IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 27.3.2006 Coram: The Hon'ble Mr.JUSTICE S.RAJESWARAN W.P.Nos.24857 and 25609 of 2001 I) W.P.No.24857/2001: M/s.National Stock Exchange of India Ltd. Rep. by its Authorised Signatory A.Sabastian having its Main Office at Exchange Plaza Bandra Kurla Complex Bandra (E) Mumbai-400 051 .. Petitioner vs. 1.The Assistant Provident Fund Commissioner Employees Provident Fund Organisation Regional Office No.20, Royapettah High Road Chennai.14 2.The Managing Director Premier Securities Ltd. Having its regd. Office at "Karumuthu Centre", V Floor 498, Anna Salai, Nandanam Chennai-35 .. Respondents II) W.P.No.25609/2001: 1.S.Gangadhara Rao 2.P.Bhaskara Raju .. Petitioners vs. 1.Employees' Provident Organisation rep. by Asst.PF Commissioner 20, Royapettah High Road Chennai.14 https://hcservices.ecourts.gov.in/hcservices/ 2.National Stock Exchange of India Ltd. Rep. by its Director No.9 Bazullah Road T.Nagar, Chennai 17 3.Premier Securities Ltd. Rep. by its Managing Director 'Vairams' 4th Floor 112, Thyagaraya Road T.Nagar, Chennai.17 .. Respondents W.P.No.24857/2001 filed under Article 226 of the Constitution of India seeking to issue a writ of certiorarified mandamus as stated therein. W.P.No.25609/2001 filed under Article 226 of the Constitution of India praying to issue a writ of certiorari, as stated therein. Mr.T.R.Rajagopalan, : For petitioner in Senior Counsel, for W.P.No.24857/01 & Mr.S.Thiruvenkatasamy for 2nd respondent in W.P.25609/2001 Mr.G.R.Swaminathan : For petitioners in W.P.No.25609/01 Mr.Titus Jesudoss : For 1st respondent in W.P.No.25609/01. Mr.P.B.Benjamin George : For 1st respondent in W.P.No.24857/01. COMMON ORDER: I) Writ Petition No.24857/2001 has been filed for issue of a writ of certiorarified mandamus to call for the records of the 1st respondent dated 28.8.2001 made in E2/TN/39526/E.0/Circle I/2001 along with order bearing proceedings No.E1/TN/36764/ENF/Regl/2001, dated 5.1.2001 issued under Sec.8F of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (hereinafter referred to as 'the Act') and forbear the 1st respondent and their agents, servants or other persons in any manner dealing with the Security Deposit lying with the petitioner given at the instance of the 2nd respondent, as its trading member according to bye-laws, rules and regulations of the Stock Exchange. 2. The petitioner is a recognised stock exchange in India having his own rules, bye-laws and regulations. The second respondent became a trading member in the petitioner stock exchange and as per the requirements of the bye-laws and rules, the 2nd respondent deposited a sum https://hcservices.ecourts.gov.in/hcservices/ of Rs.56 lakhs for their admission to membership of capital market segment. Out of this amount of Rs.56 lakhs, Rs.45 lakhs was received by the petitioner-stock exchange as security deposit against clearing and settlement of dues that may be accrued at the instance of the 2nd respondent trading member. Rs.5 lakhs was received against equipment given to the 2nd respondent and the balance of Rs.1 lakh was received for supply of U.P.S. by the petitioner stock exchange. Out of Rs.45 lakhs received as security deposit, Rs.9 lakhs had already been given to National Securities Clearing Corporation for the purpose of appropriation of member dues and the balance of deposit of Rs.36 lakhs is with the petitioner. 3. As per the bye-laws, rules and regulations, the petitioner has a first charge and lien on the deposit given by the 2nd respondent. The 2nd respondent violated the terms and conditions of the rules, bye-laws and regulations and the petitioner withdrew the trading facilities with effect from 21.7.1999. Subsequently, the 2nd respondent has also been expelled from the membership of the petitioner from 1.3.2001. As per the bye-laws upon expulsion from the membership, assets of the 2nd respondent shall vest with the defaulter's committee. As per clause 23 of the bye-laws the assets shall be obtained in satisfying the claims in order of priority as provided thereunder and only if any surplus is available, the same is liable to be returned to the defaulting trading member. So far 11 arbitration awards have been passed against the 2nd respondent in the arbitral proceedings and the total amount of the award passed against the 2nd respondent comes to Rs.25,15,552.33 and since the 2nd respondent has now become a defaulter, the defaulting committee of the petitioner is liable to fulfil the liability of the 2nd respondent from the security deposit available with the petitioner. 