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Petitioner: STOCK EXCHANGE, AHMEDABAD VS Respondent: ASSISTANT COMMISSIONER OF INCOME- JUDGMENT
Court Name: Gujarat High Court Judge(s): A. R. Dave, R. K. Abichandani Title:STOCK EXCHANGE, AHMEDABAD vs ASSISTANT COMMISSIONER OF INCOME-
JUDGMENT
Reported As: 1999 PTD 3698 Result: Petition dismissed Judgment JUDGMENT ' R. K. ABICHANDANI, J.---The petitioner-Stock Exchange challenges the order provisional; attachment of its deceased member's card, his security deposit and margin money, issued on February 14, 1994, under section 281B of the Income-tax, Act, 1961, as extended from time to time, and garnishee notice, dated June 14, 1995, issued on the Stock Exchange under section 226(3) of the said Act and further action taken thereunder. ' The impugned order under section 281B of the said Act dated February 15, 1994, a copy of which is at Annexure "A" to the petition was an order passed against the assessee, Smt. Dipti R. Shah, as a legal heir of Rajesh Anubhai Shah, on the ground that the assessment proceedings for the assessm ent years 1989-90 to 1993-94 were pending in the case of the assessee and it was reasonably believed that on completion of the proceedings substantial demand of tax, interest and penalty would arise and since the assessee had not made any provision for the payment of such amounts, it was considered necessary to provisionally attach the property of the assessee described in Schedule I to the said order. This property which was provisionally attached consisted of (1) Ahmedabad Stock Exchange Card bearing No, 2-0419-6 in the name of Shri Rajesh Anubhai Shah, (2) Margin money kept with the Stock Exchange, and (3) security deposits kept with the Stock Exchange. The name of Smt. Dipti R. Shah, widow of Shri Rajesh A. Shah, was shown as the assessee, presumably because of the provision of section 159(3), which provides that the legal representative of the deceased shall, for the purposes of the said Act, be deemed to be an assessee. ' The notice under section 226(3), dated June 14, 1995, a copy, of which is also at Annexure "A" to the petition was addressed to the petitioner Stock Exchange, requiring it to pay to the authority, i,e,, the
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Assistant Commissioner of Income-tax, any amount due from the petitioner to or held by the petitioner for or on account of the deceased Rajesh A. Shah-legal heir Dipti R. Shah. It was stated in the notice that a sum of Rs,12,24,887, was due from "Rajesh A. Shah-legal heir Dipti R. Shah". A copy of the notice was served to Smt. Dipti R. Shah as a legal heir of the assessee . It appears-that since the petitioner did not pay the amount as demanded in the notice issued under section 226(3), the Assistant Commissioner wrote to the petitioner on October 5, 1995, which letter is referred to in paragraph 7 of the petition, requiring the petitioner to explain as to why it should not be treated to be an assessee in default in respect of the amounts specified in the said notice and why further proceedings should not be taken against the petitioner for the realisation of the amount. It was stated in this letter that despite the provisional attachment of the property in question, the Governing Board of the Stock Exchange had unauthorisedly disposed of the membership rights of the deceased, which had vested in the Stock Exchange on January 23, 1995, against the consideration of Rs, 27 lakhs to Messrs U.T.I. Securities Exchange Limited. ' One Rajesh A. Shah, who was a member of the petiti9ner-Stock Exchange, passed away on February 7, 1994. According to the petitioner since he had failed to discharge during his lifetime, his obligations and liabilities in respect of certain transactions effected by him at the Stock Exchange, the Governing Board of the Stock Exchange had declared him as a "deemed defaulter" on February 12, 1994. That resolution was not annexed with the petition, but during the course of the arguments it was referred to in support of the petitioner's case that the legal representatives of the deceased member had expressed in writing their inability to satisfy in full or in part the liabilities/obligations and claims arising out of the contracts made by the late member, subject to the rules and regulations, and, therefore, he was treated as a deemed defaulter and it was resolved that the membership right of Rajesh A. Shah which vested in the Stock Exchange was to be disposed of by inviting offers by fixing a minimum floor price of Rs, 25 lakhs. The "disposable membership rights" of the deceased Rajesh A. Shah were by an auction notice published in the Economic Times, dated February 16, 1994, offered for sale. ' It appears from the minutes of the meeting said to have been held on February 12, 1994, and the contents of paragraph 4 of the petition that the petitioner's case was that the said member Rajesh A. Shah, after his death, was declared as a "deemed defaulter" and because he was a defaulter, his right of membership vested