Holding

A membership card is a personal privilege, not property, so its proceeds are not attachable, while securities deposited are attachable, and the BSE's lien under Rule 43 makes it a secured creditor, giving it priority over government dues which apply only to unsecured creditors.

Summary

The Bombay Stock Exchange (BSE) declared member Suresh D. Shah a defaulter and the Income Tax Department sought to attach the proceeds of his membership card and securities under s.226(3) of the Income Tax Act. BSE argued that a membership card is a personal, non‑transferable privilege and that its lien under Rule 43 makes it a secured creditor, giving it priority over government dues. The Supreme Court held that the membership card does not constitute property and its proceeds cannot be attached, but the securities deposited by the member are assets of the member and are attachable. The lien under Rule 43 creates a secured creditor position for BSE, and government dues have priority only over unsecured creditors. Consequently, the appeal by BSE was allowed and the High Court judgment set aside.

Issues considered

The membership card of a defaulter is a property right that can be attached under s.226(3) Income Tax Act and Rule 26 of Schedule II.
Whether securities deposited by a defaulter with the Stock Exchange are attachable under the same provisions.
Whether the lien created by Rule 43 of the BSE Rules makes the Exchange a secured creditor with priority over income‑tax dues.
Whether the lien under Rule 43 is a statutory lien and its effect on priority of government debts.

Legislation cited

Constitution of Indias. 372
Income Tax Act, 1961s. 226(3), s. Schedule II Rule 26
Provincial Insolvency Act, 1920s. 2(e)
Securities Contracts (Regulation) Act, 1956s. 8, s. 9
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002s. 2(zf)

Subjects

membership carddefaulterincome taxpriority of duessecured creditorliensecuritiesStock ExchangeattachmentIncome Tax Actstatutory liengovernment debt priorityunsecured creditor

Judgment

[i014] 14 S.C.R. 409

THE STOCK EXCHANGE, BOMBAY A
v.
V. S. KANDALGAONKAR & ORS.
(Civil Appeal No. 4354 of 2003)
SEPTEMBER 25, 2014 B
(R. M. LODHA, CJI, KURIAN JOSEPH AND
R. F. NARIMAN, JJ.)
Income Tax Act, 1961:
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 under-
rr. 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
I i \

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I
I
410 SUPREME COURT REPORTS l [2014] 14 S.C.R. !
r/ ... -- · ; THE STOCK EXCHANGE, BOMBAY v. V. S. 411 ···

.I ~' KANDALGAONKAR & ORS.
' '

A a member is declared a defaulter, his right of nomination . Triveni Shankar Saxena v. State. of U.P. & A
:--.:- .__,_ ---
shall cease and vest in the Exchange because even the Ors.1991 (3) Suppl. SCR 534 =1992 Suppl. 1 .
personal privilege given is, at that point, taken away from . SCC 524; K.S. Saradambal v. Jagannatham K
the defaul~ing member. Theref~re, th~ proceeds of a I ·. Brothers, (1972) 42. Companies Case 359 ..:.
membershrp card cannot be pard over to Income Tax / referred to.-,· ·
. . ·_ ' --
·-.

B . Department for the dues of the members by virtue of r.16 ' ' 3.2 In the instanfcase, the first and paramount lien B
(iii), as such a member at.no point of time owns any · given to the Stock Exchange is by Rule 43 of the Rules
. "'
property capable of attachment. [Para 14 and 17]
[434-F-H; 438-C-E]
/sha Valimohamad and Anr.
.. '
Haji Gut{im v: ·
.
,'
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
C ""· Mohamad & Haji Dada Trust 1975 (1) SCR 720; are equally. "Rules"· and, therefore; 'subordinate C ·
Stock Exchange,· Ahmedabad v. Asstt. ' legislation. Therefore, the lien spoken of by Ruie 43 is a
· Commisioner'of Income Tax, Ahmedabad 2001 lien; co'nferred by Rules irnder a statute.' [Para 21]
' '.. -·-·
(2) SCR
-, .
255 =' 2001 ·.(3) sec 559
. . .
- relied on.
.
[451~0-F] . " .
1
, . . .· 2. The expression "transfer" can depending upon · •FOrwarding P. Ltd. and anotherv. Trustees, Port of
D
. D its context mean transfer of ownership or transfer of Vizagapatnam, and Anr., (1987) 61 Company
, possession. As regards the securities deposited by th'e Cases 513; Board of Trustees, Bombay v. Indian
' member with the Stoi:k Exchange, it is clear that whatls Oil Corporation 1998 (2) SCR 774 =1998 (4) SCC
'transferred is only possession as the niember only 302 - referred to .
. E "de~C>s\ts" th~~e.s~c~i'ities. [Par~ 17][439:~·GJ:;' < '1.'' 'i 3;3 Income Tax Act' does not provide for ariy E
,. .· ··. Vasudev
. ·. Ramchandra
. . . . . . ·.She/at.
. " ·. v. . Pran/al
.. . . ·..· ' . .· . . ,. II paramountcy of dues by way of income tax. In the i_nstan_t.
.... ,,, . . Jayanand . Thakur
, & Ors.,
.. , ·. 1915
. . (2) . SCR .534;
., ·•
. " ... '; . . · "
. . . , I 1 · case, the common law of England qua Crown debts •
' Bombay Stock Exchange v. Jaya Shah 2003 (4).~•.-.:. . · · ' became applicable by virtue of Art. 372 of the /

