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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4354 of 2003

The Stock Exchange, Bombay                       …….Appellant

Versus

V.S. Kandalgaonkar & Ors.                                              ..….Respondents

J U D G M E N T  

R.F.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  

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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 10 th 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  

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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  

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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 7 th 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   

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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 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.  

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(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  

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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  thereunder,  the  delivery  of  and  payment  for  securities, the passing on of delivery orders and the regulation  and maintenance of such clearing house;

(c)  the  submission  to  the  Securities  and  Exchange  Board  of  India  by  the  clearing  house  as  soon  as  may  be  after  each  periodical settlement of all or any of the following particulars as  the Securities and Exchange Board of India may, from time to  time, require, namely;—

(i) the total number of each category of security carried  over from one settlement period to another;

(ii)  the  total  number  of  each  category  of  security,  contracts  in  respect  of  which  have  been  squared  up  during the course of each settlement period;

(iii)  the  total  number  of  each  category  of  security  actually delivered at each clearing;

(d) the publication by the clearing house of all or any of the  particulars submitted to the Securities and Exchange Board  of India under clause (c) subject  to the directions,  if  any,  issued by the Securities and Exchange Board of India in this  behalf;

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(e) the regulation or prohibition of blank transfers;

(f) the number and classes of contracts in respect of which  settlements  shall  be made or  differences  paid through the  clearing house;

(g)  the regulation,  or  prohibition of  bundles or  carry-over  facilities;

(h) the fixing, altering or postponing of days for settlements;

(i)  the  determination  and  declaration  of  market  rates,  including the opening, closing, highest and lowest rates for  securities;

(j) the terms, conditions and incidents of contracts, including  the  prescription  of  margin  requirements,  if  any,  and  conditions  relating  thereto,  and  the  forms  of  contracts  in  writing;

(k) the regulation of the entering into, making, performance,  rescission and termination, of contracts, 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;

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(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  otherwise, and the exercise of powers in such emergencies,  including the power to fix maximum and minimum prices  for securities;

(t)  the  regulation  of  dealings  by  members  for  their  own  account;

(u)  the  separation  of  the  functions  of  the  jobbers  and  brokers;

(v)  the  limitations  on  the  volume  of  trade  done  by  any  individual member in exceptional circumstances;

(w) the obligation of members to supply such information or  explanation and to produce such documents relating to the  business as the governing body may require.

(3) The bye-laws made under this section may—

(a)  specify  the  bye-laws the  contravention of  which shall  make a contract entered into otherwise than in accordance  with the bye-laws void under sub-section (1) of section 14;

(b)  provide that  the contravention of  any of  the bye-laws  shall render the member concerned liable to one or more of  the following punishments, namely:—

(i) fine;

(ii) expulsion from membership;

(iii) suspension from membership for a specified period;

(iv) any other penalty of a like nature not involving the  payment of money.

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(4) Any bye-laws made under this section shall be subject to  such conditions in regard to previous publication as may be  prescribed,  and  when  approved  by  the  Securities  and  Exchange Board of India, shall be published in the Gazette  of India and also in the Official Gazette of the State in which  the  principal  office  of  the  recognised  stock  exchange  is  situate,  and  shall  have  effect  as  from  the  date  of  its  publication in the Gazette of India;

Provided that if the Securities and Exchange Board of India  is satisfied in any case that in the interest of the  trade or in  the public interest any bye-law should be made immediately,  it may, by order in writing specifying the reasons therefore,  dispense with the condition of previous publication.”

8. As a number of rules of the Stock Exchange have been referred to in  

the course of argument, we will set down those which are relevant for the  

purposes of the question to be decided.   

“Membership a Personal Privilege

5. The membership shall constitute a personal permission from  the  Exchange  to  exercise  the  rights  and  privileges  attached  thereto subject to the Rules, Bye-laws and Regulations of the  Exchange.

Right of Nomination

7. Subject to the provisions of these Rules a member shall have  the right of nomination which shall be personal and non- transferable.

Right 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.

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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 Exchange.

Liabilities relating to Contracts

ii. second-the  payment  of  such  debts,  liabilities,  obligations and claims arising out of any contracts made  by such former member subject to the Rules, Bye-laws  and  Regulations  of  the  Exchange  as  shall  have  been  admitted by the Governing Board: Provided that if  the amount available be insufficient to  pay and satisfy all such debts, liabilities, obligations and  claims in full they shall be paid and satisfied pro rata; and

Surplus

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iii. third-the payment of the surplus if any to the funds of  the Exchange: provided that the Exchange in general  meeting may at its absolute discretion direct that such  surplus be disposed of or applied in such other manner  as it may deem fit.

37.  Form of Security

The security  to  be furnished by a  member  shall  be provided  either by a deposit of cash or it may be provided in the form of a  Deposit Receipt of a Bank approved by the Governing Board or  in Securities approved by the Governing Board subject to such  terms and conditions as the Governing Board may from time to  time impose. Deposits of cash shall not carry interest and the  securities deposited by a member valued at the market price of  the day shall exceed the sum for the time being secured thereby  by such percentage as the Governing Board may from time to  time prescribe.

