 67,93,000.00 remained to be discharged. This was apart from claims pending in arbitration, amounting to Rs. 11,41,575.00 as on 19th December 1996. By letter dated 5th October 1995, the Assessing Officer informed the Stock Exchange that since the Broker was declared a Defaulter by the Stock Exchange on 29th June 1994, his Membership Card may be auctioned. By the said letter, the Stock Exchange was informed that the said Broker was in arrears of income -tax to the tune of Rs. 25,43,551.00 and, therefore, it was necessary to apportion a part of the amount realised from the auction for the purposes of meeting outstanding income -tax dues. Accordingly, the Stock Exchange was called upon by the Assessing Officer to issue a cheque in favour of RBI in respect of outstanding demands. By the said letter, the Assessing Officer further stated that he would be issuing Notice under Section 226(3) of the Income -tax Act on receiving intimation from the Stock Exchange regarding auctioning of the Membership Card. By letter dated 11th October 1995, a reply was given by the Stock Exchange to the Assessing Officer, inter alia, stating that under Rules 5 and 6 of the Bombay Stock Exchange Rules, the Membership right was a personal privilege and was, therefore, inalienable. That, under Rule 9 on death or default of a Member, the right of nomination seized and vested in the Exchange and consequently, the Membership right of Suresh Shah had vested with the Exchange when he was declared a Defaulter on 29th June 1994. Therefore, the Stock Exchange regretted its inability to issue its cheque in favour of RBI towards the outstanding arrears of tax, amounting to Rs. 25,43,651.00 for the years ending 31st March 1990 and 31st March 1991 on the ground that the Membership right of the Defaulter was not attachable. On 29th March 1996, the Assessing Officer forwarded a Certificate under Section 222 of the Income -tax Act to the TRO and pursuant to that Certificate, the TRO (respondent No. 2) issued a Prohibitory Order under Rule 26(1) of Schedule -II to the Income -tax Act. The Prohibitory Order was issued on 10th May 1996, which is the subject matter of challenge in this Writ Petition. On 11th February 1997, the Governing Body of Bombay Stock Exchange rejected the application of Suresh Shah for readmission. Basically, in this Petition, therefore, the Stock Exchange has challenged the Prohibitory Order dated 10th May 1996 on the ground that the Membership Card was not attachable.

(3.) MR . Dastur, learned Senior Counsel appearing on behalf of Bombay Stock Exchange contended that the Membership Card was a privilege conferred on the Member by the Stock Exchange. That the Broker was declared a Defaulter on 29th June 1994. That, on his being declared a Defaulter, the Membership Card vested in the Stock Exchange and, therefore, the realised value of that card, on auction, also accrued to the Stock Exchange and it did not belong to the Broker. Mr. Dastur contended that the letter of the Assessing Officer, dated 5th October 1995, was only an intimation. It was not a Notice under Section 226(3) to the Garnishee and, therefore, on 5th October 1995, there was no attachment. It was only a proposal. That, the Card was auctioned by the Stock Exchange for Rs. 1,34,26,482.50 and after liquidating the debts of the Broker to the Stock Exchange, to the Clearing House etc. the surplus amount lying with the Stock Exchange, as of today, out of the sale proceeds of the nomination right of the Defaulter -Member, stood at Rs. 47,85,199.93, which has been kept aside as per the Interim Order passed by this Court. Mr. Dastur further submitted that under the Bye -laws, every Member was required to pay 5 per cent to Investors protection Fund and also to Brokers' Contingency Fund. Therefore, after adjusting further amounts to Investors' Protection Fund and Brokers' Contingency Fund as indicated above, the balance surplus payable to the Broker/Official Assignee was Rs. 34,06,680.00. He contended that this balance surplus lying with the Exchange out of the sale proceeds of the nomination rights of the Defaulter -Member became payable to the Broker/Official Assignee only by virtue of a General Body Resolution of the Stock Exchange dated 13th October 1999. That, in the absence of such a Resolution, the said amount of Rs. 34,06,680.00 would not have become payable to the Broker/Official Assignee because the entire sale proceeds of the nomination rights vested in the Defaulters' Committee under the Rules and Bye -laws of the Stock Exchange on 29th June 