· · :Suppl; SCR 892 = 2004 (1) SCC 160- relied ... Constitution which states that all laws in force in. the
on.·, ·--'\'_._ ~,-,\ ... __ territory of India immediately before the commencement . F
F 1

· 3.1 It is settled law that Government debts have · of the Constitution shall continue in force until altered "-'--·
precedence only over unsecured credit6rs. The moment ·or repealed by a· competent legislature or; other
competent authority: The lien possessed.by the Stock:
l . 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] ':'. '·' . . ·_.·... · . J.
Exchange makes it a'. secured creditor and, as such, if
would have priority ove.r Government dues. [Para 24-25] ' G
I· . . . , ' , . , ... , ;, ; . , l
[454-D-F; 455-A-B] , . ' ·. . , , : . 'r ·. ,
Dena Bank v. Bhikabhai Prabhudas Parekh· : · . · - i ' ·----- .__;__ 1 I
· Co. 2000 (3) SCR 509 =2000'.(5) SCC.G94 - •. , ·Collector ofAurangabad andAnr. v. Central Bar:k · • / \
,. ·· relied on · ·· · ·· .. of India and Anr. 1967 (3) SCR 855; Giles v. ., . -"-.'. \ . · ·
• Gr?ver (1832) (131) English Reports 563 - \ ~ ~
ii;; H re Ired on. . , ·· ·.. . . ·. \ H

-I
''
•
I i \

''-<
I
I
410 SUPREME COURT REPORTS l [2014] 14 S.C.R. !
r/ ... -- · ; THE STOCK EXCHANGE, BOMBAY v. V. S. 411 ···

.I ~' KANDALGAONKAR & ORS.
' '

A a member is declared a defaulter, his right of nomination . Triveni Shankar Saxena v. State. of U.P. & A
:--.:- .__,_ ---
shall cease and vest in the Exchange because even the Ors.1991 (3) Suppl. SCR 534 =1992 Suppl. 1 .
personal privilege given is, at that point, taken away from . SCC 524; K.S. Saradambal v. Jagannatham K
the defaul~ing member. Theref~re, th~ proceeds of a I ·. Brothers, (1972) 42. Companies Case 359 ..:.
membershrp card cannot be pard over to Income Tax / referred to.-,· ·
. . ·_ ' --
·-.