38. Security How Held

Deposits  of  cash shall  be lodged in a  Bank approved by the  Governing  Board  and  Bank  Deposit  Receipts  and  securities  shall  be  transferred  to  and  held  either  in  the  names  of  the  Trustees of the Exchange or in the name of a Bank approved by  the Governing Board and lodged with a Bank approved by the  Governing Board. Such deposit shall be entirely at the risk of  the member providing the security but it shall be held by the  Bank solely for and on account of the Exchange at the absolute  discretion of the Exchange without any right whatever on the  part of such member or those in his right to call in question, the  exercise of such discretion.

Change of Security

41. A member may withdraw any security provided by him if he  first provides in lieu thereof other security of sufficient value to  the satisfaction of the Governing Board.

Lien on Security

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43. The security provided by a member shall be subject to a first  and paramount lien for any sum due to the Exchange or to the  Clearing House by him or by the partnership of which he 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 and  having  handed  to  you  in  terms  of  the  Rules  thereof  to  be  deposited in ______________________(Name of Bank) in the  name of  the  Exchange the  sum of  Rs.  20,000 and/or  having  transferred to the names of the Trustees of the Exchange and/or  

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(Name  of  Bank)  the  securities  mentioned  below,  I  hereby  declare and agree that  the said Security and any cash,  stock,  shares or other securities that may be added to or substituted for  the said Security by arrangement with you are subject to a first  and paramount lien for any sum due to the Exchange or to the  Clearing House by me/us or by the partnership of which I may  be  a  partner  and  for  any  sum  due  to  any  member  of  the  Exchange  for  the  due  fulfillment  of  my  engagements,  obligations and liabilities or of the partnership of which I 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. I hereby further declare and agree that the  said Security and any cash, stock, shares or other securities that  may  be  added  to  or  substituted  for  the  said  Security  by  arrangement  with  you  are  to  be  held  for  you  and  on  your  account by the said Trustees and/or Bank(s)  at your absolute  discretion without any right whatever on the part of myself or  those  in  my  right  to  call  in  question  the  exercise  of  such  discretion  on any  ground whatever  so  that  you  may at  your  absolute discretion as aforesaid apply and pay the same or the  proceeds thereof (in case you shall as you shall be fully entitled  to do sell the same) or cause the same to be applied and paid to  or for behalf of the Exchange or the Clearing House to whom I  or any partnership of which I may be a partner may be indebted  or to or for behalf of any member of the Exchange to whom I or  any partnership of which I may be a partner may be indebted  under  a  claim or  claims arising from any bargains,  dealings,  transactions and contracts made subject to the Rules, Bye-laws  and Regulations of the Exchange during the continuance of my  membership  of  the  Exchange.  If  on  the  completion  of  all  bargains,  dealings,  transactions  and  contracts  entered  into  before the termination of my membership or on my ceasing to  do  business  on  the  Exchange  the  said  Security  or  proceeds  thereof shall not have been required for payment of my or my  said partnership liabilities as above provided 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  

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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  the  Defaulters’ Committee within such time of the declaration of  default as the Governing Board or the President may direct. A  member violating this provision shall be declared a defaulter.

Distribution

330. The Defaulters’ Committee shall at the risk and cost of the  creditor  members  pay  all  assets  received  in  the  course  of  realisation into such bank and/or keep them with the Clearing  House in such names as the Governing Board may from time to  time direct and shall distribute the same as soon as possible pro  rata upto sixteen annas in the Rupee but without interest among  the creditor members whose claims are admitted in accordance  with these Bye-laws and Regulations.

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Application of Defaulters’ Assets and Other Amounts

400. Subject to the provisions of Bye-law 398, the Defaulters’  Committee  shall  realise  and  apply  all  the  money,  rights  and  assets of the defaulter which have vested in or which have been  received by the Defaulters’ Committee (other than the amount  paid  by  the  Governing  Board  to  the  Defaulters’  Committee  pursuant to Rule 16A in respect of the consideration received by  the Governing Board for exercising the right of nomination in  respect of the defaulter’s erstwhile right of membership) and all  other assets and money of the defaulter in the Exchange or the  market  including the money and securities  receivable by him  from any other member, money and securities of the defaulter  lying with the Clearing House or the Exchange, credit balances  lying  in  the  Clearing  House,  security  deposits,  any  bank  guarantees furnished on behalf  of  the defaulter,  fixed deposit  receipts discharged or assigned to or in favour of the Exchange,  Base / Additional Capital deposited with the Exchange by the  defaulter, any security created or agreed to be created by the  defaulter or any other person in favour of the Exchange or the  Defaulters’ Committee for the obligations of the defaulter to the  following purposes and in the following order of priority , viz.:-

(i) First - to make any payments required to be made under  Bye-law 391 and 394;

(ii) Second - the payment of such subscriptions, debts, fines,  fees,  charges  and  other  money  as  shall  have  been  determined by the Defaulters’ Committee to be due to the  Securities and Exchange Board of India, to the Exchange  or to the Clearing House by the defaulter;