4. While so the 1st respondent communicated an order dated 5.1.2001 issued under Sec.8(F) of the Act attaching the security deposit of the 2nd respondent to the tune of Rs.30 lakhs lying with the petitioner. The order was passed by the 1st respondent on the basis that the 2nd respondent committed default in remitting a sum of Rs.2,44,547/- being the Provident Fund contribution in respect of the employees and also a sum of Rs.17,97,510/- towards the arrears of P.F. dues of the group company of the 2nd respondent called, M/s.Premier Housing and Industrial Enterprises Ltd. After receipt of the said order dated 5.1.2001, the petitioner sent a letter giving all the facts and figures and also indicating the right of the petitioner over the security deposit. The 1st respondent rejected the right of the petitioner over the security deposit of the 2nd respondent by letter dated 28.8.2001. Challenging the letter dated 28.8.2001 along with the order dated 5.1.2001, the Writ Petition No.24857/2001 has been filed for the aforesaid relief. 5. On 19.12.2001 this court while admitting the writ petition granted stay of the impugned order subject to the condition that the petitioner shall keep the amount of Rs.30 lakhs lying with the petitioner intact https://hcservices.ecourts.gov.in/hcservices/ without any transactions for a period of eight weeks. By order dated 6.3.2002, this court continued the interim stay subject to the petitioner keeping Rs.27,89,611.89 intact without any transaction, as it was represented by the learned counsel for the petitioner that the amount lying with the petitioner was only Rs.27,89,611.89. 6. The 1st respondent filed counter affidavit. According to the 1st respondent, M/s.Premier Housing and Industrial Enterprises Ltd. is an establishment covered under the Act bearing P.F.Code No.TN-39526. The said establishment failed to pay the statutory Provident Fund dues for the period from April 1998 to March 2000. As such an enquiry under Sec.7A of the Act was initiated on 14.6.2000 and the dues were assessed to the extent of Rs.17,97,510/- and necessary proceedings were issued to the establishment directing them to pay the P.F. dues and action under Sec.8F of the Act was invoked for attachment of Rs.20,42,057/- which includes dues of Rs.17,97,510 by M/s.Premier Housing and Industrial Enterprises Ltd. and a sum of Rs.2,44,547/- by its group of companies, namely, M/s.Premier Securities Ltd., the 2nd respondent herein. 7. According to the 1st respondent department, as per Sec.11 of the Act, the amount due from an employer shall be deemed to be the first charge on the assets of the establishment and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority on all other debts. The petitioner establishment was also explained in detail that the statement furnished by them is not reliable in view of the fact that the statement was totally contrary to the provisions of Sec.8F(3)(i)(ii) of the Act. Therefore, they have prayed for dismissal of the writ petition. 8. Heard the learned Senior Counsel appearing for the petitioner and the learned counsel for the 1st respondent. I have also perused the records filed in support of their contentions. 9. The learned Senior Counsel appearing for the petitioner relied on the following judgments and submitted that the impugned proceedings are liable to be quashed:- (1) AIR 1966 S.C. 1370 (Kesoram Industries v. The Commissioner of Wealth Tax, (Central); (2) AIR 1981 S.C. 1585; (Beharilal Ramcharan v. The I.T. Officer, Kanpur); (3) (2001)3 SCC 559 (Stock Exchange, Ahmedabad v. Asst. Commissioner of Income Tax, Ahmedabad); (4) (2004)1 SCC 160 (Bombay Stock Exchange v. Jaya I.Shah); (5) (2000)5 SCC 694 (Dena Bank v. Bhikhabhai Prabhudas Parekh & Co.); (6) (2001) 3 SCC 482 (B.S.E.Brokers' Fourm, Bombay v. Securities and Exchange Board of India); (7) 2003-II-LLJ 657 (Keystone India (P) Ltd., Guduvancheri v. R.P.F. Commissioner, Chennai; (8) (1993)3 SCC 217 (Srikanta Datta Narasimharaja Wodiyar v. Enforcement Officer, Mosore; (9) AIR 1999 S.C. 2517( Vinay Bubna v. Stock Exchange, Mumbai) and (10) 2003-III-LLJ 419 (Manager, Vijaya Bank v. R.P.F. Commissioner, Mangalore & others). https://hcservices.ecourts.gov.in/hcservices/ 10. Learned counsel for the 1st respondent relied on the decision in 2002-I- LLJ 986 (F.C.Construction(I) Pvt. Ltd. v. R.P.F.Commr., Indore). 