# 14 S.C.R. 409 THE STOCK EXCHANGE, BOMBAY v. V. S. KANDALGAONKAR & ORS

- **Citation:** [2014] 14 S.C.R. 409
- **Court:** Supreme Court of India
- **Decided:** 2014-09-25
- **Case number:** Civil Appeal No. 4354 of 2003
- **Bench:** R. M. Lodha, Kurian Joseph, R. F. Nariman
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/14-s-c-r-409-the-stock-exchange-bombay-v-v-s-kandalgaonkar-ors-29746
- **Pages:** 47

## Headnote

Income Tax Act, 1961:
A
B
s.226(3) - Assessee in default of income tax - Such C
assessee, also declared a defaulter member of Stock
Exchange - Priority over debts owed by defaulter member
to Stock Exchange and Income Tax Department - Held:
Membership card is only a personal permission from Stock
Exchange to exercise the rights and privileges that may be D
given subject to Rules, Bye-Laws and Regulations of Stock
Exchange -
Therefore, the proceeds of a membership card
cannot be paid over to Income Tax Department for the dues
of the members -As regards securities deposited with Stock
Exchange, the lien possessed by Stock Exchange makes it E
a secured creditor and, as such, it would have priority over
Government dues - Provincial Insolvency Act, 1920- s. 2( e)
- Securities and Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002 ~ s.2(zf) -
Constitution of India, 1950-Art. 372 - Securities Contracts F
(Regulation) Act, 1956- ss. 8 and 9- Rules framed underrr. 5, 9, 16(iii) and 43 - Subordinate legislation.
Allowing the appeal, the Court
HELD : 1.1 In view of Rules 5 and 9 of the Rules
framed under the Securities Contracts (Regulation) Act, G
1956, 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
H
409
l
I·
ii;;
I
410
SUPREME COURT REPORTS l
[2014] 14 S.C.R.
! '
'
A 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 defaul~ing member. Theref~re, th~ proceeds of a I ·.
membershrp card cannot be pard over to Income Tax /
B . Department for the dues of the members by virtue of r.16 '
(iii), as such a member at.no point of time owns any
property capable of attachment. [Para 14 and 17]
[434-F-H; 438-C-E]
.. '
/sha Valimohamad and Anr. v: · Haji Gut{im
C ""·
Mohamad & Haji Dada Trust 1975 (1) SCR 720;
Stock Exchange,· Ahmedabad v. Asstt.
· Commisioner'of Income Tax, Ahmedabad 2001
' '. (2) SCR 255 =' 2001 · (3) sec 559 - relied on.
. -·-· -, .
.
.
.
.
.
''-<
. "'
,
. . .· 2. The expression "transfer" can depending upon
. D its context mean transfer of ownership or transfer of
, possession. As regards the securities deposited by th'e
' member with the Stoi:k Exchange, it is clear that what ls
'transferred is only possession as the niember only
. E
"de~C>s\ts" th~~e.s~c~i'ities. [Par~ 17][439:~·GJ:;' < '1.''
, .· · Vasudev ·. Ramchandra ·.She/at. · v. Pran/al ·
.·
.
.
·.
.
. . . . .
. .
" .
. . . .
. · .. ' .
. . ,
.. ,, . Jayanand Thakur & Ors., 1915 (2) SCR .534; ·•
; . .
· "
.. ,
.
.
,
.. ,
·.
. .
.
.,
. " ... '
. .
. ,
'
Bombay Stock Exchange v. Jaya Shah 2003 (4).~•.-.:. .
·
·
F
· · :Suppl; SCR 892 = 2004 (1) SCC 160- relied ...
on.·,
·--'\'_._
~,-,\ ... 1 __
· 3.1 It is settled law that Government debts have ·
precedence only over unsecured credit6rs. The moment
. the Stock Exchange has a .lien ove.r the member's
securities, it would have precedence over income tax
G dues. [Para 19][444-F~G; 445:F-G] ':' '·'
·_· ... ·
.
. .
.
.
,
'
,
.
.
. . . , ... , ;, ; . , l
Dena Bank v. Bhikabhai Prabhudas Parekh· : ·
· Co. 2000 (3) SCR 509 =2000'.(5) SCC.G94 - •. ,
, .
·· relied on
· ·· · ··
..
H
i
\
I
I /
... -- · ; THE STOCK EXCHANGE, BOMBAY v. V. S.