B . Department for the dues of the members by virtue of r.16 ' ' 3.2 In the instanfcase, the first and paramount lien B
(iii), as such a member at.no point of time owns any · given to the Stock Exchange is by Rule 43 of the Rules
. "'
property capable of attachment. [Para 14 and 17]
[434-F-H; 438-C-E]
/sha Valimohamad and Anr.
.. '
Haji Gut{im v: ·
.
,'
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
C ""· Mohamad & Haji Dada Trust 1975 (1) SCR 720; are equally. "Rules"· and, therefore; 'subordinate C ·
Stock Exchange,· Ahmedabad v. Asstt. ' legislation. Therefore, the lien spoken of by Ruie 43 is a
· Commisioner'of Income Tax, Ahmedabad 2001 lien; co'nferred by Rules irnder a statute.' [Para 21]
' '.. -·-·
(2) SCR
-, .
255 =' 2001 ·.(3) sec 559
. . .
- relied on.
.
[451~0-F] . " .
1
, . . .· 2. The expression "transfer" can depending upon · •FOrwarding P. Ltd. and anotherv. Trustees, Port of
D
. D its context mean transfer of ownership or transfer of Vizagapatnam, and Anr., (1987) 61 Company
, possession. As regards the securities deposited by th'e Cases 513; Board of Trustees, Bombay v. Indian
' member with the Stoi:k Exchange, it is clear that whatls Oil Corporation 1998 (2) SCR 774 =1998 (4) SCC
'transferred is only possession as the niember only 302 - referred to .
. E "de~C>s\ts" th~~e.s~c~i'ities. [Par~ 17][439:~·GJ:;' < '1.'' 'i 3;3 Income Tax Act' does not provide for ariy E
,. .· ··. Vasudev
. ·. Ramchandra
. . . . . . ·.She/at.
. " ·. v. . Pran/al
.. . . ·..· ' . .· . . ,. II paramountcy of dues by way of income tax. In the i_nstan_t.
.... ,,, . . Jayanand . Thakur
, & Ors.,
.. , ·. 1915
. . (2) . SCR .534;
., ·•
. " ... '; . . · "
. . . , I 1 · case, the common law of England qua Crown debts •
' Bombay Stock Exchange v. Jaya Shah 2003 (4).~•.-.:. . · · ' became applicable by virtue of Art. 372 of the /

· · :Suppl; SCR 892 = 2004 (1) SCC 160- relied ... Constitution which states that all laws in force in. the
on.·, ·--'\'_._ ~,-,\ ... __ territory of India immediately before the commencement . F
F 1

· 3.1 It is settled law that Government debts have · of the Constitution shall continue in force until altered "-'--·
precedence only over unsecured credit6rs. The moment ·or repealed by a· competent legislature or; other
competent authority: The lien possessed.by the Stock:
l . 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] ':'. '·' . . ·_.·... · . J.
Exchange makes it a'. secured creditor and, as such, if
would have priority ove.r Government dues. [Para 24-25] ' G
I· . . . , ' , . , ... , ;, ; . , l
[454-D-F; 455-A-B] , . ' ·. . , , : . 'r ·. ,
Dena Bank v. Bhikabhai Prabhudas Parekh· : · . · - i ' ·----- .__;__ 1 I
· Co. 2000 (3) SCR 509 =2000'.(5) SCC.G94 - •. , ·Collector ofAurangabad andAnr. v. Central Bar:k · • / \
,. ·· relied on · ·· · ·· .. of India and Anr. 1967 (3) SCR 855; Giles v. ., . -"-.'. \ . · ·
• Gr?ver (1832) (131) English Reports 563 - \ ~ ~
ii;; H re Ired on. . , ·· ·.. . . ·. \ H

-I
''
•
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
·~
..
Ji

•• I
/ " '

414 SUPREME COURT REPORTS . [2014] 14 S.C.R. THE STOCK EXCHANGE, BOMBAYv. V. S. 415
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]

A 3. The Stock Exchange then filed a Writ Petition being placed with the Petitioner by Suresh d. Shah and A
Writ Petition No.220 of 1997 dated 24th December 1996 in ..· which have vested in the Petitioner in accordance
which the following reliefs were claimed: . with the Rules, Bye-laws and regulations of the
(a) ·· that this Hon'ble Court may be pleased t~ issue a Petitioner; ·
writ of certiorari or a writ in the nature of certiorari 4. The Writ Petition was finally heard and by a judgment
B · or any other ·appropriate writ, order or direction dated 27th March 2003, most of the contentions of the Stock B
under Article 226 of the Constitution of India calling Exchange.were rejected and the Writ Petiti.on was dismissed.
for the records in relation to the recovery ,, r ; 5. A Special Leave.Petition was filed against the said.
proceedings initiated by the Respondents against judgment being SLP(Civil) .No. 8245 of,2003 in which, by an

l
· Mr.· Suresh D. Shah and after going through the order dated 7th May 2003, the operation of the judgment was
·c · same and examining the legality and validity thereof not stayed to the extent that it specifically directed ttie petitioner c
to quash and set aside the impugned notice dated to make certain payments and handover securities to the
5th October, 1995 and the impugned order dated . Income Tax Department. However, in so far as the judgment.
10th May 1996, Impugned Notice/ letter dated 27th . declared law, the operation of such declaration of law was
December 1996 being Exhibits "D", "F" and "H" stpyed. · .. D
.D .
hereto;
'
.. , .
- ,, '~ t·. r , '. 6. As this Civil Appeal raises important questions of law·
... (b) that this Hon'ble Court may be pleased to issue a . · both from the point of view of the Bombay Stock Exchange
... writ of mandamus or any other appropriate writ, and the Income Tax Department, we are going into the matter
order or direction' under Article 226 of the ; ·'
m some detail. .
• ,
, ·.
I
:·
,
. . •
.

