Deputy Commissioner of Income Tax, Chennai vs T. Jayachandran

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 4341 OF 2018 (Arising out of Special Leave Petition (C) NO. 22112 OF 2013)

Deputy Commissioner of Income Tax, Chennai .... Appellant(s)

Versus

T. Jayachandran .... Respondent(s)

WITH CIVIL APPEAL Nos. 4342-4343 OF 2018 (Arising out of Special Leave Petition (C) No. 22114-22115 OF 2013

CIVIL APPEAL Nos. 4349-4350 OF 2018 (Arising out of Special Leave Petition (C) Nos. 39044-39045 OF 2013

CIVIL APPEAL No. 4344 OF 2018 (Arising out of Special Leave Petition (C) No. 22113 OF 2013

CIVIL APPEAL Nos. 4346-4348 OF 2018 (Arising out of Special Leave Petition (C) Nos. 26719-26721 OF 2013

Signature Not Verified CIVIL APPEAL No. 4351 OF 2018 Digitally signed by ASHA SUNDRIYAL

(Arising out of Special Leave Petition (C) No. 16104 OF 2014 Date: 2018.04.25 17:36:09 IST Reason:

1 CIVIL APPEAL Nos. 4352 OF 2018 (Arising out of Special Leave Petition (C) Nos. 22468 OF 2014

CIVIL APPEAL No. 4353 OF 2018 (Arising out of Special Leave Petition (C) No. 32560 OF 2014

CIVIL APPEAL Nos. 4354 OF 2018 (Arising out of Special Leave Petition (C) Nos. 17863 OF 2015

CIVIL APPEAL No. 4355 OF 2018 (Arising out of Special Leave Petition (C) No. 4739 OF 2016

CIVIL APPEAL Nos. 4344 OF 2018 (Arising out of Special Leave Petition (C) Nos. 24963 OF 2013

CIVIL APPEAL No. 4356 OF 2018 (Arising out of Special Leave Petition (C) No. 20754 OF 2017

AND CIVIL APPEAL Nos. 4357 OF 2018 (Arising out of Special Leave Petition (C) Nos. 24250 OF 2017

JUDGMENT

R.K. Agrawal, J.

1) Leave granted.

2) The present appeal has been filed against the impugned

judgment and order dated 29.10.2012 passed by the High Court of

2 Judicature at Madras in Tax Case (Appeal) No. 368 of 2005 wherein

the Division Bench of the High Court allowed the appeal filed by the

respondent by absolving the additional tax liability imposed by the

Assessing Officer, vide order dated 25.01.1996.

3) Brief facts:-

(a) The Respondent - an individual and the proprietor of M/s

Chandrakala and Company, is a stock broker registered with the

Madras Stock Exchange. He is stated to be an approved broker of

the Indian Bank. The assessment years under consideration herein

are 1991-92, 1992-93 and 1993-94 respectively. During all these

relevant assessment years the Respondent acted as a broker to the

Indian Bank in purchase of the securities from different financial

institutions.

(b) It is the case of the Revenue that the Indian Bank, in order to

save itself from being charged unusually high rate of interest on

borrowing money from the market, lured Public Sector Undertaking

(PSUs) to make fixed term deposit with it on higher rate of interest.

The rate of interest offered to the PSUs for making huge term

deposits was to the extent of 12.75% of interest on fixed deposits

3 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 fixed

term deposit with the Indian Bank, the bank requested the

Respondent to purchase securities on its behalf at a prescribed

price which was unusually high but adequate to cover the market

price of the securities, brokerage/incidental charges to be levied by

the Respondent on these transactions, apart from covering the extra

interest payable to the PSUs. The Respondent, on the instructions

of Indian Bank, purchased securities at a particular rate quoted by

the Bank and sold them to Indian Railways Finance Corporation.

Bank of Madura was the routing bank through which the securities

were purchased and sold to Indian Bank for which Bank of Madura

charged service charges. The Respondent was paid commission in

respect of transactions done on behalf of Indian Bank. Under

instructions from Indian Bank, a portion of the amount realized

from the security transactions carried on behalf of Indian Bank was

paid by way of additional interest to certain Public Sector

Undertakings (PSU) on the deposits made with the Indian Bank and

4 out of eight PSUs three has confirmed the receipt of such additional

interest through demand drafts.

