Thestockexchange,Ahmedabad v. Asstt. Commissioner Of Income Tax, Ahmedabad

THESTOCKEXCHANGE,AHMEDABAD v. ASSTT. COMMISSIONER OF INCOME TAX, AHMEDABAD MARCH2, 2001 [S.P. BHARUCHA, N. SANTOSH HEGDE AND Y.K. SABHARWAL, JJ.] Stock Exchange Rules, 1957 (Ahmedabad)-Rules 5, 6, 7, 9, 11, 15, 16, 50, 51, 53, 54, Appendix C: Stock Exchange-Membership-Nature of-Held, right of membership is c merely a personal privilege granted to a member-Membership non-transfer-able and incapable of alienation by the member or his legal representatives and heirs except to the limited extent as provided in rules on fulfilment of conditions provided therein-Death or default of a member-Consequence of-Held, the member's right of nomination ceases and it vests in the Exchange absolutely free of all rights, claims or interests of such member or any person claiming D through such member. Death of a member-Provisional attachment order by Income Tax De-partment in respect of Stock Exchange Card in the name of deceased and margin money and security deposits kept by him with the Stock Exchange-A garnishee notice for an amount due also issued to the Stock Exchange-Legality of-Heirs and legal representatives of the deceased member having already informed the Stock Exchange that they were unable to meet his liabili-ties-Membership right having vested in Stock Exchange, it was disposed of in exercise of the right of nomination-Held, the membership right in question was not the property of the assessee and therefore could not be attached-Fu11her, no garnishee notice could be issued as no amount on account of the deceased was due from or held by the Stock Exchange-Income Tax Act, 1961-Sections 281B, 226(3)-Securities Contracts (Regulation) Act, 1956. Deceased was a member of a Stock Exchange. Ou his death, his heirs and legal representatives informed the Stock Exchange that they were unable to meet the liabilities of the deceased. Pursuant thereto, the Gov-erning Board of the Stock Exchange passed a resolution declaring the deceased as a deemed defaulter. It was further resolved that his member· ship rights vested in Stock Exchange he disposed of by inviting offers. The same were disposed of in due course. In the meanwhile, Assistant Commissioner of Income Tax issued a provisional attachment order under Section 281B of the Income Tax Act, 1961 in respect of Stock Exchange Card in the name of the deceased and margin money and security deposit• kept by him with the Stock Exchange. Later on, a garnishee notice under Section 226(3) of the Income Tax Act, 1961 was also issued to the Stock Exchange. The aforesaid orders of provisional attachment and the garnishee notice were challenged unsuccessfully by the Stock Exchange in a writ petition before High Court. Hence the present appeal. Allowing the appeal, the Court HELD : 1.1. The membership right in question was not the property of the assessee and, therefore, it could not he attached under Section 281B of the Income Tax Act. No amount on account of the deceased was due from or held by the Stock Exchange and, therefore, Section 226(3) could notbeinvoked.[262-C-D] 1.2. On a plain and combined reading of the Stock Exchange (Regu-lation) Rules, it is clear that right of membership is merely a personal privilege granted to a member, it is non-transferable and incapable of alienation by the member or his legal representatives and heirs except to the limited extent as provided in the rules on fulfilment of the conditions provided therein. The nomination wherever provided for is also not auto-matic. It is hedged by Rules. On right of nomination vesting in the Stock Exchange under the Rules, that right belongs to the Stock Exchange abso-lutely. [261-B-D] Official Assignee of Bombay v. K.R. P. Shroff& Ors., AIR (1932) PC 186 and Vinay Bubna v. Stock Exchange, Mumbai & Ors., [1999] 6 SCC 215, referred to. 1998. ASSTT.COMMISSIONER आयकर, अहमदाबाद 255 256 1961 1961 1998 . 1.3, Rule 9 of the Securities Contracts" (Regulations) Act, 1956 stipu-lates that both in case of death or default of a member, his right of nomination shall cease and vest in ~he Exchange. The heirs and legal representatives of the deceased member had informed the Stock Exchange that they were unable to meet the liabilities of the deceased and the appro-priate decision in that behalf may be taken by the Stock Exchange. Under these circumstances the Governing Board exercised the right of nomina-tion in respect of membership of the deceased which had vested in the Stock Exchange. [261-E; 262-A-C] CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1727 (NT) of 1998. From the Judgment and Order dated 17.1.1998 in SCA 9089/95 of the High Comt of Gujarat at Ahmedabad. WITH Civil Appeal No. 7571 of 1999. K.N. Raval, Additional Solicitor General, Ashok