, , . 7 ..Section 226 of. the income T~~ Act provides for a·. E
Constitution of India ordering and. directing the
E. Respondents to withdraw. forthwith. the recovery
gilrnishee notice in the following terms:
· proceedings initiated against in respect of the dues ~ - - -~ '-
.of Mr Suresh D. Shah and ordering and directing. · ·' ·. , "Section 226 3(i) The assessing officer or tax recovery
·.the.· Respondents to withdraw forthwith the officer may, at ahy time or from time to time, by notice
impugned notice dated 5th October; 1995 and the .in writing require any person 'rrom whom money is due
F impugned notice dated 5th October: 1995 and the ... or may become due to the a·ssessee or any person who F
impugned prohibitory,Orderdated 10th May, 1996, , . '. holds ·or may. subsequently hold money for or on
Impugned Notice/letter dated 27th December ·1996 account of the a·sssessee, to pay the assessing officer
being Exhibits ;·D", "F" and "H" hereto; · · · · , or tax recovery officer either forthwith upon the money
•becoming due or being held or at or within the time
(c)' that this Hon'ble Court be pleased to permit the
G specified in the notice_(notbeing before the money G
Petitioner to exercise the right of nomination in
becomes due or is held) so much of the money as is
respect of the membership'right of Suresh D. Shah
sufficient to pay the am6unt due by the assessee in
in favour of such perso'n as the petitioner may
'J. . respect of arrears or the whole of the money when it is
decid~ and to apply the consi.deration 'received
"t equal to or less than that amount." ,// ·
therefore and also appropriate all other securities !\:-::.-·. - . - ... · /.'.-. //-\. H
·H
~ . '- . /
·~
..
Ji

•• I
/ " '

414 SUPREME COURT REPORTS . [2014] 14 S.C.R. THE STOCK EXCHANGE, BOMBAYv. V. S. 415
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]

A 3. The Stock Exchange then filed a Writ Petition being placed with the Petitioner by Suresh d. Shah and A
Writ Petition No.220 of 1997 dated 24th December 1996 in ..· which have vested in the Petitioner in accordance
which the following reliefs were claimed: . with the Rules, Bye-laws and regulations of the
(a) ·· that this Hon'ble Court may be pleased t~ issue a Petitioner; ·
writ of certiorari or a writ in the nature of certiorari 4. The Writ Petition was finally heard and by a judgment
B · or any other ·appropriate writ, order or direction dated 27th March 2003, most of the contentions of the Stock B
under Article 226 of the Constitution of India calling Exchange.were rejected and the Writ Petiti.on was dismissed.
for the records in relation to the recovery ,, r ; 5. A Special Leave.Petition was filed against the said.
proceedings initiated by the Respondents against judgment being SLP(Civil) .No. 8245 of,2003 in which, by an

l
· Mr.· Suresh D. Shah and after going through the order dated 7th May 2003, the operation of the judgment was
·c · same and examining the legality and validity thereof not stayed to the extent that it specifically directed ttie petitioner c
to quash and set aside the impugned notice dated to make certain payments and handover securities to the
5th October, 1995 and the impugned order dated . Income Tax Department. However, in so far as the judgment.
10th May 1996, Impugned Notice/ letter dated 27th . declared law, the operation of such declaration of law was
December 1996 being Exhibits "D", "F" and "H" stpyed. · .. D
.D .
hereto;
'
.. , .
- ,, '~ t·. r , '. 6. As this Civil Appeal raises important questions of law·
... (b) that this Hon'ble Court may be pleased to issue a . · both from the point of view of the Bombay Stock Exchange
... writ of mandamus or any other appropriate writ, and the Income Tax Department, we are going into the matter
order or direction' under Article 226 of the ; ·'
m some detail. .
• ,
, ·.
I
:·
,
. . •
.