in the Exchange and that is how the exchange offered to the eligible persons his "disposable membership right" by an auction as per the public notice, dated February 16, 1994, which was placed on record during the arguments. There was a slight improvement over the petitioner's case reflected in the petition, during the arguments when it was developed by also contending that the heirs of the deceased had shown their inability to discharge the obligations as per the Rules and Regulations, before the Governing Board passed resolution, dated February 12, 1994. It appears that even while the provisional attachment was operative by virtue of the impugned order issued under section 281B on February 15, 1994, the Governing Board proceeded to dispose of the membership right of the said deceased member by making a resolution on December 5, 1994, after holding the open bid on October 6, 1994, in favour of the U.T.I. Securities Exchange Limited, which was informed about its being admitted as a corporate member of the Stock Exchange on February 23, 1995, as stated in the communication, dated January 23, 1996, addressed by the U.T.I. Securities Exchange Limited to the office of the Assistant Commissioner of Income-tax in response to a letter, dated September 20, 1995, in which the U.T.1. Securities Exchange Limited was informed that the rights of Rajesh A. Shah were provisionally attached on February 15, 1994, under section 281B and that the Ahmedabad Stock Exchange had no right to transfer those membership rights since it had not obtained any prior approval for such transfer nor did it make any claim against the attachment order under section 281B of the said rules. This is reflected from the copies of the correspondence placed on record during the arguments and referred to by both
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the sides. The provisional attachment was extended by order, dated August 11, 1994, up to February 14, 1995, and by order, dated February 10, 1995, up to August 14, 1995. The notice under section 226(3) was issued by the Department to the petitioner on June 14, 1995, and the petitioner sent a reply, dated June 20, 1995, to this garnishee notice. ' If appears that on June 20, 1995, the Stock Exchange also filed a statement on oath under clause (vi) of section 226(3) stating that there were no dues by the Exchange payable to Rajesh A. Shah or his legal heir Depti R. Shah and that the Stock Exchange did not hold any money for or on account of the said party or his heirs. On October 5, 1996, the Assistant Commissioner of Income-tax taking strong exception to the Stock Exchange's act, of disposing of the membership right of the deceased member which was attached, called upon the petitioner to show cause as to why it should not be treated as an assessee in default in respect of the amount mentioned in the garnishee notice. ' Learned counsel appearing for the petitioner contended that the membership right of a member of a Stock Exchange was not property" but a mere personal permission to carry on business as a share broker with other members for and on behalf of his constituents, subject to the rules and regulations of the Stock Exchange. It was submitted that such personal right or permission cannot be a subject-matter of attachment either during the lifetime of a member or after his death or on his being declared as a defaulter. Learned counsel referred to the provisions of rules 5, 6, 7, 8, 9, 10, 11, 12, 14 to 16, 50, 51, 53, and 54 and Regulation 8.38 of the Rules and Regulations of the petitioner, in support of his contention. It was submitted that both in the case of death and default of a member, his right of nomination ceases and vests in the Stock Exchange, as provided by rule'9. It was argued that under rules 5 and 6, there was a prohibition on a member from assigning his right of membership or any rights or privileges attached to membership since membership was only a personal permission from the Exchange to exercise the rights and privileges attached thereto. It was further argued that even the right of nomination given to a member having seven years' standing under rule 11 (a) was hedged in with three important conditions, namely- (a) approval of such person, i,e,, the nominee by the Governing Board, for admission to the Stock Exchange (b) qualifications and eligibility of the nominee and (c) clearance of the dues of the outgoing member under rules 15 and 50 of the said rules. It was submitted that until all this was done, such inchoate right of nomination could not be exercised. It was submitted that even in the case of a deceased member, his representative's right to nominate given by rule 11(b) read with Appendix "C", was hedged in by similar considerations. It was therefore, submitted that there was no property element in such right which could be attached under the law. It was submitted that even during lifetime of the member, the right of membership was not a property which could be said to be transferable or saleable in any sense of the term. It