DEPUTY COMMISSIONER OF INCOME TAX, CHENNAIT. JAYACHANDRAN versus T. JAYACHANDRAN on 24 April 2018

[2018] 5 S.C.R. 619

DEPUTY COMMISSIONER OF INCOME TAX, CHENNAI

v.

T. JAYACHANDRAN

(Civil Appeal No. 4341 of 2018)

APRIL 24, 2018

[R. K. AGRAWAL AND NAVIN SINHA, JJ.]

Income Tax Act, 1961 – Additional interest – Respondent, anapproved broker for Indian Bank – Case of revenue was that IndianBank raised its funds by way of receiving amount from the PSU andmaking fixed term deposit on higher rate of interest – In order topay higher interest to these PSUs, the bank requested therespondent to purchase securities on its behalf – Thereafter,respondent purchased securities at a particular rate quoted by thebank and was paid commission in respect of transactions done onbehalf of Indian Bank – Under instructions from Indian Bank, aportion of amount realised from the security transactions carriedon behalf of Indian Bank was paid by way of additional interest tocertain PSUs on the deposits made with the Indian Bank –Assessing officer made demand from the respondent with regard tothe sum payable to the PSUs holding that the respondent did notact as a broker in the transactions carried out for Indian Bankrather as an independent dealer and that there was no overridingtitle in favour of PSUs with regard to the additional amount earnedout of the securities transactions and the said amount is liable to beassessed as the income of the respondent – Held: Whether thealleged interest payable to the PSUs can be assessed as an incomeof the respondent depends on the determination of true nature ofrelationship between the Indian Bank and the respondent withregard to the transactions in question and the capacity in which heheld the amount – The normal settlement process in Governmentsecurities is that during transaction banks make payments anddeliver the securities directly to each other – The broker’s onlyfunction is to bring the buyer and seller together and help them tonegotiate the terms for which he earns a commission from both theparties – He does not handle either cash or securities – The

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620SUPREME COURT REPORTS

Aevidence led by bank officials show that the price of securitiesitself were fixed by the bank authorities and as per their directionsthe respondent had purchased the securities at the market priceand the differential amount was directed to be used for takingdemand drafts from the bank itself for paying additional interest tothe PSUs which is sufficient to prove the fact that the respondentBacted as a broker to the Bank and, hence, the additional interestpayable to the PSUs could not be held to be his property or income.

Disposing of the appeals, the Court

CHELD: 1. Whether the alleged interest payable to the PSUscan be assessed as an income of the Respondent depends on thedetermination of true nature of relationship between the IndianBank and the Respondent with regard to the transactions inquestion and the capacity in which he held the amount ofRs. 14,73,91,000/-. The normal settlement process in GovernmentDsecurities is that during transaction banks make payments anddeliver the securities directly to each other. The broker’s onlyfunction is to bring the buyer and seller together and help themto negotiate the terms for which he earns a commission fromboth the parties. He does not handle either cash or securities.EIn this respect, the broker functions like the broker in the interbank foreign exchange market. The conduct of the Respondentin the transaction in question cannot be termed to be strictlywithin the normal course of business and the irregularities canbe noticed from the manner in which the whole transactions wereconducted. However, the same cannot be basis for holding theFRespondent liable for tax with regard to the sum in question andwhat is required to be seen is whether there accrued any realincome to the Respondent or not. It is required to be seen inwhat capacity the Respondent held the said amount-independentlyor on behalf of the Indian Bank. [Paras 10, 11] [625-E-G; 626-A]G

2. The relationship between the Indian Bank and theRespondent is very much clear by the evidence led during thecriminal proceedings. The Executive Director of the Bank hasspecifically spoken about the role of the Respondent as a broker specifically engaged by the Bank for the purchase of securitiesand that the Bank has included the interest money too in theconsideration paid, for the purpose of taking demand drafts infavour of PSUs. Further, the evidence led by other bank officialspoints out that the price of securities itself were fixed by thebank authorities and as per their directions the Respondent hadpurchased the securities at the market price and the differentialamount was directed to be used for taking demand drafts fromthe bank itself for paying additional interest to the PSUs. Theconduct of the parties, as is recorded in the criminal proceedingsshowing the receipt of amount by the broker, the purpose ofreceipt and the demand drafts taken by the broker at the instanceof the bank were sufficient to prove the fact that the Respondentacted as a broker to the Bank and, hence, the additional interestpayable to the PSUs could not be held to be his property orincome. [Para 12] [626-F-H; 627-A-B]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4341of 2018.