11. The impugned order dated 5.1.2001 in this W.P.No.24857/2001 was issued under Sec.8F of the Act, attaching the deposit money of Rs.30 lakhs lying at the credit of M/s.Premier Securities Ltd., the 2nd respondent towards the outstanding arrears payable by these two companies, namely, M/s.Integrated Finance Co. Ltd., and M/s.Premier Securities Ltd., the 2nd respondent herein. The major portion of the shares held by the 2nd respondent company have been acquired by M/s.Integrated Finance Company Ltd. 12. Sec.8F(3)((i) and ii) of the Act reads as follows:- "8F(1) ... (2) ... (3)(i) The Central Provident Fund Commissioner or any other officer authorised by the Central Board in this behalf may, at anytime or from time to time, by notice in writing, require any person from whom money is due or may become due to the employer or, as the case may be, the establishment or any person who holds or may subsequently hold money for or on account of the employer or as the case may be, the establishment, to pay to the Central Provident Fund Commissioner either forthwith upon the money becoming due or being held or at or within the time specified in the notice (not being before the money becomes due or is held) so much of the money as is sufficient to pay the amount due from the employer in respect of arrears or the whole of the money when it is equal to or less than that amount. (ii) A notice under this sub-section may be issued to any person who holds or may subsequently hold any money for or on account of the employer jointly with any other person and for the purposes of this sub-section, the shares of the joint-holders in such account shall be presumed, until the contrary is proved, to be equal." sub-clause (vi) of Sec.8F(3) of the Act reads as follows:- "(vi) Where a person to whom a notice under this sub- section is sent objects to it by a statement on oath that the sum demanded or any part thereof is not due to the employer or that he does not hold any money for or on account of the employer, then, nothing contained in this sub-section shall be deemed to require such person https://hcservices.ecourts.gov.in/hcservices/ to pay any such sum or part thereof, as the case may be, but if it is discovered that such statement was false in any material particular, such person shall be personally liable to the Central Provident Fund Commissioner or the officer so authorised to the extent of his own liability to the employer on the date of the notice, or to the extent of the employer's liability for any sum due under this Act whichever is less." Sub-clause (x) of Sec.8F(3)of the Act reads as follows:- "(x) If the person to whom a notice under this sub- section is sent fails to make payment in pursuance thereof to the Central Provident Fund Commissioner or the officer so authorised, he shall be deemed to be an employer in default in respect of the amount specified in the notice and further proceedings may be taken against him for the realisation of the amount as if it were an arrear due from him, in the manner provided in sections 8B to 8E and the notice shall have the same effect as an attachment of a debt by the Recovery Officer in exercise of his powers under section 8B." 13. A close reading of these provisions will make it clear that the Provident Fund Commissioner or any other authorised officer may by notice in writing require any person from whom the money is due and when a person to whom the notice is sent objects to it by a statement on oath that the sum demanded is not due to the employer, then nothing contained in this sub-section shall require such a person to pay such sum, but if it is discovered that such statement is false, such person is personally liable to the Commissioner and the person to whom the notice is sent fails to make the payment, he shall be deemed to be an employer in default in respect of the amount specified in the notice and further proceedings may be taken against him as if it were an arrear due from him. 14. The impugned proceedings have been issued following the provisions contained in Sec.8F of the Act. But the learned Senior Counsel appearing for the petitioner submitted that as per the rules, bye- laws and regulations framed by the petitioner stock exchange, the amount received as security deposit from the 2nd respondent shall vest with the defaulter's committee, who is entitled to take such other acts as contemplated under the bye-laws. In the case of the petitioner that so far 11 arbitration awards have been passed against the 2nd respondent and the total amount of award comes to Rs.25,15,552.33 and the defaulting committee is liable to fulfil the obligations of the 2nd respondent from the security deposit available with the petitioner who has got exclusive lien and charge over the same. Therefore, it cannot be attached