was contended that on the date of the refusal of the heirs to pay the dues, the right to nomination absolutely vested in the Governing Board under clause (vi) of Appendix "C" to the rules and therefore, the board was justified in disposing of the right in favour of the U.T.I. Securities Exchange Limited. Reliance was placed by learned counsel for the petitioner on the decision of the Privy Counsel in Official Assignee of Bombay v. K.R.P. Shroff, AIR 1932 PC 186, the decision of the Bombay High Court in Mrs. Sejal Rikeeh Dala v. Stock Exchange (1990) 69 Comp. Cas. 709; AIR 1991 Born. 30, and on an unreported judgment of the Bombay High Court in the case of Jugalkishore Seksaria v. Jashwantlal Shah, decided on December 20, 1991 in support of his contention that the membership right of a member of a Stock Exchange was a personal right, which was non-transferable and no property could be claimed in the membership of the Exchange and not being saleable such right to membership or nomination could not be attached. ' It was also argued that since the deceased was declared as a deemed defaulter, there was no question of his heirs getting any right of nomination and the Governing Board alone could exercise in its absolute discretion, the right of nomination. It was submitted that since the deceased
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member was declared as a deemed defaulter and as his heirs failed to discharge their liabilities, the procedure applicable to defaulters was required to be followed and all the provisions in the rule regarding a defaulter member would be attracted. ' It was further contended that the impugned garnishee notice was issued without jurisdiction because no amount was payable by the Stock Exchange either to the defaulter or to his heirs or to the estate of the deceased member, and the Exchange was obliged to distribute the amount realised by the sale of membership rights as per the priorities laid down in rule 16. It was finally contended that the margin money and the security deposit could be retained by the Stock Exchange as provided by Rule 43 and bye-law 67 and the Stock Exchange had a lien over these amounts and, therefore, the Department could not require the petitioner to pay such amounts and could not have attached them even provisionally. ' Learned counsel appearing for the Revenue, on the other hand, contended that the right to membership of the Stock Exchange was not a mere status, but it had value in terms of money and the membership card could be sold. It was contended that the fact that even if the nomination made by a member is rejected the member had a right to make a fresh nomination under Rule 12, clearly showed that the right to nominate granted by rule 11 was a property right. It was further contended that when the member dies or is in default, the right of nomination goes to the Governing Board as a trustee in order to satisfy the outstanding dues of the creditors and the tax dues vis-a-vis the dues of the unsecured creditors will have priority and will have to be satisfied before the dues of ordinary creditors are satisfied. It was submitted that the property which was attached, namely, the membership right, could not have been disposed of by the Exchange during attachment and any transfer purported to have been made by such auction, of the membership right of the deceased, was wholly ineffective and cannot defeat the power of the Revenue to collect the taxes from the dues realised by the petitioner from the estate of the deceased. It was submitted that the impugned notice under section 226(3) and the letter, dated October 5, 1995, by which the petitioner-Stock Exchange was called upon the explain its conduct of disposing of an attached property and to pay the dues and to show cause as to why the petitioner should not be treated as an assessee in default, cannot be said to be without jurisdiction. It was submitted that the communication, dated October 5, 1995, was not a final order and in paragraph 11 of that communication, the petitioner was required to explain as to why it should not be treated as an assessee in default in respect of the amounts specified in the notice for the reasons mentioned therein. The petitioner has remedies available to it under the Act. Even in the event of any adverse order being passed and has approached this Court at a premature stage. It was also contended that the contentions that the petitioner may raise in these proceedings under section 226(3) will have to be finally adjudicated upon by the concerned authority. As regards the provisional attachment order issued under section 281B of the said Act, it was submitted that the Department could have proceeded to recover the amount from the attached property and if any amount is realised by a wrongful sale by the Stock Exchange of the property while it was under attachment, the amount so realised would continue to be under provisional attachment so long as the order under section 281B remained operative. It is submitted that if during the currency of the order of provisional attachment the petitioner has disposed of the attached property, the statutory consequence would follow. It was submitted that the impugned provisional attachment order was issued in lawful exercise of the powers of the Assistant Commissioner of Income-tax in respect of the property which was attachable. ' A stock exchange is a body of individuals constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. The membership of a stock exchange depends upon the provisions of the rules of the stock exchange relating to admission and continuance of its members. The business of dealing in securities is regulated by the Securities