From the Order dated 29.10.2012 of the High Court of Judicatureat Madras in TC No. 368 of 2005

WITH

Civil Appeal Nos. 4342-4243, 4349-4350, 4344, 4346-4348, 4351,4352, 4353, 4354, 4355, 4345, 4350 and 4357 of 2018.

Arijit Prasad, Ms. Sadhana Sandhu (for Mrs. Anil Katiyar) Advs.for the Appellant.

Biswajit Bhattacharya, Arvind P. Datar, Mukul Rohatgi, Sr. Advs.,Elam Bharathi, Sumit Kumar, Pratap Venugopal, Ms. Surekha Raman,Anuj Sarma, Ms. Niharika, Ms. Kanika Kalaiyarasan (for M/s K.J. John& Co.), Preetesh Kapoor, Sanjay Kapur, Ms. Megha Karnwal,Ms. Shubhra Kapur, Sanjay Kapur, Ms. Vanita Bhargava, AjayBhargava, Roy O. John (for M/s. Khaitan and Co.), Advs. for theRespondent.

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AThe Judgment of the Court was delivered by R.K. AGRAWAL, J. 1. Leave granted.

2. The present appeal has been filed against the impugned judgmentand order dated 29.10.2012 passed by the High Court of Judicature atMadras in Tax Case (Appeal) No. 368 of 2005 wherein the DivisionBBench of the High Court allowed the appeal filed by the respondent byabsolving the additional tax liability imposed by the Assessing Officer,vide order dated 25.01.1996.

3. Brief facts:-

C(a) The Respondent - an individual and the proprietor of M/sChandrakala and Company, is a stock broker registered with the MadrasStock Exchange. He is stated to be an approved broker of the IndianBank. The assessment years under consideration herein are 1991-92,1992-93 and 1993-94 respectively. During all these relevant assessmentyears the Respondent acted as a broker to the Indian Bank in purchaseDof the securities from different financial institutions.

(b) It is the case of the Revenue that the Indian Bank, in order tosave itself from being charged unusually high rate of interest on borrowingmoney from the market, lured Public Sector Undertaking (PSUs) tomake fixed term deposit with it on higher rate of interest. The rate ofEinterest offered to the PSUs for making huge term deposits was to theextent of 12.75% of interest on fixed deposits against the approved 8%rate of interest in accordance with the RBI directions.

(c) In order to pay higher interest to the PSUs who made a fixedterm deposit with the Indian Bank, the bank requested the RespondentFto purchase securities on its behalf at a prescribed price which wasunusually high but adequate to cover the market price of the securities,brokerage/incidental charges to be levied by the Respondent on thesetransactions, apart from covering the extra interest payable to the PSUs.The Respondent, on the instructions of Indian Bank, purchased securitiesat a particular rate quoted by the Bank and sold them to Indian RailwaysGFinance Corporation. Bank of Madura was the routing bank throughwhich the securities were purchased and sold to Indian Bank for whichBank of Madura charged service charges. The Respondent was paidcommission in respect of transactions done on behalf of Indian Bank.Under instructions from Indian Bank, a portion of the amount realizedH

from the security transactions carried on behalf of Indian Bank waspaid by way of additional interest to certain Public Sector Undertakings(PSU) on the deposits made with the Indian Bank and out of eight PSUsthree has confirmed the receipt of such additional interest through demanddrafts.

(d) The Respondent filed his return of income for the AssessmentYear 1991-92 on 01.11.1993 and declared his income at Rs. 4,82,83,620/-.The total income was determined at 4,85,46,120/- vide order dated30.06.1994. However, later on, the case was taken up for scrutiny andassessment was framed under Sec 143(3) of the Income Tax Act, 1961(in short ‘the Act’). The Assessing Officer, vide order dated 25.01.1996,raised a demand for a sum of Rs. 14,73,91,000/- with regard to the sumpayable to the PSUs while holding that the Respondent has not acted asa broker in the transactions carried out for the Indian Bank rather as anindependent dealer and that there was no overriding title in favour of thePSU’s with regard to the additional amount earned out of the securitiestransactions and it is a case of application of income after accrual and,hence, the said amount is liable to be assessed as the income of theRespondent.