(iii) Third  -  the  rectification  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;

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(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 particular Bye-Law 343, the  balance,  if  any,  shall  be  applied  by  the  Defaulters’  Committee for the payment of such unpaid outstanding,  debts, liabilities, obligations and claims to or of members  of the Exchange arising out of any contracts made by the  defaulter with such members subject to the Rules, Bye- laws and Regulations of the Exchange as shall have been  admitted by the Defaulters’ Committee; provided that if  the amount available be insufficient to pay and satisfy all  such debts, liabilities, obligations and claims in full they  shall be paid and satisfied pro rata;

(vii) Seventh - subject to the Rules, Bye-Laws and Regulation  of  the Exchange,  including in particular  Bye-Law 343,  the balance,  if  any,  shall  be applied by the Defaulters’  Committee  for  the  payment  of  such  unpaid  debts,  liabilities, obligations and claims to or of the defaulter’s  constituents  arising out  of  any contracts  made by such  defaulter subject to the Rules, Bye-laws and Regulations  of  the  Exchange  as  shall  have  been  admitted  by  the  Governing Board; provided that if the amount available  be insufficient to pay and satisfy all such debts, liabilities,  obligations  and  claims  in  full  they  shall  be  paid  and  satisfied pro rata;

(viii) Eighth  -  the  balance,  if  any,  shall  be  paid  into  the  Exchange’s Customers’ Protection Fund to the extent of  any  and  all  amounts  paid  out  of  the  Customers’  Protection Fund towards the obligations or liabilities of  

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the defaulter and interest thereon at the rate of 2.5% per  month (or such other rate as the Governing Board may  specify) from the date of payment out of the Customers’  Protection Fund to the date of repayment to the Fund; and

(ix) Ninth - the surplus, if any, shall be paid to the defaulter.           Clarification: It is clarified that this Bye-law 400 does not  

apply to the amount paid by the Governing Board to the  Defaulters’ Committee pursuant to Rule 16A in respect of  the consideration received by the Governing Board for  exercising  the  right  of  nomination  in  respect  of  the  defaulter’s  erstwhile  right  of  membership  as  the  same  does not belong to the defaulter and the defaulter has no  claim, right, title or interest therein.”

9. The judgment under appeal set out two main issues which according  

to it arose for determination. They are:

[A] Whether, on the facts and circumstances of this case, the  TRO was right in attaching 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  

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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 assessee and the Stock Exchange consequent upon  

which money is likely to come in the hands of the garnishee for and on  

behalf of the assessee.  Issue No.2 was answered by saying that even on  

vesting of all the assets of the assessee in the defaulter’s committee, all such  

assets continued to belong to the assessee.  Section 73(3) Civil Procedure  

Code mandates that Government debts have a priority and that being so  

they will have precedence over other dues.  It was further held that the lien  

that the Stock Exchange may possess under Rule 43 does not make it  a  

secured creditor so that debts due to the Income Tax Department would  

have precedence.  The judgment then goes on to say:

“11. To sum up, we hereby declare:

(a) That,  the  Other  Assets  (as  described  hereinabove)  are  attachable  and  recoverable  under  provisions  of  section  226(3)(i)(x) read with Rule 26(1)(a)(c) of Schedule-II to the  Income Tax Act.

(b)That, the Government and Other Creditors such as BSE, the  Clearing House  and Other  Creditor-Members  under  Rules  and Bye-laws of the Stock Exchange are creditors of equal  

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degree and under Section 73(3), Civil Procedure Code, the  Government  dues  shall  have  priority  over  other  such  creditors.

(c) That, in the matter of application of Defaulters’ Asset under  bye-law 400, the Defaulters’ Committee shall give priority to  the debt due to the Government and the balance, if any, shall  be distributed in terms of the Bye-laws 324 alongwith Bye- law 400 of the BSE.

(d)That, a sum of Rs. 34,06,680 representing Balance Surplus  lying  with  the  Exchange  out  of  sale  proceeds  of  the  nomination  rights  of  the  Defaulter-Member  is  attachable  under the above provisions of the Income Tax Act read with  Rule 16 of the BSE Rules and consequently, the said amount  is directed to be paid over to the TRO under the impugned  Prohibitory Order.

