Who gets priority over government dues

Written by Indu Bhan | Indu Bhan | Updated: Oct 8 2014, 08:24am hrs
The Supreme Court has ruled that a stock exchange being a secured creditor will get priority in recovery of debts over the income tax dues of a defaulter member as the former has a first and paramount lien for any sum due to it.

Citing its earlier decision in Dena Bank vs Bhikhabhai Prabhudas Parekh Company, the Supreme Court said that the government debts have precedence only over unsecured creditors as the Income-Tax Act does not provide for any paramountcy of dues by way of income tax.

Setting aside the 2003 Bombay High Courts judgment that held otherwise, it said: the 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 government dues.

It accepted the Bombay Stock Exchanges plea that the sale proceeds of a membership card and the membership card itself being only a personal privilege granted to a member could not be attached by the department at any stage. The moment a member was declared a defaulter, all rights qua the membership card of the member would cease and his right of nomination would also vest in the stock exchange, it added.

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 the Income-Tax Act

Making it clear that these amounts belong to the defaulting member, the Supreme Court said that on termination of the membership of a broker, whatever surplus remains by way of security after clearing all debts has to be transferred either to the defaulting member or as he shall direct or in the absence of such direction to his legal representatives. It further said that vesting of such assets of the defaulter in the Defaulters Committee of the stock exchange is not absolute.

The issue came before the Supreme Court in an appeal filed by BSE against the departments claim that it had priority over all debts owed by the defaulter member.

While Suresh Damji Shah, a member of BSE, was declared a defaulter in June 1994 as he had failed to meet his obligations and discharge his liabilities, the department, a year later, had sought auctioning of Shahs membership card to recover its income tax dues to the tune of R25.43 lakh.

However, BSE refused such claim on the ground that the membership right was a personal privilege and inalienable and the membership right of Shah vested with it on him being declared a defaulter. BSE also stated that since the exchange was the actual owner of the membership card, no amount of tax arrears of Shah were payable by it. This led the Revenue to issue a prohibitory order to restrain BSE from making any payment relating to Shah to anyone other than the department. Aggrieved by the departments decision not to recall its prohibitory orders, BSE moved the Bombay High Court, which rejected its plea.