1994, when the broker was declared a Defaulter. That, the Defaulters' Committee was even entitled in future to distribute such Balance Surplus in any other manner if the Rules and the Bye -laws so provide. However, Mr. Dastur contended that in the facts and circumstances of this case, as of today, the General Body Resolution dated 13th October 1999 is in force and as per that Resolution, the surplus amount lying with the Exchange out of the sale proceeds of the nomination right is required to be paid over to the Broker and, therefore, if this Court directs, the Stock Exchange has no objection to handing over the said amount to the Income -tax Department. However, Mr. Dastur reiterated the Caveat that the entire surplus amount belonged to the Stock Exchange and the Balance Surplus is being offered to the Department/Official Assignee only in view of the Resolution dated 13th October 1999 and that too, after appropriating/adjusting/setting -off amounts payable by the Broker to the Stock Exchange, Clearing House and other Credit -Members/clients in whose favour Arbitration Awards have been given. Mr. Dastur contended that the Membership Card was not a debt under Rule 26(1)(a). That, the Card was not the property of the Broker. Therefore, Rule 26(1)(a) did not apply to the Membership Card. He further contended that finding this case, there was only an intention to issue Notice under Section 226(3) of the Act. That the Notice under Section 226(3) was never issued and therefore, the Prohibitory Order dated 10th May 1996 issued by the TRO under Section 220(2) was bad in law. He further contended that the impugned Prohibitory Order dated 10th May 1996 was also bad in law because the TRO has not specified the Account of the Defaulter in the Books of the Bombay Stock Exchange in the prohibitory Order. It is contended that Bombay Stock Exchange was required to know as to what the attachment related to. That Rule 26 of Schedule II to the Income -tax Act refers to the debt of the Defaulter and, therefore, the TRO was required to give particulars of the debt sought to be attached. Otherwise, the attachment was bad in law. That the Prohibitory Order dated 10th May 1996 also prevented Suresh Shah from receiving the debt allegedly due from the Stock Exchange and, therefore, the TRO was required to specifics the particulars of the debt which the Broker was not entitled to recover and so also, the TRO was required to tell the Stock Exchange that it ought not to pay its debt to the Broker. That, without furnishing the particulars of the Account, the Prohibitory Order was bad in law. That, the Prohibitory Order was vague. That, Rule 26 of Schedule -II to the Income -tax Act required the TRO to specify the Debt. Mr. Dastur further contended that Section 226(3) was different from Rule 26 of Schedule -II. That Section 226(3) contemplates issuance of Garnishee Notice, whereas Rule 26 refers to attachment of debt and, therefore, in the case of Section 226(3) the particulars of debt may not be relevant, but in the context of Rule 26, particulars of debt owned by the Stock Exchange to the Broker needs to be specified and since it has not been specified, the Prohibitory Order is bad in law. According to the learned counsel, in this case Section 226(3) has not been invoked. Mr. Dastur further contended that Section 226(3) is one of the modes of recovery just as attachment under Rule 26 is also a mode of recovery. He contended that Rule 26 of Schedule -II is pursuant to the power of the TRO under Section 222(1)(a). He, therefore, contended that in the case of Section 226(3), the particulars of the debt need not be specified, but when it comes to attachment of movables under Rule 26, the debt needs to be particularized and in this case, debt has not been particularized and, therefore, the Prohibitory Order was invalid and bad in law. He further contended that debt was not required to be specified for the purposes of Section 226(3) because that section only refers to money due and payable by the Garnishee to the assessee, whereas Rule 26 refers to the debt which is attached as a property and, therefore, that property needs to be particularized which, in this case, has not been done and, therefore the Prohibitory Order is bad in law because without identification of the debt, the Prohibitory Order under Rule 26 is bad in law. It was contended that the TRO in this case should have addressed a letter to the Stock Exchange enquiring as to whether that Broker was maintaining any Accounts in the Books of the Stock