(d) The Respondent filed his return of income for the Assessment

Year 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 dated 30.06.1994. However, later on, the case was taken

up for scrutiny and assessment 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 sum payable to the PSUs while

holding that the Respondent has not acted as a broker in the

transactions carried out for the Indian Bank rather as an

independent dealer and that there was no overriding title in favour

of the PSU’s with regard to the additional amount earned out of the

securities transactions 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 the Respondent.

5

(e) The Respondent, being dissatisfied with the order, preferred

an Appeal before the Commissioner for Income Tax (Appeals).

Learned Commissioner of Income Tax (Appeals), vide order dated

08.08.1996, set aside the demand for additional tax while deciding

the issue in favour of the Respondent and held that the alleged

additional interest payable to the PSUs could not be considered as

the income of the Respondent.

(f) Being aggrieved by the order dated 08.08.1996, the Revenue

filed an appeal bearing No. ITA No.2297(Mds)/1996 before the

Income Tax Appellate Tribunal (hereinafter referred to as ‘the

Tribunal’). The Tribunal, vide order dated 05.01.2005, allowed the

appeal filed by the Revenue and held that the amount received at

the hands of the Respondent which is alleged to be payable to the

PSUs is the income of the Respondent and there is no overriding

title exists in favour of the PSUs so as to cause diversion of income.

(g) It is pertinent to note that in the meanwhile criminal

proceedings which were initiated with respect to the present

transactions in question against the Respondent along with others

bearing No. CC 17 of 1997, was decided on 27.04.2004 by the CBI

6 court. The court, while acquitting the Respondent has observed that

the relationship between the Indian Bank and the Respondent is

that of principal-agent and with regard to the transactions in

question the Respondent acted in the capacity of a broker and not

as an individual dealer. However, the Tribunal refused to rely on the

evidence produced in the trial court on the ground that the

assessment proceedings are different from the criminal proceedings

and the evidence adduced in the trial court couldn’t be relied to

absolve the Respondent 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 High

Court. The High Court, vide order dated 29.10.2012, set aside the

order of the Tribunal while relying on the evidence given in the

criminal case in this regard. Hence, this appeal is filed before this

Court.

7 Point(s) for consideration:-

4) The only point for consideration before this Court is whether

on the facts and circumstances of the present case the High Court

was right in holding that the alleged additional interest payable to

PSUs cannot be assessed as income of the Respondent?

Rival contentions:-

5) Learned counsel appearing on behalf of the Revenue

contended that the High Court erred in relying on the evidence

given in the criminal proceedings as the nature of the criminal

proceedings is different from that of assessment proceedings.

Learned counsel further contended that the High Court, while

passing impugned judgment, relied on the letter dated 25.03.1994

of M/s Indian Bank. However, the High Court failed to consider the

factual position that out of 8 PSUs only 3 have confirmed the

receipt of demand drafts. The remaining 5 PSUs denied to have

received any such Demand Draft either from Shri T. Jayachandran,

the Respondent or from M/s Indian Bank and the High Court was

not justified in accepting the Respondent’s contention that there

8 was some overriding title in favour of the PSUs in the alleged

additional interest payable to them by the Indian Bank.

6) Learned counsel for the Revenue finally contended that the

impugned judgment is bad in law on the facts and circumstances of

the present case and requires to be set aside by this Court.

7) Per contra, learned senior counsel appearing for the

Respondent submitted that the role of the Respondent was only

that of a conduit for taking demand drafts in respect of additional

interests payable to the PSUs and the demand draft taken on behalf

of the Indian Bank did not form part of the total income of the

Respondent and there exists an overriding title in favour of the

PSUs with reference to the amount in question i.e., the additional

interest payable to the PSUs.

8) Learned senior counsel further submitted that though the

assessment proceedings are different in nature from that of criminal

proceedings but the same could not be a ground to throw out the

legitimate conclusion arrived at by the trial court on the basis of

proved evidence. Learned senior counsel finally submitted that the

High Court was right in taking note of the developments in the

9 criminal case in coming to the conclusion that the respondent was

acting as a broker or agent to the Indian Bank and the order of the

High Court was well within the parameters of law and requires no

interference.

9) We have heard learned counsel for both the parties and

perused the factual matrix of the case.