~' KANDALGAONKAR & ORS.
411 ···
. Triveni Shankar Saxena v. State. of U.P. &
Ors.1991 (3) Suppl. SCR 534 =1992 Suppl. 1 .
. SCC 524; K.S. Saradambal v. Jagannatham K
A
:--.:- .__,_ ---
Brothers, (1972) 42. Companies Case 359 ..:.
referred to.
·
. .
-,·
·_
·-.
'
--
'
3.2 In the instanfcase, the first and paramount lien B
· given to the Stock Exchange is by Rule 43 of the Rules
made u/s 8 of the Securities Contract (Regulations) Act.
Rules made by Stock Exchanges in exercise of powers
conferred by the Securities Contracts (Regulation) Act
are equally. "Rules"· and, therefore; 'subordinate C

## Text

_Characters 0–39,658 of 84,268. This is a partial read: ask again with offset=39658 for what follows._

[i014] 14 S.C.R. 409
THE STOCK EXCHANGE, BOMBAY
v.
V. S. KANDALGAONKAR & ORS.
(Civil Appeal No. 4354 of 2003)
SEPTEMBER 25, 2014
(R. M. LODHA, CJI, KURIAN JOSEPH AND
R. F. NARIMAN, JJ.)
Income Tax Act, 1961:
A
B
s.226(3) - Assessee in default of income tax - Such C
assessee, also declared a defaulter member of Stock
Exchange - Priority over debts owed by defaulter member
to Stock Exchange and Income Tax Department - Held:
Membership card is only a personal permission from Stock
Exchange to exercise the rights and privileges that may be D
given subject to Rules, Bye-Laws and Regulations of Stock
Exchange -
Therefore, the proceeds of a membership card
cannot be paid over to Income Tax Department for the dues
of the members -As regards securities deposited with Stock
Exchange, the lien possessed by Stock Exchange makes it E
a secured creditor and, as such, it would have priority over
Government dues - Provincial Insolvency Act, 1920- s. 2( e)
- Securities and Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002 ~ s.2(zf) -
Constitution of India, 1950-Art. 372 - Securities Contracts F
(Regulation) Act, 1956- ss. 8 and 9- Rules framed underrr. 5, 9, 16(iii) and 43 - Subordinate legislation.
Allowing the appeal, the Court
HELD : 1.1 In view of Rules 5 and 9 of the Rules
framed under the Securities Contracts (Regulation) Act, G
1956, 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
H
409
l
I·
ii;;
I
410
SUPREME COURT REPORTS l
[2014] 14 S.C.R.
! '
'
A 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 defaul~ing member. Theref~re, th~ proceeds of a I ·.
membershrp card cannot be pard over to Income Tax /
B . Department for the dues of the members by virtue of r.16 '
(iii), as such a member at.no point of time owns any
property capable of attachment. [Para 14 and 17]
[434-F-H; 438-C-E]
.. '
/sha Valimohamad and Anr. v: · Haji Gut{im
C ""·
Mohamad & Haji Dada Trust 1975 (1) SCR 720;
Stock Exchange,· Ahmedabad v. Asstt.
· Commisioner'of Income Tax, Ahmedabad 2001
' '. (2) SCR 255 =' 2001 · (3) sec 559 - relied on.
. -·-· -, .
.
.
.
.
.
''-<
. "'
,
. . .· 2. The expression "transfer" can depending upon
. D its context mean transfer of ownership or transfer of
, possession. As regards the securities deposited by th'e
' member with the Stoi:k Exchange, it is clear that what ls
'transferred is only possession as the niember only
. E
"de~C>s\ts" th~~e.s~c~i'ities. [Par~ 17][439:~·GJ:;' < '1.''
, .· · Vasudev ·. Ramchandra ·.She/at. · v. Pran/al ·
.·
.
.
·.
.
. . . . .
. .
" .
. . . .
. · .. ' .
. . ,
.. ,, . Jayanand Thakur & Ors., 1915 (2) SCR .534; ·•
; . .
· "
.. ,
.
.
,
.. ,
·.
. .
.
.,
. " ... '
. .
. ,
'
Bombay Stock Exchange v. Jaya Shah 2003 (4).~•.-.:. .