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Contracts (Regulation) Act, 1956, which, inter alia, provides for grant of recognition to stock exchanges by the Central Government in accordance with the requirements of section 4 thereof. Under this provision, the Central Government may, inter alia, prescribe conditions relating to the qualifications for membership of stock exchanges recognised by it. Section 30 of the said Act empowers the Central Government to make rules even as regards the conditions as to the admission of members of the Stock Exchange concerned: Accordingly, rule 8 of the Securities Contracts (Regulation) Rules, 1957, provides for qualification for membership of a recognised stock exchange. The petitioner-Stock Exchange is a recognised stock exchange having a set of its rules, bye-laws and regulations duly approved by the Government of India under the said Act. Both the sides have referred to these rules, bye-laws and regulations, copies of which are placed on the record of this petition. ' The rules of the petitioner-Stock Exchange, inter alia, provide for membership and nomination in rules 5 to 16; election of new members in rules 17 to 35; membership security in rules 36 to 46, termination of membership in rules 47 to 52 and, default and readmission to membership in rules 53 to 66. ' The source of power of associations to demarcate the nature of the rights and privileges of its members, is the contract on the basis of which they become members. An individual possessing the prescribed qualifications and desiring to be a member of the petitioner-Stock Exchange has to make an application in Form Appendix "A" prescribed by rule 22 of the said Rules, in which he has to state that the was seeking admission "upon the terms of and under and subject in all respects to the rules, bye-laws and regulations of the Exchange...". Admission of a member is by election by ballot under rule 28, which provides that the election of all new members (whether they shall have been nominated or not) shall be by ballot and a candidate shall be deemed duly elected if approved by a majority of not less than 2/3rd of the votes cast at a meeting of the Governing Board at which not less than one half of the total number of members of the Governing Board are present in addition to the Government nominees, if any. Under rule 29 the Governing Board may, in its absolute discretion, reject any application for admission (whether the candidate shall have been nominated or not), without assigning any reason. The person nominated as a candidate for admission under the rules, however, is not required to pay entrance fee payable by a member, in view of the proviso to rule 32. On admission to membership, a certificate of membership is issued under rule 35. ' When an individual becomes member of the Stock Exchange by accepting all the terms and conditions of the membership, a contract comes into existence between such individual and the Stock Exchange whereby the individual agrees to abide by these rules and regulations of this Stock Exchange and the Stock Exchange impliedly agrees not to deal with him otherwise than in accordance with its rules and regulations. The rights privileges and obligations of a member of the Stock Exchange, thus, have a contractual origin. The nature and extent of the right of a member must, therefore, simply depend upon the material terms of the contract as may be found in the rules and regulations of the Stock Exchange. ' The provisions regarding membership and nomination contained in rules 5 and 6 indicate that the membership is a personal privilege and the right of membership is inalienable. A member cannot assign or transfer any of his rights and privileges attached to membership. This obviously is a restriction on the member, who is prohibited from effecting any transfer inter-vivos. One of the important rights of a member is the right of nomination which, subject to the provisions of the rules, is granted by rule 7 and is described therein as a "personal and non-transferable" right. This right of nomination cannot be exercised by an expelled member or a member who has ceased to be such member under the rules, as provided by rule 8. Under rule 9, on the death or default of a member, his right of nomination ceases and vests in the Stock Exchange. A member with less than seven
