Deputy Commissioner of Income-tax, Chennai v. T. Jayachandran
[Citation -2018-LL-0424-19]

Citation 2018-LL-0424-19
Appellant Name Deputy Commissioner of Income-tax, Chennai
Respondent Name T. Jayachandran
Court SUPREME COURT
Relevant Act Income-tax
Date of Order 24/04/2018
Judgment View Judgment
Keyword Tags public sector undertaking • application of income • criminal proceedings • sale of securities • overriding title • additional tax • demand draft • stock broker • term deposit
Bot Summary: 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 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 the said amount is liable to be assessed as the income of the Respondent. 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. 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. 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. 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. 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 the said sum of Rs. 14,73,91,000/- cannot be termed as the income of the Respondent.


REPORTABLE IN 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) present appeal has been filed against impugned judgment and order dated 29.10.2012 passed by High Court of 2 Judicature at Madras in Tax Case (Appeal) No. 368 of 2005 wherein Division Bench of High Court allowed appeal filed by respondent by absolving additional tax liability imposed by Assessing Officer, vide order dated 25.01.1996. 3) Brief facts:- (a) Respondent - individual and proprietor of M/s Chandrakala and Company, is stock broker registered with Madras Stock Exchange. He is stated to be approved broker of Indian Bank. assessment years under consideration herein are 1991-92, 1992-93 and 1993-94 respectively. During all these relevant assessment years Respondent acted as broker to Indian Bank in purchase of securities from different financial institutions. (b) It is case of Revenue that Indian Bank, in order to save itself from being charged unusually high rate of interest on borrowing money from market, lured Public Sector Undertaking (PSUs) to make fixed term deposit with it on higher rate of interest. rate of interest offered to PSUs for making huge term deposits was to extent of 12.75% of interest on fixed deposits 3 against approved 8% rate of interest in accordance with RBI directions. (c) In order to pay higher interest to PSUs who made fixed term deposit with Indian Bank, bank requested Respondent to purchase securities on its behalf at prescribed price which was unusually high but adequate to cover market price of securities, brokerage/incidental charges to be levied by Respondent on these transactions, apart from covering extra interest payable to PSUs. Respondent, on instructions of Indian Bank, purchased securities at particular rate quoted by Bank and sold them to Indian Railways Finance Corporation. Bank of Madura was routing bank through which securities were purchased and sold to Indian Bank for which Bank of Madura charged service charges. Respondent was paid commission in respect of transactions done on behalf of Indian Bank. Under instructions from Indian Bank, portion of amount realized from security transactions carried on behalf of Indian Bank was paid by way of additional interest to certain Public Sector Undertakings (PSU) on deposits made with Indian Bank and 4 out of eight PSUs three has confirmed receipt of such additional interest through demand drafts. (d) Respondent filed his return of income for Assessment Year 1991-92 on 01.11.1993 and declared his income at Rs. 4,82,83,620/-. total income was determined at 4,85,46,120/- vide order dated 30.06.1994. However, later on, case was taken up for scrutiny and assessment was framed under Sec 143(3) of Income Tax Act, 1961 (in short Act ). Assessing Officer, vide order dated 25.01.1996, raised demand for sum of Rs. 14,73,91,000/- with regard to sum payable to PSUs while holding that Respondent has not acted as broker in transactions carried out for Indian Bank rather as independent dealer and that there was no overriding title in favour of PSU s with regard to additional amount earned out of securities transactions and it is case of application of income after accrual and, hence, said amount is liable to be assessed as income of Respondent. 5 (e) Respondent, being dissatisfied with order, preferred Appeal before Commissioner for Income Tax (Appeals). Learned Commissioner of Income Tax (Appeals), vide order dated 08.08.1996, set aside demand for additional tax while deciding issue in favour of Respondent and held that alleged additional interest payable to PSUs could not be considered as income of Respondent. (f) Being aggrieved by order dated 08.08.1996, Revenue filed appeal bearing No. ITA No.2297(Mds)/1996 before Income Tax Appellate Tribunal (hereinafter referred to as Tribunal ). Tribunal, vide order dated 05.01.2005, allowed appeal filed by Revenue and held that amount received at hands of Respondent which is alleged to be payable to PSUs is income of Respondent and there is no overriding title exists in favour of PSUs so as to cause diversion of income. (g) It is pertinent to note that in meanwhile criminal proceedings which were initiated with respect to present transactions in question against Respondent along with others bearing No. CC 17 of 1997, was decided on 27.04.2004 by CBI 6 court. court, while acquitting Respondent has observed that relationship between Indian Bank and Respondent is that of principal-agent and with regard to transactions in question Respondent acted in capacity of broker and not as individual dealer. However, Tribunal refused to rely on evidence produced in trial court on ground that assessment proceedings are different from criminal proceedings and evidence adduced in trial court couldn t be relied to absolve Respondent from tax liability. (h) Being aggrieved by order of ITAT dated 05.01.2005, assessee filed Tax Case Appeal No. 368 of 2005 before High Court. High Court, vide order dated 29.10.2012, set aside order of Tribunal while relying on evidence given in criminal case in this regard. Hence, this appeal is filed before this Court. 7 Point(s) for consideration:- 4) only point for consideration before this Court is whether on facts and circumstances of present case High Court was right in holding that alleged additional interest payable to PSUs cannot be assessed as income of Respondent? Rival contentions:- 5) Learned counsel appearing on behalf of Revenue contended that High Court erred in relying on evidence given in criminal proceedings as nature of criminal proceedings is different from that of assessment proceedings. Learned counsel further contended that High Court, while passing impugned judgment, relied on letter dated 25.03.1994 of M/s Indian Bank. However, High Court failed to consider factual position that out of 8 PSUs only 3 have confirmed receipt of demand drafts. remaining 5 PSUs denied to have received any such Demand Draft either from Shri T. Jayachandran, Respondent or from M/s Indian Bank and High Court was not justified in accepting Respondent s contention that there 8 was some overriding title in favour of PSUs in alleged additional interest payable to them by Indian Bank. 6) Learned counsel for Revenue finally contended that impugned judgment is bad in law on facts and circumstances of present case and requires to be set aside by this Court. 