·
·
F
· · :Suppl; SCR 892 = 2004 (1) SCC 160- relied ...
on.·,
·--'\'_._
~,-,\ ... 1 __
· 3.1 It is settled law that Government debts have ·
precedence only over unsecured credit6rs. The moment
. the Stock Exchange has a .lien ove.r the member's
securities, it would have precedence over income tax
G dues. [Para 19][444-F~G; 445:F-G] ':' '·'
·_· ... ·
.
. .
.
.
,
'
,
.
.
. . . , ... , ;, ; . , l
Dena Bank v. Bhikabhai Prabhudas Parekh· : ·
· Co. 2000 (3) SCR 509 =2000'.(5) SCC.G94 - •. ,
, .
·· relied on
· ·· · ··
..
H
i
\
I
I /
... -- · ; THE STOCK EXCHANGE, BOMBAY v. V. S.
~' KANDALGAONKAR & ORS.
411 ···
. Triveni Shankar Saxena v. State. of U.P. &
Ors.1991 (3) Suppl. SCR 534 =1992 Suppl. 1 .
. SCC 524; K.S. Saradambal v. Jagannatham K
A
:--.:- .__,_ ---
Brothers, (1972) 42. Companies Case 359 ..:.
referred to.
·
. .
-,·
·_
·-.
'
--
'
3.2 In the instanfcase, the first and paramount lien B
· given to the Stock Exchange is by Rule 43 of the Rules
made u/s 8 of the Securities Contract (Regulations) Act.
Rules made by Stock Exchanges in exercise of powers
conferred by the Securities Contracts (Regulation) Act
are equally. "Rules"· and, therefore; 'subordinate C ·
' legislation. Therefore, the lien spoken of by Ruie 43 is a
lien; co'nferred by Rules irnder a statute.' [Para 21]
[451~0-F]
. "
.
· • 1 FOrwarding P. Ltd. and anotherv. Trustees, Port of
Vizagapatnam, and Anr., (1987) 61 Company
Cases 513; Board of Trustees, Bombay v. Indian
Oil Corporation 1998 (2) SCR 77 4 =1998 (4) SCC
302 - referred to .
D
3;3 Income Tax Act' does not provide for ariy E
paramountcy of dues by way of income tax. In the i_nstan_t.
/
· case, the common law of England qua Crown debts •
became applicable by virtue of Art. 372 of the
Constitution which states that all laws in force in. the
territory of India immediately before the commencement . F
of the Constitution shall continue in force until altered
"-'--·
·or repealed by a· competent legislature or; other
competent authority: The lien possessed.by the Stock:
Exchange makes it a'. secured creditor and, as such, if
would have priority ove.r Government dues. [Para 24-25] ' G
[454-D-F; 455-A-B]
,
.
' ·. . ,
, : . 'r
·. ,
.
·
-
i
'
·-----
.__;__ 1
I
·Collector of Aurangabad andAnr. v. Central Bar:k
· • / \
of India and Anr. 1967 (3) SCR 855; Giles v . ., . -"-.'. \
. · ·
Gr?ver (1832) (131) English Reports 563 -
\ ~ ~
re Ired on.
. ,
··
·..
. .
·. \ H
' '
412
SUPREME COURT REPORTS
[2014] 14 S.C.R.
A
CASE LAW REFERENCE
2001 (2) SCR 255
relied on
para 11
2000 (3) SCR 509
relied on
para 17
1975 (2) SCR 534
relied on
para 17
B 2003 (4) Suppl. SCR 892
relied on
para 17
2000 (3) SCR 509
relied on
para 19
. 1991 (3) Suppl. SCR 534
referred to para 19
(1972) 42 Companies Case 359 referred to
para 19
C (1987) 61 Company Cases 513
referr~d to para 22
1998 (2) SCR 774
referred to
para 22
(1832) (131) English Reports 563 referred to para 24
1967 (3) SCR 855
referred to
para 24
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
D 4354 of 2003.
From the judgment and order dated 27.03.2003 in W.P.
No. 220 of 1997 passed 'by the Division Bench of the High
Court at Bombay.
E
Arvind P. Datar, Sr. Adv., Pratap Venugopal and Surekha
Raman (For M/s. K.J. John & Co.), Advocates for the Appellant.
R.P. Bhatt, Sr. Adv., Arijit Prasad, Vikas Malhotra,
Ms. Sriparna Chatterjee, Wasim A. Qadri, Ms. Anil Katiyar,
B.V. Balramdas, Bhargava V. Desai and Archana, Advocates
F for the Respondents.