under Sec.8F of the Act. https://hcservices.ecourts.gov.in/hcservices/ 15. But the learned counsel for the 1st respondent submitted that under Sec.11(2) of the Act, the amount due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority to all other debts and therefore the impugned proceedings have been validly passed as per Sec.11(2) of the Act, which is as under:- "11(2) Without prejudice to the provisions of sub- section (1), if any amount is due from an employer, (whether in respect of the employee's contribution (deducted from the wages of the employee) or the employer's contribution, the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law for the time being in force, be paid in priority to all other debts." 16. In AIR 1966 S.C. 1370 (supra), the Hon'ble Supreme Court has held in para 32 as under:- "(32) To summarize: A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in futuro: debitum in prasenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened. A liability to pay income- tax is a present liability though it becomes payable after it is quantified in accordance with ascertainable data. There is a perfected debt at any rate on the last day of the accounting year and not a contingent liability. The rate is always easily ascertainable. If the Finance Act is passed, it is the rate fixed by that Act; if the Finance Act has not yet been passed, it is the rate proposed in the Finance Bill pending before Parliament or the rate in force in the preceding year, whichever is more favourable to the assessee. All the ingredients of a "debt" are present. It is a present liability of an ascertainable amount". 17. In AIR 1981 S.C. 1585 (supra), the Hon'ble Supreme Court while interpreting Sec.226 of the Income Tax Act, has held in para 3 as follows:- "3(vi) Where a person to whom a notice under this sub- section is sent objects to it by a statement on oath that the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for or on account of the assessee, then nothing contained in this sub-section shall be deemed to require such person https://hcservices.ecourts.gov.in/hcservices/ to pay any such sum or part thereof, as the case may be, but if it is discovered that such statement was false in any material particular, such person shall be personally liable to the Income-tax Officer to the extent of his own liability to the assessee on the date of the notice, or to the extent of assessee's liability for any sum due under this Act, whichever is less." 18. In (2001)3 SCC 559 (supra), the Hon'ble Supreme Court has held in para 9 as under:- "9. The Stock Exchange Rules, Bye-laws and Regulations have been approved by the Government 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 framework of the Rules, Bye-laws 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 member, it is 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 is also not automatic. It is hedged by Rules. On right of nomination vesting in the Stock Exchange under the Rules, that 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." 19. In (2004)1 SCC 160 (supra), the Hon'ble Supreme Court has held in para 61 as under:- "61. The learned Single Judge noted the admission made by the Exchange to the effect that the Defaulters' Committee called in and realised the security and margin money and securities deposited by the defaulter member and recovered monies, securities and other assets due, payable or deliverable to the defaulter member. It noticed that a sum of Rs.50 lakhs which the Defaulters' Committee would distribute rateably on pro rata basis amongst the creditor constituents of the defaulter member. It also noted that till 12.1.1995, the Exchange had received around 100 claims from the creditor constituents of the defaulter member aggregating to Rs.24 lakhs and in that view of the https://hcservices.ecourts.gov.in/hcservices/ matter the Exchange agreed to make part-payment of Rs.2,96,000 to the respondent. The learned Single Judge while rejecting the contention of the Exchange that the assets belonging to the defaulter member cannot be attached in garnishee proceedings since it is not a debt due by the Exchange to the defaulter member, held: " .. The submission is devoid of any merit. Despite admission of the Exchange as contained in the said affidavit dated 12.1.1995 that the Defaulters' Committee did realise the amount lying with it from the assets of the defaulter member, part of which has been utilised in defraying to the full extent the liability of the defaulter member to the Exchange, it is amusing that it is now contended that the amounts so realised belong to the Exchange and not to the defaulter member. No doubt the Defaulters' Committee of the Exchange is having custody or possession of such amount on behalf of the defaulter member but not the ownership thereof. It is not the property either of the Exchange or of the Defaulters' Committee. The surplus amount lying with the Defaulters' Committee is, in the wider sense, a debt due by the Exchange to the defaulter member and has been justifiably attached to the extent of the decretal amount payable by the defaulter member to the claimant by serving the garnishee notice upon the Exchange." 