, , . 7 ..Section 226 of. the income T~~ Act provides for a·. E
Constitution of India ordering and. directing the
E. Respondents to withdraw. forthwith. the recovery
gilrnishee notice in the following terms:
· proceedings initiated against in respect of the dues ~ - - -~ '-
.of Mr Suresh D. Shah and ordering and directing. · ·' ·. , "Section 226 3(i) The assessing officer or tax recovery
·.the.· Respondents to withdraw forthwith the officer may, at ahy time or from time to time, by notice
impugned notice dated 5th October; 1995 and the .in writing require any person 'rrom whom money is due
F impugned notice dated 5th October: 1995 and the ... or may become due to the a·ssessee or any person who F
impugned prohibitory,Orderdated 10th May, 1996, , . '. holds ·or may. subsequently hold money for or on
Impugned Notice/letter dated 27th December ·1996 account of the a·sssessee, to pay the assessing officer
being Exhibits ;·D", "F" and "H" hereto; · · · · , or tax recovery officer either forthwith upon the money
•becoming due or being held or at or within the time
(c)' that this Hon'ble Court be pleased to permit the
G specified in the notice_(notbeing before the money G
Petitioner to exercise the right of nomination in
becomes due or is held) so much of the money as is
respect of the membership'right of Suresh D. Shah
sufficient to pay the am6unt due by the assessee in
in favour of such perso'n as the petitioner may
'J. . respect of arrears or the whole of the money when it is
decid~ and to apply the consi.deration 'received
"t equal to or less than that amount." ,// ·
therefore and also appropriate all other securities !\:-::.-·. - . - ... · /.'.-. //-\. H
·H
~ . '- . /
416 SUPREME COURT REPORTS [2014) 14 S.C.R.

A 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-
B
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
c 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
D 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;
E
(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.
F (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
G 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
H 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. ·
E
(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, 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 SUPREME COURT REPORTS [2014) 14 S.C.R.

A 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
B be.
9. Power of recognised stock exchanges to make bye-
laws.-
(1)Any recognised stock exchange may, subjectto the
previous approval of the Securities and Exchange Board
c 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-
D (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
E 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
F 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;
G . (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;
H
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 H
•

420 SUPREME COURT REPORTS [2014] 14 S.C.R.

A 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;
B
(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;

c
(r) the makirig, 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 p.owers in such
emergencies, including the power to fix ·maximum and
D
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
or explanation and to produce such documents relating
F 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.
F
"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. 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.
H
422 SUPREME COURT REPORTS [2014] 14 S.C.R.

A 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.
Allocation in Order of Priority
16. When as provided in these Rules the Governing Board
D 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
E
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
F
Exchange.
Liabilities relating to Contracts
ii. second-the payment of such debts, liabilities,
obligations and. claims arising out of any contracts
G 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
H
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.

H
424 SUPREME COURT REPORTS. [2014] 14 S.C.R.

A 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
B
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
D 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
E 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.
F 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
G
prescribe.
. APPENDIX F
Member's Security Declaration Form No. 1
(Rule.46)
H
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
426 SUPREME COURT REPORTS [2014] 14 S.C.R.

A 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.
Yours faithfully,
(Signature of member depositing the Security)
Securities above referred to:
F 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
G 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 .
H
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,
H
428 · SUPREME COURT REPORTS [2014] 14 S.C.R.

A 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
B 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
c 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
D
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
E
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
F
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
G 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;
H
. 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 SUPREME COURT REPORTS [2014] 14 S,C.R.

A 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
B 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
c 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
D
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:
[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
F 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
a
·the assessee, or the existence of 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) . 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. F
(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 degree and under G
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' H
432 SUPREME COURT REPORTS [2014] 14 S.C.R.

A 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 40'l of the BSE.
(d) That, a sum of Rs. 34,06,680 representing Balance
B 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
c 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
D
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 arid
the realized value, on the date of the sale, could be
E 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 TROwould be entitled to
appropriate the said amount towards the dues of
F 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
G 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
H Act."
THE STOCK EXCHANGE, BOMBAY v. V. S. 433
KANDALGAONKAR &ORS. [R. F. NARIMAN, J.]

11. Mr. Arvind Datar, learned senior counsel appearing A
on behalf of the Stock Exchange raised essentially three
submissions. The first submission 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 B
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 c
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 D
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 E
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 F
therefore is that what is contemplated is a transfer of these
shares 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 G
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 H
creditors.
434 SUPREME COURT REPORTS [2014] 14 S.C.R.