(e) We hereby direct the BSE also to hand the securities lying in  Members Security Deposit Accounts to the TRO, who would  be entitled to sell and appropriate the sale proceeds towards  the  claim  of  the  Income  Tax  Department  against  the  Defaulting  Broker-Member.  If  the  TRO  so  direct,  those  securities could also be sold by BSE and the realized value,  on the date of the sale, could be handed over to the TRO. It  is for the TRO to decide this point. We further direct credit  balance its the Clearing House of Rs. 1,53, 538/- to be paid  over  to  the  TRO and  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  

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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 Exchange.  The High Court was  

therefore not correct in saying that though a membership card is only a  

personal privilege and ordinarily the Income Tax Department cannot attach  

the sale proceeds, yet since these amounts came into the hands of the Stock  

Exchange for  and  on behalf  of  the  assessee  they were  attachable.   The  

second argument was made on conjoint reading of Rule 38 and 44.  The  

learned senior counsel argued that all securities in the form of shares that  

are given by a member shall be transferred and held either  in the name of  

the  trustees  of  the  Stock Exchange or  in  the  name of  a  Bank which is  

approved by the Governing Board.  By operation of Rule 44, on termination  

of the membership of a broker, whatever remains by way of security after  

clearing all debts has to be “transferred” either to him or as he shall direct  

or  in  the  absence  of  such  direction  to  his  legal  representatives.   The  

argument therefore is  that what is contemplated is a transfer of these shares  

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by virtue of which the member ceases to be owner of these shares for the  

period  that  they  are  “transferred”  and  this  being  so,  the  Income  Tax  

Department  cannot  lay  their  hands  on these  shares  or  the  sale  proceeds  

thereof as the member ceases to have ownership rights of these shares.  Shri  

Datar also argued that by virtue of Rule 43, the Stock Exchange has a first  

and paramount lien for any sum due to it, and that this made it a secured  

creditor  so  that  in  any  case  income  tax  dues  would  not  to  be  given  

preference over dues to secured creditors.

12. Shri R.P.Bhat, learned senior counsel arguing on behalf of Revenue  

refuted these contentions and stated that on a conjoint reading of the Rules  

and the Bye-Laws a membership card may not be directly attachable but  

that the High Court’s reading of Rule 16 is correct.  Further, on a conjoint  

reading of the various Rules relating to member’s security, it is clear that  

the expression “transferred” would not refer to transfer of ownership but  

would  refer  only  to  the  delivery  made  of  shares  for  the  purpose  of  

realization in case a member defaults.  He further argued that the mere fact  

that a lien was provided in the Rules did not make such lien a statutory lien  

and that therefore Government dues would have a first preference over all  

the dues of the Stock Exchange.

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13. Mr. Datar also handed over during the course of argument certain  

annual  reports  and  letters  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.   

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15. In  Isha Valimohamad  and Anr. vs. Haji Gulam Mohamad &  

Haji Dada Trust 1975 (1) SCR 720 the Supreme Court made a distinction  

between “privilege” and “accrued right”.

                            “Mr. Patel for respondent contended that even if the  landlord had no accrued right, he at least had a 'privilege'  as visualised in Section 51, proviso (1)(ii) of the Bombay  Act and that the privilege should survive the repeal.

                             A privilegium, in short, is a special act affecting  special persons with an anomalous advantage, or with an  anomalous burthen. It is derived from privatum, which,  as opposed to publican, signified anything which regards  persons  considered  individually;  publicum  being  anything which regards persons considered collectively,  and forming a society

                    (See Austin's Jurisprudence, Vol. II, 5th ed. (1911) P.   519)

                           The meaning of that word in jurisprudence has   undergone  considerable  change  after  Austin  wrote.  According to Hohfeld:

                               ... a privilege is the opposite of a duty, and the   correlative of a 'no-right'. For instance, where "X has a  right or claim that Y should stay off the land (of X), he  himself has the 'privilege' of entering on the land; or, in  equivalent words, X does not have a duty to stay off.

                             Fundamental Legal Conceptions (1923) pp. 38-39)

Arthur L. Corbin writes:

                           We say that B had a right that A should not intrude  and that A had a duty to stay out. But if B had invited A  to enter, we know that those results would not occur. In  

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such case we say that B had no right that A should stay  out and that A had the privilege of entering.

                              (See "Legal Analysis and Terminology", 29 Yale   Law Journal 163)

According to Kocourek:

                            Privilege and inability are correlatives. Where there   is  a  privilege  there  must  be  inability.  The  terms  are  correlatives. The dominus of a Privilege may prevent the  servus  of  the  Inability  from  exacting  an  act  from  the  dominus

                                      (See "Jural Relations", 2nd ed., p. 24)

Patton says:

                            The Restatement of the law of Property defines a   privilege as a legal freedom on the part of one person as  against another to do a given act or a legal freedom not to  do a certain act.

                               (See Jurisprudence, 3rd ed. (1964), p. 256)

                           We think that the respondent-landlord had the legal   freedom  as  against  the  appellants  to  terminate  the  tenancy or not. The appellants had no right or claim that  the respondent should not terminate the tenancy and the  respondent had, therefore, the privilege of terminating it  on the ground that appellants had sub-let the 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  

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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  

application of the defaulting member’s other assets and securities, and in  

this  case  ultimately  the  surplus  is  paid  only  to  the  defaulting  member,  

making  it  clear  that  these  amounts  really  belonged  to  the  defaulting  

member.