H. Desai, Ramesh P. Bhatt, Dr. V. Gauri Shankar, Chirag M. Shroff, M.N. Shrof, Ranbir Chandra, Ms. Neera Gupta, B.V.B. Das, for Ms. Sushma Suri for the appearing parties. The Judgment of the Court was delivered by Y.K. SABHARWAL, ,J. The Stock Exchange, Ahmedabad, the appel-!ant, admitted Rajesh Shah as its member on 19th Februaty, 1988. He <lied on 7th February, 1994. On 12th February, 1994, heirs and legal representatives of Rajesh Shah wrote to the Stock Exchange tliat they are unable to meet the liabilities of the deceased. The Governing Board of the Stock Exchange is said to have passed a resolution dated 12th February, 1994 declaring Rajesh Shah, the deceased member, as a deemed defaulter and further resolving tliat his 1nembership rights vested in Stock Exchange be disposed of by inviting offers within a minimum floor price of Rs. 25 lakhs. A provisional attachment order dated 15th February, 1994 under Section 281 B of the Income Tax Act, 1961 was issued by tl1e Assistant Cnmmissioner of Income Tax (Respondeni) in respect of Stock Exchange card in the name of Rajesh Shah and margin money and security deposits kept by him with the Stock Exchange. The Stock Exchange on 16th February, 1994 issued advertisement inviting claims from the member creditors and constituents of Rajesh Shah to lodge their claims with it within 30 days of the advertisement and also invited offers for purchase of membership with a minimum floor price of Rs. 25 lakhs. In respect of the order of provisional attachment, the stand of Stock Exchange is that under its Rules, Bye-laws and Regulations on the death or default of a member, member's right of nomination ceases and it vests in the exchange and belongs absolutely to the exchange free of all rights, claims or interests of such member or any person claiming 258 SUPREME COURT REPORTS [2001] 2 S.C.R. through such member and the Governing Board is entitled to deal with or dispose of such right of membership as it may think fit. On 5th December, 1994, tl1e Governing Board of the Stock Exchange passed resolution disposing of membership iight of deceased Rajesh Shah vested in the Stock Exchange in favour of UT! Security Ltd. for Rs. 27 lakhs. A garnishee notice dated 14th June, 1995 under Section 226(3) of the Income Tax Act, 1961 in the. sum of Rs. 12,24,887 was also issued to the Executive Director, Stock Exchange by the respondent. In reply thereto, the Stock Exchange reiterated the stand that no amount was due from it to Rajesh Shall or his legal heirs and the exchange does not hold auy m0ney for and on behalf of Rajesh Shah or his legal heirs. The plea of the Stock Exchange was not acceptable to the respondent. Under the aforesaid circumstances, the appellant-Stock Exchange filed a writ petition in the High Court challenging the orders of provisional attach-ment and the garnishee notice. The writ petition has been dismissed by tlie High Court which judgment is under challenge in this appeal. 1998. 259 1998 . Under Section 281 B, provisional attachment for the purpose of protect-ing the Interests of the revenue can be ordered in respect of any property belonging to the assessee. The legal representatives of the deceased shall, for the purposes of the Income Tax Act, be deemed to be an assessee [Section 159(3)]. The question for dete1mination is as to the nature of the rights of the deceased or his legal representatives in the Stock Exchange Card. On the facts of the case, whether the said card was the property belonging to the assessee and after his denlise devolved upon his legal representatives and heirs or it was a personal permission in favour of the deceased and right of nomi· nation of the legal representative and heirs after his deatl1 has ceased and the said right ha" vested in the Exchange, is the point in issue. The High Court has held that there was a property element in the right of membership of Stock Exchange and, therefore, the same could be attached and, thus, writ petition was dismissed. In order to decide the point, it is necessary to examine the Rules relating to the membership of the Stock Exchange. The appellant-Stock Exchange is a recognised Stock Exchange under Securities Contracts (Regulations) Act, 1956 and has been established with the object, inter alia, to support and protect, in the public interest, the character and status of brokers and dealers and to further their interests and that of the public interested in securities and to maintain high standards of commercial honour and integrity. Rule 5 pro- 259 STOCK EXCHANGE v. ASSTT. COMMR. OF INCOME TAX [YK. SABHARWAL, !.] vides that the membership shall constitute a personal pennission from the Exchange to exercise the rights and privileges attached thereto subject to the Rules, Bye-Laws and Regulations. Rule 