A , .12. Shri R.P.Bh;;it, 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
B 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
C 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.
'
13. Mr. Datar also handed over during the course of
argument certain annual reports and letters to buttress his
D argument that in point of fact shares were actuallytransferred ·
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
E arrangement between the Exchange and the member, and that
in fact the right to the dividend as well as the right to vbte 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.
F
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
G 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 ma~er is
H no longer res integra.
. THE STOCK EXCHANGE, BOMBAY v. VS. 435
KANDALGAONKAR &ORS. [R. F. NARIMAN, J.]

15. In lsha Valimohamad and Anr. vs. Haji Gulam A
Mohamad & Haji Dada Trust 1975 (1) SCR 720 the
Supreme Court made a distindion between "privilege" and
"accrued rig ht". ·
"Mr. Patel for respondent contended that even if the
landlord had no accrued right, he at least had a 'privilege' B
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 C.
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
D
(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 E
correlative of a 'no-right'. For instance, where "X has a
right or claim that Y sho.uld 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) F
Arthur L. Corbin writes:
We say that B had a right thatA should not intrude
and thatA had a duty to stay out. But if B had invited A to
enter, we knciw that those results would not occur. In such G
case we say that B had no right that A should stay out
and thatA had the privilege of entering.
(See "Legal Analysis and Terminology", 29 Yale Law
Journal 163)
H
436 SUPREME COURT REPORTS [2014) 14 S.C.R.

A According to Kocourek:
I t '·

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
serv'us of the Inability. from exacting an act from the
B dominus ·
(See "Jural Relations", 2nd ed., p. 24)
Patton says:
The Restatement of the law of Property defines a
C 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
D
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 appellar:its had sub-let the premises.
E 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
F 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 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.
H
THE STOCK EXCHANGE, BOMBAY v. V. S. 437
KANDALGAONKAR &ORS. [R. F. NARIMAN, J.)

16. Further, the rules and the bye-laws also make this A
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. B
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, anc:t in this case
ultimately. the surplus is paid only to the defaulting member,
making it clear that these amounts really belonged to the c
defaulting member.
17. In the Ahmedabad Stock Exchange case, 2001
(3) sec 5~9, this Court has held that:
"9. The Stock Exchange Rules, Bye-laws and
Regulations have been approved by the Government D
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, therefore, to be
examined within the f;amework of the Rules, Bye-laws E
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 membef, it is non-transferable and incapable of
alienation by the member or his legal representatives F
and heirs except to the limited extent as provided in
the Rules on fulfilment of conditions provided therein.
Tne 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 G
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.
H
438 SUPREME COURT REPORTS [2014] 14 S.C.R.

A 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 lnpome Tax Act. No amount on account of Rajesh
B 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
C 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
D 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. ·
E 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
F 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
G 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
H
. ·~ ,.

. THE STOCK EXCHANGE, BOMBAYv. V. S. 439
. KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]

under certain circumstances. On a conjoint reading of these A
Rules what emerges is as follows:·
(i) · The entire Chapter deals orily with security to be
provided by a member as the Chapter heading
· states; · f- : · ·

(ii) 'The seeurity to be furnished can be in various forms. B
What is important is ttiat cash is in the form of a
deposit and securities are· also "deposited" with
the Stock Exchange under Rule 37;
. (iii) Rule 38 which is crucial provides how securities c
are to be ~held" which is clear from the marginal
note ~ppended to it What falls for construction is ·
·the expression "securities shall be transferred to ·
and held". Blacks Dictionary defines "transfer" as
folloWs: · ··
D
"Transfer means ever/mode, diredt or indirect,
absolute ·or . conditional, voluntary or
· involuntary,. of disposing· of or parting with
an
. property or with interest in'properly, including
retention of title asa security interest and E
foreciosure of the debtor's equity of
redemption." ···
It is clear therefore that the expression "transfer"
cari depending upon its context mean transfer
cifownership.or transfer pf possession. It is clear F
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 G
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
H
440 SUPREME COURT REPORTS [2014] 14 S.C.R.

