Full Judgment Text
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. 43424343 OF 2018
(Arising out of Special Leave Petition (C) No. 2211422115 OF 2013)
CIVIL APPEAL Nos. 43494350 OF 2018
(Arising out of Special Leave Petition (C) Nos. 3904439045 OF 2013)
CIVIL APPEAL No. 4344 OF 2018
(Arising out of Special Leave Petition (C) No. 22113 OF 2013)
CIVIL APPEAL Nos. 43464348 OF 2018
(Arising out of Special Leave Petition (C) Nos. 2671926721 OF 2013)
CIVIL APPEAL No. 4351 OF 2018
(Arising out of Special Leave Petition (C) No. 16104 OF 2014)
Signature Not Verified
Digitally signed by
ANITA MALHOTRA
Date: 2018.09.29
13:01:14 IST
Reason:
CIVIL APPEAL Nos. 4352 OF 2018
(Arising out of Special Leave Petition (C) Nos. 22468 OF 2014)
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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. 4345 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
J U D G M E N T
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
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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 199192, 199293 and 199394 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
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deposits was to the extent 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 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
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Undertakings (PSU) on the deposits made with the Indian Bank and
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 199192 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.
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(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
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court. The court, while acquitting the Respondent has observed that
the relationship between the Indian Bank and the Respondent is
that of principalagent 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.
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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
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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
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High Court was right in taking note of the developments in the
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
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buyer and seller together and help them to negotiate the terms for
which he earns a commission from both the parties. He does not
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 amountindependently 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
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oral also and the same can be inferred from the conduct of the
parties.
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
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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
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
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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) 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.
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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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