The membership right of a Stock Exchange is not the property of assessee and hence cannot be attached under Income Tax – SC

Any litigation under various tax laws, might take a considerable amount of time. The pendency of any proceedings could potentially delay the earning of revenue by the government. Further, the taxpayer may transfer his property to another person before the end of the proceedings. In order to protect the interests of the revenue during the pendency of any proceedings, the government has the power to provisionally attach the properties of the taxpayer.

Where, during the pendency of any proceeding for the assessment of any income or for the assessment or reassessment of any income which has escaped assessment, the Assessing Officer is of the opinion that for the purpose of protecting the interests of the revenue it is necessary so to do, he may, with the previous approval of the Chief Commissioner, Commissioner, Director General or Director, by order in writing, attach provisionally any property belonging to the assessee in the manner provided in the Second Schedule.

Every such provisional attachment shall cease to have effect after the expiry of a period of six months from the date of the order made. However, the Chief Commissioner, Commissioner, Director General or Director may, for reasons to be recorded in writing, extend the aforesaid period by such further period or periods as he thinks fit, so, however, that the total period of extension shall not in any case exceed two years.

Let us refer to the case of Stock Exchange Ahmedabad v. ACIT (2001), where the issue under consideration was whether the Stock Exchange Card was the property belonging to the assessee and after his demise devolved upon his legal representatives and heirs or it was a personal permission in favour of the deceased and right of nomination of the legal representative and heirs after his death has ceased and the said right has vested in the Exchange or not

Facts of the Case:

Upon the death of its member, Rajesh Shah, the appellant resolved to dispose of his membership rights in the stock exchange by inviting offers with a minimum floor price of Rs 25 Lakhs.
A provisional attachment order under Section 281B of the Income-tax Act, 1961 was issued by the ACIT in respect of Stock Exchange Card in the name of Rajesh Shah and margin money and security deposits kept by him with the Stock Exchange.
The stand of Stock Exchange was that under its rules, bye-laws and regulations on the death or default of a member, member’s right of nomination ceased and it vested in the Exchange and belonged absolutely to the exchange and the Governing Board was entitled to deal with or dispose of such right of membership as it may think fit.
Later, the Governing Board of the Stock Exchange passed resolution disposing of membership right of deceased Rajesh Shah vested in the Stock Exchange in favour of UTI Security Ltd. for Rs. 27 Lakhs.
A garnishee notice, under Section 226(3) of the IT Act, 1961, in the sum of Rs 12,24,887 was also issued to the executive director, Stock Exchange, by the ACIT.
In reply thereto, the Stock Exchange reiterated the stand that no amount was due from it to Rajesh Shah or his legal heirs and the Exchange did not hold any money for and on behalf of Rajesh Shah or his legal heirs.
The plea of the Stock Exchange was not acceptable to the respondent.

Petition to High Court (HC)

Thereafter, the appellant Stock Exchange filed a writ petition in the High Court challenging the orders of provisional attachment and the garnishee notice. The writ petition was dismissed by the High Court. The said judgment was challenged before the Supreme Court.

Observations of the Supreme Court (SC)

On examination of various rules of the Stock Exchange relating to membership and payment of outstanding dues of an ex-member, it was clear that right of membership was merely a personal privilege granted to a member, it was non-transferable and incapable of alienation by the member or his legal representatives and heirs except to the limited extent as provided in the rules on fulfilment of conditions provided therein.
The nomination wherever provided for was not automatic and hedged by rules.
On its vesting the right of nomination belonged to the Stock Exchange absolutely.
The consideration received by the Stock Exchange on exercise of the right of nomination vesting in it, was to be applied in the manner provided in Rule 16.
Membership of the Stock Exchange was a personal permission from the Exchange to exercise the rights and privileges attached thereto. It was not a private asset.
That was a case of a defaulter but in principle it would make no difference as under rules both in the case of the death or default of a member, his right of nomination ceased and vested in the Stock Exchange.
The heirs and legal representatives had informed the Stock Exchange that they were unable to meet the liabilities of the deceased and did not pay or satisfy the dues and claims as required under Rule 15.
Under these circumstances the Governing Board exercised the right of nomination in respect of membership of Rajesh Shah which had vested in the Stock Exchange.

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 281B of the IT Act.
No amount on account of Rajesh Shah was due from or held by the Stock Exchange and, therefore, Section 226(3) of the IT Act could not be invoked.

SC was 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 be attached under Section 281B of the IT Act. The order of provisional attachment and garnishee notice issued under Section 226(3) were quashed.

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