17. In the  Ahmedabad Stock Exchange case, 2001 (3) SCC 559, this  

Court has held that:

“9. The  Stock  Exchange  Rules,  Bye-laws  and  Regulations   have  been  approved  by  the  Government  of  India  under  the   Securities  Contracts  (Regulation)  Act,  1956.  There  is  no   challenge  to  these  Rules.  The  question  whether  right  of   membership confers upon the member any right of property is,   

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therefore,  to be examined within the framework of the Rules,   Bye-laws  and  Regulations  of  the  Exchange.  On  a  plain  and   combined  reading  of  the  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   conditions provided therein. The nomination wherever provided   for is also not  automatic.  It  is  hedged by Rules.  On right  of   nomination vesting in the Stock Exchange under the Rules, that   right  belongs  to  the  Stock  Exchange  absolutely.  The   consideration received by the Stock Exchange on exercise of the   right of nomination vesting in it, is to be applied in the manner   provided in Rule 16.

13. In the present case Rule 16 was properly applied by the   Stock Exchange. The membership right in question was not the   property of the assessee and, therefore, it could not be attached   under  Section  281-B of  the  Income Tax  Act.  No  amount  on   account  of  Rajesh  Shah  was  due  from or  held  by  the  Stock   Exchange and, therefore, Section 226(3) could not be invoked.   We are unable to sustain the judgment under appeal holding   that in substance the right of membership or membership card   was a right of property which could be attached under Section   281-B of the Income Tax Act.”

It is clear therefore that the conclusion of the High Court that the  

proceeds of a card which has been auctioned can be paid over to the Income  

Tax Department for the dues of the member by virtue of Rule 16 (iii) is  

incorrect  as  such  member  at  no  point  owns  any  property  capable  of  

attachment, as has been held in the Ahmedabad Stock Exchange case.  On  

this point therefore Shri Datar is on firm ground and must succeed.

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Re:  (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 securities are  

also “deposited” with the Stock Exchange under Rule 37;

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(iii) Rule 38 which is crucial  provides how securities are to be “held”  

which is clear from the marginal note appended to it. What falls for  

construction is the expression “securities shall be transferred to and  

held”.  Blacks Dictionary defines “transfer” as follows:

“Transfer means every mode, direct or indirect, absolute   or conditional, voluntary or involuntary, of disposing of   or parting with property or with an interest in property,   including  retention  of  title  as  a  security  interest  and   foreclosure of the debtor's equity of redemption.”

     It  is  clear  therefore  that  the  expression  “transfer”  can  

depending upon its context mean transfer of ownership or transfer of  

possession.  It is clear that what is transferred is only possession as  

the member only “deposits” these securities.   Further, as has been  

held  in  Vasudev  Ramchandra  Shelat   v.  Pranlal  Jayanand  

Thakur & Ors., 1975 (2) SCR 534 at 541, a share transfer can be  

accomplished  by  physically  transferring  or  delivering  a  share  

certificate  together  with  a  blank  transfer  form  signed  by  the  

transferor. The transfer of shares in favour of the Stock Exchange is  

only for the purposes of easy liquidity in the event of default.

(iv) The expression “transferred” must take colour from the expression  

“lodged” in Rule 38 when it comes to deposits of cash. Understood in  

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this sense, transfer only means delivery for the purposes of holding  

such shares as securities; (v) This is also clear from the language of Rule 38 when it says “such  

deposit  shall  be  entirely  at  the  risk  of  the  member  providing  the  

security ………..” Obviously, first and foremost the cash lodged and  

the shares transferred are only deposits.  Secondly, they are entirely  

at the risk of the member who provides the security making it clear  

that such member continues  to be the owner  of the said shares by  

way  of  security  for  otherwise  they  cannot  possibly  be  at  the  

member’s risk; (vi) Under Rule 41 a member may withdraw any security provided by  

him if he satisfies the conditions of the Rules. This again shows that  

what is sought to be withdrawn is a security which the member owns; (vii) By Rule 43 a lien on securities is provided to the Stock Exchange.  

Such lien is only compatible with the member being owner of the  

security,  for  otherwise  no  question  arises  of  an  owner  (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.  

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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 made a Rule of  the Court  and a decree  

followed.  The Bombay High Court made the garnishee notice of the non-

member creditor absolute and the Supreme Court was faced with the correct  

construction  of  bye-laws  relating  to  defaulter  members.   The  Supreme  

Court held:

“39. How the card money is to be dealt with has been provided   under the Rules. A dichotomy, however, has been created under   the Rules and Bye-laws as regards the amount received by sale   of membership card and amount recovered from the defaulter's   other assets. On a plain reading of the Rules and Bye-laws it   appears that the authority to deal with the card money and the   

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liability  of  the  members  by  the  Defaulters'  Committee  is   different, but having regard to the scheme of distribution of the   liabilities of the Exchange, clearing house, members and non- members,  all  the  assets  shall  be  placed at  the  hands of  the   Defaulters'  Committee.  But  as  would  appear  from  the   discussions made hereinafter the application thereof would be   separate and distinct.

40. In terms of the Bye-laws, a Defaulters' Committee is to   be constituted which is a Standing Committee consisting of six   members of the Exchange. Such a Committee is constituted in   terms of Rule 170(a)(ii) of the Stock Exchange Rules, Bye-laws   and Regulations, 1957. It is not a juristic person. It is merely an   association of persons.