Discussion:-

10) The answer to the short question whether the alleged interest

payable to the PSUs can be assessed as an income of the

Respondent depends on the determination of true nature of

relationship between the Indian Bank and the Respondent with

regard to the transactions in question and the capacity in which he

held the amount of 14,73,91,000/-. Now, coming to the question of

relationship between the Indian Bank and the Respondent, the

normal settlement process in Government securities is that during

transaction banks make payments and deliver the securities

directly to each other. The broker’s only function is to bring the

buyer and seller together and help them to negotiate the terms for

which he earns a commission from both the parties. He does not

10 handle either cash or securities. In this respect, the broker

functions like the broker in the inter bank foreign exchange market.

The conduct of the Respondent in the transaction in question

cannot be termed to be strictly within the normal course of

business and the irregularities can be noticed from the manner in

which the whole transactions were conducted. However, the same

cannot be basis for holding the Respondent liable for tax with

regard to the sum in question and what is required to be seen is

whether there accrued any real income to the Respondent or not.

11) It is required to be seen in what capacity the Respondent held

the said amount-independently or on behalf of the Indian Bank.

The Assessing Officer, while passing order dated 25.01.1996, has

held that there exists no agreement between the Respondent and

the Indian Bank about the payment of additional interest to the

PSUs and there was no overriding title in respect of the additional

interest for the PSUs. However, the position in this regard is very

much settled that an agreement need not be in writing but can be

oral also and the same can be inferred from the conduct of the

parties.

11

12) Further, while considering the claim of the Respondent and

the view of the Assessing Officer, how the bank itself had treated

the Respondent, is a matter of relevance. At the outset, learned

counsel appearing on behalf of the Revenue contended that the

proceedings under the Income Tax Act are independent proceedings

and the High Court committed a grave error in relying on the

findings of the criminal Court. We do not find any force in the

contention of the appellant herein as the High Court has not held

that the findings of the criminal court are binding on the Revenue

authorities. Rather the High Court was of the view that the findings

arrived at by the criminal court can be taken into consideration

while deciding the question as to the relationship between the

parties to the case. When the findings are arrived by a criminal

court on the evidence and the material placed on record then in

absence of anything shown to the contrary, there seems to be no

reason as to why these duly proved evidence should not be relied

upon by the Court. The High Court has specifically appraised the

findings given by the CBI Court in this regard. The relationship

between the Indian Bank and the Respondent is very much clear by

the evidence led during the criminal proceedings. The Executive

12 Director of the Bank has specifically spoken about the role of the

Respondent as a broker specifically engaged by the Bank for the

purchase of securities and that the Bank has included the interest

money too in the consideration paid, for the purpose of taking

demand drafts in favour of PSUs. Further, the evidence led by other

bank officials points out that the price of securities itself were fixed

by the bank authorities and as per their directions the Respondent

had purchased the securities at the market price and the

differential amount was directed to be used for taking demand

drafts from the bank itself for paying additional interest to the

PSUs. Further, the letter dated 25.03.1994 by the Bank wherein the

Bank had acknowledged the receipt of Demand Drafts taken by the

Respondent gives an unblurred picture about the capacity of the

Respondent in holding the amount in question. Consequently, the

conduct of the parties, as is recorded in the criminal proceedings

showing the receipt of amount by the broker, the purpose of receipt

and the demand drafts taken by the broker at the instance of the

bank are sufficient to prove the fact that the Respondent acted as a

broker to the Bank and, hence, the additional interest payable to

the PSUs could not be held to be his property or income.

13

13) The income that has actually accrued to the Respondent is

taxable. What income has really occurred to be decided, not by

reference to 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 could not claim any ownership on the sum of Rs.

14,73,91,000/- and that the receipt of money was only for the

purpose of taking demand drafts for the payment of the differential

interest payable by Indian Bank and that the Respondent had

actually handed over the said money to the Bank itself, we have no

hesitation in holding that the Respondent held the said amount in

trust to be paid to the public sector units on behalf of the Indian

Bank based on prior understanding reached with the bank at the

time 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 the above discussion, the decision rendered by the High

Court requires no interference

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14) In view of the above discussion, the appeal is hereby dismissed

with no orders as to cost. In view of the above, all the connected

appeals are also disposed of accordingly.

…….....…………………………………J.

(R.K. AGRAWAL)

…….…………….………………………J.

(NAVIN SINHA)

NEW DELHI;

APRIL 24, 2018.

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