6 provides that right of membership is inalienable. Subject to the provisions of the Rules, under Rule 7 the right of nomination has been given to a member which right is personal and non-transferable. Rule 11 provides that a member of not less than 7 years' standing who desires to resign may nominate a person eligible under the Rules for admission in his place. Under proviso to Rule ll(a), a member of less than 7 years' standing who desires to resign may with the sanction of the Gov-erning Board nominate his own son eligible nnder the Rules for admission to membership of the Exchange as a candidate for admission in his plac·e. Under Rule 11 (b ), however, the legal representatives of a deceased member or his heirs or the persons mentioned in Appendix C to the Rules may with the sanction of the Governing Board nominate any person eligible under tl1e Rules for admission to membership of the exchange as a candidate for ad-mission in place of the deceased member. In considering such nomination the Governing Board shall be guided so far as practicable by the instruct.ions set out in Appendix C. Rajesh Shal1 before his death was a member of less than 7 years' standing. 259 260 Rule 9 deals with right of nomination of deceased or defaulter member. It provides that "On the death or default of a member his right of nomination shall cease and vest in the Exchange." Rule 10 provides that "When a right of membership is forfeited to or vests in the Exchange under any Rule, Bye-Law or Regulation or 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 tlu·ough such member and the Governing Board shall be entitled to deal with or dispose of such right of membership as it may think fit." Rule 15 stipulates that the Governing Board shall not approve a nomination unless the nominating member or in the case of a deceased member, his legal representatives or heirs or persons mentioned in Appendix C or any other person on his behalf shall have paid and satisfied in full the dues of the Exchange and liabilities relating to contracts. Rule 16 comes into play when tl1e Governing Board exercises right of nomination in respect of a membership vesting in the Exchange. It provides that in such a case the consideration received therefor shall be applied to the following purposes and in the following order of priority namely : "Dues of Exchange and clearing House : 260 SUPREME COURT REPORTS (2001) 2 S.C.R. A (i) first - tl1e payment of such subscriptions. debts, fines, fees, charges and other monies as shall have been detetmined by the Governing Board to be due to the Exchange or to tl1e Clearing House by the former member whose right of membership vests in the Exchange; B Liabilities relating to Contracts (ii) second - the payment of such debts, liabilities, obligations and claims arising out of any contracts made by such fonner mem-ber subject to the Rules, Bye-laws and Regulations of the Exchange as shall have been admitted by the Governing Board: c Provided that if tl1e 3lllount available be insufficient to pay and satisfy alf such debts, liabilities, obligations and claims in full they shall be paid and satisfied pro rata, and Surplus (iii) tl:tird - tl1e payment of the surplus if any lo the funds of the Exchange: Provided that the Exchange in general meeting may all its absolute discretion direct that such surplus be disposed of or applied in such other maimer as it may deem fit." Rule 50 provides that when a member dies all subscriptions, debts, fines, E fees, charges and other monies as shall have been determined by the Gov-erning Board to be due by him to the Exchange or to the Clearing House and all debts, liabilities, obligations and claims arising out of any contracts made by him subject to Rules, Bye-laws and Regulations of the Exchange as shall have been admitted by the Governing Board shall be paid and satisfied F in full before his legal representatives or heirs or the persons mentioned in Appendix C are allowed to exercise the right of nomination. Rule 51 provides that if the legal representatives of a deceased 1nember or his heirs or the persons mentioned in Appendix C or any other person on his behalf do not or are unable to pay and satisfy his dues, debts, liabilities, obligations and claims as provided in the Rules, Bye-laws and Regulations of the Exchange, G the Governing Board shall exercise the right of nomination in respect of such membersl:tip and the consideration received therefore shall be applied in the marmer provided in the Rules. Rule 53 stipulates that a member who is declared a defaulter shall at once cease to be a member of the Exchange and as such cease to enjoy any of the rights and privileges of membership but the rights H of his creditor members against him shall remain unimpaired and under Ruic