Exchange. That, no such letter was addressed and, therefore, the particulars of accounts have not been collected from the Stock Exchange. He contended that Rule 26 requires particulars of the Account to be mentioned and in the absence of such particulars the Prohibitory order was bad in law. Mr. Dastur relied upon the judgment of the Stock Exchange in the case of Stock Exchange Ahmedabad v. Asstt. CIT : [2001]248ITR209(SC) in support of his contention that the Membership Card was a privilege conferred on the Broker; that the Membership Card was not the property of the Broker and when the Broker was declared a Defaulter, the right of nomination stood vested in the Stock Exchange and, therefore, even the Balance Surplus out of the sale proceeds of the nomination rights of the Defaulter -Member should ordinarily vest in the Stock Exchange, but which is being offered to the Broker only in terms of the Resolution dated 13th October 1999. He contended that the surplus amount of consideration of the Membership rights vested in the Exchange. That when such Membership rights were auctioned, the surplus consideration after settlement of all liabilities of the Defaulter to the Stock Exchange Clearing House, Creditor -Members as also admitted claims of the clients is credited to the funds of the Exchange. However, the Exchange, in the General Body Meeting at its absolute discretion, may direct that the surplus be disposed of or applied in such other manner as it may deem fit in terms of Rule 16 of the Stock Exchange Rules. That the Governing Body, in its meeting held on 27th August 1999 had considered the matter and it recommended to the General Body to pass an appropriate Resolution to give 90 per cent of the surplus consideration realised from the auction of the Membership right to the defaulter as ex -gratia payment, after appropriating 5 per cent of the surplus towards Customers Protection Fund (Now known as Investors' Protection Fund) and 5 per cent of the surplus amount towards Brokers' Contingency Fund. Mr. Dastur, therefore, submitted that the Balance Surplus (ex -gratia payment) was required to be handed over to the Broker and in the present case the Stock Exchange has no objection to hand over the said amount either to the Official Assignee or to the Income -tax Department as the Court may direct. Mr. Dastur contended that the Stock Exchange has no objection to pay over to the Department, 90 per cent of the surplus consideration realised from the auction after appropriating 5 per cent of the surplus towards Customer's Protection Fund and 5% of the surplus towards Brokers' Contingency Fund as long as the right of the Bombay Stock Exchange to fix the priority is protected. He contended that in future, the General Body can even pass a Resolution that no part of the surplus should be paid over to the Defaulter because even that surplus belongs to the Stock Exchange. However, in this case, in view of the Resolution of October 1999, the surplus became payable to the Broker as an exception to the general rule. Mr. Dastur further clarified that 90 per cent of the surplus consideration realized from the auction of the Membership right would become payable to the Defaulting Broker only in the event of there being a surplus. That, in cases of deficits, no amount would become payable to the Broker -Member and in such cases, there would be no question of handing over the balance to the Department. He, therefore, contended that even the Resolution of October 1999 would apply only in cases of surplus on account of sale of Membership rights. He contended that as far as distribution of the sale proceeds of the nomination rights of the Defaulter is concerned, the same is required to be applied strictly as per the priority in Rule 16. At this stage, it may be mentioned, once again, that in this case, we are concerned with sale proceeds of the nomination rights of the Defaulter and credit balances in the above -mentioned Accounts of the Broker in the Books of Stock Exchange. Therefore, these two are distinct and different items of distribution. As stated above, the Stock Exchange holds deposits of the Brokers under various heads. Therefore the question before the Court is: whether such deposits can be attached under Rule 26 of Schedule -II to the Act, apart from the sale proceeds which the Exchange fetches on auctioning of the nomination rights of the Defaulter. In support of his arguments, Mr. Dastur has relied upon numerous Rules and Bye -laws of the Stock Exchange, which we will discuss at the appropriate stage.