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Therefore, in this Petition, the important issue which arises for determination is: whether the Department was entitled to attach and recover its dues from the sale proceeds of the Membership Card and whether the Department was entitled to attach the deposits of Suresh Shah (Broker) under the abovementioned various heads on the ground that the Income-tax Department had a priority claim over all other creditors of Suresh Shah, including BSE and the Clearing House.

Arguments

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

Scope of Section 226(3)(i)(x) r/w Section 222 to 225 r/w Rule 26 of Schedule-II to the Income-tax Act, 1961 :

7. In this case, we are concerned with the period after 1st April 1989. Section 222 to 226 fall in Chapter-XVII of the Income-tax Act, which deals with collection and recovery. Section 226 falls under the Caption "Other Modes of Recovery". Section 226(1), inter alia, provides that where no Certificate has been drawn under Section 222, the Assessing Officer may recover the tax by any one or more of the modes provided in Section 226. Section 226(3) provides for one such mode. It, inter alia, contemplates issuance of a Garnishee Notice. It states that a Garnishee Notice may be directed to any person from whom money is due or money becomes due to the assessee or to any person who holds money or who may subsequently hold money on account of the assessee. The requisite condition is that at the time of the service of the Garnishee Notice, there must be subsisting, an ascertained debt in the hands of the Garnishee due to the assessee or there should be some contractual relationship as a consequence of which, money is likely to come in the hands of the Garnishee for and on behalf of the assessee. Under Section 226(3)(x) if the Garnishee fails to pay to the TRO/Assessing Officer, the Garnishee shall be deemed to an assessee in default and further proceedings may be taken against him for realisation of the amount in the manner provided in Sections 222 to 225 and the Notice under Section 226(3)(x) shall constitute attachment of a debt by the TRO under Section 222 of the Income-tax Act. By reason of Section 226(3)(X) r/w Section 222, the provisions of Rule 26 of Schedule-II to the Income-tax Act stands attracted. Rule 23 of Schedule-II to the Income-tax Act provides for attachment and sale of moveables in possession of the Defaulter, whereas Rule 26 deals with attachment and sale of movables in possession of some Other Person. Rule 26(1), inter alia, states that in the case of a debt, not secured by a negotiable instrument, the attachment shall be by a written order, prohibiting the Garnishee from making payment to its Creditor [See Rule 26(1)(a)], whereas Rule 26(1) refers to attachment of other movable property, not in possession of the Defaulter. In such a case, under Rule 26(l)(iii), the attachment will be by a written order, prohibiting the person in possession from handing over the movable to the Defaulter. In this case, we are concerned with attachment of a debt and attachment of any other movable property. In this case, the TRO has invoked Section 226(3)(i)(x) read with Rule 26(l)(a)(c).

However, in this case, a Garnishee Notice has been issued by the TRO under Section 226(3)(i). As stated above, the requisite condition for serving the Garnishee Notice is that there must be subsisting an ascertained debt in hands of BSE due to the assessee (Defaulting-Broker) or there should be some contractual relationship, as a consequence of which, money is likely to come in the hands of BSE (Garnishee) for an on behalf of the assessee-Broker. Therefore, either of the two conditions, if satisfied, would attract Section 226(3)(i), which is one of the modes of recovery prescribed under the Income-tax Act.

Now, in the present case, there existed a contractual relationship between the Broker and BSE. However, on 29th June, 1994, the Broker was declared a Defaulter under the Rules of BSE and his right of membership stood vested in the Exchange on his being declared a Defaulter. Under Issue No. 1, we are concerned with attachment of the BSE Membership Card allotted to the Broker. As held hereinabove, the Defaulting-Member, had no interest in the Membership Card or its sale. Therefore, the TRO was not right in attaching such sale proceeds. However, as stated above, the TRO has issued Notice under Section 226(3)(i) & (x) and, as as consequence money, which is likely to come in the hands of the Garnishee-BSE for and on behalf of the assessee-Broker, is attachable because the requisite condition for service of the Garnishee Notice is subsistence of an ascertained debt in the hands of the Garnishee (BSE) due to the assessee-Broker or existence of a contractual relationship between the Broker and BSE consequent upon which, money is likely to come in the hands of the Garnishee for and on behalf of the assessee-Broker. Therefore, even if the Broker-Member has no right, title and interest in the Membership Card, still in view of Rule 16(1)(iii) of the Stock Exchange Rules, the Balance Surplus would become payable to the TRO as the said amount came into the hands of BSE for and on behalf of the assessee-Broker in the course of administration of assets and allocation under Rule 16(1)(iii) read with the General Body Resolution dated 13th October 1999. This Balance Surplus comes to Rs. 34,06,680.00. Therefore, we are directing this amount of Balance Surplus to be paid over by BSE to the TRO as per the impugned show-cause Notice under Section 226(3)(i).