Stock exchange dues a priority over IT dues, says SC

First priority would be given to the exchange and clearing house; second to settle contracts; and the surplus could be used according to the discretion of the exchange

The Supreme Court has ruled that stock exchange dues shall have priority over income-tax (I-T) dues in case of a default by a stock exchange member (broker).

The remark was made in a two-decade-old case between the BSE and the I-T department over who has the first right to the dues of defaulting member Suresh Damji Shah.

The I-T department had in 1995 written to the BSE claiming that the funds received by auctioning the licence of the defaulting member should be handed over to it to settle the tax dues amounting to about Rs 25 lakh.

The BSE contested the I-T department’s claim stating that the exchange was the rightful owner of the membership card and, hence, it had the right to settle the dues.

Subsequently, the I-T department imposed a prohibitory order on the BSE not to use the proceeds from the auction to settle its dues.

The BSE then filed a writ petition in the Bombay High Court, which heard the matter and dismissed it in 2003. The court directed the exchange to make certain payments and hand over the securities to the I-T department.

The plea finally reached the apex court, which ruled in favour of the BSE, saying exchanges have the first right to the dues of any defaulting member.

“As this civil appeal raises important questions of law both from the point of view of the BSE and the I-T department, we are going into the matter in some detail,” said the apex court in the order.

The SC clarified that any membership would be used to settle dues in the order of priority first to the exchanges and clearing houses; second to settle contracts; and finally, the surplus could be used according to the discretion of the exchange.

“Stock exchanges that make rules in exercise of powers conferred by the Securities Contracts Regulation Act are equally ‘rules’ and therefore subordinate legislation… It can be said to have a superior right to income-tax dues, which may become payable by virtue of the stock exchange being a secured creditor,” the SC stated.