(e) The Respondent, being dissatisfied with the order, preferredan Appeal before the Commissioner for Income Tax (Appeals). LearnedCommissioner of Income Tax (Appeals), vide order dated 08.08.1996,set aside the demand for additional tax while deciding the issue in favourof the Respondent and held that the alleged additional interest payable tothe PSUs could not be considered as the income of the Respondent.

(f) Being aggrieved by the order dated 08.08.1996, the Revenuefiled an appeal bearing No. ITA No.2297(Mds)/1996 before the IncomeTax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’). TheTribunal, vide order dated 05.01.2005, allowed the appeal filed by theRevenue and held that the amount received at the hands of theRespondent which is alleged to be payable to the PSUs is the income ofthe Respondent and there is no overriding title exists in favour of thePSUs so as to cause diversion of income.

(g) It is pertinent to note that in the meanwhile criminal proceedingswhich were initiated with respect to the present transactions in questionagainst the Respondent along with others bearing No. CC 17 of 1997,was decided on 27.04.2004 by the CBI court. The court, while acquitting A

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Athe Respondent has observed that the relationship between the IndianBank and the Respondent is that of principal-agent and with regard tothe transactions in question the Respondent acted in the capacity of abroker and not as an individual dealer. However, the Tribunal refused torely on the evidence produced in the trial court on the ground that theassessment proceedings are different from the criminal proceedings andBthe evidence adduced in the trial court couldn’t be relied to absolve theRespondent from the tax liability.

(h) Being aggrieved by the order of the ITAT dated 05.01.2005,the assessee filed Tax Case Appeal No. 368 of 2005 before the HighCourt. The High Court, vide order dated 29.10.2012, set aside the orderCof the Tribunal while relying on the evidence given in the criminal case inthis regard. Hence, this appeal is filed before this Court.

Point(s) for consideration:-

4. The only point for consideration before this Court is whetherDon the facts and circumstances of the present case the High Court wasright in holding that the alleged additional interest payable to PSUs cannotbe assessed as income of the Respondent?

Rival contentions:-

5. Learned counsel appearing on behalf of the Revenue contendedEthat the High Court erred in relying on the evidence given in the criminalproceedings as the nature of the criminal proceedings is different fromthat of assessment proceedings. Learned counsel further contendedthat the High Court, while passing impugned judgment, relied on theletter dated 25.03.1994 of M/s Indian Bank. However, the High Courtfailed to consider the factual position that out of 8 PSUs only 3 haveFconfirmed the receipt of demand drafts. The remaining 5 PSUs deniedto have received any such Demand Draft either from Shri T.Jayachandran, the Respondent or from M/s Indian Bank and the HighCourt was not justified in accepting the Respondent’s contention thatthere was some overriding title in favour of the PSUs in the allegedGadditional interest payable to them by the Indian Bank.

6. Learned counsel for the Revenue finally contended that theimpugned judgment is bad in law on the facts and circumstances of thepresent case and requires to be set aside by this Court.

7. Per contra, learned senior counsel appearing for the Respondentsubmitted that the role of the Respondent was only that of a conduit fortaking demand drafts in respect of additional interests payable to thePSUs and the demand draft taken on behalf of the Indian Bank did notform part of the total income of the Respondent and there exists anoverriding title in favour of the PSUs with reference to the amount inquestion i.e., the additional interest payable to the PSUs.

8. Learned senior counsel further submitted that though theassessment proceedings are different in nature from that of criminalproceedings but the same could not be a ground to throw out the legitimateconclusion arrived at by the trial court on the basis of proved evidence.Learned senior counsel finally submitted that the High Court was rightin taking note of the developments in the criminal case in coming to theconclusion that the respondent was acting as a broker or agent to theIndian Bank and the order of the High Court was well within theparameters of law and requires no interference.