7) Per contra, learned senior counsel appearing for Respondent submitted that role of Respondent was only that of conduit for taking demand drafts in respect of additional interests payable to PSUs and demand draft taken on behalf of Indian Bank did not form part of total income of Respondent and there exists overriding title in favour of PSUs with reference to amount in question i.e., additional interest payable to PSUs. 8) Learned senior counsel further submitted that though assessment proceedings are different in nature from that of criminal proceedings but same could not be ground to throw out legitimate conclusion arrived at by trial court on basis of proved evidence. Learned senior counsel finally submitted that High Court was right in taking note of developments in 9 criminal case in coming to conclusion that respondent was acting as broker or agent to Indian Bank and order of High Court was well within parameters of law and requires no interference. 9) We have heard learned counsel for both parties and perused factual matrix of case. Discussion:- 10) answer to short question whether alleged interest payable to PSUs can be assessed as income of Respondent depends on determination of true nature of relationship between Indian Bank and Respondent with regard to transactions in question and capacity in which he held amount of 14,73,91,000/-. Now, coming to question of relationship between Indian Bank and Respondent, normal settlement process in Government securities is that during transaction banks make payments and deliver securities directly to each other. broker s only function is to bring buyer and seller together and help them to negotiate terms for which he earns commission from both parties. He does not 10 handle either cash or securities. In this respect, broker functions like broker in inter bank foreign exchange market. conduct of Respondent in transaction in question cannot be termed to be strictly within normal course of business and irregularities can be noticed from manner in which whole transactions were conducted. However, same cannot be basis for holding Respondent liable for tax with regard to sum in question and what is required to be seen is whether there accrued any real income to Respondent or not. 11) It is required to be seen in what capacity Respondent held said amount-independently or on behalf of Indian Bank. Assessing Officer, while passing order dated 25.01.1996, has held that there exists no agreement between Respondent and Indian Bank about payment of additional interest to PSUs and there was no overriding title in respect of additional interest for PSUs. However, position in this regard is very much settled that agreement need not be in writing but can be oral also and same can be inferred from conduct of parties. 11 12) Further, while considering claim of Respondent and view of Assessing Officer, how bank itself had treated Respondent, is matter of relevance. At outset, learned counsel appearing on behalf of Revenue contended that proceedings under Income Tax Act are independent proceedings and High Court committed grave error in relying on findings of criminal Court. We do not find any force in contention of appellant herein as High Court has not held that findings of criminal court are binding on Revenue authorities. Rather High Court was of view that findings arrived at by criminal court can be taken into consideration while deciding question as to relationship between parties to case. When findings are arrived by criminal court on evidence and material placed on record then in absence of anything shown to contrary, there seems to be no reason as to why these duly proved evidence should not be relied upon by Court. High Court has specifically appraised findings given by CBI Court in this regard. relationship between Indian Bank and Respondent is very much clear by evidence led during criminal proceedings. Executive 12 Director of Bank has specifically spoken about role of Respondent as broker specifically engaged by Bank for purchase of securities and that Bank has included interest money too in consideration paid, for purpose of taking demand drafts in favour of PSUs. Further, evidence led by other bank officials points out that price of securities itself were fixed by bank authorities and as per their directions Respondent had purchased securities at market price and differential amount was directed to be used for taking demand drafts from bank itself for paying additional interest to PSUs. Further, letter dated 25.03.1994 by Bank wherein Bank had acknowledged receipt of Demand Drafts taken by Respondent gives unblurred picture about capacity of Respondent in holding amount in question. Consequently, conduct of parties, as is recorded in criminal proceedings showing receipt of amount by broker, purpose of receipt and demand drafts taken by broker at instance of bank are sufficient to prove fact that Respondent acted as broker to Bank and, hence, additional interest payable to PSUs could not be held to be his property or income. 13 13) income that has actually accrued to Respondent is taxable. What income has really occurred to be decided, not by reference to physical receipt of income, but by receipt of income in reality. Given fact that Respondent had acted only as broker and could not claim any ownership on sum of Rs. 14,73,91,000/- and that receipt of money was only for purpose of taking demand drafts for payment of differential interest payable by Indian Bank and that Respondent had actually handed over said money to Bank itself, we have no hesitation in holding that Respondent held said amount in trust to be paid to public sector units on behalf of Indian Bank based on prior understanding reached with bank at time of sale of securities and, hence, said sum of Rs. 14,73,91,000/- cannot be termed as income of Respondent. In view of above discussion, decision rendered by High Court requires no interference 14 14) In view of above discussion, appeal is hereby dismissed with no orders as to cost. In view of above, all connected appeals are also disposed of accordingly. ..... J. (R.K. AGRAWAL) . . J. (NAVIN SINHA) NEW DELHI; APRIL 24, 2018. 15 Deputy Commissioner of Income-tax, Chennai v. T. Jayachandran
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