20. In (2000)5 SCC 694 (supra), the Hon'ble Supreme Court held in para 8 as follows: "8.The principle of priority of government debts is founded on the rule of necessity and of public policy. The basic justification for the claim for priority of State debts rests on the well-recognised principle that the State is entitled to raise money by taxation because unless adequate revenue is received by the State, it would not be able to function as a sovereign Government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and in order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasises the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues (see Builders Supply Corn. AIR 1965 SC 1061 : (1965)56 ITR 91). In the same case the Constitution Bench has noticed a consensus of judicial opinion that the arrears of tax due to the State can https://hcservices.ecourts.gov.in/hcservices/ claim priority over private debts and that this rule of common law amounts to law in force in the territory of British India at the relevant time within the meaning of Article 372(1) of the Constitution of India and therefore continues to be in force thereafter. On the very principle on which the rule is founded, the priority would be available only to such debts as are incurred by the subjects of the Crown by reference to the State's sovereign power of compulsory exaction and would not extend to charges for commercial services or obligation incurred by the subjects to the State pursuant to commercial transactions. Having reviewed the available judicial pronouncements their Lordships have summed up the law as under: 1.There is a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts. 2.The common law doctrine about priority of Crown debts which was recognised by Indian High Courts prior to 1950 constituents "law in force" within the meaning of Article 372(1) and continues to be in force. 3.The basic justification for the claim for priority of State debts is the rule of necessity and the wisdom of conceding to the State the right to claim priority in respect of its tax dues. 4.The doctrine may not apply in respect of debts due to the State if they are contracted by citizens in relation to commercial activities which may be undertaken by the State for achieving socio-economic good. In other words, where the welfare State enters into commercial fields which cannot be regarded as an essential and integral part of the basic government functions of the State and seeks to recover debts from its debtors arising out of such commercial activities the applicability of the doctrine of priority shall be open for consideration." 21. In (2001) 3 SCC 482 (supra) the Hon'ble Supreme Court has held in para 49 as follows:- "49. Lastly, on behalf of the trading members of the National Stock Exchange it is contended that they are not the members of the said stock exchange so as to bring them within the ambit of the levy. This argument is based on the premise that it is only a full-fledged https://hcservices.ecourts.gov.in/hcservices/ member of a stock exchange who can be called upon to be registered under Section 12(2) of the Act and not any other member of the stock exchange. They contend that the National Stock Exchange has only institutional members who are treated as full-fledged members and all others are only trading members who do not have any rights and obligations expected of a member of the stock exchange. It is also contended that under the Rules and Regulations, a stockbroker, to be registered as such under the Act, has to be a regular member of the stock exchange and since the said Rules and Regulations of the Board do not recognise a trading member as a member of the stock exchange, they cannot be brought within the net of the levy. They rely on the definition of "stock exchange" under Rule 2(d) of the Rules which states that "stock exchange" means a stock exchange which is for the time being recognised by the Central Government under