9. We have heard learned counsel for both the parties and perusedthe factual matrix of the case.

Discussion:-

10. The answer to the short question whether the alleged interestpayable to the PSUs can be assessed as an income of the Respondentdepends on the determination of true nature of relationship between theIndian Bank and the Respondent with regard to the transactions inquestion and the capacity in which he held the amount of 14,73,91,000/-.Now, coming to the question of relationship between the Indian Bankand the Respondent, the normal settlement process in Governmentsecurities is that during transaction banks make payments and deliverthe securities directly to each other. The broker’s only function is tobring the buyer and seller together and help them to negotiate the termsfor which he earns a commission from both the parties. He does nothandle either cash or securities. In this respect, the broker functions likethe broker in the inter bank foreign exchange market. The conduct ofthe Respondent in the transaction in question cannot be termed to bestrictly within the normal course of business and the irregularities can benoticed from the manner in which the whole transactions wereconducted. However, the same cannot be basis for holding the Respondent AB

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Aliable for tax with regard to the sum in question and what is required tobe seen is whether there accrued any real income to the Respondent ornot.

11. It is required to be seen in what capacity the Respondent heldthe said amount-independently or on behalf of the Indian Bank. TheBAssessing Officer, while passing order dated 25.01.1996, has held thatthere exists no agreement between the Respondent and the Indian Bankabout the payment of additional interest to the PSUs and there was nooverriding title in respect of the additional interest for the PSUs. However,the position in this regard is very much settled that an agreement neednot be in writing but can be oral also and the same can be inferred fromCthe conduct of the parties.

12. Further, while considering the claim of the Respondent andthe view of the Assessing Officer, how the bank itself had treated theRespondent, is a matter of relevance. At the outset, learned counselappearing on behalf of the Revenue contended that the proceedingsDunder the Income Tax Act are independent proceedings and the HighCourt committed a grave error in relying on the findings of the criminalCourt. We do not find any force in the contention of the appellant hereinas the High Court has not held that the findings of the criminal court arebinding on the Revenue authorities. Rather the High Court was of theEview that the findings arrived at by the criminal court can be taken intoconsideration while deciding the question as to the relationship betweenthe parties to the case. When the findings are arrived by a criminal courton the evidence and the material placed on record then in absence ofanything shown to the contrary, there seems to be no reason as to whythese duly proved evidence should not be relied upon by the Court. TheFHigh Court has specifically appraised the findings given by the CBICourt in this regard. The relationship between the Indian Bank and theRespondent is very much clear by the evidence led during the criminalproceedings. The Executive Director of the Bank has specifically spokenabout the role of the Respondent as a broker specifically engaged by theGBank for the purchase of securities and that the Bank has included theinterest money too in the consideration paid, for the purpose of takingdemand drafts in favour of PSUs. Further, the evidence led by otherbank officials points out that the price of securities itself were fixed bythe bank authorities and as per their directions the Respondent hadpurchased the securities at the market price and the differential amountH

was directed to be used for taking demand drafts from the bank itselffor paying additional interest to the PSUs. Further, the letter dated25.03.1994 by the Bank wherein the Bank had acknowledged the receiptof Demand Drafts taken by the Respondent gives an unblurred pictureabout the capacity of the Respondent in holding the amount in question.Consequently, the conduct of the parties, as is recorded in the criminalproceedings showing the receipt of amount by the broker, the purpose ofreceipt and the demand drafts taken by the broker at the instance of thebank are sufficient to prove the fact that the Respondent acted as abroker to the Bank and, hence, the additional interest payable to thePSUs could not be held to be his property or income.

13. The income that has actually accrued to the Respondent istaxable. What income has really occurred to be decided, not by referenceto physical receipt of income, but by the receipt of income in reality.Given the fact that the Respondent had acted only as a broker and couldnot claim any ownership on the sum of Rs. 14,73,91,000/- and that thereceipt of money was only for the purpose of taking demand drafts forthe payment of the differential interest payable by Indian Bank and thatthe Respondent had actually handed over the said money to the Bankitself, we have no hesitation in holding that the Respondent held the saidamount in trust to be paid to the public sector units on behalf of theIndian Bank based on prior understanding reached with the bank at thetime of sale of securities and, hence, the said sum of Rs. 14,73,91,000/-cannot be termed as the income of the Respondent. In view of theabove discussion, the decision rendered by the High Court requires nointerference.

14. In view of the above discussion, the appeal is hereby dismissedwith no orders as to cost. In view of the above, all the connected appealsare also disposed of accordingly.

Devika Gujral

Appeals disposed of.

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