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years' standing will have no right to nominate a person for admission in his place except his own son who is eligible, that too with the sanction of the Board. However, once a member completes seven years' standing as a member, he is under rule 11(a) given an important right to nominate any eligible person in his place when he desires to resign. This right to nominate a person in his place is re-enforced by rule 12, which empowers him to make a fresh nomination when his nominee is rejected by the Governing Board. The nomination form is prescribed in Appendix "B" under rule 13, by which the member nominates the eligible person to be named therein as his successor and under which he tenders the resignation of his membership in his favour. This right to nominate the successor on resignation by the member is, however, not an absolute right and a notice of the proposed nomination is to be posted under rule 14 on the notice board of the Exchange for fifteen days during which the claims against the member or in respect of whom the nomination is made, are to be filed. The Governing Board would approve a nomination only if the dues of the Stock Exchange and liabilities relating to contracts have been paid and satisfied in full as per rule 15. Thus, when there are no liabilities outstanding, the member who has a standing of seven years, has a valuable right of nominating his successor, who on acceptance of the nomination by the Governing Board as per the rules, will become a member in the place of the nominator. ' On the death of the member, though this right of nomination of the deceased member vests in the Exchange under rule 9, that vesting is to be read subject to rule 11(b) under which the legal representatives mentioned in Appendix "C" of the rules are empowered with the sanction of the Governing Board to nominate an eligible person as a candidate for admission in the place of the deceased person. Thus, while a living member who has seven years' standing does not require sanction of the Board for nominating a person eligible for admission in his place, the heirs of a deceased member can make the nomination "with the sanction of the Board", which words appear in rule 11(b) as also in the proviso to rule 11(a) which deals with nomination by a member of his son, but are conspicuously absent from rule 11(a) giving the right to nominate to a member having seven years' standing subject, of course, to the provisions of rules 15 and 50, requiring the outstanding to be paid up before the nomination could be approved by the Board. The Governing Board has, however, power in both the cases to admit a member by the prescribed procedure or to reject the nomination, in which event a fresh nomination can be submitted under rule 12. This, therefore, is the nature and extent of the right of a member and the heirs of a deceased member to nominate a person eligible under the rules in the place of the retiring or deceased member, as the case may be. ' Appendix "C" under rule 11(b) lays down guidelines for the Governing Board to follow when dealing with the matter under rule 11(b). In the first five clauses are mentioned combinations of the heirs of the deceased and preference is to be given to a person recommended by them in the order indicated. In clause (vi), which is relevant, it is provided that "in any other event the Governing Board shall, subject to the rules of the Exchange relating to the qualifications of candidates, have an absolute discretion to make the nomination in favour of any person it may think fit". Thus, though the right to nomination of a deceased member vests in the Stock Exchange under rule 9, it can be exercised by his heirs mentioned in Appendix "C" under rule 11(b) with the sanction of the Board and if there be no recommendation by such heirs, the right to nominate which was vested in the Stock Exchange can be exercised by the Governing Board in its absolute discretion subject to the rules of the Exchange relating to qualifications. Thus, the right of nomination of a deceased member vesting in the Stock Exchange is by rule 11(b), allowed to be exercised by the heirs of such member with the Board's sanction and in the absence of the heirs availing of it, by the Board itself in its absolute discretion. When this event empowering the Board to exercise the right to nomination of a deceased member occurs as per clause (vi) of Appendix "C", there would remain no right of the heirs to nominate with Board's consent a person for the candidature in the place of
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the deceased member. In other words, the heirs lose their right to nominate if they do not make the nomination as per rule 11(b), read with clauses (i) to (v) of Appendix "C" and they cannot after the Board comes into the picture under clause (vi) of Appendix "C", nominate any person. Thus, even the limited and hedged in right of nomination by the heirs would, in other words, be extinguished at that…
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