IMPORTANT POINTS
No member of Stock Exchange has an accrued right over membership card. It’s a privilege which vests in the Stock Exchange at the moment of default.
The Stock Exchange is the secured creditor in respect of the property in the securities deposited by a member.
Dues of the Stock Exchange shall have priority over Government dues.

JUDGMENT

R.F.Nariman, J.

1. The present matter arises as the result of a member of a Stock Exchange being declared a defaulter. The Income Tax Department claims that it has priority over all debts owed by the defaulter member, whereas the Stock Exchange, Bombay claims otherwise.

2. The facts necessary to appreciate the controversy are as follows:

By a notice dated 29th June 1994, the Stock Exchange, Bombay declared Shri Suresh Damji Shah as a defaulter with immediate effect as he had failed to meet his obligations and discharge his liabilities. By a notice dated 5th October 1995 issued under Section 226 (3) of the Income Tax Act, the Income Tax Department wrote to the Stock Exchange and told them that Shri Shah’s membership card being liable to be auctioned, the amount realized at such auction should be paid towards Income Tax dues of Assessment Year 1989-90 and 1990-91 amounting to Rs.25.43 Lakhs. The Stock Exchange, Bombay by its letter dated 11th October 1995 replied to the said notice and stated that under Rules 5 and 6 of the Stock Exchange the membership right is a personal privilege and is inalienable. Further, under Rule 9 on death or default of a member his right of nomination shall cease and vest in the Exchange and accordingly the membership right of Shri Shah has vested with the Exchange on his being declared a defaulter. This being the case, since the Exchange is now and has always been the owner of the membership card, no amount of tax arrears of Shri Shah are payable by it. By a prohibitory order dated 10th May 1996, the Income Tax Department prohibited and restrained the Stock Exchange from making any payment relating to Shri Shah to any person whomsoever otherwise than to the Income Tax Department. The amount claimed in the prohibitory order was stated to be Rs. 37.48 Lakh plus interest. On 18th July 1996, the Solicitors of the Stock Exchange, Bombay wrote to the Income Tax Department calling upon them to withdraw the prohibitory order dated 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 to the Bombay Stock Exchange refusing to recall its prohibitory order. Meanwhile, Shri Shah applied to be re-admitted to the Stock Exchange which application was rejected by the Stock Exchange on 13th February, 1997.

3. The Stock Exchange then filed a Writ Petition being Writ Petition No.220 of 1997 dated 24th December 1996 in which the following reliefs were claimed:

(a) that this Hon’ble Court may be pleased to issue a writ of certiorari or a writ in the nature of certiorari or any other appropriate writ, order or direction under Article 226 of the Constitution of India calling for the records in relation to the recovery proceedings initiated by the Respondents against Mr. Suresh D. Shah and after going through the same and examining the legality and validity thereof to quash and set aside the impugned notice dated 5th October, 1995 and the impugned order dated 10th May 1996, Impugned Notice/ letter dated 27th December 1996 being Exhibits “D”, “F” and “H” hereto;

(b) that this Hon’ble Court may be pleased to issue a writ of mandamus or any other appropriate writ, order or direction under Article 226 of the Constitution of India ordering and directing the Respondents to withdraw forthwith the recovery proceedings initiated against in respect of the dues of Mr Suresh D. Shah and ordering and directing the Respondents to withdraw forthwith the impugned notice dated 5th October, 1995 and the impugned notice dated 5th October, 1995 and the impugned prohibitory Order dated 10th May, 1996, Impugned Notice/letter dated 27th December 1996 being Exhibits “D”, “F” and “H” hereto;

(c) that this Hon’ble Court be pleased to permit the Petitioner to exercise the right of nomination in respect of the membership right of Suresh

D. Shah in favour of such person as the petitioner may decide and to apply t