'
The Judgment of the Court was delivered by ·
R. F. NARIMAN, J.
1. The present matter arises as the result of a member
G 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
H as follows :
·
THE STOCK EXCHANGE, BOMBAY v. V. S.
· 413
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]
By a notice dated 29th June 1994, the .Stock Exchange, A
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 TaxAct, the Income
Tax Department wrote to the Stock Exchange and told them B
that Shri Shah's membership card being liable to be auctioned,
the amount realized at such auction should be paid towards
Income Tax dues of Assessment Year 1989-90 and 1990-91
amounting to Rs.25.43 Lakhs. The Stock Exchange, Bombay
by its letter dated 11th October 1995 replied to the said notice c
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 D
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 E
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 F
Exchange, Bombay wrote to the Income Tax Department calling
upon them to withdraw the prohibitory order dated ·10th May
1996 in view of the fact that the membership right of the
Exchange is a personal privilege and is inalienable. By a letter
dated 27th December 1996, the Tax Department wrote back G
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.
H
414
A
B
·c
.D
E.
F
G
·H
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SUPREME COURT REPORTS
. [2014] 14 S.C.R.
Ji
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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 t~ 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"
h.
'
ereto;
.. , .
-
, ,
'~
t·.
r ,
... (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,Orderdated 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 perso'n as the petitioner may
decid~ and to apply the consi.deration 'received
therefore and also appropriate all other securities
"
THE STOCK EXCHANGE, BOMBAYv. V. S.
415
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]
placed with the Petitioner by Suresh d. Shah and
A
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 B
Exchange.were rejected and the Writ Petiti.on was dismissed.
,, r ; 5. A Special Leave.Petition was filed against the said.
judgment being SLP(Civil) .No. 8245 of,2003 in which, by an
order dated 7th May 2003, the operation of the judgment was
not stayed to the extent that it specifically directed ttie petitioner c
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
stpyed. ·
. .
D
'. 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
; ·'
•
,
I
,
.
m some detail.
.
, ·.
:·
.
.
•
, ,
. 7 .. Section 226 of. the income T~~ Act provides for a·. E
gilrnishee notice in the following terms:
~
- -
-~ ' -
· ·' ·. , "Section 226 3(i) The assessing officer or tax recovery
officer may, at ahy time or from time to time, by notice
.in writing require any person 'rrom whom money is due
... or may become due to the a·ssessee or any person who F
, . '. holds ·or may. subsequently hold money for or on
account of the a·sssessee, 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_(notbeing before the money G
becomes due or is held) so much of the money as is
sufficient to pay the am6unt due by the assessee in
'J. . respect of arrears or the whole of the money when it is
equal to or less than that amount."
, // ·
!\:-::.-·. -
.
-
... ·
/.'.-.
//-\.
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/
416
A
B
c
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E
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G
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SUPREME COURT REPORTS
[2014) 14 S.C.R.
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 ofa) 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 oth-er movable property
(except as aforesaid) -
the person in
possession of the same from giving it over to
the defaulter.
(2) A copy of such order shall be affixed on some
conspicuous part of the office of the tax recovery
officer, and another copy shall be sent, in the
case of the debt, to the debtor, in the case of the
share, to proper officer of the corporation, and
in the case of the other movable property (except
as aforesaid), to the person in possession of
the same.
(3) A debtor prohibited under clause (i) of sub-rule
(1) may pay the amount of his debt to the tax
recovery officer, and such payment shall
THE STOCK EXCHANGE, BOMBAY v. V. S.
417
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]
discharge him as effectually as payment to the
A
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:
B
"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 c
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 0
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
E
the period specified therein, the Central Government may
make the rules for, or amend the rules made by, tlie
recognised stock exchange, either in the form proposed
F
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 G
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
H
418
A
B
c
D
E
F
G
H
SUPREME COURT REPORTS
[2014) 14 S.C.R.
made or amended shall, notwithstanding anything to the
contrary contained in the Companies Act, 1956(Iof1956),
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 byelaws.-
(1)Any recognised stock exchange may, subjectto 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 e~ch settlement period;
(iii) the total number of each category of security
actually delivered at each clearing;
THE STOCK EXCHANGE, BOMBAY v. V. S.
419
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.)