46. Vesting of such assets of the defaulter in the Defaulters'   Committee is not absolute. The Defaulters' Committee is merely   a trustee. It holds the said amount vested in it for the benefit   and on account of the creditor members. Once the liabilities of   the creditors from the defaulters are paid to the members, in   terms  of  Rule  44,  the  assets  devolve  upon  the  Defaulters'   Committee in terms of Bye-law 326 for a limited purpose and   as contradistinguished from the Rules in terms whereof the card   may vest in the Exchange, do not vest in it absolutely.

47. The  Defaulters'  Committee  takes  in  its  custody  the   amount realised from other assets not as an owner thereof and   the  vestment  thereof  would,  thus,  be  coterminous  with  the   satisfaction  of  the  claims  of  the  member.  It,  as  soon  as  the   purpose of Bye-law 326 is satisfied, comes to an end.

48. The  assets  of  a  defaulting  member  can  broadly  be   divided  into  two  categories,  namely,  card  membership  and   other assets.

57. There cannot, however, be any doubt that 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   

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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 would result in an incongruity.   Unfortunately,  no  clear  picture  emerges  from the  Rules  and   Bye-laws as there does not appear to be any provision how the   card money as  also  other  assets  belonging to  the defaulting   member can be handled by the Defaulters' Committee. But the   Rules and Bye-laws have to be read harmoniously. They have to   be read together so as to make them effective and workable. So   read,  the Defaulters'  Committee constituted in terms of  Bye- laws would apply to the other assets, dues and payments of the   members  on  a  pro  rata  basis  whereafter  the  dues  of  non- members  can  be  disbursed.  While  doing  so,  however,  such   claims can be determined only having regard to the cut-off date   which must be prescribed by the Governing Board in terms of   clause (vii) of Bye-law 343. So far as card money is concerned,   the same must be disbursed having regard to the priority clause   contained in Rule 16,  in which event,  upon discharge of  the   dues of the Exchange and clearing house, the same has to be   distributed  according  to  the  dues  of  members  and  non- members. It bears repetition to state that there does not exist   any distinction between a member and a non-member in terms   of  Rule  16  and  in  the  event  the  amount  of  the  card  money   available  in  the  hands  of  the  Exchange  is  not  sufficient  to   satisfy all the claims, the same has to be distributed on a pro   rata  basis.  However,  any  amount  remaining  surplus  even   thereafter  would  be  subject  to  a  decision  of  the  Governing   Board. The Governing Board may in a given situation, having   regard to the hardship which may be faced by the members and   non-members  in  realising  their  dues,  may  direct  that  such   amount would be available for disbursement towards the said   

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dues. It, however, we may hasten to add, is free to apply the   surplus  for  a  different  purpose  which,  evidently  cannot  be   dehors the purpose and object for which the Exchange has been   constituted.”

18. Ultimately, the matter was remanded to find out what was the cut off  

date for purposes of limitation.

19. Though this judgment has no direct application to the facts before us  

it  does  hold  that  after  the  assets  of  the  defaulting  member  are  pooled  

together and amounts are  realized, the payments that would be made from  

such  pool  would  be  from the  assets  of  the  defaulting  member.  To  that  

extent,  therefore,  the aforesaid judgment reinforces what  we have stated  

above. Mr. Datar’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   

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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  Bihar v. State  of  Bihar [(1972)  3  SCC  196 : AIR 1971 SC 1210] the principle has been recognised by   this Court holding that the rights of the pawnee who has parted   with money in favour of the pawnor on the security of the goods   cannot  be  extinguished  even  by  lawful  seizure  of  goods  by   making  money  available  to  other  creditors  of  the  pawnor   without  the  claim  of  the  pawnee  being  first  fully  satisfied.   Rashbehary Ghose states in Law of Mortgage (TLL, 7th Edn.,   p. 386) — “It seems a government debt in India is not entitled   to precedence over a prior secured debt.”

What  has  been  argued  before  us  is  that  the  moment  the  Stock  

Exchange has a lien over the member’s securities, it would have precedence  

over income tax dues.  We find there is force in this submission.

The  Provincial  Insolvency  Act  defines  “secured  creditor”  under  

Section 2 (e) as follows:

(e)  “Secured creditor” means a person holding a mortgage,   charge or lien on the property of the debtor or any part thereof   as a security for a debt due to him from the debtor;”

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Similarly, the Securitisation and Reconsruction of Financial Assets  

and Enforcement of Security Interest Act, 2002 in Section 2 (z)(f) defines  

“security interest” as follows:

“Section 2(zf) “security interest" means right, title and   interest  of  any  kind  whatsoever  upon  property,  created  in   favour  of  any  secured  creditor  and  includes  any  mortgage,   charge, hypothecation, assignment other than those specified in   Section 31”

In Triveni Shankar Saxena v. State of U.P. & Ors., 1992 Suppl. 1  

SCC 524 at para 17 in an instructive passage the Supreme Court held as  

follows:

“17. We shall now examine what the word 'lien' means. The   word 'lien' originally means "binding" from the Latin ligamen.   Its lexical meaning is "right to retain". The word 'lien' is now   variously described and used under different  context such as   'contractual lien', 'equitable lien', 'specific lien', 'general lien',   'partners lien', etc. etc. in Halsbury's Laws of England, Fourth   Edition, Volume 28 at page 221, para 502 it is stated :

In its primary or legal sense "lien" means a right at common   law  in  one  man  to  retain  that  which  is  rightfully  and   continuously in his possession belonging to another until  the   present and accrued claims are satisfied.”