A for the purposes of easy liquidity in the event of
default.
(iv) The expression "transferred" musttake colour from
the expression "lodged" in Rule 38 when it comes
to deposits of cash. Understood in this sense,
B 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 d_eposit shall be entirely at the
risk of the member providing the security ........... "
c Obviously, first and foremost the cash lodged and
the shares transferred are only deposits. Secondly,
they are entirely at the risk ofthe member who
provides the security making it clear that such
member continues to be the owner of the said
D 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
E
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
F 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
G as the security is being given back to the member
under the circumst~nces mentioneq 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. Obviously,
H therefore, securities which are handed over to the
THE STOCK EXCHANGE, BOMBAYv. V. S. 441
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]

exchange continue to be assets of the member A
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 B
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. c
· In Bombay Stock Exchange v.. Jaya Shah, 2004 (1)
sec 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 D
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:
~ E
• "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 F
assets. On a plain reading of the Rules and Bye-laws it .
appears that the authority to deal with the card-money
and the 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 G
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. ·
H
442 SUPREME COURT REPORTS [2014] 14 S.C.R.
. I . •·

A 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
B 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
C. 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
D · contradistinguishedfrom 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
E 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
F .
broadly be divided into two categories, namely, card
membership and other assets.
57. There cannot, however; be any doubt that so
/orig as the claims of the awardees, both of members
G as also non-members, are dealt with by the Defaulters'
Committee, the Exchange· or the De.taulters' Committee
would not be a debtor in relation to an awardee. But
· once the Defaultef"S' Committee determines such claims
and a surplus is available in the hands of the Defaulters'
H Committee, as the surplus amount would become
THE STOCK EXCHANGE, BOMBAYv. V. S. 443
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]

p<Jyable to the defaulting members, the same would A
become an asset of the defaulting member. In other
words, other assets 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 B
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 c/ai1J7 on a pro rata basis and not in its entirety. c
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 D
clear picture emerges from the Rules and Bye-laws as
there does not appear to be any provision how the card
money as a/so other assets belonging to the defaulting
member can be handled by the Defaulters' Committee.
But the Rules and Bye-laws have to be read E
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 F
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 G
be disbursed having regard to the priority clause
contained in .Rule 16, in which event, upon discharge
of the_ dues of the Exchange ahd clearing house, the
same has to be distributed according to the dues of
members and non-members. It bears repetition to state H
444 SUPREME COURT REPORTS [2014] 14 S.C.R.

A 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 no.t sufficient to satisfy all
the claims, the same has to be distributed on a pro rata
B 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 wflich may be
faced by the members and non-members in realising
c their dues, may direct that such amount would be
available for disbursement
,. .
towards the said 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
D 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
E 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
F therefore fail.
Re: (3)
It is settled law that Government debts have precedence
only over unsecured creditors. This was held in Dena Bank
G v. Bhikabhai Prabhudas • .
Parekh
~.
Co.,
I
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
H England or the principles of equ.ity and good
THE STOCK EXCHANGE, BOMBAY v. V. S. 445
KANDALGAONKAR &ORS. [R F. NARIMAN, J .]

conscience (as applicable to India) do not accord the A
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 preferred. Where the right of the subject is B
complete and perfect before that· of the King
commences, the rule does not apply, for there is no
.point oftime 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 c
already. In Giles v.Grover {(1832) 131ER563: 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
Biharf(1972) 3 sec 196: AIR 1971 sc 12101 the
principle has been recognised by this Court holding D
that the rights of the pawnee who has parted with money
in favour of the pawnor on the security of th·e 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 E
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 F
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: G
(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;"
H
446 SUPREME COURT REPORTS [2014] 14 S.C.R.

A Similarly, the Securitisation and Reconsruction of
Financial Assets and Enforcement of Security Interest Act, 2002
in ~ection 2 (z)(f) defines
.
"security interest" as follows:
: . .
"Section 2(zf) "security interest" means right, title
and interest of any kind whatsoever upon property,
B 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.,
C at
1992 Suppl. 1 SCC 524 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
D.
context such as 'contractual lien', 'equitable lien',
'specific lien', 'generaf lien', 'partners lien", etc.· e"tc. in
. Halsbury's Laws of England, Fourth Edition, Volume 28
at page 221, ·para 502 it is stated:
. I .
E In its pri17Jary or legal sense "lien" means a right at
common law in one man to retain that which is rightfully
and continuouslr. in his possession belonging to
another until the present and accrued. claims are
, ' . ' ·'
1
satisfied."
F Similarly, in K.S.. Saradambal v. Jagannatham K
Brothers, (1972) 42 Companies Case 359, the Madras High
Court held: I
"It would be sufficient only to refer to the following
• observation in 'Halsbury's Laws of England, third edition,
G 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
H
THE STOCK EXCHANGE, BOMBAY v. V. S. . 447
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.)

and does not depend on possession. A pawn or pledge A
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." B
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: c.
· ''.A lien maybe 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 technicarsense, signifies the right by which a person
in possession of personal property holds and retains it
0
against the owner in satisfaction of a demand due to
the party retaining it; but ih 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 E
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:
F
"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 G
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 the company
law. Section 529 of the Act is important and it re?ds:
H
448 SUPREME COURT REPORTS (2014) 14 S.C.R.