(d) the publication by the clearing house of all or any of A
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;
(e) the regulation or prohibition of blank transfers;
B
(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 c
facilities;
(h) the fixing, altering or postponing of days for
settlements;
(i) the dete.rmination and declaration of market rates,
including the opening, closing, highest and lowest rates D
for securities;
G) the terms, conditions and incidents of contracts,
including the prescription of margin requirements, if any,
and conditions rel~ting thereto, and the forms ofcontracts E
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
F
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 n'ot parties to such contracts;
G
(I) the regulation of taravani business including the placing
of limitations thereon;
.
(m) the listing of securities or the stock exchange, the
inclusion of any security for the purpose of dealings and
the suspension or withdrawal of any such securities, and
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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;
B
(o) the levy and recovery of fees, fines and penalties;
(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 makirig, comparing, settling and closing of
"
c
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 p.owers in such
D
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
E
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
F
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
G
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:-
H
THE STOCK EXCHANGE, BOMBAY v; V. S.
421
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.)
(i) fine;
.
A
(ii) expulsion from membership; .
(iii) suspension from membership for a specified
period;
(iv) any other penalty of a like nature not involving the B
payment of money.
(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 C
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 D
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."
E
8. As a number of rules of the Stock Exchange have been
referred to in the course of argument, we will set down those
wl1ich 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
F
and Regulations of the Exchange.
G
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.
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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.
Forfeited or Lapsed Right of Membership
B
10. When a right of.membership is forfeited to or vests
in the Exchange underany 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
c
such member and the Governing Board shall be entitled
to deal with or dispose of such right of membership as it
may think fit.
D
E
F
G
H
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 Go~erning 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
THE STOCK EXCHANGE, BOMBAY v. V. S.
423
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]
and claims in full they shall be paid and satisfied pro A
rata; and
Surplus
iii. third-the payment of the surplus if any to the funds
of the Excha11ge: provided that the Exchange in
general meeting may at its absolute discretion direct B
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 C
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.
D
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.
E
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 F
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 G
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.
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Change of Security
B
D
E
F
G
H
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
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-iaws 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 Fto 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 STOCK EXCHANGE, BOMBAY v. V. S.
425
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]
The Governing Board,
A
The Stock Exchange,
Bombay.
Gentlemen,
Having been admitted as a member of the Stock B
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 (Name of Bank) the securities mentioned below,
C
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 D
· 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 E
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
F
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 G
· 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 H
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Exchange or the Clearing House to whom 1 or any
partnership of which I may be a partner maybe 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
B
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
c
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
o
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 and bar inquiry of any kind at the instance of
E
myself or any one in my right in respect thereof.
F
G
H
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'sAssets ·
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 .
THE STOCK EXCHANGE, BOMBAY v. V. S.
427
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]
in the Defaulters' Committee for. the benefit and on
A
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
B
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
c
330. The Defaulters' Committee shall at the risk and cost
of the creditor members pay all assets received in the
course of realisation info 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 D
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.
Application of Defaulters' Assets and Other Amounts
E
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
F
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 G
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,
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428
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B
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[2014] 14 S.C.R.
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 I
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, det:>ts,
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;
(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 contrib.utions) and not recovered by the
Fund and the interest payable by the defaulter to
the Fund in respect thereof;
. THE STOCK EXCHANGE, BOMBAY v. V. S.
429
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]
(v)
Fifth -the balance, if any, shall be paid into the Fund
A
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;
B
(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, C
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; D
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
E
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
F
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 G
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 H
430
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SUPREME COURT REPORTS
[2014] 14 S,C.R.
extent of any and all amounts paid out of the
Customers' Protection Fund towards the
obligations or liabilities of the .defaulter and interest
thereon atthe rate of2.5% 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
E which according to it arose for determination. They are:
F
[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
Sctied ule -11 to the Income Tax Act, the Balance Surplu·s
amount lying with BSE out of the sale proceeds of the
nomination rights of the DefaultercMember under rule
16(1 )(iii) framed by BSE r/w the Resolution of the General
. Body of BSE dated 13. 10.1999?
G
[BJ 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?
H
THE STOCK EXCHANGE, BOMBAY v. V. S.
431
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]
10. Issue A was answered by saying that though a A
defaulting member had no interest in a membership card and
that the Income Tax Department 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 B
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 c
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 D
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:
E
"11. To sum up, we hereby declare:
(a) .