Similarly, in K.S. Saradambal v. Jagannatham K Brothers, (1972)  

42 Companies Case 359, the Madras High Court held:

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 “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 by which a person in possession of   personal  property  holds  and retains  it  against  the  owner  in   satisfaction of a demand due to the party retaining it; but in its   more  extensive  meaning  and  common  acceptation  it  is   understood  and  used  to  denote  a  legal  claim  or  charge  on   property, either real or personal, as security for the payment of   some debt  or obligation; it is not strictly a right in or right to   the  thing  itself  but  more  properly  constitutes  a  charge  or   security  thereon.”  The  word  “lien”  is  defined  in  Stroud’s   Judicial Dictionary, third edition, at page 1644, as:

  “A lien- (without effecting a transference of the property in a   thing) – is the right to retain possession of a thing until a claim   be satisfied; and it is either particular or general”.

  Having regard to the foregoing definitions the question arises   whether the holder of a lien, as the applicant company in the   instant case, can be considered to be a secured creditor under   

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the company law. Section 529 of the Act is important and it   reads:

“529.  Application  of  the  insolvency  rules  in  winding  up  of   insolvent  companies.-  (1)  In  the  winding  up  of  an  insolvent   company,  the same rules shall  prevail  and be observed with   regard to –  

(a)Debts Probable; (b)The valuation of annuities and future and contingent   

liabilities; and (c) The  respective  rights  of  secured  and  unsecured   

creditors;

As are in force from the time being under the law of insolvency   with respect to the estates of persons adjudged insolvent.

(2) All persons who in any such case would be entitled to prove   for and receive dividends out of the assets of the company, may   come in under the winding up, and make such claims against   the company as they respectively are entitled to make by virtue   of this section.

Provided that if a secured creditor instead of relinquishing his   security  and  proving  for  his  debt  proceeds  to  realize  his   security, he shall be liable to pay the expenses incurred by the   liquidator  (including  provisional  liquidator,  if  any),  for  the   preservation of the security before its realization by the secured   creditor”.

Though  the  expression  “insolvent  company”  is  not  defined,   obviously it refers to a company which has been ordered to be   wound up on a petition founded upon section 433 (c), that is,   the company being unable to pay its debts. According to section   529, in the winding up of such a company, the same rules shall   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.

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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 Presidency Towns   Insolvency Act, 1909, define “secured creditor”. In the former   Act, section 2(e) defines that expression as:

 “2.(e) ‘Secured creditor’ means a person holding a mortgage,   charge or lien on the property of the debtor or any part thereof   as a security for a debt to him from the debtor.”

    In the latter Act, Section 2(g) defines that expression as:

   “Secured  creditor’  includes  a  landlord  who  under  any   enactment for the time being in force has a charge on land for   the rent of that land.”

    The latter definition is an inclusive definition. According to   the  former  definition  even  a  person  holding  a  lien  on  the   property of a debtor is a secured creditor. In dealing with the   question as to who a secured creditor is in company law, it is   observed in Palmer’s Company Law, 21st edition, at page 765.:

  “Secured creditor is one, who has some mortgage, charge or   lien on the company’s property…….A solicitor who holds a lien   on documents of a liquidating company for his costs against the   company is a secured creditor, and must mention his lien in his   proof.”

  On a consideration of Section 529 read with the relevant   provisions of the insolvency law, I come to the conclusion that   the holder of a statutory lien or the holder of a lien created by   

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contract and registered as required by Section 125 is a secured   creditor in the matter of winding up of the insolvent company   with  regard  to,  among  other  things,  debts  provable  in  the   winding  up  proceedings.  The  applicant-company  being  the   holder of a statutory lien is thus in the position of a secured   creditor…..”

20. In the present case, the first and paramount lien given to the Stock  

Exchange is by Rule 43 of the Rules made under Section 8 of the Securities  

Contract  Act.  Sections  7A,  8  and  30  of  the  Securities  Contracts  

(Regulation) Act 1956 deal with the power of recognized Stock Exchanges  

making rules restricting voting rights;  rules relating to  Stock Exchanges  

generally including membership thereof; and rules to carry out the purposes  

of the Securities Contracts (Regulation) Act respectively.    Whereas, the  

rules made under Section 7A and Section 8 are made  by recognized Stock  

Exchanges with the approval of the Central Government and published in  

the Official Gazette, rules made under Section 30 are made by the Central  

Government itself for purposes of carrying into effect the  objects of the  

Securities 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  

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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 under Section 30 does not take the matter very much further.  