A "529. Appliqation 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
(b) The valuation of annuities and future and
contingent liabilities; and
(c) The respective rights of secured and unsecured
creditors;
c As are in force from the time being under the law of
insolvency with respect to the estates of persons
adjudged insolvent. 1
(2) All persons who in any such case would be entitled
to prove for and receive dividends out of the assets of
D the company, may come in under the winding up, and
make such claims against the company as they
respectively are entitled fo make by virtue of this section.
Provided that if a secured ' creditor instead of
relinquishing his security and proving for his debt
E 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".

F .
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
G
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.
H
THE STOCK EXCHANGE, BOMBAY v. V. S. 449
KANDALGAONKAR & ORS. [R. F. NARIMAN, J .]

The question is whether only the insolvency rules are A
applicable or all the relevant provisions of the
insolvency law are applicable to a case of winding up
of an insolvent company.
The intention underlying section 529 is that all the
provisions of the insolvency law are applicable to the B
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, Oehradun,
Mussorie Electric Tramway Co. Ltd. AIR 1929 All 353 C
(FB.). 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 D
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, E
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." F
In the latter Act, Section 2(g) defines that expression
as:·
"Secured creditor' includes a landlbrd who under any
enactment for the time _being in force has a charge on G
land for the rent of that land."
The latter definition is an inclusive definition.
According to the for.mer 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 H
450 SUPREME COURT REPORTS (2014] 14 S.C.R.

A 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
B 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 lie(! or the holder
c of a lien created by 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 )n the winding up
proceedings. The applicant-company being the holder
D · 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
E 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
F 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
G 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,
H before each House of Parliament, while itis in session
THE STOCK EXCHANGE, BOMBAY v. V. S. 451
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]

for a total period of thirty days which may be comprised A
in one session or in two or more successive sessions,
and if, before the expiry of the 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 B
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." C
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 D
under Sections 7 A 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 E
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" arid therefore subordinate legislation.
This makes it amply clear that the lien spoken of by Rule 43 is F
a lien, conferred by Rules under a statute.
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. G
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 H
452 SUPREME COURT REPORTS [2014] 14 S.C.R.

A 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. ·
B 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
c 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 ofthe said rates, charges, penalties or the cost
of the distress or arrest or of the keeping of the same
D remain unpaic/ 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 proceeds of such sale shall satisfy such rates or
penalties. and costs including the costs of sale
E remaining unpaid. The surplus, if any, is to be rendered
to the master of such vessel on demand.
9. The statutory right uirder Section 64 embodies this
overriding right of the harbour authority over the vessel
for the recovery of its dues. This right stands above the
F
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
G
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
H
THE STOCK EXCHANGE, BOMBAY v. V. S. 453
KANDALGAONKAR &ORS. [R. F. NARIMAN, J.]

the vessel while it is anchored in the harbour and recover A
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 paramaunt. The lien cannot be
extinguished or the vessel sold by any other authority
under the directions of the court or otherwise, unless B
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 c
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 D
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 ofits right under Section 64 the appellant
is, therefore, entitled to sell the vessel without the E
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 F
proceeds of the vessel."
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 G
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. H
454 SUPREME COURT REPORTS [2014] 14 S.C.R.

A 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
B 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."
C . Based on this it was further argued that such lien would
not include any li~n 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.
D 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 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.
E 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
F India immediately before the commencement of the
Constitution shall cpntinue in force until altered or repealed by
a competent le"gislature 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
G 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 Cro.wn 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
H Constitution and was continued by Article 372 of the
Constitution (at page 861, 862).
THE STOCK EXCHANGE, BOMBAY v. V. S. 455
KANDALGAONKAR & ORS. [R. F. NARIMAN, J.]

25. In the present case, as has been noted above, the A
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
Exchange, being a secured creditor, would have. priority over B
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. C

Rajendra Prasad Appeal allowed. ·