Section 3(51) of the General Clauses Act defines “Rules” as meaning “a  

rule  made  in  exercise  of  power  conferred  by  law  and  shall  include  a  

Regulation  made as  a  rule  under  any enactment.”   It  is  clear  from this  

definition of ‘Rule’ also that Stock Exchanges who make rules in exercise  

of  powers  conferred  by  the  Securities  Contracts  (Regulation)  Act  are  

equally “Rules” and therefore subordinate legislation.  This makes it amply  

clear that the lien spoken of  by Rule 43 is a lien, conferred by Rules under  

a statute.

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22. Mr. Bhat argued that only a lien that flows from the statute itself can  

be considered as a statutory lien and referred us to two judgments, one by  

the Bombay High Court and one by the Supreme Court.

The Bombay High Court held in the case of Forwarding P. Ltd. and  

another  v.  Trustees,  Port  of  Vizagapatnam,  and  Anr.,  (1987)  61  

Company Cases 513 that the power of arrest and sale of vessel belonging to  

a company in winding up by the port authorities emanates directly from  

section 64 of the Major Port Trusts Act, 1963 and hence the question of  

obtaining leave of the company court under section 446 of the Companies  

Act, 1856  will not arise when an authority exercises independent statutory  

rights.

This  judgment  was  quoted  with  approval  in  Board  of  Trustees,  

Bombay  vs.  Indian  Oil  Corporation,  1998  (4)  SCC  302  where  the  

Supreme Court set out Section 64 of the Major Port Trusts Act and held as  

under:

                      “8. The Port authorities have a paramount right to arrest a   vessel and detain the same until the amounts due to it in respect   of extending the port facilities and services to the vessel are paid.   Under  Sub-section  (2),  in  case  any  part  of  the  said  rates,   charges, penalties or the cost of the distress or arrest or of the   keeping of the same remain unpaid for a space of five days next   after any such distress or arrest has been made, the Board may   cause  the  vessel  so  distrained  or  arrested  to  be  sold.  The   

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proceeds of such sale shall satisfy such rates or penalties and   costs including the costs of sale remaining unpaid. The surplus,   if any, is to be rendered to the master of such vessel on demand.

                 9. The statutory right under Section 64 embodies this overriding   right of the harbour authority over the vessel for the recovery of   its  dues.  This  right  stands  above  the  rights  of  secured  and   unsecured 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. Therefore, the lien of a harbour authority over the vessel   is a paramount lien and realization of its dues by the harbour   authority  by  the  sale  of  the  vessel  is  above  the  priorities  of   secured creditors. In other words, the statutory lien of a harbour   authority  has  paramountcy  even  over  the  claims  of  secured   creditors in a winding up. In exercise of its right under Section   64 the appellant is, therefore, entitled to sell the vessel without   the intervention of the court. In exercise of that paramount right   which  overrides  the  claims  of  all  other  creditors  including   secured creditors, the appellant has a right to arrest the vessel   and sell it. Without the consent of the appellant, this right cannot   be transferred to the sale proceeds of the vessel.”

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It is no doubt true that the Supreme Court held that the statutory lien  

of a Harbour authority over a vessel is a paramount lien which overrides the  

claim  of  all  other  creditors  including  secured  creditors.   The  question,  

however, in the present case is somewhat different. The question is whether  

the lien exercised under Rule 43 by the Stock Exchange can be said to be a  

superior right to income tax dues which may become payable by virtue of  

the Stock Exchange being a secured creditor.

23. It  was  argued  that  Black’s  Law  Dictionary  5th Edition  defines  

“statutory lien” as follows:

“Statutory lien: A lien arising solely by force of statute upon  specified circumstances or conditions, but does not include any  lien  provided  by  or  dependent  upon  an  agreement  to  give  security, whether or not such lien is also provided by or is also  dependent upon statute and whether or not the agreement or  lien is made fully effective by Statute.”   

Based on this it was further argued that such lien would not include  

any  lien  provided  by  or  dependent  on  an  agreement  to  give  security,  

whether or not such lien is also provided by or dependent upon statute, and  

whether or not such lien is made fully effective by statute.

24. The first  thing to be noticed is that the Income Tax Act does not  

provide for any paramountcy of dues by way of income tax. This is why the  

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Court in Dena Bank’s case (supra) held that Government dues only have  

priority over unsecured debts and in so holding  the Court referred to a  

judgment in Giles vs. Grover (1832) (131) English Reports 563 in which it  

has been held that the Crown has no precedence over a pledgee 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. vs. 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  

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Exchange, being a secured creditor, would have priority over Government  

dues.

26. The  three  issues  are  answered  as  above.   The  Stock  Exchange’s  

appeal is allowed and the impugned judgment passed by the Division Bench  

of the Bombay High Court is set aside.

..............................................CJI (R.M. Lodha)

………………………………..J. (Kurian Joseph)

………………………………..J. (R.F. Nariman)

New Delhi, September 25, 2014

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